Roche battles payment cuts while growing diagnostics business

It’s a golden age for medical testing. But for Roche Diagnostics Corp., the path to actually pocketing that gold is hardly straightforward.

The Switzerland-based company, which operates its North American diagnostics business out of Indianapolis, has, along with its peers, launched a series of innovative tests that allow doctors to make quicker and more precise diagnoses of key diseases.

For example, Roche introduced in 2011 a test of the BRAF gene mutation that lies behind a deadly form of melanoma. Also, Roche has a test to identify the KRAS gene mutation that lies behind many colorectal cancers.

Those new tests have helped Roche grow its North American revenue, excluding its troubled diabetes care business, 23 percent over the past five years (when Roche's results, which are reported in Swiss francs, are converted to U.S. dollars). The unit recorded nearly $2.3 billion in sales last year, excluding diabetes.

But the money for diagnostic tests continues to go down in key areas, noted Wayne Burris, chief financial officer of Roche Diagnostics’ U.S. business. (A video interview with Burris from IBJ's Life Sciences Power Breakfast on April 24 appears below.)

Case in point: On Jan. 1, the federal Medicare program cut its payments for the tissue diagnostic tests—think analysis of tumors to see if they’re cancerous—an average of 23 percent.

And last year, the Medicare program cut reimbursement for the KRAS and BRAF tests 74 percent and 38 percent, respectively.

Those payments go to the hospitals that buy Roche’s fluid analyzers, not to Roche directly. But when hospitals can’t make as much money on performing tests, they tend to perform fewer of them or to buy fewer of Roche’s expensive machines.

In response to these changes, Roche has hired more personnel to lobby Congress and the federal government to not cut payments for diagnostics tests. Roche has also hired more people to “educate” hospitals about the downstream value of Roche’s tests.

“We’re trying to educate–not really Congress, but even hospital systems–on the value of diagnostics testing. And the fact that the value and the cost to the hospital isn’t just the cost of the test itself,” Burris said.

Roche doesn’t want to be forced into price cuts that mirror Medicare’s cuts. In fact, Burris said, Roche should start receiving some of the savings it can help hospitals achieve by avoiding other tests, hospital admissions or expensive procedures.

"We may not agree that just because reimbursement went down, that we’re going to cut the price for our diagnostics test,” Burris said. "Through efficiency we can take other costs out of their system and make them more efficient and more effective.”

As an example, he cited Roche’s troponin T test, which can sense if a patient that recently underwent surgery or kidney dialysis is at risk of a heart attack.

The test has replaced a battery of tests hospitals used to have to perform to tell if a patient was at risk of a heart attack, which has also helped hospitals do a better job identifying patients at the most imminent risk.

“So think about the other tests they don’t have to do, think about the people that they admit that they don’t have to admit, and the people that they send home that they should have kept,” Burris said. “That’s a huge savings to the health care system, and we should get rewarded for that.”

Since the Medicare program, along with private health insurers, is pushing hospitals to avoid unnecessary hospitalizations, the hospitals have been “moderately” interested in working with Roche to reward it for its tests, Burris said.

The other way Roche is trying to wring more value out of its diagnostics tests is by pairing them with drugs, where reimbursement remains far more lucrative than it does for diagnostic tests. Roche’s pharma business accounts for roughly 80 percent of its annual revenue.

There are now 250 projects under way that involve pairing a diagnostics test with a Roche drug, Roche executives reported in February. These projects are called “companion diagnostics.”

“Most of our pharma compounds that are in development right now have a companion diagnostics drug match to them,” Burris said. “We believe the hurdle from a regulatory standpoint is going to almost require that, some of the newest drugs have a diagnostic that improves its safety, its efficiency, its effectiveness. We also believe that in certain areas having that companion diagnostic will give us an advantage versus other products that are in the marketplace.”

That’s the case because diagnostics can help identify only the patients that truly benefit from a drug. In the past, even the most successful drugs were often effective in fewer than 40 percent of patients.

“On the diagnostics side, we don’t make drugs, we just make them better,” Burris said.