Department of Health and Human Services 
OFFICE OF 
INSPECTOR GENERAL 
Home Dialysis 
Payment Vulnerabilities 
JANET REHNQUIST 
Inspector General 
MAY 2003 
OEI-07-01-00570  O I G
FFICE OF  NSPECTOR  ENERAL

http://www.oig.hhs.gov/ 
The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, as amended, 
by Public Law 100-504, is to protect the integrity of the Department of Health and Human Services 
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The OIG's Office of Evaluation and Inspections (OEI) conducts short-term management and program 
evaluations (called inspections) that focus on issues of concern to the Department, the Congress, and the 
public.  The findings and recommendations contained in the inspections reports generate rapid, accurate, 
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allegations of wrongdoing in HHS programs or to HHS beneficiaries and of unjust enrichment by 
providers.  The investigative efforts of OI lead to criminal convictions, administrative sanctions, or civil 
monetary penalties.  The OI also oversees State Medicaid fraud control units which investigate and 
prosecute fraud and patient abuse in the Medicaid program. 
Office of Counsel to the Inspector General 
The Office of Counsel to the Inspector General (OCIG) provides general legal services to OIG, rendering 
advice and opinions on HHS programs and operations and providing all legal support in OIGs internal 
operations.  The OCIG imposes program exclusions and civil monetary penalties on health care providers 
and litigates those actions within the Department.  The OCIG also represents OIG in the global settlement 
of cases arising under the Civil False Claims Act, develops and monitors corporate integrity agreements, 
develops model compliance plans, renders advisory opinions on OIG sanctions to the health care 
community, and issues fraud alerts and other industry guidance.  E X E C U T I V E   S U M M A R Y  
OBJECTIVE 
To assess End Stage Renal Disease (ESRD) home dialysis billing processes and identify any 
vulnerabilities in Medicare payments. 
BACKGROUND 
End Stage Renal Disease, characterized by a permanent loss of kidney function, is the only 
basis for entitlement to Medicare based on the presence of a specific medical diagnosis.  The 
Centers for Medicare & Medicaid Services (CMS) is charged with the administration of the 
ESRD Program.  By 2000, the ESRD Medicare population in the United States climbed to 
approximately 273,000, with Medicare expenditures reaching nearly $12 billion. In the next 10 
years, the number of individuals with ESRD, as well as Medicare expenditures for this 
population, is projected to more than double. 
A beneficiary may receive dialysis at a facility or at home.  If a beneficiary chooses the latter, he 
or she must select one of two payment methods. In Method I, a dialysis facility will provide all 
necessary supplies and services. In Method II, a dialysis facility provides all necessary services 
and a durable medical equipment supplier furnishes all necessary supplies. Fiscal intermediaries 
(FIs) process claims for ESRD supplies and services for Method I, but only services for 
Method II.  Durable medical equipment regional carriers (DMERCs) process durable medical 
equipment claims, including dialysis supply kits, for Method II beneficiaries. The FIs and 
DMERCs, which process claims for ESRD facilities and durable medical equipment (DME) 
suppliers, respectively, should match the home dialysis beneficiaries method selection to the 
types of payment allowed. 
In order to complete this inspection, we identified the population of home dialysis beneficiaries 
by reviewing every recorded CMS-382 submission, designating home dialysis and payment 
method, from late 1996 to mid-2001. Next, we reviewed the calendar year (CY) 2000 
National Claims History File (NCH) to identify claims for all beneficiaries with a Medicare 
status code indicating ESRD. 
FINDINGS 
Medicare and beneficiaries paid an additional $15.3 million for continuous cycling peritoneal 
dialysis (CCPD) under Method II when compared to Method I. Medicare also allowed claims 
without existing method selection data in the Common Working File (CWF), resulting in $9.5 
million in incorrect payments. 
i 
Home Dialysis Payment Vulnerabilities  OEI-07-01-00570  Medicare regulations for reimbursement for home dialysis are inconsistent 
Medicare pays all dialysis modalities under all Methods equally, except for CCPD under 
Method II, where payments per month can be up to $484 more than the others.  This premium 
resulted in additional annual payments of $12.2 million for Medicare and 
$3.1 million for beneficiaries in CY 2000. From CYs 1997 to 2000, there was a shift in both 
payment method and dialysis modality, with the majority of these beneficiaries now electing 
Method II, and an increasing proportion using the more expensive CCPD. 
Medicare allowed claims without an existing method selection 
According to the Carrier Manual, a Medicare ESRD claim should only be paid if a method 
selection form is on file. If one does not exist, the claim should be denied.  Medicare allowed 
$9.5 million for more than 12,000 home dialysis-related items in 
CY 2000 without a method selection designation in the CWF. 
RECOMMENDATIONS 
We recommend that CMS: 
  Change regulations to limit payments for Method II CCPD kits to that of Method I. 
	 Ensure that claims are not paid unless a valid method selection form has been recorded 
on the CWF. 
  Review the $9.5 million in paid Medicare claims and collect any incorrect payments. 
AGENCY COMMENTS 
In its written response to our report, CMS disagreed with the recommendation of changing 
regulations to limit payments for Method II CCPD supplies to that of Method I. The CMS 
believes the statute clearly intends that payment limits for CCPD supplies should be set at a 
higher level than under the composite rate methodology. We agree that the statute clearly 
allows a higher payment limit for CCPD supplies under Method II; however, the statute does 
not require paying the higher limit.  Therefore, we continue to believe that CMS should 
reimburse suppliers consistently for the same dialysis supplies, irrespective of the method the 
beneficiary chooses. 
The CMS agrees to take corrective action to ensure that claims are not paid unless a valid 
method selection form has been recorded on the CWF and that improper overpayments should 
be recovered.  The full text of CMSs comments is included in Appendix B. 
ii 
Home Dialysis Payment Vulnerabilities  OEI-07-01-00570  T A B L E   O F   C O N T E N T S  
PAGE

EXECUTIVE SUMMARY .....................................................  i

INTRODUCTION .............................................................1

FINDINGS 
Inconsistent payments for home dialysis  ........................................5

Payments with no method selection............................................ 6

CONCLUSION & RECOMMENDATIONS .......................................8

APPENDICES

Appendix A: Claims Processing  ..............................................9

Appendix B: Agency Comments ............................................. 10

ACKNOWLEDGMENTS ..................................................... 12
 I N T R O D U C T I O N  
OBJECTIVE 
To assess End Stage Renal Disease (ESRD) home dialysis billing processes and identify any 
vulnerabilities in Medicare payments. 
BACKGROUND 
End Stage Renal Disease is characterized by a permanent and irreversible loss of kidney 
function requiring either kidney transplantation or regular dialysis treatments in order to survive. 
In 1972, amendments to Title XVIII of the Social Security Act extended Medicare Part A and 
Part B benefits to virtually all individuals with ESRD regardless of age.1 The ESRD program is 
the only Medicare program for which entitlement is based on the presence of a specific medical 
diagnosis. 
In 1973, the year in which the program was initiated, the number of eligible ESRD beneficiaries 
totaled 10,000. At the end of 2000, the ESRD Medicare population had climbed to 
approximately 273,000, with Medicare expenditures of nearly $12 billion.2 The number of 
individuals with ESRD is expected to more than double by 2010, surpassing 
660,000 individuals, with projected Medicare expenditures of $28 billion.2 
Home Dialysis 
Dialysis treatments are utilized by 80 percent of ESRD beneficiaries; the remaining 20 percent 
receive transplants or withdraw from treatment.  Dialysis may be performed either in a facility 
or in a home setting. Peritoneal dialysis, the most typical treatment modality for home dialysis 
patients, uses the bodys own peritoneal membrane as the filter for screening toxins from the 
body. There are two forms of peritoneal dialysis: continuous ambulatory peritoneal dialysis 
(CAPD) and continuous cycling peritoneal dialysis (CCPD). 
Continuous ambulatory peritoneal dialysis. In CAPD, the dialysate solution is left in the 
peritoneal cavity for 4 to 6 hours. The process of draining the dialysate and replacing fresh 
solution takes approximately 30 minutes, and most patients change the solution 
4 times a day. 
1 
Individuals with ESRD, who are under age 65, may experience a 3-month waiting period prior to Medicare 
coverage. In addition, individuals who have coverage under an Employers Group Health Plan may undergo a 30-
month period in which Medicare acts as a secondary payer to the Group Health Plan. 
2 
United States Renal Data System, retrieved from the World Wide Web: http://www.usrds.org/atlas.htm 
(August 30, 2001). MedPAC (Report to Congress: Medicare Payment Policy; March 2002). CMS ESRD Facility 
Survey Tables (OCSQ, CMS; August 2001). 
1 
Home Dialysis Payment Vulnerabilities  OEI-07-01-00570  Continuous cycling peritoneal dialysis. Although similar in function to CAPD, CCPD uses a 
machine to automatically fill and drain the dialysate from the abdomen.  This process takes 
12 hours and is performed overnight, allowing the machine to exchange the dialysate several 
times. 
Treatment and Method Selection 
If a physician certifies that it is reasonable to expect that the beneficiary will complete the 
required self-dialysis training course and is able to self-dialyze at home on a regular basis, the 
beneficiary will complete the CMS-382 form and select either Method I or Method II for billing 
purposes. The beneficiary submits the CMS-382 form to his or her coordinating dialysis 
facility. This facility then forwards the form to the appropriate fiscal intermediary (FI). When 
the FI receives the completed form, it is supposed to enter the CMS-382 data, including the 
beneficiarys method selection, into its automated system and then transfer the data to CMSs 
Common Working File (CWF) within 30 days of receipt.  The FIs and durable medical 
equipment regional carriers (DMERCs) use the CWF to process, edit, and screen claims, 
helping to ensure proper claims processing. (For a discussion of claims processing see 
Appendix A in this report.) 
According to the Carrier Manual, beneficiaries who choose home dialysis must select a method 
for receiving necessary services and supplies.  They can choose either Method I or Method II. 
Method I. With Method I, a dialysis facility provides all equipment and support services for the 
home dialysis beneficiary. The facility is paid at the same composite rate it would receive for 
in-center treatments, regardless of whether the home beneficiary is performing hemodialysis, 
CAPD, or CCPD. The FIs process all Method I claims from facilities for supplies and ESRD-
related services. 
Method II. Method II was established as an alternative to Method I for beneficiaries who wish 
to make their own arrangements for supplies and equipment.  The CMS believes that 
congressional intent in establishing Method II was to save the beneficiary money on coinsurance 
expenses by allowing beneficiaries to deal directly with suppliers.  With Method II, a single 
durable medical equipment (DME) home dialysis supplier provides all necessary equipment and 
supplies for the home dialysis beneficiary while a dialysis facility provides services.3 The 
supplier must report all items and services, which are furnished to the beneficiary, to the 
coordinating dialysis facility at least every 30 days, so that the facility can record the information 
in the beneficiarys record. The FIs process all ESRD service-related claims and the DMERCs 
process all supply claims. 
3 
See Medicare Intermediary Manual 3166, 3167, 3170 for a detailed listing. 
2 
Home Dialysis Payment Vulnerabilities  OEI-07-01-00570  The DME supplier bills for equipment and supplies that it provides, with reimbursement limited 
to $1,490 per month, per beneficiary, for all treatment modalities except CCPD, which is 
limited to $1,974. In addition to supplier payments, Medicare pays the coordinating dialysis 
facility for services provided (e.g., maintaining documentation and arranging for lab tests). 
METHODOLOGY 
Pre-Inspection Activities 
In order to gain a better understanding of ESRD, we reviewed relevant publications and held 
discussions with knowledgeable officials at CMS. We met with representatives from a local 
dialysis facility as well as an ESRD Network official to discuss billing and other related issues. 
Additionally, we reviewed documents published by advocacy and service groups, such as the 
ESRD Networks. 
Population Identification 
The intended population for this inspection was to include beneficiaries listed in the Renal 
Beneficiary and Utilization System.  However, efforts to select this population were 
compromised, due to data problems identified in our recent report Problems Pervade the 
Renal Beneficiary and Utilization System (OEI-07-01-00250).  We, therefore, selected our 
population from a file CMS created for use in this inspection. This file was created from CMS-
382 submissions to the CWF in late 1996 to mid-2001. 
Using this CMS-382 file, the CMS Enrollment Database and the National Claims History 
(NCH) file, we extracted our population and ESRD claims for beneficiaries dialyzing as of 
January 1, 2000. The NCH file claims were identified using Medicare Status Codes and 
included all claims processed by FIs and DMERCs. 
The inspection was broken into two parts: (1) identifying excess dollars paid for CCPD under 
Method II rather than under Method I, and (2) identifying home dialysis claims paid without an 
existing method selection on the CWF.  Each of these parts followed the same procedure of: 
(1) analyzing the processes for paying ESRD-related claims, 
(2) analyzing questionable payments, and (3) identifying dollars at risk in the Medicare 
program. 
To identify excess dollars paid for CCPD under Method II, we calculated the amount that 
Medicare and beneficiaries actually paid, according to claims data, and then subtracted this 
amount from the maximum payment that would have been allowed under Method I. 
For processing ESRD-related claims, we identified claims without CMS-382 forms on file. We 
also conducted a telephone survey with each FI and DMERC to understand what processes 
are in place to ensure the appropriate payment of ESRD-related claims. We asked which 
specific edits are being used and whether any contractors implemented specific practices to 
supplement these edits. In addition, we interviewed CMS staff to 
3 
Home Dialysis Payment Vulnerabilities  OEI-07-01-00570  determine what edits, procedures, and controls are in place to ensure accurate claims 
processing and payment. 
In this study, allowed dollars are dollars Medicare allowed for a claim. Medicare typically pays 
80 percent of the allowed amount after the beneficiary deductible.  Unless otherwise indicated, 
we used the total allowed dollars to determine the effect on the Medicare program and 
beneficiaries.  We did not conduct a medical record review. 
We conducted this inspection in accordance with the Quality Standards for Inspections 
issued by the Presidents Council on Integrity and Efficiency. 
4 
Home Dialysis Payment Vulnerabilities  OEI-07-01-00570  F I N D I N G S  
Medicare regulations for reimbursement for home dialysis are inconsistent, resulting in Medicare 
and beneficiaries paying $15.3 million more for CCPD under Method II than would have been 
paid for the same services and supplies under Method 1. Also, Medicare contractors allowed 
$9.5 million for claims without existing method selection data in the CWF. We recommend that 
CMS make a regulatory change to correct inequities in home dialysis payments, ensure that 
claims are not paid unless a valid method selection form is on record, and collect any 
incorrectly paid claims. 
Medicare regulations for reimbursement for home dialysis are 
inconsistent 
Consistent with statutory requirements4 and the CMS Carrier Manual, all dialysis kits for all 
modalities under Method I were paid up to the same rate of $1,490 per month in 
CY 2000. Under Method II, hemodialysis and CAPD were paid the same as in Method I, but 
the CCPD payment could be as much as $1,974 per month (a $484 premium) even though the 
supplies provided are the same as those supplied under Method I. 
Medicare and beneficiaries paid a total of $62.2 million in CY 2000 for CCPD kits under 
Method II. If Medicare had paid for these same supplies at the maximum limit for Method I 
reimbursement, the total allowable amount would have been $49.9 million, a difference of 
$15.3 million.  In 1992, CMS, formerly the Health Care Financing Administration (HCFA), 
referenced a 1989 congressional document which stated that by establishing Method II, 
beneficiaries would save money on coinsurance expenses because they could make their own 
arrangements.5  However, beneficiaries paid at least an additional $3.1 million (20 percent 
coinsurance of $15.3 million) by choosing Method II CCPD over Method I CCPD. Medicare 
paid an additional $12.2 million for CCPD kits under Method II, which is $15.3 million less the 
$3.1 million beneficiary coinsurance. 
The CMS (formerly the HCFA) expressed concern that Method II reimbursement, if left 
unchecked, would create an economic incentive for suppliers to encourage Method II 
selection.6 MedPAC also stated that this incentive increased the use of CCPD from 
3 to 5 percent of all forms of dialysis during 1993-1997. 
4
 Omnibus Budget Reconciliation Act of 1989 
5 
57 FR 54179 (November 17, 1992) ; Medicare and Medicaid Health Budget Reconciliation Amendments of 
1989: 40 (Comm. Print 101-1) 
6 
54 FR 1247 (January 12, 1989) 
5 
Home Dialysis Payment Vulnerabilities  OEI-07-01-00570  Between CYs 1997 to 2000, there has been a trend from beneficiaries choosing Method I to 
choosing Method II and a trend from beneficiaries dialyzing under CAPD to dialyzing under 
CCPD.  As shown in Chart 1 below, since 1997, the share of Method I and CAPD decreased 
19 percent and 15 percent, respectively. During the same period, the share of Method II and 
CCPD increased 31 percent and 32 percent, respectively, meaning that such a trend will 
escalate the costs of ESRD for both Medicare and beneficiaries. 
Chart 1: Percentage of Beneficiaries Receiving Peritoneal Dialysis by Modality and Method 
Medicare paid $9.5 million in claims without an existing 
method selection. 
According to the Carrier Manual, no payment can be made for any home dialysis items or 
services for a beneficiary, unless a CMS-382 form has been filed.7 This form indicates that a 
beneficiary has selected home dialysis, and whether the beneficiary has opted for either Method 
I or Method II. 
In CY 2000, Medicare allowed $9.5 million for claims without a corresponding method 
selection recorded in the CWF.  This amount is a combination of $8.9 million from more than 
5,000 claims for home dialysis related items;8 and $660,000 for more than 
7 
This criteria was stated in 1990 and reiterated in various forms in 1991, 1993, and 1998. 
8 
Codes A4650-A4927 
6 
Home Dialysis Payment Vulnerabilities  OEI-07-01-00570 7,000 facility claims of home dialysis support services9 that were paid despite the lack of a 
recorded method selection from the CMS-382 form.  The problem is systemic among all 
DMERCs and FIs. 
The FIs and DMERCs are responsible for determining the appropriateness of payments by 
checking against the method selection designation in the CWF.  In addition, the CWF maintains 
a consistency edit, RD 08, which functions to reject the claim in the absence of a valid method 
selection.10 Once a claim is submitted, the CWF sends a trailer back to the contractor 
identifying the beneficiarys method selection and effective date. Fiscal intermediary billing 
specialists stated that if the CWF rejects claims without a method selection, the providers must 
submit additional information to support the claim.  In the case of an RD-08 rejection, the 
provider must resubmit a CMS-382, which the FI will input into their own system as well as in 
the CWF. The DMERC staff stated that if there was no method selection on file in the CWF, 
the claim should be denied. The ESRD facility would then need to submit a CMS-382 to the 
FI. Nonetheless, claims are paid without the method selection recorded on the CWF. 
Therefore, the edit is not always working properly. 
9 
Revenue Codes 825, 835, 845, 855

10 
Medicare Intermediary Manual: 3644.4 (11-92)

7 
Home Dialysis Payment Vulnerabilities  OEI-07-01-00570 C O N C L U S I O N  A N D  
R E C O M M E N D A T I O N S  
The current number of ESRD beneficiaries is 273,000, with annual expenditures of $12 billion. 
A projected doubling of the population in 10 years makes payment processes for dialysis 
significant. Current regulations caused Medicare and beneficiaries to pay an additional $15.3 
million for CCPD under Method II in CY 2000. Also, Medicare contractors paid $9.5 million 
in claims without existing method selection data in the CWF.  As such, we recommend that 
CMS: 
  Change regulations to limit payments for Method II CCPD kits to that of Method I. 
	 Ensure that claims are not paid unless a valid method selection form has been recorded 
on the CWF. 
  Review the $9.5 million in paid Medicare claims and collect any incorrect payments. 
AGENCY COMMENTS 
In its written response to our report, CMS disagreed with the recommendation of changing 
regulations to limit payments for Method II CCPD supplies to that of Method I. The CMS 
believes the statute clearly intends that payment limits for CCPD supplies should be set at a 
higher level than under the composite rate methodology. We agree that the statute clearly 
allows a higher payment limit for CCPD supplies under Method II; however, the statute does 
not require paying the higher limit.  Therefore, we continue to believe that CMS should 
reimburse suppliers consistently for the same dialysis supplies, irrespective of the method the 
beneficiary chooses. 
The CMS agrees to take corrective action to ensure that claims are not paid unless a valid 
method selection form has been recorded on the CWF and that improper overpayments should 
be recovered.  The full text of CMSs comments is included in Appendix B. 
8 
Home Dialysis Payment Vulnerabilities  OEI-07-01-00570  APPENDIX  A 
Claims Processing 
There are five basic steps in the claims payment process: 1) claims submission, 2) basic checks, 
3) shared system processing, 4) querying the CWF, and 5) payment processing.  When 
contractors receive claims for payment of ESRD services, they enter the claims information into 
their local system to perform basic checks, calculate the payment amount, and conduct 
consistency and utilization edits in order to measure compliance with the contractors (i.e., FI, 
DMERC) guidelines. Contractors use their own local system to perform basic checks; but, to 
complete shared system processing, contractors use standardized CMS-approved software 
packages.  The process is driven by the individual contractors medical review guidelines and 
are based on CMSs national guidelines. 
When contractors have finished processing the claim to the point of payment or denial, they 
must then query the CWF at one of the nationwide host sites.  The FI or DMERC electronically 
forwards the claim to the CWF host site for edit checks and payment authorization. 
For home dialysis beneficiaries, the FIs and DMERCs compare claims for ESRD supplies and 
equipment to the method selection information in CWF. The CWF host site then reviews the 
claim for consistency, entitlement, remaining benefits, deductible status, and duplicates of 
previously processed claims. 
Within 24 hours of receiving the claim, the host site makes one of three payment determinations: 
pay the claim, reject the claim, or hold the claim to obtain missing information. When the host 
site authorizes the payment, the FI or DMERC pays the claim. 
The CMS has made recent changes in policy, which affect claims processing.  According to 
Program Memorandum B-01-56, supply kits were unbundled after January 1, 2002, and each 
individual item contained in the kit has now become a separate line item on each claim, thus 
requiring line-item billing.  Also, the CMS recently released Program Memoranda AB-00-96 
and AB-01-61, which requires FIs and DMERCs to determine the effective date, rather than 
the signed date, of the CMS-382 form in an attempt to reduce inappropriate payments. 
9 
Home Dialysis Payment Vulnerabilities  OEI-07-01-00570  APPENDIX  B 
10 
Home Dialysis Payment Vulnerabilities  OEI-07-01-00570  11 
Home Dialysis Payment Vulnerabilities  OEI-07-01-00570  A C K N O W L E D G M E N T S  
This report was prepared under the direction of Brian T. Pattison, Regional Inspector General for 
Evaluation and Inspections and Gina Maree, Assistant Regional Inspector General for Evaluation and 
Inspections in Kansas City. Other principal Office of Evaluation and Inspections staff who contributed 
include: 
Brian T. Whitley, Lead Analyst  Bambi Straw, Program Specialist 
Michael Barrett, Team Leader  Brian Ritchie, Director, Technical 
Linda Paddock, Program Analyst  Support Staff 
Linda Moscoe, Program Analyst 
Scott Horning, Program Analyst 
For information or copies of this report, please contact

the Office of Inspector Generals

Public Affairs office at (202) 619-1343.

Reports are also available on the World Wide Web at our home page address:

http://www.oig.hhs.gov/ 
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Home Dialysis Payment Vulnerabilities  OEI-07-01-00570