End-Stage Renal Disease: Medicare Should Pay a Bundled Rate for  
All ESRD Items and Services (26-JUN-07, GAO-07-1050T).		 
                                                                 
GAO provided to Congress, as requested, a statement for the	 
record on Medicare payments for certain drugs provided to	 
patients with end-stage renal disease (ESRD), a condition of	 
permanent kidney failure. Through Medicare's ESRD benefit,	 
patients receive a treatment known as dialysis, which removes	 
excess fluids and toxins from the bloodstream. Patients also	 
receive items and services related to their dialysis treatments, 
including drugs to treat conditions resulting from the loss of	 
kidney function, such as anemia and low blood calcium. Detailed  
information on the prudence of bundling payments for all ESRD	 
items and services and a recommendation to establish a bundled	 
payment system as soon as possible are included in our report	 
entitled End-Stage Renal Disease: Bundling Medicare's Payment for
Drugs with Payment for All ESRD Services Would Promote Efficiency
and Clinical Flexibility. This report, along with a testimony	 
statement, was released at a December 6, 2006, hearing of the	 
full Committee on Ways and Means. Today's statement highlights	 
the information in that report and refers to information other	 
witnesses presented at the hearing.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-1050T					        
    ACCNO:   A71427						        
  TITLE:     End-Stage Renal Disease: Medicare Should Pay a Bundled   
Rate for All ESRD Items and Services				 
     DATE:   06/26/2007 
  SUBJECT:   Blood diseases					 
	     Cost analysis					 
	     Dialysis						 
	     Food and drug law					 
	     Medicare						 
	     Payments						 
	     Policy evaluation					 
	     Prescription drugs 				 
	     Prices and pricing 				 
	     Program evaluation 				 
	     Rates						 
	     Urologic diseases					 

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GAO-07-1050T

   

     * [1]Revised Medicare Payment Provisions Do Not Eliminate Incenti
     * [2]Bundled Payment System for ESRD Services, Including Injectab
     * [3]Contacts and Acknowledgments

          * [4]Order by Mail or Phone

Testimony

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

United States Government Accountability Office
GAO

For Release on Delivery
Expected at 10:00 a.m. EDT
Tuesday, June 26, 2007

END-STAGE RENAL DISEASE

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

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

GAO-07-1050T

Mr. Chairman and Members of the Subcommittee:

I am pleased to provide, as requested, a statement for the record on
Medicare payments for certain drugs provided to patients with end-stage
renal disease (ESRD), a condition of permanent kidney failure.^1 Through
Medicare's ESRD benefit, patients receive a treatment known as dialysis,
which removes excess fluids and toxins from the bloodstream. Patients also
receive items and services related to their dialysis treatments, including
drugs to treat conditions resulting from the loss of kidney function, such
as anemia and low blood calcium. Detailed information on the prudence of
bundling payments for all ESRD items and services and a recommendation to
establish a bundled payment system as soon as possible are included in our
report entitled End-Stage Renal Disease: Bundling Medicare's Payment for
Drugs with Payment for All ESRD Services Would Promote Efficiency and
Clinical Flexibility.^2 This report, along with a testimony statement, was
released at a December 6, 2006, hearing of the full Committee on Ways and
Means.^3 Today's statement highlights the information in that report and
refers to information other witnesses presented at the hearing. The work
we performed for the report was conducted in accordance with generally
accepted government auditing standards.

^1These drugs are covered under Medicare Part B, the part of Medicare that
covers a broad range of medical services, including physician, laboratory,
and hospital outpatient services and durable medical equipment. Part
B-covered drugs are typically administered by a physician or other medical
professional rather than by patients themselves. In contrast, drugs
covered under the new prescription drug benefit, known as Part D, are
generally self-administered by patients.

^2GAO, End-Stage Renal Disease: Bundling Medicare's Payment for Drugs with
Payment for All ESRD Services Would Promote Efficiency and Clinical
Flexibility, [5]GAO-07-77 (Washington, D.C.: Nov. 13, 2006).

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

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

The way Medicare currently pays for injectable drugs provided to patients
during dialysis treatments helps explain the potential for these drugs to
be overused. The Centers for Medicare & Medicaid Services (CMS), the
agency that administers the Medicare program, divides ESRD items and
services into two groups for payment purposes. In the first group are
dialysis and associated routine services--such as nursing, supplies,
equipment, and certain laboratory tests. These items and services are paid
for under a composite rate--that is, one rate for a defined set of
services. Paying under a composite rate is a common form of Medicare
payment, also known as bundling. In the second group are primarily
injectable drugs and certain laboratory tests that were either not routine
or not available in 1983 when Medicare implemented the ESRD composite
rate. These items and services are paid for separately on a per-service
basis and are referred to as "separately billable."

Over time, Medicare's composite rate, which was not automatically adjusted
for inflation, covered progressively less of the costs to provide routine
dialysis services, while program payments for the separately billable
drugs generally exceeded providers' costs to obtain these drugs. As a
result, dialysis facilities relied on Medicare's generous payments for
separately billable drugs to subsidize the composite rate payments that
had remained nearly flat for two decades. In addition, the use of the
separately billable drugs by facilities became routine, and program
payments for these drugs grew substantially. In 2005, program spending for
the separately billable drugs totaled about $2.9 billion.

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

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

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

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

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

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

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

Our own study found that Epogen use, which grew rapidly in the years
before the MMA provisions took effect, continued to grow through the first
half of 2006, although at a slower rate than previously. Epogen is the
only product available in the domestic ESRD market for anemia management.
However, the ASP method relies on market forces to achieve a favorable
rate for Medicare. When a product is available through only one
manufacturer, Medicare's ASP rate lacks the moderating influence of
competition. The lack of price competition may be financially
insignificant for noncompetitive products that are rarely used, but for
Epogen, which is pervasively and frequently used, the lack of price
competition could be having a considerable adverse effect on Medicare
spending.

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

Medicare's approach to paying for most services provided by health care
facilities is to pay for a group--or bundle--of services using a
prospectively set rate. For example, under prospective payment systems,
Medicare makes bundled payments for services provided by acute care
hospitals, skilled nursing facilities, home health agencies, and inpatient
rehabilitation facilities. In creating one payment bundle for a group of
associated items and services provided during an episode of care, Medicare
encourages providers to operate efficiently, as providers retain the
difference if Medicare's payment exceeds the costs they incur to provide
the services. Medicare's composite rate for routine dialysis and related
services was introduced in 1983 and was the program's first bundled rate.

Experts contend that a bundled payment for all dialysis-related services
would have two principal advantages. First, it would encourage facilities
to provide services efficiently; in particular, under a fixed, bundled
rate for a defined episode of care,^8 facilities would no longer have an
incentive to provide more ESRD drugs than clinically necessary. Second,
bundled payments would afford clinicians more flexibility in decision
making because incentives to prescribe a particular drug or treatment are
reduced. For example, providers might be more willing to explore
alternative methods of treatment and modes of drug delivery if there were
no financial benefit to providing more drugs and services than necessary.

^8In the case of the composite rate, one dialysis session constitutes an
episode of care. Unlike this method, a newly designed payment bundle could
define the episode of care more broadly. For example, the new payment
bundle could cover dialysis and related items and services for 1 month.

In response to a congressional mandate that CMS study the feasibility of
creating a bundled payment,^9 the agency issued a study in 2003 concluding
that developing a bundled ESRD payment rate was feasible and that further
study of case-mix adjustment--that is, a mechanism to account for
differences in patients' use of resources--was needed. In the MMA, the
Congress required CMS to issue a report and conduct a 3-year demonstration
of a system that would bundle payment for ESRD services, including drugs
that are currently billed separately, under a single rate.^10 Both the CMS
report, due in October 2005, and the demonstration, mandated to start in
January 2006, are delayed.

Any payment changes based on CMS's report or demonstration would require
legislation, because the MMA specified that drugs billed separately in
2003 would continue to be billed separately and not bundled in the
composite rate.^11 In light of the uncertain time frame for CMS's test of
bundling and the need for explicit legislation, in our report we asked the
Congress to consider establishing a bundled payment for all ESRD services
as soon as possible. In our view, Medicare could realize greater system
efficiency if all ESRD drugs and services were bundled under a single
payment. A bundled payment would encourage facilities to use drugs more
prudently, as they would have no financial incentive to use more than
necessary and could retain the difference between Medicare's payment and
their costs. To account for facilities' increased or decreased costs over
time, a periodic reexamination of the bundled rate may be necessary. This
would ensure that facilities would be paid appropriately and that Medicare
could realize the benefit of any cost reductions.

Contacts and Acknowledgments

For more information regarding this statement, please contact A. Bruce
Steinwald at (202) 512-7114 or [7][email protected] . Contact points for
our Offices of Congressional Relations and Public Affairs may be found on
the last page of this statement. Phyllis Thorburn, Assistant Director;
Jessica Farb; and Hannah Fein made key contributions to this statement.

(290649)

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

^10Pub. L. No. 108-173, S 623(e)-(f), 117 Stat. 2066, 2315-17.

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

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