Department of Health and Human Services

OFFICE OF 

INSPECTOR GENERAL 

`

 

END STAGE RENAL DISEASE 

DRUGS: FACILITY ACQUISITION 

COSTS AND FUTURE MEDICARE 

PAYMENT CONCERNS 

 

Daniel R. Levinson 

Inspector General 

September 2010 

OEI-03-09-00280 
 

INTRODUCTION EXECUTIVE SUMMARY 

OBJECTIVES

1. To compare Medicare payment amounts for selected separately 

billable end stage renal disease (ESRD) drugs to average acquisition 

costs for these drugs at dialysis facilities in the first quarter of 2009. 

2. To examine how facility acquisition costs for selected separately 

billable ESRD drugs have changed over the past several years. 

3. To determine whether the method the Centers for Medicare & 

Medicaid Services (CMS) plans to use to update payments for 

separately billable ESRD drugs after 2011 is an accurate predictor 

of changes in facility acquisition costs. 

BACKGROUND 

Beneficiaries typically receive treatment for ESRD, such as dialysis, 

from a facility that is approved to furnish specific ESRD services. In 

2008, 94 percent of dialysis facilities were independent and 6 percent 

were hospital based. Medicare currently pays both types of 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. Drugs not covered under the composite rate, 

such as epoetin alfa and darbepoetin alfa, must be billed separately and 

are referred to as separately billable drugs. Medicare pays for most 

separately billable drugs furnished by independent and hospital-based 

dialysis facilities at 106 percent of their average sales prices (ASP). In 

2008, Medicare paid $2.1 billion for separately billable ESRD drugs. 

On January 1, 2011, Federal law will require CMS to begin 

implementation of a new system that combines composite rate 

payments with payments for items and services that are currently 

separately billable (including separately billable drugs) to create a 

single bundled payment. Federal law will require that once the bundled 

rate takes effect, it be updated annually to reflect the changes over time 

in the prices of goods and services used to provide ESRD care. CMS has 

decided to base these price updates on wage and price proxy data from 

the Bureau of Labor Statistics. For the ESRD drugs portion of the new 

bundled rate, CMS plans to use the Producer Price Index (PPI) for 

Prescription Drugs to estimate price changes. 

We sent requests for information to the three largest independent 

dialysis companies, a random sample of independent facilities not 

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EXECUTIVE SUMMARY 

owned by the three largest dialysis companies, and all hospital-based 

dialysis facilities. These surveys included a request for first-quarter 

2009 data on the total amount paid; discounts and rebates received; and 

total units purchased for 11 high-expenditure separately billable ESRD 

drugs. In total, we received acquisition cost information for more than 

three-quarters of all dialysis facilities. 

We calculated the volume-weighted average acquisition cost per drug 

and compared it to each drug’s first-quarter 2009 Medicare payment 

amount. We also performed this comparison in the aggregate (i.e., for 

the entire group of drugs as a whole). To examine how facility 

acquisition costs for selected separately billable ESRD drugs have 

changed over the past several years, we compared average acquisition 

costs for the first quarter of 2009 to average acquisition costs in 2003, 

2005, and the third quarter of 2006, as determined in previous Office of 

Inspector General (OIG) reports. To determine whether the PPI for 

Prescription Drugs has been an accurate predictor of changes in 

acquisition costs for certain separately billable ESRD drugs, we 

compared the changes in acquisition costs for separately billable drugs 

in independent facilities to changes in the PPI for Prescription Drugs 

from 2003 to the first quarter of 2009 (changes for darbepoetin alfa were 

measured from 2005, as the drug did not yet have a Medicare billing 

code in 2003). 

FINDINGS 

In the aggregate, drug acquisition costs at independent dialysis 

facilities were 10 percent below Medicare payment amounts. 

In the first quarter of 2009, aggregate acquisition costs for ESRD drugs 

among responding independent dialysis facilities averaged 10 percent 

below Medicare payment amounts. For these facilities, average 

acquisition costs for all 11 of the drugs under review were between 

2 percent and 27 percent below Medicare payment amounts. The 

average acquisition cost for epoetin alfa (a product that accounted for 

nearly 70 percent of Medicare drug expenditures in independent 

facilities in 2008) was 9 percent less than the Medicare payment 

amount. Overall, responding independent chain dialysis facilities paid 

less for drugs under review than nonchain facilities. 

In the aggregate, drug acquisition costs at hospital-based dialysis 

facilities were 7 percent below Medicare payment amounts. In the 

first quarter of 2009, aggregate acquisition costs for ESRD drugs among 

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EXECUTIVE SUMMARY 

responding hospital-based dialysis facilities averaged 7 percent below 

Medicare payment amounts. For these facilities, average acquisition 

costs for 5 of the 11 ESRD drugs under review were between 4 percent 

and 33 percent below Medicare payment amounts. Average acquisition 

costs for epoetin alfa and darbepoetin alfa (two products that accounted 

for 73 percent of Medicare drug spending in hospital-based facilities in 

2008) were 4 percent and 15 percent below the Medicare payment 

amounts, respectively. For 6 of the 11 drugs, average acquisition costs 

among responding hospital-based facilities ranged from 0.4 percent to 

12 percent above the Medicare payment amounts (for 3 of these drugs, 

the difference was 1 percent or less). These six drugs accounted for 

23 percent of total Medicare payments to hospital-based facilities in 

2008. 

Over the past several years, average acquisition costs for 7 of the 

11 drugs under review have decreased among responding 

independent dialysis facilities. Seven of the eleven separately billable 

ESRD drugs under review have seen a decrease in their average 

acquisition costs for responding independent dialysis facilities over the 

last several years. In contrast, only four drugs became more expensive 

for independent dialysis facilities during this time period. These four 

drugs accounted for only 3 percent of total Medicare payments to 

independent facilities for separately billable ESRD drugs in 2008. 

During a period when acquisition costs for many ESRD drugs 

decreased, the index CMS plans to use as the basis for future 

payment changes increased by 39 percent. Once the new payment 

methodology takes effect in 2011, CMS plans to use the PPI for 

Prescription Drugs as the basis for annual adjustments to the 

prescription drug portion of the bundled rate. According to PPI data, 

prices for prescription drugs were 39 percent higher in the first quarter of 

2009 than in 2003. However, facility acquisition costs for the drugs that 

account for the majority of Medicare expenditures in independent dialysis 

facilities actually decreased during this same period. 

For example, the average acquisition cost among responding independent 

dialysis facilities for 1,000 units of epoetin alfa fell from $8.82 in 2003 to 

$8.37 in the first quarter of 2009 (a decrease of 5 percent). If the PPI for 

Prescription Drugs had been an accurate predictor for changes in the 

acquisition cost of epoetin alfa since 2003, dialysis facilities would have 

paid $12.22 for 1,000 units of the drug in the first quarter of 2009. This 

amount would be 46 percent higher than epoetin alfa’s average 

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

acquisition cost among responding independent dialysis facilities (and 

33 percent higher than the ASP-based payment amount). Had the 

Medicare payment amount for epoetin alfa since 2003 been based on 

changes in the PPI for Prescription Drugs, total program payments to all 

independent dialysis facilities for the drug in the first quarter of 2009 

alone would have been $113 million higher than actual payments under 

the current ASP-based system.

acquisition cost among responding independent dialysis facilities (and 

33 percent higher than the ASP-based payment amount). Had the 

Medicare payment amount for epoetin alfa since 2003 been based on 

changes in the PPI for Prescription Drugs, total program payments to all 

independent dialysis facilities for the drug in the first quarter of 2009 

alone would have been $113 million higher than actual payments under 

the current ASP-based system.

RECOMMENDATION 

CMS currently pays all dialysis facilities at 106 percent of ASPs for 

most separately billable ESRD drugs. Under the current system, we 

found that aggregate acquisition costs for ESRD drugs at both 

independent and hospital-based dialysis facilities were below Medicare 

payment amounts. In addition, when we compared acquisition costs 

among responding independent dialysis facilities to costs from prior OIG 

reports, we found that 7 out of the 11 separately billable ESRD drugs 

under review have actually seen a decrease in their average acquisition 

costs over the last several years. The cost of epoetin alfa, a drug 

responsible for more than $1.4 billion in annual Medicare spending in 

dialysis facilities, fell by 5 percent. During this same period, the PPI for 

Prescription Drugs increased by 39 percent. 

If the new bundled system is implemented as planned and acquisition 

costs for the majority of separately billable ESRD drugs decrease (as 

they have in the past) while price indexes rise, the existing gap between 

Medicare payment amounts and dialysis facility acquisition costs will 

continue to grow each year. As a result, payments under the new 

bundled system would not accurately reflect facility acquisition costs, 

potentially costing the program additional hundreds of millions of 

dollars per year. Therefore, we recommend that CMS: 

Develop a more accurate method for estimating changes in the 

prices of ESRD drugs. 

AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 

RESPONSE 

CMS did not concur with our recommendation. In its response to the 

draft report, CMS stated that the downward trajectory of average 

acquisition costs documented in OIG’s analysis was influenced largely 

by changes in CMS’s payment mechanism for separately billable ESRD 

drugs, particularly for epoetin alfa. CMS states that, as a result, OIG’s 

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EXECUTIVE SUMMARY 

figures are not suitable for inferring future price trends as the market 

for epoetin alfa becomes more competitive. CMS’s view is that it is more 

appropriate to look at recent quarterly price changes—changes that 

CMS states have not been distorted by changes in payment policy—that 

show an increase in the cost of epoetin alfa since the end of 2008. CMS 

expects that future ESRD drug price growth will more closely reflect 

market-based price drivers, such as those measured by the PPI for 

Prescription Drugs. 

OIG fully appreciates the difficulty that CMS faces in implementing the 

new bundled rate payment system, especially in terms of estimating 

future costs for all items and services related to ESRD care. OIG also 

realizes that the historical average acquisition cost data presented in 

this report may not necessarily be predictive of future trends in the 

costs of separately billable drugs. Nevertheless, based on our findings, 

we remain concerned that Medicare could end up paying too much for 

these drugs once the bundled rate is implemented, potentially costing 

the program and its beneficiaries hundreds of millions of dollars a year. 

Therefore, OIG intends to work with CMS to carefully monitor the cost 

of epoetin alfa and other ESRD drugs in the future. 
 TABLE OF CONTENTS 

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

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

FINDINGS ...................................................... 14 

In the aggregate, drug acquisition costs at independent dialysis 

facilities were 10 percent below Medicare payment amounts . . . . . . . . 14 

In the aggregate, drug acquisition costs at hospital-based dialysis 

facilities were 7 percent below Medicare payment amounts . . . . . . . . . 16 

Over the past several years, average acquisition costs for 7 of the 

11 drugs under review have decreased among responding 

independent dialysis facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 

During a period when acquisition costs for many ESRD drugs 

decreased, the index CMS plans to use as the basis for future 

payment changes increased by 39 percent . . . . . . . . . . . . . . . . . . . . . . . 18 

RECOMMENDATION ........................................... 20 

Agency Comments and Office of Inspector General Response . . . . . . . . 21 

APPENDIXES .................................................. 23 

A: Medicare Expenditures in 2008 for Drugs Under Review. . . . . . . . . 23 

B: Agency Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 

ACKNOWLEDGMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
 

 INTRODUCTION 

OBJECTIVES 

1. To compare Medicare payment amounts for selected separately 

billable end stage renal disease (ESRD) drugs to average acquisition 

costs for these drugs at dialysis facilities in the first quarter of 2009. 

2. To examine how facility acquisition costs for selected separately 

billable ESRD drugs have changed over the past several years. 

3. To determine whether the method the Centers for Medicare & 

Medicaid Services (CMS) plans to use to update payments for 

separately billable ESRD drugs after 2011 is an accurate predictor 

of changes in facility acquisition costs. 

BACKGROUND 

Medicare pays dialysis facilities for most items and services based on a 

prospective payment system, known as the composite rate. However, 

many ESRD drugs and biologicals used in treating dialysis patients 

must be billed separately and are therefore referred to as separately 

billable drugs.1 Medicare currently bases payment for most separately 

billable ESRD drugs on 106 percent of their average sales prices (ASP). 

Prior Office of Inspector General (OIG) reports have found that 

Medicare payment amounts for the majority of the high-expenditure 

separately billable ESRD drugs reviewed were consistently higher than 

average acquisition costs reported by dialysis facilities.2

On January 1, 2011, Federal law will require CMS to begin 

implementation of a new system that combines composite rate 

payments with payments for items and services that are currently 

separately billable (including separately billable drugs) to create a 

single bundled payment.3 On August 12, 2010, CMS published a notice 

of final rulemaking that sets forth the payment methodology under the 

new bundled rate system.4 According to the preamble to the final rule, 

once the new system takes effect in 2011, bundled payments in future 

1 Hereinafter, the term “drugs” refers to both drugs and biologicals. 

2 OIG, Medicare Reimbursement for End Stage Renal Disease Drugs: Third Quarter 

2006 (OEI-03-06-00590), June 2007; Medicare Reimbursement for New End Stage Renal 

Disease Drugs (OEI-03-06-00200), March 2006; Medicare Reimbursement for Existing EndStage Renal Disease Drugs (OEI-03-04-00120), May 2004. 

3 Social Security Act (the Act), § 1881(b)(14). 

4 75 Fed. Reg. 49030 (Aug. 12, 2010). 

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INTRODUCTION 

years (i.e., 2012 and later) will be annually updated based on an 

inflationary index developed by CMS. This index will use data 

published by the Bureau of Labor Statistics (BLS), including the 

Producer Price Index (PPI) for Prescription Drugs, to estimate yearly 

changes in the prices of ESRD-related goods and services.5

In a letter to OIG, Representative Pete Stark expressed concerns that 

the bundled payment system in 2011 may not accurately reflect facility 

acquisition costs and requested that OIG update its analysis of the 

acquisition costs paid by dialysis facilities for separately billable ESRD 

drugs. Specifically, OIG was requested to (1) compare recent 

acquisition costs in dialysis facilities to the Medicare payment amounts 

and (2) compare recent acquisition costs in dialysis facilities to 

acquisition costs from prior years as published in earlier OIG reports. 

Treatment of End Stage Renal Disease 

ESRD is a condition in which the kidneys are no longer able to function 

at a level necessary for day-to-day life. The loss of kidney function in 

ESRD patients is usually permanent. Treatment options include kidney 

transplantation and dialysis. In 2007, Medicare covered approximately 

400,000 beneficiaries with ESRD.6 One of the most common 

complications of ESRD is anemia, a deficiency in red blood cells. 

Erythropoietin-stimulating agents, such as epoetin alfa (trade name 

Epogen) and darbepoetin alfa (trade name Aranesp), treat anemia by 

increasing the number of red blood cells. 

Beneficiaries receive treatment for ESRD, such as dialysis, from a 

facility that is approved to furnish specific ESRD services. Facilities 

may be either independent or hospital based. Both types of dialysis 

facilities provide outpatient services to ESRD patients as well as home 

maintenance dialysis, which is dialysis performed by appropriately 

trained patients at their own homes. Independent dialysis facilities are 

freestanding and the majority are owned or managed by a chain 

(87 percent of independent dialysis facilities are chain facilities 

according to CMS’s Dialysis Facility Compare database). 

Hospital-based dialysis facilities must be financially and 

2 

5 75 Fed. Reg. 49030, 49154–49161 (Aug. 12, 2010). 

6 Payment, Safety and Quality Issues in Treatment of Patients with ESRD. Testimony of 

Leslie V. Norwalk, Esq., Acting Administrator, CMS, June 26, 2007. Accessed at 

http://waysandmeans.house.gov/media/pdf/110/norwalk.pdf on July 9, 2009. 

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INTRODUCTION 

administratively integrated within a hospital.7 As of December 2008, 

independent dialysis facilities accounted for 94 percent of all facilities 

and hospital-based dialysis facilities represented only 6 percent.8

Medicare Payments to Dialysis Facilities 

CMS currently pays 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 is composed of a labor and nonlabor portion, with an 

add-on adjustment for area wage index. The composite rate includes 

most items and services related to dialysis services, such as labor costs; 

related supplies; routine tests; and certain drugs, such as 

antihistamines, glucose, and insulin. Since January 1, 2009, 

hospital-based facilities receive the same rate as independent dialysis 

facilities.9 Drugs not covered under the composite rate, such as epoetin 

alfa and darbepoetin alfa, must be billed separately and are referred to 

as separately billable drugs.10 

Medicare Payments for Separately Billable ESRD Drugs 

In general, 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 physician or other health care 

professional. Exceptions include epoetin alfa and darbepoetin alfa, 

which are covered even if self-administered by the patient.11 

According to CMS’s National Claims History File, Medicare paid 

$2.1 billion for separately billable drugs furnished by dialysis facilities 

in 2008 ($2 billion in independent dialysis facilities and $116 million in 

hospital-based dialysis facilities).12 Epoetin alfa and darbepoetin alfa 

accounted for 72 percent of Medicare payments for separately billable 

ESRD drugs in independent dialysis facilities and 73 percent of 

payments in hospital-based dialysis facilities. 

3 

7 42 CFR §§ 413.174(c)(4) and 413.174(c)(5). 

8 Dialysis Facility Compare database. Accessed at http://www.medicare.gov on 

December 10, 2008. 

9 CMS, Medicare Benefit Policy Manual, ch. 11, § 30.5; CMS, Medicare Claims Processing 

Manual, ch. 8, § 10.1. 

10 CMS, Medicare Benefit Policy Manual, ch. 11, § 30.4.2; CMS, Medicare Claims 

Processing Manual, ch. 8, § 60.2.1.1. 

11 CMS, Medicare Benefit Policy Manual, ch. 11, §§ 30.4 and 90. 

12 As of December 2009, the National Claims History File for 2008 was 95-percent 

complete. 

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INTRODUCTION 

Independent dialysis facilities. Prior to January 1, 2005, CMS paid 

independent dialysis facilities for separately billable drugs based on the 

lower of the billed amount or 95 percent of their average wholesale 

prices. The exception was epoetin alfa, which was paid for based on a 

statutory payment allowance of $10 per 1,000 units.13 

Beginning January 1, 2005, in accordance with the Medicare 

Prescription Drug, Improvement, and Modernization Act of 2003 

(MMA), P.L. 108-173, CMS based payment to independent dialysis 

facilities for the 10 highest expenditure separately billable drugs on 

acquisition costs determined by OIG.14 With certain exceptions, 

including specific vaccines, CMS paid all other drugs administered in 

independent dialysis facilities in 2005 at 106 percent of their ASPs.15 

As of January 1, 2006, with certain exceptions, CMS began to pay for all

separately billable drugs furnished by independent dialysis facilities at 

106 percent of their ASPs.16 This is the same method used to pay for 

other drugs under Medicare Part B. In announcing this change, CMS 

stated that it was inappropriate to use the older acquisition data 

provided by OIG (updated for inflation) as a basis for payment and 

questioned the feasibility of continually acquiring acquisition cost data 

over the long term.17 

Hospital-based dialysis facilities. Prior to January 1, 2006, CMS paid 

hospital-based dialysis facilities for separately billable drugs based on 

reasonable cost.18 The exception to this rule was epoetin alfa, which 

was paid in the same manner as in independent facilities, i.e., based on 

a statutory payment allowance of $10 per 1,000 units prior to 

January 1, 2005, and based on the OIG-reported average acquisition 

cost in 2005.19 Since January 1, 2006, all separately billable drugs 

13 The Act, §§ 1881(b)(11)(B)(ii)(I) and 1881(b)(11)(B)(ii)(II). CMS, Medicare Claims 

Processing Manual, ch. 8, §§ 60.2.2 and 60.4.3. 

14 MMA, § 623(d)(1). The Act, § 1881(b)(13)(A)(ii). As required by the MMA, OIG 

reviewed 2003 acquisition costs for 10 high-dollar ESRD drugs in the study entitled 

Medicare Reimbursement for Existing End-Stage Renal Disease Drugs (OEI-03-04-00120), 

May 2004. See the discussion of related OIG work on p. 7 for additional information. 

1542 CFR §§ 414.904(d)(2) and 414.904(e). 

16 CMS, Medicare Claims Processing Manual, ch. 8, § 60.2.2; 42 CFR 

 §§ 414.904(d)(2)(iii) and 414.904(e). 

17 70 Fed. Reg. 70116, 70222–70223 (Nov. 21, 2005). 

18 CMS, Medicare Claims Processing Manual, ch. 8, § 60.2.2. 

19 The Act, §§ 1881(b)(11)(B)(ii)(I) and 1881(b)(11)(B)(ii)(II). CMS, Medicare Claims 

Processing Manual, ch. 8, § 60.4.3. 

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INTRODUCTION 

5 

is facilities. 

(with certain exceptions) furnished by hospital-based dialysis facilities 

have been paid at 106 of their ASPs.20 This change produced a 

consistent drug payment methodology among independent dialysis 

facilities and hospital-based dialys

Changes to the ESRD Payment Methodology Under the Medicare 

Improvements for Patients and Providers Act of 2008 

Effective January 1, 2011, section 1881(b)(14) of the Act, as added by 

section 153(b) of the Medicare Improvements for Patients and Providers 

Act of 2008 (MIPPA), P.L. 110-275, will require Medicare payment for 

all items and services used in the treatment of ESRD, including drugs 

that are currently separately billable, to be included in a single bundled 

rate. The new bundled rate is to be implemented over a multiyear 

phase-in period, with full implementation beginning January 1, 2014. 21 

However, prior to January 1, 2011, ESRD facilities may make a 

one-time election to be excluded from the phase-in and accept payment 

entirely under the ESRD bundled rate.22

This new bundled rate will include a payment adjustment based on 

patient characteristics, unusual variations in the type or amount of 

medical care needed, and additional costs incurred at low-volume 

facilities.23 On August 12, 2010, CMS published a final rule that would 

implement the bundled rate for outpatient ESRD facilities.24 

Base rate in 2011. According to the final rule, CMS will calculate a base 

rate per treatment (base rate) by adding the projected 2011 composite 

rate payment to the projected 2011 average payment for separately 

billable services (including separately billable drugs).25 In accordance 

with Federal law, the estimated total payments under the bundled base 

rate must equal 98 percent of the estimated total amount of payments 

20 CMS, Medicare Claims Processing Manual, ch. 8, § 60.2.2. 42 CFR 

§§ 414.904(d)(2)(iii) and 414.904(e). 

21 During the phase-in, ESRD facilities will be paid based on a blend of the ESRD 

bundled rate and composite rate payment/separately billable systems. 

22 The Act, § 1881(b)(14)(E)(ii). 

23 The Act, § 1881(b)(14)(D). Payment adjustments may also include additional items 

that the Secretary of Health & Human Services determines appropriate, such as an 

adjustment for facilities located in rural areas. 

24 75 Fed. Reg. 49030 (Aug. 12, 2010). 

25 75 Fed. Reg. 49030, 49200 (Aug. 12, 2010). 

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INTRODUCTION 

that would have been made for 2011 if the bundled rate had not been 

implemented.26 

Separately billable drugs component of the base rate in 2011. In the 

preamble to its final rule, CMS states that total payments for the top 

11 separately billable ESRD drugs accounted for 99.8 percent of total 

spending for all separately billable drugs in 2007.27, 28 Because total 

payments under the new system must initially equal 98 percent of the 

estimated total payments that would have been made if the bundled 

system were not implemented, CMS must determine what total 

payments for separately billable drugs would likely be in 2011 under 

the current system. In doing this, CMS updated the second-quarter 

2010 ASP-based payment amounts for separately billable drugs to 

2011 levels using the PPI for Prescription Drugs.29, 30

Annual payment increases after 2011. Once the base rate for ESRD 

bundled payments is established, it will be annually updated to reflect 

changes over time in the prices of goods and services used to provide 

ESRD care. Federal law requires CMS to develop an all-inclusive ESRD 

bundled rate (ESRDB) input price index that will reflect annual price 

increases of the various categories that make up the ESRDB market 

basket.31, 32 CMS plans to use wage and price proxies published by BLS 

to measure the annual rate of price change in each category (e.g., wages 

and salaries, pharmaceuticals, capital costs).33 Beginning in 2012, 

ESRD bundled payment amounts must be annually updated by the 

increase in the ESRDB price index minus a productivity adjustment.34

26 The Act, § 1881(b)(14)(A)(ii). 

27 75 Fed. Reg. 49030, 49076 (Aug. 12, 2010). 

28 Ten of these drugs were included in this report. The drugs selected for this report 

were chosen prior to CMS’s publishing its final rule for the new ESRD payment system. 

29 75 Fed. Reg. 49030, 49079 (Aug. 12, 2010). 

30 According to CMS, the term “PPI for Prescription Drugs,” as used in its final rule, 

refers specifically to BLS’s price index for Pharmaceuticals for Human Use (Prescription). 

See 75 Fed. Reg. 49030, 49160 (Aug 12, 2010). 

31 The Act, § 1881(b)(14)(F)(i), as amended by section 3401(h) of the Patient Protection 

and Affordable Care Act (PPACA), P.L. 111-148. We conducted this study prior to the 

passage of the PPACA. The changes contained in the PPACA had no effect on our analysis. 

32 In this context, the term “ESRD market basket” refers to the mix of goods and services 

used to produce ESRD care. 

33 75 Fed. Reg. 49030, 49158–49160 (Aug. 12, 2010). 

34 The Act, §§ 1881(b)(14)(F)(i)(I) and 1881(b)(14)(F)(i)(II), as amended by section 3401(h) 

of the PPACA. The productivity adjustment is described in the Act, § 1886(b)(3)(B)(xi)(II). 

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INTRODUCTION 

According to the preamble to CMS’s final rule, the pharmaceutical 

category of the ESRDB will account for approximately 25 percent of the 

entire ESRDB market basket, with epoetin alfa expenditures making up 

almost 70 percent of the pharmaceutical category.35 CMS intends to use 

the PPI for Prescription Drugs as its price proxy for the pharmaceutical 

category.36 According to CMS, the PPI for Prescription Drugs reflects 

price changes associated with the average mix of all prescription drugs 

sold in pharmacies. CMS states that it anticipates “... the price changes 

associated with the assortment of drugs administered in ESRD facilities 

should, over time, be similar to the average prescription drug price 

changes observed across the entire economy.”37

Related Work by the Office of Inspector General 

An OIG report completed in May 2004 and a followup report completed 

in March 2006 compared the average acquisition costs reported by 

independent dialysis facilities to the Medicare payment amounts for 

selected ESRD drugs.38 The May 2004 report found that large 

independent dialysis facilities could acquire 10 high-expenditure drugs 

at costs that averaged 22 percent below the Medicare payment amount; 

smaller independent facilities could acquire these drugs for an average 

of 14 percent less. Both large and small facilities could obtain epoetin 

alfa for an average of 12 percent and 5 percent below the Medicare 

payment amount, respectively. The March 2006 report focused on only 

darbepoetin alfa, which did not yet have its own Medicare billing code 

during the period covered by the May 2004 report. Independent dialysis 

facilities could acquire darbepoetin alfa for less (sometimes 

substantially less) than the Medicare payment amount. 

A June 2007 OIG report provided updated information on payment 

differences for 11 high-dollar separately billable ESRD drugs (the 

10 drugs included in the May 2004 report and the 1 drug from the 

March 2006 report).39 In the June 2007 report, we found that 

independent dialysis facilities could acquire 9 of the 11 ESRD drugs 

7 

35 75 Fed. Reg. 49030, 49156–49158 (Aug. 12, 2010). 

36 Ibid, 49160 (Aug. 12, 2010). 

37 Ibid. 

38 OIG, Medicare Reimbursement for Existing End-Stage Renal Disease Drugs 

 (OEI-03-04-00120), May 2004; Medicare Reimbursement for New End Stage Renal Disease 

Drugs (OEI-03-06-00200), March 2006. 

39 OIG, Medicare Reimbursement for End Stage Renal Disease Drugs: Third Quarter 

2006 (OEI-03-06-00590), June 2007. 

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INTRODUCTION 

under review for costs averaging from 7 percent to 32 percent less than 

the Medicare payment amounts. For the two remaining drugs, average 

acquisition costs among independent facilities were 3 percent and 

9 percent above the Medicare payment amounts. Hospital-based 

dialysis facilities could acquire 6 of the 11 drugs under review at prices 

averaging from 4 percent to 29 percent less than the Medicare payment 

amounts. For the five remaining drugs, average acquisition costs 

among hospital-based facilities ranged from 1 percent to 8 percent above 

the Medicare payment amounts. 

METHODOLOGY 

Scope 

This study focused on the 11 drugs that had been included in OIG’s 

3 most recent studies of ESRD drug pricing. Since 2003, these 11 drugs 

have consistently accounted for nearly all of Medicare’s spending on 

separately billable ESRD drugs in dialysis facilities. 

Drugs Under Review 

We compiled a list of the 11 drugs included in the 3 OIG ESRD drug 

pricing studies issued since 2003. Using data from CMS’s National 

Claims History File, we then determined Medicare expenditures in 2007 

for each of these 11 drugs, as well as for all separately billable ESRD 

drugs furnished by dialysis facilities.40 As Table 1 shows, all of the 

selected drugs were among the 15 drugs (excluding vaccines) with the 

highest total payments in independent and hospital-based dialysis 

facilities (and all but 3 were among the top 10 in both settings). In 

independent and hospital-based dialysis facilities, the 11 selected drugs 

accounted for 99 percent and 97 percent of total Medicare payments for 

separately billable drugs in 2007, respectively. 

40 At the time we selected our sample, outpatient data for 2008 were not 100 percent 

complete. See Appendix A for Medicare payments in 2008 for the drugs under review. 

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INTRODUCTION 

Table 1: Payment in 2007 for Drugs Under Review 

Separately Billable Drug 

Payment 

Ranking in 

Independent 

Dialysis 

Facilities 

Total Payment 

in Independent 

Dialysis 

Facilities 

Payment 

Ranking in 

Hospital-Based 

Dialysis 

Facilities 

Total Payment 

in 

Hospital-Based 

Dialysis 

Facilities 

Epoetin alfa, per 1,000 units 1 $1,457,712,457 2 $44,438,489 

Paricalcitol, 1 g* 2 $243,791,813 3 $9,182,565 

Iron sucrose, 1 mg 3 $125,469,448 4 $5,185,761 

Doxercalciferol, 1 g 4 $56,453,718 5 $3,438,602 

Sodium ferric gluconate, 12.5 

mg 

5 $49,201,885 6 $3,400,363 

Darbepoetin alfa, 1 g 6 $47,980,810 1 $57,389,882 

Alteplase recomb, 1 mg 7 $16,286,265 7 $3,307,690 

Levocarnitine, 1 g 8 $3,561,991 11 $328,083 

Vancomycin HCL, 500 mg 9 $2,595,876 12 $194,233 

Calcitriol, 0.1 g 10 $1,931,801 10 $414,817 

Iron dextran, 50 mg 15 $474,834 13 $129,437 

 Total $2,005,460,898 $127,409,922 

Source: OIG analysis of 2007 National Claims History File. 

 * μg = microgram, mg = milligram, g = gram.

Data Collection 

Independent dialysis facilities. As of December 2008, 3 dialysis companies 

(Davita, Fresenius, and Dialysis Clinic, Inc.) owned 3,181 (71 percent) of 

the 4,461 independent dialysis facilities.41 We sent a survey requesting 

first-quarter 2009 acquisition cost information for the 11 drugs under 

review to representatives of these 3 companies. We requested 

information about the total amount paid by each company for each of 

the 11 drugs, the amount of discounts and rebates received, the net 

amount paid, the number of units purchased, and the average 

acquisition cost per drug. We defined average acquisition cost as the 

total amount paid (net of all rebates and discounts) divided by the total 

number of units purchased. Between August 2009 and January 2010, 

all three companies responded with the requested information. In their 

responses, the 3 large dialysis companies indicated that they had 

41 Dialysis Facility Compare database. Accessed at http://www.medicare.gov on 

December 10, 2008. 

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 INTRODUCTION INTRODUCTION 

acquired or opened an additional 137 independent dialysis facilities in 

the first quarter of 2009 (for a revised total of 3,318). 

We also sent requests for information for identical first-quarter 

2009 cost data to a random sample of 200 independent dialysis facilities 

not affiliated with the 3 largest companies.42 We asked each facility if it 

was part of a chain. Between August and December 2009, we received 

responses from 165 facilities (83 percent). However, 18 of the 

responding independent facilities had actually been acquired by Davita 

or Fresenius, meaning that they were owned by 1 of the 3 large dialysis 

companies during the review period. Acquisition cost data for these 18 

facilities were thus included as part of the larger companies’ responses. 

Another two facilities provided incomplete data that could not be 

included in the analysis. Therefore, we received complete data from 145 

independent dialysis facilities not affiliated with the 3 largest 

companies. Several of the responding facilities owned multiple dialysis 

units and provided cost data for 20 additional facilities (for a total of 165 

respondents not affiliated with the 3 large independent dialysis 

companies). According to the responses provided, 106 of these facilities 

were part of a chain and 59 were nonchains. 

After we combined data from the 3,318 facilities owned or managed by 

the 3 largest dialysis companies and the 165 responding unaffiliated 

independent dialysis facilities, our results represent acquisition costs for 

more than three-quarters of all independent dialysis facilities. 

Hospital-based dialysis facilities. We selected all of the 

276 hospital-based dialysis facilities that were listed in CMS’s Dialysis 

Facility Compare database as of December 2008. In July 2009, we sent 

surveys to these facilities requesting first-quarter 2009 acquisition cost 

information for each of the 11 drugs under review. Between August and 

December 2009, we received responses from 199 hospital-based dialysis 

facilities (72 percent of all hospital-based dialysis facilities). 

We were unable to use data from 57 respondents because of their 

participation in the 340B program.43 In addition, one hospital-based 

facility was excluded from our analysis because it received Department 

42 We randomly selected these facilities from Medicare’s Dialysis Facility Compare 

database. 

43 The 340B program requires drug manufacturers to provide drugs to eligible health 

care centers at or below statutorily defined ceiling prices. Public Health Services Act, § 

340B. 

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INTRODUCTION 

of Veterans Affairs pricing, which is heavily discounted compared to the 

marketplace. Another five facilities were excluded from our analysis for 

providing incomplete data. Two hospital-based facilities had been 

acquired by one of the major dialysis companies (and therefore no longer 

met the definition of “hospital based”). One of the responding hospitals 

provided data on 3 additional hospitals, resulting in 134 respondents 

with valid data for 137 hospital-based dialysis facilities. 

CMS data. We obtained the ASP-based Medicare payment amounts 

for the 11 selected separately billable ESRD drugs in the first quarter 

of 2009 from CMS’s Web site. 

PPI data. For the purpose of comparing changes in the PPI for 

Prescription Drugs to changes in facility acquisition costs, we obtained 

from BLS’s Web site annual and monthly values of the PPI for 

Prescription Drugs for the period beginning in 2003 (i.e., the period 

covered by OIG’s first mandated ESRD pricing study) and ending in 

March 2009. 

Data Analysis 

Comparing acquisition costs to Medicare payment amounts. For both 

facility types (i.e., independent and hospital-based), we calculated 

volume-weighted average acquisition costs (hereinafter referred to as 

average acquisition costs) by totaling the amount paid net of any 

discounts and rebates for each drug and dividing it by the total units 

purchased among all facilities for each drug. In calculating these 

figures, we identified any outliers among the costs reported by facilities 

and removed them from our analysis. We defined an outlier as an 

average acquisition cost reported by a facility that was not within three 

standard deviations of the mean.44 We calculated the percentage 

difference between the average acquisition cost and CMS’s first-quarter 

2009 ASP-based Medicare payment amount per drug for both facility 

types. 

To calculate the aggregate difference between the average acquisition 

costs and CMS’s first-quarter 2009 ASP-based Medicare payment 

amounts among all 11 drugs, we: 

44 Among independent dialysis facilities, an average of 1.9 responses per drug were 

considered outliers and removed. Among hospital-based dialysis facilities, this number was 

1.5. No more than four outliers were removed for any single drug in both types of facilities. 

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INTRODUCTION 

 calculated the total amount paid for the 11 drugs among the 

facilities by summing the data reported by all respondents; 

 multiplied the total units purchased for each drug, as reported by 

facilities, by its Medicare payment amount to calculate the total 

amount that facilities would have paid for all these drugs if their 

acquisition costs equaled Medicare payment amounts; and 

 calculated the percentage difference between the total amount paid 

for the 11 drugs, as reported by facilities, and the total that would 

have been paid had the acquisition cost been equal to Medicare 

payment amounts. 

Independent chain versus nonchain facilities. To determine whether 

independent dialysis chain facilities had average acquisition costs that 

differed from those of nonchain facilities, we compared cost data from 

the 3,424 responding facilities affiliated with chains to cost data from 

the 59 responding nonchain facilities by repeating the analysis 

described in the section above. In addition, we compared chain and 

nonchain acquisition costs to CMS’s first-quarter 2009 ASP-based 

Medicare payment amounts. We also calculated the aggregate 

difference between chain and nonchain acquisition costs and CMS’s 

first-quarter 2009 ASP-based payment amounts. 

Change in PPI for Prescription Drugs versus change in acquisition costs. 

Using cost data from previous OIG reports, we compared average 

acquisition costs from the first quarter of 2009 to average acquisition 

costs in 2003 (for 10 of the 11 drugs), 2005 (for darbepoetin alfa only), 

and the third quarter of 2006.45, 46 To determine whether actual drug 

costs have increased, decreased, or remained the same, we determined 

45 OIG reports entitled Medicare Reimbursement for Existing End-Stage Renal Disease 

Drugs (OEI-03-04-00120), May 2004, and Medicare Reimbursement for New End Stage 

Renal Disease Drugs (OEI-03-06-00200), March 2006, contained acquisition cost data for 

the entire years (2003 and 2005, respectively). Medicare Reimbursement for End Stage 

Renal Disease Drugs: Third Quarter 2006 (OEI-03-06-00590), June 2007, contained 

acquisition cost data only for the third quarter of 2006. In addition, the March 2006 report 

focused only on a single drug (darbepoetin alfa), which did not yet have its own Medicare 

billing code at the time of our initial report. 

46 In the May 2004 OIG report entitled Medicare Reimbursement for Existing End-Stage 

Renal Disease Drugs (OEI-03-04-00120), we separately calculated average acquisition costs 

for the four largest independent dialysis companies and smaller independent dialysis 

facilities (we did not calculate a combined figure). For the purpose of this report, we 

estimated a combined average acquisition cost for independent facilities in 2003 using a 

weighting method that approximates how costs for independent facilities were calculated in 

later reports. 

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INTRODUCTION 

the percentage change in price between each period for each drug. 

Because two of the earlier OIG reports did not collect acquisition cost 

data from hospital-based dialysis facilities, we compared acquisition 

cost changes over time only for independent dialysis facilities. 

To determine whether the PPI for Prescription Drugs has been an 

accurate predictor of changes in prices for separately billable ESRD 

drugs, we compared the changes in per-drug acquisition costs among 

independent dialysis facilities for separately billable drugs to changes in 

the PPI from 2003 to the first quarter of 2009. Using the same data, we 

also calculated how much epoetin alfa (a drug whose expenditures will 

account for nearly 70 percent of the pharmaceutical portion of the ESRD 

market basket under the new bundled rate) would have cost in the first 

quarter of 2009 if its average acquisition cost from 2003 had changed at 

the same rate as the PPI for Prescription Drugs. To estimate the 

amount that total Medicare expenditures would have differed in the 

first quarter of 2009 had payment for epoetin alfa been based on the PPI 

for Prescription Drugs since 2003 rather than ASP, we (1) calculated the 

percentage difference between the drug’s first-quarter 2009 Medicare 

payment amount and the PPI-based cost figure from the same quarter 

and (2) multiplied this amount by one-quarter of Medicare expenditures 

for the drug in independent dialysis facilities in 2008.47

Limitations 

We did not verify the drug cost information submitted by the dialysis 

facilities. The acquisition cost data provided in this report represent all 

purchases for the drugs under review made by more than three-quarters 

of all dialysis facilities during the first quarter of 2009; we did not 

project these figures to facilities not included in our sample. 

Standards 

This study was conducted in accordance with the Quality Standards for 

Inspections approved by the Council of the Inspectors General on 

Integrity and Efficiency. 

13 

47 This calculation assumes that Medicare expenditures in the first quarter of 2009 were 

equal to one-quarter of the annual expenditures in 2008. 

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In the first quarter of 2009, 

aggregate acquisition costs for 

ESRD drugs among responding 

independent dialysis facilities 

averaged 10 percent below 

Medicare payment amounts. For these facilities, average acquisition 

costs for all 11 of the drugs under review were between 2 percent and 

27 percent below Medicare payment amounts. 

In the aggregate, drug acquisition costs at 

independent dialysis facilities were 10 percent 

below Medicare payment amounts 

 FINDINGS 

The average acquisition cost for epoetin alfa (a product that accounted 

for nearly 70 percent of Medicare drug expenditures in independent 

facilities in 2008) was 9 percent less than the Medicare payment 

amount. In total, 99 percent of responding independent dialysis 

facilities could purchase epoetin alfa at prices that were below the 

Medicare payment amount in that quarter. Table 2 illustrates the 

percentage difference between Medicare payment amounts and average 

acquisition costs reported by independent dialysis facilities for the first 

quarter of 2009. 

Table 2: Medicare Payment Amounts and Average Acquisition Costs for Responding 

Independent Dialysis Facilities

Separately Billable Drug 

First-Quarter 

2009 

Medicare 

Payment 

Amount 

First-Quarter 

2009 

Average 

Acquisition 

Cost 

Percentage 

 Difference 

Percentage of Medicare 

Payments to 

Independent Facilities 

for Separately Billable 

Drugs in 2008

Alteplase recombinant, 1 mg $34.10 $33.40 -2.1% 0.8% 

Iron dextran, 50 mg $11.78 $11.21 -4.8% < 0.1% 

Sodium ferric gluconate, 12.5 mg $4.74 $4.40 -7.2% 2.5% 

Epoetin alfa, per 1,000 units $9.20 $8.37 -9.0% 69.5% 

Paricalcitol, 1 g $3.66 $3.29 -10.1% 14.2% 

Doxercalciferol, 1 g $3.31 $2.94 -11.2% 2.5% 

Vancomycin HCl, 500 mg $3.08 $2.70 -12.3% 0.1% 

Iron sucrose, 1 mg $0.37 $0.31 -16.2% 6.6% 

Darbepoetin alfa, 1 g $3.06 $2.54 -17.0% 2.2% 

Levocarnitine, 1 g $6.71 $5.35 -20.3% 0.1% 

Calcitriol, 0.1 g $0.45 $0.33 -26.7% 0.1% 

 Aggregate -9.7% 98.6% 

Source: OIG analysis of first-quarter 2009 average acquisition costs among responding independent facilities, November 2009. 

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FINDINGS 

Overall, responding independent chain dialysis facilities paid less for 

the drugs under review than nonchain facilities 

In the aggregate, overall acquisition costs among responding 

independent chain facilities averaged 10 percent below Medicare 

payment amounts. Costs among responding independent nonchain 

facilities averaged 3 percent below Medicare payment amounts. 

On average, responding independent chain facilities could purchase 

10 of the 11 drugs under review for less than responding independent 

nonchain facilities in the first quarter of 2009. For these 10 drugs, 

average acquisition costs among chains ranged from 3 percent to 

26 percent less than average acquisition costs among nonchains. For 

the 11th drug, chains actually paid 2 percent more, on average. 

For responding independent chain facilities, average acquisition costs 

were less than the Medicare payment amounts for all 11 drugs. 

However, among responding independent nonchain facilities, there were 

three drugs for which the average acquisition costs exceeded the 

Medicare payment amounts (by 1 percent to 7 percent) in the first 

quarter of 2009. These three drugs accounted for 22 percent of total 

Medicare payments to independent facilities for separately billable 

ESRD drugs in 2008. The average acquisition costs among responding 

chain and nonchain facilities for all 11 drugs are presented in Table 3. 

Table 3: Medicare Payment Amounts and Average Acquisition Costs for Responding 

Chain and Nonchain Independent Dialysis Facilities

Separately Billable Drug

First-Quarter 2009 

Medicare Payment 

Amount

First-Quarter 2009 

Average Acquisition Cost 

for Chains

First-Quarter 2009 

Average Acquisition Cost 

for Nonchains

Alteplase recombinant, 1 mg* $34.10 $33.38 $34.50 

Iron dextran, 50 mg $11.78 $11.20 $11.75 

Sodium ferric gluconate, 12.5 mg $4.74 $4.39 $4.62 

Epoetin alfa, per 1,000 units $9.20 $8.36 $9.15 

Paricalcitol, 1 g* $3.66 $3.28 $3.90 

Doxercalciferol, 1 g $3.31 $2.94 $3.30 

Vancomycin HCl, 500 mg $3.08 $2.70 $2.91 

Iron sucrose, 1 mg $0.37 $0.31 $0.38 

Darbepoetin alfa, 1 g $3.06 $2.56 $2.51 

Levocarnitine, 1 g $6.71 $5.34 $5.81 

Calcitriol, 0.1 g $0.45 $0.32 $0.43 

Source: OIG analysis of first-quarter 2009 average acquisition costs among responding independent facilities, November 2009. 

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FINDINGS 

In the aggregate, drug acquisition costs at 

hospital-based dialysis facilities were 7 percent 

below Medicare payment amounts 

In the first quarter of 2009, 

aggregate acquisition costs for 

ESRD drugs among responding 

hospital-based dialysis facilities 

averaged 7 percent below 

Medicare payment amounts. For these facilities, average acquisition 

costs for 5 of the 11 ESRD drugs under review were between 4 percent 

and 33 percent below Medicare payment amounts. Average acquisition 

costs for epoetin alfa and darbepoetin alfa (two products that accounted 

for 73 percent of Medicare drug spending in hospital-based facilities in 

2008) were 4 percent and 15 percent below the Medicare payment 

amounts, respectively. 

For 6 of the 11 drugs, average acquisition costs among responding 

hospital-based facilities ranged from 0.4 percent to 12 percent above the 

Medicare payment amount (for 3 of these drugs, the difference was 

1 percent or less). These six drugs accounted for 23 percent of total 

Medicare payments to hospital-based facilities in 2008. Table 4 

illustrates the percentage difference between Medicare payment 

amounts and average acquisition costs reported by hospital-based 

dialysis facilities in the first quarter of 2009. 

Table 4: Medicare Payment Amounts and Average Acquisition Costs for Responding 

Hospital-Based Dialysis Facilities

Separately Billable Drug 

First-Quarter 

2009 

Medicare 

Payment 

Amount 

First-Quarter 

2009 

Average 

Acquisition 

Cost 

Percentage 

 Difference 

Percentage of Medicare 

Payments to HospitalBased Facilities for 

Separately Billable Drugs 

in 2008

Paricalcitol, 1 g $3.66 $4.10 12.0% 9.7% 

Iron sucrose, 1 mg $0.37 $0.39 5.4% 4.4% 

Doxercalciferol, 1 g $3.31 $3.39 2.4% 3.0% 

Levocarnitine, 1 g $6.71 $6.78 1.0% 0.2% 

Sodium ferric gluconate, 12.5 mg $4.74 $4.78 0.8% 3.1% 

Alteplase recombinant, 1 mg $34.10 $34.23 0.4% 3.0% 

Epoetin alfa, per 1,000 units $9.20 $8.82 -4.1% 29.6% 

Iron dextran, 50 mg $11.78 $11.22 -4.8% 0.4% 

Vancomycin HCl, 500 mg $3.08 $2.71 -12.0% 0.2% 

Darbepoetin alfa, 1 g $3.06 $2.59 -15.4% 43.2% 

Calcitriol, 0.1 g $0.45 $0.30 -33.3% 0.1% 

 Aggregate -7.0% 96.9% 

 Source: OIG analysis of first-quarter 2009 average acquisition costs among responding hospital-based dialysis facilities, November 2009. 

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FINDINGS 

Over the past several years, average acquisition 

costs for 7 of the 11 drugs under review have 

decreased among responding independent 

As Table 5 illustrates, 7 of the 

11 separately billable ESRD drugs 

under review have actually seen a 

decrease in their average 

acquisition costs for responding 

independent dialysis facilities over the last several years.48 Costs for 

two of the drugs were at least 50 percent less in the first quarter of 2009 

than in 2003. In contrast, only four drugs became more expensive for 

independent dialysis facilities during this time period. These four drugs 

accounted for only 3 percent of total Medicare payments to independent 

facilities for separately billable ESRD drugs in 2008. 

dialysis facilities 

Table 5: Changes in Average Acquisition Costs Among Independent Dialysis 

Facilities From 2003 to the First Quarter of 2009

Separately Billable Drug 2003 Average 

Acquisition Cost 

Third-Quarter 2006 

Average 

Acquisition Cost 

First-Quarter 2009 

Average 

Acquisition Cost 

Percentage 

Change From 2003 

to First Quarter of 

2009 

Doxercalciferol, 1 g $2.33 $2.16 $2.94 26.2% 

Alteplase recombinant, 1 mg $28.90 $32.48 $33.40 15.6% 

Iron dextran, 50 mg $10.01 $11.29 $11.21 12.0% 

Vancomycin HCl, 500 mg $2.69 $2.46 $2.70 0.4% 

Sodium ferric gluconate, 12.5 mg $4.43 $4.34 $4.40 -0.7% 

Darbepoetin alfa,* 1 g $2.59 $2.82 $2.54 -1.9% 

Iron sucrose, 1 mg $0.32 $0.32 $0.31 -3.1% 

Epoetin alfa, per 1,000 units $8.82 $8.56 $8.37 -5.1% 

Paricalcitol, 1 g $3.53 $3.40 $3.29 -6.8% 

Levocarnitine, 1 g $11.22 $7.00 $5.35 -52.3% 

Calcitriol, 0.1 g $0.87 $0.37 $0.33 -62.1% 

Source: OEI-03-04-00120; OEI-03-06-00200; OEI-03-06-00590; OIG analysis of first-quarter 2009 average acquisition costs among responding 

independent facilities, November 2009. 

* Darbepoetin alfa did not yet have its own Medicare billing code in 2003. Therefore, the price given in the 2003 column is for 2005, the first year it had 

a Medicare billing code. 

48 Darbepoetin alfa did not yet have its own Medicare billing code in 2003. Therefore, all 

analyses of its acquisition cost changes used data starting in 2005, the first year it had a 

Medicare billing code. 

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FINDINGS 

During a period when acquisition costs for 

many ESRD drugs decreased, the index CMS 

plans to use as the basis for future payment 

changes increased by 39 percent 

CMS plans to use the PPI for 

Prescription Drugs (a measure 

that reflects price changes 

associated with the average mix of 

all the prescription drugs sold in 

pharmacies) as the basis for 

annual adjustments to the prescription drug portion of the new bundled 

rate. According to PPI data, prices for all prescription drugs were 

39 percent higher in the first quarter of 2009 than in 2003.49 However, 

facility acquisition costs for the drugs that account for the majority of 

Medicare expenditures in independent dialysis facilities actually 

decreased during this same period. 

For example, the average acquisition cost among responding 

independent dialysis facilities for 1,000 units of epoetin alfa fell from 

$8.82 in 2003 to $8.37 in the first quarter of 2009. In other words, on 

average, independent facilities paid 5 percent less for the highest 

expenditure ESRD drug in early 2009 than they did several years 

earlier. If the PPI for Prescription Drugs had been an accurate 

predictor for changes in the acquisition cost of epoetin alfa since 2003, 

dialysis facilities would have paid $12.22 for 1,000 units of the drug in 

the first quarter of 2009.50 This amount would be 46 percent higher 

than epoetin alfa’s average acquisition cost among responding 

independent dialysis facilities (and 33 percent higher than the 

ASP-based payment amount). Had the Medicare payment amount for 

epoetin alfa since 2003 been based on changes in the PPI for 

Prescription Drugs, total program payments to all independent dialysis 

facilities for the drug in the first quarter of 2009 alone would have been 

$113 million higher than actual payments under the current ASP-based 

system. As Graph 1 illustrates, if past trends continue, this gap would 

continue to expand substantially in future years. 

49 BLS, Databases, Tables & Calculators by Subject. Accessed at http://www.bls.gov/data 

on November 25, 2009. 

50 Under the Act, as amended by section 3401(h) of the PPACA, ESRD bundled payment 

amounts must be updated by the increase in the ESRDB price index minus a productivity 

adjustment. The PPI for Prescription Drugs is one part of the ESRDB index. We did not 

address changes in the productivity adjustment when performing our calculations using the 

PPI for Prescription Drugs. Had we done so, the differences in our figures may have been 

reduced, but the general trends would have likely remained the same. 

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FINDINGS 

Graph 1: Changes in Epoetin Alfa Average Acquisition Cost Versus Changes in the 

PPI for Prescription Drugs Since 2003 

19 

$8.82

$8.37 $8.56

$12.22

$10.51

$9.48 $9.20

$7.00

$8.00

$9.00

$10.00

$11.00

$12.00

$13.00

2003 2006 2009

Year

Amount Paid

Epogen (acq)

Epogen (PPI)

Epogen (ASP

plus 6 percent)

 Source: OEI-03-04-00120; OEI-03-06-00590; OIG analysis of first-quarter 2009 average acquisition costs among responding independent facilities; 

OIG analysis of BLS data, November 2009. 

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 RECOMMENDATION

CMS currently pays all dialysis facilities at 106 percent of ASPs for 

most separately billable ESRD drugs. Under the current system, we 

found that aggregate acquisition costs for ESRD drugs at both 

independent and hospital-based dialysis facilities were below Medicare 

payment amounts. In addition, when we compared acquisition costs 

among responding independent dialysis facilities to costs from prior OIG 

reports, we found that 7 out of the 11 separately billable ESRD drugs 

under review have actually seen a decrease in their average acquisition 

costs over the last several years. The cost of epoetin alfa, a drug 

responsible for more than $1.4 billion in annual Medicare spending in 

dialysis facilities, fell by 5 percent. During this same period, the PPI for 

Prescription Drugs increased by 39 percent. 

If the new bundled system is implemented as planned and acquisition 

costs for the majority of separately billable ESRD drugs decrease (as 

they have in the past) while price indexes rise, the existing gap between 

Medicare payment amounts and dialysis facility acquisition costs will 

continue to grow each year. As a result, payments under the new 

bundled system would not accurately reflect facility acquisition costs, 

potentially costing the program additional hundreds of millions of 

dollars per year. Therefore, we recommend that CMS: 

Develop a more accurate method for estimating changes in the 

prices of ESRD drugs 

CMS decided to use the PPI for Prescription Drugs (a measure that 

reflects price changes associated with the average mix of all the 

prescription drugs sold in pharmacies) as the proxy for drug price 

increases under the assumption that “... the price changes associated 

with the assortment of drugs administered in ESRD facilities should, 

over time, be similar to the average prescription drug price changes 

observed across the entire economy.”51 However, average acquisition 

costs for the majority of the drugs purchased by dialysis facilities have 

actually decreased during the period under review. At the same time, 

there has been a substantial increase in CMS’s chosen index. Therefore, 

the agency should develop a new method for estimating changes that 

more accurately reflects historical trends in the pricing of drugs that 

make up the pharmaceutical category of the ESRDB price index. 

51 75 Fed. Reg. 49030, 49160 (Aug. 12, 2010). 

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RECOMMENDATION 

AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 

RESPONSE

CMS did not concur with our recommendation. In its response to the 

draft report, CMS stated that the downward trajectory of average 

acquisition costs documented in OIG’s analysis was influenced largely 

by changes in CMS’s payment mechanism for separately billable ESRD 

drugs. Specifically, CMS believes that the decrease in the average 

acquisition cost of epoetin alfa during the period under review was 

caused by an above-market Medicare payment amount in the baseline 

year of OIG’s analysis (2003) and the subsequent decrease in the 

payment amount for epoetin alfa after the ASP-based system was 

implemented. CMS states that, as a result, OIG’s figures are not 

suitable for inferring future price trends as the market for epoetin alfa 

becomes more competitive. 

CMS’s view is that it is more appropriate to look at recent quarterly 

price changes—changes that CMS states have not been distorted by 

changes in payment policy—that show an increase in the cost of epoetin 

alfa since the end of 2008. CMS goes on to state its belief that 

underlying market forces are driving these recent increases and that 

future costs should resemble changes in general pharmaceutical prices 

rather than past trends. Therefore, CMS expects that future ESRD 

drug price growth will more closely reflect market-based price drivers, 

such as those measured by the PPI for Prescription Drugs. CMS 

expects that, beginning in 2011, the PPI for Prescription Drugs will 

grow 3.4 percent annually for the first 5 years of the bundled rate 

payment system and states that this trend is consistent with the 

recently observed trend in the cost of epoetin alfa. 

OIG fully appreciates the difficulty that CMS faces in implementing the 

new bundled rate payment system, especially in terms of estimating 

future costs for all items and services related to ESRD care. OIG also 

realizes that the historical average acquisition cost data presented in 

this report may not necessarily be predictive of future trends in the 

costs of separately billable drugs. Nevertheless, based on our findings, 

we remain concerned that Medicare could end up paying too much for 

these drugs once the bundled rate is implemented, potentially costing 

the program and its beneficiaries hundreds of millions of dollars a year. 

We are especially concerned that CMS’s chosen index, the PPI for 

Prescription Drugs, has consistently averaged annual growth above 

4 percent (and over 7 percent in 2008 and 2009). During this same 

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RECOMMENDATION 

period, the ASP for epoetin alfa has seen a more modest increase and, 

according to CMS’s response, never matched the growth of the PPI for 

Prescription Drugs. Given the risks to the program of overpaying for 

prescription drugs, OIG intends to work with CMS to carefully monitor 

the cost of epoetin alfa and other ESRD drugs in the future. 

 

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Medicare Expenditures in 2008 for Drugs Under Review 

 APPENDIX ~ A 

Separately Billable Drug 

Payment Ranking 

in Independent 

Dialysis Facilities 

Total Payment in 

Independent 

Dialysis Facilities 

Payment Ranking 

in Hospital-Based 

Dialysis Facilities 

Total Payment in 

Hospital-Based 

Dialysis Facilities 

Epoetin alfa, per 1,000 

units 1 $ 1,382,667,793 2 $34,287,338 

Paricalcitol, 1 g* 2 $282,709,514 3 $11,244,877 

Iron sucrose, 1 mg 3 $130,808,384 4 $5,055,486 

Doxercalciferol, 1 g 4 $50,504,917 7 $3,495,384 

Sodium ferric gluconate, 

12.5 mg 5 $49,256,017 5 $3,625,818 

Darbepoetin alfa, 1 g 6 $43,185,051 1 $50,052,297 

Alteplase recomb, 1 mg 7 $16,575,330 6 $3,531,937 

Levocarnitine, 1 g 8 $2,543,581 12 $211,776 

Vancomycin HCL, 500 mg 9 $1,714,940 11 $234,703 

Calcitriol, 0.1 mcg 11 $1,025,188 13 $145,580 

Iron dextran, 50 mg 16 $316,878 8 $427,609 

 Total $1,961,307,593 $112,312,805 

Source: Office of Inspector General analysis of 2008 National Claims History File, 95-percent complete. 

 * μg = microgram, mg = milligram, g = gram.

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A P PEN D x B 

Agency Comments 

DEPARlMENTOF HEALTH & HUMAN SERVICES Centers tor Medicare & Medicaid Services 

Administrator 

Wsshlngton, DC 20201 

DATE: 'JUN 1 0 2010 

TO: 	 Daniel R, Levinson 

Inspector GeqeqU 

FROM: 	 M~TAVenner 

Acting Administrator and Chief Operating Officer 

SUBJECT: 	 Office of Inspector General (OIG) Draft Report: "End Stage Renal Disease 

Drugs: Facility Acquisitions Costs and Future Medicare Payment Concerns" 

(OE1~03·09·00280) 

Thank you for the opportunity to comment on the OlG Report: "End Stage Renal Disease Drugs: 

Facility Acquisition Costs and Future Medicare Payment Concerns". The'Centers for Medicare 

& Medicaid Services (CMS) recognizes the critical nature ofpaying appropriately for services 

for its beneficiaries and is committed to ensuring that payment updates for providers ofEnd 

Stage Renal Disease (ESRD) treatments are calculated fairly and appropriately. 

Beginning in 2011, CMS will implement the ESRD Prospective Payment System. At that time, 

ESRD providers will begin receiving a "bundled" payment for providing services to Medicare 

beneficiaries, That bundled payment is intended to pay for renal dialysis services inclusive of 

several covered pharmaceuticals. 

When Medicare began covering ESRD patients in 1973, providers were permitted to bill 

separately for prescription drugs, including Erythropoietin (Epo) (which represents about twothirds ofthe industry's total drug costs). At that time, the payment rate for Epo was set 

according to statute ilt $10 per 1,000 units (see section 1881(bXIIXB) ofthe Social Security 

. Act). For other commonly used drugs ofESRD patients, payment rates were set to Average 

Wholesale Price minus 5 percent. 

Beginning in 2006, the agency was required to pay for drugs using the average sales price ofthe 

respective drugs, plus six percent (ASP+6). The analyses that the OIG has conducted carefully 

documents the downward trajectory ofprice growth in average acquisition cost (AAC) over a 

short historical period that has been largely influenced by the change in CMS's payment 

mechanism, We do, however, have some reservations regarding the OIG's recommendation for 

projecting price changes for drugs in ESRD facilities. The rationale for those concerns is 

articulated below. 

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APPENDIX ~ B 

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APPENDIX ~ B 

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APPENDIX ~ B 

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APPENDIX~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, and David E. Tawes, Director, Prescription Drug Pricing 

Unit. 

Roman Strakovsky served as the lead analyst for this study. Other 

principal Office of Evaluation and Inspections staff from the 

Philadelphia regional office who contributed to the report include 

Stephanie Yeager; other staff who contributed include Natasha 

Franklin. 
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 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. These assessments help reduce waste, abuse, and 

mismanagement and promote economy and efficiency throughout HHS. 

Office of Evaluation and Inspections 

The Office of Evaluation and Inspections (OEI) conducts national evaluations to provide 

HHS, Congress, and the public with timely, useful, and reliable information on significant 

issues. These evaluations focus on preventing fraud, waste, or abuse and promoting 

economy, efficiency, and effectiveness of departmental programs. To promote impact, OEI 

reports also present practical recommendations for improving program operations. 

Office of Investigations 

The Office of Investigations (OI) conducts criminal, civil, and administrative investigations 

of fraud and misconduct related to HHS programs, operations, and beneficiaries. With 

investigators working in all 50 States and the District of Columbia, OI utilizes its resources 

by actively coordinating with the Department of Justice and other Federal, State, and local 

law enforcement authorities. The investigative efforts of OI often lead to criminal 

convictions, administrative sanctions, and/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 for OIG’s internal operations. OCIG represents OIG in all civil and 

administrative fraud and abuse cases involving HHS programs, including False Claims Act, 

program exclusion, and civil monetary penalty cases. In connection with these cases, OCIG 

also negotiates and monitors corporate integrity agreements. OCIG renders advisory 

opinions, issues compliance program guidance, publishes fraud alerts, and provides other 

guidance to the health care industry concerning the anti-kickback statute and other OIG 

enforcement authorities.