End-Stage Renal Disease
Bundling Medicare's Payment for Drugs with Payment for All ESRD Services Would Promote Efficiency and Clinical Flexibility Gao ID: GAO-07-77 November 13, 2006Medicare covers dialysis--a process that removes excess fluids and toxins from the bloodstream--for most individuals with end-stage renal disease (ESRD), a condition of permanent kidney failure. The Centers for Medicare & Medicaid Services (CMS) pays for certain dialysis services under a type of bundled rate, called a composite rate, and, for certain dialysis-related drugs, pays a separate rate per dose each time the drug is administered. These drugs are referred to as "separately billable" and are paid at 6 percent above manufacturers' average sales price (ASP). Recently, the Congress required CMS to explore the creation of a bundled payment for all ESRD services, including separately billable drugs. GAO was asked to examine (1) recent changes in payments for ESRD services, (2) the ASP payment method of setting rates for separately billable ESRD drugs, and (3) CMS efforts to develop a bundled payment method that includes all ESRD drugs. GAO obtained information for this study from CMS, the U.S. Renal Data System, ESRD experts, and previously issued GAO reports.
The effect of several legislative and regulatory changes since 2003 has been to raise the composite rate while reducing Medicare's pre-2005 generous payments for separately billable ESRD drugs. In 2005, when the first legislative change was implemented, Medicare expenditures for certain separately billable drugs dropped 11.8 percent. In 2006, Medicare regulation changed the payment for these drugs to a method based on ASP. Since then, Medicare's payment rates have varied from quarter to quarter but have remained relatively consistent with the lower 2005 payment rates. Medicare's cost containment efforts have targeted the most expensive of the separately billable drugs--Epogen--for which program spending totaled $2 billion in 2005. Epogen is used to treat anemia in ESRD patients; most patients receive this drug at nearly every dialysis session. Recent data indicate that Epogen use per patient continues to rise, although more slowly than in previous years. Several unknowns about the composition of ASP and the lack of empirical evidence for the percentage level added to ASP make it difficult for CMS to determine whether the ASP-based payment rates are no greater than necessary to achieve appropriate beneficiary access. Paying for Epogen under the ASP method is of particular concern. The ASP method relies on market forces to moderate manufacturers' prices; but Epogen is the product of a single manufacturer and has no competitor products in the ESRD market. Without competition, the power of market forces to moderate price is absent. For rarely used products, the lack of price competition may be financially insignificant, but for Epogen, which is pervasively and frequently used, the lack of price competition could be having a considerable effect on Medicare spending. In 2003, the Congress required CMS to issue a report and conduct a demonstration of a system that would bundle payment for ESRD services, including drugs that are currently billed separately, under a single rate. The bundled payment approach, used to pay for most Medicare services, encourages providers to operate efficiently, as they retain the difference if Medicare's payment exceeds the costs they incur to provide the services. GAO and others have found that a bundled rate for all ESRD services would have advantages for achieving efficiency and clinical flexibility in treating ESRD patients. CMS's demonstration testing the feasibility of a bundled rate, mandated to start in January 2006, is delayed, as is the completion of the agency's mandated report to the Congress on bundling. The report was due in October 2005; as of November 2006, CMS officials could not tell us when the report would be available.
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Director: Team: Phone:GAO-07-77, End-Stage Renal Disease: Bundling Medicare's Payment for Drugs with Payment for All ESRD Services Would Promote Efficiency and Clinical Flexibility
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Report to the Chairman, Committee on Ways and Means, House of
Representatives:
United States Government Accountability Office:
GAO:
November 2006:
End-Stage Renal Disease:
Bundling Medicare's Payment for Drugs with Payment for All ESRD
Services Would Promote Efficiency and Clinical Flexibility:
GAO-07-77:
GAO Highlights:
Highlights of GAO-07-77, a report to the Chairman, Committee on Ways
and Means, House of Representatives
Why GAO Did This Study:
Medicare covers dialysis”a process that removes excess fluids and
toxins from the bloodstream”for most individuals with end-stage renal
disease (ESRD), a condition of permanent kidney failure. CMS pays for
certain dialysis services under a type of bundled rate, called a
composite rate, and, for certain dialysis-related drugs, pays a
separate rate per dose each time the drug is administered. These drugs
are referred to as ’separately billable“ and are paid at 6 percent
above manufacturers‘ average sales price (ASP). Recently, the Congress
required CMS to explore the creation of a bundled payment for all ESRD
services, including separately billable drugs. GAO was asked to examine
(1) recent changes in payments for ESRD services, (2) the ASP payment
method of setting rates for separately billable ESRD drugs, and (3) CMS
efforts to develop a bundled payment method that includes all ESRD
drugs. GAO obtained information for this study from CMS, the U.S. Renal
Data System, ESRD experts, and previously issued GAO reports.
What GAO Found:
The effect of several legislative and regulatory changes since 2003 has
been to raise the composite rate while reducing Medicare‘s pre-2005
generous payments for separately billable ESRD drugs. In 2005, when the
first legislative change was implemented, Medicare expenditures for
certain separately billable drugs dropped 11.8 percent. In 2006,
Medicare regulation changed the payment for these drugs to a method
based on ASP. Since then, Medicare‘s payment rates have varied from
quarter to quarter but have remained relatively consistent with the
lower 2005 payment rates. Medicare‘s cost containment efforts have
targeted the most expensive of the separately billable
drugs”Epogen®”for which program spending totaled $2 billion in 2005.
Epogen is used to treat anemia in ESRD patients; most patients receive
this drug at nearly every dialysis session. Recent data indicate that
Epogen use per patient continues to rise, although more slowly than in
previous years.
Several unknowns about the composition of ASP and the lack of empirical
evidence for the percentage level added to ASP make it difficult for
CMS to determine whether the ASP-based payment rates are no greater
than necessary to achieve appropriate beneficiary access. Paying for
Epogen under the ASP method is of particular concern. The ASP method
relies on market forces to moderate manufacturers‘ prices; but Epogen
is the product of a single manufacturer and has no competitor products
in the ESRD market. Without competition, the power of market forces to
moderate price is absent. For rarely used products, the lack of price
competition may be financially insignificant, but for Epogen, which is
pervasively and frequently used, the lack of price competition could be
having a considerable effect on Medicare spending.
In 2003, the Congress required CMS to issue a report and conduct a
demonstration of a system that would bundle payment for ESRD services,
including drugs that are currently billed separately, under a single
rate. The bundled payment approach, used to pay for most Medicare
services, encourages providers to operate efficiently, as they retain
the difference if Medicare‘s payment exceeds the costs they incur to
provide the services. GAO and others have found that a bundled rate for
all ESRD services would have advantages for achieving efficiency and
clinical flexibility in treating ESRD patients. CMS‘s demonstration
testing the feasibility of a bundled rate, mandated to start in January
2006, is delayed, as is the completion of the agency‘s mandated report
to the Congress on bundling. The report was due in October 2005; as of
November 2006, CMS officials could not tell us when the report would be
available.
What GAO Recommends:
The Congress should consider establishing a bundled payment system for
all ESRD services, including drugs, as soon as possible. CMS generally
agreed with GAO‘s view, but said it needed to finalize, among other
things, the development of a sound case-mix adjuster before bundling
payment for all ESRD services.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-77].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact A. Bruce Steinwald at
(202) 512-7101 or steinwalda@gao.gov.
[End of Section]
Contents:
Letter:
Results in Brief:
Background:
New Payment Provisions Reduced Subsidy from Separately Billable Drugs
but Did Not Eliminate Incentives to Overuse These Drugs:
ASP Payment Method, While Administratively Practical, May Not Help
Medicare Foster Efficient Provider Goals:
Bundling Is Fundamental to Medicare Payment Policy, but System to
Expand Composite Rate Bundle to Include All ESRD Drugs Remains in
Design Phase:
Conclusions:
Matter for Congressional Consideration:
Agency and Industry Comments and Our Evaluation:
Appendix I: Comments from the Centers for Medicare & Medicaid Services:
Appendix II: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Separately Billable Injectable ESRD Drugs Used by Dialysis
Facilities in 2005:
Table 2: Recent Legislative and Regulatory Changes to ESRD Payments:
Table 3: Medicare Reimbursement Rates for Certain Separately Billable
ESRD Drugs:
Table 4: Percentage Change in Medicare Expenditures for Certain
Separately Billable ESRD Drugs from 2004 to 2005:
Figures:
Figure 1: Average Epogen Dose per Administration in the First 6 Months
of Each Year, 1991-2006:
Figure 2: Average Number of Monthly Epogen Administrations in the First
6 Months of Each Year, 1991-2006:
Abbreviations:
ASP: average sales price:
AWP: average wholesale price:
CMS: Centers for Medicare & Medicaid Services:
CHOIR: Correction of Hemoglobin and Outcomes in Renal Insufficiency
Trial:
CREATE: Cardiovascular Risk Reduction by Early Anemia Treatment with
Epoetin Beta Trial:
ESRD: end-stage renal disease:
FDA: Food and Drug Administration:
Hct: hematocrit:
HHS: Department of Health and Human Services:
KCC: Kidney Care Council:
KDOQI: Kidney Disease Outcomes Quality Initiative;
MedPAC: Medicare Payment Advisory Commission:
MMA: The Medicare Prescription Drug, Improvement, and Modernization Act
of 2003:
NRAA: National Renal Administrators Association:
OIG: Office of the Inspector General:
RPA: Renal Physicians Association:
USRDS: United States Renal Data System:
United States Government Accountability Office:
Washington, DC 20548:
November 13, 2006:
The Honorable William M. Thomas:
Chairman:
Committee on Ways and Means:
House of Representatives:
Dear Mr. Chairman:
Regardless of age, most individuals with end-stage renal disease
(ESRD), a condition of permanent kidney failure, are eligible for
health care coverage under Medicare.[Footnote 1] Since the
implementation of the ESRD benefit in 1973, hundreds of thousands of
lives have been extended through Medicare-covered dialysis treatment--
a process that removes excess fluids and toxins from the bloodstream.
Patients receive additional items and services related to their
dialysis treatments, such as laboratory tests, clinical services, and
drugs to treat conditions resulting from the loss of kidney function,
such as anemia and low blood calcium. In 2005, Medicare's ESRD
population was about 390,000 and program expenditures for dialysis and
dialysis-related drugs totaled $7.9 billion.[Footnote 2]
The Centers for Medicare & Medicaid Services (CMS) in the Department of
Health and Human Services (HHS), which has the responsibility for
administering the Medicare program, divides ESRD items and services
into two groups for payment purposes. In the first group are dialysis
and associated routine services--such as nursing, supplies, equipment,
and certain laboratory tests. These items and services are paid for
under a composite rate--that is, one rate for a defined set of
services. Paying under a composite rate is a common form of Medicare
payment also known as bundling. In the second group are primarily
injectable drugs and certain laboratory tests that were either not
routine or not available in 1983 when Medicare implemented the
composite rate. These items and services, which are paid for separately
on a per-service basis, are referred to as "separately billable." Over
time, Medicare's composite rate, which was not automatically adjusted
for inflation, covered progressively less of the costs to provide
routine dialysis services, while program payments for the separately
billable drugs generally exceeded providers' costs to obtain these
drugs.[Footnote 3] As a result, dialysis facilities relied on
Medicare's generous payments for separately billable drugs to subsidize
the composite rate payments that had remained nearly flat for two
decades.[Footnote 4] In addition, the use of the separately billable
drugs by facilities became routine, and program payments for these
drugs grew substantially. In 2005, program spending for the separately
billable ESRD drugs accounted for about $2.9 billion.
Medicare's payment method for separately billable ESRD drugs has
changed several times in the last few years. Currently, each of these
drugs is paid for on a per administration basis equal to 6 percent
above manufacturers' average sales price (ASP), referred to as ASP+6;
this payment rate went into effect in 2006.[Footnote 5] In 2005,
Medicare spending for one of these drugs, Epogen®,[Footnote 6] was $2
billion, accounting for more than two-thirds of Medicare payments for
all separately billable ESRD drugs. Introduced in 1989, Epogen was an
expensive breakthrough drug used to treat anemia in patients with
ESRD.[Footnote 7] Over time, policymakers have raised concerns about
incentives in the Medicare payment system for dialysis facilities to
use Epogen more than necessary because Medicare payments for the drug
substantially exceeded facilities' costs of acquiring it.[Footnote 8]
In principle, these incentives existed for all of the separately
billable drugs, but the attention to Epogen stems from its pervasive,
frequent use: that is, most ESRD patients receive injections of Epogen
at nearly every dialysis treatment.[Footnote 9]
In recent years, CMS has been exploring, as required by the Congress,
the creation of a bundled payment for all ESRD services, including the
drugs that facilities currently bill for separately. In response to a
mandate that CMS study the feasibility of creating a bundled
payment,[Footnote 10] the agency issued a study in 2003 concluding that
developing a bundled ESRD payment rate was feasible and that further
study of case-mix adjustment--that is, a mechanism to account for
differences in patients' use of resources--was needed. In the Medicare
Prescription Drug, Improvement, and Modernization Act of 2003 (MMA),
the Congress required that CMS report on the design of a bundled
prospective payment system for ESRD services, including a case-mix
adjustment methodology, and conduct a 3-year demonstration to test the
design of a bundled ESRD payment system.[Footnote 11]
You asked us to report on issues related to payment for separately
billable ESRD drugs. This report examines the (1) potential for recent
payment changes to address the subsidization issue and eliminate
incentives to overuse separately billable ESRD drugs, (2)
appropriateness of the ASP payment method to set rates for separately
billable ESRD drugs, and (3) rationale for developing, and the status
of CMS's efforts to develop, a bundled payment method that includes all
ESRD drugs.
To examine the effect of recent payment changes, we reviewed
legislation and regulations relevant to the payment system for ESRD
drugs and services. We also reviewed publicly available information
from CMS on prices for drugs used in ESRD facilities. We reviewed data
for the first 6 months of each year from 1991 to 2005 and preliminary
data from the first 6 months of 2006 on the utilization of Epogen from
the United States Renal Data System (USRDS).[Footnote 12],[Footnote 13]
We assessed the reliability of these data by interviewing officials
responsible for producing these data, reviewing relevant documentation,
and examining the data for obvious errors. We determined that the data
were sufficiently reliable for the purposes of our study. To determine
the appropriateness of the ASP payment method, we reviewed our
previously issued products on this method and interviewed CMS
officials, dialysis facility representatives, nephrologists, drug
manufacturers, and other experts on ESRD.[Footnote 14] To explore the
rationale for and efforts to design a payment bundle for ESRD services,
we reviewed the clinical literature on dialysis and injectable drugs
and information from CMS on its ESRD bundling demonstration. We
performed this work from April 2006 through November 2006 in accordance
with generally accepted government auditing standards.
Results in Brief:
Since 2003, several legislative and regulatory changes have been
implemented to adjust Medicare's composite rate and lower payment rates
for separately billable ESRD drugs. The effect of these changes has
been to raise the composite rate while reducing the subsidy from
generous Medicare payments for the separately billable drugs under pre-
MMA payment rates. In 2005, when the first MMA change to Medicare's
payment method for these drugs was implemented, Medicare expenditures
for certain separately billable ESRD drugs dropped 11.8 percent. Since
2006, when payment for these drugs changed to a method based on ASP,
Medicare's payment rates have varied from quarter to quarter but have
remained relatively consistent with the lower 2005 payments. Medicare's
cost containment efforts have targeted Epogen, because most of the
program's spending for ESRD drugs outside the composite rate is for
Epogen alone. Several months of data suggest that, although the growth
in Epogen use per patient has slowed, the use of this drug continues to
rise.
Medicare's ASP method of paying for Part B drugs--which include the
ESRD drugs outside the composite rate--may not be sufficient for
achieving Medicare's rate-setting goals. Several unknowns about the
composition of ASP and the lack of empirical evidence for the
percentage level added to ASP make it difficult for CMS to determine
whether the ASP-based payment rates are no greater than necessary to
achieve appropriate beneficiary access. Paying for Epogen under the ASP
method is of particular concern. The ASP method relies on market forces
to moderate manufacturers' prices; however, Epogen is the product of a
single manufacturer and has no competitor products in the ESRD market.
In principle, ASPs are lower than they would otherwise be when two or
more manufacturers of similar products compete on price for market
share. However, when no competition exists, as is the case for Epogen,
the power of market forces to moderate price is absent. For rarely used
products, the lack of price competition may be financially
insignificant, but for Epogen, which is pervasively and frequently
used, the lack of price competition could be having a considerable
effect on Medicare spending.
Bundling services under a single payment rate is a fundamental
principle of Medicare payment policy for most types of services. The
composite rate for routine dialysis-related services was the first of
Medicare's several payment systems that, in broad terms, sets a fixed,
prospective rate for a set of clinically related services. Under
Medicare's current payment policy for ESRD services, the composite rate
excludes drugs that have become routine in treating ESRD patients. In
2003, the MMA required CMS to design a system that would no longer pay
for each injectable ESRD drug under a separate rate but would bundle
payment for these drugs together with other ESRD items and services
under a single rate. We and others have noted that a bundled rate would
have advantages for achieving efficiency and clinical
flexibility.[Footnote 15] For example, a bundled rate would remove the
financial incentive for facilities to choose one treatment over
another, allowing the flexibility to choose treatments that are
clinically effective but may require less use of Epogen. Interested
parties we spoke with, including facility representatives and ESRD
experts, also supported a bundled payment for dialysis-related items
and services for similar reasons. In addition, they noted the
importance of designing a sound case-mix adjuster to account for the
differences across facilities in the mix of patients using more or less
resources than average and the need for an automatic payment update to
adjust the bundled rate for inflation. CMS's report designing a model
for a bundled ESRD payment system was due in October 2005; however, as
of November 2006, CMS officials could not tell us when the report would
be issued. The demonstration testing the feasibility of a bundled rate,
mandated to start in January 2006, is also delayed.
In light of the uncertain timeline necessary for CMS to test bundling
and the potential for bundling to eliminate financial incentives to
overuse separately billable drugs, the Congress should consider
establishing a bundled payment system for all ESRD services as soon as
possible.
In commenting on a draft of this report, CMS generally agreed with our
view that all ESRD services be included under a bundled payment system
but expressed the need to resolve implementation issues, primarily that
the development of a sound case-mix adjuster be finalized.
Representatives from ESRD industry groups who reviewed the report
echoed CMS's concerns regarding the development of an adequate case-mix
adjuster and expressed other concerns associated with bundled payments,
such as the need to account for the costs of technology innovation and
treatment protocols.
Background:
Most individuals diagnosed with ESRD are eligible to receive Medicare
benefits under both Medicare Parts A and B.[Footnote 16],[Footnote 17]
Medicare covers over 80 percent of all individuals with the disease.
Treatment of ESRD:
ESRD treatment options include kidney transplantation and maintenance
dialysis. The latter removes substances that would otherwise be
filtered through the kidney from the individual's blood. Kidney
transplants are not a practical option on a wide scale, as not all
patients are candidates for transplant and suitable donated organs are
scarce. In contrast, dialysis is the treatment used by most ESRD
patients. Dialysis can be administered through two methods:
hemodialysis and peritoneal dialysis. During hemodialysis, a machine
pumps blood through an artificial kidney, called a hemodialyzer, and
returns the cleansed blood to the body. Hemodialysis, the most
prevalent treatment method,[Footnote 18] is generally administered at
freestanding facilities that provide dialysis services.[Footnote 19]
The conventional regimen includes hemodialysis three times a
week.[Footnote 20]
Peritoneal dialysis--which is generally done in the home--utilizes the
peritoneal membrane, which surrounds the patient's abdomen, as a
natural blood filter. Patients remove wastes and excess fluids from
their abdomen manually throughout the day, or a machine automates the
process while they sleep at night. This procedure eliminates the need
for the blood to leave the body of the patient and filter through a
machine. The use of peritoneal dialysis has declined as a treatment
modality over the last decade.[Footnote 21]
One of the complications of ESRD is anemia, a condition in which an
insufficient number of red blood cells is available to carry oxygen
throughout the body. In ESRD patients, this condition is treated by
maintaining at an optimal level the percentage of red blood cells
relative to all cells in whole blood (by volume). This measure is known
as the hematocrit (Hct) level. The Kidney Disease Outcomes Quality
Initiative (KDOQI), established by the National Kidney Foundation, has
set the minimum target for ESRD patients' Hct levels at 33 percent and
has found insufficient evidence to recommend routinely maintaining Hct
levels at 39 percent or greater.[Footnote 22] ESRD patients receive
Epogen to keep their Hct above a minimum level.[Footnote 23] The Food
and Drug Administration (FDA) labeled Epogen for use encompassing a
somewhat lower Hct target level ranging from 30 to 36 percent. Recent
clinical studies cited by KDOQI indicate that there may be increased
patient mortality and morbidity if Hct levels are much higher than 39
percent.[Footnote 24] Epogen is typically administered to Medicare ESRD
patients intravenously. Epogen can also be administered subcutaneously,
that is, through an injection under the skin.[Footnote 25] The
subcutaneous method requires less epoetin, but experts note that,
because some pain is associated with this method, patients generally
prefer intravenous delivery.[Footnote 26]
Medicare Payment for ESRD Services:
Medicare's composite rate is designed to cover the cost of services
associated with a single dialysis treatment, including nursing and
other clinical services, social services, supplies, equipment, and
certain laboratory tests and drugs. Under the composite rate,
facilities receive a fixed payment, regardless of their actual costs to
deliver these services. In 2006, the composite base rate is about $130
for freestanding dialysis facilities.[Footnote 27]
Medicare pays separately for certain drugs and laboratory tests that
have become routine treatments since 1983. These drugs include, but are
not limited to, epoetin (brand name, Epogen), injectable vitamin D, and
injectable iron. Epogen is generally administered to most patients at
every dialysis treatment, whereas the other drugs, although routinely
provided, are not administered as frequently. Table 1 highlights three
separately billable prescription drugs provided routinely to dialysis
patients.
Table 1: Separately Billable Injectable ESRD Drugs Used by Dialysis
Facilities in 2005:
Separately billable drugs used in dialysis treatments: Injectable
iron[A];
Compound: Iron sucrose;
Number of manufacturers: 1;
Percentage of Medicare expenditures for separately billable ESRD drugs:
5.3.
Separately billable drugs used in dialysis treatments: Injectable
iron[A];
Compound: Sodium ferric gluconate complex;
Number of manufacturers: 1;
Percentage of Medicare expenditures for separately billable ESRD drugs:
3.3.
Separately billable drugs used in dialysis treatments: Injectable
iron[A];
Compound: Iron dextran;
Number of manufacturers: 3;
Percentage of Medicare expenditures for separately billable ESRD drugs:
0.1.
Separately billable drugs used in dialysis treatments: Injectable
vitamin D[B];
Compound: Paricalcitol;
Number of manufacturers: 1;
Percentage of Medicare expenditures for separately billable ESRD drugs:
11.4.
Separately billable drugs used in dialysis treatments: Injectable
vitamin D[B];
Compound: Doxercalciferol;
Number of manufacturers: 1;
Percentage of Medicare expenditures for separately billable ESRD drugs:
2.8.
Separately billable drugs used in dialysis treatments: Injectable
vitamin D[B];
Compound: Calcitriol;
Number of manufacturers: 8;
Percentage of Medicare expenditures for separately billable ESRD drugs:
0.4.
Separately billable drugs used in dialysis treatments: Epoetin[C];
Compound: Epoetin alfa;
Number of manufacturers: 1;
Percentage of Medicare expenditures for separately billable ESRD drugs:
70.0.
Separately billable drugs used in dialysis treatments: Epoetin[C];
Compound: Darbepoetin alfa;
Number of manufacturers: 1;
Percentage of Medicare expenditures for separately billable ESRD drugs:
3.7.
Separately billable drugs used in dialysis treatments: Other separately
billable drugs used in dialysis facilities;
Compound: Levocarnitine, Alteplase, Vancomycin, vaccines, etc;
Number of manufacturers: N/A;
Percentage of Medicare expenditures for separately billable ESRD drugs:
3.0.
Total;
Compound: [Empty];
Number of manufacturers: [Empty];
Percentage of Medicare expenditures for separately billable ESRD drugs:
100.0.
Source: GAO analysis of CMS data and drug information from FDA.
[A] Iron is used in the treatment of anemia in conjunction with
epoetin.
[B] Vitamin D is used to prevent osteomalacia by promoting bone
mineralization.
[C] Epoetin is used in the treatment of anemia by promoting the
formation of red blood cells by the bone marrow.
[End of table]
As table 1 shows, three drugs--iron sucrose, paricalcitol, and epoetin
alfa--account for about 87 percent of Medicare spending on separately
billable ESRD drugs. Although each of these three drugs is a "sole-
source" product--that is, produced by a single manufacturer--two of the
three have pharmaceutical alternatives available, whereas the third,
epoetin, has no available alternatives in the ESRD market.[Footnote 28]
In recent years, Medicare's method of paying for separately billable
ESRD drugs has changed several times. Beginning in 1998, Medicare law
required that payment for drugs covered under Part B equal 95 percent
of the drug's average wholesale price (AWP).[Footnote 29] Despite its
name, however, AWP was neither an average price nor the price
wholesalers charged. It was a price that manufacturers derived using
their own criteria; there were no requirements or conventions that AWP
reflect the price of an actual sale of drugs by a
manufacturer.[Footnote 30] An analysis we conducted in 2001 on Part B
drug prices found that Medicare's AWP-based payments often far exceeded
market prices that were widely available to health care
providers.[Footnote 31]
The MMA mandated that in 2005 Medicare pay for separately billable ESRD
drugs based on their acquisition costs, as determined by the HHS Office
of the Inspector General (OIG).[Footnote 32] Since acquisition costs
were not defined in the MMA, the OIG determined a drug's average
acquisition cost based on a survey of prices providers paid for the top
10 ESRD drugs, ranked by Medicare expenditures.[Footnote 33] For 2005,
Medicare paid the OIG-determined average acquisition cost for the top
10 ESRD drugs.[Footnote 34] For 2006, the MMA gave the HHS Secretary
discretion to alter the basis of payment for separately billable ESRD
drugs.[Footnote 35] Under this authority, CMS determined that Medicare
would pay for the separately billable ESRD drugs using the method
required by the MMA to pay physicians for these drugs--that is, 106
percent of the drug's ASP.[Footnote 36]
CMS instructs pharmaceutical manufacturers to report data to CMS on the
ASP for each Part B drug sold by the manufacturer, within 30 days after
the end of the quarter. For drugs sold at different strengths and
package sizes, manufacturers are required to report price and volume
data for each product, after accounting for price concessions. CMS then
aggregates the manufacturer-reported ASPs to calculate a national ASP
for each drug category.[Footnote 37] ASP rates are calculated and
posted every quarter. The rates reflect the sales price on average from
6 months earlier.
New Payment Provisions Reduced Subsidy from Separately Billable Drugs
but Did Not Eliminate Incentives to Overuse These Drugs:
Since 2003, several legislative and regulatory changes have been
implemented affecting Medicare's composite rate for routine ESRD
services and payment rates for separately billable ESRD drugs. The
changes have increased the composite rate and reduced the subsidy
facilities obtained from generous Medicare payments for the separately
billable drugs under pre-MMA payment rates. Nevertheless, as long as
facilities receive a separate payment for each administration of each
drug and the payment exceeds the cost of acquiring the drug, an
incentive remains to use more of these drugs than necessary. For
Epogen, the most frequently used drug, several months of data indicate
that the per-patient use of this drug continues to rise, although at a
slower rate than under pre-MMA payment rates.
New Payment Provisions Increased Composite Rate and Reduced Subsidy
from Separately Billable Drugs:
The MMA initiated new Medicare payment provisions addressing the
composite rate and payment for separately billable drugs. Prior to the
MMA's payment changes, facilities relied on payments for separately
billable drugs to subsidize the cost of providing dialysis services
covered under the composite rate. In a 2004 report, we found that, in
2001, Medicare's payment for the composite rate was 11 percent lower on
average than facilities' average costs to provide the items and
services included in the composite rate, whereas Medicare's payment for
separately billable drugs was 16 percent higher than facilities'
average costs of acquiring these drugs.[Footnote 38] We concluded that
this payment disparity created an incentive for facilities to overuse
separately billable drugs, as payments for them compensated for losses
on items and services included in the composite rate.
Together with the MMA provisions, more recent legislative and
regulatory changes have reduced the disparity between Medicare's
payments and facilities' average costs for both composite rate services
and separately billable drugs. Essentially, these changes lowered
payments for separately billable drugs from their pre-MMA amounts, and
raised payments for the composite rate. The base composite rate was
increased by 1.6 percent in 2005 and 2006 and the composite rate total
was further increased through a "drug add-on" payment, which shifted
some of the payments for separately billable drugs to the composite
rate.[Footnote 39] In 2005, the add-on equaled 8.7 percent of the
updated composite rate. In 2006, the 8.7 percent was replaced with a
drug add-on payment of 14.5 percent of the 2006 updated composite
rate.[Footnote 40] (See table 2.)
Table 2: Recent Legislative and Regulatory Changes to ESRD Payments:
MMA;
Changes in composite rate: Increase in the base composite rate of 1.6
percent in 2005; Creation of a "drug add-on" adjustment to the
composite rate in order to maintain budget neutrality, starting in
2005; Adjustment of drug add-on payment made yearly to reflect annual
growth of drug expenditures, starting in 2006;
Changes in payment for separately billable drugs: Payment rates based
on average acquisition cost as determined by the OIG for 2005.
CMS regulation;
Changes in composite rate: Drug add-on payment equaled 8.7 percent of
the updated 2005 base composite rate; Drug add-on payment of 8.7
percent was replaced with an add-on equal to 14.5 percent of the
updated 2006 base composite rate;
Changes in payment for separately billable drugs: Payment rates based
on ASP + 6 percent for 2006.
Deficit Reduction Act of 2005;
Changes in composite rate: Increase in the base composite rate of 1.6
percent in 2006;
Changes in payment for separately billable drugs: [Empty].
Source: GAO analysis of laws and regulations.
Note: The HHS OIG developed the methodology to determine average
acquisition cost of ESRD drugs.
[End of table]
The most significant changes to the ESRD payment system are the changes
in payment rates for separately billable drugs. In 2005, Medicare's
payment rates based on average acquisition costs were lower than its
previous payment rates based on 95 percent of AWP. For example, from
2004 to 2005, the per-unit rate for iron dextran decreased from $17.91
to $10.94 and the per-unit rate for paricalcitol decreased from $5.33
to $4.00. (See table 3.) Since 2006, when the payment method for
separately billable drugs changed to ASP + 6 percent, Medicare's
payment rates have varied from quarter to quarter but have remained
relatively consistent with the lower 2005 payments based on average
acquisition costs.
Table 3: Medicare Reimbursement Rates for Certain Separately Billable
ESRD Drugs:
Iron;
Iron dextran (50.0 mg);
2004 95% AWP: $17.91;
2005 Average acquisition cost: $10.94;
January 2006[A]ASP+6%: n/a;
April 2006[A]ASP+6%: n/a;
July 2006[A]ASP+6%: n/a;
October 2006[A]ASP+6%: n/a.
Iron;
Iron dextran[B](165 Injection) (50.0 mg);
2004 95% AWP: n/a;
2005 Average acquisition cost: n/a;
January 2006[A]ASP+6%: $12.25;
April 2006[A]ASP+6%: $12.42;
July 2006[A]ASP+6%: $11.69;
October 2006[A]ASP+6%: $11.78.
Iron;
Iron dextran[B] (267 injection) (50.0 mg);
2004 95% AWP: n/a;
2005 Average acquisition cost: n/a;
January 2006[A]ASP+6%: $10.24;
April 2006[A]ASP+6%: $10.27;
July 2006[A]ASP+6%: $10.34;
October 2006[A]ASP+6%: $10.38.
Iron;
Iron sucrose (1.0 mg);
2004 95% AWP: $0.66;
2005 Average acquisition cost: $0.37;
January 2006[A]ASP+6%: $0.36;
April 2006[A]ASP+6%: $0.36;
July 2006[A]ASP+6%: $0.37;
October 2006[A]ASP+6%: $0.36.
Iron;
Sodium ferric gluconate complex (12.5 mg);
2004 95% AWP: $8.17;
2005 Average acquisition cost: $4.95;
January 2006[A]ASP+6%: $4.90;
April 2006[A]ASP+6%: $5.06;
July 2006[A]ASP+6%: $4.75;
October 2006[A]ASP+6%: $4.81.
Vitamin D;
Calcitriol (0.1 mcg);
2004 95% AWP: $1.38;
2005 Average acquisition cost: $0.96;
January 2006[A]ASP+6%: $0.71;
April 2006[A]ASP+6%: $0.46;
July 2006[A]ASP+6%: $0.51;
October 2006[A]ASP+6%: $0.53.
Vitamin D;
Paricalcitol (1.0 mcg);
2004 95% AWP: $5.33;
2005 Average acquisition cost: $4.00;
January 2006[A]ASP+6%: $3.81;
April 2006[A]ASP+6%: $3.80;
July 2006[A]ASP+6%: $3.81;
October 2006[A]ASP+6%: $3.81.
Vitamin D;
Doxercalciferol (1.0 mcg);
2004 95% AWP: $5.50;
2005 Average acquisition cost: $2.60;
January 2006[A]ASP+6%: $2.69;
April 2006[A]ASP+6%: $3.17;
July 2006[A]ASP+6%: $3.16;
October 2006[A]ASP+6%: $2.88.
Epoetin;
Epogen (1,000 units);
2004 95% AWP: $10.00[C];
2005 Average acquisition cost: $9.76;
January 2006[A]ASP+6%: $9.57;
April 2006[A]ASP+6%: $9.33;
July 2006[A]ASP+6%: $9.48;
October 2006[A]ASP+6%: $9.45.
Source: GAO analysis of CMS information.
[A] Payments under ASP + 6 percent are based on quarterly data and
rounded to the nearest cent.
[B] The different doses of iron dextran were paid separately under the
ASP + 6 percent methodology.
[C] The payment for Epogen does not represent 95 percent of AWP.
[End of table]
Since the implementation of these changes, Medicare spending for
individual separately billable ESRD drugs has decreased to varying
degrees. Beginning in 2005, when Medicare's payment method for these
drugs changed from AWP to average acquisition cost, Medicare
expenditures for several separately billable drugs decreased 11.8
percent from 2004. (See table 4.) Specifically, the average payments
for iron sucrose and paricalcitol decreased by almost 35 percent and 25
percent, respectively.[Footnote 41] Similarly, payment for Epogen was
lower than it had been for the previous decade, when it was set
statutorily at $10 per unit, but the reduction--3.2 percent--was
significantly less compared with the other drugs.
Table 4: Percentage Change in Medicare Expenditures for Certain
Separately Billable ESRD Drugs from 2004 to 2005:
Dollars in millions.
Iron;
Iron dextran (50.0 mg);
2004 Medicare expenditures: 5.0;
2005 Medicare expenditures: 2.3;
Percentage change[A]: -54.4.
Iron;
Iron sucrose (1.0 mg);
2004 Medicare expenditures: 237.3;
2005 Medicare expenditures: 154.8;
Percentage change[A]: - 34.8.
Iron;
Sodium ferric gluconate complex (12.5 mg);
2004 Medicare expenditures: 159.6;
2005 Medicare expenditures: 96.2;
Percentage change[A]: -39.7.
Vitamin D;
Calcitriol (0.1 mcg);
2004 Medicare expenditures: 20.9;
2005 Medicare expenditures: 10.9;
Percentage change[A]: -48.1.
Vitamin D;
Paricalcitol (1.0 mcg);
2004 Medicare expenditures: 439.4;
2005 Medicare expenditures: 331.3;
Percentage change[A]: - 24.6.
Vitamin D;
Doxercalciferol (1.0 mcg);
2004 Medicare expenditures: 112.8;
2005 Medicare expenditures: 81.9;
Percentage change[A]: - 27.4.
Epoetin;
Epogen (1,000 units);
2004 Medicare expenditures: 2,107.2;
2005 Medicare expenditures: 2,039.6;
Percentage change[A]: -3.2.
Total;
2004 Medicare expenditures: 3,082.2;
2005 Medicare expenditures: 2,716.9;
Percentage change[A]: -11.8.
Source: GAO analysis of CMS data.
Note: Total includes Medicare expenditures from all facility types and
the 20 percent coinsurance the beneficiary pays.
[A] Totals and percentage change were calculated prior to rounding.
[End of table]
Because payments to facilities for separately billable drugs are closer
to the cost of acquiring these drugs and because composite rate
payments have increased, the degree of cross-subsidization to support
services provided under the composite rate has diminished, but the
incentive to overuse these drugs has not been eliminated. To the extent
that facilities can obtain the drugs for less than Medicare's payment
rates and that the volume of drugs billed for separately increases
facilities' revenue, an incentive remains for facilities to overuse
these drugs to maximize revenues.
Preliminary Data Suggest that Epogen Use Continues to Grow, Though More
Slowly than Before MMA Provisions Took Effect:
Utilization of Epogen--a major spending driver for ESRD services--has
been and remains a focus of Medicare's ESRD cost containment efforts.
Preliminary data show that Epogen use--as measured by average dose per
administration--continues to increase, although at a much slower rate
than in previous years.[Footnote 42] Specifically, using data for the
first 6 months of each year, we found that from 1991 through 2004,
before the MMA provisions took effect, Epogen use increased at an
average annual rate of 6.7 percent, rising from about 3,000 units per
administration to about 7,400 units (see fig. 1). In 2005, Epogen use
remained virtually unchanged; in 2006, the average monthly Epogen dose
per administration increased slightly from about 7,400 units to about
7,500 units, an increase of about 1.4 percent.
Figure 1: Average Epogen Dose per Administration in the First 6 Months
of Each Year, 1991-2006:
[See PDF for image]
Source: GAO analysis of data from USRDS.
Note: Data are per ESRD patient with at least one Epogen claim in the
first 6 months. We restricted the utilization data to the first half of
the year to make our comparisons consistent with 2006 data, which we
only have for the first 6 months of the year.
[End of figure]
Another measure of Epogen use--the average number of Epogen
administrations per month per patient--also has not changed
significantly since the implementation of the MMA. Between the first 6
months of 1994 and the first 6 months of 2004, the average number of
monthly Epogen administrations per patient increased from about 9.4 to
about 10.6 (see fig. 2). Although the average number of monthly
administrations was lower in both 2005 and 2006--at about 10.4 and 10.5
per patient, respectively--the average number of administrations per
patient in 2006 was about 10 percent higher than in 1991, when the
number was about 9.5.
Figure 2: Average Number of Monthly Epogen Administrations in the First
6 Months of Each Year, 1991-2006:
[See PDF for image]
Source: GAO analysis of data from USRDS.
Note: Data are per ESRD patient with at least one Epogen claim in the
first 6 months. We restricted the utilization data to the first half of
the year to make our comparisons consistent with 2006 data, which we
only have for the first 6 months of the year.
[End of figure]
In addition to payment changes, CMS has sought over time to limit
expenditures for Epogen by issuing policies that link payment to
utilization. That is, Medicare reduces payments when a patient's Hct
level reaches a certain percentage. Since 1997, CMS has created three
different monitoring policies to encourage the efficient use of Epogen
for ESRD patients. Each of these policies has been closely aligned with
the clinical guidelines for Hct levels endorsed by the National Kidney
Foundation. In 1997, the first policy denied payment when a patient's 3-
month rolling average Hct level exceeded 36.5 percent. In 1998, CMS
revised the policy so that the maximum level for the 3-month rolling
average Hct was 37.5 percent; if a patient exceeded that level,
payments were not denied as long as the Epogen dose was reduced 20
percent. In July 2004, CMS issued a proposal for a new monitoring
policy. After consultation with the dialysis community, the final
policy took effect on April 1, 2006. Under this policy, when a
patient's Hct level is above 39.0 percent, the facility must reduce the
Epogen dosage by 25 percent of the preceding month's administered
amount.[Footnote 43],[Footnote 44] Whether or not the facility reduces
the dosage, Medicare pays the facility as though the reduction has
occurred--in effect, not rewarding the facility for overutilization.
ASP Payment Method, While Administratively Practical, May Not Help
Medicare Foster Efficient Provider Goals:
In broad terms, Medicare's policy is to set payment rates that are
adequate to ensure beneficiary access to services but do not exceed the
costs efficient providers incur to furnish needed care. In prior work
on Medicare payment for Part B drugs, which include separately billable
ESRD drugs, we noted that the ASP method was practical for setting
payment rates compared with Medicare's previous methods to pay for
these drugs, but we remained concerned about the appropriateness of the
rates set under ASP.[Footnote 45] The practical aspects of ASP are
several: it is based on actual transactions and is a better proxy for
providers' acquisition costs than Medicare's previous methods to pay
for these drugs; ASP is the most recent publicly available price
information, as it is updated quarterly, and is therefore timely for
rate-setting purposes; and price data from manufacturers are
administratively easier for CMS to collect than obtaining such data
from health care providers.
However, we also observed that CMS is not well-positioned to validate
the accuracy or appropriateness of its ASP-based payment rates.
Significantly, CMS lacks sufficient information on how manufacturers
allocate rebates to individual drugs sold in combination with other
drugs or products. In addition, CMS does not instruct manufacturers to
provide a breakdown of price and volume data by purchaser type--that
is, by physicians, hospitals, other health care providers, and
wholesalers, which purchase drugs for resale to health care providers.
As a result, CMS cannot determine how well average price data represent
acquisition costs for different purchaser types.[Footnote 46]
Additionally, a sufficient empirical foundation does not exist for
setting the payment rate for Medicare Part B drugs at 6 percent above
ASP, further complicating efforts to determine the appropriateness of
the rate.
The ASP payment method is of particular concern with respect to Epogen
because it is the only product available in the ESRD market for anemia
management. The ASP method relies on market forces to achieve a
favorable payment rate for Medicare--that is, one that is sufficient to
maintain beneficiary access but not overly generous for providers and
therefore wasteful for taxpayers. In principle, under ASP, when two or
more clinically similar products exist in a market, market forces could
serve to bring prices down, as each manufacturer competes for its own
product's market share. In contrast, when a product is available
through only one manufacturer, Medicare's rate lacks the moderating
influence of competition. For this reason, Medicare's ASP method may
not be appropriate for Epogen, which is the product of a single
manufacturer and has no competitor products in the ESRD market. The
lack of price competition may be financially insignificant for
noncompetitive products that are rarely used, but for Epogen, which is
pervasively and frequently used, the lack of price competition could be
having a considerable effect on Medicare spending.
Since the introduction of Epogen in the ESRD anemia management market,
it has been difficult for competitor products to enter this market.
Amgen, Epogen's manufacturer, has held seven patents on Epogen, the
first of which was granted in 1987 and the last of which expires in
2015; Amgen has obtained injunctions against pharmaceutical firms
seeking to market their anemia management drugs in the United States.
However, competitor products may enter the U.S. market in the near
future. There are three potential sources of future competition: a drug
that currently exists, drugs that are likely to enter the market soon,
and products that are under development. Aranesp is a drug that Amgen
manufactures and markets to hospitals and physicians to treat anemia in
patients with cancer and chronic kidney disease but generally does not
market to ESRD facilities. CERA is a drug that the manufacturer--F.
Hoffmann LaRoche--hopes to introduce in the United States sometime in
2007.[Footnote 47] Certain products currently in development, which are
several years away from entering the market, could have a distinct
advantage over injectable products, as they are expected to be long-
lasting oral therapies.[Footnote 48],[Footnote 49]
Bundling Is Fundamental to Medicare Payment Policy, but System to
Expand Composite Rate Bundle to Include All ESRD Drugs Remains in
Design Phase:
The composite rate for routine dialysis-related services was the first
of Medicare's several payment systems that, in broad terms, sets a
fixed, prospective rate for a set of clinically related services.
Consistent with this payment policy, the Congress has required CMS to
develop a system that would no longer pay for each injectable ESRD drug
under a separate rate but would bundle payment for these drugs together
with other ESRD services under a single rate. A bundled rate would have
advantages for achieving efficiency and greater clinical flexibility.
CMS's design of a bundled rate is under way but behind schedule, making
the implementation of a fully bundled payment system, based on this
design, at least several years away. Any payment system changes based
on CMS's report or demonstration would require legislation.
Bundling Intended to Encourage Efficiency and Clinical Flexibility
While Discouraging Unnecessary Use:
Medicare's approach to paying for most services provided by facilities
is to pay for a group--or bundle--of services using a prospectively set
rate. For example, under prospective payment systems, Medicare makes
bundled payments for services provided by acute care hospitals, skilled
nursing facilities, home health agencies, and inpatient rehabilitation
facilities. In creating one payment bundle for a group of associated
items and services provided during an episode of care,[Footnote 50]
Medicare encourages providers to operate efficiently, as providers
retain the difference if Medicare's payment exceeds the costs they
incur to provide the services. Medicare's composite rate for routine
dialysis-related services was introduced in 1983 and was the program's
first bundled rate.[Footnote 51]
In recent years, we, the Medicare Payment Advisory Commission (MedPAC),
and CMS have recommended expanding the bundled payment for ESRD
services to include not only the services paid under the composite rate
but also the drugs that facilities currently bill for
separately.[Footnote 52] Experts contend that a bundled payment for
dialysis-related services would have two principal advantages. First,
it would encourage facilities to provide services efficiently; in
particular, under a fixed, bundled rate for a defined episode of
care,[Footnote 53] facilities would no longer have an incentive to
provide more ESRD drugs than clinically necessary. Second, bundled
payments would afford clinicians more flexibility in decision making
because incentives to prescribe a particular drug or treatment are
reduced.
For example, certain clinical alternatives are, according to some ESRD
experts, advantageous to patients and could result in the use of less
Epogen, but these alternatives are not encouraged under the current
payment system. Studies have shown that daily hemodialysis--which some
experts contend is clinically preferable--reduced the need for Epogen
in some ESRD patients with anemia.[Footnote 54] However, Medicare
coverage is limited to three dialysis treatments a week. Under a
bundled payment, facilities would have the flexibility to increase the
number of weekly dialysis treatments and reduce their use of Epogen.
Studies have also shown that patients who receive subcutaneous instead
of intravenous injections of epoetin and patients undergoing peritoneal
dialysis instead of hemodialysis need less epoetin to manage their
anemia.[Footnote 55],[Footnote 56] Under the current payment system,
which pays facilities for epoetin on a per administration basis,
facilities have an incentive to select the epoetin delivery method and
the dialysis modality that maximize their Medicare revenue. Under a
bundled payment, facilities would have less incentive to choose the
costlier intravenous over subcutaneous injections of epoetin or the
costlier hemodialysis over peritoneal dialysis.
Facility representatives, ESRD experts, and other interested parties we
spoke with generally supported a bundled payment for dialysis-related
items and services while underscoring the importance of certain
elements as part of the bundled payment system. First, facility
representatives noted that bundled payments called for a case-mix
adjuster--that is, a mechanism to account for the differences in the
mix of more expensive and less expensive patients across facilities.
Without accounting for these differences, facilities that treated a
disproportionate share of costly patients would be financially
disadvantaged.
Second, some facility representatives noted that an automatic payment
update would be needed to adjust the bundled rate for inflation,
consistent with Medicare's other bundled payment systems that are
updated automatically on an annual basis. They pointed out that the
current ESRD composite rate is Medicare's only payment bundle that does
not receive an automatic update.[Footnote 57]
Third, ESRD experts we spoke with noted that, under bundling, the
incentive to overuse services is blunted, but the incentive to underuse
services is present. For example, facilities could choose to provide
too little Epogen to patients with anemia because they would save money
providing less of this costly drug. These individuals commented that
CMS's monitoring policy, which currently focuses on overutilization of
Epogen, would need to refocus its attention on underutilization to
ensure that under a bundled payment system ESRD patients received
appropriate levels of Epogen and other dialysis-related drugs and
services.
Implementation of Bundled Payment System for ESRD Services Could Be
Years Away:
The MMA mandated a two-pronged approach for CMS to study the creation
of a bundled payment method. It required CMS to submit a report to the
Congress on a bundled payment system design in October 2005 and start a
3-year bundling demonstration in January 2006.[Footnote 58] The
legislation linked the two requirements by directing CMS to base the
design of the bundling demonstration on the content of the mandated
report. It also required CMS to obtain input on the demonstration's
design and implementation from an advisory panel that included industry
and government experts. The report had not been issued nor had the
demonstration been launched as of November 2006. Any payment system
changes based on CMS's report or demonstration would require
legislation.[Footnote 59]
The report and demonstration efforts, led by two different
organizational units in CMS, face similar design considerations. Both
must define the ESRD services to be included in a payment bundle,
design a case-mix adjustment model to account for differences in
patients' use of resources, and develop a payment policy for
exceptional cases, known as an outlier policy. However, despite similar
goals, each unit has a different focus. Essentially, the unit
responsible for the report is designing a bundled payment system that
is intended to be implemented programwide and expeditiously, following
congressional approval. In contrast, the unit responsible for the
demonstration is designing a bundled payment system that is intended to
be implemented on a limited and self-selective basis--that is, through
facilities' voluntary participation in the demonstration.
The time frame for implementing a bundled payment system based on CMS's
report is uncertain. Officials could not tell us when the report would
be available. Furthermore, additional time is needed for the Congress
to review the report and possibly pass legislation based on the report.
CMS officials predict that it would take a minimum of 18 months to
fully implement the system, once legislation had been enacted.
The start of the bundled payment demonstration is similarly subject to
an uncertain chain of events. Specifically, under MMA, CMS cannot
launch its demonstration before considering the information in its
mandated report.[Footnote 60] However, once demonstration staff are
able to consider the report's information, CMS can begin taking steps
to solicit proposals for participation by dialysis facilities. The
selection process involves screening applications for conformance with
the demonstration's criteria and the awarding of contracts. This
process can take a minimum of several months. Demonstration staff
anticipate that the demonstration will start in October 2007. Under
this time line, they expect that the first useable results will be
available 12 months later, or October 2008. On the basis of these
results, the Congress could choose to pass legislation to change the
ESRD payment system. Because CMS typically makes mandated payment
changes effective at the beginning of calendar years, and because such
changes require a several-month period of rulemaking and public
comment, the earliest payment year that could be informed by
demonstration results is 2010.
Conclusions:
The rationale for Medicare to continue paying for Epogen and other ESRD
drugs outside of a payment bundle has diminished over time. Composite
rate updates and add-ons, coupled with the overhaul of payment for Part
B drugs, have moved Medicare toward paying more appropriately for ESRD
services. Nevertheless, under the ASP payment method--which pays for
separately billable ESRD drugs on a per administration basis--
facilities continue to have an incentive to use these drugs more than
may be necessary. Paying for Epogen under ASP presents an additional
dilemma: as a single-source drug in a market with no competitor
products, Epogen is not subject to the moderating effects that
competition can have on price.
In our view, Medicare could realize greater system efficiency if all
ESRD services, including drugs, were bundled under a single payment. A
bundled payment--suitably adjusted for differences across facilities in
their mix of patients--would encourage facilities to use drugs more
prudently, as they would have no financial incentive to use more than
necessary and could retain the difference between Medicare's payment
and their costs. At the same time, because treatment choices would be
payment neutral, clinicians would have more flexibility to try
different treatment combinations of items and services paid for in the
bundle. To account for facilities' increased or decreased costs over
time, a reexamination of the bundled rate may be necessary
periodically. In the case of Epogen, for example, if other competitor
products entered the market in the future, the costs facilities would
incur to treat anemia could decline. By adjusting the payment bundle
accordingly, Medicare could realize the benefits of such cost
reductions.
CMS's time line is considerably protracted for issuing the mandated
report on a bundled ESRD payment system and conducting a demonstration
that remains under development. The time needed to complete these steps
makes the prospect of implementing such a system several years away.
Matter for Congressional Consideration:
In light of the uncertain time frame for CMS's test of bundling and the
potential for bundling to eliminate financial incentives to overuse
separately billable drugs, the Congress should consider establishing a
bundled payment system for all ESRD services as soon as possible.
Agency and Industry Comments and Our Evaluation:
Comments from CMS:
In written comments on a draft of this report, CMS noted its
appreciation of our interest in ensuring an appropriate payment system
for all ESRD services and stated that our findings will be useful to
the agency in fulfilling its commitment to reform the ESRD payment
system. The agency generally agreed with our view that all ESRD
services should be included under a bundled payment system but
expressed the need to resolve implementation issues, primarily that the
development of a sound case-mix adjuster be finalized. It stated that
such a system should also promote efficiency and clinical flexibility
for ESRD facilities and should guard against incentives to undertreat
ESRD patients in order to maximize profits. We agree that a fully
bundled system will require an adequate case-mix adjuster and a
monitoring system to ensure patients receive adequate care. At the same
time, we are asking the Congress to consider acting as soon as
possible, acknowledging that the Congress would likely want to receive
and consider CMS's research findings and recommendations before
establishing a new payment system.
CMS observed that it has devoted considerable time and resources to
developing an appropriate ESRD payment system, including research on
case-mix adjusters and quality incentives. Specifically, the agency
noted that the implementation in April 2005, of the case-mix adjusted
composite rate as required by the MMA of 2003 was a significant
accomplishment. CMS has also pursued several research approaches in its
efforts to create a demonstration of a fully bundled ESRD payment
system and expects to build on these prior efforts to form the basis
for ESRD payment reform. We commend CMS for its attention to research
on ESRD payment and encourage the agency to expedite the completion of
its report to the Congress. CMS also mentioned the importance of
collecting data on patient outcomes. We appreciate the importance of
collecting these data, but this issue was beyond the scope of this
report. CMS provided technical comments, which we incorporated as
appropriate. We have reprinted CMS's letter in appendix I.
Comments from Industry Representatives:
We invited representatives of drug manufacturers, large and small
dialysis facility organizations, and a nephrologist specialty
association to review and comment on the draft report. The groups
represented were Amgen Inc. (Amgen), F. Hoffmann-La Roche Ltd. (Roche),
the Kidney Care Council (KCC), the National Renal Administrators
Association (NRAA), and the Renal Physicians Association (RPA). Several
of the industry groups noted that the report was well written,
thorough, and covered many of the issues affecting dialysis providers.
The bulk of the groups' comments focused on three general issues
central to the message of our report: the increase in utilization of
Epogen over time, the current ASP-based payment system for ESRD drugs,
and the implementation of a fully bundled ESRD payment system.
First, Amgen, KCC, Roche, and NRAA noted that the report did not fully
explain why utilization of Epogen has grown over time or why the growth
rate has slowed in recent years. Amgen stated that the draft report did
not sufficiently cover the goal of Epogen therapy--which is to increase
patient Hct levels--and its link to improved quality of life for
dialysis patients. KCC noted that while the average Epogen dose has
increased over time, patient outcomes--as measured by average Hct
levels--have also improved. KCC further contended that because Epogen
utilization has remained relatively flat in recent years, providers are
not responding to the incentive to overuse ESRD drugs. Roche maintained
that the slow growth in Epogen use over the past few years is
attributable to more patients' having achieved Hct levels within the
target range. NRAA added that the slower growth of Epogen use is
positive because it demonstrates that providers use less Epogen as more
patients reach the target Hct range.
In our report, we discuss the utilization of Epogen rather than the
clinical outcomes associated with that utilization. In response to the
groups' comments, we have added information that describes the benefits
of Epogen therapy as well as data on patient Hct levels prior to the
MMA payment changes. Although we do not take a position on whether the
drug is overutilized at the levels we report, we stand by our
contention that an inherent incentive to maximize revenues exists when
items are paid for on a cost-plus (e.g., ASP+6 percent), fee-for-
service basis. It is because of the inherent nature of this incentive
that we recommend combining payment for ESRD drugs with all dialysis
services under a single bundled rate.
Second, all of the groups commented on our discussion in the report of
the current ASP-based payment method for separately billable ESRD
drugs, with some groups expressing concerns about an abrupt movement to
a fully bundled rate. Amgen noted that the ASP method is relatively new
and that it is too early to decide whether to move to a fully bundled
rate. In addition, Amgen was concerned with our characterization of ASP
payment issues associated with Epogen and stated that the entry of a
new anemia management product may not necessarily result in reduced
prices. Two of the organizations noted that, prior to moving to a
bundled rate, a transitional system--one that encourages price
competition for anemia management drugs--may be desirable. Roche stated
that continuing to use the ASP-based payment system for Epogen could
have negative downstream effects on a fully bundled ESRD payment
system, as any price increases prior to bundling would be captured in
the dollar amounts allocated for anemia management drugs included in
the bundle. Similarly, KCC stated that an alternative payment system
should be explored prior to bundling. KCC also stated that, as long as
there is no viable clinical alternative to Epogen, bundling by itself
would not provide for clinical flexibility, nor would bundling alone
ensure drug price stability. KCC suggested that a transitional system
could involve paying for drugs at ASP and transferring the rate's
current 6 percent add-on to the composite rate. In general, both RPA
and NRAA viewed the ASP-based payment method for ESRD drugs favorably.
RPA specifically referred to the recent legislative and regulatory
actions, including the move to an ASP-based rate, as "responsible,"
because payments for separately billable drugs were lowered while the
composite rate was increased.
Our discussion of the ASP-based payment method focuses on payment for
separately billable drugs in general and on Epogen in particular
because of its market domination and the high Medicare expenditures
associated with it. We agree that the introduction of a competitor
product may not result in immediate price reductions, but note that, in
principle, competition tends to lower prices over time. Although we
acknowledge that there may be a better way to pay for separately
billable drugs than ASP+6 percent, our focus is on the need to mitigate
the incentives that can undermine the efficient use of resources in
ESRD care. Any transitional system that allows separate billing for
individual drugs perpetuates the incentive to maximize revenues through
utilization of these drugs. We agree that bundling by itself cannot
solve problems resulting from the lack of price competition. However,
as noted in our draft report, if price competition were introduced
under a bundled payment system, it could result in lower treatment
costs for providers and--after adjustments to the bundle for these
lower costs--could result in savings for Medicare.
Finally, representatives from four of the groups expressed concerns
about implementation challenges associated with a payment bundle.
Consistent with CMS's position and the position of experts cited in our
draft report, Amgen and KCC emphasized the importance of appropriate
case-mix adjustment in a bundled payment system. KCC underscored the
considerable variation in patients' need for Epogen and the role of the
case-mix adjuster to ensure adequate compensation for providers
treating patients needing unusually high levels of the drug. RPA, NRAA,
and KCC were concerned that bundling could limit innovation in the ESRD
market or that physicians would be reluctant to use any new ESRD drugs
that facilities would find to costly to cover within the payment
bundle. Consistent with this concern, NRAA noted that the payment
bundle methodology should have a mechanism to ensure the appropriate
incorporation of new technologies and treatment protocols.
We agree that an appropriate case-mix adjuster is important to a
bundled payment system and noted in the draft report that adjusting for
differences in patients' needs was a key point made by interested
parties we contacted. We acknowledge that if the payment bundle does
not account for patient differences, facilities that treat a
disproportionate share of costly patients would be financially
disadvantaged. We note that CMS has done extensive research on case-mix
adjustment in a fully bundled ESRD payment system and believe that any
new system will benefit from these efforts. We also agree that a new
payment bundle should be periodically updated to reflect the costs of
current technologies and treatment protocols. Specific details on the
contents of a bundle, its implementation, and evaluation over time were
beyond the scope of this report.
As we agreed with your office, unless you publicly announce the
contents of this report earlier, we plan no further distribution of it
until 30 days from the date of this letter. At that time, we will send
copies of this report to the appropriate congressional committees and
other interested parties. We will also make copies available to others
upon request. This report will be available at no charge on GAO's Web
site at [Hyperlink, http://www.gao.gov].
If you or your staff have questions about this report, please contact
me at (202) 512-7101 or steinwalda@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. GAO staff who made key contributions to
this report are listed in appendix II.
Sincerely yours,
Signed by:
A. Bruce Steinwald:
Director, Health Care:
[End of section]
Appendix I: Comments from the Centers for Medicare & Medicaid Services:
Department Of Health & Human Services:
Centers for Medicare & Medicaid Services:
Administrator:
Washington, DC 20201:
Date: Nov 0 9 2006:
To: A. Bruce Steinwald:
Director, Health Care:
From: Leslie V. Norwalk, Esq.
Acting Administrator:
Subject: Government Accountability Office's Draft Report: "End-Stage
Renal Disease: Bundling Medicare's Payment for Drugs with Payment for
All ESRD Services Would Promote Efficiency and Clinical Flexibility"
(GAO-07-77):
Thank you for the opportunity to review and comment on the Government
Accountability Office's (GAO) draft report entitled, "End-Stage Renal
Disease: Bundling Medicare's Payment for Drugs with Payment for All
ESRD Services Would Promote Efficiency and Clinical Flexibility." We
appreciate the GAO's interest in ensuring an appropriate payment system
for all end-stage renal disease (ESRD) services and thank you for your
efforts on this report.
The GAO's findings provide useful information that will help us fulfill
our commitment to reform the ESRD payment system in a way that supports
high quality care and appropriate payment for services. The report
recommends, in light of the uncertainties concerning the timing of the
Report to Congress and demonstration, that Congress consider
establishing a bundled payment system for all ESRD services as soon as
possible.
Specifically, it recommends the immediate implementation of a bundled
payment system suitably adjusted for differences across facilities in
their mix of patients, and notes that facility representatives
generally support bundled payment. This support for bundled payment
would appear to be conditioned on: (1) the implementation of an
acceptable method of case mix adjustment, without which facilities
treating a disproportionate number of costly patients would be
disadvantaged; (2) establishing an annual update factor to adjust the
bundled payment for inflation; and (3) implementation of safeguards to
protect against potential underutilization of services.
GAO Recommendation:
Congress should consider establishing a bundled payment system for all
ESRD services as soon as possible.
CMS Response:
We appreciate the GAO's support of Medicare payment reform in
recommending that Congress take action to implement a fully bundled
prospective payment system (PPS) for dialysis services provided by ESRD
facilities. The Centers for Medicare & Medicaid Services (CMS) agrees
with the GAO that reforms in this area should move forward "as soon as
possible." However, CMS also believes the timeframe should ensure
adequate research and development to support implementation of a system
that pays fairly while supporting high quality care through mechanisms
such as pay-for-performance.
We also agree that such a system should promote efficiency and clinical
flexibility for ESRD facilities. We believe the system should guard
against incentives to under-treat or "cherry-pick" ESRD patients in
order to maximize profits. While the report briefly addresses this
concern, we would like to emphasize that accomplishing these goals will
require that (1) research be complete to ensure an adequate case mix
adjustment system for a fully bundled system and (2) prior to
implementation, mechanisms be in place to ensure beneficiary
protections with respect to quality of care.
We also wish to note CMS' significant accomplishments in implementing
the basic case mix adjusted composite rate system required by the MMA.
After enactment of the new law, CMS funded research activities to
develop new case-mix adjustments that were implemented in April 2005.
Since then, CMS. has pursued several research approaches that could be
used in a demonstration of a bundled PPS. However, we are not yet
satisfied that the results achieve our goals related to quality and
payment accuracy. Thus, we have devoted a considerable amount of time
and resources to developing an appropriate ESRD payment system
including research targeted on case mix adjusters and quality
incentives. We expect our current efforts, building on the prior
research, will provide the basis for payment reform in this area.
While the report does not make a specific recommendation on the issue,
GAO might consider the benefits of linking a bundled payment system
with a requirement that ESRD facilities report outcomes data for 100
percent of their patients. Such data would allow monitoring quality of
care under a bundled PPS that could address potential concerns about
ESRD beneficiaries being vulnerable to substandard care. CMS is in the
process of developing a Web-based ESRD data system that could be used
to collect such data electronically by 2009.
The CMS would like to thank the GAO for their efforts on this report.
These findings provide us with useful information that will assist us
in moving forward with development of a bundled payment system for all
ESRD services. We look forward to working collaboratively in the future
to address the recommendations in this report.
We have also provided technical comments for your consideration.
[End of section]
Appendix II: GAO Contact and Staff Acknowledgments:
GAO Contact:
A. Bruce Steinwald (202) 512-7101 or steinwalda@gao.gov.
Acknowledgments:
Phyllis Thorburn, Assistant Director; Jessica Farb; Hannah Fein;
Zachary Gaumer; and Shivani Sharma made key contributions to this
report.
FOOTNOTES
[1] In addition to being diagnosed with ESRD, individuals generally
must meet one of the following requirements to receive Medicare
coverage: obtain the required work credits under the Social Security
program, receive Social Security benefits, or be the spouse or
dependent child of a person who has met the required work credits or is
receiving Social Security benefits. 42 U.S.C. § 426-1 (2000).
[2] For the purposes of this report, Medicare expenditures include the
20 percent coinsurance paid by the beneficiary, unless otherwise noted.
[3] These drugs are covered under Medicare Part B, the part of Medicare
that covers a broad range of medical services, including physician,
laboratory, hospital outpatient department services, and durable
medical equipment. Part B-covered drugs are typically administered by a
physician or other medical professional rather than by patients
themselves. In contrast, drugs covered under the new prescription drug
benefit, known as Part D, are generally self-administered by patients.
[4] Dialysis facilities can be hospital-based or freestanding, part of
a chain or independent, and for-profit or not-for-profit; 60 percent of
dialysis facilities in the United States are owned by two for-profit
chains. Large chains tend to receive volume discounts on ESRD drugs,
whereas smaller, independent facilities may not have the same
negotiating power; thus smaller facilities may pay higher prices for
ESRD drugs.
[5] The Medicare Prescription Drug, Improvement, and Modernization Act
of 2003 defined ASP as manufacturer's average sales price for all U.S.
purchasers of a drug, net of volume, prompt pay, and cash discounts,
and charge-backs and rebates. Certain prices, including prices paid by
certain federal purchasers, are excluded, as are prices for drugs
furnished under Medicare Part D. Pub. L. No. 108-173, sec. 302(c), §
1847(c), 117 Stat. 2066, 2240-41 (to be codified at 42 U.S.C. § 1395w-
3a(c)).
[6] Epogen, which is a brand name for epoetin alfa, is a synthetic
version of erythropoietin--a protein made by the kidney that stimulates
the production of red blood cells. The drug was developed in the 1980s
by Amgen, a biologicals manufacturing company that markets the drug for
use in the ESRD setting.
[7] In examining Medicare's payment options in 1990 to cover this drug,
the Office of Technology Assessment noted that Epogen not only reduces
dialysis patients' need for blood transfusions but also alleviates
symptoms of anemia and improves the quality of patients' lives. See
U.S. Congress, Office of Technology Assessment, Recombinant
Erythropoietin: Payment Options for Medicare, OTA-H-451 (Washington,
DC: May 1990).
[8] Unlike the method Medicare used to pay for other separately
billable drugs, the method Medicare used to pay for Epogen was an
amount set in statute for a single year--$10.00 per 1,000 units in
1994; CMS continued to pay this rate at its discretion until 2005. Most
patients receive Epogen three times a week; the dose is based on the
patient's body weight among other things. A typical starting dose is 50-
100 units per kilogram or per 2.2 pounds. For example, a patient
weighing 150 pounds may receive a dose of between 3,400 units and 6,800
units three times a week. The dose is then titrated based on the
patient's response to the therapy.
[9] Whether Epogen has been overused has not been determined
conclusively but research currently being conducted is shedding light
on this issue. Evidence of systematic overuse is difficult to
establish, as needed amounts can vary across patients and across
treatments for the same patient. See for example, Onyekachi Ifudu,
"Controversies in Renal Anemia Management," Dialysis and
Transplantation, vol. 35, no. 3 (2006) and Dennis Cotter et al.,
"Translating Epoetin Research Into Practice: the Role of Government and
the Use of Scientific Evidence," Health Affairs, vol. 25, no. 5 (2006).
[10] Medicare, Medicaid, and SCHIP Benefits Improvement and Protection
Act of 2000, Pub L. No. 106-554, app. F, § 422(b)-(c), 114 Stat. 2763A-
463, 2763A-516-2763A-517.
[11] Pub. L. No. 108-173, § 623(e)-(f), 117 Stat. 2066, 2315-17.
[12] We restricted the utilization data to the first half of the year
to make our comparisons consistent with preliminary 2006 data, for
which we have the first 6 months of the year.
[13] USRDS is a national data system that collects, analyzes, and
distributes information about ESRD in the United States and is funded
by the National Institute of Diabetes and Digestive and Kidney Diseases
in conjunction with CMS. The data for 2006 may change as more Medicare
claims for ESRD services are submitted.
[14] GAO, Medicare Part B Drugs: CMS Data Source for Setting Payments
Is Practical but Concerns Remain, GAO-06-971T (Washington, D.C.: July
13, 2006); Medicare Hospital Pharmaceuticals: Survey Shows Price
Variation and Highlights Data Collection Lessons and Outpatient Rate-
Setting Challenges for CMS, GAO-06-372 (Washington, D.C.: Apr. 28,
2006); and Medicare: Comments on CMS Proposed 2006 Rates for Specified
Covered Outpatient Drugs and Radiopharmaceuticals Used in Hospitals,
GAO-06-17R (Washington, D.C.: Oct. 31, 2005).
[15] See GAO Medicare Dialysis Facilities: Beneficiary Access Stable
and Problems in Payment System Being Addressed, GAO-04-450 (Washington,
D.C.: June 25, 2004); Tommy G. Thompson, Secretary of Health and Human
Services, Report to Congress: Toward a Bundled Outpatient Medicare End
Stage Renal Disease Prospective Payment System (Washington, D.C.: May
2003); and Medicare Payment Advisory Commission (MedPAC), Report to the
Congress, Medicare Payment Policy (Washington, D.C.: March 2006) and
Report to the Congress, Medicare Payment Policy (Washington, D.C.:
March 2001). MedPAC is an independent federal body established by law
to advise the Congress on issues affecting the Medicare program.
[16] 42 U.S.C. § 426-1(b) (2000).
[17] Medicare Part A covers inpatient hospital, skilled nursing
facility, and hospice care, as well as some home health care. Medicare
Part B covers physician services, hospital outpatient services, and
certain other services, such as physical therapy. Medicare coverage
generally begins the third month after the month dialysis begins. For
individuals who have employer group coverage, Medicare is the secondary
payer for 30 months, after which Medicare becomes the primary payer. 42
U.S.C. § 1395y(b)(1)(B)(iii) (2000). Generally, individuals with ESRD
may not join a Medicare Advantage Plan. 42 U.S.C. § 1395w-21(a)(3)(B)
(2000).
[18] In 2003, about 91 percent of all dialysis patients underwent in-
facility hemodialysis, and about 8 percent of the dialysis population
utilized peritoneal dialysis.
[19] In 2003, fewer than 1 percent of patients received hemodialysis at
home with the assistance of a caregiver.
[20] This frequency is consistent with Medicare's coverage of three
hemodialysis treatments a week. Some experts contend that daily
hemodialysis--five to seven times a week--is clinically preferable, as
this frequency more closely approximates the body's continuous
cleansing of the blood. Proponents assert that daily hemodialysis leads
to fewer hospitalizations and a reduction in the use of medications. In
addition, the National Institutes of Health is currently sponsoring a
study of nocturnal dialysis--a form of hemodialysis that can be done at
home while the patient is asleep, six nights a week.
[21] The percentage of patients undergoing peritoneal dialysis has
steadily decreased since its peak of 15 percent in 1990.
[22] See National Kidney Foundation, "KDOQI Clinical Practice
Guidelines and Clinical Practice Recommendations for Anemia in Chronic
Kidney Disease," American Journal of Kidney Diseases, vol. 47, no. 5,
supp. 3 (2006).
[23] According to the 18 ESRD networks that serve as the liaison
between the federal government and dialysis providers, the percent of
patients with a mean Hct greater than or equal to 33 has increased from
43 percent in 1997 to 80 percent in 2003. See The Forum of ESRD
Networks Summary Report of the ESRD Networks' Annual Reports 2004,
(Baltimore, Md: December 2005).
[24] See Anatole Besarab et al., "The Effects of Normal as Compared
with Low Hematocrit Values in Patients with Cardiac Disease Who Are
Receiving Hemodialysis and Epoetin," New England Journal of Medicine,
vol. 339, no. 9 (1998). Two clinical trials, Cardiovascular Risk
Reduction by Early Anemia Treatment with Epoetin Beta Trial (CREATE)
and Correction of Hemoglobin and Outcomes in Renal Insufficiency Trial
(CHOIR) compared the efficacy and safety of higher Hct targets in
patients with non-dialysis dependent chronic kidney disease. The target
Hct level was between 39 and 45 percent in the CREATE treatment group.
The CREATE trial did not achieve its goal of reducing risk for certain
cardiac events. In the CHOIR trial, the incidence of adverse events,
including mortality, was higher in the treatment group, with a target
Hct of 40.5 percent, than in the control group, with a target of 33.9
percent. The CHOIR trial was stopped because of safety concerns.
[25] At Department of Veterans Affairs facilities, subcutaneous
administration of epoetin is the predominant delivery method.
[26] See Denise Hynes et al., "Adherence to Guidelines for ESRD Anemia
Management," American Journal of Kidney Diseases, vol. 47, no. 3 (March
2006) and James Kaufman et al., "Subcutaneous Compared with Intravenous
Epoetin in Patients Receiving Hemodialysis," The New England Journal of
Medicine, vol. 339, no. 9 (1998).
[27] Additional adjustments to the rate account for, among other
things, differences in providers' costs associated with location, based
on a geographic wage index, and differences in facilities' mix of
patients, who vary in their clinical resource needs.
[28] Although darbepoetin alfa, or Aranesp®, is an alternative to
Epogen and is approved for use in ESRD patients, it is not generally
marketed to freestanding dialysis facilities. It is, however, marketed
to hospitals, which purchase the drug to treat anemia in patients with
chronic kidney disease, certain types of cancer, and ESRD patients
receiving dialysis at the hospital's facility.
[29] The Balanced Budget Act of 1997 required that payment for drugs
and biologicals furnished on or after January 1, 1998, equal 95 percent
of the drug's AWP if the drug is not otherwise paid on a cost or
prospective payment basis. Pub. L. No. 105-33 § 4556, 111 Stat. 251,
462-63. Until 2004, Medicare paid physicians 95 percent of AWP for Part
B drugs. The MMA changed this to 85 percent of AWP for 2004. MMA sec.
303(b), § 1842(o)(4)(A), 117 Stat. 2238 (to be codified at 42 U.S.C. §
1395u(o)(4)(A)).
[30] AWPs are published in commercial drug price compendia, based on
data obtained from manufacturers, distributors, and other suppliers;
the Medicare claims administration contractors that pay claims for Part
B drugs based providers' payments on the published AWPs.
[31] GAO, Medicare: Payments for Covered Outpatient Drugs Exceed
Providers' Costs, GAO-01-1118 (Washington, D.C.: Sept. 21, 2001).
[32] MMA sec. 623(d)(1), § 1881(b)(13)(A)(ii), 117 Stat. 2314 (to be
codified at 42 U.S.C. § 1395rr(b)(13)(A)(ii)).
[33] These prices were net of rebates and discounts providers received.
See Department of Health and Human Services Office of the Inspector
General, Medicare Reimbursement for Existing End-Stage Renal Disease
Drugs, OEI-03-04-00120 (Washington, D.C.: May 2004).
[34] For the drugs representing 2 percent of Medicare spending not
accounted for by the top 10 ESRD drugs, Medicare paid ASP+ 6 percent in
2005.
[35] MMA sec. 623(d)(1), § 1881(b)(13)(A)(iii), 117 Stat. 2314 (to be
codified at 42 U.S.C. § 1395rr(b)(13)(A)(iii)).
[36] 70 Fed. Reg. 70,116, 70,162 (Nov. 21, 2005).
[37] Manufacturers' reported price data are based on FDA's system of
National Drug Codes, while the ASP that CMS calculates for each drug is
based on the agency's Healthcare Common Procedure Coding System, which
uses categories that are broader than the FDA's coding system.
[38] See GAO-04-450. Because composite rate payments represent a larger
share of Medicare spending than payments for separately billable drugs,
these percentage differences in costs and payments are not directly
comparable.
[39] These add-on payments--the difference between the rates Medicare
paid under pre-MMA provisions and the rates paid each year from 2005
on--are designed to maintain budget neutrality as a result of payment
reductions for separately billable drugs, beginning in 2005.
[40] The MMA required CMS to annually update the drug add-on payment to
account for changes due to increased utilization and prices. MMA sec.
623(d)(1), § 1881(b)(12)(F), 117 Stat. 2314 (to be codified at 42
U.S.C. § 1395rr(b)(12)(F)).
[41] After epoetin, the next highest Medicare expenditures are for iron
sucrose and paricalcitol in the ESRD setting.
[42] We restricted the data to the first half of the year to increase
the validity of our comparison of previous years to 2006, for which we
have only partial data.
[43] Medicare has a process under which facilities can appeal the
denial of a claim by showing that it is medically necessary. 42 U.S.C.
§ 1395ff (2000).
[44] Effective October 2006, CMS revised the monitoring policy to,
among other things, clarify its policy for reporting dosage reductions.
[45] GAO-06-971T, GAO-06-372, and GAO-06-17R.
[46] In a report to the Congress, CMS stated that it was unable to
obtain net acquisition cost data and average sales price data by
purchaser type due to the proprietary nature of drug pricing
information. See HHS, Report to Congress--Report on Sales of Drugs and
Biologicals to Large Volume Purchasers (Washington, D.C.: 2006).
[47] Amgen has filed suit in U.S. District Court against F. Hoffmann
LaRoche to prevent it from marketing CERA in the United States on the
grounds that CERA violates Amgen's patents. Although the patent
infringement case has not been resolved, industry analysts expect that
F. Hoffmann LaRoche will launch CERA "at risk" in 2007, after getting
approval from FDA. Launching at risk here means marketing the product
at the risk of incurring damages for patent infringement.
[48] For example, FibroGen recently developed FG-2216 and FG-4592,
which are currently in exploratory clinical trials in Europe.
[49] Oral products could be covered under Part D--Medicare's new
prescription drug benefit. In this case, payments for them would not be
made to dialysis facilities under Medicare Part B.
[50] For example, Medicare's bundled payment for home health services
covers a 60-day episode of care.
[51] In 1978, the Secretary of HHS was required to prescribe methods
and procedures for determining the amount Medicare should pay for ESRD
services and to provide appropriate incentives to encourage more
efficient and effective delivery of services including, to the extent
feasible, prospectively set payment rates. Pub. L. No. 95-292, sec. 2,
§ 1881(b)(2)(B), 92 Stat. 307, 309 (codified as amended at 42 U.S.C. §
1395rr(b)(2)(B) (2000)).
[52] See GAO-04-450, MedPAC (March 2006) and (March 2001), and HHS (May
2003).
[53] In the case of the composite rate, one dialysis session
constitutes an episode of care. Unlike the current composite rate
payment method, a newly designed payment bundle could define the
episode of care more broadly. For example, the new payment bundle could
cover dialysis and related items and services for 1 month.
[54] See Francesco Locatelli and Lucia Del Vecchio, "Dialysis Adequacy
and Response to Erythropoietic Agents: What is the Evidence Base?"
Nephrology Dialysis Transplantation, vol. 18, supp. 8 (2003), Ezio
Movilli et al., "Adequacy of Dialysis Reduces the Doses of Recombinant
Erythropoietin Independently from the Use of Biocompatible Membranes in
Haemodialysis Patients," Nephrology Dialysis Transplantation, vol. 16,
no.1 (2001), and Onyekachi Ifudu et al., "The Intensity of Hemodialysis
and the Response to Erythropoietin in Patients with End-Stage Renal
Disease," The New England Journal of Medicine, vol. 334, no. 7 (1996).
[55] In recent studies, researchers have determined that subcutaneous
delivery of epoetin, compared with intravenous delivery, could result
in significant cost savings to Medicare. See Denise Hynes et al.,
"Potential Cost Savings of Erythropoietin Administration in End-Stage
Renal Disease," The American Journal of Medicine, vol. 112, no. 3,
(2002), Anatole Besarab et al., "Meta-Analysis of Subcutaneous Versus
Intravenous Epoetin in Maintenance Treatment of Anemia in Hemodialysis
Patients," American Journal of Kidney Diseases, vol. 40, no. 3 (2002),
and Laura Pizzi et al., "Economic Implications of Non-Adherence to
Treatment Recommendations for Hemodialysis Patients with Anemia,"
Dialyisis and Transplantation, vol. 35, no. 11 (2006).
[56] See Francisco Coronel et al., "Erythropoietin Requirements: A
Comparative Multicenter Study Between Peritoneal Dialysis and
Hemodialysis," Journal of Nephrology, vol 16, no. 5 (2003) and Jon
Snyder et al., "Hemoglobin Levels and Erythropoietin Doses in
Hemodialysis and Peritoneal Dialysis Patients in the United States,"
Journal of the American Society of Nephrology, vol. 15, no. 1 (2004).
[57] Since the MMA provisions became effective, the drug add-on payment
to the composite rate is updated annually, but adjustments to the base
rate are not automatic; only seven adjustments have been made in the
last 23 years.
[58] MMA § 623(e)-(f), 117 Stat. 2315-16.
[59] The MMA specified that drugs billed separately when it was enacted
continue to be billed separately and not bundled into the composite
rate. MMA sec. 623(d)(1), § 1881(b)(13)(B), 117 Stat. 2314-15 (to be
codified at 42 U.S.C. § 1395rr(b)(13)(B)).
[60] A step toward implementing the demonstration has already been
taken. Largely as an incentive for facilities to participate, CMS is
incorporating "pay for performance" in its bundled payment design--that
is, a mechanism that would link a facility's conformance to ESRD
quality standards to Medicare's payment rate. In July 2006, CMS
solicited proposals for a contractor to develop the pay-for-performance
component of the bundling demonstration; subsequently, CMS awarded a
contract.
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