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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entitled 'End-Stage Renal Disease: Bundling Medicare's Payment for Drug 
with Payment for All ESRD Services Would Promote Efficiency and 
Clinical Flexibility' which was released on December 6, 2006. 

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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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