FDA Drops Appeal to Regulate $8.6B Laboratory Testing Market

Laboratory testing market maintains independence as FDA shifts focus to regulating diagnostic equipment and supplies

Three Key Facts

• Court victory stands: The FDA let the May appeal deadline pass without action after a federal court blocked its regulation of laboratory developed tests as medical devices in March
• $8.6 billion market impact: The global laboratory-developed testing market, valued at $5.14 billion in 2023 and projected to reach $8.58 billion by 2030, avoids direct FDA oversight affecting nearly 80,000 tests
• Indirect regulation emerges: The agency now targets device components and research-use violations through warning letters, signaling alternative enforcement strategies

Introduction

The FDA’s decision to abandon its appeal of a federal court ruling has effectively killed the agency’s ambitious plan to regulate laboratory developed tests as medical devices. The U.S. District Court for the Eastern District of Texas struck down the FDA’s final rule in March, determining the agency lacked statutory authority to expand its jurisdiction over LDTs. Industry groups celebrated the regulatory reprieve after the May appeal deadline passed without FDA action.

The vacated rule would have phased out the agency’s enforcement discretion approach over four years, bringing thousands of hospital and commercial laboratory tests under direct FDA oversight. Laboratory developed tests represent a growing segment of personalized medicine, with facilities creating custom diagnostic tools for specific patient populations.

Key Developments

The American Clinical Laboratory Association, HealthTrackRx, and the Association for Molecular Pathology filed coordinated lawsuits challenging the LDT rule’s legal foundation. The court ruled that LDTs do not qualify as devices under the Federal Food, Drug, and Cosmetic Act, severing the FDA’s primary regulatory pathway.

The Trump administration’s silence on the ruling reflects a broader shift in regulatory philosophy. A Health and Human Services spokesperson declined to comment on the litigation strategy, leaving industry observers to interpret the agency’s priorities.

Hospital systems particularly welcomed the outcome after expressing concerns about compliance costs and innovation constraints. “This ruling ensures that hospital-based labs are able to continue to develop innovative and high-quality tests,” said Jason Kleinman, American Hospital Association director of federal relations.

The decision’s timing coincides with the Supreme Court’s Loper Bright ruling, which eliminated Chevron deference and requires courts to exercise independent judgment on agency authority. This legal shift constrains regulatory agencies’ ability to expand their jurisdiction through creative interpretation of existing statutes.

Market Impact

Laboratory stocks gained ground following confirmation that the FDA would not appeal, with diagnostic companies benefiting from reduced regulatory uncertainty. The ruling preserves market access for smaller laboratories that argued they lacked resources for FDA compliance.

The compound annual growth rate of 7.58% for the LDT market faces fewer regulatory headwinds, though component-level oversight could still affect margins. Investment flows into diagnostic innovation may accelerate as companies regain confidence in their regulatory pathway.

Larger diagnostic firms lose a potential competitive advantage, as FDA regulation would have favored well-resourced companies capable of navigating complex approval processes. The decision levels the playing field for emerging test developers and academic medical centers.

Strategic Insights

The FDA’s warning letter to German diagnostics company DRG Instruments reveals the agency’s pivot strategy. Rather than regulating tests directly, the agency targets instruments, reagents, and accessories used in LDT development—areas where its device authority remains intact.

Attorney Steven Gonzalez of Hyman, Phelps & McNamara notes this component-focused approach leverages existing FDA jurisdiction. “The agency could regulate test components under the Food, Drug, and Cosmetic Act, targeting instruments and reagents used in diagnostics,” he explains.

The shift creates compliance complexity for laboratory suppliers, who must navigate research-use restrictions more carefully. Companies may face increased scrutiny over product labeling and intended use claims, particularly for reagents marketed for research but used clinically.

Market consolidation could accelerate as component suppliers invest in regulatory compliance capabilities. Smaller reagent manufacturers may struggle with enhanced oversight requirements, potentially reducing supplier diversity for laboratory customers.

Expert Opinions and Data

Scott Danzis, a Covington partner, views the regulatory retreat as reflecting broader administrative priorities. “It’s certainly not hard to surmise that this current FDA wanted to go in a different direction than the FDA final rule,” he observes, noting the agency’s resource constraints and shifting focus.

The Association for Molecular Pathology advocates strengthening existing Clinical Laboratory Improvement Amendments regulations rather than expanding FDA authority. “The best way to ensure the accuracy, reliability, and appropriate use of LDTs is through clarification of long-standing CLIA regulations,” the organization states.

Allyson Mullen, director at Hyman, Phelps & McNamara, emphasizes that regulatory discussions continue despite the court victory. Key personnel within the FDA remain focused on defining LDT scope and companion diagnostic boundaries, suggesting future policy developments.

The flexibility that enabled rapid COVID-19 test deployment through LDTs demonstrates the clinical value of maintaining current oversight levels. Nearly 80,000 tests would have faced new regulatory requirements under the vacated rule, potentially slowing emergency response capabilities.

Conclusion

The FDA’s decision to forgo its appeal settles the immediate regulatory landscape while opening indirect enforcement pathways through component oversight. Laboratories maintain operational flexibility under existing CLIA requirements, though suppliers face increased scrutiny over device labeling and intended use.

The diagnostics industry operates under a dual regulatory framework where test development remains largely unregulated while supporting instruments and reagents face enhanced FDA oversight. This hybrid approach creates compliance complexity but preserves innovation capacity for personalized medicine applications.