Department of Health and Human Services
OFFICE OF 
`  
INSPECTOR GENERAL 
 
 
 
 
 
 
 
 
END S  TAGE RENAL DISEASE 
 
D : F A
RUGS    ACILITY  CQUISITION 
 
 
C F M
OSTS AND  UTURE  EDICARE 
 
P   C  
AYMENT  ONCERNS
 
 
 
 
Daniel R. Levinson  
Inspector General 
 
September 2010 
OEI-03-09-00280   
   
 E X E C U T I V E   S U M M A R Y  
I N T R O D U C T I O N  
OBJECTIVES
 
1.  To compare Medicare payment amounts for selected separately 
billable end stage renal disease (ESRD) drugs to average acquisition 
costs for these drugs at dialysis facilities in the first quarter of 2009. 
2.  To examine how facility acquisition costs for selected separately 
billable ESRD drugs have changed over the past several years. 
3.  To determine whether the method the Centers for Medicare & 
Medicaid Services (CMS) plans to use to update payments for 
separately billable ESRD drugs after 2011 is an accurate predictor 
of changes in facility acquisition costs. 
BACKGROUND 
Beneficiaries typically receive treatment for ESRD, such as dialysis, 
from a facility that is approved to furnish specific ESRD services.  In 
2008, 94 percent of dialysis facilities were independent and 6 percent 
were hospital based.  Medicare currently pays both types of facilities 
based on a prospective payment system, known as the composite rate.  
Facilities receive a fixed composite rate payment for each dialysis 
treatment they provide.  Drugs not covered under the composite rate, 
such as epoetin alfa and darbepoetin alfa, must be billed separately and 
are referred to as separately billable drugs.  Medicare pays for most 
separately billable drugs furnished by independent and hospital-based 
dialysis facilities at 106 percent of their average sales prices (ASP).  In 
2008, Medicare paid $2.1 billion for separately billable ESRD drugs.   
On January 1, 2011, Federal law will require CMS to begin 
implementation of a new system that combines composite rate 
payments with payments for items and services that are currently 
separately billable (including separately billable drugs) to create a 
single bundled payment.  Federal law will require that once the bundled 
rate takes effect, it be updated annually to reflect the changes over time 
in the prices of goods and services used to provide ESRD care.  CMS has 
decided to base these price updates on wage and price proxy data from 
the Bureau of Labor Statistics.  For the ESRD drugs portion of the new 
bundled rate, CMS plans to use the Producer Price Index (PPI) for 
Prescription Drugs to estimate price changes. 
We sent requests for information to the three largest independent 
dialysis companies, a random sample of independent facilities not 
  OEI-03-09-00280  ESRD DRUGS:  FACILITY ACQUISITION COSTS AND FUTURE MEDICARE PAYMENT CONCERNS  i   
   
E X E C U T I V E   S U M M A R Y  
owned by the three largest dialysis companies, and all hospital-based 
dialysis facilities.  These surveys included a request for first-quarter 
2009 data on the total amount paid; discounts and rebates received; and 
total units purchased for 11 high-expenditure separately billable ESRD 
drugs.  In total, we received acquisition cost information for more than        
three-quarters of all dialysis facilities.   
We calculated the volume-weighted average acquisition cost per drug 
and compared it to each drugs first-quarter 2009 Medicare payment 
amount.  We also performed this comparison in the aggregate (i.e., for 
the entire group of drugs as a whole).  To examine how facility 
acquisition costs for selected separately billable ESRD drugs have 
changed over the past several years, we compared average acquisition 
costs for the first quarter of 2009 to average acquisition costs in 2003, 
2005, and the third quarter of 2006, as determined in previous Office of 
Inspector General (OIG) reports.  To determine whether the PPI for 
Prescription Drugs has been an accurate predictor of changes in 
acquisition costs for certain separately billable ESRD drugs, we 
compared the changes in acquisition costs for separately billable drugs 
in independent facilities to changes in the PPI for Prescription Drugs 
from 2003 to the first quarter of 2009 (changes for darbepoetin alfa were 
measured from 2005, as the drug did not yet have a Medicare billing 
code in 2003).  
FINDINGS 
In the aggregate, drug acquisition costs at independent dialysis 
facilities were 10 percent below Medicare payment amounts.   
In the first quarter of 2009, aggregate acquisition costs for ESRD drugs 
among responding independent dialysis facilities averaged 10 percent 
below Medicare payment amounts.  For these facilities, average 
acquisition costs for all 11 of the drugs under review were between         
2 percent and 27 percent below Medicare payment amounts.  The 
average acquisition cost for epoetin alfa (a product that accounted for 
nearly 70 percent of Medicare drug expenditures in independent 
facilities in 2008) was 9 percent less than the Medicare payment 
amount.  Overall, responding independent chain dialysis facilities paid 
less for drugs under review than nonchain facilities. 
In the aggregate, drug acquisition costs at hospital-based dialysis 
facilities were 7 percent below Medicare payment amounts.  In the 
first quarter of 2009, aggregate acquisition costs for ESRD drugs among 
  OEI-03-09-00280  ESRD DRUGS:  FACILITY ACQUISITION COSTS AND FUTURE MEDICARE PAYMENT CONCERNS  ii   
   
E X E C U T I V E   S U M M A R Y  
responding hospital-based dialysis facilities averaged 7 percent below 
Medicare payment amounts.  For these facilities, average acquisition 
costs for 5 of the 11 ESRD drugs under review were between 4 percent 
and 33 percent below Medicare payment amounts.  Average acquisition 
costs for epoetin alfa and darbepoetin alfa (two products that accounted 
for 73 percent of Medicare drug spending in hospital-based facilities in 
2008) were 4 percent and 15 percent below the Medicare payment 
amounts, respectively.  For 6 of the 11 drugs, average acquisition costs 
among responding hospital-based facilities ranged from 0.4 percent to             
12 percent above the Medicare payment amounts (for 3 of these drugs, 
the difference was 1 percent or less).  These six drugs accounted for      
23 percent of total Medicare payments to hospital-based facilities in 
2008.   
Over the past several years, average acquisition costs for 7 of the  
11 drugs under review have decreased among responding 
independent dialysis facilities.  Seven of the eleven separately billable 
ESRD drugs under review have seen a decrease in their average 
acquisition costs for responding independent dialysis facilities over the 
last several years.  In contrast, only four drugs became more expensive 
for independent dialysis facilities during this time period.  These four 
drugs accounted for only 3 percent of total Medicare payments to 
independent facilities for separately billable ESRD drugs in 2008.   
During a period when acquisition costs for many ESRD drugs 
decreased, the index CMS plans to use as the basis for future 
payment changes increased by 39 percent.  Once the new payment 
methodology takes effect in 2011, CMS plans to use the PPI for 
Prescription Drugs as the basis for annual adjustments to the 
prescription drug portion of the bundled rate.  According to PPI data, 
prices for prescription drugs were 39 percent higher in the first quarter of          
2009 than in 2003.  However, facility acquisition costs for the drugs that 
account for the majority of Medicare expenditures in independent dialysis 
facilities actually decreased during this same period. 
For example, the average acquisition cost among responding independent 
dialysis facilities for 1,000 units of epoetin alfa fell from $8.82 in 2003 to 
$8.37 in the first quarter of 2009 (a decrease of 5 percent).  If the PPI for 
Prescription Drugs had been an accurate predictor for changes in the 
acquisition cost of epoetin alfa since 2003, dialysis facilities would have 
paid $12.22 for 1,000 units of the drug in the first quarter of 2009.  This 
amount would be 46 percent higher than epoetin alfas average 
  OEI-03-09-00280  ESRD DRUGS:  FACILITY ACQUISITION COSTS AND FUTURE MEDICARE PAYMENT CONCERNS  iii   
   
E   X E C U T I V E   S U M M A R Y   
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RREECCOOMMMMEENNDDAATTIIOONN  
CMS currently pays all dialysis facilities at 106 percent of ASPs for 
most separately billable ESRD drugs.  Under the current system, we 
found that aggregate acquisition costs for ESRD drugs at both 
independent and hospital-based dialysis facilities were below Medicare 
payment amounts.  In addition, when we compared acquisition costs 
among responding independent dialysis facilities to costs from prior OIG 
reports, we found that 7 out of the 11 separately billable ESRD drugs 
under review have actually seen a decrease in their average acquisition 
costs over the last several years.  The cost of epoetin alfa, a drug 
responsible for more than $1.4 billion in annual Medicare spending in 
dialysis facilities, fell by 5 percent.  During this same period, the PPI for 
Prescription Drugs increased by 39 percent.   
If the new bundled system is implemented as planned and acquisition 
costs for the majority of separately billable ESRD drugs decrease (as 
they have in the past) while price indexes rise, the existing gap between 
Medicare payment amounts and dialysis facility acquisition costs will 
continue to grow each year.  As a result, payments under the new 
bundled system would not accurately reflect facility acquisition costs, 
potentially costing the program additional hundreds of millions of 
dollars per year.  Therefore, we recommend that CMS: 
Develop a more accurate method for estimating changes in the 
prices of ESRD drugs. 
AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 
RESPONSE 
CMS did not concur with our recommendation.  In its response to the 
draft report, CMS stated that the downward trajectory of average 
acquisition costs documented in OIGs analysis was influenced largely 
by changes in CMSs payment mechanism for separately billable ESRD 
drugs, particularly for epoetin alfa.  CMS states that, as a result, OIGs 
  OEI-03-09-00280  ESRD DRUGS:  FACILITY ACQUISITION COSTS AND FUTURE MEDICARE PAYMENT CONCERNS  iv   
   
E X E C U T I V E   S U M M A R Y  
figures are not suitable for inferring future price trends as the market 
for epoetin alfa becomes more competitive.  CMSs view is that it is more 
appropriate to look at recent quarterly price changeschanges that 
CMS states have not been distorted by changes in payment policythat 
show an increase in the cost of epoetin alfa since the end of 2008.  CMS 
expects that future ESRD drug price growth will more closely reflect 
market-based price drivers, such as those measured by the PPI for 
Prescription Drugs. 
OIG fully appreciates the difficulty that CMS faces in implementing the 
new bundled rate payment system, especially in terms of estimating 
future costs for all items and services related to ESRD care.  OIG also 
realizes that the historical average acquisition cost data presented in 
this report may not necessarily be predictive of future trends in the 
costs of separately billable drugs.  Nevertheless, based on our findings, 
we remain concerned that Medicare could end up paying too much for 
these drugs once the bundled rate is implemented, potentially costing 
the program and its beneficiaries hundreds of millions of dollars a year.  
Therefore, OIG intends to work with CMS to carefully monitor the cost 
of epoetin alfa and other ESRD drugs in the future. 
  OEI-03-09-00280  ESRD DRUGS:  FACILITY ACQUISITION COSTS AND FUTURE MEDICARE PAYMENT CONCERNS  v   
 T A B L E   O F   C O N T E N T S  
EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
 
 
I N T RO DUC T IO N . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 
 
 
FINDINGS ...................................................... 14 
In the aggregate, drug acquisition costs at independent dialysis       
facilities were 10 percent below Medicare payment amounts . . . . . . . . 14 
In the aggregate, drug acquisition costs at hospital-based dialysis     
facilities were 7 percent below Medicare payment amounts . . . . . . . . . 16 
Over the past several years, average acquisition costs for 7 of the               
11 drugs under review have decreased among responding           
independent dialysis facilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 
During a period when acquisition costs for many ESRD drugs        
decreased, the index CMS plans to use as the basis for future           
payment changes increased by 39 percent . . . . . . . . . . . . . . . . . . . . . . . 18 
 
 
RECOMMENDATION ........................................... 20 
Agency Comments and Office of Inspector General Response. . . . . . . . 21  
 
 
APPENDIXES .................................................. 23 
A:  Medicare Expenditures in 2008 for Drugs Under Review. . . . . . . . . 23 
B:  Agency Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 
 
A C K NO WL E D G M E N T S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
     
   
 I N T R O D U C T I O N  
OBJECTIVES 
1.  To compare Medicare payment amounts for selected separately 
billable end stage renal disease (ESRD) drugs to average acquisition 
costs for these drugs at dialysis facilities in the first quarter of 2009. 
2.  To examine how facility acquisition costs for selected separately 
billable ESRD drugs have changed over the past several years. 
3.  To determine whether the method the Centers for Medicare & 
Medicaid Services (CMS) plans to use to update payments for 
separately billable ESRD drugs after 2011 is an accurate predictor 
of changes in facility acquisition costs. 
BACKGROUND 
Medicare pays dialysis facilities for most items and services based on a 
prospective payment system, known as the composite rate.  However, 
many ESRD drugs and biologicals used in treating dialysis patients 
must be billed separately and are therefore referred to as separately 
billable drugs.1  Medicare currently bases payment for most separately 
billable ESRD drugs on 106 percent of their average sales prices (ASP).  
Prior Office of Inspector General (OIG) reports have found that 
Medicare payment amounts for the majority of the high-expenditure 
separately billable ESRD drugs reviewed were consistently higher than 
average acquisition costs reported by dialysis facilities.2 
On January 1, 2011, Federal law will require CMS to begin 
implementation of a new system that combines composite rate 
payments with payments for items and services that are currently 
separately billable (including separately billable drugs) to create a 
single bundled payment.3  On August 12, 2010, CMS published a notice 
of final rulemaking that sets forth the payment methodology under the 
new bundled rate system.4  According to the preamble to the final rule, 
once the new system takes effect in 2011, bundled payments in future 
 
1 Hereinafter, the term drugs refers to both drugs and biologicals.  
2 OIG, Medicare Reimbursement for End Stage Renal Disease Drugs:  Third Quarter 
2006 (OEI-03-06-00590), June 2007; Medicare Reimbursement for New End Stage Renal 
Disease Drugs (OEI-03-06-00200), March 2006; Medicare Reimbursement for Existing End-
Stage Renal Disease Drugs (OEI-03-04-00120), May 2004. 
3 Social Security Act (the Act),  1881(b)(14). 
4 75 Fed. Reg. 49030 (Aug. 12, 2010). 
  OEI-03-09-00280  ESRD DRUGS:  FACILITY ACQUISITION COSTS AND FUTURE MEDICARE PAYMENT CONCERNS  1   
   
 I N T R O D U C T I O N  
 
years (i.e., 2012 and later) will be annually updated based on an 
inflationary index developed by CMS.  This index will use data 
published by the Bureau of Labor Statistics (BLS), including the 
Producer Price Index (PPI) for Prescription Drugs, to estimate yearly 
changes in the prices of ESRD-related goods and services.5 
In a letter to OIG, Representative Pete Stark expressed concerns that 
the bundled payment system in 2011 may not accurately reflect facility 
acquisition costs and requested that OIG update its analysis of the 
acquisition costs paid by dialysis facilities for separately billable ESRD 
drugs.  Specifically, OIG was requested to (1) compare recent 
acquisition costs in dialysis facilities to the Medicare payment amounts 
and (2) compare recent acquisition costs in dialysis facilities to 
acquisition costs from prior years as published in earlier OIG reports. 
Treatment of End Stage Renal Disease   
ESRD is a condition in which the kidneys are no longer able to function 
at a level necessary for day-to-day life.  The loss of kidney function in 
ESRD patients is usually permanent.  Treatment options include kidney 
transplantation and dialysis.  In 2007, Medicare covered approximately 
400,000 beneficiaries with ESRD.6  One of the most common 
complications of ESRD is anemia, a deficiency in red blood cells.  
Erythropoietin-stimulating agents, such as epoetin alfa (trade name 
Epogen) and darbepoetin alfa (trade name Aranesp), treat anemia by 
increasing the number of red blood cells.   
Beneficiaries receive treatment for ESRD, such as dialysis, from a 
facility that is approved to furnish specific ESRD services.  Facilities 
may be either independent or hospital based.  Both types of dialysis 
facilities provide outpatient services to ESRD patients as well as home 
maintenance dialysis, which is dialysis performed by appropriately 
trained patients at their own homes.  Independent dialysis facilities are 
freestanding and the majority are owned or managed by a chain         
(87 percent of independent dialysis facilities are chain facilities 
according to CMSs Dialysis Facility Compare database).            
Hospital-based dialysis facilities must be financially and 
 
5 75 Fed. Reg. 49030, 4915449161 (Aug. 12, 2010). 
6 Payment, Safety and Quality Issues in Treatment of Patients with ESRD.  Testimony of 
Leslie V. Norwalk, Esq., Acting Administrator, CMS, June 26, 2007.  Accessed at 
http://waysandmeans.house.gov/media/pdf/110/norwalk.pdf on July 9, 2009. 
  OEI-03-09-00280  ESRD DRUGS:  FACILITY ACQUISITION COSTS AND FUTURE MEDICARE PAYMENT CONCERNS  2   
   
 
 
I N T R O D U C T I O N  
administratively integrated within a hospital.7  As of December 2008, 
independent dialysis facilities accounted for 94 percent of all facilities 
and hospital-based dialysis facilities represented only 6 percent.8 
Medicare Payments to Dialysis Facilities 
CMS currently pays dialysis facilities based on a prospective payment 
system, known as the composite rate.  Facilities receive a fixed 
composite rate payment for each dialysis treatment they provide.  The 
composite rate is composed of a labor and nonlabor portion, with an  
add-on adjustment for area wage index.  The composite rate includes 
most items and services related to dialysis services, such as labor costs; 
related supplies; routine tests; and certain drugs, such as 
antihistamines, glucose, and insulin.  Since January 1, 2009,      
hospital-based facilities receive the same rate as independent dialysis 
facilities.9  Drugs not covered under the composite rate, such as epoetin 
alfa and darbepoetin alfa, must be billed separately and are referred to 
as separately billable drugs.10   
Medicare Payments for Separately Billable ESRD Drugs 
In general, Medicare coverage of separately billable drugs in dialysis 
facilities is limited to products that cannot be self administered,         
i.e., drugs that are administered by a physician or other health care 
professional.  Exceptions include epoetin alfa and darbepoetin alfa, 
which are covered even if self-administered by the patient.11  
According to CMSs National Claims History File, Medicare paid    
$2.1 billion for separately billable drugs furnished by dialysis facilities 
in 2008 ($2 billion in independent dialysis facilities and $116 million in 
hospital-based dialysis facilities).12  Epoetin alfa and darbepoetin alfa 
accounted for 72 percent of Medicare payments for separately billable 
ESRD drugs in independent dialysis facilities and 73 percent of 
payments in hospital-based dialysis facilities.   
 
7 42 CFR  413.174(c)(4) and 413.174(c)(5). 
8 Dialysis Facility Compare database.  Accessed at http://www.medicare.gov on   
December 10, 2008. 
9 CMS, Medicare Benefit Policy Manual, ch. 11,  30.5; CMS, Medicare Claims Processing 
Manual, ch. 8,  10.1.   
10 CMS, Medicare Benefit Policy Manual, ch. 11,  30.4.2; CMS, Medicare Claims 
Processing Manual, ch. 8,  60.2.1.1. 
11 CMS, Medicare Benefit Policy Manual, ch. 11,  30.4 and 90.  
12 As of December 2009, the National Claims History File for 2008 was 95-percent 
complete.  
  OEI-03-09-00280  ESRD DRUGS:  FACILITY ACQUISITION COSTS AND FUTURE MEDICARE PAYMENT CONCERNS  3   
   
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Independent dialysis facilities.  Prior to January 1, 2005, CMS paid 
independent dialysis facilities for separately billable drugs based on the 
lower of the billed amount or 95 percent of their average wholesale 
prices.  The exception was epoetin alfa, which was paid for based on a 
statutory payment allowance of $10 per 1,000 units.13   
Beginning January 1, 2005, in accordance with the Medicare 
Prescription Drug, Improvement, and Modernization Act of 2003 
(MMA), P.L. 108-173, CMS based payment to independent dialysis 
facilities for the 10 highest expenditure separately billable drugs on 
acquisition costs determined by OIG.14  With certain exceptions, 
including specific vaccines, CMS paid all other drugs administered in 
independent dialysis facilities in 2005 at 106 percent of their ASPs.15   
As of January 1, 2006, with certain exceptions, CMS began to pay for all 
separately billable drugs furnished by independent dialysis facilities at 
106 percent of their ASPs.16  This is the same method used to pay for 
other drugs under Medicare Part B.  In announcing this change, CMS 
stated that it was inappropriate to use the older acquisition data 
provided by OIG (updated for inflation) as a basis for payment and 
questioned the feasibility of continually acquiring acquisition cost data 
over the long term.17  
Hospital-based dialysis facilities.  Prior to January 1, 2006, CMS paid 
hospital-based dialysis facilities for separately billable drugs based on 
reasonable cost.18  The exception to this rule was epoetin alfa, which 
was paid in the same manner as in independent facilities, i.e., based on 
a statutory payment allowance of $10 per 1,000 units prior to      
January 1, 2005, and based on the OIG-reported average acquisition 
cost in 2005.19  Since January 1, 2006, all separately billable drugs 
 
13 The Act,  1881(b)(11)(B)(ii)(I) and 1881(b)(11)(B)(ii)(II).  CMS, Medicare Claims 
Processing Manual, ch. 8,  60.2.2 and 60.4.3. 
14 MMA,  623(d)(1).  The Act,  1881(b)(13)(A)(ii).  As required by the MMA, OIG 
reviewed 2003 acquisition costs for 10 high-dollar ESRD drugs in the study entitled 
Medicare Reimbursement for Existing End-Stage Renal Disease Drugs (OEI-03-04-00120), 
May 2004.  See the discussion of related OIG work on p. 7 for additional information.    
1542 CFR  414.904(d)(2) and 414.904(e). 
16 CMS, Medicare Claims Processing Manual, ch. 8,  60.2.2; 42 CFR  
  414.904(d)(2)(iii) and 414.904(e). 
17 70 Fed. Reg. 70116, 7022270223 (Nov. 21, 2005). 
18 CMS, Medicare Claims Processing Manual, ch. 8,  60.2.2. 
19 The Act,  1881(b)(11)(B)(ii)(I) and 1881(b)(11)(B)(ii)(II).  CMS, Medicare Claims 
Processing Manual, ch. 8,  60.4.3. 
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I N T R O D U C T I O N  
(with certain exceptions) furnished by hospital-based dialysis facilities 
have been paid at 106 of their ASPs.20  This change produced a 
consistent drug payment methodology among independent dialysis 
facilities and hospital-based dialysis facilities.   
Changes to the ESRD Payment Methodology Under the Medicare 
Improvements for Patients and Providers Act of 2008 
Effective January 1, 2011, section 1881(b)(14) of the Act, as added by 
section 153(b) of the Medicare Improvements for Patients and Providers 
Act of 2008 (MIPPA), P.L. 110-275, will require Medicare payment for 
all items and services used in the treatment of ESRD, including drugs 
that are currently separately billable, to be included in a single bundled 
rate.  The new bundled rate is to be implemented over a multiyear 
phase-in period, with full implementation beginning January 1, 2014. 21  
However, prior to January 1, 2011, ESRD facilities may make a         
one-time election to be excluded from the phase-in and accept payment 
entirely under the ESRD bundled rate.22 
This new bundled rate will include a payment adjustment based on 
patient characteristics, unusual variations in the type or amount of 
medical care needed, and additional costs incurred at low-volume 
facilities.23  On August 12, 2010, CMS published a final rule that would 
implement the bundled rate for outpatient ESRD facilities.24   
Base rate in 2011.  According to the final rule, CMS will calculate a base 
rate per treatment (base rate) by adding the projected 2011 composite 
rate payment to the projected 2011 average payment for separately 
billable services (including separately billable drugs).25  In accordance 
with Federal law, the estimated total payments under the bundled base 
rate must equal 98 percent of the estimated total amount of payments 
 
20 CMS, Medicare Claims Processing Manual, ch. 8,  60.2.2.  42 CFR 
 414.904(d)(2)(iii) and 414.904(e). 
21 During the phase-in, ESRD facilities will be paid based on a blend of the ESRD 
bundled rate and composite rate payment/separately billable systems.  
22 The Act,  1881(b)(14)(E)(ii).   
23 The Act,  1881(b)(14)(D).  Payment adjustments may also include additional items 
that the Secretary of Health & Human Services determines appropriate, such as an 
adjustment for facilities located in rural areas. 
24 75 Fed. Reg. 49030 (Aug. 12, 2010). 
25 75 Fed. Reg. 49030, 49200 (Aug. 12, 2010). 
  OEI-03-09-00280  ESRD DRUGS:  FACILITY ACQUISITION COSTS AND FUTURE MEDICARE PAYMENT CONCERNS  5   
   
I N T R O D U C T I O N    
that would have been made for 2011 if the bundled rate had not been 
implemented.26   
Separately billable drugs component of the base rate in 2011.  In the 
preamble to its final rule, CMS states that total payments for the top  
11 separately billable ESRD drugs accounted for 99.8 percent of total 
spending for all separately billable drugs in 2007.27, 28  Because total 
payments under the new system must initially equal 98 percent of the 
estimated total payments that would have been made if the bundled 
system were not implemented, CMS must determine what total 
payments for separately billable drugs would likely be in 2011 under 
the current system.  In doing this, CMS updated the second-quarter 
2010 ASP-based payment amounts for separately billable drugs to    
2011 levels using the PPI for Prescription Drugs.29, 30 
Annual payment increases after 2011.  Once the base rate for ESRD 
bundled payments is established, it will be annually updated to reflect 
changes over time in the prices of goods and services used to provide 
ESRD care.  Federal law requires CMS to develop an all-inclusive ESRD 
bundled rate (ESRDB) input price index that will reflect annual price 
increases of the various categories that make up the ESRDB market 
basket.31, 32  CMS plans to use wage and price proxies published by BLS 
to measure the annual rate of price change in each category (e.g., wages 
and salaries, pharmaceuticals, capital costs).33  Beginning in 2012, 
ESRD bundled payment amounts must be annually updated by the 
increase in the ESRDB price index minus a productivity adjustment.34 
 
26 The Act,  1881(b)(14)(A)(ii). 
27 75 Fed. Reg. 49030, 49076 (Aug. 12, 2010). 
28 Ten of these drugs were included in this report.  The drugs selected for this report 
were chosen prior to CMSs publishing its final rule for the new ESRD payment system. 
29 75 Fed. Reg. 49030, 49079 (Aug. 12, 2010). 
30 According to CMS, the term PPI for Prescription Drugs, as used in its final rule, 
refers specifically to BLSs price index for Pharmaceuticals for Human Use (Prescription).  
See 75 Fed. Reg. 49030, 49160 (Aug 12, 2010). 
31 The Act,  1881(b)(14)(F)(i), as amended by section 3401(h) of the Patient Protection 
and Affordable Care Act (PPACA), P.L. 111-148.  We conducted this study prior to the 
passage of the PPACA.  The changes contained in the PPACA had no effect on our analysis.  
32 In this context, the term ESRD market basket refers to the mix of goods and services 
used to produce ESRD care. 
33 75 Fed. Reg. 49030, 4915849160 (Aug. 12, 2010). 
34 The Act,  1881(b)(14)(F)(i)(I) and 1881(b)(14)(F)(i)(II), as amended by section 3401(h) 
of the PPACA.  The productivity adjustment is described in the Act,  1886(b)(3)(B)(xi)(II).   
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According to the preamble to CMSs final rule, the pharmaceutical 
category of the ESRDB will account for approximately 25 percent of the 
entire ESRDB market basket, with epoetin alfa expenditures making up 
almost 70 percent of the pharmaceutical category.35  CMS intends to use 
the PPI for Prescription Drugs as its price proxy for the pharmaceutical 
category.36  According to CMS, the PPI for Prescription Drugs reflects 
price changes associated with the average mix of all prescription drugs 
sold in pharmacies.  CMS states that it anticipates ... the price changes 
associated with the assortment of drugs administered in ESRD facilities 
should, over time, be similar to the average prescription drug price 
changes observed across the entire economy.37 
Related Work by the Office of Inspector General 
An OIG report completed in May 2004 and a followup report completed 
in March 2006 compared the average acquisition costs reported by 
independent dialysis facilities to the Medicare payment amounts for 
selected ESRD drugs.38  The May 2004 report found that large 
independent dialysis facilities could acquire 10 high-expenditure drugs 
at costs that averaged 22 percent below the Medicare payment amount; 
smaller independent facilities could acquire these drugs for an average 
of 14 percent less.  Both large and small facilities could obtain epoetin 
alfa for an average of 12 percent and 5 percent below the Medicare 
payment amount, respectively.  The March 2006 report focused on only 
darbepoetin alfa, which did not yet have its own Medicare billing code 
during the period covered by the May 2004 report.  Independent dialysis 
facilities could acquire darbepoetin alfa for less (sometimes 
substantially less) than the Medicare payment amount.   
A June 2007 OIG report provided updated information on payment 
differences for 11 high-dollar separately billable ESRD drugs (the        
10 drugs included in the May 2004 report and the 1 drug from the             
March 2006 report).39  In the June 2007 report, we found that 
independent dialysis facilities could acquire 9 of the 11 ESRD drugs 
 
35 75 Fed. Reg. 49030, 4915649158 (Aug. 12, 2010). 
36 Ibid, 49160 (Aug. 12, 2010). 
37 Ibid. 
38 OIG, Medicare Reimbursement for Existing End-Stage Renal Disease Drugs 
 (OEI-03-04-00120), May 2004; Medicare Reimbursement for New End Stage Renal Disease 
Drugs (OEI-03-06-00200), March 2006.   
39 OIG, Medicare Reimbursement for End Stage Renal Disease Drugs:  Third Quarter 
2006 (OEI-03-06-00590), June 2007.   
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under review for costs averaging from 7 percent to 32 percent less than 
the Medicare payment amounts.  For the two remaining drugs, average 
acquisition costs among independent facilities were 3 percent and          
9 percent above the Medicare payment amounts.  Hospital-based 
dialysis facilities could acquire 6 of the 11 drugs under review at prices 
averaging from 4 percent to 29 percent less than the Medicare payment 
amounts.  For the five remaining drugs, average acquisition costs 
among hospital-based facilities ranged from 1 percent to 8 percent above 
the Medicare payment amounts.   
METHODOLOGY 
Scope 
This study focused on the 11 drugs that had been included in OIGs        
3 most recent studies of ESRD drug pricing.  Since 2003, these 11 drugs 
have consistently accounted for nearly all of Medicares spending on 
separately billable ESRD drugs in dialysis facilities.  
Drugs Under Review 
We compiled a list of the 11 drugs included in the 3 OIG ESRD drug 
pricing studies issued since 2003.  Using data from CMSs National 
Claims History File, we then determined Medicare expenditures in 2007 
for each of these 11 drugs, as well as for all separately billable ESRD 
drugs furnished by dialysis facilities.40  As Table 1 shows, all of the 
selected drugs were among the 15 drugs (excluding vaccines) with the 
highest total payments in independent and hospital-based dialysis 
facilities (and all but 3 were among the top 10 in both settings).  In 
independent and hospital-based dialysis facilities, the 11 selected drugs 
accounted for 99 percent and 97 percent of total Medicare payments for 
separately billable drugs in 2007, respectively. 
 
 
 
 
 
 
 
40 At the time we selected our sample, outpatient data for 2008 were not 100 percent 
complete.  See Appendix A for Medicare payments in 2008 for the drugs under review. 
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I N T R O D U C T I O N  
Table 1:  Payment in 2007 for Drugs Under Review 
Payment  Payment  Total Payment 
Total Payment 
Ranking in  Ranking in  in  
in Independent 
Separately Billable Drug  Independent  Hospital-Based  Hospital-Based 
Dialysis 
Dialysis  Dialysis  Dialysis 
Facilities 
Facilities  Facilities  Facilities 
Epoetin alfa, per 1,000 units  1  $1,457,712,457  2  $44,438,489 
Paricalcitol, 1 g*  2  $243,791,813  3  $9,182,565 
Iron sucrose, 1 mg  3  $125,469,448  4  $5,185,761 
Doxercalciferol, 1 g  4  $56,453,718  5  $3,438,602 
Sodium ferric gluconate, 12.5 
5  $49,201,885  6  $3,400,363 
mg 
Darbepoetin alfa, 1 g  6  $47,980,810  1  $57,389,882 
Alteplase recomb, 1 mg  7  $16,286,265  7  $3,307,690 
Levocarnitine, 1 g  8  $3,561,991  11  $328,083 
Vancomycin HCL, 500 mg  9  $2,595,876  12  $194,233 
Calcitriol, 0.1 g  10  $1,931,801  10  $414,817 
Iron dextran, 50 mg  15  $474,834  13  $129,437 
   Total    $2,005,460,898    $127,409,922 
Source:  OIG analysis of 2007 National Claims History File. 
             * g = microgram, mg = milligram, g = gram. 
Data Collection 
Independent dialysis facilities.  As of December 2008, 3 dialysis companies 
(Davita, Fresenius, and Dialysis Clinic, Inc.) owned 3,181 (71 percent) of 
the 4,461 independent dialysis facilities.41  We sent a survey requesting 
first-quarter 2009 acquisition cost information for the 11 drugs under 
review to representatives of these 3 companies.  We requested 
information about the total amount paid by each company for each of 
the 11 drugs, the amount of discounts and rebates received, the net 
amount paid, the number of units purchased, and the average 
acquisition cost per drug.  We defined average acquisition cost as the 
total amount paid (net of all rebates and discounts) divided by the total 
number of units purchased.  Between August 2009 and January 2010, 
all three companies responded with the requested information.  In their 
responses, the 3 large dialysis companies indicated that they had 
 
41 Dialysis Facility Compare database.  Accessed at http://www.medicare.gov on 
December 10, 2008. 
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acquired or opened an additional 137 independent dialysis facilities in 
the first quarter of  2009 (for a revised total of 3,318). 
We also sent requests for information for identical first-quarter        
2009 cost data to a random sample of 200 independent dialysis facilities 
not affiliated with the 3 largest companies.42  We asked each facility if it 
was part of a chain.  Between August and December 2009, we received 
responses from 165 facilities (83 percent).  However, 18 of the 
responding independent facilities had actually been acquired by Davita 
or Fresenius, meaning that they were owned by 1 of the 3 large dialysis 
companies during the review period.  Acquisition cost data for these 18 
facilities were thus included as part of the larger companies responses.  
Another two facilities provided incomplete data that could not be 
included in the analysis.  Therefore, we received complete data from 145 
independent dialysis facilities not affiliated with the 3 largest 
companies.  Several of the responding facilities owned multiple dialysis 
units and provided cost data for 20 additional facilities (for a total of 165 
respondents not affiliated with the 3 large independent dialysis 
companies).  According to the responses provided, 106 of these facilities 
were part of a chain and 59 were nonchains. 
After we combined data from the 3,318 facilities owned or managed by 
the 3 largest dialysis companies and the 165 responding unaffiliated 
independent dialysis facilities, our results represent acquisition costs for 
more than three-quarters of all independent dialysis facilities. 
Hospital-based dialysis facilities.  We selected all of the                          
276 hospital-based dialysis facilities that were listed in CMSs Dialysis 
Facility Compare database as of December 2008.  In July 2009, we sent 
surveys to these facilities requesting first-quarter 2009 acquisition cost 
information for each of the 11 drugs under review.  Between August and 
December 2009, we received responses from 199 hospital-based dialysis 
facilities (72 percent of all hospital-based dialysis facilities).   
We were unable to use data from 57 respondents because of their 
participation in the 340B program.43  In addition, one hospital-based 
facility was excluded from our analysis because it received Department 
 
42 We randomly selected these facilities from Medicares Dialysis Facility Compare 
database. 
43 The 340B program requires drug manufacturers to provide drugs to eligible health 
care centers at or below statutorily defined ceiling prices.  Public Health Services Act,  
340B.   
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I N T R O D U C T I O N  
of Veterans Affairs pricing, which is heavily discounted compared to the 
marketplace.  Another five facilities were excluded from our analysis for 
providing incomplete data.  Two hospital-based facilities had been 
acquired by one of the major dialysis companies (and therefore no longer 
met the definition of hospital based).  One of the responding hospitals 
provided data on 3 additional hospitals, resulting in 134 respondents 
with valid data for 137 hospital-based dialysis facilities.  
CMS data.  We obtained the ASP-based Medicare payment amounts 
for the 11 selected separately billable ESRD drugs in the first quarter 
of 2009 from CMSs Web site.   
PPI data.  For the purpose of comparing changes in the PPI for 
Prescription Drugs to changes in facility acquisition costs, we obtained 
from BLSs Web site annual and monthly values of the PPI for 
Prescription Drugs for the period beginning in 2003 (i.e., the period 
covered by OIGs first mandated ESRD pricing study) and ending in 
March 2009.   
Data Analysis 
Comparing acquisition costs to Medicare payment amounts.  For both 
facility types (i.e., independent and hospital-based), we calculated 
volume-weighted average acquisition costs (hereinafter referred to as 
average acquisition costs) by totaling the amount paid net of any 
discounts and rebates for each drug and dividing it by the total units 
purchased among all facilities for each drug.  In calculating these 
figures, we identified any outliers among the costs reported by facilities 
and removed them from our analysis.  We defined an outlier as an 
average acquisition cost reported by a facility that was not within three 
standard deviations of the mean.44  We calculated the percentage 
difference between the average acquisition cost and CMSs first-quarter 
2009 ASP-based Medicare payment amount per drug for both facility 
types. 
To calculate the aggregate difference between the average acquisition 
costs and CMSs first-quarter 2009 ASP-based Medicare payment 
amounts among all 11 drugs, we:  
 
44 Among independent dialysis facilities, an average of 1.9 responses per drug were 
considered outliers and removed.  Among hospital-based dialysis facilities, this number was 
1.5.  No more than four outliers were removed for any single drug in both types of facilities. 
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I N T R O D U C T I O N  
  calculated the total amount paid for the 11 drugs among the 
facilities by summing the data reported by all respondents; 
  multiplied the total units purchased for each drug, as reported by 
facilities, by its Medicare payment amount to calculate the total 
amount that facilities would have paid for all these drugs if their 
acquisition costs equaled Medicare payment amounts; and 
  calculated the percentage difference between the total amount paid 
for the 11 drugs, as reported by facilities, and the total that would 
have been paid had the acquisition cost been equal to Medicare 
payment amounts. 
Independent chain versus nonchain facilities.  To determine whether 
independent dialysis chain facilities had average acquisition costs that 
differed from those of nonchain facilities, we compared cost data from 
the 3,424 responding facilities affiliated with chains to cost data from 
the 59 responding nonchain facilities by repeating the analysis 
described in the section above.  In addition, we compared chain and 
nonchain acquisition costs to CMSs first-quarter 2009 ASP-based 
Medicare payment amounts.  We also calculated the aggregate 
difference between chain and nonchain acquisition costs and CMSs 
first-quarter 2009 ASP-based payment amounts. 
Change in PPI for Prescription Drugs versus change in acquisition costs.  
Using cost data from previous OIG reports, we compared average 
acquisition costs from the first quarter of 2009 to average acquisition 
costs in 2003 (for 10 of the 11 drugs), 2005 (for darbepoetin alfa only), 
and the third quarter of 2006.45, 46  To determine whether actual drug 
costs have increased, decreased, or remained the same, we determined 
 
45 OIG reports entitled Medicare Reimbursement for Existing End-Stage Renal Disease 
Drugs (OEI-03-04-00120), May 2004, and Medicare Reimbursement for New End Stage 
Renal Disease Drugs (OEI-03-06-00200), March 2006, contained acquisition cost data for 
the entire years (2003 and 2005, respectively).  Medicare Reimbursement for End Stage 
Renal Disease Drugs:  Third Quarter 2006 (OEI-03-06-00590), June 2007, contained 
acquisition cost data only for the third quarter of 2006.  In addition, the March 2006 report 
focused only on a single drug (darbepoetin alfa), which did not yet have its own Medicare 
billing code at the time of our initial report.    
46 In the May 2004 OIG report entitled Medicare Reimbursement for Existing End-Stage 
Renal Disease Drugs (OEI-03-04-00120), we separately calculated average acquisition costs 
for the four largest independent dialysis companies and smaller independent dialysis 
facilities (we did not calculate a combined figure).  For the purpose of this report, we 
estimated a combined average acquisition cost for independent facilities in 2003 using a 
weighting method that approximates how costs for independent facilities were calculated in 
later reports.  
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the percentage change in price between each period for each drug.  
Because two of the earlier OIG reports did not collect acquisition cost 
data from hospital-based dialysis facilities, we compared acquisition 
cost changes over time only for independent dialysis facilities.   
To determine whether the PPI for Prescription Drugs has been an 
accurate predictor of changes in prices for separately billable ESRD 
drugs, we compared the changes in per-drug acquisition costs among 
independent dialysis facilities for separately billable drugs to changes in 
the PPI from 2003 to the first quarter of 2009.  Using the same data, we 
also calculated how much epoetin alfa (a drug whose expenditures will 
account for nearly 70 percent of the pharmaceutical portion of the ESRD 
market basket under the new bundled rate) would have cost in the first 
quarter of 2009 if its average acquisition cost from 2003 had changed at 
the same rate as the PPI for Prescription Drugs.  To estimate the 
amount that total Medicare expenditures would have differed in the 
first quarter of 2009 had payment for epoetin alfa been based on the PPI 
for Prescription Drugs since 2003 rather than ASP, we (1) calculated the 
percentage difference between the drugs first-quarter 2009 Medicare 
payment amount and the PPI-based cost figure from the same quarter 
and (2) multiplied this amount by one-quarter of Medicare expenditures 
for the drug in independent dialysis facilities in 2008.47 
Limitations    
We did not verify the drug cost information submitted by the dialysis 
facilities.  The acquisition cost data provided in this report represent all 
purchases for the drugs under review made by more than three-quarters 
of all dialysis facilities during the first quarter of 2009; we did not 
project these figures to facilities not included in our sample. 
Standards   
This study was conducted in accordance with the Quality Standards for 
Inspections approved by the Council of the Inspectors General on 
Integrity and Efficiency. 
 
47 This calculation assumes that Medicare expenditures in the first quarter of 2009 were 
equal to one-quarter of the annual expenditures in 2008. 
  OEI-03-09-00280  ESRD DRUGS:  FACILITY ACQUISITION COSTS AND FUTURE MEDICARE PAYMENT CONCERNS  13   
   
 F I N D I N G S  
In the first quarter of 2009, 
In the aggregate, drug acquisition costs at 
aggregate acquisition costs for 
independent dialysis facilities were 10 percent 
ESRD drugs among responding 
below Medicare payment amounts  independent dialysis facilities 
averaged 10 percent below 
Medicare payment amounts.  For these facilities, average acquisition 
costs for all 11 of the drugs under review were between 2 percent and  
27 percent below Medicare payment amounts.   
The average acquisition cost for epoetin alfa (a product that accounted 
for nearly 70 percent of Medicare drug expenditures in independent 
facilities in 2008) was 9 percent less than the Medicare payment 
amount.  In total, 99 percent of responding independent dialysis 
facilities could purchase epoetin alfa at prices that were below the 
Medicare payment amount in that quarter.  Table 2 illustrates the 
percentage difference between Medicare payment amounts and average 
acquisition costs reported by independent dialysis facilities for the first 
quarter of 2009. 
Table 2:  Medicare Payment Amounts and Average Acquisition Costs for Responding 
Independent Dialysis Facilities 
First-Quarter  First-Quarter  Percentage of Medicare 
2009  2009  Payments to 
Percentage 
Separately Billable Drug  Medicare  Average  Independent Facilities 
 Difference 
Payment  Acquisition  for Separately Billable 
Amount  Cost  Drugs in 2008
Alteplase recombinant, 1 mg  $34.10   $33.40  -2.1%  0.8% 
Iron dextran, 50 mg  $11.78   $11.21  -4.8%  < 0.1% 
Sodium ferric gluconate, 12.5 mg  $4.74   $4.40  -7.2%  2.5% 
Epoetin alfa, per 1,000 units  $9.20   $8.37  -9.0%  69.5% 
Paricalcitol, 1 g  $3.66   $3.29  -10.1%  14.2% 
Doxercalciferol, 1 g  $3.31   $2.94  -11.2%  2.5% 
Vancomycin HCl, 500 mg  $3.08   $2.70  -12.3%  0.1% 
Iron sucrose, 1 mg  $0.37   $0.31  -16.2%  6.6% 
Darbepoetin alfa, 1 g  $3.06   $2.54  -17.0%  2.2% 
Levocarnitine, 1 g  $6.71   $5.35  -20.3%  0.1% 
Calcitriol, 0.1 g  $0.45   $0.33  -26.7%  0.1% 
     Aggregate     -9.7%  98.6% 
Source:  OIG analysis of first-quarter 2009 average acquisition costs among responding independent facilities, November 2009.   
 
  OEI-03-09-00280  ESRD DRUGS:  FACILITY ACQUISITION COSTS AND FUTURE MEDICARE PAYMENT CONCERNS  14   
   
F I N D I N G S  
Overall, responding independent chain dialysis facilities paid less for 
the drugs under review than nonchain facilities                            
In the aggregate, overall acquisition costs among responding 
independent chain facilities averaged 10 percent below Medicare 
payment amounts.  Costs among responding independent nonchain 
facilities averaged 3 percent below Medicare payment amounts.   
On average, responding independent chain facilities could purchase     
10 of the 11 drugs under review for less than responding independent 
nonchain facilities in the first quarter of 2009.  For these 10 drugs, 
average acquisition costs among chains ranged from 3 percent to           
26 percent less than average acquisition costs among nonchains.  For 
the 11th drug, chains actually paid 2 percent more, on average.   
For responding independent chain facilities, average acquisition costs 
were less than the Medicare payment amounts for all 11 drugs.  
However, among responding independent nonchain facilities, there were 
three drugs for which the average acquisition costs exceeded the 
Medicare payment amounts (by 1 percent to 7 percent) in the first 
quarter of 2009.  These three drugs accounted for 22 percent of total 
Medicare payments to independent facilities for separately billable 
ESRD drugs in 2008.  The average acquisition costs among responding 
chain and nonchain facilities for all 11 drugs are presented in Table 3. 
Table 3:  Medicare Payment Amounts and Average Acquisition Costs for Responding 
Chain and Nonchain Independent Dialysis Facilities 
First-Quarter 2009  First-Quarter 2009  First-Quarter 2009 
Separately Billable Drug  Medicare Payment  Average Acquisition Cost  Average Acquisition Cost 
Amount  for Chains  for Nonchains 
Alteplase recombinant, 1 mg*  $34.10   $33.38  $34.50 
Iron dextran, 50 mg  $11.78   $11.20  $11.75 
Sodium ferric gluconate, 12.5 mg  $4.74   $4.39  $4.62 
Epoetin alfa, per 1,000 units  $9.20   $8.36  $9.15 
Paricalcitol, 1 g*  $3.66   $3.28  $3.90 
Doxercalciferol, 1 g  $3.31   $2.94  $3.30 
Vancomycin HCl, 500 mg  $3.08   $2.70  $2.91 
Iron sucrose, 1 mg  $0.37   $0.31  $0.38 
Darbepoetin alfa, 1 g  $3.06   $2.56  $2.51 
Levocarnitine, 1 g  $6.71   $5.34  $5.81 
Calcitriol, 0.1 g  $0.45   $0.32  $0.43 
Source:  OIG analysis of first-quarter 2009 average acquisition costs among responding independent facilities, November 2009.   
  OEI-03-09-00280  ESRD DRUGS:  FACILITY ACQUISITION COSTS AND FUTURE MEDICARE PAYMENT CONCERNS  15   
   
F I N D I N G S  
In the first quarter of 2009, 
In the aggregate, drug acquisition costs at 
aggregate acquisition costs for 
hospital-based dialysis facilities were 7 percent 
ESRD drugs among responding 
below Medicare payment amounts 
hospital-based dialysis facilities 
averaged 7 percent below 
Medicare payment amounts.  For these facilities, average acquisition 
costs for 5 of the 11 ESRD drugs under review were between 4 percent 
and 33 percent below Medicare payment amounts.  Average acquisition 
costs for epoetin alfa and darbepoetin alfa (two products that accounted 
for 73 percent of Medicare drug spending in hospital-based facilities in 
2008) were 4 percent and 15 percent below the Medicare payment 
amounts, respectively.   
For 6 of the 11 drugs, average acquisition costs among responding 
hospital-based facilities ranged from 0.4 percent to 12 percent above the 
Medicare payment amount (for 3 of these drugs, the difference was         
1 percent or less).  These six drugs accounted for 23 percent of total 
Medicare payments to hospital-based facilities in 2008.  Table 4 
illustrates the percentage difference between Medicare payment 
amounts and average acquisition costs reported by hospital-based 
dialysis facilities in the first quarter of 2009. 
Table 4:  Medicare Payment Amounts and Average Acquisition Costs for Responding          
Hospital-Based Dialysis Facilities 
First-Quarter  First-Quarter  Percentage of Medicare 
2009  2009  Payments to Hospital-
Percentage 
Separately Billable Drug  Medicare  Average  Based Facilities for 
 Difference 
Payment  Acquisition  Separately Billable Drugs 
Amount  Cost  in 2008
Paricalcitol, 1 g  $3.66   $4.10  12.0%  9.7% 
Iron sucrose, 1 mg  $0.37   $0.39  5.4%  4.4% 
Doxercalciferol, 1 g  $3.31   $3.39  2.4%  3.0% 
Levocarnitine, 1 g  $6.71   $6.78  1.0%  0.2% 
Sodium ferric gluconate, 12.5 mg  $4.74   $4.78  0.8%  3.1% 
Alteplase recombinant, 1 mg  $34.10   $34.23  0.4%  3.0% 
Epoetin alfa, per 1,000 units  $9.20   $8.82  -4.1%  29.6% 
Iron dextran, 50 mg  $11.78   $11.22  -4.8%  0.4% 
Vancomycin HCl, 500 mg  $3.08   $2.71  -12.0%  0.2% 
Darbepoetin alfa, 1 g  $3.06   $2.59  -15.4%  43.2% 
Calcitriol, 0.1 g  $0.45   $0.30  -33.3%  0.1% 
     Aggregate     -7.0%  96.9% 
  Source:  OIG analysis of first-quarter 2009 average acquisition costs among responding hospital-based dialysis facilities, November 2009.   
  OEI-03-09-00280  ESRD DRUGS:  FACILITY ACQUISITION COSTS AND FUTURE MEDICARE PAYMENT CONCERNS  16   
   
F I N D I N G S  
Over the past several years, average acquisition  As Table 5 illustrates, 7 of the       
costs for 7 of the 11 drugs under review have  11 separately billable ESRD drugs 
under review have actually seen a 
decreased among responding independent 
decrease in their average 
dialysis facilities  
acquisition costs for responding 
independent dialysis facilities over the last several years.48  Costs for 
two of the drugs were at least 50 percent less in the first quarter of 2009 
than in 2003.  In contrast, only four drugs became more expensive for 
independent dialysis facilities during this time period.  These four drugs 
accounted for only 3 percent of total Medicare payments to independent 
facilities for separately billable ESRD drugs in 2008.   
Table 5:  Changes in Average Acquisition Costs Among Independent Dialysis 
Facilities From 2003 to the First Quarter of 2009 
Percentage 
Third-Quarter 2006  First-Quarter 2009 
Separately Billable Drug  2003 Average  Average  Average  Change From 2003 
Acquisition Cost  Acquisition Cost  Acquisition Cost  to First Quarter of 
2009 
Doxercalciferol, 1 g  $2.33   $2.16  $2.94   26.2% 
Alteplase recombinant, 1 mg  $28.90   $32.48  $33.40   15.6% 
Iron dextran, 50 mg  $10.01   $11.29  $11.21   12.0% 
Vancomycin HCl, 500 mg  $2.69   $2.46  $2.70   0.4% 
Sodium ferric gluconate, 12.5 mg  $4.43   $4.34  $4.40   -0.7% 
Darbepoetin alfa,* 1 g  $2.59   $2.82  $2.54   -1.9% 
Iron sucrose, 1 mg  $0.32   $0.32  $0.31   -3.1% 
Epoetin alfa, per 1,000 units  $8.82   $8.56  $8.37   -5.1% 
Paricalcitol, 1 g  $3.53   $3.40  $3.29   -6.8% 
Levocarnitine, 1 g  $11.22   $7.00  $5.35   -52.3% 
Calcitriol, 0.1 g  $0.87   $0.37  $0.33   -62.1% 
Source:  OEI-03-04-00120; OEI-03-06-00200; OEI-03-06-00590; OIG analysis of first-quarter 2009 average acquisition costs among responding    
independent facilities, November 2009.   
* Darbepoetin alfa did not yet have its own Medicare billing code in 2003.  Therefore, the price given in the 2003 column is for 2005, the first year it had 
a Medicare billing code. 
 
 
 
 
 
48 Darbepoetin alfa did not yet have its own Medicare billing code in 2003.  Therefore, all 
analyses of its acquisition cost changes used data starting in 2005, the first year it had a 
Medicare billing code.  
  OEI-03-09-00280  ESRD DRUGS:  FACILITY ACQUISITION COSTS AND FUTURE MEDICARE PAYMENT CONCERNS  17   
   
F I N D I N G S  
CMS plans to use the PPI for 
During a period when acquisition costs for 
Prescription Drugs (a measure 
many ESRD drugs decreased, the index CMS 
that reflects price changes 
plans to use as the basis for future payment 
associated with the average mix of 
changes increased by 39 percent  all the prescription drugs sold in 
pharmacies) as the basis for 
annual adjustments to the prescription drug portion of the new bundled 
rate.  According to PPI data, prices for all prescription drugs were        
39 percent higher in the first quarter of 2009 than in 2003.49  However, 
facility acquisition costs for the drugs that account for the majority of 
Medicare expenditures in independent dialysis facilities actually 
decreased during this same period.   
For example, the average acquisition cost among responding 
independent dialysis facilities for 1,000 units of epoetin alfa fell from 
$8.82 in 2003 to $8.37 in the first quarter of 2009.  In other words, on 
average, independent facilities paid 5 percent less for the highest 
expenditure ESRD drug in early 2009 than they did several years 
earlier.  If the PPI for Prescription Drugs had been an accurate 
predictor for changes in the acquisition cost of epoetin alfa since 2003, 
dialysis facilities would have paid $12.22 for 1,000 units of the drug in 
the first quarter of 2009.50  This amount would be 46 percent higher 
than epoetin alfas average acquisition cost among responding 
independent dialysis facilities (and 33 percent higher than the          
ASP-based payment amount).  Had the Medicare payment amount for 
epoetin alfa since 2003 been based on changes in the PPI for 
Prescription Drugs, total program payments to all independent dialysis 
facilities for the drug in the first quarter of 2009 alone would have been 
$113 million higher than actual payments under the current ASP-based 
system.  As Graph 1 illustrates, if past trends continue, this gap would 
continue to expand substantially in future years. 
 
 
49 BLS, Databases, Tables & Calculators by Subject.  Accessed at http://www.bls.gov/data  
on November 25, 2009. 
50 Under the Act, as amended by section 3401(h) of the PPACA, ESRD bundled payment 
amounts must be updated by the increase in the ESRDB price index minus a productivity 
adjustment.  The PPI for Prescription Drugs is one part of the ESRDB index.  We did not 
address changes in the productivity adjustment when performing our calculations using the 
PPI for Prescription Drugs.  Had we done so, the differences in our figures may have been 
reduced, but the general trends would have likely remained the same. 
  OEI-03-09-00280  ESRD DRUGS:  FACILITY ACQUISITION COSTS AND FUTURE MEDICARE PAYMENT CONCERNS  18   
   
F I N D I N G S  
Graph 1:  Changes in Epoetin Alfa Average Acquisition Cost Versus Changes in the 
PPI for Prescription Drugs Since 2003 
 
$13.00
$12.22
 
$12.00
 
Epogen (acq)
d $11.00
  ai $10.51
P
unt  $10.00   $9.48 $9.20 Epogen (PPI)
o
m $8.82
A $9.00   $8.56
$8.37
Epogen (ASP
$8.00   plus 6 percent)
 
$7.00
2003 2006 2009
 
Year
 
     Source:  OEI-03-04-00120; OEI-03-06-00590; OIG analysis of first-quarter 2009 average acquisition costs among responding independent facilities;     
OIG analysis of BLS data, November 2009.   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  OEI-03-09-00280  ESRD DRUGS:  FACILITY ACQUISITION COSTS AND FUTURE MEDICARE PAYMENT CONCERNS  19   
   
 R E C O M M E N D A T I O N  
 
CMS currently pays all dialysis facilities at 106 percent of ASPs for 
most separately billable ESRD drugs.  Under the current system, we 
found that aggregate acquisition costs for ESRD drugs at both 
independent and hospital-based dialysis facilities were below Medicare 
payment amounts.  In addition, when we compared acquisition costs 
among responding independent dialysis facilities to costs from prior OIG 
reports, we found that 7 out of the 11 separately billable ESRD drugs 
under review have actually seen a decrease in their average acquisition 
costs over the last several years.  The cost of epoetin alfa, a drug 
responsible for more than $1.4 billion in annual Medicare spending in 
dialysis facilities, fell by 5 percent.  During this same period, the PPI for 
Prescription Drugs increased by 39 percent.   
If the new bundled system is implemented as planned and acquisition 
costs for the majority of separately billable ESRD drugs decrease (as 
they have in the past) while price indexes rise, the existing gap between 
Medicare payment amounts and dialysis facility acquisition costs will 
continue to grow each year.  As a result, payments under the new 
bundled system would not accurately reflect facility acquisition costs, 
potentially costing the program additional hundreds of millions of 
dollars per year.  Therefore, we recommend that CMS: 
Develop a more accurate method for estimating changes in the 
prices of ESRD drugs 
CMS decided to use the PPI for Prescription Drugs (a measure that 
reflects price changes associated with the average mix of all the 
prescription drugs sold in pharmacies) as the proxy for drug price 
increases under the assumption that ... the price changes associated 
with the assortment of drugs administered in ESRD facilities should, 
over time, be similar to the average prescription drug price changes 
observed across the entire economy.51  However, average acquisition 
costs for the majority of the drugs purchased by dialysis facilities have 
actually decreased during the period under review.  At the same time, 
there has been a substantial increase in CMSs chosen index.  Therefore, 
the agency should develop a new method for estimating changes that 
more accurately reflects historical trends in the pricing of drugs that 
make up the pharmaceutical category of the ESRDB price index.  
 
51 75 Fed. Reg. 49030, 49160 (Aug. 12, 2010). 
  OEI-03-09-00280  ESRD DRUGS:  FACILITY ACQUISITION COSTS AND FUTURE MEDICARE PAYMENT CONCERNS  20   
   
R E C O M M E N D A T I O N  
AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 
RESPONSE
 
CMS did not concur with our recommendation.  In its response to the 
draft report, CMS stated that the downward trajectory of average 
acquisition costs documented in OIGs analysis was influenced largely 
by changes in CMSs payment mechanism for separately billable ESRD 
drugs.  Specifically, CMS believes that the decrease in the average 
acquisition cost of epoetin alfa during the period under review was 
caused by an above-market Medicare payment amount in the baseline 
year of OIGs analysis (2003) and the subsequent decrease in the 
payment amount for epoetin alfa after the ASP-based system was 
implemented.  CMS states that, as a result, OIGs figures are not 
suitable for inferring future price trends as the market for epoetin alfa 
becomes more competitive. 
CMSs view is that it is more appropriate to look at recent quarterly 
price changeschanges that CMS states have not been distorted by 
changes in payment policythat show an increase in the cost of epoetin 
alfa since the end of 2008.  CMS goes on to state its belief that 
underlying market forces are driving these recent increases and that 
future costs should resemble changes in general pharmaceutical prices 
rather than past trends.  Therefore, CMS expects that future ESRD 
drug price growth will more closely reflect market-based price drivers, 
such as those measured by the PPI for Prescription Drugs.  CMS 
expects that, beginning in 2011, the PPI for Prescription Drugs will 
grow 3.4 percent annually for the first 5 years of the bundled rate 
payment system and states that this trend is consistent with the 
recently observed trend in the cost of epoetin alfa. 
OIG fully appreciates the difficulty that CMS faces in implementing the 
new bundled rate payment system, especially in terms of estimating 
future costs for all items and services related to ESRD care.  OIG also 
realizes that the historical average acquisition cost data presented in 
this report may not necessarily be predictive of future trends in the 
costs of separately billable drugs.  Nevertheless, based on our findings, 
we remain concerned that Medicare could end up paying too much for 
these drugs once the bundled rate is implemented, potentially costing 
the program and its beneficiaries hundreds of millions of dollars a year.  
We are especially concerned that CMSs chosen index, the PPI for 
Prescription Drugs, has consistently averaged annual growth above        
4 percent (and over 7 percent in 2008 and 2009).  During this same 
  OEI-03-09-00280  ESRD DRUGS:  FACILITY ACQUISITION COSTS AND FUTURE MEDICARE PAYMENT CONCERNS  21   
   
R E C O M M E N D A T I O N  
period, the ASP for epoetin alfa has seen a more modest increase and, 
according to CMSs response, never matched the growth of the PPI for 
Prescription Drugs.  Given the risks to the program of overpaying for 
prescription drugs, OIG intends to work with CMS to carefully monitor 
the cost of epoetin alfa and other ESRD drugs in the future. 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 A P P E N D I X   ~   A  
Medicare Expenditures in 2008 for Drugs Under Review          
Payment Ranking  Total Payment in  Payment Ranking  Total Payment in 
Separately Billable Drug  in Independent  Independent  in Hospital-Based  Hospital-Based 
Dialysis Facilities  Dialysis Facilities  Dialysis Facilities  Dialysis Facilities 
Epoetin alfa, per 1,000 
1  $ 1,382,667,793  2  $34,287,338 
units 
Paricalcitol, 1 g*  2  $282,709,514  3  $11,244,877 
Iron sucrose, 1 mg  3  $130,808,384  4  $5,055,486 
Doxercalciferol, 1 g  4  $50,504,917  7  $3,495,384 
Sodium ferric gluconate, 
5  $49,256,017  5  $3,625,818 
12.5 mg 
Darbepoetin alfa, 1 g  6  $43,185,051  1  $50,052,297 
Alteplase recomb, 1 mg  7  $16,575,330  6  $3,531,937 
Levocarnitine, 1 g  8  $2,543,581  12  $211,776 
Vancomycin HCL, 500 mg  9  $1,714,940  11  $234,703 
Calcitriol, 0.1 mcg  11  $1,025,188  13  $145,580 
Iron dextran, 50 mg  16  $316,878  8  $427,609 
     Total    $1,961,307,593    $112,312,805 
Source:  Office of Inspector General analysis of 2008 National Claims History File, 95-percent complete. 
             * g = microgram, mg = milligram, g = gram. 
  OEI-03-09-00280  ESRD DRUGS:  FACILITY ACQUISITION COSTS AND FUTURE MEDICARE PAYMENT CONCERNS  23  A  P  PEN  D  x  B 
Agency Comments 
DEPARlMENTOF HEALTH & HUMAN SERVICES  Centers tor Medicare & Medicaid Services 
Administrator 
Wsshlngton, DC 20201 
DATE:  'JUN 1 0 2010 
TO: 	 Daniel R, Levinson 
Inspector GeqeqU 
FROM: 	 M~TAVenner 
Acting Administrator and Chief Operating Officer 
SUBJECT: 	 Office of Inspector General (OIG) Draft Report: "End Stage Renal Disease 
Drugs: Facility Acquisitions Costs and Future Medicare Payment Concerns" 
(OE1~030900280) 
Thank you for the opportunity to comment on the OlG Report: "End Stage Renal Disease Drugs: 
Facility Acquisition Costs and Future Medicare Payment Concerns". The'Centers for Medicare 
& Medicaid Services (CMS) recognizes the critical nature ofpaying appropriately for services 
for its beneficiaries and is committed to ensuring that payment updates for providers ofEnd 
Stage Renal Disease (ESRD) treatments are calculated fairly and appropriately. 
Beginning in 2011, CMS will implement the ESRD Prospective Payment System. At that time, 
ESRD providers will begin receiving a "bundled" payment for providing services to Medicare 
beneficiaries, That bundled payment is intended to pay for renal dialysis services inclusive of 
several covered pharmaceuticals. 
When Medicare began covering ESRD patients in 1973, providers were permitted to bill 
separately for prescription drugs, including Erythropoietin (Epo) (which represents about two
thirds ofthe industry's total drug costs). At that time, the payment rate for Epo was set 
according to statute ilt $10 per 1,000 units (see section 1881(bXIIXB) ofthe Social Security 
. Act). For other commonly used drugs ofESRD patients, payment rates were set to Average 
Wholesale Price minus 5 percent. 
was 
Beginning in 2006, the agency  required to pay for drugs using the average sales price ofthe 
respective drugs, plus six percent (ASP+6). The analyses that the OIG has conducted carefully 
documents the downward trajectory ofprice growth in average acquisition cost (AAC) over a 
short historical period that has been largely influenced by the change in CMS's payment 
mechanism, We do, however, have some reservations regarding the OIG's recommendation for 
projecting price changes for drugs in ESRD facilities. The rationale for those concerns is 
articulated below. 
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A P P E N D I X ~ A  
 
This report was prepared under the direction of Robert A. Vito, Regional 
Inspector General for Evaluation and Inspections in the Philadelphia 
regional office, and David E. Tawes, Director, Prescription Drug Pricing 
Unit.   
Roman Strakovsky served as the lead analyst for this study.  Other 
principal Office of Evaluation and Inspections staff from the 
Philadelphia regional office who contributed to the report include 
Stephanie Yeager; other staff who contributed include Natasha 
Franklin.  
 
  OEI-03-09-00280  ESRD DRUGS:  FACILITY ACQUISITION COSTS AND FUTURE MEDICARE PAYMENT CONCERNS  28   
Office of Inspector General 
http://oig.hhs.gov 
 
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amended, is to protect the integrity of the Department of Health and Human Services 
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