United States Government Accountability Office

GAO Report to the Chairman, Committee on 

Ways and Means, House of 

Representatives 

END-STAGE RENAL 

DISEASE 

Bundling Medicare’s 

Payment for Drugs 

with Payment for All 

ESRD Services Would 

Promote Efficiency 

and Clinical Flexibility

November 2006 

 

GAO-07-77 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

November 2006

END-STAGE RENAL DISEASE 

Bundling Medicare’s Payment for Drugs 

with Payment for All ESRD Services 

Would Promote Efficiency and Clinical 

Flexibility 

Highlights of GAO-07-77, a report to the 

Chairman, Committee on Ways and 

Means, House of Representatives 

Medicare covers dialysis—a

process that removes excess fluids 

and toxins from the bloodstream—

for most individuals with end-stage 

renal disease (ESRD), a condition

of permanent kidney failure. CMS 

pays for certain dialysis services 

under a type of bundled rate, called 

a composite rate, and, for certain 

dialysis-related drugs, pays a 

separate rate per dose each time

the drug is administered. These 

drugs are referred to as “separately

billable” and are paid at 6 percent 

above manufacturers’ average sales 

price (ASP). Recently, the Congress 

required CMS to explore the 

creation of a bundled payment for 

all ESRD services, including

separately billable drugs. GAO was 

asked to examine (1) recent

changes in payments for ESRD 

services, (2) the ASP payment

method of setting rates for 

separately billable ESRD drugs, 

and (3) CMS efforts to develop a 

bundled payment method that 

includes all ESRD drugs. GAO 

obtained information for this study 

from CMS, the U.S. Renal Data

System, ESRD experts, and 

previously issued GAO reports. 

What GAO Recommends

The Congress should consider

establishing a bundled payment 

system for all ESRD services, 

including drugs, as soon as

possible. CMS generally agreed 

with GAO’s view, but said it needed

to finalize, among other things, the

development of a sound case-mix 

adjuster before bundling payment

for all ESRD services. 

The effect of several legislative and regulatory changes since 2003 has been 

to raise the composite rate while reducing Medicare’s pre-2005 generous 

payments for separately billable ESRD drugs. In 2005, when the first 

legislative change was implemented, Medicare expenditures for certain 

separately billable drugs dropped 11.8 percent. In 2006, Medicare regulation 

changed the payment for these drugs to a method based on ASP. Since then, 

Medicare’s payment rates have varied from quarter to quarter but have 

remained relatively consistent with the lower 2005 payment rates. 

Medicare’s cost containment efforts have targeted the most expensive of the 

separately billable drugs—Epogen®—for which program spending totaled 

$2 billion in 2005. Epogen is used to treat anemia in ESRD patients; most 

patients receive this drug at nearly every dialysis session. Recent data 

indicate that Epogen use per patient continues to rise, although more slowly 

than in previous years. 

Several unknowns about the composition of ASP and the lack of empirical 

evidence for the percentage level added to ASP make it difficult for CMS to 

determine whether the ASP-based payment rates are no greater than 

necessary to achieve appropriate beneficiary access. Paying for Epogen 

under the ASP method is of particular concern. The ASP method relies on 

market forces to moderate manufacturers’ prices; but Epogen is the product 

of a single manufacturer and has no competitor products in the ESRD 

market. Without competition, the power of market forces to moderate price 

is absent. For rarely used products, the lack of price competition may be

financially insignificant, but for Epogen, which is pervasively and frequently 

used, the lack of price competition could be having a considerable effect on 

Medicare spending. 

In 2003, the Congress required CMS to issue a report and conduct a 

demonstration of a system that would bundle payment for ESRD services, 

including drugs that are currently billed separately, under a single rate. The 

bundled payment approach, used to pay for most Medicare services, 

encourages providers to operate efficiently, as they retain the difference if 

Medicare’s payment exceeds the costs they incur to provide the services. 

GAO and others have found that a bundled rate for all ESRD services would 

have advantages for achieving efficiency and clinical flexibility in treating 

ESRD patients. CMS’s demonstration testing the feasibility of a bundled rate, 

mandated to start in January 2006, is delayed, as is the completion of the 

agency’s mandated report to the Congress on bundling. The report was due 

in October 2005; as of November 2006, CMS officials could not tell us when 

the report would be available. 

www.gao.gov/cgi-bin/getrpt?GAO-07-77.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact A. Bruce 

Steinwald at (202) 512-7101 or 

steinwalda@gao.gov. 
Contents 

Letter 1

Results in Brief 5 

Background 7

New Payment Provisions Reduced Subsidy from Separately

Billable Drugs but Did Not Eliminate Incentives to Overuse 

These Drugs 13 

ASP Payment Method, While Administratively Practical, May Not 

Help Medicare Foster Efficient Provider Goals 20 

Bundling Is Fundamental to Medicare Payment Policy, but System 

to Expand Composite Rate Bundle to Include All ESRD Drugs 

Remains in Design Phase 22 

Conclusions 27

Matter for Congressional Consideration 27 

Agency and Industry Comments and Our Evaluation 28 

Appendix I Comments from the Centers for Medicare & 

Medicaid Services 33 

Appendix II GAO Contact and Staff Acknowledgments 35 

Tables 

Table 1: Separately Billable Injectable ESRD Drugs Used by 

Dialysis Facilities in 2005 10 

Table 2: Recent Legislative and Regulatory Changes to ESRD 

Payments 14

Table 3: Medicare Reimbursement Rates for Certain Separately 

Billable ESRD Drugs 15 

Table 4: Percentage Change in Medicare Expenditures for Certain 

Separately Billable ESRD Drugs from 2004 to 2005 16 

Figures 

Figure 1: Average Epogen Dose per Administration in the First 6 

Months of Each Year, 1991-2006 18 

Figure 2: Average Number of Monthly Epogen Administrations in 

the First 6 Months of Each Year, 1991-2006 19 

Page i GAO-07-77 End-Stage Renal Disease
Abbreviations 

ASP average sales price 

AWP average wholesale price

CMS Centers for Medicare & Medicaid Services 

CHOIR Correction of Hemoglobin and Outcomes in Renal 

 Insufficiency Trial 

CREATE Cardiovascular Risk Reduction by Early Anemia Treatment 

 with Epoetin Beta Trial

ESRD end-stage renal disease

FDA Food and Drug Administration 

Hct hematocrit 

HHS Department of Health and Human Services 

KCC Kidney Care Council 

KDOQI Kidney Disease Outcomes Quality Initiative 

MedPAC Medicare Payment Advisory Commission 

MMA The Medicare Prescription Drug, Improvement, and 

 Modernization Act of 2003 

NRAA National Renal Administrators Association 

OIG Office of the Inspector General 

RPA Renal Physicians Association 

USRDS United States Renal Data System 

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately. 

Page ii GAO-07-77 End-Stage Renal Disease
United States Government Accountability Office

Washington, DC 20548 

November 13, 2006 

The Honorable William M. Thomas 

Chairman 

Committee on Ways and Means 

House of Representatives 

The Honorable William M. Thomas 

Chairman 

Committee on Ways and Means 

House of Representatives 

Dear Mr. Chairman: 

Regardless of age, most individuals with end-stage renal disease (ESRD), a 

condition of permanent kidney failure, are eligible for health care coverage 

under Medicare.1

 Since the implementation of the ESRD benefit in 1973, 

hundreds of thousands of lives have been extended through Medicarecovered dialysis treatment—a process that removes excess fluids and 

toxins from the bloodstream. Patients receive additional items and 

services related to their dialysis treatments, such as laboratory tests, 

clinical services, and drugs to treat conditions resulting from the loss of 

kidney function, such as anemia and low blood calcium. In 2005, 

Medicare’s ESRD population was about 390,000 and program expenditures 

for dialysis and dialysis-related drugs totaled $7.9 billion.2

Regardless of age, most individuals with end-stage renal disease (ESRD), a 

condition of permanent kidney failure, are eligible for health care coverage 

under Medicare.1

 Since the implementation of the ESRD benefit in 1973, 

hundreds of thousands of lives have been extended through Medicarecovered dialysis treatment—a process that removes excess fluids and 

toxins from the bloodstream. Patients receive additional items and 

services related to their dialysis treatments, such as laboratory tests, 

clinical services, and drugs to treat conditions resulting from the loss of 

kidney function, such as anemia and low blood calcium. In 2005, 

Medicare’s ESRD population was about 390,000 and program expenditures 

for dialysis and dialysis-related drugs totaled $7.9 billion.2

The Centers for Medicare & Medicaid Services (CMS) in the Department of 

Health and Human Services (HHS), which has the responsibility for 

administering the Medicare program, divides ESRD items and services into

two groups for payment purposes. In the first group are dialysis and 

associated routine services—such as nursing, supplies, equipment, and 

certain laboratory tests. These items and services are paid for under a 

composite rate—that is, one rate for a defined set of services. Paying 

under a composite rate is a common form of Medicare payment also 

known as bundling. In the second group are primarily injectable drugs and 

certain laboratory tests that were either not routine or not available in

1983 when Medicare implemented the composite rate. These items and 

The Centers for Medicare & Medicaid Services (CMS) in the Department of 

Health and Human Services (HHS), which has the responsibility for 

administering the Medicare program, divides ESRD items and services into

two groups for payment purposes. In the first group are dialysis and 

associated routine services—such as nursing, supplies, equipment, and 

certain laboratory tests. These items and services are paid for under a 

composite rate—that is, one rate for a defined set of services. Paying 

under a composite rate is a common form of Medicare payment also 

known as bundling. In the second group are primarily injectable drugs and 

certain laboratory tests that were either not routine or not available in

1983 when Medicare implemented the composite rate. These items and 

 1

In addition to being diagnosed with ESRD, individuals generally must meet one of the

following requirements to receive Medicare coverage: obtain the required work credits

under the Social Security program, receive Social Security benefits, or be the spouse or

dependent child of a person who has met the required work credits or is receiving Social 

Security benefits. 42 U.S.C. § 426-1 (2000). 

2

For the purposes of this report, Medicare expenditures include the 20 percent coinsurance

paid by the beneficiary, unless otherwise noted. 

Page 1 GAO-07-77 End-Stage Renal Disease
services, which are paid for separately on a per-service basis, are referred 

to as “separately billable.” Over time, Medicare’s composite rate, which 

was not automatically adjusted for inflation, covered progressively less of

the costs to provide routine dialysis services, while program payments for 

the separately billable drugs generally exceeded providers’ costs to obtain 

these drugs.3 As a result, dialysis facilities relied on Medicare’s generous 

payments for separately billable drugs to subsidize the composite rate 

payments that had remained nearly flat for two decades.4

 In addition, the 

use of the separately billable drugs by facilities became routine, and 

program payments for these drugs grew substantially. In 2005, program 

spending for the separately billable ESRD drugs accounted for about 

$2.9 billion.

Medicare’s payment method for separately billable ESRD drugs has 

changed several times in the last few years. Currently, each of these drugs 

is paid for on a per administration basis equal to 6 percent above 

manufacturers’ average sales price (ASP), referred to as ASP+6; this 

payment rate went into effect in 2006.5

 In 2005, Medicare spending for one 

of these drugs, Epogen®,

6

 was $2 billion, accounting for more than twothirds of Medicare payments for all separately billable ESRD drugs. 

Introduced in 1989, Epogen was an expensive breakthrough drug used to

 3

These drugs are covered under Medicare Part B, the part of Medicare that covers a broad 

range of medical services, including physician, laboratory, hospital outpatient department

services, and durable medical equipment. Part B-covered drugs are typically administered 

by a physician or other medical professional rather than by patients themselves. In 

contrast, drugs covered under the new prescription drug benefit, known as Part D, are

generally self-administered by patients. 

4

Dialysis facilities can be hospital-based or freestanding, part of a chain or independent, 

and for-profit or not-for-profit; 60 percent of dialysis facilities in the United States are 

owned by two for-profit chains. Large chains tend to receive volume discounts on ESRD

drugs, whereas smaller, independent facilities may not have the same negotiating power; 

thus smaller facilities may pay higher prices for ESRD drugs. 

5

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 defined

ASP as manufacturer’s average sales price for all U.S. purchasers of a drug, net of volume,

prompt pay, and cash discounts, and charge-backs and rebates. Certain prices, including

prices paid by certain federal purchasers, are excluded, as are prices for drugs furnished 

under Medicare Part D. Pub. L. No. 108-173, sec. 302(c), § 1847(c), 117 Stat. 2066, 2240-41 

(to be codified at 42 U.S.C. § 1395w-3a(c)). 

6

Epogen, which is a brand name for epoetin alfa, is a synthetic version of erythropoietin—a 

protein made by the kidney that stimulates the production of red blood cells. The drug was 

developed in the 1980s by Amgen, a biologicals manufacturing company that markets the 

drug for use in the ESRD setting. 

Page 2 GAO-07-77 End-Stage Renal Disease
treat anemia in patients with ESRD.7

 Over time, policymakers have raised

concerns about incentives in the Medicare payment system for dialysis 

facilities to use Epogen more than necessary because Medicare payments 

for the drug substantially exceeded facilities’ costs of acquiring it.8

 In 

principle, these incentives existed for all of the separately billable drugs, 

but the attention to Epogen stems from its pervasive, frequent use: that is, 

most ESRD patients receive injections of Epogen at nearly every dialysis 

treatment.9

In recent years, CMS has been exploring, as required by the Congress, the 

creation of a bundled payment for all ESRD services, including the drugs 

that facilities currently bill for separately. In response to a mandate that 

CMS study the feasibility of creating a bundled payment,10 the agency

issued a study in 2003 concluding that developing a bundled ESRD 

payment rate was feasible and that further study of case-mix adjustment—

that is, a mechanism to account for differences in patients’ use of 

resources—was needed. In the Medicare Prescription Drug, Improvement, 

and Modernization Act of 2003 (MMA), the Congress required that CMS 

report on the design of a bundled prospective payment system for ESRD 

services, including a case-mix adjustment methodology, and conduct a 

 7

In examining Medicare’s payment options in 1990 to cover this drug, the Office of 

Technology Assessment noted that Epogen not only reduces dialysis patients’ need for

blood transfusions but also alleviates symptoms of anemia and improves the quality of

patients’ lives. See U.S. Congress, Office of Technology Assessment, Recombinant 

Erythropoietin: Payment Options for Medicare, OTA-H-451 (Washington, DC: May 1990).

8

Unlike the method Medicare used to pay for other separately billable drugs, the method 

Medicare used to pay for Epogen was an amount set in statute for a single year—$10.00 per 

1,000 units in 1994; CMS continued to pay this rate at its discretion until 2005. Most patients 

receive Epogen three times a week; the dose is based on the patient’s body weight among 

other things. A typical starting dose is 50-100 units per kilogram or per 2.2 pounds. For 

example, a patient weighing 150 pounds may receive a dose of between 3,400 units and 

6,800 units three times a week. The dose is then titrated based on the patient’s response to 

the therapy. 

9

Whether Epogen has been overused has not been determined conclusively but research

currently being conducted is shedding light on this issue. Evidence of systematic overuse is

difficult to establish, as needed amounts can vary across patients and across treatments for 

the same patient. See for example, Onyekachi Ifudu, “Controversies in Renal Anemia 

Management,” Dialysis and Transplantation, vol. 35, no. 3 (2006) and Dennis Cotter et al., 

“Translating Epoetin Research Into Practice: the Role of Government and the Use of

Scientific Evidence,” Health Affairs, vol. 25, no. 5 (2006). 

10Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000, Pub L. 

No. 106-554, app. F, § 422(b)–(c), 114 Stat. 2763A-463, 2763A-516–2763A-517.

Page 3 GAO-07-77 End-Stage Renal Disease
3-year demonstration to test the design of a bundled ESRD payment 

system.11

You asked us to report on issues related to payment for separately billable

ESRD drugs. This report examines the (1) potential for recent payment 

changes to address the subsidization issue and eliminate incentives to 

overuse separately billable ESRD drugs, (2) appropriateness of the ASP 

payment method to set rates for separately billable ESRD drugs, and 

(3) rationale for developing, and the status of CMS’s efforts to develop, a 

bundled payment method that includes all ESRD drugs. 

To examine the effect of recent payment changes, we reviewed legislation 

and regulations relevant to the payment system for ESRD drugs and 

services. We also reviewed publicly available information from CMS on 

prices for drugs used in ESRD facilities. We reviewed data for the first 

6 months of each year from 1991 to 2005 and preliminary data from the 

first 6 months of 2006 on the utilization of Epogen from the United States 

Renal Data System (USRDS).12,13 We assessed the reliability of these data 

by interviewing officials responsible for producing these data, reviewing 

relevant documentation, and examining the data for obvious errors. We 

determined that the data were sufficiently reliable for the purposes of our 

study. To determine the appropriateness of the ASP payment method, we 

reviewed our previously issued products on this method and interviewed 

CMS officials, dialysis facility representatives, nephrologists, drug 

manufacturers, and other experts on ESRD.14 To explore the rationale for 

and efforts to design a payment bundle for ESRD services, we reviewed 

the clinical literature on dialysis and injectable drugs and information 

 11Pub. L. No. 108-173, § 623(e)–(f), 117 Stat. 2066, 2315-17. 

12We restricted the utilization data to the first half of the year to make our comparisons 

consistent with preliminary 2006 data, for which we have the first 6 months of the year. 

13USRDS is a national data system that collects, analyzes, and distributes information about

ESRD in the United States and is funded by the National Institute of Diabetes and Digestive 

and Kidney Diseases in conjunction with CMS. The data for 2006 may change as more

Medicare claims for ESRD services are submitted. 

14GAO, Medicare Part B Drugs: CMS Data Source for Setting Payments Is Practical but 

Concerns Remain, GAO-06-971T (Washington, D.C.: July 13, 2006); Medicare Hospital 

Pharmaceuticals: Survey Shows Price Variation and Highlights Data Collection Lessons 

and Outpatient Rate-Setting Challenges for CMS, GAO-06-372 (Washington, D.C.: Apr. 28, 

2006); and Medicare: Comments on CMS Proposed 2006 Rates for Specified Covered 

Outpatient Drugs and Radiopharmaceuticals Used in Hospitals, GAO-06-17R 

(Washington, D.C.: Oct. 31, 2005). 

Page 4 GAO-07-77 End-Stage Renal Disease
from CMS on its ESRD bundling demonstration. We performed this work 

from April 2006 through November 2006 in accordance with generally 

accepted government auditing standards. 

Since 2003, several legislative and regulatory changes have been 

implemented to adjust Medicare’s composite rate and lower payment rates 

for separately billable ESRD drugs. The effect of these changes has been 

to raise the composite rate while reducing the subsidy from generous 

Medicare payments for the separately billable drugs under pre-MMA 

payment rates. In 2005, when the first MMA change to Medicare’s payment 

method for these drugs was implemented, Medicare expenditures for 

certain separately billable ESRD drugs dropped 11.8 percent. Since 2006,

when payment for these drugs changed to a method based on ASP, 

Medicare’s payment rates have varied from quarter to quarter but have

remained relatively consistent with the lower 2005 payments. Medicare’s 

cost containment efforts have targeted Epogen, because most of the 

program’s spending for ESRD drugs outside the composite rate is for 

Epogen alone. Several months of data suggest that, although the growth in 

Epogen use per patient has slowed, the use of this drug continues to rise. 

Results in Brief 

Medicare’s ASP method of paying for Part B drugs—which include the 

ESRD drugs outside the composite rate—may not be sufficient for 

achieving Medicare’s rate-setting goals. Several unknowns about the 

composition of ASP and the lack of empirical evidence for the percentage

level added to ASP make it difficult for CMS to determine whether the 

ASP-based payment rates are no greater than necessary to achieve

appropriate beneficiary access. Paying for Epogen under the ASP method 

is of particular concern. The ASP method relies on market forces to 

moderate manufacturers’ prices; however, Epogen is the product of a 

single manufacturer and has no competitor products in the ESRD market. 

In principle, ASPs are lower than they would otherwise be when two or 

more manufacturers of similar products compete on price for market 

share. However, when no competition exists, as is the case for Epogen, the 

power of market forces to moderate price is absent. For rarely used 

products, the lack of price competition may be financially insignificant,

but for Epogen, which is pervasively and frequently used, the lack of price 

competition could be having a considerable effect on Medicare spending. 

Bundling services under a single payment rate is a fundamental principle 

of Medicare payment policy for most types of services. The composite rate 

for routine dialysis-related services was the first of Medicare’s several 

payment systems that, in broad terms, sets a fixed, prospective rate for a 

Page 5 GAO-07-77 End-Stage Renal Disease
set of clinically related services. Under Medicare’s current payment policy 

for ESRD services, the composite rate excludes drugs that have become 

routine in treating ESRD patients. In 2003, the MMA required CMS to 

design a system that would no longer pay for each injectable ESRD drug 

under a separate rate but would bundle payment for these drugs together 

with other ESRD items and services under a single rate. We and others 

have noted that a bundled rate would have advantages for achieving 

efficiency and clinical flexibility.15 For example, a bundled rate would 

remove the financial incentive for facilities to choose one treatment over 

another, allowing the flexibility to choose treatments that are clinically

effective but may require less use of Epogen. Interested parties we spoke 

with, including facility representatives and ESRD experts, also supported a 

bundled payment for dialysis-related items and services for similar 

reasons. In addition, they noted the importance of designing a sound casemix adjuster to account for the differences across facilities in the mix of 

patients using more or less resources than average and the need for an 

automatic payment update to adjust the bundled rate for inflation. CMS’s 

report designing a model for a bundled ESRD payment system was due in 

October 2005; however, as of November 2006, CMS officials could not tell

us when the report would be issued. The demonstration testing the 

feasibility of a bundled rate, mandated to start in January 2006, is also 

delayed. 

In light of the uncertain timeline necessary for CMS to test bundling and 

the potential for bundling to eliminate financial incentives to overuse 

separately billable drugs, the Congress should consider establishing a 

bundled payment system for all ESRD services as soon as possible. 

In commenting on a draft of this report, CMS generally agreed with our 

view that all ESRD services be included under a bundled payment system 

but expressed the need to resolve implementation issues, primarily that 

the development of a sound case-mix adjuster be finalized. 

Representatives from ESRD industry groups who reviewed the report 

 15See GAO Medicare Dialysis Facilities: Beneficiary Access Stable and Problems in

Payment System Being Addressed, GAO-04-450 (Washington, D.C.: June 25, 2004); Tommy

G. Thompson, Secretary of Health and Human Services, Report to Congress: Toward a

Bundled Outpatient Medicare End Stage Renal Disease Prospective Payment System 

(Washington, D.C.: May 2003); and Medicare Payment Advisory Commission (MedPAC), 

Report to the Congress, Medicare Payment Policy (Washington, D.C.: March 2006) and 

Report to the Congress, Medicare Payment Policy (Washington, D.C.: March 2001).

MedPAC is an independent federal body established by law to advise the Congress on

issues affecting the Medicare program.

Page 6 GAO-07-77 End-Stage Renal Disease
echoed CMS’s concerns regarding the development of an adequate casemix adjuster and expressed other concerns associated with bundled 

payments, such as the need to account for the costs of technology 

innovation and treatment protocols. 

Most individuals diagnosed with ESRD are eligible to receive Medicare 

benefits under both Medicare Parts A and B.16,17 Medicare covers over 

80 percent of all individuals with the disease. 

ESRD treatment options include kidney transplantation and maintenance 

dialysis. The latter removes substances that would otherwise be filtered 

through the kidney from the individual’s blood. Kidney transplants are not

a practical option on a wide scale, as not all patients are candidates for 

transplant and suitable donated organs are scarce. In contrast, dialysis is 

the treatment used by most ESRD patients. Dialysis can be administered 

through two methods: hemodialysis and peritoneal dialysis. During 

hemodialysis, a machine pumps blood through an artificial kidney, called a 

hemodialyzer, and returns the cleansed blood to the body. Hemodialysis, 

the most prevalent treatment method,18 is generally administered at 

Background 

Treatment of ESRD

 1642 U.S.C. § 426-1(b) (2000). 

17Medicare Part A covers inpatient hospital, skilled nursing facility, and hospice care, as 

well as some home health care. Medicare Part B covers physician services, hospital 

outpatient services, and certain other services, such as physical therapy. Medicare 

coverage generally begins the third month after the month dialysis begins. For individuals 

who have employer group coverage, Medicare is the secondary payer for 30 months, after 

which Medicare becomes the primary payer. 42 U.S.C. § 1395y(b)(1)(B)(iii) (2000). 

Generally, individuals with ESRD may not join a Medicare Advantage Plan. 42 U.S.C. §

1395w-21(a)(3)(B) (2000). 

18In 2003, about 91 percent of all dialysis patients underwent in-facility hemodialysis, and 

about 8 percent of the dialysis population utilized peritoneal dialysis. 

Page 7 GAO-07-77 End-Stage Renal Disease
freestanding facilities that provide dialysis services.19 The conventional 

regimen includes hemodialysis three times a week.20

Peritoneal dialysis—which is generally done in the home—utilizes the 

peritoneal membrane, which surrounds the patient’s abdomen, as a natural 

blood filter. Patients remove wastes and excess fluids from their abdomen 

manually throughout the day, or a machine automates the process while 

they sleep at night. This procedure eliminates the need for the blood to 

leave the body of the patient and filter through a machine. The use of 

peritoneal dialysis has declined as a treatment modality over the last 

decade.

21

One of the complications of ESRD is anemia, a condition in which an 

insufficient number of red blood cells is available to carry oxygen 

throughout the body. In ESRD patients, this condition is treated by 

maintaining at an optimal level the percentage of red blood cells relative to

all cells in whole blood (by volume). This measure is known as the 

hematocrit (Hct) level. The Kidney Disease Outcomes Quality Initiative 

(KDOQI), established by the National Kidney Foundation, has set the 

minimum target for ESRD patients’ Hct levels at 33 percent and has found 

insufficient evidence to recommend routinely maintaining Hct levels at 

39 percent or greater.22 ESRD patients receive Epogen to keep their Hct 

above a minimum level.23 The Food and Drug Administration (FDA) 

 19In 2003, fewer than 1 percent of patients received hemodialysis at home with the 

assistance of a caregiver. 

20This frequency is consistent with Medicare’s coverage of three hemodialysis treatments a 

week. Some experts contend that daily hemodialysis—five to seven times a week—is

clinically preferable, as this frequency more closely approximates the body’s continuous 

cleansing of the blood. Proponents assert that daily hemodialysis leads to fewer 

hospitalizations and a reduction in the use of medications. In addition, the National 

Institutes of Health is currently sponsoring a study of nocturnal dialysis—a form of 

hemodialysis that can be done at home while the patient is asleep, six nights a week. 

21The percentage of patients undergoing peritoneal dialysis has steadily decreased since its 

peak of 15 percent in 1990. 

22See National Kidney Foundation, “KDOQI Clinical Practice Guidelines and Clinical 

Practice Recommendations for Anemia in Chronic Kidney Disease,” American Journal of

Kidney Diseases, vol. 47, no. 5, supp. 3 (2006). 

23According to the 18 ESRD networks that serve as the liaison between the federal 

government and dialysis providers, the percent of patients with a mean Hct greater than or

equal to 33 has increased from 43 percent in 1997 to 80 percent in 2003. See The Forum of

ESRD Networks Summary Report of the ESRD Networks’ Annual Reports 2004, 

(Baltimore, Md: December 2005). 

Page 8 GAO-07-77 End-Stage Renal Disease
labeled Epogen for use encompassing a somewhat lower Hct target level 

ranging from 30 to 36 percent. Recent clinical studies cited by KDOQI 

indicate that there may be increased patient mortality and morbidity if Hct 

levels are much higher than 39 percent.24 Epogen is typically administered 

to Medicare ESRD patients intravenously. Epogen can also be 

administered subcutaneously, that is, through an injection under the skin.25

The subcutaneous method requires less epoetin, but experts note that, 

because some pain is associated with this method, patients generally

prefer intravenous delivery.26

Medicare Payment for 

ESRD Services 

Medicare’s composite rate is designed to cover the cost of services 

associated with a single dialysis treatment, including nursing and other 

clinical services, social services, supplies, equipment, and certain 

laboratory tests and drugs. Under the composite rate, facilities receive a 

fixed payment, regardless of their actual costs to deliver these services. In

2006, the composite base rate is about $130 for freestanding dialysis 

facilities.27

Medicare pays separately for certain drugs and laboratory tests that have

become routine treatments since 1983. These drugs include, but are not 

limited to, epoetin (brand name, Epogen), injectable vitamin D, and 

 24See Anatole Besarab et al., “The Effects of Normal as Compared with Low Hematocrit 

Values in Patients with Cardiac Disease Who Are Receiving Hemodialysis and Epoetin,” 

New England Journal of Medicine, vol. 339, no. 9 (1998). Two clinical trials,

Cardiovascular Risk Reduction by Early Anemia Treatment with Epoetin Beta Trial 

(CREATE) and Correction of Hemoglobin and Outcomes in Renal Insufficiency Trial 

(CHOIR) compared the efficacy and safety of higher Hct targets in patients with nondialysis dependent chronic kidney disease. The target Hct level was between 39 and 45

percent in the CREATE treatment group. The CREATE trial did not achieve its goal of

reducing risk for certain cardiac events. In the CHOIR trial, the incidence of adverse 

events, including mortality, was higher in the treatment group, with a target Hct of 40.5

percent, than in the control group, with a target of 33.9 percent. The CHOIR trial was 

stopped because of safety concerns. 

25At Department of Veterans Affairs facilities, subcutaneous administration of epoetin is the 

predominant delivery method. 

26See Denise Hynes et al., “Adherence to Guidelines for ESRD Anemia Management,” 

American Journal of Kidney Diseases, vol. 47, no. 3 (March 2006) and James Kaufman et

al., “Subcutaneous Compared with Intravenous Epoetin in Patients Receiving 

Hemodialysis,” The New England Journal of Medicine, vol. 339, no. 9 (1998). 

27Additional adjustments to the rate account for, among other things, differences in 

providers’ costs associated with location, based on a geographic wage index, and

differences in facilities’ mix of patients, who vary in their clinical resource needs. 

Page 9 GAO-07-77 End-Stage Renal Disease
injectable iron. Epogen is generally administered to most patients at every

dialysis treatment, whereas the other drugs, although routinely provided,

are not administered as frequently. Table 1 highlights three separately 

billable prescription drugs provided routinely to dialysis patients. 

Table 1: Separately Billable Injectable ESRD Drugs Used by Dialysis Facilities in 

2005 

Separately billable 

drugs used in

dialysis treatments Compound 

Number of 

manufacturers 

Percentage of

Medicare 

expenditures for 

separately billable 

ESRD drugs

Injectable ironaIron sucrose 1 5.3

Sodium ferric gluconate 

complex 1 3.3

Iron dextran 3 0.1

Injectable vitamin DbParicalcitol 1 11.4

Doxercalciferol 1 2.8

Calcitriol 8 0.4

EpoetincEpoetin alfa 1 70.0

Darbepoetin alfa 1 3.7

Other separately 

billable drugs used in 

dialysis facilities

Levocarnitine, 

Alteplase, Vancomycin, 

vaccines, etc. N/A 3.0

Total 100.0

Source: GAO analysis of CMS data and drug information from FDA.

a

Iron is used in the treatment of anemia in conjunction with epoetin. 

b

Vitamin D is used to prevent osteomalacia by promoting bone mineralization. 

c

Epoetin is used in the treatment of anemia by promoting the formation of red blood cells by the bone

marrow. 

As table 1 shows, three drugs—iron sucrose, paricalcitol, and epoetin 

alfa—account for about 87 percent of Medicare spending on separately 

billable ESRD drugs. Although each of these three drugs is a “sole-source” 

product—that is, produced by a single manufacturer—two of the three 

Page 10 GAO-07-77 End-Stage Renal Disease
have pharmaceutical alternatives available, whereas the third, epoetin, has 

no available alternatives in the ESRD market.28

In recent years, Medicare’s method of paying for separately billable ESRD 

drugs has changed several times. Beginning in 1998, Medicare law required 

that payment for drugs covered under Part B equal 95 percent of the drug’s 

average wholesale price (AWP).29 Despite its name, however, AWP was 

neither an average price nor the price wholesalers charged. It was a price 

that manufacturers derived using their own criteria; there were no 

requirements or conventions that AWP reflect the price of an actual sale of 

drugs by a manufacturer.30 An analysis we conducted in 2001 on Part B 

drug prices found that Medicare’s AWP-based payments often far 

exceeded market prices that were widely available to health care 

providers.31

The MMA mandated that in 2005 Medicare pay for separately billable 

ESRD drugs based on their acquisition costs, as determined by the HHS 

Office of the Inspector General (OIG).32 Since acquisition costs were not 

defined in the MMA, the OIG determined a drug’s average acquisition cost 

based on a survey of prices providers paid for the top 10 ESRD drugs, 

 28Although darbepoetin alfa, or Aranesp®, is an alternative to Epogen and is approved for

use in ESRD patients, it is not generally marketed to freestanding dialysis facilities. It is,

however, marketed to hospitals, which purchase the drug to treat anemia in patients with 

chronic kidney disease, certain types of cancer, and ESRD patients receiving dialysis at the 

hospital’s facility. 

29The Balanced Budget Act of 1997 required that payment for drugs and biologicals

furnished on or after January 1, 1998, equal 95 percent of the drug’s AWP if the drug is not

otherwise paid on a cost or prospective payment basis. Pub. L. No. 105-33 § 4556, 111 Stat.

251, 462-63. Until 2004, Medicare paid physicians 95 percent of AWP for Part B drugs. The 

MMA changed this to 85 percent of AWP for 2004. MMA sec. 303(b), § 1842(o)(4)(A), 117

Stat. 2238 (to be codified at 42 U.S.C. § 1395u(o)(4)(A)). 

30AWPs are published in commercial drug price compendia, based on data obtained from 

manufacturers, distributors, and other suppliers; the Medicare claims administration 

contractors that pay claims for Part B drugs based providers’ payments on the published 

AWPs. 

31GAO, Medicare: Payments for Covered Outpatient Drugs Exceed Providers’ Costs, 

GAO-01-1118 (Washington, D.C.: Sept. 21, 2001). 

32MMA sec. 623(d)(1), § 1881(b)(13)(A)(ii), 117 Stat. 2314 (to be codified at 42 U.S.C. §

1395rr(b)(13)(A)(ii)). 

Page 11 GAO-07-77 End-Stage Renal Disease
ranked by Medicare expenditures.33 For 2005, Medicare paid the OIGdetermined average acquisition cost for the top 10 ESRD drugs.34 For 2006, 

the MMA gave the HHS Secretary discretion to alter the basis of payment 

for separately billable ESRD drugs.35 Under this authority, CMS determined 

that Medicare would pay for the separately billable ESRD drugs using the 

method required by the MMA to pay physicians for these drugs—that is, 

106 percent of the drug’s ASP.36

CMS instructs pharmaceutical manufacturers to report data to CMS on the 

ASP for each Part B drug sold by the manufacturer, within 30 days after 

the end of the quarter. For drugs sold at different strengths and package 

sizes, manufacturers are required to report price and volume data for each 

product, after accounting for price concessions. CMS then aggregates the 

manufacturer-reported ASPs to calculate a national ASP for each drug 

category.

37 ASP rates are calculated and posted every quarter. The rates 

reflect the sales price on average from 6 months earlier. 

 33These prices were net of rebates and discounts providers received. See Department of 

Health and Human Services Office of the Inspector General, Medicare Reimbursement for 

Existing End-Stage Renal Disease Drugs, OEI-03-04-00120 (Washington, D.C.: May 2004). 

34For the drugs representing 2 percent of Medicare spending not accounted for by the top 

10 ESRD drugs, Medicare paid ASP+ 6 percent in 2005. 

35MMA sec. 623(d)(1), § 1881(b)(13)(A)(iii), 117 Stat. 2314 (to be codified at 42 U.S.C. §

1395rr(b)(13)(A)(iii)). 

3670 Fed. Reg. 70,116, 70,162 (Nov. 21, 2005). 

37Manufacturers’ reported price data are based on FDA’s system of National Drug Codes, 

while the ASP that CMS calculates for each drug is based on the agency’s Healthcare 

Common Procedure Coding System, which uses categories that are broader than the FDA’s

coding system.

Page 12 GAO-07-77 End-Stage Renal Disease
Since 2003, several legislative and regulatory changes have been 

implemented affecting Medicare’s composite rate for routine ESRD 

services and payment rates for separately billable ESRD drugs. The 

changes have increased the composite rate and reduced the subsidy 

facilities obtained from generous Medicare payments for the separately 

billable drugs under pre-MMA payment rates. Nevertheless, as long as 

facilities receive a separate payment for each administration of each drug 

and the payment exceeds the cost of acquiring the drug, an incentive

remains to use more of these drugs than necessary. For Epogen, the most 

frequently used drug, several months of data indicate that the per-patient

use of this drug continues to rise, although at a slower rate than under preMMA payment rates. 

The MMA initiated new Medicare payment provisions addressing the 

composite rate and payment for separately billable drugs. Prior to the 

MMA’s payment changes, facilities relied on payments for separately 

billable drugs to subsidize the cost of providing dialysis services covered 

under the composite rate. In a 2004 report, we found that, in 2001, 

Medicare’s payment for the composite rate was 11 percent lower on 

average than facilities’ average costs to provide the items and services 

included in the composite rate, whereas Medicare’s payment for separately

billable drugs was 16 percent higher than facilities’ average costs of 

acquiring these drugs.38 We concluded that this payment disparity created

an incentive for facilities to overuse separately billable drugs, as payments 

for them compensated for losses on items and services included in the 

composite rate. 

New Payment 

Provisions Reduced 

Subsidy from 

Separately Billable 

Drugs but Did Not 

Eliminate Incentives 

to Overuse These 

Drugs 

New Payment Provisions 

Increased Composite Rate 

and Reduced Subsidy from 

Separately Billable Drugs 

Together with the MMA provisions, more recent legislative and regulatory

changes have reduced the disparity between Medicare’s payments and 

facilities’ average costs for both composite rate services and separately 

billable drugs. Essentially, these changes lowered payments for separately

billable drugs from their pre-MMA amounts, and raised payments for the 

composite rate. The base composite rate was increased by 1.6 percent in 

2005 and 2006 and the composite rate total was further increased through 

a “drug add-on” payment, which shifted some of the payments for 

 38See GAO-04-450. Because composite rate payments represent a larger share of Medicare

spending than payments for separately billable drugs, these percentage differences in costs 

and payments are not directly comparable. 

Page 13 GAO-07-77 End-Stage Renal Disease
separately billable drugs to the composite rate.39 In 2005, the add-on 

equaled 8.7 percent of the updated composite rate. In 2006, the 8.7 percent 

was replaced with a drug add-on payment of 14.5 percent of the 2006 

updated composite rate.40 (See table 2.) 

Table 2: Recent Legislative and Regulatory Changes to ESRD Payments 

Changes in composite rate 

Changes in payment for 

separately billable drugs

MMA Increase in the base composite 

rate of 1.6 percent in 2005. 

Creation of a “drug add-on” 

adjustment to the composite rate 

in order to maintain budget 

neutrality, starting in 2005. 

Adjustment of drug add-on

payment made yearly to reflect 

annual growth of drug 

expenditures, starting in 2006.

Payment rates based on 

average acquisition cost as 

determined by the OIG for 2005.

CMS regulation Drug add-on payment equaled

8.7 percent of the updated 2005 

base composite rate. 

Drug add-on payment of 

8.7 percent was replaced with an 

add-on equal to 14.5 percent of 

the updated 2006 base 

composite rate. 

Payment rates based on ASP + 

6 percent for 2006. 

Deficit Reduction 

Act of 2005 

Increase in the base composite 

rate of 1.6 percent in 2006. 

Source: GAO analysis of laws and regulations. 

Note: The HHS OIG developed the methodology to determine average acquisition cost of ESRD

drugs. 

The most significant changes to the ESRD payment system are the 

changes in payment rates for separately billable drugs. In 2005, Medicare’s 

payment rates based on average acquisition costs were lower than its 

previous payment rates based on 95 percent of AWP. For example, from 

 39These add-on payments—the difference between the rates Medicare paid under pre-MMA 

provisions and the rates paid each year from 2005 on—are designed to maintain budget 

neutrality as a result of payment reductions for separately billable drugs, beginning in 2005. 

40The MMA required CMS to annually update the drug add-on payment to account for 

changes due to increased utilization and prices. MMA sec. 623(d)(1), § 1881(b)(12)(F), 117 

Stat. 2314 (to be codified at 42 U.S.C. § 1395rr(b)(12)(F)). 

Page 14 GAO-07-77 End-Stage Renal Disease
2004 to 2005, the per-unit rate for iron dextran decreased from $17.91 to

$10.94 and the per-unit rate for paricalcitol decreased from $5.33 to $4.00. 

(See table 3.) Since 2006, when the payment method for separately billable 

drugs changed to ASP + 6 percent, Medicare’s payment rates have varied 

from quarter to quarter but have remained relatively consistent with the 

lower 2005 payments based on average acquisition costs. 

Table 3: Medicare Reimbursement Rates for Certain Separately Billable ESRD Drugs 

2004 

95% AWP 

2005

Average 

acquisition cost

January 2006a

ASP+6%

April 2006a 

ASP+6% 

July 2006a

ASP+6%

October 2006a

ASP+6%

Iron Iron dextran 

(50.0 mg) $17.91 $10.94 n/a n/a n/a n/a

Iron

dextranb 

(165 injection) 

(50.0 mg) n/a n/a $12.25 $12.42 $11.69 $11.78

Iron dextranb 

(267 injection) 

(50.0 mg) n/a n/a $10.24 $10.27 $10.34 $10.38

Iron sucrose 

(1.0 mg) $0.66 $0.37 $0.36 $0.36 $0.37 $0.36

Sodium ferric

gluconate complex 

(12.5 mg) $8.17 $4.95 $4.90 $5.06 $4.75 $4.81

Vitamin D Calcitriol 

(0.1 mcg) $1.38 $0.96 $0.71 $0.46 $0.51 $0.53

Paricalcitol

(1.0 mcg) $5.33 $4.00 $3.81 $3.80 $3.81 $3.81

Doxercalciferol

(1.0 mcg) $5.50 $2.60 $2.69 $3.17 $3.16 $2.88

Epoetin Epogen

(1,000 units) $10.00c

$9.76 $9.57 $9.33 $9.48 $9.45

Source: GAO analysis of CMS information. 

a

Payments under ASP + 6 percent are based on quarterly data and rounded to the nearest cent. 

b

The different doses of iron dextran were paid separately under the ASP + 6 percent methodology. 

c

The payment for Epogen does not represent 95 percent of AWP. 

Since the implementation of these changes, Medicare spending for 

individual separately billable ESRD drugs has decreased to varying 

degrees. Beginning in 2005, when Medicare’s payment method for these 

drugs changed from AWP to average acquisition cost, Medicare 

expenditures for several separately billable drugs decreased 11.8 percent 

Page 15 GAO-07-77 End-Stage Renal Disease
from 2004. (See table 4.) Specifically, the average payments for iron 

sucrose and paricalcitol decreased by almost 35 percent and 25 percent, 

respectively.

41 Similarly, payment for Epogen was lower than it had been 

for the previous decade, when it was set statutorily at $10 per unit, but the 

reduction—3.2 percent—was significantly less compared with the other

drugs. 

Table 4: Percentage Change in Medicare Expenditures for Certain Separately 

Billable ESRD Drugs from 2004 to 2005 

Source: GAO analysis of CMS data. 

Note: Total includes Medicare expenditures from all facility types and the 20 percent coinsurance the

beneficiary pays.

a

Totals and percentage change were calculated prior to rounding. 

Because payments to facilities for separately billable drugs are closer to 

the cost of acquiring these drugs and because composite rate payments 

have increased, the degree of cross-subsidization to support services 

 

Dollars in millions 

 2004

Medicare 

expenditures

2005

Medicare 

expenditures

Percentage

changea

Iron Iron dextran 

(50.0 mg) 5.0 2.3 -54.4

 Iron sucrose 

(1.0 mg) 237.3 154.8 -34.8

 Sodium ferric 

gluconate 

complex 

(12.5 mg) 159.6 96.2 -39.7

Vitamin D Calcitriol 

(0.1 mcg) 20.9 10.9 -48.1

 Paricalcitol 

(1.0 mcg) 439.4 331.3 -24.6

 Doxercalciferol 

(1.0 mcg) 112.8 81.9 -27.4

Epoetin Epogen 

(1,000 units) 2,107.2 2,039.6 -3.2

Total 3,082.2 2,716.9 -11.8

41After epoetin, the next highest Medicare expenditures are for iron sucrose and 

paricalcitol in the ESRD setting. 

Page 16 GAO-07-77 End-Stage Renal Disease
provided under the composite rate has diminished, but the incentive to 

overuse these drugs has not been eliminated. To the extent that facilities 

can obtain the drugs for less than Medicare’s payment rates and that the 

volume of drugs billed for separately increases facilities’ revenue, an 

incentive remains for facilities to overuse these drugs to maximize 

revenues. 

Utilization of Epogen—a major spending driver for ESRD services—has 

been and remains a focus of Medicare SRD cost ment effo

Preliminary data show that Epogen use—as measured by average dose per 

administration—continues to increase, although at a much slower rate 

than in previous years. pecifically, using data for the first 6 months of 

each year, we found th m 1991 through 2004, before the MMA 

provisions took effect, gen use increased at an average annual rate

6.7 percent, rising from a units per administration to about 7,400 

units (see fig. 1). In 20 e remained virtually unchanged; in 

2006, the average mon Epogen dose per administration increased 

slightly from about 7,4 nits to ab 500 units, an increase of abou

1.4 perc nt.

 

’s E contain rts.

42 S

at fro

Epo of

bout 3,000 

05, Epogen us

thly

00 u out 7, t

e

42We restricted the data to the first half of t to increase the validity of our 

comparison of previous years to 2006, for which we have only partial data. 

Preliminary Data Suggest 

that Epogen Use Continues 

to Grow, Though More 

Slowly than Before MMA 

Provisions Took Effect 

he year

Page 17 GAO-07-77 End-Stage Renal Disease
Figure 1: Average Epogen Dose per Administration in the First 6 Months of Each

Year, 1991-2006 

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Number of units

3,005

7,404 7,407 7,507

Year

Source: GAO analysis of data from the USRDS.

Note: Data are per ESRD patient with at least one Epogen claim in the first 6 months. We restricted 

the utilization data to the first half of the year to make our comparisons consistent with 2006 data, 

which we only have for the first 6 months of the year. 

Another measure of Epogen use—the average number of Epogen 

administrations per month per patient—also has not changed significantly 

since the implementation of the MMA. Between the first 6 months of 1994 

and the first 6 months of 2004, the average number of monthly Epogen 

administrations per patient increased from about 9.4 to about 10.6 (see 

fig. 2). Although the average number of monthly administrations was 

lower in both 2005 and 2006—at about 10.4 and 10.5 per patient, 

respectively—the average number of administrations per patient in 2006 

was about 10 percent higher than in 1991, when the number was about 9.5. 

Page 18 GAO-07-77 End-Stage Renal Disease
Figure 2: Average Number of Monthly Epogen Administrations in the First 6 Months

of Each Year, 1991-2006 

ote: Data are per ESRD patient with at least one Epogen claim in the first 6 months. We restricted 

addition to payment changes, CMS has sought over time to limit 

. In

lling

37.5 percent; if a patient exceeded that level, payments were not denied as

long as the Epogen dose was reduced 20 percent. In July 2004, CMS issued 

a proposal for a new monitoring policy. After consultation with the 

dialysis community, the final policy took effect on April 1, 2006. Under this 

policy, when a patient’s Hct level is above 39.0 percent, the facility must 

reduce the Epogen dosage by 25 percent of the preceding month’s 

Number of administrations

9.48 9.36

10.57 10.38 10.46

Year

Source: GAO analysis of data from the USRDS.

0

2

4

6

8

10

12

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

N

the utilization data to the first half of the year to make our comparisons consistent with 2006 data, 

which we only have for the first 6 months of the year. 

In

expenditures for Epogen by issuing policies that link payment to 

utilization. That is, Medicare reduces payments when a patient’s Hct level 

reaches a certain percentage. Since 1997, CMS has created three different 

monitoring policies to encourage the efficient use of Epogen for ESRD 

patients. Each of these policies has been closely aligned with the clinical

guidelines for Hct levels endorsed by the National Kidney Foundation

1997, the first policy denied payment when a patient’s 3-month ro

average Hct level exceeded 36.5 percent. In 1998, CMS revised the policy 

so that the maximum level for the 3-month rolling average Hct was 

Page 19 GAO-07-77 End-Stage Renal Disease
administered amount.43 44 Whether or not the facility reduces the dosage, 

Medicare pays the facility as though the reduction has occurred—in effect, 

,

not rewarding the facility for overutilization. 

,

spitals,

In broad terms, Medicare’s policy is to set payment rates that are adequate

to ensure beneficiary access to services but do not exceed the costs 

efficient providers incur to furnish needed care. In prior work on Medicare 

payment for Part B drugs, which include separately billable ESRD drugs,

we noted that the ASP method was practical for setting payment rates 

compared with Medicare’s previous methods to pay for these drugs, but 

we remained concerned about the appropriateness of the rates set under 

ASP.45 The practical aspects of ASP are several: it is based on actual 

transactions and is a better proxy for providers’ acquisition costs than 

Medicare’s previous methods to pay for these drugs; ASP is the most 

recent publicly available price information, as it is updated quarterly, and

is therefore timely for rate-setting purposes; and price data from 

manufacturers are administratively easier for CMS to collect than 

obtaining such data from health care providers. 

However, we also observed that CMS is not well-positioned to validate the 

 End-Stage Renal Disease

accuracy or appropriateness of its ASP-based payment rates. Significantly

CMS lacks sufficient information on how manufacturers allocate rebates

to individual drugs sold in combination with other drugs or products. In 

addition, CMS does not instruct manufacturers to provide a breakdown of 

price and volume data by purchaser type—that is, by physicians, ho

other health care providers, and wholesalers, which purchase drugs for

resale to health care providers. As a result, CMS cannot determine how 

well average price data represent acquisition costs for different purchaser 

types.46 Additionally, a sufficient empirical foundation does not exist for

 howing

n cost

drug 

pricing information. See HHS, Report to Congress—Report on Sales of Drugs and

Biologicals to Large Volume Purchasers (Washington, D.C.: 2006). 

ASP Payment Method, 

While 

Administratively 

Practical, May Not 

Help Medicare Foster 

Efficient Provider 

Goals 

43Medicare has a process under which facilities can appeal the denial of a claim by s

that it is medically necessary. 42 U.S.C. § 1395ff (2000).

44Effective October 2006, CMS revised the monitoring policy to, among other things, clarify

its policy for reporting dosage reductions.

45GAO-06-971T, GAO-06-372, and GAO-06-17R. 

46In a report to the Congress, CMS stated that it was unable to obtain net acquisitio

data and average sales price data by purchaser type due to the proprietary nature of 

Page 20 GAO-07-77 
setting the payment rate for Medicare Part B drugs at 6 percent above AS

further complicating efforts to determine the appropriateness of the rate.

P,

The ASP payment method is of particular concern with respect to Epogen 

ecause it is the only product available in the ESRD market for anemia 

e of

and

roducts

ently

ng a considerable effect 

on Medicare spending. 

re 

under development. Aranesp is a drug that Amgen manufactures and 

markets to hospitals and physicians to treat anemia in patients with cancer 

and chronic kidney disease but generally does not market to ESRD 

 

b

management. The ASP method relies on market forces to achieve a 

favorable payment rate for Medicare—that is, one that is sufficient to

maintain beneficiary access but not overly generous for providers and 

therefore wasteful for taxpayers. In principle, under ASP, when two or 

more clinically similar products exist in a market, market forces could 

serve to bring prices down, as each manufacturer competes for its own 

product’s market share. In contrast, when a product is available through 

only one manufacturer, Medicare’s rate lacks the moderating influenc

competition. For this reason, Medicare’s ASP method may not be 

appropriate for Epogen, which is the product of a single manufacturer

has no competitor products in the ESRD market. The lack of price 

competition may be financially insignificant for noncompetitive p

that are rarely used, but for Epogen, which is pervasively and frequ

used, the lack of price competition could be havi

Since the introduction of Epogen in the ESRD anemia management 

market, it has been difficult for competitor products to enter this market. 

Amgen, Epogen’s manufacturer, has held seven patents on Epogen, the 

first of which was granted in 1987 and the last of which expires in 2015; 

Amgen has obtained injunctions against pharmaceutical firms seeking to 

market their anemia management drugs in the United States. However, 

competitor products may enter the U.S. market in the near future. There

are three potential sources of future competition: a drug that currently 

exists, drugs that are likely to enter the market soon, and products that a

facilities. CERA is a drug that the manufacturer—F. Hoffmann LaRoche—

hopes to introduce in the United States sometime in 2007.47 Certain 

 t F. Hoffmann LaRoche to prevent it 

from marketing CERA in the United States on the grounds that CERA violates Amgen’s 

l

ing

47Amgen has filed suit in U.S. District Court agains

patents. Although the patent infringement case has not been resolved, industry analysts 

expect that F. Hoffmann LaRoche will launch CERA “at risk” in 2007, after getting approva

from FDA. Launching at risk here means marketing the product at the risk of incurr

damages for patent infringement. 

Page 21 GAO-07-77 End-Stage Renal Disease
products currently in development, which are several years away from 

entering the market, could have a distinct advantage over injectable 

products, as they are expected to be long-lasting oral therapies.48,49

of

this

t

e

CMS’s

Medicare’s approach to paying for most services provided by facilities is to 

e. For

s

 

The composite rate for routine dialysis-related services was the first

Medicare’s several payment systems that, in broad terms, sets a fixed,

prospective rate for a set of clinically related services. Consistent with

payment policy, the Congress has required CMS to develop a system tha

would no longer pay for each injectable ESRD drug under a separate rat

but would bundle payment for these drugs together with other ESRD 

services under a single rate. A bundled rate would have advantages for 

achieving efficiency and greater clinical flexibility. CMS’s design of a 

bundled rate is under way but behind schedule, making the 

implementation of a fully bundled payment system, based on this design, 

at least several years away. Any payment system changes based on

report or demonstration would require legislation. 

pay for a group—or bundle—of services using a prospectively set rat

example, under prospective payment systems, Medicare makes bundled 

payments for services provided by acute care hospitals, skilled nursing 

facilities, home health agencies, and inpatient rehabilitation facilities. In

creating one payment bundle for a group of associated items and services

provided during an episode of care,50 Medicare encourages providers to 

operate efficiently, as providers retain the difference if Medicare’s 

payment exceeds the costs they incur to provide the services. Medicare’

48For example, FibroGen recently developed FG-2216 and FG-4592, which are currently in

exploratory clinical trials in Europe. 

fit.

Bundling Is 

Fundamental to 

Medicare Payment 

Policy, but System to 

Expand Composite 

Rate Bundle to 

Include All ESRD 

Drugs Remains in 

Design Phase 

Bundling Intended to 

Encourage Efficiency and 

Clinical Flexibility While 

Discouraging Unnecessary 

Use 

49Oral products could be covered under Part D—Medicare’s new prescription drug bene

In this case, payments for them would not be made to dialysis facilities under Medicare

Part B. 

50For example, Medicare’s bundled payment for home health services covers a 60-day 

episode of care. 

Page 22 GAO-07-77 End-Stage Renal Disease
composite rate for routine dialysis-related services was introduced in 19

and was the program’s first bundled rate.51

83 

In recent years, we, the Medicare Payment Advisory Commission 

MedPAC), and CMS have recommended expanding the bundled payment 

have

drug or 

xperts, advantageous to patients and could result in the use of less 

pogen, but these alternatives are not encouraged under the current 

payment system. Studies have shown that daily hemodialysis—which 

 

(

for ESRD services to include not only the services paid under the 

composite rate but also the drugs that facilities currently bill for 

separately.52 Experts contend that a bundled payment for dialysis-related 

services would have two principal advantages. First, it would encourage 

facilities to provide services efficiently; in particular, under a fixed, 

bundled rate for a defined episode of care,53 facilities would no longer

an incentive to provide more ESRD drugs than clinically necessary. 

Second, bundled payments would afford clinicians more flexibility in 

decision making because incentives to prescribe a particular

treatment are reduced. 

For example, certain clinical alternatives are, according to some ESRD 

e

E

some experts contend is clinically preferable—reduced the need for 

Epogen in some ESRD patients with anemia.54 However, Medicare 

coverage is limited to three dialysis treatments a week. Under a bundled

payment, facilities would have the flexibility to increase the number of 

 for 

extent feasible, prospectively set payment rates. Pub. L. No. 95-292, sec. 2, § 1881(b)(2)(B), 

92 Stat. 307, 309 (codified as amended at 42 U.S.C. § 1395rr(b)(2)(B) (2000)). 

52See GAO-04-450, MedPAC (March 2006) and (March 2001), and HHS (May 2003). 

53In the case of the composite rate, one dialysis session constitutes an episode of care.

Unlike the current composite rate payment method, a newly designed payment bundle

could define the episode of care more broadly. For example, the new payment bundle

could cover dialysis and related items and services for 1 month. 

nce Base?” Nephrology Dialysis Transplantation, 

alysis Patients,” Nephrology Dialysis Transplantation, vol. 16, no.1 (2001), and 

Onyekachi Ifudu et al., “The Intensity of Hemodialysis and the Response to Erythropoietin 

.

51In 1978, the Secretary of HHS was required to prescribe methods and procedures

determining the amount Medicare should pay for ESRD services and to provide appropriate 

incentives to encourage more efficient and effective delivery of services including, to the

54See Francesco Locatelli and Lucia Del Vecchio, “Dialysis Adequacy and Response to

Erythropoietic Agents: What is the Evide

vol. 18, supp. 8 (2003), Ezio Movilli et al., “Adequacy of Dialysis Reduces the Doses of

Recombinant Erythropoietin Independently from the Use of Biocompatible Membranes in

Haemodi

in Patients with End-Stage Renal Disease,” The New England Journal of Medicine, vol

334, no. 7 (1996). 

Page 23 GAO-07-77 End-Stage Renal Disease
weekly dialysis treatments and reduce their use of Epogen. Studies have

also shown that patients who receive subcutaneous instead of intravenous

injections of epoetin and patients undergoing peritoneal dialysis instead of 

he

tin

dicare

r

e

ents

ayment system. First, facility representatives noted 

that bundled payments called for a case-mix adjuster—that is, a 

hese

ent

t

automatically on an annual basis. They pointed out that the current ESRD 

 

hemodialysis need less epoetin to manage their anemia.55,56 Under t

current payment system, which pays facilities for epoetin on a per 

administration basis, facilities have an incentive to select the epoe

delivery method and the dialysis modality that maximize their Me

revenue. Under a bundled payment, facilities would have less incentive to

choose the costlier intravenous over subcutaneous injections of epoetin o

the costlier hemodialysis over peritoneal dialysis. 

Facility representatives, ESRD experts, and other interested parties w

spoke with generally supported a bundled payment for dialysis-related

items and services while underscoring the importance of certain elem

as part of the bundled p

mechanism to account for the differences in the mix of more expensive

and less expensive patients across facilities. Without accounting for t

differences, facilities that treated a disproportionate share of costly 

patients would be financially disadvantaged. 

Second, some facility representatives noted that an automatic paym

update would be needed to adjust the bundled rate for inflation, consisten

with Medicare’s other bundled payment systems that are updated 

 etin,

compared with intravenous delivery, could result in significant cost savings to Medicare. 

-

e

nce

al of Kidney Diseases, 

, no. 3 (2002), and Laura Pizzi et al., “Economic Implications of Non-Adherence to

5 

 of Nephrology, vol. 15, no. 1 (2004). 

55In recent studies, researchers have determined that subcutaneous delivery of epo

See Denise Hynes et al., “Potential Cost Savings of Erythropoietin Administration in End

Stage Renal Disease,” The American Journal of Medicine, vol. 112, no. 3, (2002), Anatol

Besarab et al., “Meta-Analysis of Subcutaneous Versus Intravenous Epoetin in Maintena

Treatment of Anemia in Hemodialysis Patients,” American Journ

vol. 40

Treatment Recommendations for Hemodialysis Patients with Anemia,” Dialyisis and 

Transplantation, vol. 35, no. 11 (2006). 

56See Francisco Coronel et al., “Erythropoietin Requirements: A Comparative Multicenter 

Study Between Peritoneal Dialysis and Hemodialysis,” Journal of Nephrology, vol 16, no. 

(2003) and Jon Snyder et al., “Hemoglobin Levels and Erythropoietin Doses in 

Hemodialysis and Peritoneal Dialysis Patients in the United States,” Journal of the 

American Society

Page 24 GAO-07-77 End-Stage Renal Disease
composite rate is Medicare’s only payment bundle that does not receive a

automatic update.57

Third, ESRD experts we spoke with noted that, under bundling, the 

incentive to overuse services is blunted, but the incentive to underu

services is present. For example, facilities could choose to provide too

little Epogen to patients with anemia because they would save money 

providing less of this costly drug. These individuals commented that CMS’s

monitoring policy, which currently focuses on overutilization of Epogen, 

would need to refocus its attention on underutiliza

n

se

tion to ensure that 

under a bundled payment system ESRD patients received appropriate 

t a report

d

he

mandated report. It also 

required CMS to obtain input on the demonstration’s design and 

ystem

legislation.59

The report and demonstration efforts, led by two different organizational 

units in CMS, face similar design considerations. Both must define the 

ESRD services to be included in a payment bundle, design a case-mix 

adjustment model to account for differences in patients’ use of resources, 

 

levels of Epogen and other dialysis-related drugs and services. 

The MMA mandated a two-pronged approach for CMS to study the 

creation of a bundled payment method. It required CMS to submi

to the Congress on a bundled payment system design in October 2005 an

start a 3-year bundling demonstration in January 2006.58 The legislation 

linked the two requirements by directing CMS to base the design of t

bundling demonstration on the content of the

implementation from an advisory panel that included industry and 

government experts. The report had not been issued nor had the 

demonstration been launched as of November 2006. Any payment s

changes based on CMS’s report or demonstration would require 

and develop a payment policy for exceptional cases, known as an outlier

policy. However, despite similar goals, each unit has a different focus. 

 

3 years. 

to be billed 

3)(B), 

(13)(B)).

Implementation of 

Bundled Payment System 

for ESRD Services Could 

Be Years Away 

57Since the MMA provisions became effective, the drug add-on payment to the composite

rate is updated annually, but adjustments to the base rate are not automatic; only seven

adjustments have been made in the last 2

58MMA § 623(e)–(f), 117 Stat. 2315-16. 

59The MMA specified that drugs billed separately when it was enacted continue

separately and not bundled into the composite rate. MMA sec. 623(d)(1), § 1881(b)(1

117 Stat. 2314-15 (to be codified at 42 U.S.C. § 1395rr(b)

Page 25 GAO-07-77 End-Stage Renal Disease
Essentially, the unit responsible for the report is designing a bundled 

payment system that is intended to be implemented programwide and 

expeditiously, following congressional approval. In contrast, the unit 

stem

—

e

months to

fully implement the system, once legislation had been enacted. 

to an

criteria

several

ll start in

basis of

the Congress could choose to pass legislation to change the 

ESRD payment system. Because CMS typically makes mandated payment 

 

responsible for the demonstration is designing a bundled payment sy

that is intended to be implemented on a limited and self-selective basis

that is, through facilities’ voluntary participation in the demonstration. 

The time frame for implementing a bundled payment system based on 

CMS’s report is uncertain. Officials could not tell us when the report 

would be available. Furthermore, additional time is needed for the 

Congress to review the report and possibly pass legislation based on th

report. CMS officials predict that it would take a minimum of 18

The start of the bundled payment demonstration is similarly subject

uncertain chain of events. Specifically, under MMA, CMS cannot launch its 

demonstration before considering the information in its mandated report.

60

However, once demonstration staff are able to consider the report’s 

information, CMS can begin taking steps to solicit proposals for 

participation by dialysis facilities. The selection process involves 

screening applications for conformance with the demonstration’s

and the awarding of contracts. This process can take a minimum of

months. Demonstration staff anticipate that the demonstration wi

October 2007. Under this time line, they expect that the first useable 

results will be available 12 months later, or October 2008. On the

these results,

changes effective at the beginning of calendar years, and because such 

changes require a several-month period of rulemaking and public 

comment, the earliest payment year that could be informed by 

demonstration results is 2010. 

 has already been taken. Largely as an 

S is incorporating “pay for performance” in its 

bundled payment design—that is, a mechanism that would link a facility’s conformance to

60A step toward implementing the demonstration 

incentive for facilities to participate, CM

ESRD quality standards to Medicare’s payment rate. In July 2006, CMS solicited proposals

for a contractor to develop the pay-for-performance component of the bundling 

demonstration; subsequently, CMS awarded a contract. 

Page 26 GAO-07-77 End-Stage Renal Disease
The rationale for Medicare to continue paying for Epogen and other E

drugs outside of a payment bundle has diminished over time. Composit

rate updates and add-ons, coupled with the overhaul of payment for P

drugs, have moved Medicare toward paying more appropriately for ESRD 

services. Nevertheless, under the ASP payment method—which pays for 

separately billable ESRD drugs on a per administration basis—facilities

SRD

e

art B 

continue to have an incentive to use these drugs more than may be 

a:

gen

n

ll ESRD

services, including drugs, were bundled under a single payment. A bundled 

the

,

e,

d report 

ration that

e time needed to complete these steps 

makes the prospect of implementing such a system several years away. 

light of the uncertain time frame for CMS’s test of bundling and the 

potential for bundling to eliminate financial incentives to overuse 

separately billable drugs, the Congress should consider establishing a 

bundled payment system for all ESRD services as soon as possible. 

Conclusions 

necessary. Paying for Epogen under ASP presents an additional dilemm

as a single-source drug in a market with no competitor products, Epo

is not subject to the moderating effects that competition can have o

price. 

In our view, Medicare could realize greater system efficiency if a

payment—suitably adjusted for differences across facilities in their mix of

patients—would encourage facilities to use drugs more prudently, as they 

would have no financial incentive to use more than necessary and could 

retain the difference between Medicare’s payment and their costs. At

same time, because treatment choices would be payment neutral

clinicians would have more flexibility to try different treatment 

combinations of items and services paid for in the bundle. To account for 

facilities’ increased or decreased costs over time, a reexamination of the 

bundled rate may be necessary periodically. In the case of Epogen, for 

example, if other competitor products entered the market in the futur

the costs facilities would incur to treat anemia could decline. By adjusting

the payment bundle accordingly, Medicare could realize the benefits of 

such cost reductions. 

CMS’s time line is considerably protracted for issuing the mandate

on a bundled ESRD payment system and conducting a demonst

remains under development. Th

Matter for In

Congressional 

Consideration 

Page 27 GAO-07-77 End-Stage Renal Disease
In written comments on a draft of this report, CMS noted its appreciation 

of our interest in ensuring an appropriate payment system for all ES

services and stated that our findings will be useful to the agency in 

fulfilling its commitment to reform the ESRD payment system. The agency

generally agreed with our view that all ESRD services should be includ

under a

RD

ed 

bundled payment system but expressed the need to resolve 

implementation issues, primarily that the development of a sound casent to

ons

te

MMA of 2003 was a significant accomplishment. 

CMS has also pursued several research approaches in its efforts to create a 

Congress. CMS also mentioned the importance of collecting data on 

atient outcomes. We appreciate the importance of collecting these data, 

ical 

ed

Agency and Industry

Comments and Our 

Evaluation 

Comments from CMS 

mix adjuster be finalized. It stated that such a system should also promote

efficiency and clinical flexibility for ESRD facilities and should guard 

against incentives to undertreat ESRD patients in order to maximize 

profits. We agree that a fully bundled system will require an adequate casemix adjuster and a monitoring system to ensure patients receive adequate 

care. At the same time, we are asking the Congress to consider acting as 

soon as possible, acknowledging that the Congress would likely wa

receive and consider CMS’s research findings and recommendati

before establishing a new payment system. 

CMS observed that it has devoted considerable time and resources to 

developing an appropriate ESRD payment system, including research on

case-mix adjusters and quality incentives. Specifically, the agency noted 

that the implementation in April 2005, of the case-mix adjusted composi

rate as required by the

demonstration of a fully bundled ESRD payment system and expects to 

build on these prior efforts to form the basis for ESRD payment reform. 

We commend CMS for its attention to research on ESRD payment and 

encourage the agency to expedite the completion of its report to the 

p

but this issue was beyond the scope of this report. CMS provided techn

comments, which we incorporated as appropriate. We have reprint

CMS’s letter in appendix I. 

Page 28 GAO-07-77 End-Stage Renal Disease
Comments from Industry 

Representatives 

We invited representatives of drug manufacturers, large and small dialysis 

facility organizations, and a nephrologist specialty association to review 

nd comment on the draft report. The groups represented were Amgen 

Inc. (Amgen), F. Hoffmann-La Roche Ltd. (Roche), the Kidney Care 

ouncil (KCC), the National Renal Administrators Association (NRAA), 

ps’

fully

ly

wth

use Epogen utilization has 

remained relatively flat in recent years, providers are not responding to 

l

r on 

cent), fee-for-service basis. It is because of the 

inherent nature of this incentive that we recommend combining payment 

r ESRD drugs with all dialysis services under a single bundled rate. 

a

C

and the Renal Physicians Association (RPA). Several of the industry 

groups noted that the report was well written, thorough, and covered 

many of the issues affecting dialysis providers. The bulk of the grou

comments focused on three general issues central to the message of our 

report: the increase in utilization of Epogen over time, the current ASPbased payment system for ESRD drugs, and the implementation of a

bundled ESRD payment system. 

First, Amgen, KCC, Roche, and NRAA noted that the report did not ful

explain why utilization of Epogen has grown over time or why the gro

rate has slowed in recent years. Amgen stated that the draft report did not 

sufficiently cover the goal of Epogen therapy—which is to increase patient 

Hct levels—and its link to improved quality of life for dialysis patients. 

KCC noted that while the average Epogen dose has increased over time, 

patient outcomes—as measured by average Hct levels—have also 

improved. KCC further contended that beca

the incentive to overuse ESRD drugs. Roche maintained that the slow 

growth in Epogen use over the past few years is attributable to more 

patients’ having achieved Hct levels within the target range. NRAA added

that the slower growth of Epogen use is positive because it demonstrates 

that providers use less Epogen as more patients reach the target Hct 

range. 

In our report, we discuss the utilization of Epogen rather than the clinica

outcomes associated with that utilization. In response to the groups’ 

comments, we have added information that describes the benefits of 

Epogen therapy as well as data on patient Hct levels prior to the MMA

payment changes. Although we do not take a position on whether the drug

is overutilized at the levels we report, we stand by our contention that an 

inherent incentive to maximize revenues exists when items are paid fo

a cost-plus (e.g., ASP+6 per

fo

Page 29 GAO-07-77 End-Stage Renal Disease
Second, all of the groups commented on our discussion in the report of the

current ASP-based payment method for separately billable ESRD drugs, 

with some groups expressing concerns about an abrupt movement to a 

fully bundled rate. Amgen noted that the ASP method is relatively ne

that it is too early to decide whether to move to a fully bundled rate. In 

addition, Amgen was concerned with our characterization of ASP pay

issues associated with Epogen and stated that the entry of a new anem

management product may not necessarily result in reduced prices. Two

the organizations noted that, prior to moving to a bundled rate, a 

transitional system—one that encourages price competition for anemia

management drugs—may be desirable. Roche stated that continuing to use 

the ASP-based payment system fo

w and 

ment

ia

of

r Epogen could have negative 

downstream effects on a fully bundled ESRD payment system, as any price 

at ASP

te.

cussion of the ASP-based payment method focuses on payment for 

separately billable drugs in general and on Epogen in particular because of

ult

ay

ce

competition. However, as noted in our draft report, if price competition 

ere introduced under a bundled payment system, it could result in lower 

treatment costs for providers and—after adjustments to the bundle for 

these lower costs—could result in savings for Medicare. 

increases prior to bundling would be captured in the dollar amounts 

allocated for anemia management drugs included in the bundle. Similarly, 

KCC stated that an alternative payment system should be explored prior to

bundling. KCC also stated that, as long as there is no viable clinical 

alternative to Epogen, bundling by itself would not provide for clinical 

flexibility, nor would bundling alone ensure drug price stability. KCC 

suggested that a transitional system could involve paying for drugs

and transferring the rate’s current 6 percent add-on to the composite ra

In general, both RPA and NRAA viewed the ASP-based payment method

for ESRD drugs favorably. RPA specifically referred to the recent 

legislative and regulatory actions, including the move to an ASP-based

rate, as “responsible,” because payments for separately billable drugs were

lowered while the composite rate was increased. 

Our dis

its market domination and the high Medicare expenditures associated with

it. We agree that the introduction of a competitor product may not res

in immediate price reductions, but note that, in principle, competition

tends to lower prices over time. Although we acknowledge that there m

be a better way to pay for separately billable drugs than ASP+6 percent, 

our focus is on the need to mitigate the incentives that can undermine the

efficient use of resources in ESRD care. Any transitional system that 

allows separate billing for individual drugs perpetuates the incentive to 

maximize revenues through utilization of these drugs. We agree that 

bundling by itself cannot solve problems resulting from the lack of pri

w

Page 30 GAO-07-77 End-Stage Renal Disease
Finally, representatives from four of the groups expressed concerns about 

implementation challenges associated with a payment bundle. Consistent

with CMS’s position and the position of experts cited in our draft report,

Amgen and KCC emphasized the importance of appropriate case-mix 

adjustment in a bundled payment system. KCC underscored the 

considerable variation in patients’ need for Epogen and the role of the 

case-mix adjuster to ensure adequate compensation for providers treating

patients needing unusually high levels of the drug. RPA, NRAA, and KCC 

were concerned that bundling could limit innovation in the ESRD

or that physicians would be reluctant to use any new ESRD drugs that 

facilities would find to costly to cover within the payment bundle. 

Consistent with this concern, NRAA noted that the payment bund

methodology should have a mechanism to ensure the appropriate 

incorporation of new technologies and treatment protocols. 

We agree that an appropriate case-mix adjuster is important to a bundled

payment system and noted in the draft report that adjusting for diffe

in patients’ needs was a key point made by interested parties we 

contacted. We acknowledge that if the payment bundle does not accou

for patient differences, facilities that treat a disproportionate share of 

costly patients would be financially disadvantaged. We note that CMS has 

done extensive research on case-mix adjustment in a fully bundled ESRD

payment system and believe that any new system will benefit from

efforts. We also agree that a new payment bundle should be periodically

updated to reflect the costs of current technologies and treatment 

protocols. Specific details on the contents of a bun

market

le

rences 

nt

these

dle, its implementation, 

and evaluation over time were beyond the scope of this report. 

ort

ll

As we agreed with your office, unless you publicly announce the contents

of this report earlier, we plan no further distribution of it until 30 days 

from the date of this letter. At that time, we will send copies of this rep

to the appropriate congressional committees and other interested parties.

We will also make copies available to others upon request. This report wi

be available at no charge on GAO’s Web site at http://www.gao.gov. 

Page 31 GAO-07-77 End-Stage Renal Disease
If you or your staff have questions about this report, please contact me at

(202) 512-7101 or steinwalda@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page

of this report. GAO staff who made key contributions to this report are

listed in appendix II. 

Sincerely yours, 

A. Bruce Steinwald 

Director, Health Care 

Page 32 GAO-07-77 End-Stage Renal Disease
Appendix I: Comments from the Centers for Medicare & Medicaid Services 

Page 33 GAO-07-77 

Appendix I: Comments from the Centers for 

Medicare & Medicaid Services 

 End-Stage Renal Disease
Appendix I: Comments from the Centers for Medicare & Medicaid Services 

Page 34 GAO-07-77 End-Stage Renal Disease
Appendix II: GAO Contact and Staff 

Acknowledgments 

Page 35 GAO-07-77 End-Stage Renal Disease

A. Bruce Steinwald (202) 512-7101 or steinwalda@gao.gov. 

Phyllis Thorburn, Assistant Director; Jessica Farb; Hannah Fein; Zachary 

Gaumer; and Shivani Sharma made key contributions to this report. 

Appendix II: GAO Contact and Staff 

Acknowledgments 

GAO Contact 

Acknowledgments 

(290535) 
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