Report Template Update = 04-30-05_rev.13 

Department of Health and Human Services


OFFICE OF 

INSPECTOR GENERAL 

MEDICARE REIMBURSEMENT FOR 


NEW END STAGE RENAL DISEASE 


DRUGS


Daniel R. Levinson


Inspector General 


March 2006


OEI-03-06-00200

Report Template Update = 04-30-05_rev.13 

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 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 HHS. 

Office of Evaluation and Inspections 

The Office of Evaluation and Inspections (OEI) conducts management and program 

evaluations (called inspections) that focus on issues of concern to HHS, Congress, and 

the public. The findings and recommendations contained in the inspections generate 

rapid, accurate, and up-to-date information on the efficiency, vulnerability, and 

effectiveness of departmental programs. OEI also oversees State Medicaid Fraud 

Control Units which investigate and prosecute fraud and patient abuse in the Medicaid 

program. 

Office of Investigations 

The 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. 

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. OCIG imposes program exclusions and civil 

monetary penalties on health care providers and litigates those actions within HHS. 

OCIG also represents OIG in the global settlement of cases arising under the Civil False 

Claims Act, develops and monitors corporate integrity agreements, develops compliance 

program guidances, renders advisory opinions on OIG sanctions to the health care 

community, and issues fraud alerts and other industry guidance. 
Δ EXECUTIVE SUMMAR Y 

OBJECTIVE 

To determine the difference between the Medicare reimbursement 

amount for a new separately billable end stage renal disease (ESRD) 

drug and the acquisition cost of this drug for ESRD facilities in 2005, as 

mandated 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 (i.e., separately billable drugs) that may be part of 

dialysis treatment. 

In 2005, independent dialysis facilities (i.e., freestanding, nonhospital 

dialysis facilities) were reimbursed for separately billable drugs using 

two methods. For 10 high-dollar separately billable drugs, 

reimbursement was based on the average acquisition cost of 

independent facilities as calculated by CMS using 2003 cost data 

presented in the Office of Inspector General’s (OIG) May 2004 report, 

“Medicare Reimbursement for Existing End Stage Renal Disease Drugs” 

(OEI-03-04-00120). All other separately billable drugs furnished by 

independent dialysis facilities (with certain exceptions, such as 

vaccines) were reimbursed at 106 percent of the drugs’ average sales 

prices (ASP) as reported by manufacturers. In calendar year (CY) 2005, 

Medicare reimbursed a total of $1.8 billion for separately billable drugs 

furnished by independent dialysis facilities. 

As of January 1, 2006, CMS began to reimburse all separately billable 

drugs (again, with certain exceptions) at 106 percent of their ASP, the 

same method used to reimburse for most other outpatient drugs under 

Medicare Part B. According to the preamble to a proposed rule 

published in the August 8, 2005, “Federal Register,” CMS stated that it 

was inappropriate to use the older acquisition cost data provided by OIG 

(updated by inflation) as a basis for reimbursement. In the proposed 

rule, CMS also questioned the feasibility of continually acquiring 

acquisition cost data over the long term. 

We conducted this study based on a mandate set forth in section 623(c) 

of the MMA. Pursuant to section 623(c), this study is to determine the 

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EXE CUTIVE S U MMAR Y 

difference between the Medicare reimbursement amount for any new 

separately billable ESRD drugs and the acquisition costs of these new 

drugs for facilities. Section 623(c) of the MMA also directs OIG to 

estimate the rate of growth of facilities’ expenditures for separately 

billable ESRD drugs. 

CMS has the authority to set CY 2007 reimbursement rates for ESRD 

drugs billed by independent dialysis facilities. Section 1881(b)(12) of 

the Social Security Act provides for payment neutrality based on 

increases in the composite rate and reductions in drug reimbursement 

amounts due to the OIG studies. 

Section 623(c)(2)(B) of the MMA defines a “new drug” as a drug “for 

which a billing code does not exist prior to January 1, 2004.” According 

to our analysis, darbepoetin alfa accounted for 99.9 percent of the 

Medicare reimbursement for all new ESRD drugs. We sought 

acquisition cost data for darbepoetin alfa from the 55 facilities 

responsible for 94 percent of Medicare reimbursement for the drug in 

2005. Forty-six facilities (84 percent) responded to our request. We 

compared CY 2005 acquisition costs for each of these facilities to the 

Medicare reimbursement amounts in each quarter of that year. We also 

calculated an average acquisition cost among all the responding 

facilities, weighted by the number of units of darbepoetin alfa purchased 

by each facility. 

In our May 2004 study, we projected the future growth rate of 

expenditures for separately billable ESRD drugs, as required by the 

MMA. In calculating the future growth rate, we looked at past monthly 

growth rates of expenditures for separately billable drugs over a 3-year 

period. We could not and did not account for the potential effects of 

changes to the drug reimbursement methodology. At the time of the 

earlier study, most separately billable drugs were reimbursed by 

Medicare using a completely different methodology (based on average 

wholesale price) than the acquisition-cost based methods used by CMS 

in 2005 and the ASP-based methods enacted by CMS in 2006. Because 

of these recent major changes in the reimbursement methodology and 

the resulting lack of comparable historical data, we determined it would 

not be possible for us to accurately estimate future growth rates at this 

time. Once complete data on 2005 and 2006 expenditures become 

available, the effect of the changes to the reimbursement methodology 

should be more evident. Any estimates made at that time would 

therefore be more accurate. 

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EXE CUTIVE S U MMAR Y

FINDING 

In 2005, independent dialysis facilities were able to acquire 

darbepoetin alfa at prices below the Medicare reimbursement 

amount. In 2005, net acquisition costs for darbepoetin alfa among the 

46 responding facilities were between $2.24 per microgram (mcg) and 

$2.94 per mcg. On average, facilities paid $2.59 per mcg for darbepoetin 

alfa in 2005, after all discounts and rebates were taken into account. 

During this same time period, the Medicare reimbursement amount 

ranged from a high of $3.54 per mcg in the first quarter of 2005 to a low 

of $3.01 per mcg in the fourth quarter. 

CONCLUSION 

Section 623(c) of the MMA mandated that OIG complete a report that 

determined the difference between the Medicare reimbursement 

amounts for new separately billable ESRD drugs and the acquisition 

costs of these drugs for facilities. CMS has the authority to use the data 

presented in this report to set CY 2007 reimbursement amounts for the 

new ESRD drugs under review. 

This report presents the OIG’s findings about acquisition costs to 

independent dialysis facilities for one new drug, darbepoetin alfa, in 

2005. As described in the finding, the responding facilities acquired 

darbepoetin alfa for less, and sometimes substantially less, than the 

Medicare reimbursement amount in 2005. 

We hope that this data is useful to CMS in its continued efforts to pay 

appropriately for prescription drugs. 

 OE I-03-06-00 200 MEDI C ARE RE I M B U R SEM E N T F O R NEW E SRD DR U G S iii 
Report Template Update = 04-30-05_rev.13 

Δ T ABLE OF CONTENTS 

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

INTR O D U C T I ON ........................................... 1

FINDI N G ................................................... 6

Facilities purchased drug at less than reimbursement amount.. . . 6 

CON C L U SION ............................................. 7

ACKN O W LEDGMENTS ..................................... 8
Δ INTRODU C TION 

OBJECTIVE 

To determine the difference between the Medicare reimbursement 

amount for a new separately billable end stage renal disease (ESRD) 

drug and the acquisition cost of this drug for ESRD facilities in 2005, as 

mandated by the Medicare Prescription Drug, Improvement, and 

Modernization Act of 2003 (MMA). 

BACKGROUND 

Medicare Reimbursement for Dialysis Services 

The Medicare program currently covers kidney dialysis for more than 

300,000 enrollees under its ESRD benefit. In accordance with section 

1881 of the Social Security Act, the Centers for Medicare & Medicaid 

Services (CMS) reimburses 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 many drugs 

(i.e., separately billable drugs) that may be part of dialysis treatment. 

Medicare Reimbursement for Separately Billable ESRD Drugs 

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.1 The exceptions to this 

requirement are epoetin alfa and darbepoetin alfa, two drugs that 

stimulate the production of red blood cells in patients with anemia. 

Epoetin alfa and darbepoetin alfa furnished by dialysis facilities may be 

covered even when they are self-administered by the patient.2 

Independent Dialysis Facilities. In 2005, independent dialysis facilities 

(i.e., freestanding, nonhospital dialysis facilities) were reimbursed for 

separately billable drugs using two methods.3 For 10 high-dollar 

separately billable drugs, reimbursement was based on the average 

acquisition cost of independent facilities as calculated by CMS based on 

2003 cost data presented in the Office of Inspector General’s (OIG) May 

1 CMS “Provider Reimbursement Manual,” section 2711.2. 

2 CMS “Medicare Benefit Policy Manual,” chapter 11, section 90. 

3 42 CFR § 414.904(d)(2). 

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INTROD UCT ION 

2004 report, “Medicare Reimbursement for Existing End Stage Renal 

Disease Drugs” (OEI-03-04-00120). All other drugs billed by 

independent dialysis facilities were reimbursed at 106 percent of the 

drugs’ average sales prices (ASP) as reported by manufacturers.4 In 

calendar year (CY) 2005, Medicare reimbursed a total of $1.8 billion for 

separately billable drugs furnished by independent dialysis facilities. 

As of January 1, 2006, CMS began to reimburse all separately billable 

ESRD drugs5 at 106 percent of their ASP, the same method used to 

reimburse for other drugs under Medicare Part B.6,7 CMS stated that it 

was inappropriate to use the older acquisition cost data provided by OIG 

(updated by inflation) as a basis for reimbursement, and questioned the 

feasibility of continually acquiring acquisition cost data over the long 

term.8 

Studies Mandated By the MMA 

OIG conducted this study and the May 2004 study based on a mandate 

set forth in the MMA. Section 623(c)(1) of the 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. 

Pursuant to section 623(c)(3) of the MMA, the studies are to determine 

the difference between the Medicare reimbursement amount for 

separately billable ESRD drugs and the acquisition costs of these drugs 

for facilities. The studies must also estimate the growth rate of 

facilities’ expenditures for these drugs. The first study, which focused 

4 Exceptions to this payment methodology include certain vaccines, infusion drugs 

administered through durable medical equipment, and blood products. 

5 Exceptions to this payment methodology include certain vaccines, infusion drugs 

administered through durable medical equipment, and blood products. 

6 CMS Final Rule 1502-FC, as published in 70 Fed. Reg. 70,116, 70,224 (Nov. 21, 2005). 

7 In 2005, hospital-based dialysis facilities were reimbursed for separately billable drugs 

(with the exception of erythropoietin) at their cost. In 2006, separately billable drugs 

furnished by hospital-based facilities are reimbursed at the same rate as independent 

dialysis facilities, i.e., 106 percent of the ASP. Hospital-based facilities were not included in 

this study because our review is based on acquisition costs and Medicare reimbursement in 

2005. 

8 70 Fed. Reg. 45,764, 45,845 (Aug. 8, 2005). 

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INTROD UCT ION 

on existing ESRD drugs, was completed in May 2004. This second 

study, which focuses on new ESRD drugs, is to be completed by April 1, 

2006. For the purposes of this study, section 623(c)(2)(B) of the MMA 

defines a “new drug” as a drug “for which a billing code does not exist 

prior to January 1, 2004.” 

CMS used data from the first study to set CY 2005 reimbursement rates 

for ESRD drugs billed by independent dialysis facilities and has the 

authority do the same in CY 2007 for new drugs identified in this 

second study. Section 1881(b)(12) of the Social Security Act provides for 

payment neutrality based on increases in the composite rate to offset 

any reductions in drug reimbursement amounts due to the OIG studies. 

METHODOLOGY 

Determining Drugs Under Review 

We obtained from CMS a master list of billing codes, and then created a 

subset of all new billing codes for prescription drugs that became 

effective on or after January 1, 2004. We then obtained drug 

reimbursement data for independent dialysis facilities in 2004 and 2005 

from CMS’s National Claims History File. We determined that codes 

for six new drugs furnished by independent dialysis facilities had been 

reimbursed by Medicare in 2004 and 2005. 

One drug, darbepoetin alfa, accounted for 99.9 percent of all 

reimbursement for these six drug codes. Therefore, we limited our data 

collection to this drug. Among all drugs billed by independent dialysis 

facilities, darbepoetin alfa ranked in the top seven in terms of total 

Medicare dollars during the previous 2 years, with reimbursement 

exceeding $20 million in 2004 and $26 million in 2005.9 The other five 

new drugs accounted for less than $20,000 each in reimbursement 

during both years. 

Medicare Reimbursement Amounts 

We obtained the Medicare reimbursement amount for darbepoetin alfa 

from CMS during each quarter of 2005. 

9 Although the $26 million in reimbursement for darbepoetin alfa in 2005 is relatively 

high, it accounts for less than 2 percent of total Medicare reimbursement for all ESRD 

drugs billed by independent dialysis facilities. In comparison, Medicare Part B reimbursed 

almost $800 million in 2005 for darbepoetin alfa provided in physician’s offices. 

 OE I-03-06-00 200 MEDI C ARE RE I M B U R SEM E N T F O R NEW E SRD DR U G S 3 
INTROD UCT ION

Facility Acquisition Costs 

Based on data from CMS’s National Claims History File, we determined 

that only 157 of the approximately 3,900 independent dialysis facilities 

were reimbursed by Medicare for darbepoetin alfa in 2005. Of these 

157, 55 facilities accounted for 94 percent of Medicare reimbursement, 

with each being reimbursed more than $100,000 for the drug that 

year.10 These 55 facilities formed the basis of our sample. 

We sent a request to the 55 sampled facilities asking them to provide 

CY 2005 acquisition cost data for darbepoetin alfa. The requested 

information was to include the total cost of the purchases, the number of 

units purchased, and the amount of discounts and rebates received. 

Forty-six facilities (84 percent) responded to our request. The 46 

responding facilities accounted for 86 percent of the Medicare 

reimbursement for darbepoetin alfa to the 55 facilities in the sample.11 

We calculated a weighted annual average acquisition cost for 

darbepoetin alfa among the 46 facilities by adding the total cost of 

facility purchases (net of all rebates and discounts) in 2005 and dividing 

the total by the number of units purchased that year. 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. 

Growth Rate of Expenditures 

In our May 2004 study, we projected the future growth rate of 

expenditures for separately billable ESRD drugs, as required by the 

MMA. In calculating the future growth rate, we looked at past monthly 

growth rates of expenditures for separately billable drugs over a 3-year 

period. We could not and did not account for the potential effects of 

changes to the drug reimbursement methodology. At the time of the 

earlier study, most separately billable drugs were reimbursed by 

Medicare using a completely different methodology (based on average 

10 In our 2004 study, we had identified a small number of national chains that accounted 

for a large majority of Medicare reimbursement for ESRD drugs. However, no facilities 

owned by these large national chains were among the 55 with the most Medicare 

reimbursement for darbepoetin alfa in 2005. 

11 The nine facilities that did not respond to our request seemed similar to the facilities 

that did. There were no distinguishing characteristics (e.g., membership in a chain, amount 

of Medicare reimbursement, physical location) that would lead to the conclusion that the 

nonrespondents would have different acquisition costs than the respondents. 

 OE I-03-06-00 200 MEDI C ARE RE I M B U R SEM E N T F O R NEW E SRD DR U G S 4 
INTROD UCT ION 

wholesale price) than the acquisition-cost based methods used by CMS 

in 2005 and the ASP-based methods enacted by CMS in 2006. Because 

of these recent major changes in the reimbursement methodology and 

the resulting lack of comparable historical data, we determined it would 

not be possible for us to accurately estimate future growth rates at this 

time. Once complete data on 2005 and 2006 expenditures become 

available, the effect of the changes to the reimbursement methodology 

should be more evident. Any estimates made at that time would 

therefore be more accurate. 

 OE I-03-06-00 200 MEDI C ARE RE I M B U R SEM E N T F O R NEW E SRD DR U G S 5 
Δ FINDING 

In 2005, independent dialysis facilities were able to 

acquire darbepoetin alfa at prices below the 

Medicare reimbursement amount 

In 2005, net acquisition costs 

for darbepoetin alfa among the 

46 responding facilities were 

between $2.24 per microgram 

(mcg) and $2.94 per mcg. On 

average, facilities paid $2.59 

per mcg for darbepoetin alfa in 2005, after all discounts and rebates 

were taken into account. During this same time period, the Medicare 

reimbursement amount ranged from a high of $3.54 per mcg in the first 

quarter of 2005 to a low of $3.01 per mcg in the fourth quarter.12 

According to the data provided by the facilities, the average discount/ 

rebate offered for darbepoetin alfa was 17.5 percent. Facility costs 

before discounts or rebates were taken into account ranged from $2.24 

to $4.36, with an average cost of $3.14 per mcg. 

Only 10 of the 46 responding facilities estimated any additional costs 

related to the acquisition of darbepoetin alfa. These additional costs 

included patient response monitoring, storage, and waste, and were 

between 0.4 percent and 2.5 percent of total costs for the drug. 

12 In 2005, darbepoetin alfa was not one of the 10 ESRD drugs reimbursed based on the 

OIG-reported average acquisition cost, and was therefore paid at 106 percent of the ASP. 

The ASP is reported to CMS by manufacturers on a quarterly basis, and reimbursement 

amounts may change each quarter based on any increases or decreases in the ASP. 

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Δ CONCLUSION 

Section 623(c) of the MMA mandated that OIG complete a report that 

determined the difference between the Medicare reimbursement 

amounts for new separately billable ESRD drugs and the acquisition 

costs of these drugs for facilities. CMS has the authority to use the data 

presented in this report to set CY 2007 reimbursement amounts for the 

new ESRD drugs under review. 

This report presents the OIG’s findings about acquisition costs to 

independent dialysis facilities for one new drug, darbepoetin alfa, in 

2005. As described in the finding, the responding facilities acquired 

darbepoetin alfa for less, and sometimes substantially less, than the 

Medicare reimbursement amount in 2005. 

We hope that this data is useful to CMS in its continued efforts to pay 

appropriately for prescription drugs. 

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ΔAPP E N D I X A ACKNOWLEDGMENTS 

This report was prepared under the direction of Robert A. Vito, Regional 

Inspector General for Evaluation and Inspections in the Philadelphia 

regional office. Other principal Office of Evaluation and Inspections 

staff who contributed include: 

Dave Tawes, Director, Prescription Drug Pricing Unit 

Scott Hutchison, Program Analyst 

Linda Moscoe, Technical Support Staff 

Linda Boone Abbott, Program Specialist 

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