Diagnostics and Precision Medicine

Sector Definition and Market Structure

Diagnostics and precision medicine covers the tests, instruments, software and data that determine which patient receives which treatment. According to the Precision Medicine Initiative definition reproduced by MedlinePlus, precision medicine is “an emerging approach for disease treatment and prevention that takes into account individual variability in genes, environment, and lifestyle for each person.” The diagnostic is the gate to that approach. Under 21 CFR 809.3(a), in vitro diagnostic products are the reagents, instruments and systems intended for use in the diagnosis of disease or other conditions, including a determination of the state of health, and those products are devices under section 201(h) of the Federal Food, Drug, and Cosmetic Act.

Operating Models

LeverVenture divides the sector into five operating models, because each one answers to a different regulator and a different payer. A laboratory service performs a test in its own certified laboratory and bills for the result. A test kit or instrument is manufactured and sold to other laboratories. A companion diagnostic is a device whose use the labeling of a specific therapy requires. Software that analyzes a medical image or a signal from an in vitro diagnostic device falls outside the clinical decision support exclusion in section 520(o)(1)(E) of the Federal Food, Drug, and Cosmetic Act. Data and decision-support businesses sell the evidence that connects a result to a treatment decision.

Market Scale and Payment

The HHS Office of Inspector General reported in January 2026 (OEI-09-25-00330) that Medicare Part B spending on clinical diagnostic laboratory tests totaled $8.4 billion in 2024, a 5 percent increase over the previous year, and that genetic tests accounted for 43 percent of that spending, with expenditures above $3.6 billion. The same report found that Part B spending on non-genetic tests, including metabolic panels, lipid panels and complete blood cell counts, has generally declined since 2021, to $4.8 billion in 2024. CMS reports that CLIA covers approximately 320,000 laboratory entities.

The price of a test is set by statute. Under 42 U.S.C. 1395m-1, Medicare pays for most clinical diagnostic laboratory tests at the weighted median of private payor rates for the most recent data collection period. The same section defines an advanced diagnostic laboratory test as one offered and furnished only by a single laboratory that either analyzes multiple DNA, RNA or protein biomarkers with a unique algorithm to yield a single patient-specific result or is cleared or approved by FDA.

CMS states that the 2026 data reporting period ran from May 1 to July 31, 2026, under changes made by Section 6226 of the CAA, 2026, passed on February 3, 2026. According to CMS, there is no phase-in reduction for 2026, and from January 1, 2027 through 2029 a test’s payment may not be reduced by more than 15 percent per year.

Convergence Across Sectors

Crossing sectors is the thesis. A diagnostics company that is also deep tech in its instrumentation, a laboratory whose ordering and reporting run as a digital product, or a test built around an environmental exposure with a clean tech dimension is the company we look for, provided the health outcome is the core of the business and artificial intelligence is the layer that makes it work.

Investment Criteria and Underwriting

LeverVenture invests at the growth stage, in the passage between venture capital, which underwrites whether a technology can work, and private equity, which underwrites whether a working business can be optimized. We take minority positions, and we underwrite execution risk on purpose; we do not underwrite whether the science works. In diagnostics, the company we look for has a validated test and paying customers, and its next constraint is coverage, payer contracting, laboratory capacity or a regulatory submission.

Laboratory Certification and Validation

We read four records in order: the CLIA certificate and its complexity category, the validation file, the coverage position and any FDA submission. Under 42 U.S.C. 263a(b), no person may solicit or accept materials derived from the human body for laboratory examination unless a certificate applicable to that category of examination is in effect, and 42 CFR 493.5 sorts tests into waived, moderate-complexity and high-complexity categories. Under 42 CFR 493.1253(b)(2), a laboratory that introduces a method developed in-house must establish accuracy, precision, analytical sensitivity, analytical specificity and the other listed performance specifications before reporting patient results. Those characteristics are analytical, so a clean file says little about clinical utility.

Status of Laboratory-Developed Tests

As of October 10, 2026, laboratory-developed test services are regulated under CLIA and are not regulated as devices. On March 31, 2025, the U.S. District Court for the Eastern District of Texas vacated FDA’s May 6, 2024 rule in American Clinical Laboratory Association v. FDA, holding that laboratory professionals who develop test protocols are carrying out professional services and are not manufacturing devices. FDA’s final rule effective September 19, 2025 restored 21 CFR 809.3(a) to its earlier text. The court noted that neither side disputed that a laboratory making a test kit for commercial distribution manufactures a device.

The baseline can still move. H.R. 8890, introduced on May 19, 2026, would provide that laboratory operations are regulated under CLIA and not under the Federal Food, Drug, and Cosmetic Act; Congress.gov records only its committee referrals as of October 10, 2026. New York’s Clinical Laboratory Evaluation Program states that it is the only regulatory agency in the United States that conducts formal review of laboratory-developed tests, and that any laboratory seeking to test New York specimens must obtain its approval.

Companion Diagnostics

FDA’s August 6, 2014 guidance defines a companion diagnostic as an in vitro diagnostic device that provides information essential for the safe and effective use of a corresponding therapeutic product, and it states that most will be Class III devices. FDA’s April 2020 guidance on companion diagnostics for a specific group of oncology therapeutic products recommends factors a developer should weigh when its test may be labeled for a group of therapies instead of a single named product. A company in this segment succeeds as a partner to a drug sponsor, so we diligence the co-development agreement, the premarket pathway and the therapy’s clinical timeline together.

Coverage and Reimbursement

Coverage is usually the binding constraint. Palmetto GBA developed the MolDX program in 2011, and the program completes technical assessments of published test data to determine clinical utility and coverage. Palmetto’s local coverage determination L35025 states that MolDX will cover and reimburse only tests that demonstrate analytical and clinical validity, and clinical utility, at a level that meets the Medicare reasonable and necessary requirement. In its August 12, 2024 notice establishing the Transitional Coverage for Emerging Technologies pathway, CMS stated that it expects the majority of coverage determinations for Breakthrough-designated diagnostic laboratory tests to continue to be made by Medicare Administrative Contractors. CMS paused TCET for new candidates on August 11, 2026, when it proposed the RAPID coverage pathway, 91 FR 51710, which excludes in vitro diagnostics and repeats that view. We therefore model a diagnostic’s coverage timeline on the contractor process, whatever its FDA designation.

Rating and Impact

Every opportunity is scored on the six LeverRating dimensions: Team, Market, Product, Traction, Financial and Thesis fit. For a diagnostic, the six dimensions expand to ten so that regulatory position, clinical evidence, reimbursement and freedom to operate each carry their own weight, and a rating that holds under only one of the two rulers is reported as unresolved. Under ROI², one impact measure is named at entry with a baseline, an owner and a reporting cadence. In this sector that measure is usually earlier detection, a better-targeted treatment, or cost removed from a care pathway.

Artificial Intelligence as the Accelerant

Artificial intelligence is the accelerant across all five LeverVenture sectors, never a sixth sector, and in diagnostics it shortens the path from a signal to a decision. FDA’s list of AI-enabled medical devices, current as of September 4, 2026, lists 1,614 authorizations, 1,230 of them with radiology as the lead review panel and 10 with pathology. FDA’s final guidance on predetermined change control plans for AI-enabled device software functions, dated August 2025, lets a manufacturer obtain authorization for planned model updates in advance. We underwrite the model as part of the regulatory record: the authorization that covers it, whether its validation sites differ from its development sites, and whether its change control plan covers the retraining the business plan assumes.

Reference Entries

• Laboratory-Developed Tests and CLIAhow a laboratory-developed test is certified, validated and paid for after the 2025 vacatur of FDA’s rule.
• Software as a Medical Device (SaMD)the device definition, the section 520(o) exclusions and the 510(k), De Novo and premarket approval routes for diagnostic software.
• AI Diligence in Life Scienceshow artificial intelligence claims are tested against FDA guidance, change control plans and the quality system record.

Related Analysis

• Life Sciences and HealthcarePrecision Medicine Investment Landscape 2025the precision medicine stack as five businesses, and where margin concentrates across it.
• Life Sciences and HealthcarePrecision Medicine Breakthroughs: Making Personalized Cancer Treatment Accessiblewhy biomarker testing, turnaround time and reflex testing decide how many patients reach a targeted therapy.
• Life Sciences and HealthcareDigital Health: From Telemedicine to AI Diagnosticswhy prospective validation, workflow integration and liability decide which artificial intelligence diagnostics reach clinical use.

Governing Authority and Sources

• 42 U.S.C. 263a, Certification of laboratories (CLIA)
• 42 CFR Part 493, Laboratory Requirements, including 493.5
• 42 CFR 493.1253, Establishment and verification of performance specifications
• CMS, Clinical Laboratory Improvement Amendments (CLIA)
• American Clinical Laboratory Association v. FDA, No. 4:24-cv-479 (E.D. Tex. Mar. 31, 2025)
• FDA, Medical Devices; Laboratory Developed Tests; Implementation of Vacatur, 90 FR 45134 (2025)
• FDA, Laboratory Developed Tests (2025)
• 21 CFR 809.3, In vitro diagnostic products: definitions
• 21 U.S.C. 360j(o), FD&C Act section 520(o) software exclusions
• FDA, In Vitro Companion Diagnostic Devices, guidance (2014)
• FDA, Developing and Labeling In Vitro Companion Diagnostic Devices for a Specific Group of Oncology Therapeutic Products, guidance (2020)
• 42 U.S.C. 1395m-1, Medicare payment for clinical diagnostic laboratory tests
• CMS, Clinical Laboratory Fee Schedule (2026)
• HHS OIG, Total Medicare Part B Spending on Lab Tests Rose in 2024, OEI-09-25-00330 (2026)
• Noridian, Molecular Diagnostic Services (MolDX)
• CMS Medicare Coverage Database, LCD L35025, MolDX: Molecular Diagnostic Tests
• CMS, Transitional Coverage for Emerging Technologies, final notice (2024)
• CMS, Regulatory Alignment for Predictable and Immediate Device (RAPID) Coverage Pathway, notice with comment, 91 FR 51710 (August 11, 2026)
• New York State Department of Health, Clinical Laboratory Evaluation Program
• H.R. 8890, 119th Congress, introduced May 19, 2026
• MedlinePlus Genetics, What is precision medicine?
• FDA, Artificial Intelligence-Enabled Medical Devices (2026)
• FDA, Predetermined Change Control Plan for AI-Enabled Device Software Functions, final guidance (2025)