Congressional members questioned CDRH Director Jeff Shuren at a Sept. 9 hearing on whether a newly proposed regulatory framework for lab developed tests unveiled by FDA July 31 will subject clinical laboratories to the 2.3 percent device excise tax.

Because IRS’ definition of a taxable medical device is directly linked to whether a device is registered or listed with FDA, the agency’s July proposal to actively bring at least a portion of lab-developed tests into the FDA regulatory fold has raised concerns from labs, not only about additional safety and effectiveness oversight, but also about the burdens of the device tax.

FDA’s long-planned proposal would remove, over a nine-year transition period, some LDTs from enforcement discretion. The enforcement discretion policy has, according to FDA, has exempted tests performed in the same Clinical Laboratory Improvement Act-certified lab in which they are developed from premarket review and other FDA requirements. Under the proposed framework, high risk, class III tests that do not fill gaps unaddressed by FDA-approved tests are the highest priority for being subject to premarket review. Other class III tests and then moderate risk, class II tests will follow. Meanwhile, class I tests, LDTs intended for rare diseases and LDTs “for unmet needs” with no alternative tests available will be exempted from premarket regulation. (See Also see "FDA Plan To Regulate LDTs Includes Long Phase-In, Unmet-Need Exceptions" - Medtech Insight, 31 July, 2014..)

The important issue on the question of the device tax is FDA’s registration and listing regulation. Technically, all makers of medical devices are subject to requirement to register and list their facilities and products with FDA. But the agency included a provision in its LDT framework proposal would appear to give many LDT makers a pass on paying the tax anytime soon. But, over the longer term, once pre-market applications for qualifying products are submitted, test makers will have to start paying the device tax.

Shuren: Device Tax Will Fall On LDT Makers Subject To Premarket Review

Shuren was questioned by more than one lawmaker at the hearing about the device tax, even though the tax statute does not fall under his oversight.

Rep. Morgan Griffith, R-Va., asked Shuren if the agency had felt “a lot of pressure regarding the medical device tax” in putting together the LDT proposal.

Shuren answered, “No,” but he said, “We were trying to give labs a break,” with one particular provision in the proposal. The agency decided “in some cases we will exercise our enforcement discretion,” to permit many of the LDT makers to simply notify the agency about their tests, without tripping the registration and listing mechanism that would require device tax payment, the director said.

The July 31 proposal says that LDT makers can forgo registration and listing requirements “provided that such laboratories notify FDA that they are manufacturing LDTs and provide basic information regarding each of these” within six months of the publication of a final guidance.

“They are actually doing this so they can see what LDTs are out there, without forcing them all to follow-up with payment of the device tax,” American Clinical Laboratory Association President Alan Mertz said.

However, the proposal also states, “Laboratories that do not opt to notify the Agency that they are manufacturing LDTs … within the above mentioned timeframes will have opted not to be within the scope of FDA’s enforcement discretion policy,” which would subject them to payment of a registration user fee, and the device tax.

FDA’s regulation of LDTs “will not level the playing field,” said ACLA President and clinical lab spokesman Alan Mertz, because “we’re on a totally different playing field.”

But once a premarket submission is made, the registration and listing requirements would kick in, Shuren suggested, in response to questioning from Rep. Renee Ellmers, R-N.C.

“Some of the test [makers] would be taxed, if they are making a test that has to come in for premarket review,” Shuren affirmed

Mertz: Clinical Labs Have Some Concerns About Tax

ACLA’s Mertz told “The Gray Sheet” that after the framework was released, concerns emerged among laboratory directors about having to pay the device tax. ACLA represents clinical labs, many of which make LDTs.

He pointed out that there remains much ambiguity around what and how many tests will fit into the higher risk categories that will ultimately be subject to premarket review. “We don’t know how many tests … will be defined as high risk, so there’s all this uncertainty about how many tests will be subject to the tax,” Mertz said.

Makers of tests kits, already subject to FDA oversight, are already subject to the device tax, affirmed Andrew Fish, executive director of AdvaMedDx, which represents over 75 diagnostic manufacturing companies. “Of course, we would very much like to see the device tax go away in its entirety,” he hastened to add.

The prospect of LDT makers paying FDA user fees was also raised during the hearing, although both Shuren and Mertz affirmed that, under the current user fee agreement, which expires in fiscal year 2017, FDA agreed not to impose user fees on LDTs that become subject to premarket review under the proposed framework. The longer-term policy will need to be worked out in the next round of user-fee negotiations.

Mertz also said that laboratories were no strangers to the FDA user fee process, as they sat in during the last MDUFA talks. (See Also see "Clinical Labs Join Medical Device User Fee Negotiations" - Medtech Insight, 21 February, 2011..) “We were willing to be in the negotiations, but by doing so, we were not conceding that they have the authority to regulate us,” he added.

“They asked us to participate, because they knew they were eventually going to do this [LDT] guidance, and we might have to pay user fees,” Mertz commented. “I’m glad we did, because they made it clear, the final agreement on the negotiations was that at least for this MDUFA III period that goes through 2017 … there will not be a user fee [for labs].”

ACLA’s Mertz emphasized, however, that clinical labs have many reasons why they do not want to be regulated by FDA, but remain only under CMS’ CLIA jurisdiction, and that having to pay the device tax is actually not the major reason.

“It’s having to set up entirely new quality systems, it’s going through the approval process. And doing a clinical trial on a device can cost millions of dollars. These test [makers] would never have the resources nor reimbursement to justify that,” he added. (See Also see "Lab Groups’ LDT Comments Will Highlight Barriers To Test Accessibility" - Medtech Insight, 11 August, 2014..)

Mertz noted that laboratories would be willing to pay more CLIA user fees, and stated in his testimony that his members have made that clear – they prefer to be regulated under CLIA.

How Do You Label A Boxless Test?

Several witnesses at the hearing raised the same point that CDRH’s Shuren did when he introduced the LDT framework in late July: the inequity of manufacturers of device test kits having to undergo a lengthy and expensive FDA clearance and approval process, while clinical labs can compete by producing, and marketing tests created in a CLIA-regulated lab without jumping through the same hoops.

But Mertz asserted that FDA’s decision to regulate LDTs will “not level the playing field,” because at laboratories, “We’re on a totally different playing field,” than diagnostic test kit manufacturers.

Differences between tests produced at diagnostic manufacturing plants, versus those designed in clinical laboratories, was highlighted by a series of practical questions raised by Coalition for 21stCentury Medicine Co-Founder Kathleen Behrens Wilsey. The coalition represents LDT makers including Allegro Diagnostics Inc., Biodesix Inc. and Genomic Health Inc.

She asked in her testimony, for example, how FDA labeling rules would apply for an LDT in the absence of a distributed or tangible “box” on which to put a label?

Or, how would FDA distinguish a regulated ‘medical device’ from the laboratory services provided in an LDT, since the latter should be considered “the practice of laboratory medicine,” which is outside of the agency’s statutory authority.

Wilsey also queried, “How does FDA intend to apply its rules on test design and quality systems to laboratories?” that are under a continuing obligation to comply with potentially conflicting CLIA quality system requirements.

In her testimony Wilsey recommended that the agency “provide substantial guidance” on these questions, and other related issues, before FDA’s framework for LDT regulation is finalized.

When the agency will get to begin implementing its proposed framework remains to be seen. FDA issued its proposed draft guidance as a notification to Congress in compliance with a FDA Safety and Innovation Act provision requiring 60-day congressional notice on the issue. The earliest FDA can officially issue a draft guidance would be the end of September. A comment period would follow after that, and the implementation transition periods would not begin until after the guidance is finalized.

Shuren said during the hearing that it his intent to release the draft guidance within 30 days.

Will Lab-Developed Test Makers Be Subject To Device Tax? It Depends, Shuren Suggests At Hearing

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