m e o  r 
INSPECTOR  QENERAL 
OFFICE  OF ANALYSIS  AND 1NSPECTIONS  -  -  - 
-. 
Office of Ins~ectorG eneral 
The  mlssicn of the Office of Inspector General (OIG) is to 
promote the efficiency, effectiveness and integrity of prograzs 
in the United States Department of Health and Human Services 
(HHS).  It does this by developing methods to detect and prevent 
fraud, waste  and abuse.  Created by statute in 1976, the 
Inspector General keeps both the Secretary and the Congress fully 
and currently informed about programs or management problems and 
recornends corrective action.  The OIG performs its mission by 
conducting audits, investigations and inspections with 
approximately 1,200 staff strategically located around the 
country. 
Office of Analysis and Ins~ections 
This report is produced by the office of Analysis and Inspections 
(OAI), one of the three major offices within the OIG.  The other 
two are the Office of Audit and the Office of Investigations. 
OAI conducts inspections which are typically, short-term studies 
designed to determine program effectiveness, efficiency and 
vulnerability to fraud or abuse.- 
This Re~ort 
Entitled "Organ Acquisition Costs:  An Overview," this report was 
conducted to gain a better understanding of (1) the extent and 
nature of Medicare expenditures on kidpey acquisition and (2) the 
overall efficiency and economy of the kidney acquisition systems 
that exist across the U.S. 
This report was prepared by the ~egionalI nspector General, 
Office of Analysis and Inspections, Region I, Boston, 
Massachusetts.  Participating in this project were the following 
people: 
Boston Reqion  Headauarters Office 
Ma~kR.  Yessian, Ph.D.  Betty S. Burrier 
(Prc2ect Leader) 
Barry McCoy 
Eleanor M. Ellis 
Rhonda A.  Kjersgard  ORGAN ACQUISITION COSTS:  AN OVERVIEW 
RICHARD P. KUSSEROW  SEPTEMBER 1987 
INSPECTOR GENERAL 
CONTROL #OAI-01-86-00108  TABLE  OF  CONTENTS 
. . . . . . . . . . . . . . . . . . . . . .  
EXECUTIVE  SUMMARY  i 
. . . . . . . . . . . . . . . . . . . . . . . .  
INTRODUCTION  1 
. . . . . . . . . . . . . . . . . . . . . . . . . .  
FINDINGS  2 
. . . . . . . . . . . . . . . . . . . .  
THECOSTPICTURE.  . . . . . . . . . . . . . . . . . . . .   2 
COST  CONCERNS  5 
. . . . . . . . . . . . . . . . . . . .  
Laboratories  . . . . . . . . . . . . . . . . . . .   6 
Kidney Wastage  . . . . . . . . . . . . . . . . . .   9 
Fiscal Oversight  11 
. . . . . . . . . . . . . . . . . . . . . . .  
RECOMMENDATIONS  14' 
APPENDIX  I  . . . . . . . . . . . . . . . .  
BACKGROUND AND  METHODOLOGY  20 
APPENDIX  I1  . . . . . . . . . . . . . . . . . . .  
METHODOLOGICALNOTES  22 
APPENDIX  I11 
HCFA.  AETNA.  PHs.  AND ASPE  COMMENTS  ON  THE  DRAFT  REPORT  EXECUTIVE SUMMARY 
PURPOSE:  To gain a better understanding of (1) the extent and 
nature of Medicare expenditures on kidney acquisition and (2) the 
overall efficiency and economy of the kidney acquisition systems 
- 
that exist across the United States. 
MAJOR FINDINGS : 
o  ~uringF Y 1985, Medicare expenditures on kidney acquisition 
and transplantation were an estimated $240 million.  Of 
that total, $102 million, about 43 percent, was for kidney 
acquisition. 
o  Renal transplant centers (RTCts)a ccounted for about 
one-half of all the kidney acquisition expenditures; 
independent organ procurement agencies (IOPA1s)f or about 
two-fifths.  However, when only cadaver acquisitions are 
considered, the IOPA1s are dominant.  Of the estimated 
$76.5 million in Medicare funds spent on cadaver kidney 
acquisition in FY 1985, IOPA1s accounted for about 
54 percent; RTCts 36 percent. 
o  Thereis widespread variation in the per kidney acquisition 
cost of providers.  In one large city dominated by two 
RTCts, one had an average Medicare expenditure of $9,363 per 
transplant in FY 1985 compared with $17,902 for the other. 
o  Most kidney acquisition providers are not functioning 
in a very efficient or economical manner.  They tend to 
devote relatively little attention to identifying 
possible cost savings and sometimes tolerate unneces- 
sary duplication and waste.  As a result, a substantial 
portion of the ~edicaref unds spent on kidney acqui- 
sition are being spent unnecessarily. 
o  Pretransplant laboratory costs, which account for at 
least 20 percent of Medicare expenditures on kidney 
acquisition, have been growing rapidly and are subject 
to little control.   his is particularly troubling 
because it was found that: 
o  There is widespread variation in pre- 
transplant testing procedures, terminology, 
and costs. 
o  There is a sharp increase occurring in laboratory 
costs being incurred by those on transplant waiting 
lists. 
o  There is unnecessary duplication of pretransplant 
testing.  o  Kidney wastage rates, though declining, remain high 
especially for hospital organ procurement agencies 
(HOPA1s). For FY 1985, the overall wastage rate was an 
estimated 13.8 percent--16.6 percent for HOPA1s and 
11.7 percent for IOPA1s. 
o  Kidney wastage adds significantly to kidney acquisition 
costs.  If, in FY 1985, the wastage rate were 5  percent 
instead of 14 percent, the acquisition cost per cadaver 
transplant would have been $1,381.lessp er kidney trans- 
plant--$13,199 instead of'$14,580. 
o  Fiscal oversight of kidney acquisition costs is extremely 
limited.  This is especially so with respect to the costs 
incurred by RTC1s. 
o  Among those working on the front lines of organ procurement, 
there is widespread recognition about the looseness of the 
kidney acquisition cost center of RTC's.  As one transplant 
surgeon said:  I1There1sa  lot of padding in the hospital 
kidney acquisition costs.11 
RECOMMENDATIONS 
o  HCFA should amend the current Diagnosis Related Group (DRG) 
for kidney transplantation (DRG 302) .to include all costs 
associated with acquisition as well as transplantation. 
Further, as soon thereafter as possible, it should take the 
same approach with respect to heart, liver, and any other 
type of organ transplant that might be covered under 
Medicare in the future. 
o  In determining the Federal payment rate for the kidney 
acquisition component of the transplant-acquisition DRG, 
HCFA should ensure that it (1) takes into account the 
unnecessary costs reflected in current kidney acquisition 
expenditures, (2) is based on the cost per kidney trans- 
, 
planted rather than retrieved, and (3) includes living 
related as well as cadaver acquisitions. 
o  HCFA should begin full implementation of the transplant- 
acquisition DRG1s as soon as practical. 
o  HCFA should support some demonstrations of a capitated 
approach to Medicare reimbursement for kidney transplan- 
tation and acquisition.  INTRODUCTION 
As the number and type of Medicare covered organ transplants have 
increased, the cost of acquiring organs has become an increas- 
ingly important one for the Federal government.  In this report, 
we aim to promote a better overall understanding of this cost. 
In so doing, we focus on kidney acquisition costs because, as we 
address in Appendix I, most of the experience and data are in 
that area.  The implications, however, extend to organ acqui- 
sition and transplantation in general. 
Kidney acquisition costs cover a wide variety of pretransplant 
services.  These services include different kinds of laboratory 
tests involving both donors and potential transplant recipients. 
They include diverse activities associated with the organ 
acquisition process, such as transportation, organ preservation, 
and professional and public education.  And, they include a broad 
range of functions directly associated with the surgical removal 
of organs from donors. 
The Medicare program pays for these services on the traditional 
reasonable cost basis in accordance with procedures spelled out 
in detail in a July 1974 Medicare Intermediary Letter (74-23). 
As stipulated in the Letter, all Medicare reimbursement for 
procurement (acquisition) is to the renal transplant center (RTC) 
performing the transplant.  That center establishes a standard 
acquisition charge for living related donors and one for cadaver 
donors; after the close of the hospital's fiscal year, the 
charges are aligned with actual costs and any necessary 
adjustments are made. 
All procurement costs borne by donor hospitals, independent organ 
procurement agencies (IOPA1s),a nd independent laboratories 
(IL1s)a re passed on to a RTC for payment.  Typically, this means 
that the bills are provided directly to a RTC.  However, in the 
case of a donor hospital working with an IOPA, the IOPA reim- 
burses the hospital on the basis of its standard charges for the 
procedures performed and then incorporates this payment in its 
charge to a RTC. 
In 1983, when the Health Care Financing Administration (HCFA) was 
establishing the Medicare prospective payment system for hospital 
inpatient services, it. was planning to include kidney acquisition 
services in Diagnosis Related Group (DRG 302), which also 
included inpatient services associated with kidney transplant 
surgery.  However, HCFA decided that because of the ''unique 
characteristics of organ procurement activities and the desir- 
ability of maintaining an adequate supply of kidneys,!' kidney 
acquisition costs would be reimbursed in the traditional fashion, 
outside the prospective payment system.  This meant that RTC's 
could pass through for Medicare reimbursement 100 percent of 
their kidney acquisition costs, as long as they were covered and 
reasonable.  Since 1983, the incidence of and interest in kidney transplanta- 
tion has increased greatly.  With the introduction in November 
1983 of cyclosporine, a powerful immunosuppressive drug, and 
significant improvements in graft survival rates, kidney trans- 
plantation has become increasingly prominent and popular. 
From CY 1983 to 1985, the annual incidence of kidney transplants 
increased 26 percent (from 6,112 to 7,695) and transplant waiting 
lists increased by 36 percent (from 7,176 to 9,791).  During the 
same period, the number of Medicare certified IOPA1s rose by 
50 percent (from 36 to 54), IL1sb y 35 percent (26 to 35), and 
RTC1s by 14 percent (156 to 178). 
Obviously, during this period of substantial growth there has 
been a major increase in kidney acquisition costs.  But, because 
of fragmented, incomplete, and sometimes incorrect data bases, 
strikingly little is known about the extent or nature of these 
costs. 
In this report, the third in a series of reports concerning organ 
acquisition systems, we examine the Medicare costs being incurred 
for kidney acquisition.  First, by piecing together strands of 
data from different sources, we seek to offer some reasonable 
estimates of the scope and dimensions of these costs.  Second, on 
the basis of extensive field work and the review of scores of 
materials (see Appendix I), we aim to provide some insight on the 
overall efficiency and economy of the kidney acquisition systems 
that exist across the United States.  Finally, we close with some 
recommendations directed to HCFA. 
FINDINGS 
THE COST PICTURE 
We estimate that during FY 1985, the Medicare program spent about 
$240 million on kidney acquisition and transplantation.  About 
$138 million of that was for transplantation (DRG 302).  The 
remaining $102 million, about 43 percent of the total, was for 
acquisition.  For each transplant performed, the average Medicare 
expenditure was about $20,000 for inpatient expenses associated 
with the operation and about $14,800 for acquisition c0sts.l 
The $102 million expenditure was incurred by three major types of 
providers:  renal transplant centers (RTCVs),i ndependent organ 
procurement agencies (IOPA1s),a nd independent laboratories 
(IL1s)  Among them, the RTC1s accounted for the most sizeable 
portion of Medicare kidney acquisition expenditures.  As indi- 
cated in the chart below, they accounted for an estimated 
$52.3 million of such expenditures, slightly more than one-half 
of the total.  This money covered a wide range of acquisition 
costs associated with both living related and cadaver 
transplants.  (Here and subsequently, the expenditure or 
reimbursement totals are Medicare totals for FY 1985 unless 
otherwise noted. )  CHART I 
ESTIMATED MEDICARE KIDNEY 
RCQUISITION EXPENDITURES, FY 85 CIn Millions? 
PA's  541.2  IOPfk's  $41.2 
IL's  $8.6  IL's  57.7 
RTC's  $52. 
RTC's  $27. 
CADAVER AND LIUING RELATED  CADAVER ONLY 
SOURCE:  Transplant Center Cost Reports 
and Aetna 
When the universe is narrowed to expenditures for only cadaver 
transplants, which represented about 76 percent of all trans- 
plants, the RTC1s are much less prominent.  In this sphere (see 
chart above), RTC's spent an estimated $27.6 million in Medicare 
funds, a little more than one-third of the total.  In contrast, 
IOPA1s,w hich retrieve kidneys only from cadaver donors, spent an 
estimated $41.2 million, about 54  percent of the total Medicare 
reimbursement for the acquisition of cadaver kidneys.  Indepen- 
dent laboratories, which do work primarily for IOPA1s, but also 
RTC1s, received an estimated $7.7 million (about 10 percent) in 
reimbursements. 
Among the 178 Medicare certified RTC1s at the end of 1985, some 
were actively involved in procuring organs directly rather than 
working strictly through IOPA1s. These RTC1s, often referred to 
as hospital organ procurement agencies (HOPA1s),r epresented 
slightly less than one-third of all RTC1s and slightly more than 
one-third of all kidney transplants performed in 1985.4  Yet, 
during FY 1985, we estimate that they accounted for about 
,47 percent of the $102.1 million Medicare reimbursement for 
kidney acquisition. 5 
i 
DO IOPAtst hen tend to be more efficient and economical than 
HOPA1s? Perhaps, but the cost data is not differentiated 
sufficiently to determine the costs for comparable activities and 
thus, to reach any dafiPitive conclusions.  For instance, IOPA 
per kidney acquisition costs generally do not include the full 
costs for laboratory work.  Indeed, their costs for such work are 
sometimes borne by HOPA1s, thereby adding to the latter's acqui- 
sition costs. 
Unfortunately, there is insufficient historical data available on 
RTC1s to offer much information on trends in the extent or nature 
of kidney acquisition expenditures.  All that is available is the 
data compiled by Aetna on the IOPA1s and IL's.  As indicated 
below, it shows a considerable increase from 1980 to 1985 in both 
IOPA and IL expenditures.  During that period, while the number  of active IOPA1s increased from 20 to 43 and the annual number of 
kidneys procured by these IOPA1s increased from 1,817 to 3,961, 
total IOPA reimbursable costs (the amount reimburs- 
able by RTC1s) increased from $15.9 million to $43.4 million. 
Simultaneously, while the number of active IL1sr ose from 
23 to 31 their total reimbursable costs jumped from $3.9 million 
to $10.1 million. 
CHART  I 1  
TOTRL  REIMBURSfiBLE  COSTS,  IOPR's  and I L J s  
- 
FY  1980  1985 
Dollars in Millions 
SOURCE:  fie tna 
There is also insufficient data to draw upon to make many useful 
generalizations about kidney acquisition cost components.  For 
instance, from the RTC cost reports, we cannot determine the 
amount spent in acquiring living related kidneys compared with 
that of cadaver kidneys. 
However, from the RTC cost reports and the somewhat more detailed 
(and accurate) IOPA cost reports, we can decipher two sizeable 
categories of expenditure.  One concerns operating overhead; the 
other laboratory expenses. 
First of all, with respect to operating overhead, the IOPA cost 
reports for FY 1985 indicate that the reimbursable cost for 
operating overhead is about $21 million.  (This includes all of 
the "general service cost centerstlIs uch as equipment depreci- 
ation, plant maintenance, employee health and welfare, and 
administrative costs.)  With the total reimbursable cost for that 
year at $43.4 million, the overhead rate is thus almost 100 
percent.  Comparable data is not readily obtainable for the 
RTCfs. 
Second, in regard to laboratory costs, it can be determined that 
at least $20 million of the estimated $102.1 million in Medicare 
expenditures for kidney acquisition in FY 1985 were for various 
pretransplantation lab tests.  These include three major  categories of tests:  for HLA (human leukocyte antigen) typing of 
potential donors and potential recipients, for the crossmatching 
of serum from potential donors and recipients, and for ongoing 
antibody screening of potential recipients. 
Finally, in filling out the overall cost picture, it is important 
to indicate that even though exact cost comparisons are not 
possible with the current data base, there are widespread 
variations in the per kidney acquisition cost of different 
providers, even in the same community.  For instance, in one 
major metropolitan area where two RTC1s conduct the great 
majority of transplants, one of them had an average Medicare 
expenditure of $9,363 per transplant for FY 1985 compared with 
$17,902 for the other.  In another major urban area having 4 
large transplant programs, the Medicare cost per transplant in FY 
1985 ranged from $11,289 to $24,161.  (In both these areas, the 
data is based on audited cost reports.) 
Why is there such variation?  A key factor certainly is 
quantity.  Providers acquiring a larger number of kidneys have 
more opportunities to achieve economies of scale.  But there are 
also many other factors that help to explain differential costs 
and charges.  Among them are variations that exist.i n (1) the 
wastage of acquired organs, (2) the proportion of non-renal 
organs being acquired; (3) the numbek of individuals on a 
transplant waiting list; (4)  the type of preservation being used; 
and (5) the extent.of administrative overhead costs. 
COST CONCERNS 
In a financial sense, kidney acquisition systems are now an 
anomaly.  While the health care system in general is facing major 
pressure to become more cost conscious, they remain by and large 
free of such pressure.  This is because kidney acquisition costs 
continue to be reimbursed by Medicare on a I1reasonable costM 
basis.  As long as the costs incurred are covered and considered 
reasonable, Medicare is obligated to pay for them. 
As we became more familiar with the kidney acquisition systems 
across the United States, it became increasingly apparent to us 
that most of them were not functioning on a very efficient or 
economical basis.  Although many providers were quite effective 
in procuring kidneys, most seemed to devote little attention to 
identifying possible cost savings.  Worst yet, we found numerous 
indications of duplication and waste.  ~uitec learly, a 
substantial portion of the Medicare funds spent on kidney 
acquisition are being spent unnecessarily. 
This finding is of particular concern for two reasons.  One is 
that kidney acquisition systems tend to be the same ones being 
relied upon to procure hearts, livers, and increasingly, other 
organs and tissues.  With Medicare now covering heart and liver 
transplants (the latter are only for children under 18 years of 
age), the potential financial vulnerability thus extends beyond 
the acquisition of kidneys.  The second reason is that the financial stakes are increasing. 
The number of individuals receiving kidney transplants and the 
number awaiting such transplants have been rising sharply, as we 
documented in the introductory section of this report.  In the 
years ahead, the increases are likely to continue and may even 
intensify as "routine requestl1 laws begin to take hold.  (At this 
writing, at least 26 states have passed such laws.)  Thus, before 
the end of the decade, Medicare expenditures for organ acqui- 
sition could very well approach the $200 million level. 
The key question, then, is:  on what specific grounds do we base 
our finding that kidney acquisition systems tend to be run 
without sufficient attention to costs?  While there are many 
particular examples that support the point, there are three major 
ones that have broad based applicability throughout the country. 
The first concerns a functional area of expenditure: 
pretransplant laboratory services.  The second concerns a 
phenomenon associated with organ procurement:  organ wastage. 
The third concerns a vital managerial component:  fiscal over- 
sight.  Each is addressed below. 
Laboratories 
As indicated earlier, pretransplant laboratory costs account for 
at least $20 million (or 20 percent) of all Medicare expenditures 
on kidney acquisition.  At many RTC1s and IOPA1s,t hese costs 
represent one-third or more of their standard acquisition charge. 
Although there is little national information on how these costs 
break down, we do know that they have been growing rapidly and 
have been subjected to little control.  The seriousness of the 
matter is suggested by a transplant coordinator at a large RTC 
who commented as follows: 
I1We spend more than $1/2 million a year on laboratory 
tests.  Much of it is unnecessary.  But no one here 
gives a damn because it's a 100 percent Medicare 
pass-through. 
Upon analysis, we find that there are three major elements that 
serve to make the current situation a troublesome one.  They are 
addressed below. 
There is widespread variation in metransplant testina proced- 
ures, terminolosv, and costs.  This is a long-standing phenomena 
that to some extent is unavoidable in this dynamic, rapidly 
changing field.  Yet the degree of variation that currently 
exists appears to be hard to justify.  Aetna, in a May 12, 1986 
memo to independent laboratory directors, noted that there may be 
as many as 47 different crossmatch tests being employed. 
Further, drawing on 1984 data, it indicated that the cost per 
test for the labs it covered ranged from $33 to $264.  At one 
extreme, Lab A did 799 renal tests for which it was reimbursed  $210,739 for an average cost per test of $264.  At the other Lab 
B did 7,998 tests and received $268,113, for an average of $34 
per test.  Aetna added that at present: 
. . . . 
there is no mechanism to determine if these 
It 
laboratories do a comparable amount of work and simply 
count "testsu differently, or if Laboratory B actually 
performed 10 times the work done by Laboratory A at 
only a 27% increase in costs." 
Even for those tests that appear to be identical, one finds 
extensive variation in the reimbursement rates.  Antibody 
screens, for instance, range from $40 a test to as much as $175. 
Similarly, HLA  A,B  and C typing ranges from $44 to $150.  One lab 
has a menu of 36 different types of tests,'each with its own 
reimbursement rate.  Another does not differentiate the tests and 
costs for billing purposes and instead has a standard laboratory 
charge of $2,000 for each locally transplanted kidney. 
In this situation of extreme diversity, Aetna, the Medicare 
intermediary for the independent laboratories, is in poor 
position to determine whether laboratory costs are, in fact, 
reasonable.  ~ecognizingt his reality, it recently established a 
task force of laboratory representatives in an effort to achieve 
some standardization in the nomenclature and to find ways of 
determining a laboratoryts efficiency. 
This effort is an important one, addressing significant issues, 
but the prospect for any significant results in the near term 
appears limited.  Moreover, it does not involve the RTC based 
laboratories, which are overseen by whatever Medicare fiscal 
intermediary is responsible for the parent hospital.  No com- 
parable effort involving these laboratories is underway. 
There is a sharp increase occurrins in laboratory costs beinq 
incurred by those on transpldnt waitins lists.  The precise rate 
of increase cannot be determined, but it is clear that these 
i  costs are rising at an accelerated level.  Mainly this is because 
of the growing size of transplant waiting lists (from 5,072 in 
1980 to 9,791 in 1985) and because of the fact that an increasing 
proportion of the lists is composed of highly sensitized individ- 
uals (those with a high level of preformed antibodies).  Thus, as 
of June 6, 1986, 40 percent of the 8,610 individuals on the 
national waiting list of the United Network for Organ Sharing 
(UNOS) had a Panel Reactive Antibody level of 60 percent or 
more.  This means that they were likely to reject at least 6 of 
every 10 donor kidneys that became available. 
These two developments--the increasing demand for kidney trans- 
plants and the increasing proportion of highly sensitized 
individuals--add to laboratory costs in numerous ways.  For new 
transplant candidates, laboratories conduct tissue typing tests 
to determine their HLA  (human leukocyte antigen) specificities.  For those on the waiting lists, laboratories typically conduct 
monthly antibody screens to determine any changes in a 
candidate's level of antibodies.  Then, when a donor kidney 
becomes available, laboratories usually conduct crossmatch tests 
involving serum obtained from the donor and from various can- 
didates with compatible blood types.  Indeed, in many regional 
consortia, the protocol calls for such crossmatches to be 
conducted on all highly sensitized candidates with compatible 
blood types. 
Thus, the accumulated costs for laboratory tests can become quite 
significant, particularly for RTC1s with large numbers of sensi- 
tized patients on their waiting lists.  At most centers, it 
appears there are individuals who have been on a waiting list for 
years and whose chances of obtaining a transplant grow increas- 
ingly remote.  At one such center, a laboratory director noted: 
"The vast majority of tests here are done on individuals who 
never get a transplant." 
To get a better sense of the financial consequences of this 
situation, let's consider a highly sensitized individual who has 
been on a transplant waiting list for three or more years, as is 
probably the case for at least 15 to 20 percent of those on such 
lists.  Aside from the initial tissue typing costs, that individ- 
ual may generate costs averaging about $80 a month for monthly 
antibody screening and about $300 a month for HLA crossmatching. 
Over the course of a year that totals $4,560; over three 
years--$13,680. 
The underlying point here is not that such individuals should be 
removed from the list.  Rather, it is that a sizeable ongoing 
expenditure has developed with little notice and with hard 
questions seldom being asked about how these expenditures might 
be curtailed without compromising the humanitarian objectives of 
transplant programs.  For instance, are more crossmatch tests 
being conducted than are necessary?  Is once a month antibody 
screening needed for everyone?  (Some RTC1s now conduct these 
tests every second or third month for some individuals.)  Are 
there some individuals on transplant lists who, for all practical 
purposes, are no longer viable transplant candidates and who 
should be removed from the lists? 
There is unnecessary du~licationo f metransplant testinq.  In 
many areas, RTC1s have agreed to use a single laboratory fox all 
their pretransplant work.  This has afforded the opportunity to 
achieve some economies of scale and to expedite the organ 
acquisition process.  In other areas, however, RTC1s have refused 
to participate in such cooperative efforts and have continued to 
operate their own laboratories. 
At its worst, this situation can involve numerous RTC labora- 
tories that exist in the same metropolitan area and that regu- 
larly duplicate one another's work.  Such a situation, which is  not precluded under current reimbursement rules, was especially 
striking in one large metropolitan area that otherwise features a 
highly effective centralized organ procurement operation. 
That metropolitan area has five RTC1s, each of which is a medical 
school teaching hospital which operates its own tissue typing 
laboratory.  In harvesting (obtaining) kidneys, each of the RTCts 
has agreed to the following protocol:  The RTC that harvests the 
kidney packs five boxes with a tube of blood, lymphnodes, and 
spleen serum from the cadaver donor and sends them to the five 
RTC tissue typing laboratories.  Each laboratory then conducts 
its own HLA  typing of the donor serum and its own crossmatching 
of that serum with individuals on its own waiting list.  The 
process not only adds significantly to Medicare kidney acqui- 
sition expenditures in the area, but can add up to eight extra 
hours to the organ procurement process, meaning that kidneys are 
sometimes transplanted as much as eight hours later than would be 
the case if there were a single, consolidated laboratory operation. 
When asked why this situation is tolerated, a director of one of 
the laboratories said, "We can't trust the work of the other 
labs."  The transplant surgeons who comprise the board of the 
IOPA that procures kidneys for each of the RTC8s have not been 
inclined to tackle the issue--apparently feeling that it reflects 
a delicate balance of power that is best left alone.  Further, 
another laboratory director asserts that the surgeons have 
actually discouraged the lab directors from communicating too 
closely with one another because in the highly competitive 
situation that exists, they are reluctant to give away any 
secrets. 
Kidney Wastase 
The chart below shows that during the 1980's there has been 
significant progress in reducing the rate of kidney wastage in 
the United States--both for hospital organ procurement agencies 
(HOPA1s)a nd independent organ procurement agencies (IOPA1s). 
Improved organ acquisition systems, a decreased reliance on the 
national sharing of kidneys, and an increased readiness to 
transplant older kidneys appear to be major factors contributing 
to this progress.  CHART  I 1 1  
WASTED  CADAVER  KIDNEYS  AS  PERCENT  OF 
CADAVER  KIDNEYS  RETRIEVED 
Percent 
35 r  TOTAL 
I_ 
HOPAJ 5 
-6- 
IOPAJ-  5 
-D 
SOURCE:  HCFR  Facility  Survey  and  A e t n a  
Yet, the more significant point may be how high the wastage rate 
remains:  13.8 percent overall, 16.6 percent for HOPAts, and 
11.7 percent for IOPA1s. As Dr. Jeffrey Prottas of the Health 
Policy Center at Brandeis University has indicated, the United 
States rates have been much higher than European rates--by 
margins of 50 to 75 percent.8 
The cost consequences associated with this wastage are signifi- 
cant.  If in 1985 the cadaver kidney wastage rate (the proportion 
of harvested kidneys that were not transplanted) had been 
5 percent instead of 14 percent, the kidney acquisition cost per 
cadaver transplant would have been $13,199 instead of $14,580--a 
savings of $1,381 per kidney.  This is in line with Prottasl 
estimate, based on 1982 data, which is that between $1,000 to 
$1,800 of the cost of each kidney transplant can be attributed to 
unused kidneys. lo 
Moreover, -each additional transplant performed results in savings 
' over time in Medicare End Stage Renal Disease Program (ESRD) 
costs, by reducing the level of costs incurred by those on 
transplant waiting lists and even more so, by reducing the number 
that would otherwise be receiving dialysis treatments.  Thus, a 
5 percent wastage rate in 1985 would have meant that about 550 
additional transplants would have been performed.  Over a five 
year period, these additional transplants would have yielded an 
estimated Medicare cost savings of at least $41.2 million.ll 
Why, then, is the wastage rate in the United States so high? 
Prottasl 1984 study identifies poor donor management, surgical 
error, poor preservation, and sharing/matching problems as 
possible sources of wastage.  In comparing the Europe and United 
States situations, he explains:  . . 
the Europeans have a far more stan- 
It. 
dardized and centralized system for matching 
donors with potential recipients.  The 
U.S.  computer system of kidney recipients is 
fine as far as it goes, but it operates 
without agreed upon standards and without the 
routine sharing of specimens to permit 
pre-testing of donors and recipients for 
compatibility.  As a result it is often hard 
to place organs that cannot be used locally, 
and once placed it is sometimes found that 
they are not immunologically acceptable only 
after the organ has been shipped across the 
country. "12 
This conclusion is supported in an article written by 
G. M. Williams et al. and published in the February 1985 issue of 
Transplantation Proceedinas.  ~ntitledI 1Renal Transplant 
Wastage:  An International Pr~blem,t~he  article focuses on 
565 kidneys that were excised by members of the United Network 
for Organ Sharing (UNOS) during an 18 month period and that were 
either discarded or sent overseas.  It showed that the great 
majority of these kidneys (68 percent) "failed to be transplanted 
in the U.S. because of our inability to identify non-sensitized 
recipients.I1 Among the remaining 32 percent, about one-half were 
lost because of problems the authors regarded as "preventableI1 
and one-half because of what they term as an aggressive procure- 
ment attitude (i.e., a readiness to harvest kidneys even though 
the potential viability of those kidneys may be questionable). 
If in the coming years, the wastage rates continue to decline as 
they have in the recent past, the problem would be largely 
resolved.  But this is far from assured.  Indeed, some suggest 
that the easy progress has been made and that continued progress 
is unlikely without some significant initiatives. 
It is also important to take into account how wastage rates might 
' be reduced.  If they were to be reduced through less aggressive 
procurement approaches, then the gains might be offset by the 
loss of transplants that would otherwise have occurred. 
Nevertheless, it appears to be the case that with sufficient 
commitment, wastage rates can be much lower without any adverse 
effect on organ retrieval efforts.  This is most especially true 
for RTC1s, which now discard at least one out of every six 
kidneys they retrieve themselves. l3 
Fiscal Oversisht 
Fiscal oversight of kidney acquisition systems is extremely 
limited.  It seldom involves a search for ways in which 
acquisition efforts might be carried out in a more efficient or 
economical manner.  Instead, it concentrates on matters of  verification--assuring that identified costs were in fact 
incurred and eligible for reimbursement.  And even in that 
context, its effectiveness is often questionable. 
The fiscal oversight that does occur tends to be much less 
consequential for the RTC1s than the IOPA1s. In part this may be 
because the organ procurement efforts of the former tend to have 
less managerial direction than the latter.  In a 1982 survey, for 
instance, Prottas found that RTC procurement programs tended to 
receive only one-sixth of an administrator's time while IOPA1s 
generally received much more than that. l4 
However, of greater significance is that the oversight that 
Medicare intermediaries exert over RTC1s tends to be minimal. 
For these intermediaries, the review of a hospital's kidney 
. 
acquisition cost center tends to be one small part of their 
overall review of that hospital's Medicare costs.  Because of 
that and because they have little or no information available to 
compare the acquisition costs, their audits of kidney acquisition 
costs are seldom exacting. 
Among those involved on the front lines of organ procurement-- 
the transplant coordinators, surgeons, laboratory directors, and 
others--there is a widespread recognition about the looseness of 
a RTC1s kidney acquisition cost center.  In one major metro- 
politan area where a number of RTC1s dominate organ procurement, 
a group of surgeons representing these RTC's are considering 
establishing a centralized IOPA in place of the RTC procurement 
. 
efforts.  However they are reluctant to give up the financial 
advantages of the current situation.  As one of them said, "We 
all know that there's some softness on what's in the hospital's 
kidney acquisition cost center.'' 
In another area, a transplant surgeon remarked:  "There's a lot 
of padding in the hospital's kidney acquisition costs.  Personnel 
time devoted to other matters is often included in the kidney 
acquisition cost center."  Similarly, a surgeon in yet another 
area said, l1There1sa  certain amount of bootlegging that goes on 
in ESRD programs,withn on-renal  account^.^ 
Perhaps the strongest testimony in this regard was offered by the 
administrative director of an IOPA that used to be a procurement 
program within one of the nation's largest teaching hospitals. 
He said: 
"When we were part of the hospital, fiscal oversight 
was much more lenient.  The fiscal intermediary paid 
little attention to our operation.  Now, as an 
independent organ procurement agency, we're subject to 
much more oversight.I1  This relative neglect, however, is not always to the benefit of a 
RTC1s organ acquisition efforts.  As a hospital's administration 
seeks to maximize Federal reimbursement for the kidney acquisi- 
tion cost center, the benefits may very well flow to other 
departments.or to the hospital as a whole, rather than to the 
kidney acquisition component per se.  One hospital tissue typing 
laboratory director emphasized this point when he said,  "Just 
because we're reimbursed 100 percent doesn't mean the 100 percent 
comes back to us.  The financial office keeps as tight a strong- 
hold on us as on other departments."  Similarly at the same RTC 
where the chief transplant surgeon said there's a lot of ''boot- 
legging1@g oing on with the ESRD account, the finance office has 
imposed strict controls on hiring, travel, and purchases.  The 
finance director rationalized this treatment as follows: 
"We want to make sure they're efficient, so that we'll 
be ready for any tightening up by the Federal govern- 
ment.  I don't manage their account any differently-- 
even though it's a pass-through." 
In the sphere of the IOPA1s and IL's, the oversight tends to be 
somewhat more comprehensive and consequential.  Stronger mana- 
gerial direction contributes to this situation to some extent, 
but tends to be constrained by the understandings reached by 
surgeon dominated boards.  For instance, in the example noted 
earlier where five hospital laboratories regularly duplicate one 
another's work, the IOPA executive director seems to have 
insufficient authority to alter this practice. 
Also responsible for the somewhat more vigorous oversight of the 
IOPA's and ILgs,i s that Aetna has served as the single fiscal 
intermediary for them for more than seven years and in doing so 
has built up considerable expertise about kidney acquisition 
costs.  Its audits of IOPA1s and IL's appear to be more extensive 
than those that other intermediaries conduct on RTC1s. Drawing 
on its considerable experience in the area, Aetna has established 
certain cost control measures such as limits on payments made for 
' professional education and for the surgical excision of kidneys. 
Further, the laboratory task force that it established, has as 
one of its objectives the identification of means for determining 
the overall efficiency of a laboratory operation. 
But even in this sphere of IOPA1s and IL1s, it is important to 
recognize that initiatives fostering efficiency and economy are 
taking place basically at the margin, having little overall 
impact.  Thus, with respect to escalating laboratory expendi- 
tures, for instance, Aetna is still a long way from even being 
able to compare the services being performed, let alone to 
determine if their costs are llreasonable.gg  RECOMMENDATIONS 
Given the situation described in the previous pages, we feel that 
it is imperative for the Federal government to take action that 
fosters greater efficiency and economy in Medicare funded kidney 
acquisition systems. 
That could be done under the current reasonable cost framework of 
Medicare reimbursement.  Under that framework, cost limits could 
be established for a variety of particular activities or, indeed, 
for acquisition activity as a whole.  Further, stricter determin- 
ations could be made of covered services, concerning, for 
instance, the type of preservation techniques used or laboratory 
tests performed. 
However, it is important for the Federal government to take an 
approach that is less regulatory and interventionist in nature 
and that offers providers stronger incentives for efficiency and 
economy.  In that regard, we expect that over time a capitated 
approach to financing is most desirable and should therefore be 
developed.  In the more immediate sense, we regard a prospective 
payment system that allows for some area-based differences in 
costs as the most desirable approach to reimbursement.  It en- 
courages cost savings without getting the Federal government 
enmeshed in medical and organizational complexities.  And, it can 
be accomplished quickly. 
Thus, as our basic recommendation, we offer the following: 
o  HCFA should amend the current DRG for kidnev 
transplantation (DRG 302) to include all 
costs associated with acquisition as well as 
transplantation.  Further, as soon thereafter 
as ~ractical,i t should take the same 
approach with respect to heart, liver, and 
any other type of orsan transplants that 
miaht be covered under Medicare in the 
future. 
? 
Three years ago when the ~edicareP rospective Payment System 
(PPS) was established, it was quite proper to exclude kidney 
acquisition costs from that system.  With the hospital cost 
report data on kidney acquisition costs being incomplete and 
unreliable, there was insufficient data available to determine 
how to .calculate a DRG incorporating those costs.  Moreover, with 
most kidney acquisition programs still quite fragile, there was 
good reason to be concerned that cost generated pressures might 
jeopardize efforts to retrieve organs. 
However, at present that rationale is not as persuasive.  First 
of all, the relevant cost data is now available.  HCFA has 
revised that portion of the hospital cost reports that concerns 
kidney acquisition so that it provides more detail and captures  all kidney acquisition costs (including those of IOPAfsa nd 
ILfs). Thus, the FY 1985 hospital cost reports, for the first 
time, identify overall Medicare reimbursable costs for kidney 
acquisition. 
Second, kidney acquisition programs have matured and the public 
has become more accustomed to organ donation.  Although there is 
still a shortage of kidneys, the widespread movement to establish 
hospital "routine inquiryffp rocedures concerning organ donation 
could exert a considerable stimulus to the supply of cadaver 
organs in the years ahead.  At least 26 States have already 
passed legislation calling for hospitals to develop "routine 
inquiryf1p rocedures.  Further, the Omnibus Budget Reconciliation 
Act 1986 included a provision requiring all hospitals partici- 
pating in Medicare and Medicaid to establish protocols for 
encouraging organ and tissue donation. 
Third, in considering why it is now more reasonable to include 
kidney acquisition costs under the DRG for kidney transplan- 
tation, it is important to recognize that the ~edicaree xpendi- 
tures for kidney acquisition have increased significantly during 
the past three years and are likely to continue to climb, perhaps 
at an even faster rate in the years ahead.  The financial stakes 
are thereby greater and, as we have noted, some worrisome 
vulnerabilities have emerged.  A DRG incorporating transplan- 
tation and kidney acquisition would address these vulnerabilities 
and help ensure that both transplantation and acquisition are 
conducted efficiently and economically. 
Knowing that they would be reimbursed a given amount for each 
transplant performed, hospitals with transplant programs would 
have a strong incentive to address the hard cost-relevant 
questions that now tend to be ignored.  Would it be less expen- 
sive to acquire kidneys themselves or to acquire them through an 
independent organ procurement agency?  Are pretransplant labora- 
tory tests being performed in the most efficient manner possible 
and are they all necessary?  Are there economies that can be 
achieved by working together more closely and cooperatively? 
In this changed financial environment, it is quite likely that in 
the metropolitan area having five competing and duplicative 
hospital-based tissue typing laboratories, the RTC1s would find a 
way to consolidate their laboratory operations, which now account 
for more than one-third of their acquisition costs.  In the area 
where an IOPA has a kidney acquisition charge of about $13,000, 
about one-half of which is for administrative overhead, the RTC1s 
would almost certainly press the IOPA to reduce its overhead 
costs or find an alternative, less costly way to procure 
kidneys.  In the State where some newly established RTCfs are 
establishing their own organ procurement programs rather than 
working through a well established IOPA serving the area, these 
RTC1s might very well reconsider their actions.  Some individuals who recognize the need for greater cost control 
still feel that including kidney acquisition within the trans- 
plantation DRG would be unfair.  They note that IOPA1s have been 
more effective than RTCts in procuring organs and favor a 
separate DRG for kidney acquisition that would apply to IOPAtsa s 
well as RTCts. They suggest that our approach, with its focus on 
the RTCts,w ould enable RTCtst o benefit at the expense of 
IOPAts. 
We do not expect that would generally be the case.  As suggested 
above, many RTC1s may be confronted with a financial incentive to 
work through IOPAts,w hich may be less costly.  Further, IOPAts 
and RTCts are not as separate as it may appear.  The IOPA board 
of directors is typically dominated by transplant surgeons from 
one or more RTCts in the area.  A single DRG focusing on the 
RTCtsw ould encourage the RTCts to exert more leadership in the 
area of kidney acquisition and would make them more clearly and 
fully accountable for overall financial management in this area. 
Our approach is also in accord with two other important reali- 
ties.  One is that it is only the RTC that absorbs all the 
various costs associated with kidney acquisition.  The other is 
that there are some spillover effects between acquisition and 
transplantation costs.  An example is in the area of kidney 
preservation.  Although ice preservation has become the dominant 
practice, some surgeons argue that machine preservation, though 
more costly, maintains the kidneys in a healthier state.  This, 
they add, means that transplant costs are likely to be less than 
with ice preservation because the transplant is likely to take 
hold quicker, meaning that the need for post-transplant dialysis 
is less likely and that the patient is likely to be discharged 
more quickly.  Thus, some increase in acquisition cost may result 
in a decrease in transplantation cost.  A DRG linking the two 
areas would enable an RTC to realize the savings. 
Given that, there are still a number of important details that 
HCFA would have to address concerning the implementation of the 
proposed DRG.  Among the most significant of them would be those 
involving the determination of the Federal payment rate for the 
kidney acquisition component to be added to the DRG for kidney 
transplantation.  In that regard, the FY 1985 hospital cost 
reports provide the data base for determining the proper rate. 
As we noted earlier, these reports indicate that the average 
Medicare expenditure per transplanted kidney was about $14,800. 
If the proposed DRG were to be derived on a Itbudget neutralt1 
basis, as was the case when DRGtsw ere introduced in 1983, then 
this $14,800 total could provide the basis for the add-on.  But a 
budget neutral reimbursement system would only incorporate the 
inefficiencies we have found into the new system.  While there 
would be incentives over time to eliminate them, we feel that 
they can and should be eliminated from the start.  Another issue in determining the payment rate is deciding wheth 
to calculate it on the basis of cost per acquired kidney 
(transplanted and wasted) or per transplanted kidney.  Some fee 
that the former is preferable because it is less likely to 
discourage organ retrieval efforts.  We prefer the latter 
approach because we feel it provides a stronger incentive to 
reduce wastage and because RTCvs, on their own accord, have 
considerable interest in maintaining as high a level of trans- 
plantation as possible. 
still another payment-related issue concerns whether acquisition 
costs for living related and cadaver organs should be included in 
the same DRG.  We feel that they should be combined because here 
again there are spillover effects between the two cost areas and 
because we seek to encourage efficiencies for the transplant 
program as a whole.  Moreover, it is not clear that the differ- 
, 
ential between the two types of cost is sufficient to warrant 
separate treatment. 
Thus, in accord with the above discussion, we offer the following 
recommendation: 
In determinins the Federal Davment for the 
kidnev acauisition com~onento f the 
transvlant-acquisition DRG, HCFA should 
ensure that it 111 takes into account the 
unnecessary costs reflected in current kidnev 
acquisition emenditures, 12)  is based on the 
cost per kidnev trans~lantedr ather than 
retrieved, and 13)  includes livins related as 
well as cadaver acquisitions. 
Finally, there is the matter of timing--both in the sense of when 
the proposed DRG's would be implemented and whether or not there 
would be a staged implementation period.  When the DRGvsw ere 
first implemented in 1983, the statute called for a three year 
transition period during which 'la declining portion of the total 
program payment will be based on a hospital's historical costs in 
a given base year and a gradually increasing portion will be 
based on a regional and/or national Federal rate per discharge.If 
With respect to our proposed modification of the kidney 
transplantation DRG, we feel that such a lengthy transition 
period would be unnecessary, given the comparatively limited 
scope of the change involved and the compelling need to introduce 
greater efficiency to the field of organ acquisition. 
In view of that consideration and the fact that HCFA would have 
to consider a number of other factors associated with the 
proposed DRGvs,s uch as the basis for any waivers and the role of 
the Medicare fiscal intermediary for the IOPAvsa nd IL1s,w e 
offer the following recommendation:  o  HCFA should beain full im~lementationo f the 
transplant-acauisition DRGtsa s soon as 
practical. 
Many of the transplant coordinators, surgeons, and IOPA and 
laboratory directors with whom we met were quite supportive of 
the concept of a DRG for organ acquisition.  At the same time, 
they and others raised concerns about unintended effects that 
could be associated with it.  In the quest to achieve savings, 
some RTCts,t hey noted, might be inclined to take a more con- 
servative posture toward organ retrieval, to downplay immuno- 
logical considerations that can have consequences for the 
long-term viability of a transplant, to become too restrictive in 
determining who is allowed on a transplant waiting list, and to 
show even less interest in obtaining kidneys through the national 
network. 
Just as with the DRG system in general, there must be regular 
oversight to assure that the payment mechanism does not trigger 
harmful, unintended results.  The peer review organizations, the 
hospital peer review committees, the End Stage Renal Disease 
network organizations, the State survey teams, and the newly 
forming national network organization each provide forums for 
such oversight.  The establishment of national standards for 
organ procurement would also provide an important safety valve. 
In summary, we feel that the establishment of transplant- 
acquisition DRGts,a long the lines addressed above, offers a 
prime opportunity for a policy initiative that can save Medicare 
dollars without adversely affecting the quality of care.  The 
scope of the savings is, of course, impossible to determine 
precisely, but reasonable estimates can be made. 
In that regard, we have two bases for estimated savings for the 
proposed kidney transplantation-acquisition DRG.  One concerns 
those savings that would result from the substantially reduced 
wastage rates which a DRG would almost certainly generate.  We 
estimate that in its first year, the new DRG would be responsible 
for a reduction of at least 5 percentage points in the overall 
rate of kidney wastage.    his reduction, during that one year, 
would generate an estimated Medicare cost savings of 
$30.1 million over a five year period. l5 
A second category of savings would be that represented by 
increased efficiency and economy in organ acquisition systems and 
by a Federal payment that takes this into account.  In that 
context, if the Federal ~edicarep ayment per transplant were 
reduced from an estimated $14,800 to $14,000, about 5  percent, 
the first year ~edicarec ost savings would be $7.4  million.16 
Thus, without even considering any cost savings associated with 
heart or liver acquisition, the inclusion of organ acquisition in  the Medicare prospective payment system would generate in its 
first year an estimated Medicare savings of at least $37.5 
million. ($30.1 million plus $7.4 million). 
Simultaneous with the development and implementation of the DRGfs 
as noted above, we feel that some consideration should be given 
to how a capitated financing/reimbursement approach might be 
applied to organ transplantation and acquisition.  In this 
regard, a demonstration effort involving a few experienced renal 
transplant centers would be particularly desirable.  It would 
afford an opportunity to gain some valuable insights about the 
workings and impact of such a system. 
Accordingly, we conclude with the following recommendation: 
HCFA should sumort some demonstrations of a 
0 
cawitated amroach to Medicare reimbursement 
for kidney transplantation and acuuisition. 
Such demonstrations might involve providing the RTC with a 
capitated amount per transplant that would cover acquisition, 
transplantation, and certain post-transplantation costs for up to 
three years.  With the post-transplant care included in the 
capitated payment, the RTC would have a significant stake in the 
longer term viability of a transplant.  APPENDIX I 
BACKGROUND AND METHODOLOGY 
Over the past few years, the subject of organ acquisition has 
become an increasingly important and controversial one.  News- 
paper reports, television news shows, radio talk shows, Congres- 
sional hearings, and other sources have been raising hard ques- 
tions about the adequacy of current systems for obtaining and 
distributing cadaver organs and tissues that will be used for 
transplantation. 
Because of these questions and the Medicare program's significant 
stake in the condition of the country's organ acquisition 
systems, the Office of Inspector General has undertaken a broadly 
based study of these systems.  Its overriding purpose is to 
promote a better understanding of them in terms of their effec- 
tiveness, efficiency and equity, and to identify policy direc- 
tions that might be taken to promote these ends. 
The study, which was initiated in January 1986, has involved 
three major modes of inquiry: 
o  Reviews of literature and data bases, including journal 
articles, books, governmental reports and statistical 
compilations of public and private organizations. 
Particular attention has been devoted to the review and 
analysis of 1984-1985 cost reports submitted by HHS 
certified independent organ procurement agencies and by 
Medicare certified transplant centers, and to the 
review of documents and reports generated by the Organ 
Transplantation Task Force established by the National 
Organ Transplant Act of 1984. 
o  Visits to 16 cities, focusing on reviews of the organ 
acquisition practices in those cities.  These involved 
discussions with transplant surgeons and coordinators, 
nephrologists, immunologists, procurement agency 
< 
directors, fiscal analysts, ESRD network directors and 
others associated with organ acquisition and transplan- 
tation.  The cities visited were:  San Francisco, 
Los Angeles, Denver, Chicago, Minneapolis, Nashville, 
Houston, Dallas, San Antonio; Miami; Richmond; 
Charlottesville, Philadelphia, New York, Boston, and 
Washington, D. C. 
o  Telephone discussions and selected visits with various 
individuals knowledgeable about organ acquisition 
practices and issues.  These included representatives 
of organizations, such as the South-Eastern Organ 
Procurement Foundation, and the American Council on 
Transplantation; many of the members of the task force; 
academics; and various officials in the Department of  Health and Human Services, most especially in the 
Public Health Service and the Health Care Financing 
Administration; and others. 
This report is the third of a series of reports presenting the 
findings and recommendations of the study.  The first report, 
issued in August 1986, is titled "The ~ccesso f Foreign Nationals 
to U.S. Cadaver Organs.It  The second, issued in November 1986, is 
titled #@TheA ccess of Dialysis Patients to Kidney Transplan- 
tation. 
In each of these reports primary attention is given to kidney 
acquisition.  This is because there has been much more experience 
and activity concerning renal than non-renal organs.  Congress 
has extended Medicare coverage on a near universal basis to those 
requiring dialysis and transplantation since 1972.  During that 
time more than 50,000 kidney transplants have been performed in 
the Unites States, the majority of which have involved the use of 
cadaver kidneys. 
In the years ahead, however, transplantation of non-renal organs, 
especially hearts and livers, will become especially prominent 
given the continued advances in technology and the fact that 
Medicare now covers liver transplants for Medicare eligible 
children with biliary atresia and will be covering heart trans- 
plants for Medicare eligible individuals meeting specified 
medical criteria.  This prospect for accelerated growth is 
suggested by the fact that the number of both heart and liver 
transplants doubled between 1984 and 1985, and from 346 to 719 in 
the case of hearts and from 308 to 602 with respect to livers. 
In that period, the number of kidney transplants performed in the 
United States rose from 6,968 to 7,965. 
Thus, the problems encountered and lessons learned concerning 
kidney acquisition have broader relevance to organ acquisition 
generally.  There are some distinguishing characteristics between 
non-renal and renal acquisition (not the least of which is that 
non-renal organs must be made available for transplantation much 
more quickly).  But there are also important commonalities, among 
which is the fact that the same organizations typically handle 
renal and non-renal acquisition.  Accordingly, the findings and 
recommendations of this study, although focused on kidneys, have 
significance for organ acquisition in general.  APPENDIX I1 
METHODOLOGICAL NOTES 
We include this section to inform the interested reader about the 
assumptions and approaches used to obtain our estimated numbers. 
It is directed primarily to those already knowledgeable about the 
existing data bases concerning organ procurement costs. 
We stress that in some cases the estimates rest on a stronger 
foundation than others.  We also urge that the reader recognize 
that we focus on Medicare expenditures rather than overall costs 
and that we reconcile data from different reporting periods. 
Thus for instance, we develop fiscal year estimates for the 
transplant activity data compiled on a calendar year basis by the 
annual HCFA Facility Survey.  We do that in order to compare it 
more directly with the cost data that is compiled on a fiscal 
year basis. 
We recognize the imperfections in this methodology.  At the same 
time, we feel that the resulting estimates, inexact as they are, 
add valuable clarity to a cost picture that was heretofore 
extremely blurred. 
The following explanations refer to citations in the textual 
material : 
11  With respect to the ~edicaree xpenditure on transplantation 
we obtained the $138 million total from HCFA.  The average 
Medicare expenditure for inpatient services was determined by 
dividing the $138 million by 6,904, the estimated number of 
Medicare reimbursed kidney transplants during FY 1985. 
We developed the estimate of 6,904 Medicare reimbursed kidney 
transplants for FY 1985 as follows.  We took the 7,695 trans- 
plants reported in the HCFA facility survey for CY 1985 and 
subtracted from that total the 603 nonoMedicare transplants 
reported in the survey for CY 1985.  That resulted in a total of 
. 
7,092 Medicare reimbursed kidney transplants for CY 1985.  For 
CY 1984, the comparable total, using the same methodology, was 
6,339, 753 less than the CY 1985 total. 'TO obtain an estimated 
total for FY 1985, we then subtracted 188 (one-fourth of 753) 
from the CY 1985 total of 7,092.  Thus, the estimate of 6,900. 
With respect to the Medicare expenditure on kidney acquisition, 
we developed an estimate of $102.1 million on the basis of our 
review of the cost reports of individual transplant centers 
(RTCts). For the 140 RTC cost reports we obtained, we determined 
the net amount spent by Medicare by adding the amount on line 56 
of the D-6 cost reports.  Then, we projected what the total would 
be for 151 RTC1s, if the additional 11 reflected the average net 
cost of the 140.  The 151 total was determined, after discussions 
with HCFA, to be the number of active RTCts during FY 1985.  Most of these cost reports, it must be emphasized, were unaud- 
ited.  Thus, some discrepancy is likely between our totals and 
those that would be obtained subsequently from a full set of 
audited cost reports. 
21  Actually, there is also a fourth major type of provider: 
donor hospitals.  However, the acquisition costs incurred by 
these hospitals are incorporated in RTC and IOPA cost data and 
cannot be fully isolated from that data.  We estimate that in 
FY 1985, they accounted for about $8 million or about 8 percent 
of overall kidney acquisition expenditures. 
We developed that estimate as follows.  From Aetna cost report 
data, we determined that IOPA1sp aid about $5.1 million to donor 
hospitals during FY 1985.  We then assumed that RTC1s, for the 
kidneys they retrieved on their own, paid donor hospitals at a 
parallel level (though it may very well be higher).  Thus, since' 
RTCts retrieved about 41 percent of all kidneys retrieved in 
FY 1985, we increased the $5.1 miilion by that proportion.  That 
resulted in a total of $8.64 million for donor hospitals.  We 
then reduced that total by 5 percent to account for non-Medicare 
revenue, leaving a total of 8.21 million. 
For the allocation of expenditures on cadaver and living 
31 
related, we started with Aetnals FY 1985 total of $43.4 million 
in reimbursable cost for independent organ procurement agencies 
(IOPA1s). We then reduced that by 5 percent, since about 5 
percent of that would subsequently be reimbursed by non-Medicare 
sources.  Thus, we estimated that the Medicare expenditures on 
IOPA acquired kidneys was $41.2 million. 
Next, we developed a counterpart estimate for the expenditure on 
independent laboratories doing pretransplant work.  We started 
with Aetnats total of $10.1 million in reimbursable cost for FY 
1985, reduced that by $1 million to account for an estimated 
double counting that appears in the IOPA total, and then another 
5 percent to account for non-Medicare revenue.  Thus, we 
estimated that the Medicare expenditure on IL1sw as $8.6 million. 
+ 
Finally to determine the total for RTCts,w e subtracted the IOPA 
and IL estimated totals indicated above from the $102.1 estimated 
total for all Medicare kidney acquisition expenditures indicated 
in Footnote 1.   his resulted in an estimated $52.3 in RTC 
expenditures. 
For the allocation of expenditures on cadaver-only transplants, 
we subtracted the estimated total acquisition expenditure for 
living related transplants from the estimated $52.3 million total 
for RTC1s and $8.6 million for IL1s. On the assumption that 
living related transplants accounted for about 24 percent of all 
transplants for FY 1985 (as was the case for CY 1985), we 
estimated that there were 1,657 living related transplants in 
FY 1985.  We then multiplied that total by $14,800, the estimated  Medicare expenditure for acquisition per transplant.  This 
resulted in an estimated $24.5 million for living related 
acquisition costs. 
Thus, subtracting $24.5 million from $102.1 million (the esti- 
mated total for all Medicare kidney acquisition expenditures) 
resulted in an estimated total of $76.5 million for cadaver-only 
acquisition expenditures.  Since IOPA1s are involved only with 
the acquisition of cadaver organs, their total remained at $41.2 
million.  For the IL8s,w e estimated that 10 percent of their 
$8.6 million expenditures were on living related donations; thus 
$7.7 million for cadaver-only.  Finally, we subtracted the total 
for IOPA1s and IL8s ($48.9 million) from the $76.5 estimated 
total above to obtain our estimate of 27.6 million in Medicare 
reimbursed expenditures incurred directly by RTC8s for the 
acquisition of cadaver kidneys. 
41  Our number for active HOPA1s (57) comes from a compilation 
made by the Office of Organ Transplantation in the Public Health 
Service in July 1985. 
51  The 47 percent, it should be recosnized includes all 
acquisition expenses--both cadaver and-living-related--for these 
RTC1s. 
61  We arrived at the $20-milliont otal as follows:  As already 
noted, Medicare expenditures for IL1sw ere $8.6.  Given that the 
number of active RTC tissue typing laboratories is at least equal 
to the number of active IL1s and that they perform most of the 
pretransplant lab work for living related transplants, we assumed 
that the RTC lab expenditures were at least equal to the $8.6 
total above.  Then, we added $2.7 million, which reflects 
Medicare expenditures for lab services that are incorporated in 
IOPA cost reports.  Thus $8.6 +  $8.6 +  $2.7 =  $19.9 million. 
71  For the IOPA1s,t he wasted kidneys include all those identi- 
fied by Aetna as 18non-viable.m The percentage is based on only 
'those kidneys reported by IOPA1s as procured locally. 
For the HOPA1s, the wasted kidneys include all those identified 
by the HCFA facility survey as "not used."  This includes kidneys 
that were either discarded or sent overseas. 
Since at least 200 were sent overseas, one might then conclude 
that the HOPA wastage data provided in this table actually 
over-represent the number of kidneys actually wasted.  But in 
fact, it may actually under-represent the number, because in our 
field work we found that some transplant centers consistently 
under-reported the number of excised kidneys that were not used. 
81  "Analysis and Evaluation of the United States Organ 
Procurement System:  Hospital and Independent Agencies 
Compared.I8  Health Policy Center, Brandeis University, February 
1984 (~evisedJ une 1984), p. 50.  91  An estimated 5,247 Medicare reimbursed cadaver transplants 
were performed in FY 1985 (76 percent of 6,904--see footnote 1). 
With a wastage rate of 14 percent, 6,101 kidneys would have had 
to have been procured to account for the 5,247 cadaver trans- 
plants.  If the wastage rate had been 5 percent, 305 would have 
been wasted (5 percent of 6,101) instead of 854 (14 percent of 
6,101).  This represents an additional 549 transplants that would 
have been performed  (854 minus 305) or a total of 5,796 (5,247 
plus 549). 
Thus, $76.5'million (the total FY 1985 Medicare expenditure for 
cadaver transplants) divi,ded by 5,796 equals $13,199--the kidney 
acquisition cost per cadaver transplant if there had been a 
5 percent wastage rate.  $76.5 million divided by 5,247 equals 
$14,580--the kidney acquisition cost per cadaver transplant with 
a 14 percent wastage rate. 
101  See Prottas, p.  49. 
111. Each transplant of a Medicare beneficiary generates an 
estimated five year cost savings of $75,000 (for an explanation 
of the methodology used in deriving this $75,000 estimate, see 
Appendix I1 of our August 1986 report entitled ItThe Access of 
Foreign Nationals to U.S.  Cadaver Organs). 
121  See Prottas, p.  50. 
131  We say "at leastt1b ecause, as noted, it appears that a 
substantial number of the kidneys that some RTC1s harvest and do 
not use. are not reported by them as being wasted. 
141  See Prottas, p.  10. 
151  We base the estimate on the period between October 1,  1987 
and September 30, 1988 and assume that during that period and the 
- 
preceding periods of October 1, 1986  September 30, 1987 and 
- 
October 1, 1985  September 30, 1986, the rate of Medicare 
reimbursed cadaver kidney transplants would increase at the same 
rate that all cadaver transplants increased between CY 1984 and 
CY 1985:  10 percent.  Such a rate of increase would result in 
5,772 Medicare reimbursed cadaver transplants in FY 1986 (5,247 
plus 10 percent increase), 6,349 in FY 1987 (5,772 plus 
10 percent increase); and 6,984 in FY 1988 (6,349 plus 
10 percent). 
With a wastage rate of 14 percent, organ procurement agencies 
would have to procure 8,121 kidneys to account for 6,984 cadaver 
transplants.  This involves the wastage of 1,137 kidneys.  If the 
wastage rate were 9 percent, 731 kidneys would have been wasted 
(9 percent of 8,121) instead of 1,137 (14 percent of 8,121). 
This represents an additional 406 transplants that could be 
performed (1,137 minus 731) for a total of 7,390.  By multiplying 406 by $75,000 (see footnote ll), we obtain the 
estimated five year savings of $30.1 million. 
Here we refer to cadaver and living related transplants 
161 
because the proposed DRG would .encompass acquisition costs for 
each of them.  We base the estimate on the period between 
October 1, 1987 and September 30, 1988 and assume that during 
this period the rate of both cadaver and living related 
transplants would increase at the same rate as between CY 1984 
and CY 1985:  10 percent.  Such a rate of increase would result 
in 7,594 Medicare reimbursed transplants in FY 1986 (6,904 plus 
an increase of 10 percent) and 8,353 in FY 1987 (7,594 plus 
10 percent), and 9,188 in FY 1988 (8,353 plus 10 percent). 
Multiplying $14,800 (estimated Medicare payment per transplant in 
FY 1985 by 9,188 yields $136.0 million.  Multiplying $14,000 (the 
estimated per transplant payment noted in the text) by 9,188 
yields $128.6 million.  The difference between the two totals-- 
$7.4 million--is the estimated savings.  APPENDIX 111 
HCFA. AETNA, PHs, AND ASPE 
COMMENTS ON THE DRAFT REPORT 
AND OIG RESPONSE TO THE COMMENTS 
We received comments on the draft report from the ~dministrator, 
Health Care Financing Administration (HCFA), the Manager of 
Medicare Administration, Aetna Life Insurance Company (which 
serves as the single Medicare intermediary for independent organ 
procurement agencies), the Deputy Assistant Secretary for Health 
Operations, and Director, Office of Management in the Public 
Health Service (PHs), and the Assistant Secretary for-Planning 
and Evaluation. 
. 
HCFA AND AETNA COMMENTS 
The HCFA and Aetna comments focused on the recommendations and in 
both cases tended to be supportive.  In a cover memorandum, the 
HCFA Administrator stated:  "We find the recommendations 
generally to be sound and supportive of our efforts to examine 
the access and cost issues related to organ pro~urement.~T~h e 
Aetna representative, who dealt primarily with the 
recommendations calling for acquisition costs to be included in 
DRG 302, noted that the recommendation Ithas many merits.I1  Both 
respondents, however, raised a number of detailed, operational 
concerns about how the recommendations would be carried out. 
Their comments, in full, were as follows. 
HCFA COMMENTS 
OIG ~ecommendation 
HCFA should amend the current DRG for kidney transplantation 
(DRG 302) to include all costs associated with acquisition as 
well as transplantation.  Further, it should take the same 
approach with respect to heart, liver, and any other type of 
organ transplant that might be covered under Medicare in the 
. 
future 
HCFA Comments 
We agree in principle to a prospective payment approach for 
kidney acquisition.  However, we have some underlying concerns 
regarding the effect a DRG prospective payment system may have on 
the supply of kidneys for transplantation.  There is reason to 
believe that kidney transplantations or, for that matter, any 
other form of organ transplantation would decline if capitation 
was instituted.  Further, many persons believe that the success 
of the organ procurement program to date has been because of the 
flexibility of the reimbursement system.  We are not as 
optimistic as the OIG that access to organs, already in short 
supply, would not be adversely affected by the amended DRG.  A more rigorous OIG analysis of these assertions would be 
helpful. Since kidney procurement costs represent a significant 
expenditure to the ~edicarep rogram, and other internal organ 
procurement costs (hearts and livers) are not as significant to 
the Medicare program, we believe that it is premature to agree to 
use the same prospective payment approach for all types of 
organs. 
We also have several operational problems that need to be 
resolved before a DRG system for kidney acquisition could be 
implemented. 
A potential problem exists with respect to the use of 
organ procurement agency (OPA) charges in recalibrating 
the DRG.  since ~edicarei s basically the only payor of 
OPA kidneys, recalibrating the DRG using charges may 
result in exorbitant charges to Medicare.  Currently 
the Medicare intermediary sets the charge for each 
institution, but once the cost reimbursement system is 
abandoned, we would no longer predetermine these 
amounts.  The independent OPA charge to the renal 
transplant centers (RTCs) becomes a cost to the RTC. 
Since the cost of organ acquisition would constitute 
from 33  percent to 50 percent of the DRG amount, an 
improper OPA charge could dramatically impact on our 
payment rate. 
Currently Medicare does not have adequate data to 
establish a reasonable amount for kidney acquisition in 
the kidney transplant DRG.  Even though the OIG has 
determined that $14,800 should be added to the DRG, the 
report indicates (pages 3 and 4) that the organ 
acquisition data are inadequate.  There is even less 
data available on organs other than kidneys. 
We are also concerned about transportation services. 
Transportation costs are expensive and will influence 
the overall DRG rate.  Some transplant centers use 
virtually all locally retrieved kidneys while others 
import kidneys extensively from other areas.  It will 
be necessary to review more closely these costs to 
determine the impact they have on a DRG. 
We will be investigating these issues to determine the potential 
effects on an amended DRG.  Until these questions are resolved, 
we cannot agree to implement the OIG proposal. 
OIG Recommendation 
In determining the Federal payment rate for the kidney 
acquisition component of the transplant-acquisition DRG, HCFA 
should ensure that it (1) takes into account the unnecessary 
costs reflected in the current kidney acquisition expenditures, 
(2) is based on the cost per kidney transplanted rather than 
retrieved, and (3)  includes living-related as well as cadaver 
acquisitions.  HCFA Comments 
Once again, we agree in principle with this recommendation. 
However, the problems mentioned in the draft report are the very 
reasons we are unable to implement a DRG at this time.  Once we 
can obtain adequate cost data, we will begin to review the OIG 
proposals.  We would be interested in seeing a cost-benefit 
analysis of paying only for kidneys that are transplanted, and 
not all of those which are retrieved.  If retrieval is 
discouraged in cases in which an organ has only a small chance of 
being successfully transplanted, losing out on that "small 
chancew may result in unnecessary costs for patients whose 
transplantation procedures would be delayed further. 
If the same DRG price is paid for living-related and cadaver 
acquisitions, it might be possible that new negative incentives 
will be introduced.  Cadaver acquisitions are less expensive tha 
living-related acquisitions, and paying the same price for both 
would encourage cadaver harvesting and discourage living-related 
acquisitions.  The potentially harmful effect of this 
reimbursement change on the quality of transplantable organs 
deserves further study. 
OIG Recommendations 
HCFA should begin full implementation of the transplant- 
acquisition DRGs as soon as practical. 
HCFA Comments 
We agree.with the OIG recommendations, but must qualify our 
response by stating that we currently have data for one year only 
on RTC organ acquisition services and costs.  In a year's time we 
will re-evaluate our position to determine if the additional data 
available are reliable enough for use in the DRG.  It may be 
necessary to perform an audit of RTCfs costs to ensure adequate 
data for establishing a DRG. 
OIG Recommendations 
HCFA should support some demonstrations of a capitated approach 
to Medicare reimbursement for kidney transplantation and 
acquisition. 
HCFA Comments 
We currently have a demonstration project with El Camino Hospital 
in Santa Clara, ~aliforniat hat is determining the feasibility of 
an all-inclusive capitation rate for ESRD services.   his rate 
would include the costs of transplants and kidney acquisition, as 
well as any other ESRD service that would be required.  Also, we recently received a grant application for a large scale 
demonstration project to test ESRD capitation, which is under 
consideration for possible funding. 
General Comments 
o  You should also be aware that we have recently made 
several changes to improve fiscal oversight of kidney 
acquisition costs.  We have developed a new cost report 
that allocates costs by organ and identifies offsets, 
such as revenues collected by an OPA from other payors, 
which is estimated to save $1 million.  We have advised 
OPA1s that they must increase their efforts to collect 
revenues from other sources.  Finally, we have 
tightened our requirements to collect revenues for 
organs that are shipped to foreign countries with 
estimated savings of up to $1 million. 
As the OIG report indicates, Aetna is the Medicare 
fiscal intermediary responsible for auditing the cost 
reports of all independent OPA1s. The OIG report 
states that Aetna has developed expertise in the area 
of kidney acquisition costs and that its audit of 
independent OPA1s appears ,tob e more extensive than 
those audits of RTC1s conducted by other 
intermediaries.  This-inferst hat further 
specialization in this area to include the OPA1s based 
in RTC1s might be advisable. 
We examined this issue in 1985 and decided against 
designation of intermediaries for RTC-based OPA1s 
because there is no specialized bill processing 
function.  That is, payment for organ acquisition 
activities is made on the basis of settled cost 
reports.  Also, it is difficult to identify OPA1s based 
in RTC1s. Once a hospital is certified as a transplant 
.  center, it does not need separate certification to 
engage in organ acquisition activities.  Medicare 
regulations specify four functions that an entity must 
perform in order to be classified as an OPA.  Some 
RTC1s perform only some of these functions. 
o  Some of the problems with wastage of organs that the IG 
has identified will be addressed once OBRA Section 9318 
is implemented in October 1987.  These provisions 
require hospitals and organ procurement agencies to 
become part of a nationwide organ procurement network. 
o  Comparisons with European countries as to the percent 
of wasted organs may be inequitable because the United 
States tends to have more stringent standards regarding 
the number of hours between when an organ is acquired 
and when it is transplanted.  AETNA COMMENTS 
I wish to thank you for the opportunity to comment upon the 
report on acquisition costs.  As you know, we took part in 
several meetings.with Mr. Yessian during the course of the 
analysis; and we concur with the majority of the statements made 
in the report. 
The recommendation of placing the acquisition cost in DRG 302 has 
many merits.  Once established, it places the burden of cost 
containment totally at the RTC level and HCFA is relieved of the 
day to day cost control efforts.  Ultimately, if the RTC cannot 
break even or produce a profit on a transplant it may decide to 
leave the field. 
There are some considerations that we believe should be taken 
into account when the DRG  proposal is presented. 
1.  The Prospective Payment System, when fully phased in, 
will be based upon a national rate adjusted by MSA 
specific wage indexes.  The relative weight for DRG  302 
would be consistent for all providers nationwide and, 
therefore, the only difference between a payment for a 
transplant in Omaha, Nebraska and Boston, Massachusetts 
will be the labor wage index. 
We question whether this mechanism is equitable given 
the following: 
A.  Kidneys are shared nationwide and the amounts 
paid by the RTC's vary.  Locally procured 
organs are usually the least expensive and an 
RTC that relies on imported organs could be 
at a severe financial disadvantage.  For 
example, all kidneys currently shared through 
SEOPF cost $10,500. 
B.  The retrieval rates in many areasvary widely 
from year to year due to poor local economic 
conditions (less travel), bad publicity which 
decreases consent, political problems between 
hospitals, physicians and/or the OPA. 
C.  The supply of kidneys, though adequate for 
non sensitized patients, is limited.  It is 
not a truly free open competitive market. 
The PPS was designed to function best in a 
competitive hospital environment where all 
RTC1s have equal access to resources, 
supplies, and control over their operational 
policies.  Thus, although a DRG based philosophy would 
solve many of the concerns the long range 
effects must be looked at. 
2.  Although the hospital cost reports have been refined in 
the analysis of acquisition cost, we believe that it is 
still inadequate to construct a reasonable DRG weight. 
Many RTC1s do not allocate coordinator's salaries and 
other costs to extra renal organs; and the use of 
inaccurate data to establish a weight would be unfair 
to those centers that have been properly accounting for 
non renal acquisitions. 
3.  The problem of wastage does not appear to be directly 
related to the method of reimbursement.  A small 
percentage of organs are discarded due to surgical 
error; some have anatomical problems and many are lost 
due to the lack of recipients. 
The lack of recipient issue has several variations. 
Although the supply is limited, there are adequate 
numbers for non sensitized patients.  In fact, both 
patients and surgeons have rejected organs because the 
match was not quite to their liking and a better one 
would be available soon.  Further, the surgeons 
consistently reject organs over 30 hours old for 
reasons of liability.  Unless the patient is critical, 
the issues of organ age and typing match play a key 
roll. 
Within a DRG based system, the premise that surgeons 
would utilize more organs because of reimbursement, and 
override their concerns on age, typing and liability 
needs to be investigated. 
Whether or not a DRG based system is used the question 
of an excessive number of laboratories needs to be 
4  addressed as well as the frequency and type of tests 
routinely performed.  The DRG may be effective in 
reducing cost but HCFA will still be the major payor of 
kidney transplants so that the need to reduce those 
costs will remain a priority.  The certification and 
need for the service should be reviewed prior to 
certifying renal tissue typing labs. 
The capitation project approach could be a first step 
to determine how such a fixed reimbursement system 
would.  function as well as provide valuable data to 
HCFA 
We share your concerns on the cost of organ acquisition, espe- 
cially the proliferation and duplication of lab tests.  If we can 
provide further comments, please contact us.  OIG RESPONSE 
We recognize that there are various complexities which must be 
addressed if the recommendations are to be carried out 
effectively.  The specific operational considerations raised in 
both HCFA and Aetna are reasonable ones.  We welcome HCFAts 
resolve to address them and would be happy to lend whatever 
assistance possible. 
At the same time, we must underscore that kidney acquisition 
costs continue to increase, that reasonable expenditures continue 
to be reimbursed on a 100 percent pass-through basis, and that 
with respect to laboratory expenditures there is little basis 
upon which to determine if expenditures are reasonable.  Further, 
it is important to take into account that Section 9318 of the 
Omnibus Budget Reconciliation Act of 1986 requires that as of 
October 1, 1987 only one organ procurement agency can be eligible 
for Medicare reimbursement in each service area.  It is not clear 
what kind of effect this development will have on overall costs, 
but it certainly does appear to be a factor warranting 
consideration. 
We hope that the various operational problems can be dealt with 
expeditiously enough so that in some fashion a DRG incorporating 
kidney transplantation and acquisition can be introduced by 
October 1, 1988.  If that is still not found to be practical, 
then as we note on page 14, we suggest that some cost limits be 
established under the present reasonable cost framework.  At a 
time when the health care system in general is under considerable 
pressure to contain costs, we do not feel it is proper for this 
one segment, despite its overall importance, to remain completely 
shielded from such pressure. 
With respect to the comments on including heart and transplant 
under a DRG, we agreed that the need for action is not quite as 
compelling.  Accordingly, we have changed our first 
recommendation to make it clear that the firs step should be to 
include kidney acquisition under a DRG and that heart and liver 
acquisition be included in a DRG "as soon thereafter as 
practical." 
PHs COMMENTS 
The PHs comments were quite critical of the report with respect 
to its methodology as well as its findings and recommendations. 
The comments were divided into those of a general and a technical 
nature.  Some of the latter concerned the need for 
clarifications, which in two instances we made.  Most concerned 
limitations in the data reported and in the support that exists 
for our findings and recommendations. 
The general comments offered by PHs were as follows.  Our review of the report indicates that the information gathered 
in the survey is largely anecdotal and is an expression of 
opinions rather than the result of an analysis of the data 
collected.  The quotes in the report lack credibility since 
neither the speakers1 identity nor a description of his/her 
relevant level of expertise is disclosed.  There is no indication 
as to how this information was analyzed and used to develop the 
report's findings and conclusions.  The lack of data suggests the 
need for better data collection and analysis on organ 
transplantation rather than the propriety of policy formulation 
at the present time.  The report, in effect, recommends the 
collection of data after implementation of the new payment 
system, rather than acknowledge a need to first determine the 
facts needed to formulate such a policy. 
The report addresses several medical practice issues, e.g., 
determining appropriate frequency of testing and definlng the 
number of llusablewk idneys harvested.  Since these issues have 
not been resolved, it is premature to make recommendations on 
these issues.  The determination of proper medical practice is 
not an area appropriately addressed by administrative bodies of 
government.  These issues might best be resolved by scientific 
consensus development to ensure optimal transplant outcomes 
rather than focus on cost effectiveness.  From a medical 
perspective, it is known that careful patient and organ 
preparation ensure the best transplantation outcome.  Considering 
the cost of a repeat transplantation and costs of alternative 
therapies (such as dialysis), a successful organ transplant 
should ultimately prove to be the most cost effective way to 
treat people afflicted by organ failure, and ensure that its 
success has a very high priority. 
The report states that the findings and recommendations that 
resulted from the OIG investigation into the cost-effectiveness 
of kidney transplantation are also relevant to the 
transplantation of other organs, such as heart and liver.  It is 
also acknowledged that most of the experience and data are in the 
kidney area and are, therefore, less well developed in other 
transplant areas.  Because each organ has its own 
transplantation-specific considerations, the report might be more 
complete with the inclusion of a separate and more detailed 
discussion of these organ-specific issues.  Some of the features 
that distinguish liver transplantation from kidney 
transplantation, for example, include fewer available donated 
livers, a greater patient need (liver patients needing 
transplants die without a new organ, while kidney patients can 
survive on dialysis), and a lower level state-of-the-art in 
transplantation methods.  This last factor was mentioned in the 
report as a valid reason for having a "reasonable costN pay 
system for kidney transplantation while optimal methods are still 
being determined.  Other organs that are emerging as new 
frontiers in transplantation, such as the pancreas, are at an 
even earlier state of definitive method development.  The report could be strengthened by inclusion of further 
information about the unintended consequences of procuring and 
preparing organs for transplantation at a fixed fee.  For 
example, if organs were acquired at a fixed fee, how would this 
affect the incentive to obtain organs?  Would there be a lowered 
incentive to get organs for older patients or for those with a 
less than optimal prognosis?  Might hospitals act in ways that 
would be money-saving only at the expense of the welfare of those 
receiving organ transplant?  For example, how would the fixed fee 
affect a hospital's motivation to fully prepare organs for 
transplantation, do appropriate tissue typing, and prepare the 
patient immunologically--that may not be cost-effective at a 
fixed fee? 
Considering kidneys harvested from cadavers and those donated 
from living relatives tocrether in determining a fixed fee for 
kidney transplantation could change the balance between the use 
of live and cadaveric donors since live kidneys are less 
expensive than those harvested from cadavers.  Such changes could 
have serious repercussions in the ways kidneys are obtained and 
in the motivation to donate organs. 
The report should also include a more complete definition of 
organ acquisition costs in the executive summary since the broad 
range of costs covered by the term as it is used in the report 
may not be readily apparent to those reading only the executive 
summary. 
OIG RESPONSE 
In reference to the minimal data on transplant areas other .than 
kidneys, we have, as noted earlier, amended our DRG 
recommendation to call for heart and liver'acquisition costs to 
be included under a DRG as soon as practical after kidney 
acquisition costs are -so included. 
With respect to the criticisms of the methodology, we 
acknowledge, as we did earlier in this report, that there is 
limited data available on organ acquisition costs.  Our study was 
based on a careful review and synthesis of the available data 
sources and on extensive, well-documented discussions with 
individuals directly involved with organ acquisition.  We 
recognize the limitations of this approach.  At the same time, we 
feel that it generated insights that make it quite clear that 
kidney acquisition is not being handled in an efficient or 
economical manner and that some policy initiative directed to 
this reality is warranted.  ASPE COMMENTS 
The ASPE comments reflect support for the position that kidney 
acquisition costs need to be closely~examined,b ut indicate that 
the case for including organ acquisition costs under a DRG is not 
sufficiently developed.  The ASPE comments are as follows: 
I agree with the IG that kidney acquisition costs, because of 
wide variations in costs among organ procurement agencies, need 
to be closely examined.  However, I do not agree, based on this 
report, that HCFA should move quickly to include organ 
acquisition costs in the DRG for kidney transplantation.  I do 
believe that the Department should make efforts to collect the 
data which would permit appropriate analyses to make a decision 
on this matter. 
The IG makes strong recomendations based on the findings 
described in !!Organ ~cquisitionC osts:  An 0verview.I' 
Unfortunately, they are based on llfragmented,i ncomplete, and 
sometimes incorrect databasesIw and widely varying costs which 
the IG has made no apparent effort to reconcile. 
For example, Chart I1 indicates that kidney acquisition costs 
have risen dramatically, but the data are, apparently, 
uncorrected for numbers of-kidneysa cquired, inflation, or air 
transportation deregulation (most kidneys are transported by 
commercial air w.i thout the flexibility to take advantage of 
"super saversn) 
Furthermore, two of the areas identified by the IG as of 
particular concern, laboratory costs and costs due to wastage, 
are somewhat contradictory.  The contradiction lies in the tissue 
typing costs incurred to make a match.  A match can reduce 
wastage (which would othewise occur from a failure to match) or 
reduce lifetime (of the patient) transplantation costs by 
assuring greater compatibility.  Some studies show that greater 
compatibility produces longer organ survival times and less 
frequent retransplants.  While clearly duplicative testing should 
be avoided, the l@secretsHt o which the IG alludes are probably 
differences in technique and equipment which the laboratory 
directors view as providing better services. 
Therefore, I believe that the recommendation should be to gather 
the data that will permit us to make decisions about more 
efficient reimbursement methodologies, including the potential 
for a DRG inclusive of acquisition costs. 
OIG RESPONSE 
We agree on the need to collect more information to determine how 
best to include organ acquisition costs under a DRG.  In this 
report, we attempted to start that process.  We feel that we did 
make an effort to reconcile the wfragmented, incomplete, and  sometimes incorrect data bases.I1  In fact, we believe, it is the 
only such effort that has been made thus far.  Yet, we recognize 
that more should be done. 
Chart I1 was developed to promote an overall sense of the extent 
of kidney acquisition expenditures and how they are allocated 
among renal transplant centers, independent organ procurement 
agencies, and independent laboratories.    his information was not 
previously available.  It took extensive review and synthesis of 
different data bases to provide it.  To connect the numbers for 
kidneys acquired, inflation, or air transportation deregulation 
may be desirable, but would take extensive further work and may 
not even be possible. 
Finally, in reference to the comment on how laboratory costs and 
wastage costsw are somewhat contradi~tory,w~e~  must note that we 
do not argue against the need for tissue typing.  We understand 
that it is important and that it may contribute to longer organ 
survival times.  Our comments about the duplications and 
inefficiencies concerning laboratory tests are consistent with 
that understanding.  It is pertinent, we think, to note that in 
its comments Aetna, which is responsible for reviewing the costs 
of independent laboratories, reinforces our concern about 
laboratory costs.