Forecasting the Future of Diagnostics

Last fall, McDermott+ hosted senior professionals at the +Dx Diagnostics Forum in Washington, D.C., to explore the regulatory, legislative, and market developments shaping the diagnostics industry’s future. Participants discovered the importance of diagnostics in precision medicine, notably the improved efficacy of innovative treatments when accurate precision diagnostics are available. Key discussion topics included the industry’s financial health, regulatory issues, coverage and payment policies, and the future of medical innovation. 

A Shifting Market

Nearly five years after SARS-CoV-2 brought the modern world to a screeching halt, the industry is still learning how the COVID-19 pandemic impacted diagnostic market performance. The pandemic represented a huge revenue opportunity for the diagnostics industry, as the necessity of analytics and problem-solving became apparent to both the healthcare industry and the public. The diagnostics market has been making gains since 2020, with the size of acquisitions growing. However, the COVID-19 testing boom proved not to be everlasting; many companies and investors took a hit on initial investments in COVID-19-testing technologies. Post-pandemic trends indicate that larger diagnostic companies are outperforming smaller ones, potentially because of their stability—which contradicts most of the larger firms’ experiences during the pandemic. More recently, several notable large acquisitions of near-bankrupt diagnostics organizations have proven that the assets themselves are very valuable, but execution may be more difficult without the infrastructure of a large company. 

Regulatory Trends: Health Data Privacy and Lab-Developed Tests

Recent U.S. and European regulatory activity in the diagnostics space is leading diagnostic companies to thoroughly analyze the comparative regulatory landscapes to determine the best and most appropriate markets for new products and service lines. A key issue affecting the diagnostic industry is health data privacy, as the mandates in this area are more developed in the European Union and United Kingdom relative to the United States, where a patchwork of separate state laws exist. The number of states with information privacy regimes currently stands at 20.

While health data privacy laws vary between U.S. states, the federal Health Insurance Portability and Accountability Act Privacy Rule has been updated. Finalized in 2024, this rule strengthens protections for reproductive healthcare information. It prohibits the disclosure of protected health information for investigations or legal actions related to seeking, obtaining, or providing lawful reproductive care, and requires signed attestations for certain protected health information requests. These changes aim to enhance patient privacy and trust in response to concerns raised after Roe v. Wade was overturned in 2022. Other notable U.S. regulatory developments include the expanding telehealth regulatory framework, and the anti-kickback law passed within H.R. 4531, the SUPPORT Act.

The U.S. government also has been busy with non-health data privacy issues. In May 2024, the U.S. Food and Drug Administration (FDA) finalized a rule aimed at ensuring the safety of laboratory-developed tests. The final rule clarifies that in-vitro diagnostic products (IVDs) are medical devices, including when the IVD manufacturer is a clinical laboratory. Stakeholder opposition to this rule prompted U.S. Rep. Diana DeGette (D-CO) and former U.S. Rep. Larry Dean Bucshon (R-IN) to introduce an updated version of H.R. 2369, the VALID Act, in the 118th Congress, which would address what the pair considered a regulatory blind spot and would create distinct authorities within the FDA, separate from medical device authority, to regulate diagnostic tests. The bill also imposed various requirements related to in-vitro clinical tests, including those related to quality control, labeling, and reporting adverse events. The legislation did not advance out of committee in the previous Congress, and it has yet to be reintroduced in the 119th Congress. Its future is currently uncertain. 

In August 2024, the FDA released draft guidance that discusses the approval process for a predetermined change control plan (PCCP), which is a protocol that manufacturers can negotiate with the FDA to allow for planned future changes to a diagnostic device without requiring that the manufacturer file a premarket submission. Discussions around this draft guidance encouraged manufacturers to articulate clear plans to the FDA before submission to ensure the PCCP is usable when needed. 

Regulatory requirements are on the rise in Europe, too. The In Vitro Diagnostic Medical Device Regulation (IVDR) has raised regulatory standards as well as regulatory burden. This statute offers advantages like safer diagnostic tests, but some industry stakeholders fear the IVDR may cause investors to avoid the diagnostic space. 

Diagnostics Coverage and Payment

Coverage and payment are critical for the ultimate success of any diagnostic test. The +Dx Forum addressed this issue, with discussions encompassing state biomarker coverage, FDA diagnostics oversight, the Molecular Diagnostics (MolDX) Program, and the Clinical Laboratory Fee Schedule rate-setting process. 

One discussion featured firsthand accounts of advocacy efforts for state biomarker coverage. Biomarker tests—measurable indicators of a biological state, condition, or process within the body—can have a profound impact on human health. Biomarker tests exist for various cancers and many other kinds of diseases, but the coverage of such tests has not yet caught up to the science. 

The MolDX Program determines coverage for certain molecular diagnostics tests and molecular pathology services within Medicare. The MolDX Program has been expanded to include proteomics tests, which measure the structure, function, interactions, and compositions of proteins to diagnose various conditions. Coverage decisions under MolDX are based on different variables and follow rigorous and rigid procedures according to federal regulations. When seeking coverage, test developers based in the MolDX jurisdiction should be fully aware of existing MolDX policies and be proactive in seeking input from MolDX on their evidentiary base to strengthen their coverage request. 

After coverage comes payment, and in the U.S., Medicare rate-setting is crucial. Prominent stakeholders in the Medicare clinical laboratory fee schedule rate-setting process were remarkably aligned when discussing their priorities regarding improvements for the process, including accurate payment rates, transparency, and predictability. 

Future Directions 

Underlying every discussion about the future of diagnostics was the promise of artificial intelligence (AI), whether in relation to data privacy, the regulatory and legislative landscape, the FDA’s perspective on diagnostic approvals, or considerations when determining device coverage and payment. Broader conversations also considered the ways in which AI may affect the future of the U.S. healthcare system and its institutions, and how the industry can use AI as a collaborator rather than a tool.

Going forward, healthcare may cost more, but innovations will also contribute more to improving health and patient care. Currently, healthcare is more focused on cost than value-add. To account for the aging and growing population, healthcare must expand beyond the clinical setting and become more sustainable. 

As the diagnostics industry faces the future, all stakeholders in healthcare should understand not only the importance of precision medicine, but also the necessity of having precision diagnostics to complement it.

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Deborah Godes advises clients on reimbursement and policy strategy for medical devices, diagnostics, biologics and health services by public and private payers. With more than 25 years of health industry experience, Godes leverages her deep knowledge and strong industry relationships to deliver strategic, operational and policy consultative services to companies of all sizes, from startups to Fortune 100 companies.

Julia Grabo produces comprehensive research and analysis of key federal healthcare policy developments and legislative initiatives. She assists clients with real-time monitoring and analysis of fast-breaking legislative, policy and regulatory developments in Washington, DC. Grabo also coordinates coalition and client collaborations to achieve advocacy and policy goals.

Marie Knoll delivers comprehensive research analysis and statistical reports to present data-driven recommendations on healthcare trends, health policies, and information databases. Her work focuses on a multidisciplinary review of physician payment, quality and coding activities. She is deeply engaged in activities related to the development of CPT code applications; the valuation of physician services through the American Medical Association RVS Update Committee process; and the review and analysis of regulations and policies related to Medicare physician and other provider payments.

Anthony Livshen is a skilled healthcare data and policy analyst with extensive experience analyzing Medicare and Medicaid claims data to address client questions and lead research endeavors. Prior to joining M+, Livshen served as a senior health management consultant at another consulting firm. In that role, he worked on contracts with the Centers for Medicare & Medicaid Services on topics including program integrity and Medicare and Medicaid payment policy.

Maddie News delivers comprehensive research and analysis of key federal healthcare legislative and regulatory developments. She assists clients with real-time tracking and analysis of healthcare policy initiatives in Washington, D.C., and helps clients achieve advocacy and policy goals. News previously was the senior program associate for Medicaid policy at the Association for Community Affiliated Plans, where she worked on federal legislative and regulatory issues on behalf of safety net health plans.

Michael (Mike) Ryan advises manufacturers, healthcare providers, and investors on the legal, regulatory, and reimbursement/market access issues that arise during the development and commercialization of medical devices, clinical laboratory testing services, biological products, and drugs. He helps clinical laboratories and life sciences companies maintain regulatory compliance and evaluate, develop, and implement strategies to optimize coding, coverage, and payment for novel technologies.