Department of Health and Human Services 
OFFICE OF 
INSPECTOR GENERAL 
M R F
EDICARE  EIMBURSEMENT  OR 
E E - R
XISTING  ND STAGE  ENAL 
D D
ISEASE  RUGS 
Inspector General 
May 2004 
OEI-03-04-00120  Office of Inspector General

http://oig.hhs.gov 
The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, 
as amended, is to protect the integrity of the Department of Health and Human Services 
(HHS) programs, as well as the health and welfare of beneficiaries served by those 
programs. This statutory mission is carried out through a nationwide network of audits, 
investigations, and inspections conducted by the following operating components: 
Office of Audit Services 
The OIG's Office of Audit Services (OAS) provides all auditing services for HHS, either by 
conducting audits with its own audit resources or by overseeing audit work done by others. 
Audits examine the performance of HHS programs and/or its grantees and contractors 
in carrying out their respective responsibilities and are intended to provide independent 
assessments of HHS programs and operations in order to reduce waste, abuse, and 
mismanagement and to promote economy and efficiency throughout the department. 
Office of Evaluation and Inspections 
The OIG's Office of Evaluation and Inspections (OEI) conducts short-term management 
and program evaluations (called inspections) that focus on issues of concern to the 
department, the Congress, and the public. The findings and recommendations contained 
in the inspections reports generate rapid, accurate, and up-to-date information on the 
efficiency, vulnerability, and effectiveness of departmental programs. 
Office of Investigations 
The OIG's Office of Investigations (OI) conducts criminal, civil, and administrative 
investigations of allegations of wrongdoing in HHS programs or to HHS beneficiaries 
and of unjust enrichment by providers. The investigative efforts of OI lead to criminal 
convictions, administrative sanctions, or civil monetary penalties. The OI also oversees 
state Medicaid fraud control units, which investigate and prosecute fraud and patient 
abuse in the Medicaid program. 
Office of Counsel to the Inspector General 
The Office of Counsel to the Inspector General (OCIG) provides general legal services to 
OIG, rendering advice and opinions on HHS programs and operations and providing all 
legal support in OIG's internal operations. The OCIG imposes program exclusions and 
civil monetary penalties on health care providers and litigates those actions within the 
department. The OCIG also represents OIG in the global settlement of cases arising 
under the Civil False Claims Act, develops and monitors corporate integrity agreements, 
develops model compliance plans, renders advisory opinions on OIG sanctions to the 
health care community, and issues fraud alerts and other industry guidance.    A B S T R A C T

According to section 623(c) of the Medicare Prescription Drug, 
Improvement, and Modernization Act of 2003 (MMA), this study 
is to determine the difference between the Medicare payment 
amount for separately billable end-stage renal disease drugs and 
the acquisition costs of these drugs for facilities. The study 
must also estimate the rate of growth of facilities expenditures 
for these drugs. In 2003, the 4 largest dialysis providers paid 
between 12 percent and 68 percent less than the current 
Medicare reimbursement amount for the 10 drugs we reviewed. 
When weighted by 2002 total Medicare reimbursement for each 
of the drugs, acquisition costs for the 4 largest providers 
averaged 22 percent below current Medicare reimbursement 
amounts. Facilities not owned or managed by the 4 largest 
providers paid between 5 percent and 58 percent less than the 
Medicare reimbursement amount for the 10 drugs. On average, 
these facilities paid 14 percent less than the Medicare 
reimbursement amount. In 2003, average sales prices (ASPs) 
for the drugs under review were between 6 percent and 66 
percent below the Medicare reimbursement amount. When 
weighted by 2002 total Medicare reimbursement for each of the 
drugs, ASP was, on average, 17 percent below the Medicare 
reimbursement amount. According to our projections, Medicare 
reimbursement for all separately billable drugs will rise by 11 
percent ($216 million) between calendar years 2003 and 2005. 
OEI-03-04-00120  MEDICARE REIMBURSEMENT FOR EXISTING ESRD DRUGS  i    E X E C U T I V E   S U M M A R Y

OBJECTIVE 
To (1) determine the difference between the Medicare reimbursement 
amount for selected separately billable end-stage renal disease (ESRD) 
drugs and the acquisition cost of these drugs to facilities, and 
(2) estimate the growth rate of expenditures for ESRD drugs billed by 
these facilities, as required by the Medicare Prescription Drug, 
Improvement, and Modernization Act of 2003 (MMA). 
BACKGROUND 
The Centers for Medicare & Medicaid Services (CMS) reimburses all 
ESRD facilities based on a prospective payment system known as the 
composite rate. Facilities receive a fixed composite rate payment for 
each dialysis treatment they provide. The composite rate does not 
include many drugs that may be part of dialysis treatment, including 
erythropoietin (EPO) and numerous other drugs. 
Medicare reimbursement for EPO is limited by statute. Hospital-based 
ESRD facilities are reimbursed for drugs other than EPO based on 
Medicare principles of reasonable cost. In contrast, independent 
dialysis facilities are reimbursed for separately billable drugs (other 
than EPO) based on the lower of the submitted charge or 95 percent of 
the drugs average wholesale prices. In calendar year (CY) 2002, 
Medicare reimbursed more than $1.8 billion for separately billable 
drugs provided by independent dialysis facilities. 
We conducted this study based on a mandate set forth in section 623(c) 
of MMA. According to section 623(c), this study is to determine the 
difference between the Medicare payment amount for separately 
billable ESRD drugs and the acquisition costs of these drugs for 
facilities. This study must also estimate the rate of growth of facilities 
expenditures for these drugs. CMS is to use data from this study to set 
CY 2005 reimbursement rates for ESRD drugs. CMS is also directed to 
increase the composite rate payment to offset any reductions in drug 
reimbursement resulting from this study. 
We collected acquisition cost data from the 4 largest national dialysis 
providers for 10 drugs that amounted to 98.4 percent of the total 
Medicare reimbursement in 2002.  These 4 providers accounted for 73 
percent of Medicare reimbursement that year. We also collected cost 
data from a sample of facilities that are not owned or managed by these 
four providers. We collected average sales price (ASP) data for the 10 
OEI-03-04-00120  MEDICARE REIMBURSEMENT FOR EXISTING ESRD DRUGS  ii  E X E C U T I V E   S U M M A R Y  
drugs from drug manufacturers. We compared acquisition cost and ASP 
data to the current Medicare reimbursement amount (including 
copayment amount). 
To estimate the growth rate of expenditures, we obtained EPO and non-
EPO reimbursement for each month from July 2000 to September 2003 
from CMS. Using a commercial time-series program, we developed 
autoregressive moving average (ARMA) models to obtain monthly 
forecasts of EPO and non-EPO reimbursement from October 2003 to 
December 2005. We summed these monthly forecasts to obtain the 
yearly projections for 2004 and 2005. 
FINDINGS 
In 2003, the 4 largest dialysis providers paid, on average, 22 
percent less than the Medicare reimbursement amount for 10 
drugs. The 4 largest dialysis providers paid between 12 percent and 68 
percent less than the current Medicare reimbursement amount for the 
10 drugs we reviewed. Four of the 10 drugs had average acquisition 
costs that were at least 50 percent below the current Medicare 
reimbursement amount. The average acquisition cost for EPO, which 
accounts for roughly two-thirds of Medicare reimbursement for 
separately billable drugs, was 12 percent less than the reimbursement 
amount based on the statutory limit. When weighted by 2002 total 
Medicare reimbursement for each of the drugs, acquisition costs for the 
4 largest providers were an average of 22 percent below current 
Medicare reimbursement amounts. 
In 2003, 122 facilities in our sample paid, on average, 14 percent 
less than the Medicare reimbursement amount for 10 drugs. For 
the 10 drugs we reviewed, the 122 facilities not owned or managed by 
the 4 largest providers had an average acquisition cost that was 
between 5 percent and 58 percent less than the current Medicare 
reimbursement amount. When weighted by 2002 total Medicare 
reimbursement for each of the drugs, acquisition costs for the 122 
facilities averaged 14 percent below current Medicare reimbursement 
amounts (compared to 22 percent below for the 4 largest providers). 
According to the facilities, actual acquisition costs for the drugs varied 
widely. 
In 2003, manufacturer-reported ASPs for 10 drugs were, on 
average, 17 percent below the Medicare reimbursement amount. 
In 2003, ASPs for the 10 drugs under review were between 6 percent 
OEI-03-04-00120  MEDICARE REIMBURSEMENT FOR EXISTING ESRD DRUGS  iii  E X E C U T I V E   S U M M A R Y  
and 66 percent below the Medicare reimbursement amount. When 
weighted by 2002 total Medicare reimbursement for each of the drugs, 
ASP was, on average, 17 percent below the Medicare reimbursement 
amount. 
Medicare expenditures for all separately billable drugs are estimated 
to increase by 11 percent between 2003 and 2005. According to our 
projections, we expect that Medicares expenditures for all separately 
billable drugs will rise by 11 percent ($216 million) between 2003 and 
2005. We estimate that Medicare reimbursement for EPO will increase 
by $146 million (11 percent) during this period, and that reimbursement 
for other separately billable drugs will grow by $70 million (11 percent). 
In calculating future growth rates, we looked exclusively at past 
monthly growth rates for the reimbursement for separately billable 
drugs. We did not account for the potential effects of future changes, 
such as adjustments to the drug reimbursement methodology, the 
approval of new dialysis drugs, unforeseen increases in the number of 
beneficiaries eligible for the benefit, or the establishment of new quality 
standards on drug utilization. We realize, however, that these factors 
may play a key role in any future growth. Therefore, we would like to 
stress that CMS should update our projections as new reimbursement 
data become available. 
CONCLUSION 
MMA required the Office of Inspector General to provide to CMS a 
report that (1) determined the difference between the Medicare 
payment amount for separately billable ESRD drugs and the acquisition 
costs of these drugs for facilities, and (2) estimated the rate of growth of 
facilities expenditures for these drugs. This information is to be used 
by CMS in its efforts to set CY 2005 reimbursement amounts for 
separately billable ESRD drugs. 
The information in this report represents average acquisition costs to 
independent dialysis facilities for 10 drugs in 2003. According to 
respondents, the prices of some of these drugs have already increased in 
2004, and may change again by the time a new pricing methodology 
goes into effect in 2005. In addition, while the goal of this study was to 
establish the acquisition cost of certain drugs to independent dialysis 
facilities, the data make it clear that different facilities sometimes pay 
different prices for the same product. Because of this, any 
OEI-03-04-00120  MEDICARE REIMBURSEMENT FOR EXISTING ESRD DRUGS  iv  EE XX EE CC UU TT II VV EE    SS UU MM MM AA RR YY  
reimbursement amount set by CMS may still allow some facilities to 
profit from purchasing drugs, and others to potentially lose money. 
In conclusion, we hope that these data are useful to CMS in establishing 
a methodology for reimbursing separately billable ESRD drugs. We 
would be pleased to assist CMS as they move forward with any new 
pricing methodology. 
Agency Comments 
In accordance with the statutory mandate, we issued a draft report to 
CMS on April 1, 2004 that contained much of the data presented in this 
report. CMS thanked us for the opportunity to review the draft report. 
They included several technical comments that have been addressed in 
the final version. 
OEI-03-04-00120  MEDICARE REIMBURSEMENT FOR EXISTING ESRD DRUGS  v    T A B L E   O F   C O N T E N T S

A B S T R A C T  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . .   i

E X E C U T I V E   S U M M A R Y  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . .  ii

I N T R O D U C T I O N . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . .  1

F I N D I N G S

Acquisition costs of four largest providers ......................................... 8

Acquisition costs of facilities not owned by four largest providers....9

Average sales prices reported by manufacturers............................. 10

Trends in Medicare expenditures between 2003 and 2005 ............. 11

C O N C L U S I O N  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . .  13

A P P E N D I X  
Centers for Medicare & Medicaid Servicess Comments ................. 14

A C K N OW L E D G E M E N T S  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . .  16
   I N T R O D U C T I O N

OBJECTIVE 
To (1) determine the difference between the Medicare reimbursement 
amount for selected separately billable end-stage renal disease (ESRD) 
drugs and the acquisition cost of these drugs to facilities, and 
(2) estimate the growth rate of expenditures for ESRD drugs billed by 
these facilities, as required by the Medicare Prescription Drug, 
Improvement, and Modernization Act of 2003 (MMA). 
BACKGROUND 
Medicare Payments for Dialysis Services 
The Medicare program currently covers dialysis services for more than 

265,000 patients under its ESRD benefit. Payments for dialysis and 

accompanying services account for approximately $5 billion of the 

$13 billion Medicare spends annually on dialysis patients. In 

accordance with 42 U.S.C.  1395rr, the Centers for Medicare & 

Medicaid Services (CMS) reimburses all dialysis facilities based on a 

prospective payment system known as the composite rate. Facilities 

receive a fixed composite rate payment for each dialysis treatment they 

provide. The composite rate includes most items related to dialysis 

services, including labor costs, related supplies, routine tests, and some 

drugs. However, the composite rate does not include certain drugs that 

may be part of dialysis treatment, including erythropoietin (EPO) and 

numerous other drugs.

Medicare Payments for Separately Billable ESRD Drugs

According to CMSs Provider Reimbursement Manual, Medicare 

coverage of separately billable drugs in dialysis facilities is limited to 

products that cannot be self-administered, i.e., drugs that are 

administered by a health care professional. The exception to this 

requirement is EPO, a drug that stimulates the production of red blood 

cells in patients with anemia. EPO furnished by dialysis facilities is 

covered even if it is self-administered by the patient.

Medicare reimbursement for EPO is limited by statute. Hospital-based 
ESRD facilities are reimbursed for drugs other than EPO based on 
Medicare principles of reasonable cost. In contrast, independent 
dialysis facilities are reimbursed for separately billable drugs other 
than EPO through a different payment methodology. Medicare 
reimbursement for a drug furnished in an independent dialysis facility 
is based on the lower of the billed amount or 95 percent of its average 
OEI-03-04-00120  MEDICARE REIMBURSEMENT FOR EXISTING ESRD DRUGS  1  I N T R O D U C T I O N  
wholesale price. In calendar year (CY) 2002, Medicare reimbursed more 
than $1.8 billion for separately billable drugs provided by independent 
dialysis facilities. 
Studies Mandated By the MMA 
We conducted this study based on a mandate set forth in the MMA. 
Section 623(c)(1) of MMA states: 
The Inspector General of the Department of Health and 
Human Services shall conduct two studies with respect to 
drugs and biologicals (including erythropoietin) furnished 
to  end-stage  renal  disease  patients under the medicare 
program which are separately billable by end-stage renal 
disease facilities. 
According to MMA, the studies are to determine the difference between 
the Medicare payment amount for separately billable ESRD drugs and 
the acquisition costs of these drugs for facilities. The studies must also 
estimate the rate of growth of facilities expenditures for these drugs. 
The first study, which focuses on existing ESRD drugs, must be 
completed by April 1, 2004. The second study, which focuses on new 
ESRD drugs, is to be completed by April 1, 2006. 
CMS is to use data from the first study to set CY 2005 reimbursement 
rates for ESRD drugs, including EPO, billed by independent dialysis 
facilities. CMS is also directed to increase the composite rate payment 
to offset any reductions in drug reimbursement recommended by the 
study. 
METHODOLOGY 
Medicare Reimbursement Amounts

We determined total Medicare reimbursement1 for separately billable 

ESRD drugs in independent dialysis facilities in CY 2002 by accessing 

CMSs National Claims History File. We created a summary of total 

Medicare reimbursement made to independent dialysis facilities for 3 

revenue center codes (0634, 0635, 0636) used to bill for drugs. Revenue 

center codes 0634 and 0635 represent EPO. Code 0636 represents drugs 

requiring further identification via procedure codes. 

1 Total Medicare reimbursement only reflects program expenditures, and does not include 
beneficiary copayments. 
OEI-03-04-00120  MEDICARE REIMBURSEMENT FOR EXISTING ESRD DRUGS  2  I N T R O D U C T I O N  
According to data in the National Claims History File, Medicare 

reimbursed independent dialysis facilities $1.84 billion for the selected 

revenue center codes in CY 2002. Reimbursement for revenue center 

codes 0634 and 0635 (EPO) was $1.23 billion of the total, with the 

remaining $610 million being for revenue center code 0636 (drugs 

requiring a procedure code). We ranked the procedure codes listed with 

revenue center code 0636 from those with the most total reimbursement

to those with the least total reimbursement. The top 13 procedure codes 

represented 11 different drugs, and accounted for $594 million of the 

$610 million reimbursed for revenue center code 0636 in 2002.

We removed two procedure codes representing Hepatitis B vaccines 

from the list of reviewed drugs. We removed these codes because 

vaccines appear to be excluded from any new pricing methodology, and 

will apparently be reimbursed at previous levels. With the two vaccine 

codes removed, Medicare reimbursement for the remaining 11 

procedure codes and EPO totaled $1.81 billion, or 98.4 percent of total 

Medicare reimbursement in 2002.

For EPO, we determined the Medicare reimbursement amount based on 

the statutory limit. For the 11 procedure codes, we determined the 

current Medicare reimbursement amount (including copayment 

amount) by accessing the January 2004 Medicare Single Drug Pricer 

file.2  We found that several of the 11 procedure codes under review had 

been changed since 2002. Some codes were changed to account for new 

dosage sizes, while others were combined into new codes. These coding 

changes reduced the number of procedure codes in our study from 11 to 

9 (1 code for each of the 9 drugs). 

Identifying Products Represented by Procedure Codes

We used the October 2003 publication of Drug Topics Red Book to 

identify all drug products that met the definition of the 9 procedure 

codes and EPO. Five of the nine procedure codes were for single-source 

drugs, meaning only one product (in varying unit sizes) met the 

procedure code definition. EPO is also a single source drug. The other 

four procedure codes represented multiple-source drugs, meaning more 

2 The Medicare Reimbursement Amount, as published in the Single Drug Pricer File, 
consists of 2 separate payments: 80 percent of this amount is reimbursed to the provider 
by the Medicare program itself, with the remaining 20 percent being coinsurance that is 
to be paid to the provider by the beneficiary. Though EPO for ESRD patients is not listed 
in the Single Drug Pricer file, it is also subject to the 80 percent program payment and the 
20 percent beneficiary coinsurance. 
OEI-03-04-00120  MEDICARE REIMBURSEMENT FOR EXISTING ESRD DRUGS  3  I N T R O D U C T I O N  
than one drug product met the definition of the code. Using the 
information listed in Drug Topics Red Book, we then identified the 
manufacturers for each of the drug products. 
Determining Facility Acquisition Costs 
A large majority of independent dialysis facilities are owned or managed 
by national dialysis corporations. Using an industry publication, we 
identified the four largest corporations that provide dialysis services 
(hereinafter referred to as providers). We asked the four providers to 
provide a list of Medicare provider numbers for all of the facilities that 
they owned or managed. In 2002, 3,538 provider numbers appeared on 
reimbursed claims for separately billable drugs used in independent 
dialysis facilities, of which 2,396 represented facilities owned or 
managed by the 4 largest providers.3  We matched the 2,396 provider 
numbers against the National Claims History File, and determined that 
facilities owned or managed by the 4 providers received 73 percent of 
Medicare reimbursement for separately billable drugs in 2002. 
We sent a request to the 4 providers asking them to provide CY 2003 
acquisition cost information for the drugs under review. The requested 
information was to include data on the total cost of the purchases, the 
number of units purchased, and the amount of discounts and rebates 
received. We calculated an overall acquisition cost for each drug by 
adding the total cost of purchases (net of all rebates and discounts) 
made by all four providers and dividing the total by the number of units 
purchased. We did not remove prompt pay discounts from our 
calculations as we believe they are a key factor that should be accounted 
for when computing actual acquisition cost. At the request of the 
providers, we also obtained a list of any additional costs associated with 
acquiring separately billable drugs. For this report, we did not verify 
any of the cost information given by the providers. 
According to the National Claims History File, Medicare reimbursed 
1,142 facilities that were not owned or managed by the 4 largest 
providers in 2002. To estimate the costs of drugs for these facilities, we 
selected a random sample of 200 facilities. We sent a similar request to 
the sampled facilities as was sent to the four providers. Ten of the 200 
facilities informed us that they were now owned or managed by 1 of the 
3 According to the lists provided by the 4 largest providers, they owned or managed 2,396 
facilities. However, we later determined that these providers had acquired other facilities 
that were not represented in their lists. Therefore, these 4 providers may now actually 
account for more than 73 percent of Medicare reimbursement. 
OEI-03-04-00120  MEDICARE REIMBURSEMENT FOR EXISTING ESRD DRUGS  4  I N T R O D U C T I O N  
4 largest providers. We received responses from 122 of the 190 facilities 

(64 percent) remaining in the sample. We calculated an overall 

acquisition cost in CY 2003 for each drug by taking the average price of 

the drug among all the responding facilities. We did not verify any of 

the cost information given by the facilities.

Determining Manufacturer Average Sales Prices

According to Drug Topics Red Book, there are 11 different 

manufacturers of the 10 drugs under review. We sent a request to each 

of the manufacturers asking them to provide for each of their products:

	 The average sales price (ASP) in CY 2003 to all purchasers. 
ASP, which will become the basis for Part B drug 
reimbursement in 2005, is defined by MMA as the total sales to 
all purchasers (net of all rebates and discounts and excluding 
certain exempted sales) divided by the number of units sold to 
all purchasers. 
  ASP to independent dialysis facilities only 
	 The 75th and 90th percentile sales prices to all purchasers (e.g., 
75 percent of sales were at X price or lower, and 90 percent were 
at Y price or lower). 
	 The 75th and 90th percentile sales prices to independent dialysis 
facilities only 
All 11 manufacturers responded to our request. For drugs with 
products distributed by more than one manufacturer, we calculated the 
median of the supplied ASPs and percentile data. Although we 
requested from the manufacturers ASP data for independent dialysis 
facilities only, as well 75th percentile and 90th percentile pricing data, we 
did not receive this information for all of the drugs. Furthermore, the 
data that was provided varied widely in comparison to the ASP for all 
purchasers, and we concluded that it was not meaningful to report. 
In their responses, most manufacturers indicated that the data they 
provided were to be considered confidential. We specifically requested 
that manufacturers consent to having their reported ASPs included in 
this report. Because not every manufacturer provided such consent, we 
are not listing specific ASPs for any individual drugs. We will only 
discuss ASPs in general terms in this report. 
Comparing Medicare Reimbursement to Acquisition Costs 
We compared the Medicare reimbursement amount for each drug to 
facility acquisition costs and reported ASPs by calculating the 
OEI-03-04-00120  MEDICARE REIMBURSEMENT FOR EXISTING ESRD DRUGS  5  I N T R O D U C T I O N  
percentage difference between the Medicare reimbursement amount 
and each number. To determine the overall amount that the acquisition 
costs and ASPs were below Medicare reimbursement, we: 
1)	 Assigned a weight to each drug based on its percentage of Medicare 
reimbursement 
2)	 Multiplied this weight by the percentage difference between the 
Medicare reimbursement amount and the acquisition cost/ASP 
3)  Totaled the weight-adjusted percentage differences 
Estimating Growth Rate of Expenditures 
From CMSs National Claims History File, we obtained reimbursement 
totals for all separately billable EPO and non-EPO drugs for each 
month from June 2000 to September 2003 4. Using a combination of a 
commercial time-series program called ITSM and Microsoft Excel, we 
first removed trend and seasonal components from the data to obtain 
stationary residuals. We then used ITSM to find autoregressive 
moving average (ARMA) models for each set of residuals. Using these 
models, we obtained monthly forecasts of EPO and non-EPO 
reimbursement from October 2003 to December 2005. We summed 
these monthly forecasts to obtain the yearly projections for 2003, 2004, 
and 2005. 
While these models pass all standard tests for goodness-of-fit, they 
should be refined using additional data as they become available. In 
addition, it is important to note that these models were based entirely 
from past data on reimbursement for EPO and non-EPO drugs. To the 
extent that any underlying factors governing reimbursement for ESRD 
drugs were to change significantly, then our projection may become less 
accurate in the future. 
4 The variable for Medicare reimbursement was not fully populated until June 2000. In 
order to get an estimate of total Medicare reimbursement for all of 2000, we calculated a 
ratio of Medicare reimbursement to Medicare total charges for June through December of 
2000, and then multiplied Medicare total charges for January through May by this ratio. 
We added the estimate of reimbursement for the first 5 months to the actual 
reimbursement for the last 7 months to get a figure for total 2000 reimbursement. 
OEI-03-04-00120  MEDICARE REIMBURSEMENT FOR EXISTING ESRD DRUGS  6  II NN TT RR OO DD UU CC TT II OO NN  
SCOPE 
This inspection focused only on drugs that were separately billed by 
independent dialysis facilities. We limited the focus to independent 
dialysis facilities because drugs that they provide are currently 
reimbursed at a percentage of published average wholesale prices. 
Other types of facilities are reimbursed for separately billable drugs 
based on Medicare principles of reasonable cost. 
Almost 250 separately billable drugs were reimbursed by Medicare in 
2002. We reviewed pricing data for 10 drugs (9 procedure codes plus 
EPO) that accounted for 98.4 percent of all Medicare reimbursement. 
We did not independently verify any of the cost or price information 
provided by corporations, facilities, or manufacturers. 
The cost data reported for the sampled facilities are meant to portray 
costs for the 122 facilities only.  We did not project the data to other 
facilities. 
In calculating future growth rates, we looked exclusively at past 
monthly growth rates for the reimbursement for separately billable 
drugs. We did not account for the potential effects of changes to the 
drug reimbursement methodology, the approval of new dialysis drugs, 
unforeseen increases in the number of beneficiaries eligible for the 
benefit, or the establishment of new quality standards on drug 
utilization. We realize, however, that these factors may play a key role 
in any future growth. Therefore, we would like to stress that CMS 
should update our projections as new reimbursement data become 
available. 
OEI-03-04-00120  MEDICARE REIMBURSEMENT FOR EXISTING ESRD DRUGS  7  0F I NF DI IN ND GI SN  G S  
 
In 2003, the 4 largest dialysis providers paid, on  As shown in Table 1, the 4 largest 
average, 22 percent less than the Medicare  dialysis providers paid between 12 
percent and 68 percent less than 
reimbursement amount for 10 drugs.   
the current Medicare 
reimbursement amount for the 10 drugs we reviewed.  Four of the 10 
drugs had average acquisition costs that were at least 50 percent below 
the current Medicare reimbursement amount.  The average acquisition 
cost for EPO, which accounts for roughly two-thirds of Medicare 
reimbursement for separately billable drugs, was 12 percent less than 
the reimbursement amount based on the statutory limit.  When 
weighted by 2002 total Medicare reimbursement for each of the drugs, 
acquisition costs for the 4 largest providers averaged 22 percent below 
current Medicare reimbursement amounts. 
Table 1:  Acquisition Costs of Four Largest Providers Compared to Medicare Reimbursement 
Current  2003   Percent  2002  
Medicare  Average  Acquisition  Total  
Procedure  Reimbursement  Acquisition  Cost Is Below  Medicare 
Code  Drug Description  Amount  Cost   Medicare  Reimbursement
N/A  EPO, 1000 units  $10.00  $8.79  12%  $1,225,249,269
J0636  Calcitriol, .1 mcg  $1.38  $0.87  37%  $22,075,118
J1270  Doxercalciferol, 1 mcg  $5.50  $2.32  58%  $23,143,397
J1750  Iron Dextran, 50 mg  $17.91  $10.00  44%  $11,716,368
J1756  Iron Sucrose, 1 mg  $0.66  $0.32  51%  $90,251,738
J1955  Levocarnitine, 1 gm  $34.20  $10.93  68%  $30,254,432
J2501  Paricalcitol, 1 mcg  $5.33  $3.50  34%  $287,086,139
J2916  Sodium Ferric Gluconate Complex, 12.5 mg  $8.17  $4.40  46%  $108,979,052
J2997  Alteplase, Recombinant, 1 mg  $36.70  $28.84  21%  $3,443,736
J3370  Vancomycin HCl, 500 mg  $7.03  $2.68  62%  $3,602,902
TOTAL  WEIGHTED BY 2002 REIMBURSEMENT      22%  $1,805,802,151
Source: 2004 OIG Survey of 4 Largest Dialysis Providers 
 
Each provider reported that several of the prices listed in Table 1 are 
not representative of 2004 acquisition costs because manufacturers have 
recently instituted price increases for several of the drugs.  For example, 
all 4 providers reported a 5 percent price increase for Paricalcitol that 
went into effect on August 1, 2003.  Recent or future price increases of 
between 3 percent and 18 percent were also reported for Doxercalciferol, 
Alteplase, and EPO. 
Three providers reported that they are able to lower actual acquisition 
costs through the utilization of overfill for EPO.  According to one 
OEI-03-04-00120  MEDICARE REIMBURSEMENT FOR EXISTING ESRD DRUGS  8  F I N D I N G S  
respondent, the manufacturer of EPO overfills its vials (e.g., puts more 
than the stated amount of EPO in a vial) to guarantee a minimum 
dosing level for effective use of the product. The overfill ranges from 7 
to 14 percent based on type of vials.  Another provider reported a 
similar overfill percentage for Paricalcitol. Because the amount of 
overfill varies, and because facilities may have different practices 
regarding the utilization of overfill, it was not accounted for in any of 
the acquisition cost calculations. 
The providers also supplied data on additional costs they believe are 
associated with acquiring drugs. These costs included inventory costs, 
working capital costs, and spoilage/waste costs. The providers 
estimated these additional expenses accounted for as much as 1.5 
percent of total drug costs. We did not perform any independent 
analysis of this data. 
As shown in Table 2 on the 
In 2003, 122 facilities in our sample paid, on 
following page, the 122 facilities 
average, 14 percent less than the Medicare 
not owned or managed by the 4
reimbursement amount for 10 drugs. 
largest providers had an average 
acquisition cost that was between 5 percent and 58 percent less than the 
current Medicare reimbursement amount for the 10 drugs we reviewed. 
The 122 facilities that responded to our request paid more, on average, 
for each of the 10 drugs than the 4 largest providers. When weighted by 
2002 total Medicare reimbursement for each of the drugs, acquisition 
costs for the 122 facilities averaged 14 percent below current Medicare 
reimbursement amounts (compared to 22 percent below for the 4 largest 
providers). 
According to the data, actual acquisition costs for each drug varied 
widely among facilities. For example, the average acquisition cost for 
EPO was $9.50, 5 percent less than the statutorily limited 
reimbursement amount of $10.00. The lowest acquisition cost for EPO 
reported by a facility in our sample was $8.68, while the highest 
reported cost was $10.96. Approximately one-quarter of the 
respondents in the sample reported paying more than the current 
Medicare reimbursement amount of $10.00 for EPO. 
OEI-03-04-00120  MEDICARE REIMBURSEMENT FOR EXISTING ESRD DRUGS  9  F I N D I N G S  
Table 2: Acquisition Costs of Sampled Facilities Compared to Medicare Reimbursement 
Current  2003  Percent  2002 
Medicare  Average  Acquisition  Total 
Procedure  Reimbursement  Acquisition  Cost Is Below  Medicare 
Code  Drug Description  Amount  Cost  Medicare  Reimbursement 
N/A  EPO, 1000 units  $10.00  $9.50  5%  $1,225,249,269 
J0636  Calcitriol, .1 mcg  $1.38  $0.92  33%  $22,075,118 
J1270  Doxercalciferol, 1 mcg  $5.50  $2.59  53%  $23,143,397 
J1750  Iron Dextran, 50 mg  $17.91  $10.25  43%  $11,716,368 
J1756  Iron Sucrose, 1 mg  $0.66  $0.39  41%  $90,251,738 
J1955  Levocarnitine, 1 gm  $34.20  $16.87  51%  $30,254,432 
J2501  Paricalcitol, 1 mcg  $5.33  $4.15  22%  $287,086,139 
J2916  Sodium Ferric Gluconate Complex, 12.5 mg  $8.17  $4.96  39%  $108,979,052 
J2997  Alteplase, Recombinant, 1 mg  $36.70  $30.15  18%  $3,443,736 
J3370  Vancomycin HCl, 500 mg  $7.03  $2.92  58%  $3,602,902 
TOTAL  WEIGHTED BY 2002 REIMBURSEMENT  14%  $1,805,802,151 
Source: 2004 OIG Survey of Facilities not Owned or Managed by 4 Largest Providers 
In 2003, ASPs for the 10 drugs 
In 2003, manufacturer-reported ASPs for 10 
under review were between 6 
drugs were, on average, 17 percent below the 
percent and 66 percent below the 
Medicare reimbursement amount. 
Medicare reimbursement amount. 
Three of the 10 separately billed 
drugs had reported ASPs that were more than 50 percent below 
Medicare reimbursement. When weighted by 2002 total Medicare 
reimbursement for each of the drugs, ASP was, on average, 17 percent 
below the Medicare reimbursement amount. This figure falls between 
the average acquisition costs of the 4 largest providers (22 percent below 
Medicare) and the 122 providers in our sample (14 percent below 
Medicare). 
ASPs for the 10 drugs ranged from 11 percent below the acquisition 
costs to 35 percent above the acquisition costs of the 4 largest providers, 
averaging 6 percent above acquisition cost.  In comparison, ASPs for 
the 10 drugs ranged from 19 percent below the acquisition costs to 3 
percent above the acquisition costs of the 122 responding facilities in 
our sample, averaging 4 percent below acquisition cost.  While multiple 
source drugs represented the more extreme values in the ranges, they 
also accounted for fairly small percentages of total Medicare 
reimbursement. 
OEI-03-04-00120  MEDICARE REIMBURSEMENT FOR EXISTING ESRD DRUGS  10  F I N D I N G S  
Medicare expenditures for all separately billable  According to our projections, we 
drugs are estimated to increase by 11 percent  expect that Medicares 
expenditures for all separately 
between 2003 and 2005. 
billable drugs will rise by 11 
percent ($216 million) between 2003 and 2005. We estimate that 
Medicare reimbursement for EPO will increase by $146 million (11 
percent) during this period, and that reimbursement for other 
separately billable drugs will grow by $70 million (11 percent). Graph 
1 on the following page illustrates the projected growth. 
As Graph 1 shows, the growth of expenditures for both EPO and non-
EPO drugs has been slowing in recent years. For example, total 
Medicare reimbursement for EPO increased by 15 percent between 
2000 and 2001, 12 percent between 2001 and 2002, and just 9 percent 
between 2002 and 2003. Similarly, Medicare reimbursement for non-
EPO drugs increased by 41 percent between 2000 and 2001, 18 
percent between 2001 and 2002, and only 1 percent between 2002 and 
2003. 
Graph 1: Future Growth of Medicare Expenditures for Separately Billable Drugs 
$2,500 
$2,000  $2,079  $2,163 
ns)  $1,835  $1,947 
o
bursement (milli $$11,,050000   $1,317  $$11,,069016   $1,225  $1,332  $1,418  $1,478  ENToPotnOa-l E PO 
Reim $950 
$500  $610  $615  $661  $685 
$516 
$366 
$0 
2000*  2001  2002  2003**  2004***  2005*** 
Year 
* Estimated  ** Projected, Based on Partial-Year Data and Prior Growth Rates  *** Projected, Based on Prior Growth Rates 
In calculating future growth rates, we looked exclusively at past 
monthly growth rates for the reimbursement for separately billable 
drugs. We did not account for the potential effects of future changes, 
such as adjustments to the drug reimbursement methodology, the 
approval of new dialysis drugs, unforeseen increases in the number of 
OEI-03-04-00120  MEDICARE REIMBURSEMENT FOR EXISTING ESRD DRUGS  11  F I N D I N G S  
beneficiaries eligible for the benefit, or the establishment of new quality 
standards on drug utilization. We realize, however, that these factors 
may play a key role in any future growth. Therefore, we would like to 
stress that CMS should update our projections as new reimbursement 
data become available. 
OEI-03-04-00120  MEDICARE REIMBURSEMENT FOR EXISTING ESRD DRUGS  12    C O N C L U S I O N  

MMA required the Office of Inspector General to provide to CMS a 
report that (1) determined the difference between the Medicare 
payment amount for separately billable ESRD drugs and the 
acquisition costs of these drugs for facilities, and (2) estimated the rate 
of growth of facilities expenditures for these drugs. This information is 
to be used by CMS in its efforts to set CY 2005 reimbursement amounts 
for separately billable ESRD drugs. 
The information in this report represents average acquisition costs to 
independent dialysis facilities for 10 drugs in 2003. According to 
respondents, the prices of some of these drugs have already increased in 
2004, and may change again by the time a new pricing methodology 
goes into effect in 2005. In addition, while the goal of this study was to 
establish the acquisition cost of certain drugs to independent dialysis 
facilities, the data make it clear that different facilities sometimes pay 
different prices for the same product. Because of this, any 
reimbursement amount set by CMS may still allow some facilities to 
profit from purchasing drugs, and others to potentially lose money. 
In conclusion, we hope that these data are useful to CMS in 
establishing a methodology for reimbursing separately billable ESRD 
drugs. We would be pleased to assist CMS as they move forward with 
any new pricing methodology. 
Agency Comments 
In accordance with the statutory mandate, we issued a draft report to 
CMS on April 1, 2004 that contained much of the data presented in this 
report. CMS thanked us for the opportunity to review the draft report. 
They included several technical comments that have been addressed in 
the final version. The full text of CMSs comments is presented in the 
Appendix. 
OEI-03-04-00120  MEDICARE REIMBURSEMENT FOR EXISTING ESRD DRUGS  13    A P P E N D I X

OEI-03-04-00120  MEDICARE REIMBURSEMENT FOR EXISTING ESRD DRUGS  14
 A P P E N D I X  
OEI-03-04-00120  MEDICARE REIMBURSEMENT FOR EXISTING ESRD DRUGS  15
   A C K N O W L E D G E M E N T S

This report was prepared under the direction of Robert A. Vito, Regional 
Inspector General for Evaluation and Inspections in the Philadelphia 
Regional Office, and Linda M. Ragone, Deputy Regional Inspector 
General.  Other principal Office of Evaluation and Inspections staff who 
contributed include: 
Dave Tawes, Project Leader 
Lauren McNulty, Program Analyst 
Scott Hutchison, Program Analyst [Region IX] 
Bambi Straw, Program Specialist 
Barbara Tedesco, Mathematical Statistician 
Linda Moscoe, Technical Support Staff 
OEI-03-04-00120  MEDICARE REIMBURSEMENT FOR EXISTING ESRD DRUGS  16