End-Stage Renal Disease: Medicare Payments for All ESRD Services,
Including Injectable Drugs, Should Be Bundled (06-DEC-06,	 
GAO-07-266T).							 
                                                                 
This testimony discusses highlights from GAO's report entitled	 
"End-Stage Renal Disease: Bundling Medicare's Payment for Drugs  
with Payment for All ESRD Services Would Promote Efficiency and  
Clinical Flexibility." The report examines Medicare payments for 
certain drugs provided to patients with end-stage renal disease  
(ESRD), a condition of permanent kidney failure.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-266T					        
    ACCNO:   A63925						        
  TITLE:     End-Stage Renal Disease: Medicare Payments for All ESRD  
Services, Including Injectable Drugs, Should Be Bundled 	 
     DATE:   12/06/2006 
  SUBJECT:   Blood diseases					 
	     Cost analysis					 
	     Dialysis						 
	     Food and drug law					 
	     Medicare						 
	     Payments						 
	     Policy evaluation					 
	     Prescription drugs 				 
	     Prices and pricing 				 
	     Program evaluation 				 
	     Rates						 
	     Urologic diseases					 
	     Program goals or objectives			 

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GAO-07-266T

   

     * [1]Background
     * [2]New Payment Provisions Reduced Subsidy from Separately Billa
     * [3]Bundled Payment System for ESRD Services, Including Injectab
     * [4]Contacts and Acknowledgments
     * [5]GAO's Mission
     * [6]Obtaining Copies of GAO Reports and Testimony

          * [7]Order by Mail or Phone

     * [8]To Report Fraud, Waste, and Abuse in Federal Programs
     * [9]Congressional Relations
     * [10]Public Affairs

Testimony

Before the Committee on Ways and Means, House of Representatives

United States Government Accountability Office

GAO

For Release on Delivery Expected at 10:30 a.m. EST

Wednesday, December 6, 2006

END-STAGE RENAL DISEASE

Medicare Payments for All ESRD Services, Including Injectable Drugs,
Should Be Bundled

Statement of David M. Walker

Comptroller General of the United States

GAO-07-266T

Mr. Chairman and Members of the Committee:

I am pleased to be here to discuss highlights from 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.1 The report examines Medicare payments for certain drugs
provided to patients with end-stage renal disease (ESRD), a condition of
permanent kidney failure.2

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. 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 accounted for about $2.9 billion. Medicare's
payment for these separately billable drugs is the focus of my remarks
today. My remarks are based on the information included in our
aforementioned report.

1GAO, End-Stage Renal Disease: Bundling Medicare's Payment for Drugs with
Payment for All Services Would Promote Efficiency and Clinical
Flexibility, [11]GAO-07-77 (Washington, D.C.: Nov. 13, 2006).

2These 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.

Background

Since the Medicare Prescription Drug, Improvement, and Modernization Act
of 2003 (MMA) was passed,3 how separately billable drugs are paid for has
changed--from payment based on each drug's average wholesale price (AWP),4
to payment based on each drug's average acquisition cost, to payment based
on the manufacturer's average sales price (ASP) for each drug.
Specifically, beginning in 2006, payment for each drug is set at ASP + 6
percent.

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,5 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 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.6

3Pub. L. No. 108-173, 117 Stat. 2066.

4Epogen, one of the separately billable drugs, was not paid under the AWP
method. 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.

5Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of
2000, Pub L. No. 106-554, app. F, S 422(b),(c), 114 Stat. 2763A-463,
2763A-516-517.

6Pub. L. No. 108-173, S 623(e),(f), 117 Stat. 2066, 2315-2317.

New Payment Provisions Reduced Subsidy from Separately Billable Drugs but Did
Not Eliminate Incentives to Overuse These Drugs

The effect of several legislative and regulatory changes since 2003 has
been to raise the composite rate for dialysis services while reducing
Medicare's pre-2005 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, based on the ASP for each drug, Medicare's payment rates have
varied from quarter to quarter but have remained relatively consistent
with the lower 2005 payment rates.

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,
which in 2005 accounted for $2 billion in Medicare payments and is
Medicare's highest Part B expenditure drug. Introduced in 1989,
Epogen--the brand name for epoetin alpha--was an expensive breakthrough
drug used to treat anemia in patients with ESRD. Most ESRD patients
receive injections of Epogen at nearly every dialysis treatment.
Preliminary data for 2006 suggest that Epogen use, which grew rapidly in
the years before the MMA provisions took effect, continues to grow,
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,7 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 services than necessary.

In the MMA, 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.
Any payment changes based on CMS's report or demonstration would require
legislation.8 Both the report, due in October 2005, and demonstration,
mandated to start in 2006, are delayed, and CMS officials could not tell
us when the report or results from the demonstration would be available.

7In 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.

8The MMA specified that drugs billed separately at the time the
legislation was enacted continue to be billed separately and not bundled
in the composite rate. MMA sec. 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)).

In light of these circumstances, we have 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 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.

Mr. Chairman, this concludes my prepared statement. I will be happy to
answer any questions you or the other Committee Members may have.

Contacts and Acknowledgments

For further information regarding this testimony, please contact A. Bruce
Steinwald (202) 512-7101 or [email protected] . Contact points for
our Offices of Congressional Relations and Public Affairs may be found on
the last page of this testimony. Phyllis Thorburn, Assistant Director;
Jessica Farb; and Hannah Fein made key contributions to this statement.

(290589)

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References

Visible links
  11. http://www.gao.gov/cgi-bin/getrpt?GAO-07-77
  12. file:///home/webmaster/infomgt/d07266t.htm#mailto:[email protected]
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