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Disclosure: No position in EXAS.
Remember Exact Sciences?
In 2015, I argued unsuccessfully in a series of public comments and an oral presentation that the proposed Medicare reimbursement rate for the company’s Cologuard test was too high. While Cable Car’s investment positioning at the time was validated by a subsequent advisory panel decision, the public policy outcome was not what I had hoped for. I believed then and continue to believe that the company cleverly exploited technicalities in the process for establishing new codes on the Clinical Lab Fee Schedule to receive a payment rate far exceeding the level that would be cost-effective in population screening.
The rate-setting process was reformed by a rulemaking mandated by the Protecting Access to Medicare Act (PAMA), which with effect from January 1, 2018 is supposed to establish market-based reimbursement rates. PAMA was intended to reduce costs to Medicare by basing future reimbursement amounts on the rates determined by commercial payors. At least in theory, commercial payors can conduct thorough cost-effectiveness analyses and determine payments through competitive forces in the marketplace. In practice, there are issues with this approach as well. During the draft rulemaking, Cable Car submitted a public comment noting that for some tests, like Cologuard, the price in the commercial population and the price for the Medicare population really should not be the same. Unfortunately, CMS received over 1,300 comments on the proposed rulemaking and did not specifically address this concern.
Disappointingly, it now appears that an additional loophole in the data collections process under PAMA will enable Cologuard to receive another 3 years of above-market reimbursement. Thanks to a provision in the final rule inserted after comments from the lab industry, the definition of “applicable information” used to determine reimbursement rates excludes any test where the company appealed a reimbursement rate from a commercial payor. EXAS appears to have challenged a significant proportion of its test volume during the relevant period, delaying payment outside the collection window and enabling the company to report only favorable reimbursement rates.
During the relevant time period, EXAS had an average commercial reimbursement rate I estimate from its financial filings at about $321 per test. Yet based on the interquartile range and weighted median data published by CMS, more than 75% of the test volume submitted under PAMA was reimbursed at or above $508.87. I believe the company’s policy at the time was to appeal virtually every commercial reimbursement that came in significantly below the Medicare rate. Even when those payment decisions were resolved in the payor’s favor, they were excluded from the data submitted under PAMA.
PAMA imposes stiff civil monetary penalties for misrepresentations and omissions by reporting laboratories, and importantly I’m not suggesting that EXAS knowingly misrepresented the commercial reimbursement for Cologuard. Instead, it appears they once again took advantage of the rules as written. They made a great return on investment for their 2016 lobbying spend.
Although past experience suggests it will have limited impact on policy, I have written another public comment to CMS to shine light on this situation, primarily in hopes of improving the PAMA data collection process in the future and ensuring that data was accurately collected this time. Exact Sciences CFO Jeff Elliot was kind enough to give me time last week, but provided the following statement:
Exact Sciences disagrees with the assumptions and assertions in your comment letter, and we noted multiple factual inaccuracies. While we would encourage you to check your facts and your analysis further before submitting your letter, we don’t intend to respond on a point-by-point basis.
I have made every attempt to avoid factual inaccuracies and will gladly make corrections if requested.
Although EXAS is trading near all-time highs, I have not held a short position for more than two years. There was some public discussion of the likely impact of PAMA earlier this year which briefly excited some short sellers. I take no pleasure in having known better.
Read the public comment