End-Stage Renal Disease:

Medicare Should Pay a Bundled Rate for All ESRD Items and Services

GAO-07-1050T: Published: Jun 26, 2007. Publicly Released: Jun 26, 2007.

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GAO provided to Congress, as requested, a statement for the record on Medicare payments for certain drugs provided to patients with end-stage renal disease (ESRD), a condition of permanent kidney failure. Through Medicare's ESRD benefit, patients receive a treatment known as dialysis, which removes excess fluids and toxins from the bloodstream. Patients also receive items and services related to their dialysis treatments, including drugs to treat conditions resulting from the loss of kidney function, such as anemia and low blood calcium. Detailed information on the prudence of bundling payments for all ESRD items and services and a recommendation to establish a bundled payment system as soon as possible are included in our report entitled End-Stage Renal Disease: Bundling Medicare's Payment for Drugs with Payment for All ESRD Services Would Promote Efficiency and Clinical Flexibility. This report, along with a testimony statement, was released at a December 6, 2006, hearing of the full Committee on Ways and Means. Today's statement highlights the information in that report and refers to information other witnesses presented at the hearing.

The way Medicare currently pays for injectable drugs provided to patients during dialysis treatments helps explain the potential for these drugs to be overused. The Centers for Medicare & Medicaid Services (CMS), the agency that administers 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 ESRD composite rate. These items and services are paid for separately on a per-service basis and are referred to as "separately billable." 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. 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. 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 drugs totaled about $2.9 billion. Medicare's approach to paying for most services provided by health care 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, 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 and related services was introduced in 1983 and was the program's first bundled rate. Experts contend that a bundled payment for all 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, 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, providers might be more willing to explore alternative methods of treatment and modes of drug delivery if there were no financial benefit to providing more drugs and services than necessary. In response to a congressional mandate that CMS study the feasibility of creating a bundled payment, 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 MMA, the Congress required CMS to issue a report and conduct a 3-year demonstration of a system that would bundle payment for ESRD services, including drugs that are currently billed separately, under a single rate. Both the CMS report, due in October 2005, and the demonstration, mandated to start in January 2006, are delayed.

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