Department of Health and Human Services 

OFFICE OF 

INSPECTOR GENERAL 

JANET REHNQUIST 

Inspector General 

MAY 2003 

OEI-07-01-00570 

Home Dialysis 

Payment Vulnerabilities 
OFFICE OF INSPECTOR GENERAL

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EXECUTIVE SUMMARY 

OBJECTIVE 

To assess End Stage Renal Disease (ESRD) home dialysis billing processes and identify any 

vulnerabilities in Medicare payments. 

BACKGROUND 

End Stage Renal Disease, characterized by a permanent loss of kidney function, is the only 

basis for entitlement to Medicare based on the presence of a specific medical diagnosis. The 

Centers for Medicare & Medicaid Services (CMS) is charged with the administration of the 

ESRD Program. By 2000, the ESRD Medicare population in the United States climbed to 

approximately 273,000, with Medicare expenditures reaching nearly $12 billion. In the next 10 

years, the number of individuals with ESRD, as well as Medicare expenditures for this 

population, is projected to more than double. 

A beneficiary may receive dialysis at a facility or at home. If a beneficiary chooses the latter, he 

or she must select one of two payment methods. In Method I, a dialysis facility will provide all 

necessary supplies and services. In Method II, a dialysis facility provides all necessary services 

and a durable medical equipment supplier furnishes all necessary supplies. Fiscal intermediaries 

(FIs) process claims for ESRD supplies and services for Method I, but only services for 

Method II. Durable medical equipment regional carriers (DMERCs) process durable medical 

equipment claims, including dialysis supply kits, for Method II beneficiaries. The FIs and 

DMERCs, which process claims for ESRD facilities and durable medical equipment (DME) 

suppliers, respectively, should match the home dialysis beneficiaries’ method selection to the 

types of payment allowed. 

In order to complete this inspection, we identified the population of home dialysis beneficiaries 

by reviewing every recorded CMS-382 submission, designating home dialysis and payment 

method, from late 1996 to mid-2001. Next, we reviewed the calendar year (CY) 2000 

National Claims History File (NCH) to identify claims for all beneficiaries with a Medicare 

status code indicating ESRD. 

FINDINGS 

Medicare and beneficiaries paid an additional $15.3 million for continuous cycling peritoneal 

dialysis (CCPD) under Method II when compared to Method I. Medicare also allowed claims 

without existing method selection data in the Common Working File (CWF), resulting in $9.5 

million in incorrect payments. 

Home Dialysis Payment Vulnerabilities i OEI-07-01-00570 
Medicare regulations for reimbursement for home dialysis are inconsistent 

Medicare pays all dialysis modalities under all Methods equally, except for CCPD under 

Method II, where payments per month can be up to $484 more than the others. This premium 

resulted in additional annual payments of $12.2 million for Medicare and 

$3.1 million for beneficiaries in CY 2000. From CYs 1997 to 2000, there was a shift in both 

payment method and dialysis modality, with the majority of these beneficiaries now electing 

Method II, and an increasing proportion using the more expensive CCPD. 

Medicare allowed claims without an existing method selection 

According to the Carrier Manual, a Medicare ESRD claim should only be paid if a method 

selection form is on file. If one does not exist, the claim should be denied. Medicare allowed 

$9.5 million for more than 12,000 home dialysis-related items in 

CY 2000 without a method selection designation in the CWF. 

RECOMMENDATIONS 

We recommend that CMS: 

‘ Change regulations to limit payments for Method II CCPD kits to that of Method I. 

‘ Ensure that claims are not paid unless a valid method selection form has been recorded 

on the CWF. 

‘ Review the $9.5 million in paid Medicare claims and collect any incorrect payments. 

AGENCY COMMENTS 

In its written response to our report, CMS disagreed with the recommendation of changing 

regulations to limit payments for Method II CCPD supplies to that of Method I. The CMS 

believes the statute clearly intends that payment limits for CCPD supplies should be set at a 

higher level than under the composite rate methodology. We agree that the statute clearly 

allows a higher payment limit for CCPD supplies under Method II; however, the statute does 

not require paying the higher limit. Therefore, we continue to believe that CMS should 

reimburse suppliers consistently for the same dialysis supplies, irrespective of the method the 

beneficiary chooses. 

The CMS agrees to take corrective action to ensure that claims are not paid unless a valid 

method selection form has been recorded on the CWF and that improper overpayments should 

be recovered. The full text of CMS’s comments is included in Appendix B. 

Home Dialysis Payment Vulnerabilities ii OEI-07-01-00570 
TABLE OF CONTENTS 

PAGE

EXECUTIVE SUMMARY ..................................................... i

INTRODUCTION ............................................................. 1

FINDINGS 

Inconsistent payments for home dialysis ........................................ 5

Payments with no method selection ............................................ 6

CONCLUSION & RECOMMENDATIONS ....................................... 8

APPENDICES

Appendix A: Claims Processing .............................................. 9

Appendix B: Agency Comments ............................................. 10

ACKNOWLEDGMENTS ..................................................... 12
INTRODUCTION 

OBJECTIVE 

To assess End Stage Renal Disease (ESRD) home dialysis billing processes and identify any 

vulnerabilities in Medicare payments. 

BACKGROUND 

End Stage Renal Disease is characterized by a permanent and irreversible loss of kidney 

function requiring either kidney transplantation or regular dialysis treatments in order to survive. 

In 1972, amendments to Title XVIII of the Social Security Act extended Medicare Part A and 

Part B benefits to virtually all individuals with ESRD regardless of age.1 The ESRD program is 

the only Medicare program for which entitlement is based on the presence of a specific medical 

diagnosis. 

In 1973, the year in which the program was initiated, the number of eligible ESRD beneficiaries 

totaled 10,000. At the end of 2000, the ESRD Medicare population had climbed to 

approximately 273,000, with Medicare expenditures of nearly $12 billion.2 The number of 

individuals with ESRD is expected to more than double by 2010, surpassing 

660,000 individuals, with projected Medicare expenditures of $28 billion.2 

Home Dialysis 

Dialysis treatments are utilized by 80 percent of ESRD beneficiaries; the remaining 20 percent 

receive transplants or withdraw from treatment. Dialysis may be performed either in a facility 

or in a home setting. Peritoneal dialysis, the most typical treatment modality for home dialysis 

patients, uses the body’s own peritoneal membrane as the filter for screening toxins from the 

body. There are two forms of peritoneal dialysis: continuous ambulatory peritoneal dialysis 

(CAPD) and continuous cycling peritoneal dialysis (CCPD). 

Continuous ambulatory peritoneal dialysis. In CAPD, the dialysate solution is left in the 

peritoneal cavity for 4 to 6 hours. The process of draining the dialysate and replacing fresh 

solution takes approximately 30 minutes, and most patients change the solution 

4 times a day. 

1 Individuals with ESRD, who are under age 65, may experience a 3-month waiting period prior to Medicare 

coverage. In addition, individuals who have coverage under an Employer’s Group Health Plan may undergo a 30-

month period in which Medicare acts as a secondary payer to the Group Health Plan. 

2 United States Renal Data System, retrieved from the World Wide Web: http://www.usrds.org/atlas.htm 

(August 30, 2001). MedPAC (Report to Congress: Medicare Payment Policy; March 2002). CMS ESRD Facility 

Survey Tables (OCSQ, CMS; August 2001). 

Home Dialysis Payment Vulnerabilities 1 OEI-07-01-00570 
Continuous cycling peritoneal dialysis. Although similar in function to CAPD, CCPD uses a 

machine to automatically fill and drain the dialysate from the abdomen. This process takes 

12 hours and is performed overnight, allowing the machine to exchange the dialysate several 

times. 

Treatment and Method Selection 

If a physician certifies that it is reasonable to expect that the beneficiary will complete the 

required self-dialysis training course and is able to self-dialyze at home on a regular basis, the 

beneficiary will complete the CMS-382 form and select either Method I or Method II for billing 

purposes. The beneficiary submits the CMS-382 form to his or her coordinating dialysis 

facility. This facility then forwards the form to the appropriate fiscal intermediary (FI). When 

the FI receives the completed form, it is supposed to enter the CMS-382 data, including the 

beneficiary’s method selection, into its automated system and then transfer the data to CMS’s 

Common Working File (CWF) within 30 days of receipt. The FIs and durable medical 

equipment regional carriers (DMERCs) use the CWF to process, edit, and screen claims, 

helping to ensure proper claims processing. (For a discussion of claims processing see 

Appendix A in this report.) 

According to the Carrier Manual, beneficiaries who choose home dialysis must select a method 

for receiving necessary services and supplies. They can choose either Method I or Method II. 

Method I. With Method I, a dialysis facility provides all equipment and support services for the 

home dialysis beneficiary. The facility is paid at the same composite rate it would receive for 

in-center treatments, regardless of whether the home beneficiary is performing hemodialysis, 

CAPD, or CCPD. The FIs process all Method I claims from facilities for supplies and ESRDrelated services. 

Method II. Method II was established as an alternative to Method I for beneficiaries who wish 

to make their own arrangements for supplies and equipment. The CMS believes that 

congressional intent in establishing Method II was to save the beneficiary money on coinsurance 

expenses by allowing beneficiaries to deal directly with suppliers. With Method II, a single 

durable medical equipment (DME) home dialysis supplier provides all necessary equipment and 

supplies for the home dialysis beneficiary while a dialysis facility provides services.3 The 

supplier must report all items and services, which are furnished to the beneficiary, to the 

coordinating dialysis facility at least every 30 days, so that the facility can record the information 

in the beneficiary’s record. The FIs process all ESRD service-related claims and the DMERCs 

process all supply claims. 

3 

See Medicare Intermediary Manual 3166, 3167, 3170 for a detailed listing. 

Home Dialysis Payment Vulnerabilities 2 OEI-07-01-00570 
The DME supplier bills for equipment and supplies that it provides, with reimbursement limited 

to $1,490 per month, per beneficiary, for all treatment modalities except CCPD, which is 

limited to $1,974. In addition to supplier payments, Medicare pays the coordinating dialysis 

facility for services provided (e.g., maintaining documentation and arranging for lab tests). 

METHODOLOGY 

Pre-Inspection Activities 

In order to gain a better understanding of ESRD, we reviewed relevant publications and held 

discussions with knowledgeable officials at CMS. We met with representatives from a local 

dialysis facility as well as an ESRD Network official to discuss billing and other related issues. 

Additionally, we reviewed documents published by advocacy and service groups, such as the 

ESRD Networks. 

Population Identification 

The intended population for this inspection was to include beneficiaries listed in the Renal 

Beneficiary and Utilization System. However, efforts to select this population were 

compromised, due to data problems identified in our recent report “Problems Pervade the 

Renal Beneficiary and Utilization System” (OEI-07-01-00250). We, therefore, selected our 

population from a file CMS created for use in this inspection. This file was created from CMS382 submissions to the CWF in late 1996 to mid-2001. 

Using this CMS-382 file, the CMS Enrollment Database and the National Claims History 

(NCH) file, we extracted our population and ESRD claims for beneficiaries dialyzing as of 

January 1, 2000. The NCH file claims were identified using Medicare Status Codes and 

included all claims processed by FIs and DMERCs. 

The inspection was broken into two parts: (1) identifying excess dollars paid for CCPD under 

Method II rather than under Method I, and (2) identifying home dialysis claims paid without an 

existing method selection on the CWF. Each of these parts followed the same procedure of: 

(1) analyzing the processes for paying ESRD-related claims, 

(2) analyzing questionable payments, and (3) identifying dollars at risk in the Medicare 

program. 

To identify excess dollars paid for CCPD under Method II, we calculated the amount that 

Medicare and beneficiaries actually paid, according to claims data, and then subtracted this 

amount from the maximum payment that would have been allowed under Method I. 

For processing ESRD-related claims, we identified claims without CMS-382 forms on file. We 

also conducted a telephone survey with each FI and DMERC to understand what processes 

are in place to ensure the appropriate payment of ESRD-related claims. We asked which 

specific edits are being used and whether any contractors implemented specific practices to 

supplement these edits. In addition, we interviewed CMS staff to 

Home Dialysis Payment Vulnerabilities 3 OEI-07-01-00570 
determine what edits, procedures, and controls are in place to ensure accurate claims 

processing and payment. 

In this study, allowed dollars are dollars Medicare allowed for a claim. Medicare typically pays 

80 percent of the allowed amount after the beneficiary deductible. Unless otherwise indicated, 

we used the total allowed dollars to determine the effect on the Medicare program and 

beneficiaries. We did not conduct a medical record review. 

We conducted this inspection in accordance with the Quality Standards for Inspections 

issued by the President’s Council on Integrity and Efficiency. 

Home Dialysis Payment Vulnerabilities 4 OEI-07-01-00570 
FINDINGS 

Medicare regulations for reimbursement for home dialysis are inconsistent, resulting in Medicare 

and beneficiaries paying $15.3 million more for CCPD under Method II than would have been 

paid for the same services and supplies under Method 1. Also, Medicare contractors allowed 

$9.5 million for claims without existing method selection data in the CWF. We recommend that 

CMS make a regulatory change to correct inequities in home dialysis payments, ensure that 

claims are not paid unless a valid method selection form is on record, and collect any 

incorrectly paid claims. 

Medicare regulations for reimbursement for home dialysis are 

inconsistent 

Consistent with statutory requirements4 and the CMS Carrier Manual, all dialysis kits for all 

modalities under Method I were paid up to the same rate of $1,490 per month in 

CY 2000. Under Method II, hemodialysis and CAPD were paid the same as in Method I, but 

the CCPD payment could be as much as $1,974 per month (a $484 premium) even though the 

supplies provided are the same as those supplied under Method I. 

Medicare and beneficiaries paid a total of $62.2 million in CY 2000 for CCPD kits under 

Method II. If Medicare had paid for these same supplies at the maximum limit for Method I 

reimbursement, the total allowable amount would have been $49.9 million, a difference of 

$15.3 million. In 1992, CMS, formerly the Health Care Financing Administration (HCFA), 

referenced a 1989 congressional document which stated that by establishing Method II, 

beneficiaries would save money on coinsurance expenses because they could make their own 

arrangements.5 However, beneficiaries paid at least an additional $3.1 million (20 percent 

coinsurance of $15.3 million) by choosing Method II CCPD over Method I CCPD. Medicare 

paid an additional $12.2 million for CCPD kits under Method II, which is $15.3 million less the 

$3.1 million beneficiary coinsurance. 

The CMS (formerly the HCFA) expressed concern that Method II reimbursement, if left 

unchecked, would create an economic incentive for suppliers to encourage Method II 

selection.6 MedPAC also stated that this incentive increased the use of CCPD from 

3 to 5 percent of all forms of dialysis during 1993-1997. 

4

 Omnibus Budget Reconciliation Act of 1989 

5 57 FR 54179 (November 17, 1992) ; Medicare and Medicaid Health Budget Reconciliation Amendments of 

1989: 40 (Comm. Print 101-1) 

6 54 FR 1247 (January 12, 1989) 

Home Dialysis Payment Vulnerabilities 5 OEI-07-01-00570 
Between CYs 1997 to 2000, there has been a trend from beneficiaries choosing Method I to 

choosing Method II and a trend from beneficiaries dialyzing under CAPD to dialyzing under 

CCPD. As shown in Chart 1 below, since 1997, the share of Method I and CAPD decreased 

19 percent and 15 percent, respectively. During the same period, the share of Method II and 

CCPD increased 31 percent and 32 percent, respectively, meaning that such a trend will 

escalate the costs of ESRD for both Medicare and beneficiaries. 

Chart 1: Percentage of Beneficiaries Receiving Peritoneal Dialysis by Modality and Method 

Medicare paid $9.5 million in claims without an existing 

method selection. 

According to the Carrier Manual, no payment can be made for any home dialysis items or 

services for a beneficiary, unless a CMS-382 form has been filed.7 This form indicates that a 

beneficiary has selected home dialysis, and whether the beneficiary has opted for either Method 

I or Method II. 

In CY 2000, Medicare allowed $9.5 million for claims without a corresponding method 

selection recorded in the CWF. This amount is a combination of $8.9 million from more than 

5,000 claims for home dialysis related items;8 and $660,000 for more than 

7 This criteria was stated in 1990 and reiterated in various forms in 1991, 1993, and 1998. 

8 Codes A4650-A4927 

Home Dialysis Payment Vulnerabilities 6 OEI-07-01-00570
7,000 facility claims of home dialysis support services9

 that were paid despite the lack of a 

recorded method selection from the CMS-382 form. The problem is systemic among all 

DMERCs and FIs. 

The FIs and DMERCs are responsible for determining the appropriateness of payments by 

checking against the method selection designation in the CWF. In addition, the CWF maintains 

a consistency edit, RD 08, which functions to reject the claim in the absence of a valid method 

selection.10 Once a claim is submitted, the CWF sends a trailer back to the contractor 

identifying the beneficiary’s method selection and effective date. Fiscal intermediary billing 

specialists stated that if the CWF rejects claims without a method selection, the providers must 

submit additional information to support the claim. In the case of an RD-08 rejection, the 

provider must resubmit a CMS-382, which the FI will input into their own system as well as in 

the CWF. The DMERC staff stated that if there was no method selection on file in the CWF, 

the claim should be denied. The ESRD facility would then need to submit a CMS-382 to the 

FI. Nonetheless, claims are paid without the method selection recorded on the CWF. 

Therefore, the edit is not always working properly. 

9 Revenue Codes 825, 835, 845, 855

10 Medicare Intermediary Manual: 3644.4 (11-92)

Home Dialysis Payment Vulnerabilities 7 OEI-07-01-00570
CONCLUSION AND 

RECOMMENDATIONS 

The current number of ESRD beneficiaries is 273,000, with annual expenditures of $12 billion. 

A projected doubling of the population in 10 years makes payment processes for dialysis 

significant. Current regulations caused Medicare and beneficiaries to pay an additional $15.3 

million for CCPD under Method II in CY 2000. Also, Medicare contractors paid $9.5 million 

in claims without existing method selection data in the CWF. As such, we recommend that 

CMS: 

‘ Change regulations to limit payments for Method II CCPD kits to that of Method I. 

‘ Ensure that claims are not paid unless a valid method selection form has been recorded 

on the CWF. 

‘ Review the $9.5 million in paid Medicare claims and collect any incorrect payments. 

AGENCY COMMENTS 

In its written response to our report, CMS disagreed with the recommendation of changing 

regulations to limit payments for Method II CCPD supplies to that of Method I. The CMS 

believes the statute clearly intends that payment limits for CCPD supplies should be set at a 

higher level than under the composite rate methodology. We agree that the statute clearly 

allows a higher payment limit for CCPD supplies under Method II; however, the statute does 

not require paying the higher limit. Therefore, we continue to believe that CMS should 

reimburse suppliers consistently for the same dialysis supplies, irrespective of the method the 

beneficiary chooses. 

The CMS agrees to take corrective action to ensure that claims are not paid unless a valid 

method selection form has been recorded on the CWF and that improper overpayments should 

be recovered. The full text of CMS’s comments is included in Appendix B. 

Home Dialysis Payment Vulnerabilities 8 OEI-07-01-00570 
APPENDIX A 

Claims Processing 

There are five basic steps in the claims payment process: 1) claims submission, 2) basic checks, 

3) shared system processing, 4) querying the CWF, and 5) payment processing. When 

contractors receive claims for payment of ESRD services, they enter the claims information into 

their local system to perform basic checks, calculate the payment amount, and conduct 

consistency and utilization edits in order to measure compliance with the contractor’s (i.e., FI, 

DMERC) guidelines. Contractors use their own local system to perform basic checks; but, to 

complete shared system processing, contractors use standardized CMS-approved software 

packages. The process is driven by the individual contractor’s medical review guidelines and 

are based on CMS’s national guidelines. 

When contractors have finished processing the claim to the point of payment or denial, they 

must then query the CWF at one of the nationwide host sites. The FI or DMERC electronically 

forwards the claim to the CWF host site for edit checks and payment authorization. 

For home dialysis beneficiaries, the FIs and DMERCs compare claims for ESRD supplies and 

equipment to the method selection information in CWF. The CWF host site then reviews the 

claim for consistency, entitlement, remaining benefits, deductible status, and duplicates of 

previously processed claims. 

Within 24 hours of receiving the claim, the host site makes one of three payment determinations: 

pay the claim, reject the claim, or hold the claim to obtain missing information. When the host 

site authorizes the payment, the FI or DMERC pays the claim. 

The CMS has made recent changes in policy, which affect claims processing. According to 

Program Memorandum B-01-56, supply kits were unbundled after January 1, 2002, and each 

individual item contained in the kit has now become a separate line item on each claim, thus 

requiring line-item billing. Also, the CMS recently released Program Memoranda AB-00-96 

and AB-01-61, which requires FIs and DMERCs to determine the effective date, rather than 

the signed date, of the CMS-382 form in an attempt to reduce inappropriate payments. 

Home Dialysis Payment Vulnerabilities 9 OEI-07-01-00570 
APPENDIX B 

Home Dialysis Payment Vulnerabilities 10 OEI-07-01-00570 
Home Dialysis Payment Vulnerabilities 11 OEI-07-01-00570 
ACKNOWLEDGMENTS 

This report was prepared under the direction of Brian T. Pattison, Regional Inspector General for 

Evaluation and Inspections and Gina Maree, Assistant Regional Inspector General for Evaluation and 

Inspections in Kansas City. Other principal Office of Evaluation and Inspections staff who contributed 

include: 

Brian T. Whitley, Lead Analyst Bambi Straw, Program Specialist 

Michael Barrett, Team Leader Brian Ritchie, Director, Technical 

Linda Paddock, Program Analyst Support Staff 

Linda Moscoe, Program Analyst 

Scott Horning, Program Analyst 

For information or copies of this report, please contact

the Office of Inspector General’s

Public Affairs office at (202) 619-1343.

Reports are also available on the World Wide Web at our home page address:

http://www.oig.hhs.gov/ 

Home Dialysis Payment Vulnerabilities 12 OEI-07-01-00570