Department of Health and Human Services


OFFICE OF 

INSPECTOR GENERAL 

MEDICARE REIMBURSEMENT 


FOR END STAGE RENAL DISEASE 


DRUGS: THIRD QUARTER 2006 


Daniel R. Levinson


Inspector General 


June 2007 


OEI-03-06-00590

Office of Inspector General 
 http://oig.hhs.gov 

The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, 

as amended, is to protect the integrity of the Department of Health and Human Services 

(HHS) programs, as well as the health and welfare of beneficiaries served by those 

programs. This statutory mission is carried out through a nationwide network of audits, 

investigations, and inspections conducted by the following operating components: 

Office of Audit Services 

The Office of Audit Services (OAS) provides all auditing services for HHS, either by 

conducting audits with its own audit resources or by overseeing audit work done by others. 

Audits examine the performance of HHS programs and/or its grantees and contractors 

in carrying out their respective responsibilities and are intended to provide independent 

assessments of HHS programs and operations. These assessments help reduce waste, 

abuse, and mismanagement and promote economy and efficiency throughout HHS. 

Office of Evaluation and Inspections 

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

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

significant issues. Specifically, these evaluations focus on preventing fraud, waste, or 

abuse and promoting economy, efficiency, and effectiveness in departmental programs. 

To promote impact, the reports also present practical recommendations for improving 

program operations. 

Office of Investigations 

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

investigations of allegations of wrongdoing in HHS programs or to HHS beneficiaries 

and of unjust enrichment by providers. The investigative efforts of OI lead to criminal 

convictions, administrative sanctions, or civil monetary penalties. 

Office of Counsel to the Inspector General 

The Office of Counsel to the Inspector General (OCIG) provides general legal services to 

OIG, rendering advice and opinions on HHS programs and operations and providing all 

legal support in OIG's internal operations. OCIG imposes program exclusions and civil 

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

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

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

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

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

OBJECTIVE 

To compare the Medicare reimbursement amounts for selected separately 

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

costs of these drugs for ESRD dialysis facilities in the third quarter of 

2006. 

BACKGROUND 

ESRD facilities (i.e., dialysis facilities) are approved to furnish at least 

one specific ESRD service and are either independent or hospital based. 

The Centers for Medicare & Medicaid Services (CMS) reimburses both 

facility types for most items related to dialysis services based on a 

prospective payment system known as the composite rate. However, 

some drugs incident to dialysis treatment are not covered under this rate 

and are instead billed separately. A recent report by the Government 

Accountability Office (GAO) recommended that Congress consider 

establishing a new bundled payment system creating one fixed rate for all 

ESRD-related drugs and services. 

Prior to January 1, 2006, Medicare reimbursed independent and 

hospital-based dialysis facilities for separately billable ESRD drugs using 

different methods. In 2005, independent dialysis facilities generally were 

reimbursed for separately billable drugs at either their acquisition cost or 

106 percent of their published average sales price (ASP). Hospital-based 

dialysis facilities generally were reimbursed for drugs on a reasonable 

cost basis. Effective January 1, 2006, CMS enacted several significant 

changes to the drug reimbursement methods used for dialysis facilities. 

One revision included paying all dialysis facilities 106 percent of the ASP 

for all separately billable ESRD drugs and biologicals, with certain 

exceptions, making payment methods for independent and hospital-based 

dialysis facilities the same. 

We sent surveys to a random sample of independent and hospital-based 

dialysis facilities to collect third-quarter 2006 data on the total amount 

paid, discounts and rebates received, and total units purchased for 

11 high-expenditure, separately billable ESRD drugs. We determined the 

volume-weighted average acquisition cost per drug and compared it to the 

drugs’ third-quarter 2006 Medicare reimbursement amount. For each 

drug, we calculated the percentage of facilities that had average 

acquisition costs below the third-quarter 2006 ASP-based reimbursement 

amount. 

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EXE CUTIVE S U MMAR Y

FINDINGS 

Among responding independent dialysis facilities, the average 

acquisition cost was less than the Medicare reimbursement amount 

for 9 of the 11 ESRD drugs under review. In the third quarter of 2006, 

the average acquisition cost among the responding independent dialysis 

facilities for 9 of the 11 ESRD drugs under review was between 

7 and 32 percent below the Medicare reimbursement amount. For the 

remaining two drugs, average acquisition costs ranged from 3 to 9 percent 

above the Medicare reimbursement amount. Reimbursement for these 

two drugs combined accounted for less than 1 percent of total Medicare 

reimbursement for separately billable drugs in independent dialysis 

facilities in 2005. When weighted by 2005 total Medicare reimbursement 

for each of the 11 drugs, overall drug acquisition costs for responding 

independent dialysis facilities were, on average, 10 percent below the 

Medicare reimbursement amount in the third quarter of 2006. 

Overall, responding independent chain dialysis facilities paid less for the 

drugs under review than nonchain facilities. On average, independent 

chain facilities could purchase 8 of the 11 drugs under review for less 

than independent nonchain facilities in the third quarter of 2006. During 

that same period, the responding chain facilities were able to purchase 

9 of the 11 drugs for less than the Medicare reimbursement amount, 

compared to 7 of the 11 drugs among nonchain facilities. On average, the 

four drugs that nonchain facilities could not purchase for less than the 

Medicare reimbursement amount accounted for less than 10 percent of 

total Medicare payments for separately billable drugs in 2005. 

Among responding hospitals, the average acquisition cost was less 

than the Medicare reimbursement amount for 6 of the 11 ESRD drugs 

under review. In the third quarter of 2006, the average acquisition cost 

among the responding hospital-based dialysis facilities for 6 of the 

11 ESRD drugs under review was between 4 and 29 percent below the 

Medicare reimbursement amount. For the remaining five drugs, average 

acquisition costs ranged from 1 to 8 percent above Medicare 

reimbursement. Reimbursement for these five drugs accounted for 

29 percent of reimbursement to hospital-based dialysis facilities for 

separately billable drugs in 2005. This indicates that, when compared to 

independent facilities, hospital-based facilities could potentially face 

larger gaps between acquisition costs and Medicare reimbursement when 

purchasing a number of highly utilized drugs. 

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EXE CUTIVE S U MMAR Y

When weighted by 2005 total Medicare reimbursement for each of the 

11 drugs, overall drug acquisition costs for hospital-based dialysis 

facilities were, on average, 7 percent below the Medicare reimbursement 

amount in the third quarter of 2006. 

CONCLUSION 

As the findings in this report show, on average, responding independent 

dialysis facilities could acquire the majority of the selected separately 

billable ESRD drugs for less than the Medicare reimbursement amount. 

Drug acquisition costs among different types of independent dialysis 

facilities did vary, with overall drug costs to chain facilities being 

somewhat less than costs to nonchains. However, among both chain and 

nonchain independent dialysis facilities, reimbursement for the drugs 

with average acquisition costs above the Medicare reimbursement 

amount accounted for a small percentage of overall drug expenditures. In 

contrast, average acquisition costs among hospital-based dialysis facilities 

for 5 of 11 drugs under review exceeded the Medicare reimbursement 

amount. Expenditures for these drugs represented almost one-third of 

overall expenditures in hospital-based dialysis facilities for separately 

billable drugs. 

In conclusion, acquisition costs for the same drug may vary based on the 

type and chain affiliation of the facility, causing some facilities (especially 

hospital-based facilities) to potentially experience greater gaps in 

reimbursement for certain drugs than others. CMS should continue to 

monitor the situation closely to ensure that all facilities are reimbursed 

appropriately. In addition, we suggest that CMS consider the cost data 

presented in this report in its discussions about the merits of separately 

billable drugs under the composite rate, as recommended by the 

Government Accountability Office. 

AGENCY COMMENTS 

CMS reiterated that it would continue to monitor ESRD payments in 

relation to the drug acquisition costs of dialysis providers. CMS also 

stated that this report provides useful information that will be helpful in 

these monitoring efforts, and that the agency looks forward to continuing 

to work with OIG on ESRD issues in the future. 

OE I-03-06-00 590 MEDI C ARE RE I M B U R SEM E N T F O R E ND S T A G E RENA L DI S EASE DRUGS : T H I RD QUARTER 2006 iii 
Δ T ABLE OF CONTENTS 

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

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

FINDI NGS .................................................. 9

Independent facilities acquired 9 of 11 drugs for less 

than reimbursement .................................... 9

Hospital-based facilities acquired 6 of 11 drugs for less 

than reimbursement .................................... 11

CON C L U SION ............................................. 12

 Agency Comments ..................................... 13

APPENDIXES ............................................. 14

A: Agency Comments ................................... 14

ACKN O W LEDGMENTS ..................................... 16
Δ INTRODU C TION 

OBJECTIVE 

To compare the Medicare reimbursement amounts for selected separately 

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

costs of these drugs for ESRD dialysis facilities in the third quarter of 

2006. 

BACKGROUND 

In 2005, Medicare reimbursed separately billable ESRD drugs and 

biologicals1 administered in independent dialysis facilities based either on 

106 percent of their published average sales price (ASP) or, for certain 

specified drugs, their acquisition cost.2 At that time, Medicare generally 

reimbursed hospital-based dialysis facilities for separately billable drugs 

on a reasonable cost basis.3 Effective January 1, 2006, the Centers for 

Medicare & Medicaid Services (CMS) enacted several significant changes 

to the drug reimbursement methods used for ESRD facilities. One 

revision included paying all dialysis facilities (independent and 

hospital-based) 106 percent of ASP for all separately billable ESRD drugs, 

making payment methods for independent and hospital-based dialysis 

facilities the same.4 However, the ASP methodology is not used for 

vaccines, blood, and blood products.5 

This review is the third in a series of Office of Inspector General (OIG) 

reports on Medicare reimbursement for separately billable ESRD drugs. 

Staff from CMS, the Medicare Payment Advisory Commission, and a 

number of dialysis facilities previously expressed their interest in OIG’s 

conducting future reviews on the topic. This current study compares 

third-quarter 2006 average acquisition costs to Medicare reimbursement 

amounts for selected separately billable ESRD drugs in both independent 

and hospital-based dialysis facilities. 

ESRD Treatment in Dialysis Facilities 

ESRD facilities (i.e., dialysis facilities) are approved to furnish at least 

one specific ESRD service and are either independent or hospital based.

6 

1 Hereinafter, references to separately billable drugs refer to both drugs and biologicals. 

2 42 CFR § 414.904 (d)(2). 

3 CMS, “Medicare Claims Processing Manual,” Chapter 8, § 60.2.2. 

4 Ibid. 

5 42 CFR § 414.906 (e). 

6 42 CFR § 405.2102. 

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INTROD UCT ION 

Both types of dialysis facilities provide outpatient services directly to 

ESRD patients as well as home dialysis (i.e., dialysis performed by an 

appropriately trained patient in his/her home).7 Independent dialysis 

facilities are freestanding, whereas hospital-based dialysis facilities must 

be either attached to or located in a hospital.8 As of October 2006, 

4,050 independent dialysis facilities and 310 hospital-based dialysis 

facilities were listed on Medicare’s Dialysis Facility Compare database.9 

Medicare Payments to Dialysis Facilities 

CMS reimburses dialysis facilities based on a prospective payment system 

known as the composite rate. Facilities receive a fixed composite rate 

payment for each dialysis treatment they provide. Independent dialysis 

facilities receive a lower rate than hospital-based facilities.10 The 

composite rate includes most items related to dialysis services, such as 

labor costs, related supplies, routine tests, and certain drugs.11 However, 

the composite rate does not include some drugs, such as epoetin alfa and 

darbepoetin alfa, which are incident to dialysis treatment. Drugs not 

covered under the composite rate must be billed separately and thus are 

referred to as separately billable drugs.12 

A recent report by the Government Accountability Office (GAO) 

recommended that Congress consider establishing a new bundled 

payment system creating one fixed rate, adjusted for differences across 

facilities, for the services paid for under the composite rate and the drugs 

that facilities currently bill separately. Such a change would result in one 

payment rate for all ESRD services and drugs. CMS generally agreed but 

noted that more research and development were necessary to fully 

support its implementation.13 

7 42 CFR § 405.2102. 

8 “2005 United States Renal Disease Researcher’s Guide,” p. 345.

9 Dialysis Facility Compare database. Available online at: 

http://medicare.gov/Dialysis/Home.asp. Accessed in October 2006. This database provides 

information on all dialysis facilities regarding their services, quality measures, and resources. 

10 CMS, “Medicare Claims Processing Manual,” Chapter 8, § 10.1.

11 Ibid., Chapter 11, § 30. 

12 Ibid., Chapter 11, § 30.4.2. 

13 GAO-07-77, “Bundling Medicare’s Payment for Drugs With Payment for All ESRD Services 

Would Promote Efficiency and Clinical Flexibility.” Available online at: 

http://www.gao.gov/cgo-bin/getrpt?GAO-07-77. Accessed on January 24, 2007. 

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INTROD UCT ION

Medicare Payments for Separately Billable ESRD Drugs 

In general, Medicare coverage of separately billable drugs in dialysis 

facilities is limited to products that cannot be self-administered, i.e., 

drugs that are administered by a health care professional. The exceptions 

to this requirement are epoetin alfa and darbepoetin alfa, which, if 

furnished by the dialysis facility, will be covered even if the patient 

self-administers the drug.14 Both drugs stimulate the production of red 

blood cells in patients with anemia; darbepoetin alfa contains two 

additional carbohydrate chains that lengthen its biological half-life.15 

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

$2 billion for separately billable drugs furnished by independent dialysis 

facilities and $200 million for separately billable drugs furnished by 

hospital-based dialysis facilities in 2005. 

Independent Dialysis Facilities. The Medicare Prescription Drug, 

Improvement, and Modernization Act of 2003, Public Law 108-173, 

(MMA), required that CMS base calendar year (CY) 2005 reimbursement 

to independent dialysis facilities for separately billable drugs on 

acquisition costs as determined by OIG.16 In response to this 

requirement, OIG calculated CY 2003 average acquisition costs (AAC) for 

10 high-expenditure drugs (including epoetin alfa)17 used in independent 

dialysis facilities as part of a May 2004 report, “Medicare Reimbursement 

for Existing End Stage Renal Disease Drugs” (OEI-03-04-00120). CMS 

then determined CY 2005 reimbursement amounts using two methods: 

• For the 10 high-expenditure, separately billable drugs included in 

OIG’s report, CMS based reimbursement on AACs as calculated by 

OIG. 

• For all other drugs billed by independent dialysis facilities (with 

the exception of certain vaccines, blood, and blood products), CMS 

reimbursed independent dialysis facilities at 106 percent of the 

drugs’ ASP.18 

OE I-03-06-00 590 

14 CMS, “Medicare Benefit Policy Manual,” Chapter 11, § 90. 

15 68 Fed. Reg. 63398, 63456 (November 7, 2003). 

16 MMA § 623 (d)(1). 

17 At the time of that review, these 10 drugs accounted for 98.4 percent of Medicare

reimbursement to independent dialysis facilities for separately billable drugs. 

18 42 CFR § 414.904 (d)(2). 

MEDI C ARE RE I M B U R SEM E N T F O R E ND S T A G E RENA L DI S EASE DRUGS : T H I RD QUARTER 2006 3 
INTROD UCT ION 

Beginning January 1, 2006, CMS no longer reimbursed high-expenditure 

drugs (including epoetin alfa) based on AACs calculated by OIG but 

instead began to reimburse all separately billable drugs furnished by 

independent dialysis facilities (with the exception of certain vaccines, 

blood, and blood products) at 106 percent of the ASP.19 This is the same 

method used to reimburse other drugs under Medicare Part B. CMS 

implemented this change because the agency believed that it was 

inappropriate to use older AAC data provided by OIG (updated for 

inflation) as a basis for reimbursement. In addition, CMS also questioned 

the feasibility of continually obtaining acquisition cost data over the long 

term.20 

Hospital-Based Dialysis Facilities. Prior to January 1, 2006, CMS 

reimbursed hospital-based dialysis facilities for separately billable drugs 

based on reasonable cost. The exception to this rule was epoetin alfa, 

which CMS paid for based on a statutory reimbursement allowance of 

$10 per 1,000 units prior to January 1, 2005, and based on AAC in 

2005.21, 22 Beginning January 1, 2006, all separately billable drugs (with 

the exception of certain vaccines, blood, and blood products) furnished by 

hospital-based dialysis facilities became subject to a new payment 

methodology and now are reimbursed using the same rate as that of 

independent dialysis facilities, i.e., 106 percent of the ASP.23 This change 

produced a consistent drug payment methodology among independent 

dialysis facilities and hospital-based dialysis facilities. 

Related Work by the Office of Inspector General 

OIG has completed two reviews analyzing the differences between 

acquisition costs for separately billable ESRD drugs and Medicare 

reimbursement amounts in independent dialysis facilities. Both of these 

reviews were conducted pursuant to mandates in the MMA.24 

In our May 2004 report, “Medicare Reimbursement for Existing End 

Stage Renal Disease Drugs” (OEI-03-04-00120), we found that the four 

largest corporate dialysis providers and a random sample of unaffiliated 

independent dialysis facilities were able to acquire 10 high-expenditure 

 OE I-03-06-00 590 

19 CMS, “Medicare Claims Processing Manual,” Chapter 8, § 60.2.2. 

20 70 Fed. Reg. 45764, 45845 (August 8, 2005). 

21 The Social Security Act, Section 1881, (11)(B)(ii)(I). 

22 70 Fed. Reg. 45764, 45845 (August 8, 2005). 

23 CMS, “Medicare Claims Processing Manual,” Chapter 8, § 60.2.2. 

24 MMA § 623 (c). 

MEDI C ARE RE I M B U R SEM E N T F O R E ND S T A G E RENA L DI S EASE DRUGS : T H I RD QUARTER 2006 4 
INTROD UCT ION 

drugs at costs averaging 14 to 22 percent below the Medicare 

reimbursement amount. We also estimated that there would be an 

11 percent increase in Medicare expenditures for separately billable 

ESRD drugs between 2003 and 2005. CMS used the data presented in 

this report to set CY 2005 reimbursement rates for the 10 drugs under 

review. 

A second report, completed in March 2006, “Medicare Reimbursement for 

New End Stage Renal Disease Drugs” (OEI-03-06-00200), sought to 

examine new separately billable ESRD drugs (i.e., drugs not available 

prior to January 1, 2004). Darbepoetin alfa was selected as the only drug 

for review because it accounted for 99.9 percent of Medicare 

reimbursement for new ESRD drugs. We found that responding 

independent dialysis facilities were able to acquire darbepoetin alfa for 

less (sometimes substantially less) than the 2005 Medicare 

reimbursement amount. 

METHODOLOGY 

Scope 

We obtained the average acquisition cost of 11 high-expenditure, 

separately billable drugs from a random sample of independent and 

hospital-based dialysis facilities for the third quarter of 2006. The 

11 drugs selected for review account for approximately 99 percent of 

Medicare reimbursement for separately billable drugs in independent 

dialysis facilities and 98 percent in hospital-based dialysis facilities. We 

did not include vaccines, blood, or blood products in our analysis because 

they are not reimbursed under the ASP methodology. 

Selection of Drugs Under Review 

At the time of sample selection, complete 2005 National Claims History 

File data were not available. Instead, we used a 1-percent sample of this 

file to rank separately billable ESRD drugs by their total Medicare 

reimbursement in both independent dialysis facilities and hospital-based 

dialysis facilities. The top drugs from the 1-percent sample were nearly 

identical in both facility types, with 9 of the 10 highest expenditure drugs 

being the same. The differing drugs were the hepatitis B vaccine (ranked 

9th in independent dialysis facilities and 15th in hospital-based dialysis 

facilities) and albumin (ranked 17th in independent dialysis facilities and 

10th in hospital-based dialysis facilities). In selecting drugs for our 

sample, we removed the hepatitis B vaccine and the blood product 

albumin because they are both exempted from the ASP methodology. 

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INTROD UCT ION

After removing these two products, our sample of drugs in both facility 

types was identical. Based on a follow-up analysis, the nine 

high-expenditure drugs selected for review remain as high-expenditure 

drugs in the complete 2005 and the preliminary 2006 National Claims 

History File. 

We also included two additional drugs in our review (vancomycin and iron 

dextran) at the request of CMS staff. Among the 11 selected drugs, 

1 drug, epoetin alfa, accounted for 74 percent of drug reimbursement 

among independent dialysis facilities. Two drugs, epoetin alfa and 

darbepoetin alfa, combined to account for 61 percent of drug 

reimbursement among hospital-based dialysis facilities. 

Data Collection 

Independent Dialysis Facilities. In previous ESRD reviews, we determined 

that four corporations owned the majority of independent dialysis 

facilities and accounted for 73 percent of Medicare reimbursement for 

separately billable ESRD drugs. Since our last review, consolidations 

among these four corporations have created two large, independent 

dialysis companies. These two companies own 2,868, or 71 percent, of all 

independent dialysis facilities. In November 2006, we sent a survey 

requesting third-quarter 2006 cost information for each of the 11 drugs 

under review to representatives of the two large companies. We 

requested information about the total amount paid by each company for 

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

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

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

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

of units purchased. We also asked the companies to report any additional 

costs associated with the drugs’ acquisition. Both companies responded 

with the requested information. 

In November 2006, we also sent surveys requesting identical 

third-quarter 2006 cost information to a random sample of 200 

independent dialysis facilities not affiliated with the two largest 

companies.25 Between December 2006 and February 2007, we received 

data from 158 facilities (79 percent).26 Six of the responding facilities 

owned multiple dialysis units and provided cost data for 358 additional 

25 We randomly selected these facilities from Medicare’s Dialysis Facility Compare database. 

26 We received responses from 161 facilities, but 3 were unable to provide the requested data. 

One provided peritoneal services, one was closed, and one was acquired by a large corporation. 

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INTROD UCT ION

facilities (for a total of 516 respondents not affiliated with the two large 

independent dialysis companies). 

After we combined cost data from the 2,868 facilities owned or managed 

by the two large companies and the 516 responding unaffiliated 

independent facilities, our results represent acquisition cost information 

for 84 percent of all independent dialysis facilities. 

Hospital-Based Dialysis Facilities. We selected a random sample of 

200 hospital-based dialysis facilities from the 310 identified in Medicare’s 

Dialysis Facility Compare database and in November 2006 sent them 

surveys requesting third-quarter 2006 cost information. Between 

December 2006 and February 2007, we received data from 

96 hospital-based dialysis facilities (48 percent of facilities sampled and 

31 percent of all hospital-based dialysis facilities).27 

Data Analysis 

CMS Data. We obtained the ASP-based reimbursement amounts for the 

11 selected separately billable ESRD drugs in the third quarter of 

2006 from CMS’s Web site. 

Acquisition Cost Data. For both facility types, we calculated 

volume-weighted average acquisition costs by totaling the amount paid 

net any discounts and rebates for each drug and dividing it by the total 

units purchased among all facilities for each drug. In calculating these 

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

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

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

standard deviations of the mean. 28 We determined the percentage 

difference between the volume-weighted average acquisition cost and 

CMS’s third-quarter 2006 ASP-based reimbursement amount per drug for 

both facility types. We then calculated the overall percentage difference 

between facility average acquisition costs and Medicare reimbursement 

by weighting the percentage differences by total 2005 Medicare 

expenditures for the individual drugs. For each drug, we also calculated 

OE I-03-06-00 590 

27 We received 116 responses, but 23 of these respondents were unable to provide data for 

reasons including participating in the 340B program, providing inpatient services only, and 

not being able to itemize dialysis costs. One of the responding hospitals provided data on 

three additional hospitals, making our total number of responses 96. 

28 Among independent dialysis facilities, an average of 1.4 data points per drug were 

considered outliers and removed. Among hospital-based ESRD facilities, this number was 1.5. 

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

MEDI C ARE RE I M B U R SEM E N T F O R E ND S T A G E RENA L DI S EASE DRUGS : T H I RD QUARTER 2006 7 
INTROD UCT ION

the percentage of facilities that had average acquisition costs below the 

third-quarter 2006 ASP-based reimbursement amount. 

Independent Chain and Nonchain Facilities. For the purpose of this review, 

we defined a chain facility as one owned by a company that operates four 

or more independent dialysis units. In total, 3,301 independent dialysis 

facilities were part of various chains (2,868 owned by the two largest 

companies and 433 owned by the six respondents that reported data for 

multiple facilities). To determine whether independent dialysis chain 

facilities had average acquisition costs different from those of nonchain 

facilities, we compared cost data from the 3,301 chain facilities to cost 

data from the 83 nonchain facilities by repeating the analysis described in 

the above paragraphs. 

Limitations 

We did not verify the validity of the cost information submitted by the 

dialysis facilities. This cost information applies only to the 84 percent of 

all independent dialysis facilities and the 31 percent of all hospital-based 

dialysis facilities that responded to our request. We do not assume that 

the findings are representative of the entire population of independent 

dialysis and hospital-based dialysis facilities. 

Standards 

This study was conducted in accordance with the “Quality Standards for 

Inspections” issued by the President’s Council on Integrity and Efficiency 

and the Executive Council on Integrity and Efficiency. 

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 O E I - 0 3 - 0 6 - 0 0 5 9 0 MEDICARE REIMBURSEMENT FOR E ND S TAGE RENAL DISEASE DRUGS : T HIRD QUARTER 2006 9 

In the third quarter of 2006, the average 

acquisition cost among responding 

independent dialysis facilities for 9 of the 

11 drugs under review was between 

7 and 32 percent below the Medicare 

reimbursement amount. The average acquisition cost for epoetin alfa 

(a drug that accounts for three-quarters of Medicare expenditures in 

independent facilities) was 10 percent less than the Medicare 

reimbursement amount. In total, 99 percent of responding independent 

dialysis facilities could purchase epoetin alfa for less than the Medicare 

reimbursement amount. 

For 2 of the 11 drugs, average acquisition costs ranged from 3 to 9 percent 

above the Medicare reimbursement amount. Reimbursement for these 

two drugs combined accounted for less than 1 percent of total Medicare 

expenditures for separately billable drugs in independent dialysis 

facilities in 2005. Table 1 illustrates the percentage difference between 

average acquisition costs reported by independent dialysis facilities and 

the third-quarter 2006 Medicare reimbursement amounts. 

When weighted by 2005 total expenditures for each of the 11 drugs, 

overall drug acquisition costs for responding independent dialysis 

facilities were, on average, 10 percent below the Medicare reimbursement 

amount. 

Table 1: Medicare Reimbursement and Average Acquisition Cost for Independent Dialysis Facilities 

Drug 

Third-Quarter 

2006 Medicare 

Reimbursement 

Amount 

Third-Quarter 

2006 

Average 

Acquisition Cost 

Reimbursement 

and Average Cost 

Difference 

Doxercalciferol, 1 μg* $3.16 $2.16 -31.63% 

Calcitriol, 0.1 μg $0.51 $0.37 -26.88% 

Vancomycin HCl, 500 mg* $3.23 $2.46 -23.91% 

Levocarnitine, 1 g* $9.08 $7.00 -22.99% 

Iron sucrose, 1 mg $0.37 $0.32 -13.49% 

Paricalcitol, 1 μg $3.81 $3.40 -10.74% 

Epoetin alfa, per 1,000 units $9.48 $8.56 -9.66% 

Sodium ferric gluconate, 12.5 mg $4.75 $4.34 -8.72% 

Darbepoetin alfa, 1 μg $3.03 $2.82 -6.67% 

Alteplase recombinant, 1 mg $31.67 $32.48 2.55% 

Iron dextran, 50 mg $10.34 $11.29 9.16% 

Source: OIG analysis of third-quarter 2006 average acquisition costs among responding independent facilities, 

February 2007. Third-quarter 2006 Medicare reimbursement amounts were downloaded from: 

http://cms.hhs.gov/McrPartBDrugAvgSalesPrice/02_aspfiles.asp. Accessed on February 14, 2007. 

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

Among responding independent dialysis 

facilities, the average acquisition cost was less 

than the Medicare reimbursement amount for 

9 of the 11 ESRD drugs under review 

Δ FINDINGS 
 

 O E I - 0 3 - 0 6 - 0 0 5 9 0 MEDICARE REIMBURSEMENT FOR E ND S TAGE RENAL DISEASE DRUGS : T HIRD QUARTER 2006 10 

FINDINGS 

Overall, responding independent chain dialysis facilities paid less for 

the drugs under review than did nonchain facilities. On average, 

independent chain facilities could purchase 8 of the 11 drugs under 

review for less than independent nonchain facilities in the third quarter 

of 2006. During that same period, the responding chain facilities were 

able to purchase 9 of the 11 drugs for less than the Medicare 

reimbursement amount, compared to 7 of the 11 drugs among nonchain 

facilities. On average, the four drugs that nonchain facilities could not 

purchase for less than the Medicare reimbursement amount accounted for 

less than 10 percent of total Medicare payments for separately billable 

drugs in 2005. 

When weighted by 2005 total reimbursement for each of the 11 drugs, 

overall drug acquisition costs for responding chain facilities were 

12 percent below the Medicare reimbursement amount, compared to 

7 percent below for nonchain facilities. This difference can be attributed, 

in large part, to the pricing of epoetin alfa. Although chain facilities 

initially paid more than nonchain facilities for 1,000 units of epoetin alfa 

($11.66 compared to $9.47), the chain facilities received an average 

discount/rebate of $3.11, compared to $0.48 for nonchain facilities. As a 

result, the final price for epoetin alfa for chain facilities was 5 percent 

below the final price of the drug for nonchain facilities ($8.55 per 

1,000 units compared to $8.99). The average acquisition costs in chain 

and nonchain facilities for all 11 drugs are presented in Table 2. 

Table 2: Average Acquisition Costs of Chain and Nonchain Independent Dialysis Facilities

Source: OIG analysis of third-quarter 2006 average acquisition costs among responding independent facilities, February 2007. 

Third-quarter 2006 Medicare reimbursement amounts were downloaded from: 

http://cms.hhs.gov/McrPartBDrugAvgSalesPrice/02_aspfiles.asp. Accessed on February 14, 2007. 

* Costs for drugs above the Medicare reimbursement amount are in bold type. 

** The average acquisition cost for iron sucrose in nonchain facilities is slightly higher ($0.368) than the third-quarter 2006

Medicare reimbursement amount ($0.366). 

Drug 

Third-Quarter 2006 

Medicare 

Reimbursement 

Amount 

Third-Quarter 2006 

Average Acquisition 

Cost in Chains 

Third-Quarter 2006 

Average Acquisition 

Cost in Nonchains 

Alteplase recombinant, 1 mg $31.67 $32.45 $33.66 

Calcitriol, 0.1 μg $0.51 $0.37 $0.73 

Darbepoetin alfa, 1 μg $3.03 $2.72 $2.96 

Doxercalciferol, 1 μg $3.16 $2.33 $0.72 

Epoetin alfa, per 1,000 units $9.48 $8.55 $8.99 

Iron dextran, 50 mg $10.34 $11.33 $10.08 

Iron sucrose, 1 mg** $0.37 $0.32 $0.37 

Levocarnitine, 1 g $9.08 $7.14 $5.40 

Paricalcitol, 1 μg $3.81 $3.40 $3.70 

Sodium ferric gluconate, 12.5 mg $4.75 $4.32 $4.84 

Vancomycin HCl, 500 mg $3.23 $2.41 $2.51 
 

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FINDINGS 

In the third quarter of 2006, the 

average acquisition cost among 

responding hospital-based dialysis 

facilities for 6 of the 11 ESRD drugs 

under review was between 4 and 

29 percent below the Medicare reimbursement amount. Average 

acquisition costs for darbepoetin alfa and epoetin alfa (the two drugs that 

account for the majority of Medicare spending in hospital-based facilities) 

were 10 and 9 percent below the Medicare reimbursement amount, 

respectively. 

For 5 of the 11 drugs, average acquisition costs ranged from 1 to 8 percent 

above the Medicare reimbursement amount. Reimbursement for these five 

drugs accounted for 29 percent of reimbursement to hospital-based dialysis 

facilities for the selected separately billable ESRD drugs in 2005. This 

indicates that when compared to independent facilities, hospital-based 

dialysis facilities could potentially face larger gaps between acquisition 

costs and Medicare reimbursement when purchasing a number of highly 

utilized drugs. Table 3 illustrates the percentage difference between 

average acquisition costs reported by hospital-based dialysis facilities 

and the third-quarter 2006 Medicare reimbursement amounts. 

When weighted by 2005 total reimbursement for each of the 11 drugs, 

overall drug acquisition costs for responding hospital-based dialysis 

facilities were, on average, 7 percent below the Medicare reimbursement 

amount—an amount identical to that for nonchain independent facilities. 

Table 3: Medicare Reimbursement and Average Acquisition Cost in Hospital-Based Dialysis Facilities 

Drug 

Third-Quarter 

2006 Medicare 

Reimbursement 

Amount 

Third-Quarter 

2006 

Average 

Acquisition Cost 

Reimbursement 

and Average 

Cost Difference 

Doxercalciferol, 1 μg $3.16 $2.26 -28.53% 

Calcitriol, 0.1 μg $0.51 $0.37 -27.15% 

Alteplase recombinant, 1 mg $31.67 $27.20 -14.12% 

Darbepoetin alfa, 1 μg $3.03 $2.71 -10.39% 

Epoetin alfa, per 1,000 units $9.48 $8.66 -8.67% 

Vancomycin HCl, 500 mg $3.23 $3.12 -3.54% 

Sodium ferric gluconate, 12.5 mg $4.75 $4.78 0.59% 

Levocarnitine, 1 g $9.08 $9.19 1.19% 

Iron sucrose, 1 mg $0.37 $0.38 3.95% 

Paricalcitol, 1 μg $3.81 $3.99 4.78% 

Iron dextran, 50 mg $10.34 $11.15 7.81% 

Source: OIG analysis of third-quarter 2006 average acquisition costs among responding hospital-based dialysis 

facilities, February 2007. Third-quarter 2006 Medicare reimbursement amounts were downloaded from: 

http://cms.hhs.gov/McrPartBDrugAvgSalesPrice/02_aspfiles.asp. Accessed on February 14, 2007. 

Among responding hospitals, the average 

acquisition cost was less than the Medicare 

reimbursement amount for 6 of the 11 drugs 

under review 
Δ CONCLUSION 

CONCLUSION 

In 2005, CMS reimbursed independent dialysis facilities for most 

separately billable ESRD drugs based on either their acquisition cost (as 

determined by OIG) or 106 percent of their ASP. At the same time, CMS 

reimbursed hospital-based dialysis facilities for most separately billable 

ESRD drugs on a reasonable cost basis. As of January 1, 2006, CMS 

enacted several changes to the drug reimbursement methods used for 

dialysis facilities. One revision included paying all dialysis facilities 

106 percent of the ASP for all separately billable ESRD drugs (with the 

exception of certain vaccines, blood, and blood products), making payment 

methods for independent and hospital-based dialysis facilities the same. 

As the findings in this report show, on average, responding independent 

dialysis facilities could acquire the majority of the selected separately 

billable ESRD drugs for less than the Medicare reimbursement amount. 

Drug acquisition costs among different types of independent dialysis 

facilities did vary, with overall drug costs among chain facilities being 

somewhat less than those of nonchains. However, among both chain and 

nonchain independent dialysis facilities, reimbursement for the drugs 

with average acquisition costs above the Medicare reimbursement 

amount accounted for a small percentage of overall drug expenditures. In 

contrast, average acquisition costs among hospital-based dialysis facilities 

for 5 of 11 drugs under review exceeded the Medicare reimbursement 

amount. Expenditures for these drugs represented almost one-third of 

overall expenditures in hospital-based dialysis facilities for separately 

billable drugs. 

In conclusion, acquisition costs for the same drug may vary based on the 

type and chain affiliation of the facility, causing some facilities (especially 

hospital-based facilities) to potentially experience greater gaps in 

reimbursement than others. CMS should continue to monitor the 

situation closely to ensure that all facilities are reimbursed appropriately. 

In addition, we suggest that CMS consider the cost data presented in this 

report in its discussions about the merits of separately billable drugs 

under the composite rate, as recommended by the Government 

Accountability Office. 

 OE I-03-06-00 590 MEDI C ARE RE I M B U R SEM E N T F O R E ND S T A G E RENA L DI S EASE DRUGS : T H I RD QUARTER 2006 12 
C O NCL USIO N 

AGENCY COMMENTS 

CMS reiterated that it would continue to monitor ESRD payments in 

relation to the drug acquisition costs of dialysis providers. CMS also 

stated that this report provides useful information that will be helpful in 

these monitoring efforts, and that the agency looks forward to continuing 

to work with OIG on ESRD issues in the future. 

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 O E I - 0 3 - 0 6 - 0 0 5 9 0 MEDICARE REIMBURSEMENT FOR E ND S TAGE RENAL DISEASE DRUGS : T HIRD QUARTER 2006 14 

Agency Comments 

Δ APPENDIX~A 
 

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APPENDIX~A 
Δ ACKNOWLEDGMENTS 

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

Inspector General for Evaluation and Inspections in the Philadelphia 

regional office, and David E. Tawes, Director of the Medicare and 

Medicaid Prescription Drug Unit. 

Stephanie Yeager served as the lead analyst. Other regional and 

central office staff who contributed include Linda B. Abbott, Scott 

Horning, and Barbara Tedesco. 

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