Department of Health and Human Services 
OFFICE OF 
 
INSPECTOR GENERAL 
 
 
 
 
 
 
 
 
U :  M
  PDATE    EDICARE 
 
P E S
A YMENTS FOR  ND  TAGE 
 
R D D  
ENAL  ISEASE  RUGS 
 
Daniel R. Levinson   
Inspector General  
 
March 2014  
OEI-03-12-00550   
EXECUTIVE SUMMARY:  UPDATE:  MEDICARE PAYMENTS FOR END STAGE 
RENAL DISEASE DRUGS 
OEI-03-12-00550 
 
WHY WE DID THIS STUDY 
Prior to 2011, Medicare paid dialysis facilities for the treatment of end stage renal disease 
(ESRD) using a combination of a fixed rate (known as the composite rate) and separate 
payment amounts based on average sales prices (ASP) for certain drugs.  As of January 2011, 
Federal law required the Centers for Medicare & Medicaid Services (CMS) to bundle Medicare 
reimbursement for almost all ESRD treatmentsincluding drugs that were previously billed 
separatelyinto one payment rate.  By implementing the bundled rate, CMS sought to eliminate 
incentives to overuse separately billable drugs and to promote equitable payment and access to 
services in ESRD facilities that treat more costly patients.  CMS is required to update this rate 
annually to reflect changes in the price of goods and services used to provide ESRD care.  CMS 
used the PPI for Prescription Drugs, a price proxy published by the Bureau of Labor Statistics, to 
update the prescription drugs portion of the base rate for the ESRD payment bundle.  However, a 
2010 OIG study questioned the accuracy of this price proxy when used to estimate changes in 
prices for ESRD drugs. 
 
HOW WE DID THIS STUDY 
We obtained first-quarter 2012 average acquisition costs for the 11 drugs that were separately 
billable prior to the implementation of the ESRD payment bundle by surveying 3 large dialysis 
chains, a random sample of 200 independent (i.e., freestanding) dialysis facilities not affiliated 
with these chains, and 200 hospital-based dialysis facilities.  We compared the average 
acquisition costs for each facility type to the amounts paid for these drugs under the base rate for 
the ESRD payment bundle.  Using first-quarter 2009 data that we collected for the 2010 OIG 
report, we determined the extent that facility acquisition costs have changed in relation to the 
amounts estimated by the PPI for Prescription Drugs.  Finally, to compare the prior and current 
payment methodologies for ESRD drugs, we compared the drugs ASP-based payment amounts 
in first-quarter 2012 to the amounts paid under the ESRD base rate.   
 
WHAT WE FOUND 
In the first quarter of 2012, independent dialysis facilities could purchase ESRD drugs for less 
than the reimbursement amounts provided by the ESRD base rate (9 percent below, in the 
aggregate), but average acquisition costs for hospital-based dialysis facilities exceeded  
reimbursement amounts (5 percent above, in the aggregate).  In the past 3 years, dialysis 
facilities average acquisition costs for the majority of drugs under review have decreased, but 
average costs for epoetin alfa, a drug that represented more than three-quarters of the drug costs 
in responding facilities, have increased by at least 17 percent.  We also found that although 
acquisition costs for most drugs decreased, the PPI for Prescription Drugs estimated a 25-percent 
increase in drug costsmeaning that this proxy was not an accurate predictor of cost changes for 
most drugs under review. Lastly, we found that if the ASP-based reimbursement had remained 
in effect for the first quarter of 2012, payment amounts for the bundle of ESRD drugs would 
have differed by less than a dollar per treatment. 
   
   
  
WHAT WE RECOMMEND 
Federal law required CMS to reduce the ESRD payment bundles base rate for 2014 to reflect 
changes in utilization and should take into account recent drug sales and pricing data.  Our 
findings show that acquisition costs for most of the drugs under review have decreased, but the 
costs for drugs that represented the majority of  facilities total drug costs have increased.  This 
means that any savings resulting from a decrease in utilization may potentially be offset by the 
drugs cost increase. In addition, although independent dialysis facilities could acquire the 
majority of ESRD drugs for less than Medicare reimbursement, any reductions to the ESRD base 
rate could potentially harm hospital-based dialysis facilities because these facilities had difficulty 
purchasing ESRD drugs for less than reimbursement, in the aggregate.  
 
Therefore, we recommend that CMS rebase (i.e., redetermine the basis of) the ESRD base rate to 
reflect current trends in drug acquisition costs, as required by law; distinguish payments in the 
ESRD base rate between independent and hospital-based dialysis facilities; and consider 
updating the ESRD payment bundle using a factor that takes into account drug acquisition costs.  
CMS did not explicitly state whether it concurred with our first recommendation, did not concur 
with our second recommendation, and concurred with our third recommendation.   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
TABLE OF CONTENTS 
 
Objectives ....................................................................................................1 

Background..................................................................................................1 

Methodology................................................................................................8 

Findings......................................................................................................13 

Independent dialysis facilities purchased ESRD drugs for less    

than the drugs reimbursement amounts in the ESRD base rate,    

but the acquisition costs for hospital-based facilities exceeded 
 
reimbursement amounts, in the aggregate .....................................13 

Although the average facility acquisition costs for the majority     

of drugs under review decreased in the past 3 years, costs for   

ESAs have increased......................................................................16 

The PPI for Prescription Drugs was not an accurate predictor        

of cost changes between 2009 and 2012 for most drugs under 

review .............................................................................................17 

If ASP-based reimbursement had remained in effect for the first 

quarter of 2012, payment amounts for the bundle of ESRD       

drugs would have differed by less than a dollar per treatment ......18 

Conclusion and Recommendations ............................................................20 

Agency Comments and Office of Inspector General Response .....23 

Appendixes ................................................................................................25 

A: Detailed Methodology for Calculating the Individual-Drug 

Payment Portions of the ESRD Base Rate .....................................25 

B: Detailed Methodology for Selecting Dialysis Facilities ..........29 

C: Difference Between Medicare Reimbursement and Costs    

Paid by Large Chain and Smaller Independent Dialysis       

Facilities.........................................................................................31 

D: Agency Comments  ...................................................................33 

Acknowledgments......................................................................................36 

   
   
OBJECTIVES 
1. 	  To compare first-quarter 2012 facility acquisition costs for selected 
end stage renal disease (ESRD) drugs to the amounts that Medicare 
Part B paid for these drugs under the new ESRD bundled base rate.  
2.	   To determine how facility acquisition costs for selected ESRD drugs 
have changed in relation to inflation, from the first quarter of 2009 to 
the first quarter of 2012. 
3.	   To compare the average sales price (ASP)-based reimbursement 
amounts for selected ESRD drugs to the amounts paid under the new 
ESRD bundled base rate. 
BACKGROUND 
Effective January 1, 2011, the Centers for Medicare & Medicaid Services 
(CMS) implemented a statutorily mandated change in the payment method 
for ESRD treatment to a comprehensive system that bundles the payment 
for services and drugs into a single per-treatment rate.  To develop the 
base rate for the ESRD payment bundle, CMS used treatment counts from 
2007 claims data and updated these to estimate 2011 average payment per 
treatment data.  The payment bundle includes drugs that, prior to 2011, 
were billed separately and paid on the basis of 106 percent of the 
manufacturer-reported ASP.    
The ESRD payment bundle sought to reduce the incentives to overutilize 
profitable ESRD drugs, particularly erythropoietin-stimulating agents 
(ESAs), which had been previously paid under the ASP-based payment 
methodology.1   A December 2012 study by the Government Accountability 
Office (GAO) found that utilization of ESRD drugs in 2011 was about 
23 percent lower, on average, than utilization in 2007, mostly because of a 
large decline in ESA use.2  Because the ESRD base rate was based on 
2007 utilization levels, CMS may have paid more than necessary for 
dialysis care in 2011.  GAO concluded that the current payment bundle is 
excessive and that rebasing it could result in more appropriate payments to 
dialysis facilities and substantial savings for Medicare.  A May 2013 
Office of Inspector General (OIG) report had similar findings and reported 
 
1 75 Fed. Reg. 49030, 49032  (Aug. 12, 2010). 

2 GAO,  End-Stage Renal Disease:  Reduction  in  Drug Utilization Suggests Bundled 
 
Payment Is Too High (GAO-13-190R), December 2012. 
 
Update: Medicare Payments for ESRD Drugs (OEI-03-12-00550)   1 
   
   
that Medicare and its beneficiaries could have saved $510 million on 
ESAs if CMS had adjusted payments to reflect utilization in 2011.3  
Treatment of ESRD 
ESRD is a condition in which the kidneys no longer function at the level 
necessary for day-to-day life.  The loss of kidney function in ESRD is 
usually irreversible and permanent.   Treatment options include kidney 
transplantation and dialysis. One common complication of ESRD is 
anemia, a deficiency in red blood cells. ESAs, such as epoetin alfa (trade 
name Epogen) and darbepoetin alfa (trade name  Aranesp) treat anemia by 
increasing the number of red blood cells.   
Most individuals with ESRD are eligible for benefits under Medicare  
Part B. In 2011, approximately 442,000 beneficiaries qualified for ESRD 
treatment under Medicare Part B.4  Beneficiaries typically receive dialysis  
treatments from either independent (i.e., freestanding) or hospital-based 
facilities that are approved to furnish  dialysis services directly to ESRD 
patients. Both types of dialysis facilities provide outpatient maintenance 
dialysis (including dialysis performed by an appropriately trained patient 
and caregiver at home).  The majority (64 percent) of independent dialysis 
facilities are owned or managed by one of the three large chain 
organizations.  Facilities are considered hospital based if they are 
integrated into a hospitals financial and administrative systems, among 
other criteria.5  As of August 2012, independent dialysis facilities 
accounted for 94 percent of all facilities and hospital-based dialysis 
facilities represented only 6 percent.  
Medicare Payments to Dialysis Facilities Prior to 2011  
Composite Rate. Prior to January 1, 2011, CMS reimbursed dialysis 
facilities on the basis of a prospective payment system (PPS) known as the 
composite rate.  Facilities received a fixed composite rate payment for 
each dialysis treatment they provided.  The composite rate was composed 
of a labor and nonlabor portion, with an add-on adjustment for the area 
wage index. The rate included most items related to dialysis services, 
such as (1) labor costs; (2) certain laboratory services; and (3) certain 
drugs, such as antihistamines, glucose, and insulin.   
Separately Billable Drugs. Certain drugs typically administered by 
physicians or other health care professionals were not included in the 
 
3 OIG,  Medicare and Beneficiaries Could  Save Millions  If Dialysis Payments Were 
Adjusted for Anemia Management  Drug Utilization (A-01-12-00522), May 2013. 
4  The  Henry J. Kaiser Family  Foundation, Medicare Enrollment:  Hospital Insurance 
and/or  Supplementary Medical Insurance Enrollees With  End-Stage-Renal Disease, as  of  
July 2011. Accessed at http://www.statehealthfacts.org on February  21, 2013. 
5 42 CFR   413.174(c)(4)(5).  
Update: Medicare Payments for ESRD Drugs (OEI-03-12-00550)   2 
   
   
composite rate.6  Medicare paid for these separately billable drugs, 
including epoetin alfa and darbepoetin alfa, at 106 percent of their 
manufacturer-reported ASP when they were furnished in dialysis 
facilities.7,  8  Previous OIG reports have found that many facilities, 
particularly the independent facilities owned or managed by a chain, could 
acquire the majority of the separately billable drugs for less than the 
Medicare payment amounts.9    
Some policymakers raised concerns that the ASP-based reimbursement 
methodology created incentives for dialysis facilities to overutilize 
separately billable drugs.10  When the reimbursement amounts exceeded 
the price that facilities paid to acquire the drugs, which happened with the 
ESA epoetin alfa, facilities could increase their profits by administering 
more of the drug. The Food and Drug Administration (FDA) has issued 
warnings that overuse of ESAs could harm patients because ESAs increase 
the risks of blood clots, strokes, heart attacks, and death.11 In March 2007 
and June 2011, FDA issued black box warnings on certain ESA labels, 
advising physicians to monitor red blood cell levels and adjust dosages to 
maintain the lowest levels necessary.12, 13  
 
6 Epoetin alfa and darbepoetin alfa were covered as  separately billable drugs even if they 
were self-administered by the patient and not by a physician or  health care  professional.  
CMS, Medicare Benefit Policy Manual,  ch. 11,   30.4.2 (rev. 1, Oct. 1, 2003)  and 90  
(rev. 8,  March 5, 2004).  
7 CMS, Medicare Claims Processing Manual, ch. 8,   60.2.2; 42 CFR  
 414.904(d)(2)(iii).   
8  With certain exceptions, including specific vaccines; 42 CFR  414.904(e). 
9 For example, see OIG, End  Stage Renal Disease Drugs:  Facility Acquisition Costs and 
Future Medicare Payment Concerns (OEI-03-09-00280), September 2010; and OIG,  
Medicare Reimbursement for End  Stage Renal Disease Drugs:  Third Quarter 2006  
(OEI-03-06-00590), June  2007.     
10 House Committee on Ways and  Means, Subcommittee on Health, Stark Announces  a 
Hearing on Ensuring Kidney  Patients Receive Safe and Appropriate Anemia 
Management Care, June 26, 2007.  Accessed at http://www.gpo.gov/fdsys/pkg/CHRG-
110hhrg49981/html/CHRG-110hhrg49981.htm  on June 24, 2013.  GAO, End-Stage 
Renal Disease: Bundling Medicares Payment for Drugs with Payment for All ESRD 
Services Would Promote Efficiency and Clinical Flexibility (GAO-07-77),  

November 2006. 
 
11 FDA,  Public Health Advisory: erythropoiesis-stimulating agents (ESAs), 

March  9, 2007.  Accessed at 
http://www.fda.gov/ForConsumers/ByAudience/ForPatientAdvocates/HIVandAIDSActiv 

ities/ucm124262.htm on April 5, 2013.  FDA, FDA Drug  Safety Communication: 
  
Modified dosing recommendations to improve the safe use of Erythropoiesis-Stimulating  

Agents (ESAs) in chronic kidney disease, June 24, 2011.  Accessed  at 

http://www.fda.gov/drugs/drugsafety/ucm259639.htm on April  5, 2013. 
   
12 Ibid. 

13 Black  box  warnings  (alerts on the labels of prescription drugs to indicate serious or 
 
life-threatening risks)  were issued for epoetin alfa (Epogen and Procrit) and darbepoetin
  
alfa (Aranesp). 
 
Update: Medicare Payments for ESRD Drugs (OEI-03-12-00550)   3 
   
   
Medicare Bundled Payments to Dialysis Facilities  
Effective January 1, 2011, section 1881(b)(14) of the Social Security Act 
(the Act), as added by section 153(b) of the Medicare Improvements for 
Patients and Providers Act of 2008 (MIPPA), P.L. 110-275, required 
payment for all Part B items and services used in the treatment of ESRD, 
including drugs that were separately billable, to be combined into a single  
bundled rate.14  By implementing the bundled rate, CMS sought to 
eliminate incentives to overuse separately billable drugs and to promote 
equitable payment and access to services in ESRD facilities that treat more 
costly patients.15    
The ESRD PPS is being phased in over 4 years; full implementation began 
January 1, 2014. During the transition period, facilities receive a blend 
of the payment rates based on (1) payment rates under the new bundle 
system and (2) the previous composite rate and ASP-based payment 
methods.  However, facilities were given a one-time opportunity to opt out 
of the phase-in.16, 17  Eighty-seven percent of dialysis facilities opted out of 
the phase-in and accepted full payment under the ESRD PPS starting in 
January 2011.18    
ESRD Payment Bundle. The ESRD PPS payment bundle is composed of 
payments for the various components of dialysis services, such as the 
composite rate, separately billable drugs, and laboratory tests.  As 
described in the preamble to the August 2010 final rule that created the 
ESRD payment bundle, CMS calculated the ESRD base rate for 2011 
using 2007 Medicare allowable payment (MAP) amounts 
(i.e., reimbursement) for each component included in the bundle and 
divided the MAP amounts by the number of dialysis treatments per patient 
in 2007.19  CMS updated this amount to reflect estimated 2011 amounts.20   
This resulted in an overall payment amount of $229.63 per treatment in 
2011.21  CMS can further adjust this base rate for individual dialysis 
 
14 Vaccines are excluded from the bundled rate. 

15 75 Fed. Reg. 49030, 49032  (Aug. 12, 2010). 

16 The Act,  1881(b)(14)(E)(ii). 

17 Facilities had to  notify their respective Medicare contractors of their decision to  opt out 

of the phase-in on  or before November 1, 2010.
    
18  76  Fed.  Reg. 18930, 18932 (Apr. 6,  2011).  

19 CMS used  2007 as the basis for the 2011 bundled  rate because it had the lowest  
       
per-patient utilization when compared to  2008 and  2009.   

20 In accordance with section 1881(b)(14)(A)(ii)  of the Act, the estimated 2011 total
  
payments under the ESRD  base rate must equal 98  percent of the estimated total amount 
 
of payments that would have been made in that year if the  payment bundle had not  been
  
implemented.   As a result, CMS applied a 2-percent budget-neutrality reduction to the 

base rate, as well as a reduction for an outlier adjustment and a standardization 
 
adjustment. 

21 75 Fed. Reg. 49030, 49082  (Aug. 12, 2010). 

Update: Medicare Payments for ESRD Drugs (OEI-03-12-00550)   4 
   
   
facilities on the basis of factors such as its patient-level characteristics and 
volume of treatments administered. 
Drugs in the ESRD Payment Bundle That Were Formerly Separately 
Billable. CMS identified and used the 11 highest expenditure separately 
billable ESRD drugs in 2007 as the primary basis for the separately 
billable drugs component of the payment bundle.22  CMS selected these 
11 drugs because they accounted for over 99 percent23 (about $2.7 billion) 
of total Part B spending on ESRD drugs in 2007.  Payments for epoetin 
alfa accounted for the majority ($1.9 billion) of total Part B spending on 
these 11 ESRD drugs.     
Because CMS used MAP amounts from 2007, it had to project these data 
to estimate the per-treatment reimbursement in 2011 for each of the 
separately billable drugs. To calculate the percentage updates used to 
make these estimates, CMS (1) inflated the second-quarter 2010 
ASP-based payment amounts (the most recently available at the time) by 
3.9 percent (i.e., the inflation rate determined by the Producer Price Index 
(PPI) for Prescription Drugs24) and (2) calculated the percentage difference 
between these inflated ASP amounts and the average 2007 ASP payment 
amounts.  See Table 1 and Appendix A for details on how CMS calculated 
the average per-treatment reimbursement amounts for each drug in the 
ESRD base rate. 
   
 
22 Although these drugs are now included in the ESRD  payment bundle and are no longer  
billed separately when  used to treat ESRD, we still refer them as separately billable to  
distinguish this group  of  drugs from other types included in the payment bundle.   
23 75 Fed. Reg. 49030, 49079  (Aug. 12, 2010). 
24 The term PPI for Prescription  Drugs refers to the Bureau of Labor Statistics (BLS) 
PPI for Pharmaceuticals for Human Use (Prescription).  This PPI reflects price changes 
associated with the average mix of all prescription drugs in the overall economy.  
According to CMS, reliability and timeliness of  data publishing are factors for choosing  
the PPI for Prescription  Drugs as the price proxy.  CMS also stated that the PPI for 
Prescription Drugs includes an appropriate level of aggregation for use in the Medicare 
market baskets (see footnote 26 for definition  of market basket), including  former Part D 
drugs covered  in the ESRD payment bundle, and  reflects competitive pricing in efficient 
markets.  75 Fed. Reg. 49030, 49152  (Aug. 12, 2010).    
Update: Medicare Payments for ESRD Drugs (OEI-03-12-00550)   5 
   
   
Table 1: Part B Payments for Top 11 Separately Billable Drugs  
Percentage  Estimated 
Separately Billable Drugs  MAP Amounts  in   Per-Treatment  Update to   Per-Treatment 
(Part B)   2007   Reimbursement   Estimate 2011  Reimbursement  
in 2007 
Amounts  in 2011  
Epoetin alfa  $1,876,926,573  $51.08   7.0%  $54.65  
Paricalcitol  $322,849,348  $8.79   -3.2%  $8.50  
Darbepoetin alfa  $167,935,970  $4.57   -9.0%  $4.16  
Iron sucrose   $166,219,339  $4.52   2.6%  $4.64  
Doxercalciferol  $76,901,723  $2.09   16.6%  $2.44  
Sodium ferric gluconate  $68,086,707   $1.85   -0.2%   $1.85  
Alteplase recombinant  $26,697,321  $0.73   16.9%  $0.85  
Levocarnitine  $5,026,446  $0.14   -22.5%  $0.11  
Vancomycin  $3,583,504  $0.10   -3.1%  $0.09  
Calcitriol  $3,125,613  $0.09   -26.3%  $0.06  
Daptomycin   $1,234,405  $0.03   30.1%  $0.04 
     Total   $2,718,586,948*        
Source:  75 Fed. Reg. 49030, 49068, 49080 (Aug. 12, 2010).   
* Individual amounts do not add to total because of  rounding. 
 
Annual Updates to the ESRD Payment Bundle  
Beginning in 2012, CMS was required to update the payment bundle 
annually to reflect the changes over time in the prices of an appropriate 
mix of goods and services used to provide ESRD care.25, 26 CMS uses 
indexes published by BLS to measure the annual rate of price change in 
each category (e.g., wages and salaries, pharmaceuticals, capital-related 
costs).27  For example, CMS used PPI for Prescription Drugs as the price 
proxy for measuring growth in ESRD drugs for the pharmaceutical 
category (i.e., the separately billable drugs component).  After applying 
the adjustments for 2012, CMS set the base rate for the payment bundle at 
$234.81 per treatment.28  
Rebasing the ESRD Payment Bundle 
MIPPA required GAO to report on, among other things, trends in the 
utilization of ESRD drugs and to submit a report to Congress on the ESRD 
payment bundle no later than March 1, 2013.29 GAO analyzed trends in 
utilization from 2007 through 2011 and the implications of these trends for 
 
25 The Act,  1881(b)(14)(F)(i). 76  Fed. Reg.  70228, 7023170232 (Nov. 10, 2011). 

26 The term market basket is used to refer to the mix of goods and services used to 

produce ESRD care.  This term  is also commonly used to  denote the input price index 
 
(i.e., cost categories, their  respective weights, and price proxies combined) derived from  

that market basket.  The term ESRDB market basket in the final rule that implements 

the ESRD  payment bundle refers to this input price index. 
 
27  75  Fed.  Reg. 49030, 4915460 (Aug. 12, 2010). 

28 76 Fed. Reg. 70228, 70231  (Nov. 10, 2011). 

29 Section 153(d)  of MIPPA.  

Update: Medicare Payments for ESRD Drugs (OEI-03-12-00550)   6 
   
   
the ESRD bundled payment rate.30  GAO found that the utilization of 
certain dialysis drugs in 2011 was lower than in 2007 and recommended 
that Congress consider requiring CMS to rebase the ESRD bundled 
payment rate as soon as possible and to rebase it periodically thereafter 
using the most currently available data.  
To reflect the findings in GAOs report, the American Taxpayer Relief Act 
of 2012 authorized CMS to make reductions to the ESRD bundled 
payment rate on or after January 1, 2014.31   These reductions should 
reflect the estimate of the change in utilization of the ESRD drugs between 
2007 and 2012 and should take into account the most recently available 
ASP data and price changes for ESRD drugs.32    
Previous OIG Work 
A May 2013 OIG report found that Medicare and its beneficiaries could 
have saved $510 million for the ESAs epoetin alfa and darbepoetin alfa 
and $19 million for certain iron supplements if the 2011 ESRD base rate 
had been adjusted to reflect utilization of anemia management drugs 
during 2011.33   We recommended that CMS adjust the base rate to realize 
program savings associated with decreased utilization of ESAs and iron 
supplements.  CMS concurred with this recommendation. 
Before the implementation of the ESRD payment bundle, OIG issued 
several reports  demonstrating that Medicare payments for certain 
separately billable ESRD drugs were consistently higher than the reported 
facility acquisition costs.34   A September 2010 report found that drug 
acquisition costs in independent dialysis facilities and hospital-based 
 
30 GAO,  End-Stage Renal Disease:  Reduction  in  Drug Utilization Suggests Bundled  
Payment Is Too High (GAO-13-190R), December 2012. 
 
31 Section 1881(b)(14)(I)  of the Act, as added  by section  632(a)  of the American 
 
Taxpayer Relief Act, P.L. 112-240. 

32 Part B claims dated  on  or after  April 1, 2013, incur a 2-percent reduction in payment, 

in accordance  with the Budget Control Act of 2011 and the American Taxpayer Relief 

Act of  2012  (see CMS Medicare FFS Provider e-News, Mandatory Payment Reductions 
 
in the Medicare Fee-for-Service (FFS) Program  Sequestration,  March 8, 2013).  

This mandatory payment reduction (also  known as sequestration) is applied after the 

beneficiarys coinsurance has been  determined, meaning that the beneficiarys portion of 
 
the cost is not reduced.  Under sequestration,  the effective payment rate for most Part B 

drugs is 104.3 percent of the volume-weighted ASP. 
 
33 OIG,  Medicare and Beneficiaries Could  Save Millions  If Dialysis Payments Were 
Adjusted for Anemia Management  Drug Utilization (A-01-12-00522), May 2013. 
34 For example, see 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;  Medicare Reimbursement for  
End  Stage Renal Disease Drugs:  Third Quarter 2006 (OEI-03-06-00590),  June 2007; 
and End Stage  Renal Disease Drugs:  Facility Acquisition Costs and Future Medicare 
Payment Concerns (OEI-03-09-00280),  September 2010.   
Update: Medicare Payments for ESRD Drugs (OEI-03-12-00550)   7 
   
   
dialysis facilities were, in the aggregate, 10 percent and 7 percent below 
the Medicare payment amounts, respectively.     
In the September 2010 report, we also compared the changes in 
independent dialysis facilities acquisition costs for 11 separately billable 
ESRD drugs to changes in the PPI for Prescription Drugs.35   We found that 
from 2003 to 2009, PPI data indicated that prescription drug prices had 
increased, while the majority of acquisition costs for independent facilities 
had decreased. In addition, we found that first-quarter 2009 Medicare 
payments to independent dialysis facilities for epoetin alfa would have 
been $113 million higher if CMS had based reimbursement on changes in 
the PPI for Prescription Drugs instead of the ASP-based system in place at  
that time.  We recommended that CMS develop a more accurate method 
for estimating changes in the prices of ESRD drugs included in the ESRD 
bundled rate. CMS did not concur with our recommendation and moved 
forward with using the PPI for Prescription Drugs as a price predictor.   
METHODOLOGY 
Data Collection 
ESRD Drug Acquisition Cost Data for First Quarter 2012. In 
December 2012, we sent online surveys to (1) 3 large chains of 
independent dialysis facilities, (2) a random sample of 200 smaller 
independent dialysis facilities not owned or managed by these chains, and 
(3) all 200 hospital-based dialysis facilities not enrolled in the 340B 
program.36  Several of the responding smaller independent dialysis 
facilities owned multiple dialysis units and provided data for these 
additional facilities. In total, we received responses from the 3 large chain 
companies, 522 smaller independent dialysis facilities, and  
125 hospital-based dialysis facilities.  See Appendix B for a description of  
the facilities included in our analysis.  
The online surveys requested first-quarter 2012 acquisition cost 
information for each of the 11 drugs under review.  We selected these      
11 drugs because they are included in the separately billable drugs 
component of the ESRD base rate.37  Specifically, we asked each facility to  
 
35 OIG,  End Stage Renal Disease Drugs: Facility Acquisition Costs and Future Medicare 
Payment Concerns (OEI-03-09-00280),  September 2010. 
36 The 340B program requires drug manufacturers to  provide drugs to covered entities at 
or below statutorily defined ceiling prices (42 U.S.C.   256b).  Therefore,  we excluded  
all 340B-covered  facilities, which accounted for 44 percent of  hospital-based dialysis 
facilities in our sample.     
37 The 11 drugs are alteplase recombinant, darbepoetin  alfa (Aranesp), calcitriol, 
daptomycin, doxercalciferol, epoetin alfa  (Epogen), iron sucrose, levocarnitine, 
paricalcitol, sodium ferric gluconate complex, and vancomycin HCl.  
Update: Medicare Payments for ESRD Drugs (OEI-03-12-00550)   8 
   
   
provide the total amount paid, the amount of rebates and discounts 
received, the net amount paid, the number of units purchased, and the 
average acquisition cost for each of the 11 drugs.   We defined average 
acquisition cost as the total amount paid (net of all rebates and discounts) 
divided by the total number of units purchased during that quarter.  
ESRD Drug Acquisition Cost Data for First Quarter 2009. We accessed 
the dialysis facility acquisition cost data gathered in our September 2010 
report. These data represent the volume-weighted average acquisition cost  
paid in independent and hospital-based dialysis facilities for separately 
billable ESRD drugs in the first quarter of 2009.38     
ESRD Base Rate Amounts for the Drugs That Were Formerly Separately 
Billable. For each of the 11 drugs included in the separately billable drugs 
portion of the ESRD payment bundle, we calculated the per-unit payment 
amount in the 2012 ESRD base rate.  We calculated these figures using  
information from the final rules that implemented the 2011 and 2012 
ESRD base rates.39  See Appendix A for a detailed description of our 
methodology to calculate the per-unit reimbursement amount for the drugs 
included in the ESRD base rate. 
Medicare ASP-Based Payment Amounts. We obtained first-quarter 2012 
ASP-based Medicare payment amounts for the 11 drugs from CMSs Web 
site. These are the reimbursement amounts that CMS paid for Part B 
drugs dispensed in a non-ESRD setting or for drugs provided by an ESRD 
facility that chose to phase in the bundled payment method. 
PPI for Prescription Drugs Data.  We obtained from BLSs Web site the 
index base data from the PPI for Prescription Drugs for the first quarter of 
2009 (the quarter used to collect acquisition cost data in our  
September 2010 report) and the first quarter of 2012.  
Data Analysis  
Comparing Acquisition Cost to the ESRD Base Rate. We calculated the 
overall volume-weighted average acquisition cost per unit (hereinafter 
referred to as average acquisition cost) for each of the 11 drugs by          
(1) totaling the amount paid, net of any discounts and rebates, among all 
 
38 For our September 2010 report (End Stage  Renal Disease Drugs:  Facility Acquisition 

Costs and Future Medicare Payment Concerns, OEI-03-09-00280), we collected 
 
acquisition cost data for 10  of the 11 drugs included in  our current review; we did not 

collect  acquisition cost data for daptomycin, but we instead collected cost data  for  iron
  
dextran.   However,  daptomycin was included in the ESRD  payment bundle and iron
  
dextran was not.  

39 The final  rule  implementing the 2011 ESRD payment bundle can be found at 75 Fed. 
 
Reg.  49030 (Aug. 12, 2010).  A subsequent rule, found at 76 Fed. Reg. 70228 
            
(Nov. 10, 2011), provides the percentage updates used to calculate the base rate for the 

payment bundle in  2012. 
 
Update: Medicare Payments for ESRD Drugs (OEI-03-12-00550)   9 
   
   
independent and among all hospital-based dialysis facilities and 
(2) dividing that by the total units purchased.40  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 drugs average cost.41,  42    
For both facility types (i.e., independent and hospital-based), we 
calculated the aggregate difference between the first-quarter 2012 average 
acquisition costs and the total estimated amounts that would have been 
spent for those units in the 2012 ESRD base rate for the 11 drugs.   
To do so, we:  
 	  calculated the total net 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 
each facility, by its payment portion in the ESRD base rate to 
calculate the total amount that facilities would have paid for all 
these drugs if their acquisition cost equaled the ESRD base rate 
amount; 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 if the acquisition cost had been equal to the ESRD 
base rate amount. 
We calculated the percentage difference between each of the 11 drugs  
portion of the 2012 base rate and the first-quarter 2012 average acquisition 
costs reported by independent and hospital-based dialysis facilities.  We  
further analyzed the data for independent facilities by calculating the 
aggregate percentage difference between the ESRD base rate amount and 
acquisition costs in (1) three large chains of independent dialysis facilities 
and (2) the independent dialysis facilities not owned or managed by these 
three large companies.   
 
40 Some facilities provided the per-unit average acquisition costs, but did  not provide the 
total amounts paid or total units purchased for all drugs.  Because these facilities did not 
provide their totals, we did not include those totals in our calculations of average 
acquisition costs. 
41 Among the independent dialysis facilities not associated  with the three large chains, we 
identified and removed an average of 0.8 responses per drug because these responses met 
the outlier criterion.  Among  hospital-based  dialysis facilities, this number was 1.3. We 
removed  no more than four outliers for any single drug in either facility type. 
42 There was significant variability in acquisition costs for sodium ferric gluconate at the 
independent facilities not associated  with the three large chains; therefore, we did not use 
the same outlier criteria for this drug.  Instead, we identified  and excluded  four responses 
from smaller independent  facilities with amounts that were more than 80  percent higher 
or lower than the average acquisition cost for this drug.   
Update: Medicare Payments for ESRD Drugs (OEI-03-12-00550)   10 
   
   
Changes in Acquisition Costs. To determine whether actual per-unit drug 
costs had increased, decreased, or remained the same, we compared 
average facility acquisition costs in the first quarter of 2009 (obtained 
from our September 2010 report)43 to those in the first quarter of 2012. 
We determined the percentage change in the average costs for this period 
for each drug.  We did not collect cost data for 1 of the 11 drugs 
(daptomycin) as part of our previous report, so this part of our analysis 
included 10 of the drugs covered under the separately billable drugs 
component of the ESRD base rate.   
To determine whether the PPI for Prescription Drugs had been an accurate 
predictor of price change for the 10 drugs, we calculated the rate at which 
the PPI had increased between the first quarter of 2009 and the first 
quarter of 2012. To determine whether acquisition costs had changed at 
the same rate as PPI for Prescription Drugs, we multiplied this rate by 
each drugs first-quarter 2009 average acquisition cost to estimate 
first-quarter 2012 prices.  We compared this estimate to the actual average 
acquisition costs of each drug for dialysis facilities in the first quarter of 
2012. 
Comparison of Payment Methodologies. We compared first-quarter  
2012 ASP-based Medicare payment amounts for the 11 ESRD drugs to the 
amounts paid under the ESRD base rate.  To compare the two 
methodologies, we first multiplied each drugs units per treatment 
included in the base rate of the ESRD payment bundle by the first-quarter 
2012 ASP payment amounts.  We summed these amounts to estimate the 
total MAP per treatment based on the ASP payment amounts.  We  
compared this figure to the actual MAP per treatment in the 2012 ESRD 
base rate.  See Appendix A for more detail about determining the units and 
MAP amounts per treatment.    
Limitations 
We did not evaluate the appropriateness of payments for the entire ESRD 
payment bundle and the utilization figures used to calculate the base rate.  
We also did not evaluate the medical necessity of the drugs used to treat 
ESRD or the clinical appropriateness of the drugs use in dialysis facilities.   
In addition, we did not account for individual facility adjustments to the 
base rate, such as a low-volume adjustment.  Instead, we focused only on 
the unadjusted portion of the ESRD base rate that included drugs that were 
previously billed separately.  Data are based on self-reported information 
from dialysis facilities and we did not verify this information.  The 
acquisition cost data provided in this report represent purchases for the 
 
43 OIG,  End Stage Renal Disease Drugs:  Facility Acquisition Costs and Future 
Medicare Payment Concerns (OEI-03-09-00280), September 2010. 
Update: Medicare Payments for ESRD Drugs (OEI-03-12-00550)   11 
   
   
drugs under review made by the majority of the dialysis facilities during 
the first quarter of 2012. 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 
Inspection and Evaluation issued by the Council of the Inspectors General 
on Integrity and Efficiency.  
Update: Medicare Payments for ESRD Drugs (OEI-03-12-00550)   12 
   
   
FINDINGS 

Independent dialysis facilities purchased ESRD drugs 
for less than the drugs reimbursement amounts in the 
ESRD base rate, but the acquisition costs for  
hospital-based facilities exceeded reimbursement 
amounts, in the aggregate   
Consistent with the trend described in our prior ESRD drug pricing reports, 
first-quarter 2012 aggregate acquisition costs among responding 
independent dialysis facilities for the 11 ESRD drugs were below the 
reimbursement portion of the ESRD base rate for these drugs.  However, the 
first-quarter 2012 aggregate acquisition costs for hospital-based dialysis  
facilities were above the drugs reimbursement amounts in the ESRD base 
rate, meaning that these facilities could not purchase the entire bundle of 
drugs for less than they were reimbursed.   
In the aggregate, independent dialysis facilities acquired the    
11 drugs for an average of 9 percent less than the drugs 
reimbursement amount in the ESRD base rate 
In the first quarter of 2012, responding independent dialysis facilities paid 
between 5 and 54 percent below the per-unit reimbursement amounts in 
the ESRD base rate for 7 of the 11  drugs, on average.  Average acquisition 
costs for the remaining 4 drugs were between 7 and 30 percent above their 
ESRD base rate amounts.  One of these four drugs, epoetin alfa, 
represented over three-fourths of total spending ($337 million in the first 
quarter of 2012) in responding independent dialysis facilities for the drugs 
under review.  Even with epoetin alfas higher cost, aggregate acquisition 
costs for the responding independent facilities averaged 9 percent below 
the amounts represented in the ESRD base rate.  This is because many of 
the other drugs costs were lower than reimbursement in the aggregate; 
some of these drugs costs were substantially lower.  See Appendix C for 
the aggregate difference between the reimbursement amounts in the ESRD 
base rate and average acquisition costs paid by large chains and smaller 
independent facilities. See Table 2 for the percentage difference between 
the amounts in the ESRD base rate and the average acquisition costs 
reported by independent dialysis facilities for the first quarter of 2012. 
 
 
 
 
Update: Medicare Payments for ESRD Drugs (OEI-03-12-00550)   13 
   
   
Table 2: Medicare ESRD Base Rate Payment Amounts and Average         
Acquisition Costs for Responding Independent Dialysis Facilities   
First-Quarter  Percentage 
Per-Unit   2012 Average  Difference 
Amount in  the   Acquisition  Between ESRD 
Drug  
ESRD Base  Cost for  Base Rate 
Rate   Independent  Amount and  
Facilities   Facility Cost  
Daptomycin, 1 mg   $0.42   $0.54   30%  
Darbepoetin alfa, 1 mcg  $2.79   $3.42   22%  
Alteplase recombinant, 1 mg   $36.23   $42.30   17%  
Epoetin alfa, per 1,000 units   $9.15   $9.79   7%  
Calcitriol, 0.1 mcg  $0.37   $0.35   -5%  
Levocarnitine, 1 g  $5.84   $5.20   -11%  
Iron sucrose, 1 mg  $0.35   $0.26   -28%  
Vancomycin HCl, 500 mg   $3.10   $2.22   -29%  
Doxercalciferol, 1 mcg  $2.92   $1.73   -41%  
Sodium ferric gluconate, 12.5 mg   $4.43   $2.41   -46%  
Paricalcitol, 1 mcg  $3.43   $1.59   -54%  
 
Source:  OIG analysis of  first-quarter 2012 average acquisition costs among responding independent dialysis  
facilities, 2013. 
 
Aggregate spending on the 11 drugs in hospital-based dialysis 
facilities was 5 percent higher, on average, than the drugs  
reimbursement amount in the ESRD base rate 
In the first quarter of 2012, hospital-based dialysis facilities could not 
purchase ESRD drugs for less than the amount reimbursed under the drug 
component of the ESRD base rate, in the aggregate.44   Aggregate spending 
in responding hospital-based dialysis facilities averaged 5 percent more 
than the payment amount represented in the ESRD base rate.  
Hospital-based facilities acquired 5 of the 11 drugs at prices averaging 
between 4 and 30 percent higher than the drugs per-unit amount reflected 
in the ESRD base rate. Two of these drugs, epoetin alfa and darbepoetin 
alfa, accounted for nearly two-thirds of total spending by the 
hospital-based facilities to purchase the drugs under review. 
The average acquisition costs for remaining six drugs were between 7 and 
25 percent below the ESRD base rate amount.  See Table 3 for each drugs  
average acquisition cost in responding hospital-based facilities, as 
compared to the payment amounts in the ESRD base rate. 
 
44  Although hospital-based facilities could not purchase individual ESRD drugs for less 
than the drug component amount in the ESRD  base rate, they  may have been able to  
provide ESRD  treatment, including drugs, for less than the payment amount for entire  
ESRD base  rate. 
Update: Medicare Payments for ESRD Drugs (OEI-03-12-00550)   14 
   
   
Table 3: Medicare ESRD Base Rate Payment Amounts and Average         

Acquisition Costs for Responding Hospital-Based Dialysis Facilities 
  
First-Quarter  Percentage 
Per-Unit   2012 Average  Difference 
Amount in  the   Acquisition  Between ESRD 
Drug  
ESRD Base  Cost for  Base Rate 
Rate   Hospital-Based  Amount and  
Facilities*   Facility Cost  
Daptomycin, 1 mg   $0.42   $0.54   30%  
Darbepoetin alfa, 1 mcg  $2.79   $3.25   16%  
Epoetin alfa, per 1,000 units   $9.15   $10.48   14%  
Iron sucrose, 1 mg  $0.35   $0.39   9%  
Levocarnitine, 1 g  $5.84   $6.07   4%  
Calcitriol, 0.1 mcg  $0.37   $0.34   -7%  
Alteplase recombinant, 1 mg   $36.23   $33.57   -7%  
Doxercalciferol, 1 mcg  $2.92   $2.51   -14%  
Sodium ferric gluconate, 12.5 mg   $4.43   $3.61   -18%  
Vancomycin HCl, 500 mg   $3.10   $2.51   -19%  
Paricalcitol, 1 mcg  $3.43   $2.58   -25%  
Source:  OIG analysis of  first-quarter 2012 average acquisition costs among responding hospital-based dialysis  
facilities, 2013. 
* Acquisition cost data apply only to the responding  facilities that purchased  the drugs under review.  
 
Dialysis facilities could not purchase epoetin alfa for less than  
the drugs per-unit ESRD base rate amount, on average 
On average, epoetin alfa was purchased by independent dialysis facilities 
at the rate of $9.79 per 1,000 units and by hospital-based facilities at the 
rate of $10.48 per 1,000 units in the first quarter of 2012.  As a result, 
acquisition costs at independent and hospital-based facilities were 7 and 
14 percent above the amount represented in the 2012 ESRD base rate for 
the drug (i.e., $9.15 per 1,000 units), respectively. For the drugs under 
review, epoetin alfa represented more than three-quarters of the costs in 
responding independent facilities and more than a fifth of costs in 
responding hospital-based facilities. We estimate that if Medicare had 
reimbursed on the basis of the per-unit payment amount in the ESRD base  
rate for epoetin alfa only, responding independent facilities would have 
been reimbursed $22 million less than the amount they spent to purchase 
the drug in the first quarter of 2012. 
A few of the facilities expressed concern about price increases for epoetin  
alfa. During the first quarter of 2012, only one of the responding smaller 
independent dialysis facilities and none of the large chains could purchase 
epoetin alfa for less than the amount reflected in the ESRD base rate, on 
average. Less than 10 percent of responding hospital-based facilities that 
purchased the drug could do so for less than the ESRD base rate amount.  
However, spending in hospital-based facilities was concentrated on the 
Update: Medicare Payments for ESRD Drugs (OEI-03-12-00550)   15 
   
   
other ESA, darbepoetin alfa. None of these facilities could acquire 
darbepoetin alfa for less than the drugs per-unit ESRD base rate amount, 
on average. 
Although the average facility acquisition costs for the 
majority of drugs under review decreased in the past         
3 years, costs for ESAs have increased 
Changes in independent dialysis facilities acquisition costs between 
first-quarter 2009 and first-quarter 2012 ranged from a decrease of           
52 percent (paricalcitol) to an increase of 35 percent (darbepoetin alfa).  
Similarly, acquisition costs in hospital-based facilities displayed a wide 
range of changes, from a decrease of 37 percent (paricalcitol) to an 
increase of 26 percent (darbepoetin alfa).  Although the extent of the 
percentage change varied by drug, the general trend of cost changes was 
similar among the two types of dialysis facilities.  Alteplase was the only  
drug for which the acquisition cost increased in independent dialysis 
facilities but decreased in hospital-based facilities during the period under 
review.  See Table 4 for the changes in average acquisition costs for the 
drugs under review. 
 
Table 4: Changes in Average Acquisition Costs for Responding Dialysis Facilities   
  Independent Facilities   Hospital-Based Facilities  
Average  Average  Average  Average 
Acquisition  Acquisition    Acquisition  Acquisition   
Drug   Cost in   Cost in   Percentage  Cost in   Cost in   Percentage 
First-Quarter  First-Quarter  Difference   First-Quarter  First-Quarter  Difference  
2009   2012   2009   2012  
Darbepoetin alfa, 1 mcg  $2.54   $3.42   35%   $2.59   $3.25   26%  
Alteplase recombinant, 1 mg   $33.40   $42.30   27%   $34.23   $33.57   -2%  
Epoetin alfa, per 1,000 units   $8.37   $9.79   17%   $8.82   $10.48   19%  
Calcitriol, 0.1 mcg  $0.33   $0.35   6%   $0.30   $0.34   14%  
Levocarnitine, 1 g  $5.35   $5.20   -3%   $6.78   $6.07   -10%  
Iron sucrose, 1 mg  $0.31   $0.26   -18%   $0.39   $0.39   -1%  
Vancomycin HCl, 500 mg   $2.70   $2.22   -18%   $2.71   $2.51   -7%  
Doxercalciferol, 1 mcg  $2.94   $1.73   -41%   $3.39   $2.51   -26%  
Sodium ferric gluconate, 12.5 mg   $4.40   $2.41   -45%   $4.78   $3.61   -24%  
Paricalcitol, 1 mcg  $3.29   $1.59   -52%   $4.10   $2.58   -37%  
Source:  OIG analysis of  first-quarter 2009 and first-quarter 2012 average acquisition costs from responding dialysis facilities, 2013. 
 
 
 
 
Update: Medicare Payments for ESRD Drugs (OEI-03-12-00550)   16 
   
   
Average acquisition costs at dialysis facilities have decreased  
for the majority of drugs in 3 years  
By the first quarter of 2012, average acquisition costs had decreased for 
6 and 7 of the 10 drugs for which we had collected first-quarter 2009 
acquisition cost data in responding independent and hospital-based 
dialysis facilities, respectively.45 For responding independent dialysis 
facilities, the decrease in average acquisition costs ranged from 3 to  
52 percent; for responding hospital-based facilities, the decrease ranged 
from 1 to 37 percent (see Table 4).   
Average acquisition costs at dialysis facilities have increased 
for the ESAs epoetin alfa and darbepoetin alfa by at least  
17 percent in 3 years 
Between the first quarter of 2009 and the first quarter of 2012, average 
acquisition costs for epoetin alfa increased by 17 percent and 19 percent in 
the responding independent and hospital-based dialysis facilities, 
respectively.   As a result, in the first quarter of 2012, independent dialysis 
facilities spent $1.42 more and hospital-based facilities $1.66 more to 
purchase 1,000 units of the drug, on average, than they did in the first 
quarter of 2009 (see Table 4).  
The other ESA included in the bundle, darbepoetin alfa, also experienced 
similar price increases during this time.46   The average acquisition cost for 
darbepoetin alfa increased by 35 percent and 26 percent for responding 
independent and hospital-based dialysis facilities, respectively.  In 
referring to the price increase for darbepoetin alfa, one hospital-based 
facility noted that the drugs acquisition cost had continued to climb since 
the first quarter of 2012 and that it anticipates an additional increase in 
2013. 
The PPI for Prescription Drugs was not an accurate
predictor of cost changes between 2009 and 2012 for 
most drugs under review  
The PPI for Prescription Drugs overestimated first-quarter 2012 
acquisition costs for nearly all of the 10 drugs under review.  According to 
the PPI data, prescription drug prices increased by 25 percent between the 
first quarter of 2009 and the first quarter of 2012, even though acquisition 
costs for the majority of the drugs under review decreased.  As a result, the 
PPI price estimates were, on average, 54 percent and 37 percent higher 
 
45 We had not  collected first-quarter 2009  acquisition cost data  for daptomycin  in our
  
previous report.  

46 Epoetin alfa and darbepoetin alfa are produced by the same manufacturer. 

Update: Medicare Payments for ESRD Drugs (OEI-03-12-00550)   17 
   
   
than first-quarter 2012 average acquisition costs in independent and 
hospital-based facilities, respectively.    
The PPI for Prescription Drugs overestimated the average acquisition cost  
for 8 of the 10 drugs in independent dialysis facilities and 9 of the  
10 drugs in hospital-based dialysis facilities.  As was the case in our 
previous report, the PPI was not an accurate predictor of cost for epoetin 
alfa.  Between the first quarter of 2009 and the first quarter of 2012, 
average acquisition costs for this drug increased by 17 percent in 
independent dialysis facilities and 19 percent in hospital-based facilities, 
whereas the PPI increased by 25 percent.  If the PPI for Prescription Drugs 
had been an accurate predictor of changes in acquisition cost, independent  
facilities would have paid $10.43 for 1,000 units of the drug instead of the 
$9.79 actually paid (7-percent difference) and hospital-based facilities 
would have paid $10.99 for 1,000 units instead of the $10.48 actually paid     
(5-percent difference).   
The PPI for Prescription Drugs underestimated the average acquisition 
cost for 2 of the 10 drugs in independent dialysis facilities and just 1 of the 
drugs in hospital-based facilities.  The PPI underestimated the amounts 
paid by both types of facilities to acquire darbepoetin alfa.  Independent 
facilities paid on average $3.42 in the first quarter of 2012 to purchase 
1 mcg of darbepoetin alfa; using the PPI rate, these facilities would have 
paid $3.16. Hospital-based facilities paid on average $3.25 for 1 mcg of 
darbepoetin alfa, which is very close to the PPI-based estimate of $3.23.  
If ASP-based reimbursement had remained in effect 
for the first quarter of 2012, payment amounts for the 
bundle of ESRD drugs would have differed by less 
than a dollar per treatment 
Overall, the ESRD base rate paid $72.23 per treatment in 2012 for 
11 ESRD drugs that, prior to 2011, were separately billable and paid on 
the basis of 106 percent of each drugs  ASP.   We estimate that if the units 
per treatment remained consistent since CMS calculated the initial ESRD 
base rate (using 2007 claims data), the ESRD base rate reimbursement 
would have been slightly higher ($0.83 more) than per-treatment payment 
based on first-quarter 2012 ASP amounts for the 11 drugs.  This is true 
even after accounting for the standardization, outlier, and budget neutrality 
adjustments to the base rate.  See Table 5 for the price differences in 
payment methodologies.  
   
Update: Medicare Payments for ESRD Drugs (OEI-03-12-00550)   18 
   
   
Table 5: Comparison of the Former and Current ESRD Payment    
Methodologies  
     Estimated Cost  
Medicare 
  Units per  per Treatment  Reimbursement  
Treatment in the  Based on 
  Drug   ESRD Base  First-Quarter  per Treatment in   
the 2012 ESRD 
  Rate   2012 ASP 
Base Rate  
Payment 
 
  Daptomycin, 1 mg   0.10  $0.05   $0.04  
  Darbepoetin alfa, 1 mcg  1.39  $4.46   $3.88  
 
Alteplase recombinant, 1 mg   0.02  $0.91   $0.79  
 
Epoetin alfa, per 1,000 units   5.57  $53.57   $51.00  
 
  Calcitriol, 0.1 mcg  0.16  $0.17   $0.06  
  Levocarnitine, 1 g  0.02  $0.16   $0.10  
  Vancomycin HCl, 500 mg   0.03  $0.08   $0.09  
 
Iron sucrose, 1 mg  12.23   $3.93   $4.33  
 
Doxercalciferol, 1 mcg  0.78  $1.11   $2.28  
 
Sodium ferric gluconate, 12.5 mg   0.39  $1.85   $1.73  
 
  Paricalcitol, 1 mcg  2.32  $5.11   $7.94  
       Total     $71.41*  $72.23*  
 
Source:  OIG analysis, 75 Fed. Reg. 49030, 49068, 49080 (Aug.12, 2010), and CMS first-quarter 2012 payment 
amounts, 2013.   
* Individual amounts do not add to total because of  rounding. 
   
Update: Medicare Payments for ESRD Drugs (OEI-03-12-00550)   19 
   
   
CONCLUSION AND RECOMMENDATIONS 
 
On January 1, 2011, Medicare payment for the treatment of ESRD 
changed dramatically to a system that bundles all costs related to ESRD 
care into a single per-treatment payment amount.  The ESRD payment 
bundle sought to promote equitable payment and access to services by 
targeting greater payments to ESRD facilities that treat more costly 
patients and to reduce the incentives to overuse separately billable drugs.  
To comply with statutory requirements, CMS developed the ESRD base 
rate of the payment bundle using claims data from 2007.  However, drug 
utilization during 2007 did not fully reflect the impact of new safety data, 
changes to Medicare policies and procedures that address overutilization 
of ESAs and quality of care, and incentives provided under the payment 
bundle to furnish services more efficiently.  A May 2013 OIG report found 
a decline in use of certain ESRD drugs since 2007, and CMS concurred 
with the reports recommendation to adjust the ESRD bundled base rate to 
realize program savings associated with decreased utilization.   
Furthermore, Federal law requires CMS to reduce the ESRD payment 
bundles base rate for 2014 to reflect changes in the utilization and prices 
of ESRD drugs and to take into account the most recently available data 
on drug sales. Our findings show that dialysis facilities acquisition costs 
for the majority of the ESRD drugs have also decreased.  However, since 
our last report on ESRD drug pricing, the costs for ESAs (drugs 
representing the majority of total drug costs for facilities) have steadily 
increased. This means that although dialysis facilities are using ESAs to a 
lesser extent, any savings may potentially be offset by the drugs cost 
increase. However, without taking both the payment and utilization 
aspects into account, we are unable to estimate the extent to which this 
may be occurring.  
Even with the cost increase for ESAs, independent dialysis facilities could 
still acquire ESRD drugs for less than Medicare reimbursement, in the 
aggregate. However, our findings also indicate that any reductions to the 
ESRD base rate for the bundle may potentially harm hospital-based 
dialysis facilities, as such facilities experienced difficulties purchasing 
drugs for less than reimbursement, in the aggregate, even prior to any 
reduction that may result from the American Taxpayer Relief Act.  When 
making adjustments to the ESRD base rate, CMS should carefully 
consider the implications it may have on hospital-based dialysis facilities.       
 
 
Update: Medicare Payments for ESRD Drugs (OEI-03-12-00550)   20 
   
   
Therefore, we recommend that CMS: 
Rebase the ESRD base rate to reflect current trends in drug 
acquisition costs, as required by law   
The base rate for the ESRD payment bundle should more accurately 
reflect the amounts paid by facilities to purchase drugs used to treat 
ESRD.  Overall, there has been a downward trend in the average prices 
that facilities pay to acquire ESRD drugs, with the exception of the ESAs.  
ESAs represent the majority of dialysis facility costs for drugs used in 
treating ESRD.  However, the amounts in the bundled base rate do not 
reflect pricing decreases or increases.  If the payment amounts do not 
adequately reflect acquisition costs, it may influence facility decisions on 
which drugs to purchase. This gap between acquisition costs and payment 
amounts may potentially cost the program additional dollars or may result 
in certain facilities paying more to acquire the drugs than the amount 
provided under the ESRD base rate.   
Beginning in 2014, CMS is required to rebase the ESRD base rate for the 
payment bundle using updated ASP data for the drugs under review.  We  
recommend that CMS complete this rebasing and ensure that it takes into 
account the current trends in drug acquisition costs and utilization when 
doing so. 
Distinguish payments in the ESRD base rate between 
independent and hospital-based dialysis facilities 
When CMS rebases the ESRD base rate, it should adjust reimbursement  
for independent dialysis facilities and hospital-based dialysis facilities to 
account for the differences in their acquisition costs.  If necessary, CMS 
should seek legislative authorization to do so.  In the aggregate, 
independent facilities could purchase the bundle of ESRD drugs for less 
than the ESRD base rate; however, responding hospital-based facilities 
could not. Our prior reports have shown that hospital-based facilities have 
typically paid more than independent facilities to purchase ESRD drugs, 
and this current report shows that this disparity has grown.  Although we 
did not take into account additional adjustments that may have boosted 
reimbursement to an individual facility, such as a low-volume adjustment, 
it appears that hospital-based facilities have difficulties purchasing drugs 
at prices that would be financially advantageous, in the aggregate.  In fact, 
in some cases, it appears that hospital-based facilities are unable to recoup 
the total amount paid to purchase ESRD drugs.  CMS should ensure that 
the ESRD base rate covers the costs  paid by hospital-based facilities to 
purchase the drugs used to treat ESRD, and the agency could consider 
using an add-on adjustment for this facility type.   
Update: Medicare Payments for ESRD Drugs (OEI-03-12-00550)   21 
   
   
Consider updating the ESRD payment bundle using a factor 
that takes into account drug acquisition costs 
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 changes in the ESRD 
payment bundle.  Our September 2010 report found that the average 
acquisition cost for the majority of drugs purchased by dialysis facilities 
had decreased, while the PPI substantially increased. We recommended 
that CMS develop a more accurate method for estimating changes in the 
prices of ESRD drugs. CMS stated that it did not concur with the 
recommendation because the downward trajectory of average acquisition 
costs was influenced largely by payment changes and, as a result, was not 
suitable for inferring future price trends. However, we found in our 
current report that the PPI has continually increased at a time when costs  
for most of the drugs purchased by facilities have decreased.  We therefore 
continue to believe that CMS should use a more accurate cost predictor 
when updating the ESRD payment bundle. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Update: Medicare Payments for ESRD Drugs (OEI-03-12-00550)   22 
   
   
AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL  
RESPONSE 
 
In its comments on our draft report, CMS concurred with one of our three 
recommendations.  CMS did not state whether or not it concurred with one 
recommendation and did not concur with another recommendation. 
CMS concurred with our third recommendation, to consider updating the 
ESRD bundled rate using a factor that takes into account drug acquisition 
costs. CMS said it will consider our findings regarding the accuracy of the 
PPI for Prescription Drugs in its continual evaluation of the ESRD market 
basket, particularly when rebasing and revising the market basket index.  
CMS also stated that it will evaluate alternative data sources to determine 
whether it can improve the relevance of the ESRD drug price proxy (while 
maintaining a price proxy that is reliable, timely, and available). 
In commenting on our first recommendation, to rebase the ESRD base rate 
to reflect current trends in drug acquisition costs, as required by law, CMS 
did not state whether it concurred. But CMS did say that our report will 
assist the agency in determining price adjustments to the ESRD payment 
bundle in the future. CMS responded that it has implemented section 
632(a) of the American Taxpayer Relief Act of 2012, which required a 
reduction in the ESRD payment bundle. CMS stated that, as required by 
law, it took into account the most recently available ASP data, as well as 
drug price changes reflected in the ESRD market basket percentage 
increase factor when determining the reduction amount.  CMS also noted 
that the statute did not specify to take into account drug acquisition costs.  
However, for the purposes of this report, we interpreted drug acquisition 
costs and drug sales prices to be essentially the same.  We ask that in its 
final management decision, CMS more clearly indicate the distinction 
between drug acquisition and sales prices and indicate whether it concurs  
with our recommendation and what steps, if any, it plans to take to 
implement it. 
Finally, CMS did not concur with our second recommendation, to 
distinguish payments in the ESRD base rate between independent and 
hospital-based dialysis facilities.  CMS stated that section 
1881(b)(14)(A)(i) of the Act required the implementation of a 
single-payment system for providers of dialysis services.  CMS also noted 
that the ESRD payment bundle includes several payment adjusters, as well 
as an outlier policy to cover more expensive dialysis treatments and 
facility-level adjustments to enhance payments for smaller facilities.  CMS 
stated that it has the statutory authority to review the appropriateness of all 
Update: Medicare Payments for ESRD Drugs (OEI-03-12-00550)   23 
   
   
of the payment adjusters as a whole, no later than January 2016.  CMS 
said it will then consider appropriate modifications to the payment system 
to improve the accuracy of Medicare's payment for renal dialysis services, 
including drugs and biologicals.  Although the additional payment 
adjusters currently included in the ESRD payment bundle may increase 
reimbursement enough to cover the costs of acquiring ESRD drugs at 
hospital-based facilities, we believe that distinguishing payment between 
the different facility types would help to ensure that hospital-based 
facilities are paid appropriately at this time.   
We did not make any changes to the report based on CMSs comments.  
The full text of CMSs comments is provided in Appendix D. 
 
 
 
 
 
 
 
 
 
Update: Medicare Payments for ESRD Drugs (OEI-03-12-00550)   24 
   
   
APPENDIX A 
Detailed Methodology for Calculating the Individual-Drug 
Payment Portions of the ESRD Base Rate 
In calculating the individual-drug payment portions of the ESRD base 
rate, we followed CMSs methodology for developing the ESRD base rate 
in 2011, the first year the rate was implemented.  CMS developed the 
2011 base rate using 2007 Medicare allowable payment amounts for each 
service included in the ESRD payment bundle, as well as the number of 
2007 dialysis treatments.  To calculate the unadjusted per-treatment base 
rate, CMS divided the sum of the Medicare allowable payments for each 
service by the number of dialysis treatments.      
Eleven separately billable ESRD drugs accounted for 99.8 percent of total 
Part B spending on separately billable ESRD drugs in 2007.  CMS 
selected these 11 drugs as the basis for the pharmaceutical category     
(i.e., the separately billable drugs component) of the ESRD payment 
bundle. Using data provided in 75 Fed. Reg. 49030, 49068 
(Aug. 12, 2010), the rule that implements the ESRD payment bundle, we 
calculated the average unadjusted Medicare allowable payment amount 
per treatment for each of the 11 drugs.  See Table A-1 for this information.   
Table A-1: Medicare Allowable Payments per Treatment in 2007  
Average 
Total 2007  Total Dialysis   Medicare 
Part B Drug   Medicare  Treatments in  Allowable  
Allowable   2007   Payment per 
Payments 
Treatment  
Epoetin alfa  $1,876,926,573   36,747,662   $51.08  
Paricalcitol  $322,849,348   36,747,662   $8.79  
Darbepoetin alfa  $167,935,970   36,747,662   $4.57  
Iron sucrose   $166,219,339   36,747,662   $4.52  
Doxercalciferol  $76,901,723   36,747,662   $2.09  
Sodium ferric gluconate  $68,086,707   36,747,662   $1.85  
Alteplase recombinant  $26,697,321   36,747,662   $0.73  
Levocarnitine  $5,026,446   36,747,662   $0.14  
Vancomycin HCl  $3,583,504   36,747,662   $0.10  
Calcitriol  $3,125,613   36,747,662   $0.09  
Daptomycin  $1,234,405   36,747,662   $0.03  
Source:  OIG analysis, 75 Fed. Reg. 49030, 49068 (Aug. 12, 2010). 
To arrive at the base rate, CMS then adjusted the 2007 Medicare allowable 
payment amounts for each service included in the ESRD payment bundle 
to reflect estimated prices in 2011.  These adjustments were based on the 
Update: Medicare Payments for ESRD Drugs (OEI-03-12-00550)   25 
   
   
latest available ASP data, which represented the second quarter of 2010.  
CMS updated these prices using the PPI for Prescription Drugs.  
Section 1881(b)(14)(A)(ii) of the Act also required the ESRD payment 
bundle to be 98 percent budget neutral in 2011.  This means that the 
estimated total payments for 2011 under the ESRD payment bundle must 
equal 98 percent of the estimated total payments for dialysis services that 
would have been made if the bundled rate had not been implemented.  
CMS applied the following adjustments to the base rate to comply with 
this requirement: 
 	  94.07-percent adjustment to ensure that the total projected ESRD 
payments were equal to estimated total payments for dialysis 
services that would have been made if the bundled payment system  
had not been implemented, 
 	  99-percent adjustment to ensure that the outlier policy was budget 
neutral, and 
 	  98-percent adjustment to account for the budget neutrality 
requirement.  
We then calculated the Medicare allowable payment per treatment for 
each of the 11 drugs included in the base rate by applying these 
adjustments (see Table A-2).  
Table A-2: Medicare Allowable Payments per Treatment in the 2011 Base Rate  
    Adjustments Applied to the Medicare Allowable Payment    
Multiplied 
Average 
Medicare  by:    Multiplied  Equals:  
Part B Drug   PayAmlloewnta pbeler    Adtoju Rstemfleenctt     St aMnudlatirpdliiezadt iboyn:     bMy:u  lOtiuptlliieedr   byN: e Buturdagliteyt     RePiemrb Turresaetmmeenntt    
Treatment in  Estimated  Adjustment   Adjustment   Adjustment   in 2011 Base 
2007   2011 Prices  Rate  
Epoetin alfa  $51.08   1.07  0.9407  0.99  0.98  $49.88  
Paricalcitol  $8.79   0.97  0.9407  0.99  0.98  $7.76  
Darbepoetin alfa  $4.57   0.91  0.9407  0.99  0.98  $3.80  
Iron sucrose   $4.52   1.03  0.9407  0.99  0.98  $4.24  
Doxercalciferol  $2.09   1.17  0.9407  0.99  0.98  $2.23  
Sodium ferric 
$1.85   1.00  0.9407  0.99  0.98  $1.69  
gluconate 
Alteplase 
$0.73   1.17  0.9407  0.99  0.98  $0.78  
recombinant  
Levocarnitine  $0.14   0.78  0.9407  0.99  0.98  $0.10  
Vancomycin HCl  $0.10   0.97  0.9407  0.99  0.98  $0.09  
Calcitriol  $0.09   0.74  0.9407  0.99  0.98  $0.06  
Daptomycin   $0.03   1.30  0.9407  0.99  0.98  $0.04  
       Source:  OIG analysis, 75 Fed. Reg. 49030, 490802 (Aug. 12, 2010). 
 
Update: Medicare Payments for ESRD Drugs (OEI-03-12-00550)   26 
   
   
Dialysis facilities report the appropriate Healthcare Common Procedure 
Coding System (HCPCS) code on their Medicare claims and bill the units  
of service in multiples of the units shown in the HCPCS narrative 
description. This is also the unit that Medicare used as the basis for 
payment for separately billable drugs prior to the ESRD payment bundle.47   
To calculate the amount reflected in the ESRD base rate, we divided the 
2007 average Medicare allowable payment per treatment by the average 
2007 payment for a single HCPCS unit (i.e., billing unit) to determine the 
number of billing units reflected in the base rate (see Table A-3).  
Table A-3: Billing Units Reflected in the ESRD Base Rate for Each Drug 
Average  Divided by:   
Average  Equals:  
Medicare 
2007  Number of  
Allowable  
Part B Drug   HCPCS  Billing Unit   Payment  Payment  Billing 
Code   Amount for  Units in the 
per 
a Billing  ESRD Base 
Treatment  
in 2007   Unit   Rate  
Epoetin alfa  J0886  1,000 units   $51.08  $9.17   5.57 
Paricalcitol  J2501  1 mcg   $8.79  $3.79   2.32 
Darbepoetin alfa  J0882  1 mcg   $4.57  $3.29   1.39 
Iron sucrose   J1756  1 mg   $4.52  $0.37   12.23  
Doxercalciferol  J1270  1 mcg   $2.09  $2.68   0.78 
Sodium ferric gluconate  J2916  12.5 mg   $1.85  $4.76   0.39 
Alteplase recombinant  J2997  1 mg   $0.73  $33.21   0.02 
Levocarnitine  J1955  1 g   $0.14  $8.07   0.02 
Vancomycin HCl  J3370  500 mg   $0.10  $3.43   0.03 
Calcitriol  J0636  0.1 mcg   $0.09  $0.54   0.16 
Daptomycin  J0878  1 mg   $0.03  $0.34   0.10 
Source:  OIG analysis, 75 Fed. Reg. 49030, 490802 (Aug. 12, 2010), CMS ASP Drug Pricing Files (2007). 
 
We then updated the 2011 per-treatment reimbursement amounts to reflect 
the amounts in the 2012 ESRD base rate.  To calculate the reimbursement 
per treatment in the 2012 ESRD base rate, we multiplied the 2011 
per-treatment amounts by 2.1 percent to adjust for the market basket 
increases and then by 0.1520 percent for the wage-index budget neutrality 
adjustment.  We then divided the 2012 reimbursement per treatment by the 
billing units in the ESRD base rate to calculate reimbursement per billing 
unit in 2012. See Table A-4 for the per-treatment reimbursement 
amounts. 
   
 
47 CMS, 2007 ASP Drug Pricing Files. Accessed at 
http://www.cms.gov/Medicare/Medicare-Fee-for-Service-Part-B-
Drugs/McrPartBDrugAvgSalesPrice/01b_2007aspfiles.html on June 20, 2013.  
Update: Medicare Payments for ESRD Drugs (OEI-03-12-00550)   27 
   
   
Table A-4: Reimbursement per Billing Unit in the 2012 Base Rate 
Adjustments Applied 2011   
    Base Rate for 2012     
Multiplied by:   Equals:  Divided by:   
Reimbursement   Multiplied  Equals:  
Wage-Index  Reimbursement   Number of  
Part B Drug   Per Treatment   by:  Market   Budget  Per Treatment   Billing  Reimbursement  
in 2011 Base  Basket  per Billing Unit 
Neutrality   in 2012 Base  Units in the 
Rate   Adjustment   in 2012*  
Adjustment   Rate   Base Rate  
Epoetin alfa  $49.88   1.021  1.001520   $51.00   5.57  $9.15  
Paricalcitol  $7.76   1.021   1.001520  $7.94   2.32  $3.43  
Darbepoetin alfa  $3.80   1.021   1.001520  $3.88   1.39  $2.79  
Iron sucrose   $4.24   1.021   1.001520  $4.33   12.23  $0.35  
Doxercalciferol  $2.23   1.021   1.001520  $2.28   0.78  $2.92  
Sodium ferric 
$1.69   1.021   1.001520  $1.73   0.39  $4.43  
gluconate 
Alteplase recombinant  $0.78   1.021  1.001520   $0.79   0.02  $36.23  
Levocarnitine  $0.10   1.021   1.001520  $0.10   0.02  $5.84  
Vancomycin HCl  $0.09   1.021   1.001520  $0.09   0.03  $3.10  
Calcitriol  $0.06   1.021   1.001520  $0.06   0.16  $0.37  
Daptomycin  $0.04   1.021   1.001520  $0.04   0.10  $0.42  
 
Source:  OIG analysis, 75 Fed. Reg. 49030, 4908082 (Aug.  12, 2010), 76 Fed. Reg. 70228, 70231 (Nov. 10, 2011),  and  CMS ASP Drug Pricing  

Files (2007). 

*Amounts may not equal exact reimbursement because of rounding. 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Update: Medicare Payments for ESRD Drugs (OEI-03-12-00550)   28 
   
   
APPENDIX B 
Detailed Methodology for Selecting Dialysis Facilities   
Large Chains of Independent Dialysis Facilities. We classified three 
chains of independent dialysis facilities (Davita, Fresenius, and Dialysis 
Clinic Inc.) as large chains.  As of August 2012, these 3 companies owned 
3,349 (64 percent) of the 5,219 independent dialysis facilities listed in 
CMSs Certification and Survey Provider Enhanced Reports database.  We  
contacted representatives from these three companies and sent them the 
online survey on acquisition costs. All three companies responded to our 
request in January 2013. 
Smaller Independent Dialysis Facilities. To ensure that smaller 
independent facilities were represented, we sent surveys to a random  
sample of 200 of the 1,870 remaining independent dialysis facilities not 
owned or managed by one of the 3 large chains.  Of these, 177 replied 
(89 percent); however, we excluded 50 facilities because they had been 
subsequently acquired by one of the 3 large chains and their acquisition 
costs were thus included as part of the larger companies responses.  We  
excluded an additional two facilities because they indicated on the survey  
that they qualified for 340B pricing.48   Therefore, we received complete 
data from 125 smaller independent dialysis facilities.  Several of the 
responding facilities owned multiple dialysis units and provided cost 
information for 397 additional facilities (for a total of 522 respondents not 
affiliated with the 3 large independent dialysis companies).  
Hospital-Based Dialysis Facilities. As of August 2012, there were        
356 hospital-based dialysis facilities.  We identified and excluded          
156 hospitals that qualified for 340B pricing.49  In December 2012, we 
sent online surveys requesting acquisition cost data to the remaining 
200 hospital-based dialysis facilities.  These were the same requests for 
first-quarter 2012 data that we sent to the independent dialysis facilities.   
 
48  We excluded these facilities because the 340B program requires drug manufacturers to 
provide drugs to  340B-covered entities at or  below statutorily defined ceiling prices.   
42 U.S.C.  256b.  
49 To identify 340B-covered facilities, we downloaded the covered entities file from the 
Health Resources and Services Administrations Web site  on November 14, 2012, and 
identified those covered  during the first quarter of 2012 (i.e., the quarter for which we 
requested cost data).  
Update: Medicare Payments for ESRD Drugs (OEI-03-12-00550)   29 
   
   
We received responses from 177 hospital-based dialysis facilities            
(89 percent), but could not use data provided by 53 of these facilities.50 Of 
the remaining 124 respondents, 1 hospital provided data on an additional 
hospital, resulting in valid data representing 125 hospital-based dialysis 
facilities.   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
50 We  excluded  these 53  facilities for the following reasons:  9 reported  that they had  
either discontinued outpatient dialysis services or provided  primarily inpatient dialysis; 
9 had been acquired  by 1 of the large chains; 33 responded that they qualified for 340B  
pricing; and 2 received Department of Veterans Affairs pricing, which is heavily 
discounted compared to prices in the marketplace.   
Update: Medicare Payments for ESRD Drugs (OEI-03-12-00550)   30 
   
   
APPENDIX C 
 
Difference Between Medicare Reimbursement and Costs Paid 
by Large Chain and Smaller Independent Dialysis Facilities  
In the aggregate, first-quarter 2012 acquisition costs among the three large 
chains averaged 8 percent below the drugs respective reimbursement 
amounts in the ESRD base rate.  In the first quarter of 2012, these chains 
purchased 7 of the 11 drugs under review for less than the drugs 
respective reimbursement amounts in the ESRD base rate.  Average 
acquisition costs ranged between 4 and 54 percent less than the amount in 
the ESRD base rate. Costs for the remaining 4 of the 11 drugs exceeded 
reimbursement by 7 to 30 percent.   
Among responding independent dialysis facilities that were not owned or 
managed by these three large chains, acquisition costs averaged 11 percent 
below the drugs respective reimbursement amounts in the ESRD base 
rate, in the aggregate.  In the first quarter of 2012, these facilities 
purchased the same seven drugs for less than the ESRD base rate 
reimbursement amounts; the facilities average acquisition costs ranged 
from 8 and 49 percent below the ESRD base rate for these seven drugs.  
Costs for the remaining 4 of the 11 drugs exceeded reimbursement by 9 to 
32 percent. See Table C-1 for the differences in average acquisition costs 
for the two types of independent dialysis facilities.  
   
Update: Medicare Payments for ESRD Drugs (OEI-03-12-00550)   31 
   
   
Table C-1: ESRD Base Rate Payment Amounts and Average Acquisition 
Costs for Large Chains and Smaller Independent Dialysis Facilities   
First-Quarter 2012 
Per-Unit   First-Quarter  Average 
Amount in  the   2012 Average  Acquisition Costs 
Drug   ESRD Base  Acquisition  for Smaller 
Rate   Costs for Large  Independent 
Chains     Facilities*   
Alteplase recombinant, 1 mg   $36.23   $41.89   $44.51  
Calcitriol, 0.1 mcg  $0.37   $0.35   $0.32  
Daptomycin, 1 mg   $0.42   $0.54   $0.55  
Darbepoetin alfa, 1 mcg  $2.79   $3.46   $3.33  
Doxercalciferol, 1 mcg  $2.92   $1.73   $1.78  
Epoetin alfa, per 1,000 units   $9.15   $9.78   $9.96  
Iron sucrose, 1 mg  $0.35   $0.26   $0.25  
Levocarnitine, 1 g  $5.84   $5.15   $5.39  
Paricalcitol, 1 mcg  $3.43   $1.56   $2.03  
Sodium ferric gluconate, 12.5 mg   $4.43   $2.54   $2.26  
Vancomycin HCl, 500 mg   $3.10   $2.18   $2.54  
Source:  OIG analysis of  first-quarter 2012 average acquisition costs among responding independent dialysis 
facilities, 2013. 
* Acquisition cost data apply only to the responding  facilities that purchased  the drugs under review.  
   
Update: Medicare Payments for ESRD Drugs (OEI-03-12-00550)   32 
  APPENDIX D 
Agency Comments 
\4
/~'~ 
DEPARTMENT OF HEALTii & HUMAN SERVICES  Centers for Medicare & Medicaid Services
Administrator 
Washington. DC 20201 
DATE:  JAN -8 2014 
TO: 	 Daniel R. Levinson 

Inspect01: General 

FROM: 	 Mar'tlyn Taxrl3.!mer 

Administrator 

SUBJECT: 	 Office oflnspester General Draft Report: "Update: Medicare Payments for End 
Stage Renal Disease Drugs," (OEI-03-12-00550) 
The Centers for Medicare & Medicaid Services (CMS) appreciates the opportunity to review and 
comment on the above subject report. The objectives of this review were to: I) compare first
quarter-2012 facility acquisition costs for selected End Stage Renal Disease (ESRD) drugs to the 
amounts that Medicare Part B paid for these drugs under the new ESRD bundled rate; 2) 
determine how facility acquisition costs for selected ESRD drugs have changed in relation to 
inflation, from the first quarter of2009 to the first quarter of2012 and; 3) compare the average 
sale price (ASP) based reimbursement amounts for selected ESRD drugs to the amounts paid 
under the new ESRD bundled rate. 
Our response to each recommendation follows. 
Recommendation: 
Rebase the ESRD base rate to reflect current trends in drug acquisition costs, as required by law. 
Response: 
The CMS implemented section 632(a) ofthe American Taxpayer Relief Act of2012 (ATRA), 
which requires the Secretary to reduce the single payment amount for renal dialysis services to 
reflect the Secretary's estimate of the change in the utilization of ESRD-related drugs and 
biologicals (other than oral-only ESRD-related drugs) between 2007 and 2012. As the law 
requires, CMS took into account the most recently available data on ASP and changes in prices 
for drugs and biologicals reflected in the ESRD market basket percentage increase factor in 
determining the reduction amount. The statute did not specify to take into account drug 
acquisition costs. 
The final regulation was issued on November 22,2013 (See 78 FR 72156) and included a 
reduction amount which will be phased in over three to four years by offsetting the reduction 
against the market basket minus productivity adjustment and other payment impacts to create an 
overall zero percent impact for all ESRD facilities from the previous year's payments for calendar 
Update:  Medicare Payments for ESRD Drugs (OEI-03-12-00550)  33   
   
Update: Medicare Payments for ESRD Drugs (OEI-03-12-00550)  34 
   
   
 
 
Update: Medicare Payments for ESRD Drugs (OEI-03-12-00550)  35 
   
   
ACKNOWLEDGMENTS 
This report was prepared under the direction of Robert A. Vito, Regional 
Inspector General for Evaluation and Inspections in the Philadelphia 
regional office.   
Stephanie Yeager served as the team leader for this study, and   
Stefanie Vance served as the lead analyst.  Central office staff who 
provided support include Clarence Arnold, Meghan Kearns, and Christine 
Moritz. 
 
  
 
Update: Medicare Payments for ESRD Drugs (OEI-03-12-00550)   36 
   
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