Report Template Update  = 04-30-05_rev.13  
Department of Health and Human Services

OFFICE OF 

INSPECTOR GENERAL 

M R
EDICARE  EIMBURSEMENT FOR 

N E S R D
EW  ND  TAGE  ENAL  ISEASE 

D
RUGS

Daniel R. Levinson

Inspector General 

March 2006

OEI-03-06-00200
 Report Template Update  = 04-30-05_rev.13  
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: 
Office of Audit Services 
The Office of Audit Services (OAS) provides all auditing services for HHS, either by 
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 
in carrying out their respective responsibilities and are intended to provide independent 
assessments of HHS programs and operations in order to reduce waste, abuse, and 
mismanagement and to promote economy and efficiency throughout HHS. 
Office of Evaluation and Inspections 
The Office of Evaluation and Inspections (OEI) conducts management and program 
evaluations (called inspections) that focus on issues of concern to HHS, Congress, and 
the public.  The findings and recommendations contained in the inspections generate 
rapid, accurate, and up-to-date information on the efficiency, vulnerability, and 
effectiveness of departmental programs.  OEI also oversees State Medicaid Fraud 
Control Units which investigate and prosecute fraud and patient abuse in the Medicaid 
program. 
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 determine the difference between the Medicare reimbursement 
amount for a new separately billable end stage renal disease (ESRD) 
drug and the acquisition cost of this drug for ESRD facilities in 2005, as 
mandated by the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA). 
BACKGROUND 
The Centers for Medicare & Medicaid Services (CMS) reimburses all 
ESRD 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.  The composite rate does not 
include many drugs (i.e., separately billable drugs) that may be part of 
dialysis treatment. 
In 2005, independent dialysis facilities (i.e., freestanding, nonhospital 
dialysis facilities) were reimbursed for separately billable drugs using 
two methods.  For 10 high-dollar separately billable drugs, 
reimbursement was based on the average acquisition cost of 
independent facilities as calculated by CMS using 2003 cost data 
presented in the Office of Inspector Generals (OIG) May 2004 report, 
Medicare Reimbursement for Existing End Stage Renal Disease Drugs 
(OEI-03-04-00120).  All other separately billable drugs furnished by 
independent dialysis facilities (with certain exceptions, such as 
vaccines) were reimbursed at 106 percent of the drugs average sales 
prices (ASP) as reported by manufacturers.  In calendar year (CY) 2005, 
Medicare reimbursed a total of $1.8 billion for separately billable drugs 
furnished by independent dialysis facilities.   
As of January 1, 2006, CMS began to reimburse all separately billable 
drugs (again, with certain exceptions) at 106 percent of their ASP, the 
same method used to reimburse for most other outpatient drugs under 
Medicare Part B.  According to the preamble to a proposed rule 
published in the August 8, 2005, Federal Register, CMS stated that it 
was inappropriate to use the older acquisition cost data provided by OIG 
(updated by inflation) as a basis for reimbursement.  In the proposed 
rule, CMS also questioned the feasibility of continually acquiring 
acquisition cost data over the long term. 
We conducted this study based on a mandate set forth in section 623(c) 
of the MMA.  Pursuant to section 623(c), this study is to determine the 
  OEI-03-06-00200  MEDICARE REIMBURSEMENT FOR NEW ESRD DRUGS  i  E X E C U T I V E   S U M M A R Y  
difference between the Medicare reimbursement amount for any new 
separately billable ESRD drugs and the acquisition costs of these new 
drugs for facilities. Section 623(c) of the MMA also directs OIG to 
estimate the rate of growth of facilities expenditures for separately 
billable ESRD drugs. 
CMS has the authority to set CY 2007 reimbursement rates for ESRD 
drugs billed by independent dialysis facilities.  Section 1881(b)(12) of 
the Social Security Act provides for payment neutrality based on 
increases in the composite rate and reductions in drug reimbursement 
amounts due to the OIG studies. 
Section 623(c)(2)(B) of the MMA defines a new drug as a drug for 
which a billing code does not exist prior to January 1, 2004.  According 
to our analysis, darbepoetin alfa accounted for 99.9 percent of the 
Medicare reimbursement for all new ESRD drugs.  We sought 
acquisition cost data for darbepoetin alfa from the 55 facilities 
responsible for 94 percent of Medicare reimbursement for the drug in 
2005. Forty-six facilities (84 percent) responded to our request.  We 
compared CY 2005 acquisition costs for each of these facilities to the 
Medicare reimbursement amounts in each quarter of that year.  We also 
calculated an average acquisition cost among all the responding 
facilities, weighted by the number of units of darbepoetin alfa purchased 
by each facility. 
In our May 2004 study, we projected the future growth rate of 
expenditures for separately billable ESRD drugs, as required by the 
MMA. In calculating the future growth rate, we looked at past monthly 
growth rates of expenditures for separately billable drugs over a 3-year 
period.  We could not and did not account for the potential effects of 
changes to the drug reimbursement methodology.  At the time of the 
earlier study, most separately billable drugs were reimbursed by 
Medicare using a completely different methodology (based on average 
wholesale price) than the acquisition-cost based methods used by CMS 
in 2005 and the ASP-based methods enacted by CMS in 2006.  Because 
of these recent major changes in the reimbursement methodology and 
the resulting lack of comparable historical data, we determined it would 
not be possible for us to accurately estimate future growth rates at this 
time.  Once complete data on 2005 and 2006 expenditures become 
available, the effect of the changes to the reimbursement methodology 
should be more evident. Any estimates made at that time would 
therefore be more accurate. 
  OEI-03-06-00200  MEDICARE REIMBURSEMENT FOR NEW ESRD DRUGS  ii  E X E C U T I V E   S U M M A R Y

FINDING 
In 2005, independent dialysis facilities were able to acquire 
darbepoetin alfa at prices below the Medicare reimbursement 
amount.   In 2005, net acquisition costs for darbepoetin alfa among the 
46 responding facilities were between $2.24 per microgram (mcg) and 
$2.94 per mcg. On average, facilities paid $2.59 per mcg for darbepoetin 
alfa in 2005, after all discounts and rebates were taken into account.  
During this same time period, the Medicare reimbursement amount 
ranged from a high of $3.54 per mcg in the first quarter of 2005 to a low 
of $3.01 per mcg in the fourth quarter.   
CONCLUSION 
Section 623(c) of the MMA mandated that OIG complete a report that 
determined the difference between the Medicare reimbursement 
amounts for new separately billable ESRD drugs and the acquisition 
costs of these drugs for facilities.  CMS has the authority to use the data 
presented in this report to set CY 2007 reimbursement amounts for the 
new ESRD drugs under review. 
This report presents the OIGs findings about acquisition costs to 
independent dialysis facilities for one new drug, darbepoetin alfa, in 
2005. As described in the finding, the responding facilities acquired 
darbepoetin alfa for less, and sometimes substantially less, than the 
Medicare reimbursement amount in 2005.   
We hope that this data is useful to CMS in its continued efforts to pay 
appropriately for prescription drugs.   
  OEI-03-06-00200  MEDICARE REIMBURSEMENT FOR NEW ESRD DRUGS  iii  Report Template Update  = 04-30-05_rev.13  
  T A B L E   O F   C O N T E N T S  

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

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

F I N D IN G . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  6

Facilities purchased drug at less than reimbursement amount.. . .  6 

CONC LUSION  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  7

A C K NO WL E D G M E N T S  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  8
   I N T R O D U C T I O N  

OBJECTIVE 
To determine the difference between the Medicare reimbursement 
amount for a new separately billable end stage renal disease (ESRD) 
drug and the acquisition cost of this drug for ESRD facilities in 2005, as 
mandated by the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA). 
BACKGROUND 
Medicare Reimbursement for Dialysis Services 
The Medicare program currently covers kidney dialysis for more than 
300,000 enrollees under its ESRD benefit. In accordance with section 
1881 of the Social Security Act, the Centers for Medicare & Medicaid 
Services (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.  The 
composite rate includes most items related to dialysis services, 
including labor costs, related supplies, routine tests, and some drugs. 
However, the composite rate does not include many drugs  
(i.e., separately billable drugs) that may be part of dialysis treatment. 
Medicare Reimbursement for Separately Billable ESRD Drugs 
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.1  The exceptions to this 
requirement are epoetin alfa and darbepoetin alfa, two drugs that 
stimulate the production of red blood cells in patients with anemia. 
Epoetin alfa and darbepoetin alfa furnished by dialysis facilities may be 
covered even when they are self-administered by the patient.2 
Independent Dialysis Facilities.  In 2005, independent dialysis facilities 
(i.e., freestanding, nonhospital dialysis facilities) were reimbursed for 
separately billable drugs using two methods.3  For 10 high-dollar 
separately billable drugs, reimbursement was based on the average 
acquisition cost of independent facilities as calculated by CMS based on 
2003 cost data presented in the Office of Inspector Generals (OIG) May 
1 CMS Provider Reimbursement Manual, section 2711.2. 
2 CMS Medicare Benefit Policy Manual, chapter 11, section 90. 
3 42 CFR  414.904(d)(2). 
  OEI-03-06-00200  MEDICARE REIMBURSEMENT FOR NEW ESRD DRUGS  1  I N T R O D U C T I O N  
2004 report, Medicare Reimbursement for Existing End Stage Renal 
Disease Drugs (OEI-03-04-00120).  All other drugs billed by 
independent dialysis facilities were reimbursed at 106 percent of the 
drugs average sales prices (ASP) as reported by manufacturers.4 In 
calendar year (CY) 2005, Medicare reimbursed a total of $1.8 billion for 
separately billable drugs furnished by independent dialysis facilities.   
As of January 1, 2006, CMS began to reimburse all separately billable 
ESRD drugs5 at 106 percent of their ASP, the same method used to 
reimburse for other drugs under Medicare Part B.6,7 CMS stated that it 
was inappropriate to use the older acquisition cost data provided by OIG 
(updated by inflation) as a basis for reimbursement, and questioned the 
feasibility of continually acquiring acquisition cost data over the long 
term.8 
Studies Mandated By the MMA 
OIG conducted this study and the May 2004 study based on a mandate 
set forth in the MMA. Section 623(c)(1) of the MMA states:  
The Inspector General of the Department of Health and 
Human Services shall conduct two studies with respect to 
drugs and biologicals (including erythropoietin) furnished 
to  end-stage  renal  disease  patients  under  the  Medicare 
program which are separately billable by end-stage renal 
disease facilities. 
Pursuant to section 623(c)(3) of the MMA, the studies are to determine 
the difference between the Medicare reimbursement amount for 
separately billable ESRD drugs and the acquisition costs of these drugs 
for facilities. The studies must also estimate the growth rate of 
facilities expenditures for these drugs.  The first study, which focused 
4 Exceptions to this payment methodology include certain vaccines, infusion drugs 
administered through durable medical equipment, and blood products. 
5 Exceptions to this payment methodology include certain vaccines, infusion drugs 
administered through durable medical equipment, and blood products. 
6 CMS Final Rule 1502-FC, as published in 70 Fed. Reg. 70,116, 70,224 (Nov. 21, 2005). 
7 In 2005, hospital-based dialysis facilities were reimbursed for separately billable drugs 
(with the exception of erythropoietin) at their cost.  In 2006, separately billable drugs 
furnished by hospital-based facilities are reimbursed at the same rate as independent 
dialysis facilities, i.e., 106 percent of the ASP.  Hospital-based facilities were not included in 
this study because our review is based on acquisition costs and Medicare reimbursement in 
2005. 
8 70 Fed. Reg. 45,764, 45,845 (Aug. 8, 2005). 
  OEI-03-06-00200  MEDICARE REIMBURSEMENT FOR NEW ESRD DRUGS  2  I N T R O D U C T I O N  
on existing ESRD drugs, was completed in May 2004.  This second 
study, which focuses on new ESRD drugs, is to be completed by April 1, 
2006. For the purposes of this study, section 623(c)(2)(B) of the MMA 
defines a new drug as a drug for which a billing code does not exist 
prior to January 1, 2004. 
CMS used data from the first study to set CY 2005 reimbursement rates 
for ESRD drugs billed by independent dialysis facilities and has the 
authority do the same in CY 2007 for new drugs identified in this 
second study.  Section 1881(b)(12) of the Social Security Act provides for 
payment neutrality based on increases in the composite rate to offset 
any reductions in drug reimbursement amounts due to the OIG studies. 
METHODOLOGY 
Determining Drugs Under Review 
We obtained from CMS a master list of billing codes, and then created a 
subset of all new billing codes for prescription drugs that became 
effective on or after January 1, 2004.  We then obtained drug 
reimbursement data for independent dialysis facilities in 2004 and 2005 
from CMSs National Claims History File.  We determined that codes 
for six new drugs furnished by independent dialysis facilities had been 
reimbursed by Medicare in 2004 and 2005. 
One drug, darbepoetin alfa, accounted for 99.9 percent of all 
reimbursement for these six drug codes.  Therefore, we limited our data 
collection to this drug.  Among all drugs billed by independent dialysis 
facilities, darbepoetin alfa ranked in the top seven in terms of total 
Medicare dollars during the previous 2 years, with reimbursement 
exceeding $20 million in 2004 and $26 million in 2005.9 The other five 
new drugs accounted for less than $20,000 each in reimbursement 
during both years.  
Medicare Reimbursement Amounts 
We obtained the Medicare reimbursement amount for darbepoetin alfa 
from CMS during each quarter of 2005. 
9 Although the $26 million in reimbursement for darbepoetin alfa in 2005 is relatively 
high, it accounts for less than 2 percent of total Medicare reimbursement for all ESRD 
drugs billed by independent dialysis facilities.  In comparison, Medicare Part B reimbursed 
almost $800 million in 2005 for darbepoetin alfa provided in physicians offices.  
  OEI-03-06-00200  MEDICARE REIMBURSEMENT FOR NEW ESRD DRUGS  3  I N T R O D U C T I O N

Facility Acquisition Costs    
Based on data from CMSs National Claims History File, we determined 
that only 157 of the approximately 3,900 independent dialysis facilities 
were reimbursed by Medicare for darbepoetin alfa in 2005.  Of these 
157, 55 facilities accounted for 94 percent of Medicare reimbursement, 
with each being reimbursed more than $100,000 for the drug that 
year.10  These 55 facilities formed the basis of our sample. 
We sent a request to the 55 sampled facilities asking them to provide 
CY 2005 acquisition cost data for darbepoetin alfa.  The requested 
information was to include the total cost of the purchases, the number of 
units purchased, and the amount of discounts and rebates received.  
Forty-six facilities (84 percent) responded to our request.  The 46 
responding facilities accounted for 86 percent of the Medicare 
reimbursement for darbepoetin alfa to the 55 facilities in the sample.11 
We calculated a weighted annual average acquisition cost for 
darbepoetin alfa among the 46 facilities by adding the total cost of 
facility purchases (net of all rebates and discounts) in 2005 and dividing 
the total by the number of units purchased that year. We also obtained 
a list of any additional costs associated with acquiring separately 
billable drugs.  For this report, we did not verify any of the cost 
information given by the providers. 
Growth Rate of Expenditures 
In our May 2004 study, we projected the future growth rate of 
expenditures for separately billable ESRD drugs, as required by the 
MMA. In calculating the future growth rate, we looked at past monthly 
growth rates of expenditures for separately billable drugs over a 3-year 
period.  We could not and did not account for the potential effects of 
changes to the drug reimbursement methodology.  At the time of the 
earlier study, most separately billable drugs were reimbursed by 
Medicare using a completely different methodology (based on average 
10 In our 2004 study, we had identified a small number of national chains that accounted 
for a large majority of Medicare reimbursement for ESRD drugs.  However, no facilities 
owned by these large national chains were among the 55 with the most Medicare 
reimbursement for darbepoetin alfa in 2005. 
11 The nine facilities that did not respond to our request seemed similar to the facilities 
that did.  There were no distinguishing characteristics (e.g., membership in a chain, amount 
of Medicare reimbursement, physical location) that would lead to the conclusion that the 
nonrespondents would have different acquisition costs than the respondents. 
  OEI-03-06-00200  MEDICARE REIMBURSEMENT FOR NEW ESRD DRUGS  4  I N T R O D U C T I O N  
wholesale price) than the acquisition-cost based methods used by CMS 
in 2005 and the ASP-based methods enacted by CMS in 2006.  Because 
of these recent major changes in the reimbursement methodology and 
the resulting lack of comparable historical data, we determined it would 
not be possible for us to accurately estimate future growth rates at this 
time.  Once complete data on 2005 and 2006 expenditures become 
available, the effect of the changes to the reimbursement methodology 
should be more evident. Any estimates made at that time would 
therefore be more accurate. 
  OEI-03-06-00200  MEDICARE REIMBURSEMENT FOR NEW ESRD DRUGS  5    F I N D I N G  

In 2005, net acquisition costs 
In 2005, independent dialysis facilities were able to 
for darbepoetin alfa among the 
acquire darbepoetin alfa at prices below the 
46 responding facilities were 
Medicare reimbursement amount   between $2.24 per microgram 
(mcg) and $2.94 per mcg. On 
average, facilities paid $2.59 
per mcg for darbepoetin alfa in 2005, after all discounts and rebates 
were taken into account.  During this same time period, the Medicare 
reimbursement amount ranged from a high of $3.54 per mcg in the first 
quarter of 2005 to a low of $3.01 per mcg in the fourth quarter.12 
According to the data provided by the facilities, the average discount/ 
rebate offered for darbepoetin alfa was 17.5 percent.  Facility costs 
before discounts or rebates were taken into account ranged from $2.24 
to $4.36, with an average cost of $3.14 per mcg. 
Only 10 of the 46 responding facilities estimated any additional costs 
related to the acquisition of darbepoetin alfa.  These additional costs 
included patient response monitoring, storage, and waste, and were 
between 0.4 percent and 2.5 percent of total costs for the drug.  
12 In 2005, darbepoetin alfa was not one of the 10 ESRD drugs reimbursed based on the 
OIG-reported average acquisition cost, and was therefore paid at 106 percent of the ASP.  
The ASP is reported to CMS by manufacturers on a quarterly basis, and reimbursement 
amounts may change each quarter based on any increases or decreases in the ASP. 
  OEI-03-06-00200  MEDICARE REIMBURSEMENT FOR NEW ESRD DRUGS  6    C O N C L U S I O N  

Section 623(c) of the MMA mandated that OIG complete a report that 
determined the difference between the Medicare reimbursement 
amounts for new separately billable ESRD drugs and the acquisition 
costs of these drugs for facilities.  CMS has the authority to use the data 
presented in this report to set CY 2007 reimbursement amounts for the 
new ESRD drugs under review. 
This report presents the OIGs findings about acquisition costs to 
independent dialysis facilities for one new drug, darbepoetin alfa, in 
2005. As described in the finding, the responding facilities acquired 
darbepoetin alfa for less, and sometimes substantially less, than the 
Medicare reimbursement amount in 2005.   
We hope that this data is useful to CMS in its continued efforts to pay 
appropriately for prescription drugs.  
  OEI-03-06-00200  MEDICARE REIMBURSEMENT FOR NEW ESRD DRUGS  7    A C K N O W L E D G M E N T S  

A P P E N D I X   A  
This report was prepared under the direction of Robert A. Vito, Regional 
Inspector General for Evaluation and Inspections in the Philadelphia 
regional office.  Other principal Office of Evaluation and Inspections 
staff who contributed include: 
Dave Tawes, Director, Prescription Drug Pricing Unit 
Scott Hutchison, Program Analyst 
Linda Moscoe, Technical Support Staff 
Linda Boone Abbott, Program Specialist 
  OEI-03-06-00200  MEDICARE REIMBURSEMENT FOR NEW ESRD DRUGS  8