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entitled 'End-Stage Renal Disease: Medicare Should Pay a Bundled Rate 
for All ESRD Items and Services' which was released on June 26, 2007. 

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Before the Subcommittee on Health, Committee on Ways and Means, House 
of Representatives: 

United States Government Accountability Office: 


For Release on Delivery Expected at 10:00 a.m. EDT: 

Tuesday, June 26, 2007: 

End-Stage Renal Disease: 

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

Statement for the Record of A. Bruce Steinwald: 
Director, Health Care: 


Mr. Chairman and Members of the Subcommittee: 

I am pleased to provide, 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.[Footnote 
1] 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.[Footnote 2] This report, along with a testimony statement, 
was released at a December 6, 2006, hearing of the full Committee on 
Ways and Means.[Footnote 3] Today's statement highlights the 
information in that report and refers to information other witnesses 
presented at the hearing. The work we performed for the report was 
conducted in accordance with generally accepted government auditing 

Revised Medicare Payment Provisions Do Not Eliminate Incentives to 
Overuse Certain Drugs Billed for Separately: 

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." 

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. 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. 

The effect of several legislative and regulatory changes since the 
enactment of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA)[Footnote 4] has been to raise the 
composite rate for dialysis services while reducing Medicare's generous 
payments for separately billable ESRD drugs. Under the first 
legislative change in 2005, Medicare expenditures for certain of these 
drugs dropped 11.8 percent. Under the current payment method--which for 
each drug equals the manufacturer's average sales price (ASP) plus 6 
percent--Medicare's payment rates have varied from quarter to quarter 
but have remained relatively consistent with the lower 2005 payment 

The ASP-based rates are an improvement over the pre-MMA method, as ASP 
is based on actual transactions. However, certain unknowns about the 
composition of ASP and the ASP-based payment formula make it difficult 
for CMS to determine whether the ASP-based payment rates are no greater 
than necessary to achieve appropriate beneficiary access. For one 
thing, CMS has no procedures for validating the accuracy of a 
manufacturer's ASP, which is computed by the manufacturer. For another, 
CMS has no empirical justification for the 6 percent add-on to ASP. 
Regardless of how payment for these drugs is calculated, 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. 

The ASP payment method is of particular concern with respect to 
EpogenŽ, which in 2005 accounted for $2 billion in Medicare payments 
and is Medicare's highest Part B expenditure drug.[Footnote 5] Most 
ESRD patients receive injections of Epogen at nearly every dialysis 
treatment, and whether Epogen is being overused has been called into 
question by some experts. At the December 2006 hearing of the full 
Committee, expert witnesses discussed their study results regarding 
Epogen use. One study found that kidney disease patients who were given 
high levels of Epogen experienced a higher risk of cardiovascular 
events and mortality than those who received lower levels of the 
drug.[Footnote 6] Another study found that Medicare spent at least a 
third more on Epogen--amounting to hundreds of millions of dollars-- 
than it would have if the levels of Epogen administered were in line 
with practice guidelines recommended by the National Kidney 
Foundation.[Footnote 7] 

Our own study found that Epogen use, which grew rapidly in the years 
before the MMA provisions took effect, continued to grow through the 
first half of 2006, although at a slower rate than previously. Epogen 
is the only product available in the domestic ESRD market for anemia 
management. However, the ASP method relies on market forces to achieve 
a favorable rate for Medicare. When a product is available through only 
one manufacturer, Medicare's ASP rate lacks the moderating influence of 
competition. 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 adverse effect on Medicare 

Bundled Payment System for ESRD Services, Including Injectable Drugs, 
Would Promote Efficiency and Clinical Flexibility: 

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,[Footnote 8] 
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,[Footnote 9] 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.[Footnote 10] Both the CMS report, due 
in October 2005, and the demonstration, mandated to start in January 
2006, are delayed. 

Any payment changes based on CMS's report or demonstration would 
require legislation, because the MMA specified that drugs billed 
separately in 2003 would continue to be billed separately and not 
bundled in the composite rate.[Footnote 11] In light of the uncertain 
time frame for CMS's test of bundling and the need for explicit 
legislation, in our report we asked the Congress to consider 
establishing a bundled payment for all ESRD services as soon as 
possible. In our view, Medicare could realize greater system efficiency 
if all ESRD drugs and services were bundled under a single payment. A 
bundled payment 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. To account for facilities' increased or decreased costs over 
time, a periodic reexamination of the bundled rate may be necessary. 
This would ensure that facilities would be paid appropriately and that 
Medicare could realize the benefit of any cost reductions. 

Contacts and Acknowledgments: 

For more information regarding this statement, please contact A. Bruce 
Steinwald at (202) 512-7114 or Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this statement. Phyllis Thorburn, Assistant 
Director; Jessica Farb; and Hannah Fein made key contributions to this 


[1] These drugs are covered under Medicare Part B, the part of Medicare 
that covers a broad range of medical services, including physician, 
laboratory, and hospital outpatient 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. 

[2] GAO, 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 (Washington, D.C.: Nov. 13, 2006). 

[3] GAO, End-Stage Renal Disease: Medicare Payments for All ESRD 
Services, Including Injectable Drugs, Should Be Bundled, GAO-07-266T 
(Washington, D.C.: Dec. 6, 2006). 

[4] Pub. L. No. 108-173, 117 Stat. 2066. 

[5] Introduced in 1989, Epogen--the brand name for epoetin alpha--was 
an expensive breakthrough drug used to treat anemia in patients with 
ESRD. In treating anemia--a condition in which not enough red blood 
cells carry oxygen throughout the body--Epogen is used to achieve a 
certain level of hemoglobin, the part of the red blood cell that 
carries oxygen. The National Kidney Foundation develops guidelines on 
the optimal hemoglobin range. 

[6] See Ajay Singh et al., "Correction of Anemia with Epoetin Alfa in 
Chronic Kidney Disease," The New England Journal of Medicine, vol. 355, 
no. 20 (Nov. 16, 2006). 

[7] See Laura Pizzi et al., "Economic Implications of Non-Adherence to 
Treatment Recommendations for Hemodialysis Patients with Anemia," 
Dialysis and Transplantation, vol. 35, no. 11 (November 2006). 

[8] In the case of the composite rate, one dialysis session constitutes 
an episode of care. Unlike this 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. 

[9] Medicare, Medicaid, and SCHIP Benefits Improvement and Protection 
Act of 2000, Pub L. No. 106-554, app. F, § 422(b) and (c), 114 Stat. 
2763A-463, 2763A-515--2763A-517. 

[10] Pub. L. No. 108-173, § 623(e)-(f), 117 Stat. 2066, 2315-17. 

[11] MMA § 623(d)(1), § 1881(b)(13)(B), 117 Stat. 2314-15 (to be 
codified at 42 U.S.C. § 1395rr(b)(13)(B)).

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