Department of Health and Human Services

OFFICE OF 

INSPECTOR GENERAL 

M R
EDICARE  EIMBURSEMENT 

E S R D
FOR  ND  TAGE  ENAL  ISEASE 

D :  T Q 2006 

RUGS HIRD  UARTER 
Daniel R. Levinson

Inspector General 

June 2007 

OEI-03-06-00590
 Office of Inspector General 

http://oig.hhs.gov 
The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, 
as amended, is to protect the integrity of the Department of Health and Human Services 
(HHS) programs, as well as the health and welfare of beneficiaries served by those 
programs.  This statutory mission is carried out through a nationwide network of audits, 
investigations, and inspections conducted by the following operating components: 
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conducting audits with its own audit resources or by overseeing audit work done by others. 
Audits examine the performance of HHS programs and/or its grantees and contractors 
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Office of Evaluation and Inspections 
The Office of Evaluation and Inspections (OEI) conducts national evaluations to provide 
HHS, Congress, and the public with timely, useful, and reliable information on 
significant issues.  Specifically, these evaluations focus on preventing fraud, waste, or 
abuse and promoting economy, efficiency, and effectiveness in departmental programs.  
To promote impact, the reports also present practical recommendations for improving 
program operations. 
Office of Investigations 
The Office of Investigations (OI) conducts criminal, civil, and administrative 
investigations of 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. 
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 OIG's internal operations. OCIG imposes program exclusions and civil 
monetary penalties on health care providers and litigates those actions within HHS. 
OCIG also represents OIG in the global settlement of cases arising under the Civil False 
Claims Act, develops and monitors corporate integrity agreements, develops compliance 
program guidances, 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 compare the Medicare reimbursement amounts for selected separately 
billable end stage renal disease (ESRD) drugs to the average acquisition 
costs of these drugs for ESRD dialysis facilities in the third quarter of 
2006. 
BACKGROUND 
ESRD facilities (i.e., dialysis facilities) are approved to furnish at least 
one specific ESRD service and are either independent or hospital based.  
The Centers for Medicare & Medicaid Services (CMS) reimburses both 
facility types for most items related to dialysis services based on a 
prospective payment system known as the composite rate.  However, 
some drugs incident to dialysis treatment are not covered under this rate 
and are instead billed separately. A recent report by the Government 
Accountability Office (GAO) recommended that Congress consider 
establishing a new bundled payment system creating one fixed rate for all 
ESRD-related drugs and services. 
Prior to January 1, 2006, Medicare reimbursed independent and   
hospital-based dialysis facilities for separately billable ESRD drugs using 
different methods. In 2005, independent dialysis facilities generally were 
reimbursed for separately billable drugs at either their acquisition cost or 
106 percent of their published average sales price (ASP).  Hospital-based 
dialysis facilities generally were reimbursed for drugs on a reasonable 
cost basis. Effective January 1, 2006, CMS enacted several significant 
changes to the drug reimbursement methods used for dialysis facilities.  
One revision included paying all dialysis facilities 106 percent of the ASP 
for all separately billable ESRD drugs and biologicals, with certain 
exceptions, making payment methods for independent and hospital-based 
dialysis facilities the same.   
We sent surveys to a random sample of independent and hospital-based 
dialysis facilities to collect third-quarter 2006 data on the total amount 
paid, discounts and rebates received, and total units purchased for 
11 high-expenditure, separately billable ESRD drugs.  We determined the 
volume-weighted average acquisition cost per drug and compared it to the 
drugs third-quarter 2006 Medicare reimbursement amount.  For each 
drug, we calculated the percentage of facilities that had average 
acquisition costs below the third-quarter 2006 ASP-based reimbursement 
amount. 
  OEI-03-06-00590  MEDICARE REIMBURSEMENT FOR END STAGE RENAL DISEASE DRUGS:  THIRD QUARTER 2006  i  E X E C U T I V E   S U M M A R Y

FINDINGS 
Among responding independent dialysis facilities, the average 
acquisition cost was less than the Medicare reimbursement amount 
for 9 of the 11 ESRD drugs under review.  In the third quarter of 2006, 
the average acquisition cost among the responding independent dialysis 
facilities for 9 of the 11 ESRD drugs under review was between 
7 and 32 percent below the Medicare reimbursement amount.  For the 
remaining two drugs, average acquisition costs ranged from 3 to 9 percent 
above the Medicare reimbursement amount.  Reimbursement for these 
two drugs combined accounted for less than 1 percent of total Medicare 
reimbursement for separately billable drugs in independent dialysis 
facilities in 2005. When weighted by 2005 total Medicare reimbursement 
for each of the 11 drugs, overall drug acquisition costs for responding 
independent dialysis facilities were, on average, 10 percent below the 
Medicare reimbursement amount in the third quarter of 2006.   
Overall, responding independent chain dialysis facilities paid less for the 
drugs under review than nonchain facilities.  On average, independent 
chain facilities could purchase 8 of the 11 drugs under review for less 
than independent nonchain facilities in the third quarter of 2006.  During 
that same period, the responding chain facilities were able to purchase  
9 of the 11 drugs for less than the Medicare reimbursement amount, 
compared to 7 of the 11 drugs among nonchain facilities. On average, the 
four drugs that nonchain facilities could not purchase for less than the 
Medicare reimbursement amount accounted for less than 10 percent of 
total Medicare payments for separately billable drugs in 2005. 
Among responding hospitals, the average acquisition cost was less 
than the Medicare reimbursement amount for 6 of the 11 ESRD drugs 
under review.  In the third quarter of 2006, the average acquisition cost 
among the responding hospital-based dialysis facilities for 6 of the   
11 ESRD drugs under review was between 4 and 29 percent below the 
Medicare reimbursement amount.  For the remaining five drugs, average 
acquisition costs ranged from 1 to 8 percent above Medicare 
reimbursement.  Reimbursement for these five drugs accounted for 
29 percent of reimbursement to hospital-based dialysis facilities for 
separately billable drugs in 2005. This indicates that, when compared to 
independent facilities, hospital-based facilities could potentially face 
larger gaps between acquisition costs and Medicare reimbursement when 
purchasing a number of highly utilized drugs. 
  OEI-03-06-00590  MEDICARE REIMBURSEMENT FOR END STAGE RENAL DISEASE DRUGS:  THIRD QUARTER 2006  ii  EE XX EE CC UU TT II VV EE    SS UU MM MM AA RR YY
When weighted by 2005 total Medicare reimbursement for each of the 
11 drugs, overall drug acquisition costs for hospital-based dialysis 
facilities were, on average, 7 percent below the Medicare reimbursement 
amount in the third quarter of 2006. 
CONCLUSION 
As the findings in this report show, on average, responding independent 
dialysis facilities could acquire the majority of the selected separately 
billable ESRD drugs for less than the Medicare reimbursement amount. 
Drug acquisition costs among different types of independent dialysis 
facilities did vary, with overall drug costs to chain facilities being 
somewhat less than costs to nonchains. However, among both chain and 
nonchain independent dialysis facilities, reimbursement for the drugs 
with average acquisition costs above the Medicare reimbursement 
amount accounted for a small percentage of overall drug expenditures. In 
contrast, average acquisition costs among hospital-based dialysis facilities 
for 5 of 11 drugs under review exceeded the Medicare reimbursement 
amount. Expenditures for these drugs represented almost one-third of 
overall expenditures in hospital-based dialysis facilities for separately 
billable drugs. 
In conclusion, acquisition costs for the same drug may vary based on the 
type and chain affiliation of the facility, causing some facilities (especially 
hospital-based facilities) to potentially experience greater gaps in 
reimbursement for certain drugs than others. CMS should continue to 
monitor the situation closely to ensure that all facilities are reimbursed 
appropriately. In addition, we suggest that CMS consider the cost data 
presented in this report in its discussions about the merits of separately 
billable drugs under the composite rate, as recommended by the 
Government Accountability Office. 
AGENCY COMMENTS 
CMS reiterated that it would continue to monitor ESRD payments in 
relation to the drug acquisition costs of dialysis providers. CMS also 
stated that this report provides useful information that will be helpful in 
these monitoring efforts, and that the agency looks forward to continuing 
to work with OIG on ESRD issues in the future. 
OEI-03-06-00590  MEDICARE REIMBURSEMENT FOR END STAGE RENAL DISEASE DRUGS:  THIRD QUARTER 2006  iii    TT AA BB LL EE    OO FF    CC OO NN TT EE NN TT SS   

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

I N T RO DUC T IO N . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  1

F I N D IN G S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  9

Independent facilities acquired 9 of 11 drugs for less 

than reimbursement  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  9

Hospital-based facilities acquired 6 of 11 drugs for less  

than reimbursement  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  11

CONC LUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  12

  AgencyComments  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  13

APPENDIXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  14

A:   AgencyComments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  14

A C K NO WL E D G M E N T S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  16
   I N T R O D U C T I O N  

OBJECTIVE 
To compare the Medicare reimbursement amounts for selected separately 
billable end stage renal disease (ESRD) drugs to the average acquisition 
costs of these drugs for ESRD dialysis facilities in the third quarter of 
2006. 
BACKGROUND 
In 2005, Medicare reimbursed separately billable ESRD drugs and 
biologicals1 administered in independent dialysis facilities based either on 
106 percent of their published average sales price (ASP) or, for certain 
specified drugs, their acquisition cost.2  At that time, Medicare generally 
reimbursed hospital-based dialysis facilities for separately billable drugs 
on a reasonable cost basis.3 Effective January 1, 2006, the Centers for 
Medicare & Medicaid Services (CMS) enacted several significant changes 
to the drug reimbursement methods used for ESRD facilities.  One 
revision included paying all dialysis facilities (independent and    
hospital-based) 106 percent of ASP for all separately billable ESRD drugs, 
making payment methods for independent and hospital-based dialysis 
facilities the same.4  However, the ASP methodology is not used for 
vaccines, blood, and blood products.5 
This review is the third in a series of Office of Inspector General (OIG) 
reports on Medicare reimbursement for separately billable ESRD drugs.  
Staff from CMS, the Medicare Payment Advisory Commission, and a 
number of dialysis facilities previously expressed their interest in OIGs 
conducting future reviews on the topic.  This current study compares 
third-quarter 2006 average acquisition costs to Medicare reimbursement 
amounts for selected separately billable ESRD drugs in both independent 
and hospital-based dialysis facilities. 
ESRD Treatment in Dialysis Facilities 
ESRD facilities (i.e., dialysis facilities) are approved to furnish at least 
one specific ESRD service and are either independent or hospital based.6 
1 Hereinafter, references to separately billable drugs refer to both drugs and biologicals.  

2 42 CFR  414.904 (d)(2). 

3 CMS, Medicare Claims Processing Manual, Chapter 8,  60.2.2.  

4 Ibid. 

5 42 CFR  414.906 (e).  

6 42 CFR  405.2102. 

  OEI-03-06-00590  MEDICARE REIMBURSEMENT FOR END STAGE RENAL DISEASE DRUGS:  THIRD QUARTER 2006  1  I N T R O D U C T I O N  
Both types of dialysis facilities provide outpatient services directly to 
ESRD patients as well as home dialysis (i.e., dialysis performed by an 
appropriately trained patient in his/her home).7  Independent dialysis 
facilities are freestanding, whereas hospital-based dialysis facilities must 
be either attached to or located in a hospital.8 As of October 2006, 
4,050 independent dialysis facilities and 310 hospital-based dialysis 
facilities were listed on Medicares Dialysis Facility Compare database.9 
Medicare Payments to Dialysis Facilities 
CMS reimburses dialysis facilities based on a prospective payment system 
known as the composite rate.  Facilities receive a fixed composite rate 
payment for each dialysis treatment they provide.  Independent dialysis 
facilities receive a lower rate than hospital-based facilities.10  The 
composite rate includes most items related to dialysis services, such as 
labor costs, related supplies, routine tests, and certain drugs.11  However, 
the composite rate does not include some drugs, such as epoetin alfa and 
darbepoetin alfa, which are incident to dialysis treatment.  Drugs not 
covered under the composite rate must be billed separately and thus are 
referred to as separately billable drugs.12 
A recent report by the Government Accountability Office (GAO) 
recommended that Congress consider establishing a new bundled 
payment system creating one fixed rate, adjusted for differences across 
facilities, for the services paid for under the composite rate and the drugs 
that facilities currently bill separately.  Such a change would result in one 
payment rate for all ESRD services and drugs.  CMS generally agreed but 
noted that more research and development were necessary to fully 
support its implementation.13 
7 42 CFR  405.2102. 

8 2005 United States Renal Disease Researchers Guide, p. 345.

9 Dialysis Facility Compare database.  Available online at: 

http://medicare.gov/Dialysis/Home.asp. Accessed in October 2006.  This database provides 

information on all dialysis facilities regarding their services, quality measures, and resources.  

10 CMS, Medicare Claims Processing Manual, Chapter 8,  10.1.

11 Ibid., Chapter 11,  30. 

12 Ibid., Chapter 11,  30.4.2. 

13 GAO-07-77, Bundling Medicares Payment for Drugs With Payment for All ESRD Services 

Would Promote Efficiency and Clinical Flexibility.  Available online at: 

http://www.gao.gov/cgo-bin/getrpt?GAO-07-77. Accessed on January 24, 2007. 

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Medicare Payments for Separately Billable ESRD Drugs 
In general, Medicare coverage of separately billable drugs in dialysis 
facilities is limited to products that cannot be self-administered, i.e., 
drugs that are administered by a health care professional. The exceptions 
to this requirement are epoetin alfa and darbepoetin alfa, which, if 
furnished by the dialysis facility, will be covered even if the patient 
self-administers the drug.14 Both drugs stimulate the production of red 
blood cells in patients with anemia; darbepoetin alfa contains two 
additional carbohydrate chains that lengthen its biological half-life.15 
According to CMSs National Claims History File, Medicare reimbursed 
$2 billion for separately billable drugs furnished by independent dialysis 
facilities and $200 million for separately billable drugs furnished by 
hospital-based dialysis facilities in 2005. 
Independent Dialysis Facilities. The Medicare Prescription Drug, 
Improvement, and Modernization Act of 2003, Public Law 108-173, 
(MMA), required that CMS base calendar year (CY) 2005 reimbursement 
to independent dialysis facilities for separately billable drugs on 
acquisition costs as determined by OIG.16 In response to this 
requirement, OIG calculated CY 2003 average acquisition costs (AAC) for 
10 high-expenditure drugs (including epoetin alfa)17 used in independent 
dialysis facilities as part of a May 2004 report, Medicare Reimbursement 
for Existing End Stage Renal Disease Drugs (OEI-03-04-00120). CMS 
then determined CY 2005 reimbursement amounts using two methods: 
	 For the 10 high-expenditure, separately billable drugs included in 
OIGs report, CMS based reimbursement on AACs as calculated by 
OIG. 
	 For all other drugs billed by independent dialysis facilities (with 
the exception of certain vaccines, blood, and blood products), CMS 
reimbursed independent dialysis facilities at 106 percent of the 
drugs ASP.18 
14 CMS, Medicare Benefit Policy Manual, Chapter 11,  90. 

15 68 Fed. Reg. 63398, 63456 (November 7, 2003). 

16 MMA  623 (d)(1). 

17 At the time of that review, these 10 drugs accounted for 98.4 percent of Medicare

reimbursement to independent dialysis facilities for separately billable drugs. 

18 42 CFR  414.904 (d)(2). 

OEI-03-06-00590  MEDICARE REIMBURSEMENT FOR END STAGE RENAL DISEASE DRUGS:  THIRD QUARTER 2006  3  I N T R O D U C T I O N  
Beginning January 1, 2006, CMS no longer reimbursed high-expenditure 
drugs (including epoetin alfa) based on AACs calculated by OIG but 
instead began to reimburse all separately billable drugs furnished by 
independent dialysis facilities (with the exception of certain vaccines, 
blood, and blood products) at 106 percent of the ASP.19  This is the same 
method used to reimburse other drugs under Medicare Part B.  CMS 
implemented this change because the agency believed that it was 
inappropriate to use older AAC data provided by OIG (updated for 
inflation) as a basis for reimbursement.  In addition, CMS also questioned 
the feasibility of continually obtaining acquisition cost data over the long 
term.20 
Hospital-Based Dialysis Facilities. Prior to January 1, 2006, CMS 
reimbursed hospital-based dialysis facilities for separately billable drugs 
based on reasonable cost.  The exception to this rule was epoetin alfa, 
which CMS paid for based on a statutory reimbursement allowance of  
$10 per 1,000 units prior to January 1, 2005, and based on AAC in  
2005.21, 22  Beginning January 1, 2006, all separately billable drugs (with 
the exception of certain vaccines, blood, and blood products) furnished by 
hospital-based dialysis facilities became subject to a new payment 
methodology and now are reimbursed using the same rate as that of 
independent dialysis facilities, i.e., 106 percent of the ASP.23  This change 
produced a consistent drug payment methodology among independent 
dialysis facilities and hospital-based dialysis facilities.   
Related Work by the Office of Inspector General 
OIG has completed two reviews analyzing the differences between 
acquisition costs for separately billable ESRD drugs and Medicare 
reimbursement amounts in independent dialysis facilities.  Both of these 
reviews were conducted pursuant to mandates in the MMA.24 
In our May 2004 report, Medicare Reimbursement for Existing End 
Stage Renal Disease Drugs (OEI-03-04-00120), we found that the four 
largest corporate dialysis providers and a random sample of unaffiliated 
independent dialysis facilities were able to acquire 10 high-expenditure 
19 CMS, Medicare Claims Processing Manual, Chapter 8,  60.2.2. 

20 70 Fed. Reg. 45764, 45845 (August 8, 2005). 

21 The Social Security Act, Section 1881, (11)(B)(ii)(I). 

22 70 Fed. Reg. 45764, 45845 (August 8, 2005). 

23 CMS, Medicare Claims Processing Manual, Chapter 8,  60.2.2. 

24 MMA  623 (c). 

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drugs at costs averaging 14 to 22 percent below the Medicare 
reimbursement amount. We also estimated that there would be an   
11 percent increase in Medicare expenditures for separately billable 
ESRD drugs between 2003 and 2005.  CMS used the data presented in 
this report to set CY 2005 reimbursement rates for the 10 drugs under 
review. 
A second report, completed in March 2006, Medicare Reimbursement for 
New End Stage Renal Disease Drugs (OEI-03-06-00200), sought to 
examine new separately billable ESRD drugs (i.e., drugs not available 
prior to January 1, 2004). Darbepoetin alfa was selected as the only drug 
for review because it accounted for 99.9 percent of Medicare 
reimbursement for new ESRD drugs.  We found that responding 
independent dialysis facilities were able to acquire darbepoetin alfa for 
less (sometimes substantially less) than the 2005 Medicare 
reimbursement amount. 
METHODOLOGY 
Scope 
We obtained the average acquisition cost of 11 high-expenditure, 
separately billable drugs from a random sample of independent and 
hospital-based dialysis facilities for the third quarter of 2006.  The 
11 drugs selected for review account for approximately 99 percent of 
Medicare reimbursement for separately billable drugs in independent 
dialysis facilities and 98 percent in hospital-based dialysis facilities.  We 
did not include vaccines, blood, or blood products in our analysis because 
they are not reimbursed under the ASP methodology. 
Selection of Drugs Under Review 
At the time of sample selection, complete 2005 National Claims History 
File data were not available. Instead, we used a 1-percent sample of this 
file to rank separately billable ESRD drugs by their total Medicare 
reimbursement in both independent dialysis facilities and hospital-based 
dialysis facilities.  The top drugs from the 1-percent sample were nearly 
identical in both facility types, with 9 of the 10 highest expenditure drugs 
being the same.  The differing drugs were the hepatitis B vaccine (ranked 
9th in independent dialysis facilities and 15th in hospital-based dialysis 
facilities) and albumin (ranked 17th in independent dialysis facilities and 
10th in hospital-based dialysis facilities).  In selecting drugs for our 
sample, we removed the hepatitis B vaccine and the blood product 
albumin because they are both exempted from the ASP methodology. 
  OEI-03-06-00590  MEDICARE REIMBURSEMENT FOR END STAGE RENAL DISEASE DRUGS:  THIRD QUARTER 2006  5  II NN TT RR OO DD UU CC TT II OO NN
After removing these two products, our sample of drugs in both facility 
types was identical. Based on a follow-up analysis, the nine 
high-expenditure drugs selected for review remain as high-expenditure 
drugs in the complete 2005 and the preliminary 2006 National Claims 
History File. 
We also included two additional drugs in our review (vancomycin and iron 
dextran) at the request of CMS staff. Among the 11 selected drugs, 
1 drug, epoetin alfa, accounted for 74 percent of drug reimbursement 
among independent dialysis facilities. Two drugs, epoetin alfa and 
darbepoetin alfa, combined to account for 61 percent of drug 
reimbursement among hospital-based dialysis facilities. 
Data Collection 
Independent Dialysis Facilities. In previous ESRD reviews, we determined 
that four corporations owned the majority of independent dialysis 
facilities and accounted for 73 percent of Medicare reimbursement for 
separately billable ESRD drugs. Since our last review, consolidations 
among these four corporations have created two large, independent 
dialysis companies. These two companies own 2,868, or 71 percent, of all 
independent dialysis facilities. In November 2006, we sent a survey 
requesting third-quarter 2006 cost information for each of the 11 drugs 
under review to representatives of the two large companies. We 
requested information about the total amount paid by each company for 
each of the 11 drugs, the amount of discounts and rebates received, the 
net amount paid, the number of units purchased, and the average 
acquisition cost per drug. We defined average acquisition cost as the total 
amount paid (net of all rebates and discounts) divided by the total number 
of units purchased. We also asked the companies to report any additional 
costs associated with the drugs acquisition. Both companies responded 
with the requested information. 
In November 2006, we also sent surveys requesting identical 
third-quarter 2006 cost information to a random sample of 200 
independent dialysis facilities not affiliated with the two largest 
companies.25  Between December 2006 and February 2007, we received 
data from 158 facilities (79 percent).26 Six of the responding facilities 
owned multiple dialysis units and provided cost data for 358 additional 
25 We randomly selected these facilities from Medicares Dialysis Facility Compare database. 
26 We received responses from 161 facilities, but 3 were unable to provide the requested data. 
One provided peritoneal services, one was closed, and one was acquired by a large corporation. 
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facilities (for a total of 516 respondents not affiliated with the two large 
independent dialysis companies). 
After we combined cost data from the 2,868 facilities owned or managed 
by the two large companies and the 516 responding unaffiliated 
independent facilities, our results represent acquisition cost information 
for 84 percent of all independent dialysis facilities. 
Hospital-Based Dialysis Facilities. We selected a random sample of 
200 hospital-based dialysis facilities from the 310 identified in Medicares 
Dialysis Facility Compare database and in November 2006 sent them 
surveys requesting third-quarter 2006 cost information. Between 
December 2006 and February 2007, we received data from 
96 hospital-based dialysis facilities (48 percent of facilities sampled and 
31 percent of all hospital-based dialysis facilities).27 
Data Analysis 
CMS Data. We obtained the ASP-based reimbursement amounts for the 
11 selected separately billable ESRD drugs in the third quarter of 
2006 from CMSs Web site. 
Acquisition Cost Data. For both facility types, we calculated 
volume-weighted average acquisition costs by totaling the amount paid 
net any discounts and rebates for each drug and dividing it by the total 
units purchased among all facilities for each drug. In calculating these 
figures, we identified any outliers among the costs reported by facilities 
and removed them from our analysis. We defined an outlier as an 
average acquisition cost reported by a facility that was not within three 
standard deviations of the mean. 28 We determined the percentage 
difference between the volume-weighted average acquisition cost and 
CMSs third-quarter 2006 ASP-based reimbursement amount per drug for 
both facility types. We then calculated the overall percentage difference 
between facility average acquisition costs and Medicare reimbursement 
by weighting the percentage differences by total 2005 Medicare 
expenditures for the individual drugs. For each drug, we also calculated 
27 We received 116 responses, but 23 of these respondents were unable to provide data for 
reasons including participating in the 340B program, providing inpatient services only, and 
not being able to itemize dialysis costs. One of the responding hospitals provided data on 
three additional hospitals, making our total number of responses 96. 
28 Among independent dialysis facilities, an average of 1.4 data points per drug were 
considered outliers and removed. Among hospital-based ESRD facilities, this number was 1.5. 
No more than four outliers were removed for any single drug in both types of facilities. 
OEI-03-06-00590  MEDICARE REIMBURSEMENT FOR END STAGE RENAL DISEASE DRUGS:  THIRD QUARTER 2006  7  II NN TT RR OO DD UU CC TT II OO NN
the percentage of facilities that had average acquisition costs below the 
third-quarter 2006 ASP-based reimbursement amount. 
Independent Chain and Nonchain Facilities. For the purpose of this review, 
we defined a chain facility as one owned by a company that operates four 
or more independent dialysis units. In total, 3,301 independent dialysis 
facilities were part of various chains (2,868 owned by the two largest 
companies and 433 owned by the six respondents that reported data for 
multiple facilities). To determine whether independent dialysis chain 
facilities had average acquisition costs different from those of nonchain 
facilities, we compared cost data from the 3,301 chain facilities to cost 
data from the 83 nonchain facilities by repeating the analysis described in 
the above paragraphs. 
Limitations 
We did not verify the validity of the cost information submitted by the 
dialysis facilities. This cost information applies only to the 84 percent of 
all independent dialysis facilities and the 31 percent of all hospital-based 
dialysis facilities that responded to our request. We do not assume that 
the findings are representative of the entire population of independent 
dialysis and hospital-based dialysis facilities. 
Standards 
This study was conducted in accordance with the Quality Standards for 
Inspections issued by the Presidents Council on Integrity and Efficiency 
and the Executive Council on Integrity and Efficiency. 
OEI-03-06-00590  MEDICARE REIMBURSEMENT FOR END STAGE RENAL DISEASE DRUGS:  THIRD QUARTER 2006  8   
   
 F I N D I N G S  
Among responding independent dialysis  In the third quarter of 2006, the average 
facilities, the average acquisition cost was less  acquisition cost among responding 
independent dialysis facilities for 9 of the 
than the Medicare reimbursement amount for     
11 drugs under review was between        
9 of the 11 ESRD drugs under review  
7 and 32 percent below the Medicare 
reimbursement amount.  The average acquisition cost for epoetin alfa     
(a drug that accounts for three-quarters of Medicare expenditures in 
independent facilities) was 10 percent less than the Medicare 
reimbursement amount.  In total, 99 percent of responding independent 
dialysis facilities could purchase epoetin alfa for less than the Medicare 
reimbursement amount. 
For 2 of the 11 drugs, average acquisition costs ranged from 3 to 9 percent 
above the Medicare reimbursement amount.  Reimbursement for these 
two drugs combined accounted for less than 1 percent of total Medicare 
expenditures for separately billable drugs in independent dialysis 
facilities in 2005.  Table 1 illustrates the percentage difference between 
average acquisition costs reported by independent dialysis facilities and 
the third-quarter 2006 Medicare reimbursement amounts.  
When weighted by 2005 total expenditures for each of the 11 drugs, 
overall drug acquisition costs for responding independent dialysis 
facilities were, on average, 10 percent below the Medicare reimbursement 
amount.  
Table 1:  Medicare Reimbursement and Average Acquisition Cost for Independent Dialysis Facilities 
 
Third-Quarter  Third-Quarter 
2006 Medicare  2006  Reimbursement 
Reimbursement  Average  and Average Cost 
Drug  Amount  Acquisition Cost  Difference 
Doxercalciferol, 1 g*  $3.16  $2.16  -31.63% 
Calcitriol, 0.1 g  $0.51  $0.37  -26.88% 
Vancomycin HCl, 500 mg*  $3.23  $2.46  -23.91% 
Levocarnitine, 1 g*  $9.08  $7.00  -22.99% 
Iron sucrose, 1 mg  $0.37  $0.32  -13.49% 
Paricalcitol, 1 g  $3.81  $3.40  -10.74% 
Epoetin alfa, per 1,000 units  $9.48  $8.56   -9.66% 
Sodium ferric gluconate, 12.5 mg  $4.75  $4.34   -8.72% 
Darbepoetin alfa, 1 g  $3.03  $2.82   -6.67% 
Alteplase recombinant, 1 mg  $31.67  $32.48    2.55% 
Iron dextran, 50 mg  $10.34  $11.29           9.16% 
Source:  OIG analysis of third-quarter 2006 average acquisition costs among responding independent facilities, 
February 2007.  Third-quarter 2006 Medicare reimbursement amounts were downloaded from:  
http://cms.hhs.gov/McrPartBDrugAvgSalesPrice/02_aspfiles.asp.  Accessed on February 14, 2007. 
* mg = milligrams, g = microgram, g = gram. 
 
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F I N D I N G S  
Overall, responding independent chain dialysis facilities paid less for 
the drugs under review than did nonchain facilities.  On average, 
independent chain facilities could purchase 8 of the 11 drugs under 
review for less than independent nonchain facilities in the third quarter 
of 2006.  During that same period, the responding chain facilities were 
able to purchase 9 of the 11 drugs for less than the Medicare 
reimbursement amount, compared to 7 of the 11 drugs among nonchain 
facilities.  On average, the four drugs that nonchain facilities could not 
purchase for less than the Medicare reimbursement amount accounted for 
less than 10 percent of total Medicare payments for separately billable 
drugs in 2005.   
When weighted by 2005 total reimbursement for each of the 11 drugs, 
overall drug acquisition costs for responding chain facilities were            
12 percent below the Medicare reimbursement amount, compared to          
7 percent below for nonchain facilities.  This difference can be attributed, 
in large part, to the pricing of epoetin alfa.  Although chain facilities 
initially paid more than nonchain facilities for 1,000 units of epoetin alfa 
($11.66 compared to $9.47), the chain facilities received an average 
discount/rebate of $3.11, compared to $0.48 for nonchain facilities.  As a 
result, the final price for epoetin alfa for chain facilities was 5 percent 
below the final price of the drug for nonchain facilities ($8.55 per       
1,000 units compared to $8.99).  The average acquisition costs in chain 
and nonchain facilities for all 11 drugs are presented in Table 2.  
Table 2:  Average Acquisition Costs of Chain and Nonchain Independent Dialysis Facilities 
Third-Quarter 2006 
Medicare  Third-Quarter 2006  Third-Quarter 2006 
Reimbursement  Average Acquisition  Average Acquisition 
Drug  Amount  Cost in Chains  Cost in Nonchains 
Alteplase recombinant, 1 mg  $31.67  $32.45  $33.66 
Calcitriol, 0.1 g  $0.51  $0.37  $0.73 
Darbepoetin alfa, 1 g  $3.03  $2.72  $2.96 
Doxercalciferol, 1 g  $3.16  $2.33  $0.72 
Epoetin alfa, per 1,000 units  $9.48  $8.55  $8.99 
Iron dextran, 50 mg  $10.34  $11.33  $10.08 
Iron sucrose, 1 mg**  $0.37  $0.32  $0.37 
Levocarnitine, 1 g  $9.08  $7.14  $5.40 
Paricalcitol, 1 g  $3.81  $3.40  $3.70 
Sodium ferric gluconate, 12.5 mg  $4.75  $4.32  $4.84 
Vancomycin HCl, 500 mg  $3.23  $2.41  $2.51 
Source:  OIG analysis of third-quarter 2006 average acquisition costs among responding independent facilities, February 2007.   
Third-quarter 2006 Medicare reimbursement amounts were downloaded from: 
http://cms.hhs.gov/McrPartBDrugAvgSalesPrice/02_aspfiles.asp.  Accessed on February 14, 2007. 
* Costs for drugs above the Medicare reimbursement amount are in bold type.  
** The average acquisition cost for iron sucrose in nonchain facilities is slightly higher ($0.368) than the third-quarter 2006 
Medicare reimbursement amount ($0.366). 
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F I N D I N G S  
Among responding hospitals, the average  In the third quarter of 2006, the 
acquisition cost was less than the Medicare  average acquisition cost among 
responding hospital-based dialysis 
reimbursement amount for 6 of the 11 drugs 
facilities for 6 of the 11 ESRD drugs 
under review 
under review was between 4 and   
29 percent below the Medicare reimbursement amount.  Average 
acquisition costs for darbepoetin alfa and epoetin alfa (the two drugs that 
account for the majority of Medicare spending in hospital-based facilities) 
were 10 and 9 percent below the Medicare reimbursement amount, 
respectively. 
For 5 of the 11 drugs, average acquisition costs ranged from 1 to 8 percent 
above  the Medicare reimbursement amount.  Reimbursement for these five 
drugs accounted for 29 percent of reimbursement to hospital-based dialysis 
facilities for the selected separately billable ESRD drugs in 2005.  This 
indicates that when compared to independent facilities, hospital-based 
dialysis facilities could potentially face larger gaps between acquisition 
costs and Medicare reimbursement when purchasing a number of highly 
utilized drugs.  Table 3 illustrates the percentage difference between 
average acquisition costs reported by hospital-based dialysis facilities     
and the third-quarter 2006 Medicare reimbursement amounts.  
When weighted by 2005 total reimbursement for each of the 11 drugs, 
overall drug acquisition costs for responding hospital-based dialysis 
facilities were, on average, 7 percent below the Medicare reimbursement 
amountan amount identical to that for nonchain independent facilities.  
Table 3:  Medicare Reimbursement and Average Acquisition Cost in Hospital-Based Dialysis Facilities  
       
  Third-Quarter  Third-Quarter   
  2006 Medicare  2006  Reimbursement 
  Reimbursement  Average  and Average 
Drug  Amount  Acquisition Cost  Cost Difference 
Doxercalciferol, 1 g  $3.16  $2.26  -28.53% 
Calcitriol, 0.1 g  $0.51  $0.37  -27.15% 
Alteplase recombinant, 1 mg  $31.67  $27.20  -14.12% 
Darbepoetin alfa, 1 g  $3.03  $2.71  -10.39% 
Epoetin alfa, per 1,000 units  $9.48  $8.66  -8.67% 
Vancomycin HCl, 500 mg  $3.23  $3.12  -3.54% 
Sodium ferric gluconate, 12.5 mg  $4.75  $4.78  0.59% 
Levocarnitine, 1 g  $9.08  $9.19  1.19% 
Iron sucrose, 1 mg  $0.37  $0.38  3.95% 
Paricalcitol, 1 g  $3.81  $3.99  4.78% 
Iron dextran, 50 mg  $10.34  $11.15  7.81% 
Source:  OIG analysis of third-quarter 2006 average acquisition costs among responding hospital-based dialysis 
facilities, February 2007.  Third-quarter 2006 Medicare reimbursement amounts were downloaded from: 
http://cms.hhs.gov/McrPartBDrugAvgSalesPrice/02_aspfiles.asp.  Accessed on February 14, 2007. 
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CONCLUSION 
In 2005, CMS reimbursed independent dialysis facilities for most 
separately billable ESRD drugs based on either their acquisition cost (as 
determined by OIG) or 106 percent of their ASP. At the same time, CMS 
reimbursed hospital-based dialysis facilities for most separately billable 
ESRD drugs on a reasonable cost basis.  As of January 1, 2006, CMS 
enacted several changes to the drug reimbursement methods used for 
dialysis facilities.  One revision included paying all dialysis facilities 
106 percent of the ASP for all separately billable ESRD drugs (with the 
exception of certain vaccines, blood, and blood products), making payment 
methods for independent and hospital-based dialysis facilities the same. 
As the findings in this report show, on average, responding independent 
dialysis facilities could acquire the majority of the selected separately 
billable ESRD drugs for less than the Medicare reimbursement amount. 
Drug acquisition costs among different types of independent dialysis 
facilities did vary, with overall drug costs among chain facilities being 
somewhat less than those of nonchains.  However, among both chain and 
nonchain independent dialysis facilities, reimbursement for the drugs 
with average acquisition costs above the Medicare reimbursement 
amount accounted for a small percentage of overall drug expenditures.  In 
contrast, average acquisition costs among hospital-based dialysis facilities 
for 5 of 11 drugs under review exceeded the Medicare reimbursement 
amount.  Expenditures for these drugs represented almost one-third of 
overall expenditures in hospital-based dialysis facilities for separately 
billable drugs.   
In conclusion, acquisition costs for the same drug may vary based on the 
type and chain affiliation of the facility, causing some facilities (especially 
hospital-based facilities) to potentially experience greater gaps in 
reimbursement than others.  CMS should continue to monitor the 
situation closely to ensure that all facilities are reimbursed appropriately.  
In addition, we suggest that CMS consider the cost data presented in this 
report in its discussions about the merits of separately billable drugs 
under the composite rate, as recommended by the Government 
Accountability Office. 
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AGENCY COMMENTS  
CMS reiterated that it would continue to monitor ESRD payments in 
relation to the drug acquisition costs of dialysis providers. CMS also 
stated that this report provides useful information that will be helpful in 
these monitoring efforts, and that the agency looks forward to continuing 
to work with OIG on ESRD issues in the future. 
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 A P P E N D I X ~ A  
 
Agency Comments 
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A P P E N D I X ~ A  
 
 
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This report was prepared under the direction of Robert A. Vito, Regional 
Inspector General for Evaluation and Inspections in the Philadelphia 
regional office, and David E. Tawes, Director of the Medicare and 
Medicaid Prescription Drug Unit.   
Stephanie Yeager served as the lead analyst.  Other regional and 
central office staff who contributed include Linda B. Abbott, Scott 
Horning, and Barbara Tedesco. 
  OEI-03-06-00590  MEDICARE REIMBURSEMENT FOR END STAGE RENAL DISEASE DRUGS:  THIRD QUARTER 2006  16