United States Government Accountability Office

GAO Testimony 

Before the Subcommittee on Health, 

Committee on Ways and Means, House of 

Representatives

END-STAGE RENAL 

DISEASE 

Medicare Should Pay a 

Bundled Rate for All ESRD 

Items and Services 

Statement for the Record of A. Bruce Steinwald 

Director, Health Care 

For Release on Delivery

Expected at 10:00 a.m. EDT 

Tuesday, June 26, 2007

 

GAO-07-1050T 
Mr. Chairman and Members of the Subcommittee: 

I am pleased to provide, as requested, a statement for the record on 

Medicare payments for certain drugs provided to patients with end-stage 

renal disease (ESRD), a condition of permanent kidney failure.1

 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. Detailed information on 

the prudence of bundling payments for all ESRD items and services and a 

recommendation to establish a bundled payment system as soon as 

possible are included in our report entitled End-Stage Renal Disease: 

Bundling Medicare’s Payment for Drugs with Payment for All ESRD 

Services Would Promote Efficiency and Clinical Flexibility.

2

 This report, 

along with a testimony statement, was released at a December 6, 2006,

hearing of the full Committee on Ways and Means.3

 Today’s statement 

highlights the information in that report and refers to information other 

witnesses presented at the hearing. The work we performed for the report 

was conducted in accordance with generally accepted government 

auditing standards. 

 1

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. 

2

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

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

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

3

GAO, End-Stage Renal Disease: Medicare Payments for All ESRD Services, Including 

Injectable Drugs, Should Be Bundled, GAO-07-266T (Washington, D.C.: Dec. 6, 2006). 

Page 1 GAO-07-1050T 
The way Medicare currently pays for injectable drugs provided to patients

during dialysis treatments helps explain the potential for these drugs to be

overused. 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.” 

Revised Medicare 

Payment Provisions 

Do Not Eliminate 

Incentives to Overuse 

Certain Drugs Billed 

for Separately 

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 

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 totaled about $2.9 billion. 

The effect of several legislative and regulatory changes since the 

enactment of the Medicare Prescription Drug, Improvement, and 

Modernization Act of 2003 (MMA)4

 has been to raise the composite rate for 

dialysis services while reducing Medicare’s 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—which for each drug equals the 

manufacturer’s average sales price (ASP) plus 6 percent—Medicare’s 

payment rates have varied from quarter to quarter but have remained 

relatively consistent with the lower 2005 payment rates. 

 4

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

Page 2 GAO-07-1050T 
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. 

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.5

 Most ESRD patients 

receive injections of Epogen at nearly every dialysis treatment, and 

whether Epogen is being overused has been called into question by some 

experts. At the December 2006 hearing of the full Committee, expert 

witnesses discussed their study results regarding Epogen use. One study 

found that kidney disease patients who were given high levels of Epogen 

experienced a higher risk of cardiovascular events and mortality than 

those who received lower levels of the drug.6

 Another study found that 

Medicare spent at least a third more on Epogen—amounting to hundreds 

of millions of dollars—than it would have if the levels of Epogen 

administered were in line with practice guidelines recommended by the 

National Kidney Foundation.7

 5

Introduced in 1989, Epogen—the brand name for epoetin alpha—was an expensive 

breakthrough drug used to treat anemia in patients with ESRD. In treating anemia—a 

condition in which not enough red blood cells carry oxygen throughout the body—Epogen

is used to achieve a certain level of hemoglobin, the part of the red blood cell that carries

oxygen. The National Kidney Foundation develops guidelines on the optimal hemoglobin 

range. 

6

See Ajay Singh et al., “Correction of Anemia with Epoetin Alfa in Chronic Kidney Disease,” 

The New England Journal of Medicine, vol. 355, no. 20 (Nov. 16, 2006). 

7

See Laura Pizzi et al., “Economic Implications of Non-Adherence to Treatment 

Recommendations for Hemodialysis Patients with Anemia,” Dialysis and 

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

Page 3 GAO-07-1050T 
Our own study found that Epogen use, which grew rapidly in the years 

before the MMA provisions took effect, continued to grow through the 

first half of 2006, 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. 

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,8

 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 drugs and services than necessary. 

 8

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

Unlike this 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.

Page 4 GAO-07-1050T 
In response to a congressional mandate that CMS study the feasibility of 

creating a bundled payment,9

 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 CMS to issue a report and conduct a 3-year 

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

including drugs that are currently billed separately, under a single rate.10

Both the CMS report, due in October 2005, and the demonstration, 

mandated to start in January 2006, are delayed. 

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

require legislation, because the MMA specified that drugs billed separately 

in 2003 would continue to be billed separately and not bundled in the 

composite rate.11 In light of the uncertain time frame for CMS’s test of 

bundling and the need for explicit legislation, in our report we 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 ESRD 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. 

For more information regarding this statement, please contact 

A. Bruce Steinwald at (202) 512-7114 or steinwalda@gao.gov. Contact 

points for our Offices of Congressional Relations and Public Affairs may 

be found on the last page of this statement. Phyllis Thorburn, Assistant 

Director; Jessica Farb; and Hannah Fein made key contributions to this 

statement. 

 9

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

No. 106-554, app. F, § 422(b) and (c), 114 Stat. 2763A-463, 2763A-515—2763A-517. 

10Pub. L. No. 108-173, § 623(e)–(f), 117 Stat. 2066, 2315-17. 

11MMA § 623(d)(1), § 1881(b)(13)(B), 117 Stat. 2314-15 (to be codified at 42 U.S.C. § 

1395rr(b)(13)(B)). 

Page 5 GAO-07-1050T 

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