United States Government Accountability Office

GAO Testimony 

Before the Committee on Ways and 

Means, House of Representatives

END-STAGE RENAL 

DISEASE 

Medicare Payments for All 

ESRD Services, Including 

Injectable Drugs, Should Be 

Bundled 

Statement of David M. Walker 

Comptroller General of the United States 

For Release on Delivery

Expected at 10:30 a.m. EST 

Wednesday, December 6, 2006

 

GAO-07-266T 
Mr. Chairman and Members of the Committee: 

I am pleased to be here to discuss highlights from our report entitled EndStage Renal Disease: Bundling Medicare’s Payment for Drugs with 

Payment for All ESRD Services Would Promote Efficiency and Clinical 

Flexibility.

1 The report examines Medicare payments for certain drugs 

provided to patients with end-stage renal disease (ESRD), a condition of 

permanent kidney failure.

2

Through Medicare’s ESRD benefit, patients receive a treatment known as 

dialysis, which removes excess fluids and toxins from the bloodstream. 

Patients also receive items and services related to their dialysis 

treatments, including drugs to treat conditions resulting from the loss of 

kidney function, such as anemia and low blood calcium. The Centers for 

Medicare & Medicaid Services (CMS), the agency that administers 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 ESRD composite rate. These items and services are paid

for separately on a per-service basis and 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. 

As a result, dialysis facilities relied on Medicare’s generous payments for 

 1

GAO, End-Stage Renal Disease: Bundling Medicare’s Payment for Drugs with Payment 

for All Services Would Promote Efficiency and Clinical Flexibility, GAO-07-77 

(Washington, D.C.: Nov. 13, 2006). 

2

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

range of medical services, including physician, laboratory, and hospital outpatient 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 selfadministered by patients. 

Page 1 GAO-07-266T
separately billable drugs to subsidize the composite rate payments that 

had remained nearly flat for two decades. 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 drugs accounted for about $2.9 billion. 

Medicare’s payment for these separately billable drugs is the focus of my 

remarks today. My remarks are based on the information included in our 

aforementioned report. 

Since the Medicare Prescription Drug, Improvement, and Modernization 

Act of 2003 (MMA) was passed,3

 how separately billable drugs are paid for 

has changed—from payment based on each drug’s average wholesale price 

(AWP),4

 to payment based on each drug’s average acquisition cost, to 

payment based on the manufacturer’s average sales price (ASP) for each 

drug. Specifically, beginning in 2006, payment for each drug is set at ASP + 

6 percent. 

Background 

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,5

 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 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 

3-year demonstration to test the design of a bundled ESRD payment 

system.6

 3

Pub. L. No. 108-173, 117 Stat. 2066. 

4

Epogen, one of the separately billable drugs, was not paid under the AWP method. 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. 

5

Medicare, 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-516-517. 

6

Pub. L. No. 108-173, § 623(e),(f), 117 Stat. 2066, 2315-2317. 

Page 2 GAO-07-266T
The effect of several legislative and regulatory changes since 2003 has 

been to raise the composite rate for dialysis services while reducing 

Medicare’s pre-2005 generous payments for separately billable ESRD 

drugs. Under the first legislative change in 2005, Medicare expenditures for 

certain of these drugs dropped 11.8 percent. Under the current payment 

method, based on the ASP for each drug, Medicare’s payment rates have 

varied from quarter to quarter but have remained relatively consistent with 

the lower 2005 payment rates. 

The ASP-based rates are an improvement over the pre-MMA method, as 

ASP is based on actual transactions. However, certain unknowns about 

the composition of ASP and the ASP-based payment formula make it 

difficult for CMS to determine whether the ASP-based payment rates are 

no greater than necessary to achieve appropriate beneficiary access. For 

one thing, CMS has no procedures for validating the accuracy of a 

manufacturer’s ASP, which is computed by the manufacturer. For another,

CMS has no empirical justification for the 6 percent add-on to ASP. 

Regardless of how payment for these drugs is calculated, 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. 

New Payment 

Provisions Reduced 

Subsidy from 

Separately Billable 

Drugs but Did Not 

Eliminate Incentives 

to Overuse These 

Drugs 

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

which in 2005 accounted for $2 billion in Medicare payments and is 

Medicare’s highest Part B expenditure drug. Introduced in 1989, Epogen—

the brand name for epoetin alpha—was an expensive breakthrough drug 

used to treat anemia in patients with ESRD. Most ESRD patients receive 

injections of Epogen at nearly every dialysis treatment. Preliminary data 

for 2006 suggest that Epogen use, which grew rapidly in the years before

the MMA provisions took effect, continues to grow, although at a slower 

rate than previously. Epogen is the only product available in the domestic 

ESRD market for anemia management. However, the ASP method relies 

on market forces to achieve a favorable rate for Medicare. When a product 

is available through only one manufacturer, Medicare’s ASP rate lacks the

moderating influence of competition. The lack of price competition may 

be financially insignificant for noncompetitive products that are rarely 

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

price competition could be having a considerable adverse effect on 

Medicare spending. 

Page 3 GAO-07-266T
Medicare’s approach to paying for most services provided by health care 

facilities is to pay for a group—or bundle—of services using a 

prospectively set rate. For 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, 

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’s composite rate for routine dialysis and 

related services was introduced in 1983 and was the program’s first 

bundled rate. 

Bundled Payment 

System for ESRD

Services, Including 

Injectable Drugs, 

Would Promote 

Efficiency and 

Clinical Flexibility 

Experts contend that a bundled payment for all 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,7

 facilities would no longer have 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 drug or treatment are reduced. 

For example, providers might be more willing to explore alternative 

methods of treatment and modes of drug delivery if there were no 

financial benefit to providing more services than necessary. 

In the MMA, 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.

Any payment changes based on CMS’s report or demonstration would 

require legislation.8

 Both the report, due in October 2005, and 

demonstration, mandated to start in 2006, are delayed, and CMS officials 

could not tell us when the report or results from the demonstration would 

be available.

 7

In 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. 

8

The MMA specified that drugs billed separately at the time the legislation was enacted 

continue to be billed separately and not bundled in the composite rate. MMA sec. 623

(d)(1), § 1881 (b)(13)(B), 117 Stat. 2314-15 (to be codified at 42 U.S.C. § 1395rr(b)(13)(B)). 

Page 4 GAO-07-266T
In light of these circumstances, we have asked the Congress to consider 

establishing a bundled payment for all ESRD services as soon as possible. 

In our view, Medicare could realize greater system efficiency if all drugs 

and services were bundled under a single payment. A bundled payment 

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. To account for 

facilities’ increased or decreased costs over time, a periodic reexamination 

of the bundled rate may be necessary. This would ensure that facilities 

would be paid appropriately and that Medicare could realize the benefit of

any cost reductions. 

Mr. Chairman, this concludes my prepared statement. I will be happy to 

answer any questions you or the other Committee Members may have. 

For further information regarding this testimony, please contact A. Bruce 

Steinwald (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 testimony. Phyllis Thorburn, Assistant Director; Jessica 

Farb; and Hannah Fein made key contributions to this statement. 

Contacts and 

Acknowledgments 

(290589) Page 5 GAO-07-266T
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. 
GAO’s Mission The Government Accountability Office, the audit, evaluation and 

investigative arm of Congress, exists to support Congress in meeting its 

constitutional responsibilities and to help improve the performance and 

accountability of the federal government for the American people. GAO 

examines the use of public funds; evaluates federal programs and policies; 

and provides analyses, recommendations, and other assistance to help

Congress make informed oversight, policy, and funding decisions. GAO’s 

commitment to good government is reflected in its core values of 

accountability, integrity, and reliability. 

The fastest and easiest way to obtain copies of GAO documents at no cost

is through GAO’s Web site (www.gao.gov). Each weekday, GAO posts 

newly released reports, testimony, and correspondence on its Web site. To

have GAO e-mail you a list of newly posted products every afternoon, go 

to www.gao.gov and select “Subscribe to Updates.” 

The first copy of each printed report is free. Additional copies are $2 each. 

A check or money order should be made out to the Superintendent of 

Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 

more copies mailed to a single address are discounted 25 percent. Orders 

should be sent to: 

U.S. Government Accountability Office 

441 G Street NW, Room LM 

Washington, D.C. 20548 

To order by Phone: Voice: (202) 512-6000 

TDD: (202) 512-2537 

Fax: (202) 512-6061 

Contact: 

Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470 

Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400 

U.S. Government Accountability Office, 441 G Street NW, Room 7125 

Washington, D.C. 20548 

Paul Anderson, Managing Director, AndersonP1@gao.gov (202) 512-4800

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548 

Obtaining Copies of 

GAO Reports and 

Testimony

Order by Mail or Phone 

To Report Fraud,

Waste, and Abuse in 

Federal Programs 

Congressional 

Relations 

Public Affairs 

PRINTED ON RECYCLED PAPER