Department of Health and Human Services 

OFFICE OF 

INSPECTOR GENERAL 

Inspector General 

May 2004 

OEI-03-04-00120 

MEDICARE REIMBURSEMENT FOR 

EXISTING END-STAGE RENAL 

DISEASE DRUGS 
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. 
� ABSTRACT

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 D RUGS i 
� EXECUTIVE SUMMARY

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 D RUGS ii 
EXECUTIVE SUMMARY 

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 nonEPO 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 D RUGS iii 
EXECUTIVE SUMMARY 

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 Medicare’s 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 D RUGS iv 
EXECUTIVE SUMMARY EXECUTIVE SUMMARY 

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 D RUGS v 
� TABLE OF CONTENTS

ABSTRACT ................................ ....................... i

EXECUTIVE SUMMARY ................................ ......... ii

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

FINDINGS

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

CONCLUSION ................................ ................... 13

APPENDIX 

Centers for Medicare & Medicaid Services’s Comments ................. 14

ACKNO WLEDGEMENTS ................................ ........ 16
� INTRODUCTION

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 CMS’s 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 D RUGS 1 
INTRODUCTION 

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 

CMS’s 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 D RUGS 2 
INTRODUCTION 

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 D RUGS 3 
INTRODUCTION 

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 D RUGS 4 
INTRODUCTION 

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 D RUGS 5 
INTRODUCTION 

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 CMS’s 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 D RUGS 6 
INTRODUCTION INTRODUCTION 

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 D RUGS 7 
OEI - 03 - 04 - 00120 MEDICARE REIMBURSEMENT FOR EXISTING ESRD D RUGS 8

FINDINGS

As shown in Table 1, 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 averaged 22 percent below 

current Medicare reimbursement amounts.

Table 1: Acquisition Costs of Four Largest Providers Compared to Medicare Reimbursement

Procedure 

Code Drug Description

Current 

Medicare 

Reimbursement 

Amount

2003 

Average 

Acquisition

Cost 

Percent 

Acquisition 

Cost Is Below 

Medicare

2002 

Total 

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 

In 2003, the 4 largest dialysis providers paid, on 

average, 22 percent less than the Medicare 

reimbursement amount for 10 drugs. 

0 FINDINGS
FINDINGS 

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. 

In 2003, 122 facilities in our sample paid, on As shown in Table 2 on the 

average, 14 percent less than the Medicare following page, the 122 facilities 

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 D RUGS 9 
FINDINGS 

Table 2: Acquisition Costs of Sampled Facilities Compared to Medicare Reimbursement 

Procedure 

Code Drug Description 

Current 

Medicare 

Reimbursement 

Amount 

2003 

Average 

Acquisition 

Cost 

Percent 

Acquisition 

Cost Is Below 

Medicare 

2002 

Total 

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, manufacturer-reported ASPs for 10 In 2003, ASPs for the 10 drugs 

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 D RUGS 10 
FINDINGS 

Medicare expenditures for all separately billable According to our projections, we 

drugs are estimated to increase by 11 percent expect that Medicare’s 

between 2003 and 2005. 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). Graph 

1 on the following page illustrates the projected growth. 

As Graph 1 shows, the growth of expenditures for both EPO and nonEPO 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 nonEPO 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 

$1,091 

$1,225 $1,332 

$1,418 $1,478 

$950 

$366 

$516 $610 $615 $661 $685 

$1,317 

$1,606 

$1,835 

$1,947 

$2,079 $2,163 

$0 

$500 

$1,000 

$1,500 

$2,000 

$2,500 

2000* 2001 2002 2003** 2004*** 2005*** 

Year 

Reimbursement (millions) 

EPO 

Non-EPO 

Total 

* 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 D RUGS 11 
FINDINGS 

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 D RUGS 12 
� 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 

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 CMS’s comments is presented in the 

Appendix. 

OEI - 03 - 04 - 00120 MEDICARE REIMBURSEMENT FOR EXISTING ESRD D RUGS 13 
� APPENDIX

OEI - 03 - 04 - 00120 MEDICARE REIMBURSEMENT FOR EXISTING ESRD D RUGS 14
APPENDIX 

OEI - 03 - 04 - 00120 MEDICARE REIMBURSEMENT FOR EXISTING ESRD D RUGS 15
� ACKNOWLEDGEMENTS

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 D RUGS 16