Testimony of: 
Robert A. Vito 
Regional Inspector General for Evaluation and Inspections 
Office of Inspector General, U.S. Department of Health and Human Services 
________________________________________________________________________ 
 
Good morning, Mr. Chairman and Members of the Subcommittee.  I am Robert Vito, 
Regional Inspector General for Evaluation and Inspections in Philadelphia at the U.S. 
Department of Health and Human Services Office of Inspector General (OIG).  For 
nearly 20 years, OIG has devoted considerable attention to end stage renal disease 
(ESRD)-related services.  Our work has involved monitoring the oversight of the quality 
of care for dialysis patients enrolled in Medicare, conducting criminal and civil 
investigations of dialysis providers, and examining the pricing and utilization of dialysis-
related drugs and services.  I appreciate the opportunity to appear before you today to 
discuss OIGs work in this area and, in particular, summarize the findings of our recent 
review related to the pricing of separately billable ESRD drugs.   
 
In short, our most recent report, released to you today, which is available on our Web site 
at http://oig.hhs.gov/, found that, on average, dialysis facilities could acquire the majority 
of ESRD drugs at prices 4 to 32 percent less than the Medicare reimbursement amount 
during the third quarter of 2006.1  Acquisition costs for some ESRD drugs ranged from   
1 to 9 percent above Medicare reimbursement amounts; however, on average, aggregate 
drug acquisition costs ranged from 7 to 12 percent below aggregate Medicare 
reimbursement amounts.   This can be attributed, in part, to the average acquisition costs 
for the two most widely used ESRD drugs, epoetin alfa (Epogen) and darbepoetin alfa 
(Aranesp), for which acquisition costs were as much as 10 percent below Medicare 
reimbursement levels.  Finally, acquisition costs varied substantially, with chain-owned 
freestanding facilities often paying less for ESRD drugs than nonchain freestanding and 
hospital-based facilities.   
 
BACKGROUND 
 
The Medicare program currently covers dialysis services for close to 400,000 patients 
under its ESRD benefit.  Medicare covers all treatment methods for patients, including 
various methods of maintenance dialysis as well as renal transplants.  ESRD facilities are 
paid based on a prospective payment system known as the composite rate, which covers 
most items related to dialysis services, such as labor costs, related supplies, routine tests, 
and certain drugs.  Facilities receive a fixed composite rate payment for each dialysis 
treatment they provide to Medicare beneficiaries.  However, the composite rate does not 
include many drugs that may be part of dialysis treatment and certain laboratory tests.  
These items are referred to as separately billable.  For example, the drugs Epogen and 
Aranesep, which stimulate the production of red blood cells in patients with anemia, are 
billed separately from the composite rate.  
 
                                                 
1 Medicare Reimbursement for End Stage Renal Disease Drugs:  Third Quarter 2006. (OEI-03-06-00590).  June 
2007. 
 
House Committee on Ways and Means 
Subcommittee on Health:  Hearing June 26, 2007    Page 1  In 2005, Medicare spent close to $8 billion for the care of ESRD beneficiaries
approximately 60 percent of that amount was associated with dialysis services covered 
under the composite rate, with the remaining 40 percent attributable to separately billable 
items.  Beneficiaries are responsible for 20-percent copayments for both composite rate 
services and separately billable items.   
 
OIG work on ESRD services has identified vulnerabilities and inefficiencies related to 
quality of care and to the utilization, payment, and pricing of drugs and services.   
 
MEDICARE REIMBURSEMENT FOR ESRD DRUGS:  THIRD QUARTER 2006 
 
Beginning January 1, 2006, the Centers for Medicare & Medicaid Services (CMS) 
instituted a new reimbursement methodology for both freestanding and hospital-based 
facilities.  As of that date, all ESRD drugswith the exception of certain vaccines, blood, 
and blood productswere reimbursed at 106 percent of the manufacturer-reported 
average sales price (ASP).  CMS implemented this change because in 2005, as mandated 
by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 
(MMA), the agency had based reimbursement to freestanding facilities for 10 separately 
billable ESRD drugs on OIGs estimates of acquisition costs for those drugs.  However, 
the agency believed it was inappropriate to continue to use older acquisition cost data 
provided by OIG (updated for inflation) as a basis for reimbursement and questioned the 
feasibility of continually obtaining acquisition cost data over the long term.  This change 
also produced a consistent drug payment methodology among freestanding dialysis 
facilities and hospital-based dialysis facilities. 
 
In our most recent review, OIG compared the Medicare reimbursement amounts for 
selected separately billable ESRD drugs to average acquisition costs of these drugs in 
freestanding and hospital-based dialysis facilities.  We obtained third-quarter 2006 
average acquisition costs for 11 high-expenditure ESRD drugs from a sample of dialysis 
facilities and calculated the percentage of facilities that had average acquisition costs 
below the ASP-based reimbursement amounts.  We sent surveys to a random sample of 
freestanding and hospital-based dialysis facilities to collect data on the total amounts 
paid, discounts and rebates received, and total units purchased for these 11 drugs.  We did 
not verify or validate the information provided by the responding facilities.   
 
The 11 high-expenditure drugs accounted for nearly all of the $2 billion in Medicare 
reimbursement for ESRD drugs furnished by freestanding facilities and the $200 million 
for ESRD drugs furnished by hospital-based facilities in 2005.  At the time of our review, 
4,050 freestanding dialysis facilities and 310 hospital-based dialysis facilities were listed 
on Medicares database of dialysis facilities.  Approximately 71 percent of freestanding 
facilities are part of two large chain corporations, and another 11 percent are owned by 
smaller national or regional chains.   
 
House Committee on Ways and Means 
Subcommittee on Health:  Hearing June 26, 2007    Page 2  Acquisition Costs for Freestanding Facilities   
 
We found that among responding freestanding facilities, third-quarter 2006 average 
acquisition costs for 9 of the 11 drugs under review were between 7 and 32 percent below 
the Medicare reimbursement amounts.  For the remaining two drugs, acquisition costs 
ranged from 3 to 9 percent above the Medicare reimbursement amounts.  However, 
reimbursement for these two drugs combined accounted for less than 1 percent of total 
Medicare expenditures for ESRD drugs in freestanding dialysis facilities in 2005.  The 
average acquisition cost for Epogen, a drug that accounts for three-quarters of Medicare 
expenditures in freestanding facilities, was 10 percent less than the Medicare 
reimbursement amount ($8.56 per 1,000 units compared to $9.48).  In total, 99 percent of 
freestanding dialysis facilities could purchase Epogen for less than the Medicare 
reimbursement amount.  
 
Our analysis also showed that chain freestanding facilities paid less for the drugs under 
review than did nonchain freestanding facilities.  On average, drug acquisition costs for chain 
facilities were 12 percent below the Medicare reimbursement amounts, compared  
to 7 percent below for nonchain facilities.  This difference can be attributed, in large part, 
to the pricing of Epogen.  Although chain facilities initially paid more than nonchain  
facilities for Epogen, the chain facilities received a much larger discount/rebate  
(27 percent, on average) than the nonchain facilities (5 percent, on average).  As a result, 
the final price for Epogen among chain facilities was 5 percent less than the final price of 
the drug among nonchain facilities ($8.55 per 1,000 units compared to $8.99).  
 
Acquisition Costs for Hospital-Based Facilities   
 
Among responding hospital-based dialysis facilities, average acquisition costs for 6 of the 
11 ESRD drugs under review were between 4 and 29 percent below the Medicare 
reimbursement amounts.  For the remaining five drugs, acquisition costs ranged from 1 to 
8 percent above the Medicare reimbursement amounts.  These five drugs accounted for 
29 percent of reimbursement to hospital-based dialysis facilities for ESRD drugs in 2005.  
This indicates that when compared to freestanding facilities, hospital-based dialysis 
facilities could potentially face larger gaps between acquisition costs and Medicare 
reimbursement when purchasing a number of highly utilized drugs.  Average acquisition 
costs for Aranesp and Epogen (the two drugs that account for the majority of Medicare 
spending in hospital-based facilities) were 10 and 9 percent below the Medicare 
reimbursement amounts, respectively ($2.71 compared to $3.03 for Aranesp, and  
$8.66 compared to $9.48 for Epogen).  On average, overall drug acquisition costs for 
responding hospital-based dialysis facilities were 7 percent below the Medicare 
reimbursement amountsamounts identical to those of nonchain freestanding facilities. 
 
Summary 
 
We concluded that responding facilities, on average, could acquire the majority of ESRD 
drugs at prices below Medicare reimbursement amounts and that aggregate acquisition 
costs were below aggregate Medicare reimbursement amounts.  However, acquisition 
costs for the same drug may vary based on the type and chain affiliation of the facility, 
 
House Committee on Ways and Means 
Subcommittee on Health:  Hearing June 26, 2007    Page 3  causing some dialysis facilities to potentially experience greater gaps in reimbursement 
than others.  Therefore, we concluded that CMS should continue to monitor the situation 
closely to ensure that all facilities are reimbursed appropriately. 
 
PREVIOUS OIG WORK RELATED TO ESRD SERVICES AND PAYMENTS 
 
Prior Reviews of Medicare Reimbursement of ESRD Drugs 
 
OIGs most recent report on ESRD reimbursement builds upon a body of work regarding 
the appropriateness of payments for ESRD drugs.  Based on a 1990 audit in which we 
found that Medicare overpaid for ESRD services for nonroutine drugs, we recommended 
that the Medicare reimbursement rates reflect the cost of dialysis treatment in efficiently 
operated facilities.2  In a 1992 audit, we further suggested that CMS consider folding all 
separately billable drugs into the composite rate to achieve savings on administrative 
costs and reduce payment errors.3  A 1993 audit indicated that dialysis providers were 
being overpaid for Epogen and we suggested a reduction in the reimbursement rate.4   In 
1997, OIG conducted a follow-up review of Medicare reimbursement for Epogen and 
found that the reimbursement rate, which at that time was $10 per 1,000 units 
administered, exceeded the cost of purchasing Epogen by approximately $1 per 1,000 
units.5  In June of 2000, OIG issued another report specifically focusing on ESRD 
drugs.6  This report found that the Department of Veterans Affairs paid between 37 
percent and 56 percent less than Medicare for five high-expenditure ESRD drugs.  
 
Based in part on OIG work, Congress included provisions to reform drug reimbursement 
in the MMA.  These provisions created a new methodology for Part B drug 
reimbursement that is based on manufacturer-reported ASPs rather than problematic 
average wholesale prices (AWP).  In addition, the MMA required that Medicare base 
payments for certain ESRD drugs on their acquisition costs as determined by OIG.7  The 
MMA also mandated that OIG conduct two studies related to Medicare reimbursement 
for ESRD drugs.8   
 
In the first MMA-mandated OIG report, which was issued in May 2004, Medicare 
Reimbursement for Existing End Stage Renal Disease Drugs (OEI-03-04-00120), OIG 
found that the four largest freestanding corporate dialysis providers and a random sample 
of freestanding nonchain dialysis facilities were able to acquire 10 high-expenditure 
drugs at costs averaging 14 to 22 percent below the Medicare reimbursement amounts.  
                                                 
2 Management Advisory Report - Reductions Continue To Be Needed in Medicare's End Stage Renal Dialysis 
Rates, (A-14-90-00215).  July 1990. 
3 Cost of Dialysis-Related Drugs, (A-01-91-00526).  October 1992.  
4 Review of Epogen Reimbursement, (A-01-92-00506).  February 1993.  
5 Review of Epogen Reimbursement, (A-01-97-00509).  November 1997. 
6 Medicare Reimbursement of End Stage Renal Disease Drugs, (OEI-03-00-00020).  June 2000.  
7 Prior to 2005, the Medicare reimbursement amount for Epogen in both freestanding and hospital-based facilities 
was set by statute at $10 per 1,000 units. 
8 Medicare Prescription Drug, Improvement, and Modernization Act of 2003.  Public Law 108-173.                      
 623(c)(2)(A)-(B). 
 
House Committee on Ways and Means 
Subcommittee on Health:  Hearing June 26, 2007    Page 4  As required by the MMA, CMS used the data presented in this report to set calendar year 
2005 reimbursement rates for the 10 drugs at the average acquisition costs as calculated 
by OIG.  For all other drugs billed by freestanding dialysis facilitieswith the exception 
of certain vaccines, blood, and blood productsCMS reimbursed freestanding dialysis 
facilities at 106 percent of the drugs ASPs.  During this same time period, hospital-based 
facilities were reimbursed at cost for most ESRD drugs.  
 
For the second report, issued in March 2006, Medicare Reimbursement for New End 
Stage Renal Disease Drugs (OEI-03-06-00200), Aranesp 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, on average, responding freestanding dialysis facilities were 
able to acquire Aranesp for between 14 and 27 percent below the Medicare 
reimbursement amounts in 2005. 
 
Improper Billing and Utilization 
 
Through audits and investigations, OIG has also identified instances of improper billing 
and utilization of services in ESRD facilities, including inappropriate billing for services 
outside the composite rate and the provision of medically unnecessary services.    
 
For example, in a 2004 audit of Medicare payments to DaVita, Incorporated, for Epogen 
services provided at one of its Philadelphia dialysis centers, we found that 44 of the 143 
claims reviewed did not meet Medicare payment requirements for Epogen.9  In some 
cases, we identified inconsistencies between the number of units of Epogen prescribed in 
the written physician order and the number administered by the facility and billed to 
Medicare.  We also identified instances in which Epogen was still administered to the 
patient after the physician had ordered its discontinuation.    
 
In another example, in 2005, as part of a global settlement with the Government, Gambro 
Healthcare, Inc. (GHI), owner and operator of over 500 renal dialysis centers, agreed to 
pay over $350 million to resolve civil and criminal fraud allegations in the Medicare, 
Medicaid, and TRICARE programs.  To resolve its civil liability, GHI paid  
$310.5 million for allegedly submitting false Medicare claims and paying physicians 
improper remuneration related to their medical director services.  In addition, Gambro 
Supply Corporation (GSC), a wholly owned subsidiary of GHI, agreed to plead guilty to 
health care fraud, pay a $25 million criminal fine, and be permanently excluded from 
Medicare and other Federal health care programs.  To circumvent prohibitions applicable 
to durable medical supply companies, GSC made false statements to Medicare, allegedly 
enabling GHI to bill for ESRD-related services and equipment at a higher amount.  GHI 
also agreed to pay the Government $328,286 to resolve its liability under the False 
Claims Act (FCA) for allegedly causing local laboratories to improperly bill separately 
for laboratory services that should have been covered under the facilities composite rate.  
GHI also agreed to enter into a 5-year corporate integrity agreement with OIG.   
 
                                                 
9 Review of Medicare Payments to DaVita, Incorporated for Epogen Services Provided at Franklin Dialysis Center, 
Philadelphia, Pennsylvania, (A-03-03-00003).  April 2004.  
 
House Committee on Ways and Means 
Subcommittee on Health:  Hearing June 26, 2007    Page 5  More recently, in 2007, Dialysis Clinic, Inc. (DCI), which provides health care services 
to Medicare beneficiaries with ESRD at its clinics located in more than 30 States, agreed 
to pay $1.8 million to resolve its liability under the FCA.  The majority of the settlement 
was associated with DCIs administration and billing of Epogen when it was medically 
unnecessary.  CMS authorizes the administration of Epogen to keep a patients 
hematocrit blood level in the 33- to 36-percent range.  The investigation revealed that 
DCI allegedly administered Epogen to patients whose hematocrit levels were in excess of 
40 percent.  Furthermore, DCI allegedly allowed hospital laboratories to bill Medicare 
separately for tests for DCI patients even though DCI was paid for the lab services as part 
of Medicares composite rate payment.  As part of the settlement agreement, DCI entered 
into a 3-year corporate integrity agreement with OIG. 
 
Quality of Care Oversight 
 
In addition to performing work on appropriate payment rates and billing, OIG has also 
identified concerns regarding CMSs oversight of the quality of care provided by ESRD 
facilities.  In June 2000, OIG issued a report documenting problems with the oversight of 
these facilities.10  OIG found that although CMS oversight using standardized 
performance measures encouraged improvements in quality of care, CMS did not use 
these measures to hold individual facilities accountable.  OIG also found that Medicare 
certification surveys played a limited role in ensuring that ESRD facilities met minimum 
standards.   
 
In January 2002, OIG issued a series of reports concerning the lessons learned by the five 
largest dialysis corporations in using clinical performance measures.11  In those reports, 
we identified a number of methods the Medicare program could use to improve the 
quality of care in dialysis facilities.  These included examining ways to foster a 
commitment to performance measures among attending physicians and developing more 
effective intervention strategies for facilities.   
 
In 2003, GAO reported that problems with quality of care were prevalent at dialysis 
facilities, putting patients health at risk and that limitations in the ESRD survey process 
inadequately addressed or failed to detect quality problems.12  More recently, in a 
November 2006 report, OIG found that current sources of data have limitations in 
assisting CMS and its contactors in identifying quality improvement needs at ESRD 
facilities.13  These limitations include lack of current, comprehensive, and facility-
                                                 
10 External Quality Review of Dialysis Facilities:  A Call for Greater Accountability, (OEI-01-99-00050).  June 
2000; and Oversight of Kidney Dialysis Facilities Needs Improvement, (GAO/HEHS-00-114).  June 2000.  
11 Clinical Performance Measures for Dialysis Facilities:  Building on the Experience of the Dialysis 
Corporations, (OEI-01-99-00052).  January 2002; Clinical Performance Measures for Dialysis Facilities:  Practices 
of the Major Dialysis Corporations Supplemental Report # 1, (OEI-01-99-00053).  January 2002; and Clinical 
Performance Measures for Dialysis Facilities:  Lessons Learned by the Major Dialysis Corporations and Implications 
for Medicare, Supplemental Report # 2, (OEI-01-99-00054). January 2002.  
12 Dialysis Facilities:  Problems Remain in Ensuring Compliance With Medicare Quality Standards, (GAO-04-
63).  October 2003. 
13 Availability of Quality of Care Data in the Medicare End Stage Renal Disease Program, (OEI-05-05-00300).   
November 2006.  
 
House Committee on Ways and Means 
Subcommittee on Health:  Hearing June 26, 2007    Page 6  specific performance data.  We recommended that CMS increase its efforts towards 
regularly collecting clinical performance data from patients and facilities.  CMS has 
begun to develop a streamlined source of data that could assist contractors in identifying 
facilities with improvement needs, but this database has yet to be implemented.   
 
CONCLUSION 
 
Through a substantial body of work, OIG has examined the oversight of quality of care at 
ESRD facilities, appropriateness of payment systems, and improper billing and utilization 
of ESRD drugs.  Our most recent work compared Medicare reimbursement amounts for 
ESRD drugs in third quarter 2006 to dialysis facilities acquisition costs.  We found that 
responding freestanding dialysis facilities could typically acquire the majority of the 
selected separately billable ESRD drugs for less than the Medicare reimbursement 
amounts.  Drug acquisition costs varied among different types of freestanding dialysis 
facilities, with overall drug costs among chain facilities being somewhat less than those 
among nonchain facilities.  In contrast, average acquisition costs among hospital-based 
dialysis facilities for almost half of the drugs under review exceeded the Medicare 
reimbursement amounts.  We concluded that CMS should continue to monitor the 
situation closely to ensure that all facilities are reimbursed appropriately. 
 
OIG remains committed to ensuring that Medicare ESRD beneficiaries receive quality 
services and that this care is being reimbursed at appropriate levels.  Therefore, we will 
continue to conduct audits, evaluations, and investigations, as warranted, to oversee 
payment and quality of care at ESRD facilities.  Currently, we are conducting audit work 
at individual dialysis facilities to review the appropriateness of Medicare claims 
submitted by dialysis facilities for Epogen administration, as well as identifying instances 
in which laboratory tests that should be included in the composite rate are being billed 
separately. 
 
This concludes my testimony, and I welcome your questions. 
 
 
House Committee on Ways and Means 
Subcommittee on Health:  Hearing June 26, 2007    Page 7