```
Medicare: Impact of OBRA-90's Dialysis Provisions on Providers and
Beneficiaries (Letter Report, 04/25/94, GAO/HEHS-94-65).

To control soaring Medicare costs, Congress has required that, in some
cases, employer-sponsored group health plans covering Medicare
beneficiaries pay medical claims before Medicare begins to foot the
bill.  Since 1981, such a requirement has been in place for patients
with advanced kidney disease, which requires regular dialysis or a
kidney transplant.  The Omnibus Budget Reconciliation Act of 1990
(OBRA-90) extended the period during which these plans must pay before
Medicare kicks in.  The OBRA extension of the plans' obligation as
primary payers has increased the amount that providers received for
dialysis by an estimated $41 million per year.  This increase occurred
because employer-sponsored plans generally paid dialysis providers more
than the cost-based Medicare rates.  Although the additional revenue is
relatively small when viewed in the aggregate, boosting total provider
revenues for dialysis by about 1.8 percent, it represents pure profit
for providers.  The extension should not affect most kidney disease
patients' out-of-pocket expenses because provisions insulate patients
with dual coverage from being singled out for increased out-of-pocket
expenditures.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HEHS-94-65
     TITLE:  Medicare: Impact of OBRA-90's Dialysis Provisions on 
             Providers and Beneficiaries
      DATE:  04/25/94
   SUBJECT:  Urologic diseases
             Health care cost control
             Health insurance cost control
             Beneficiaries
             Cost analysis
             Medical economic analysis
             Medical services rates
             Employee medical benefits
             Payments
IDENTIFIER:  Medicare End Stage Renal Disease Program
             Medicare Program
             Health Security Act
             Medicare Secondary Payer Program
             National Health Care Reform Initiative
             Clinton Health Care Plan
             
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Cover
================================================================ COVER

Report to Congressional Committees

April 1994

MEDICARE - IMPACT OF OBRA-90'S
DIALYSIS PROVISIONS ON PROVIDERS
AND BENEFICIARIES

GAO/HEHS-94-65

OBRA-90 Medicare ESRD Provisions

Abbreviations
=============================================================== ABBREV

  EGHP - employer group health plan
  ESRD - end-stage renal disease
  HCFA - Health Care Financing Administration
  MSP - Medicare secondary payer
  OBRA-90 - Omnibus Budget Reconciliation Act of 1990
  OBRA-93 - Omnibus Budget Reconciliation Act of 1993

Letter
=============================================================== LETTER

B-252171

April 25, 1994

The Honorable Daniel Patrick Moynihan
Chairman
The Honorable Bob Packwood
Ranking Minority Member
Committee on Finance
United States Senate

The Honorable John D.  Dingell
Chairman
The Honorable Carlos J.  Moorhead
Ranking Minority Member
Committee on Energy and Commerce
House of Representatives

The Honorable Dan Rostenkowski
Chairman
The Honorable Bill Archer
Ranking Minority Member
Committee on Ways and Means
House of Representatives

To help control rising Medicare costs, Congress has enacted a series
of amendments to the Social Security Act to require that, in certain
cases, employer-sponsored group health plans\1 covering Medicare
beneficiaries pay medical claims before Medicare pays for services. 
Since 1981, such a requirement has been in place for patients with
end-stage renal disease (ESRD), a condition that requires regular
blood cleansing (dialysis) or a kidney transplant.  The Omnibus
Budget Reconciliation Act of 1990 (OBRA-90) extended the period
during which employer-sponsored plans are required to pay before
Medicare does.\2 OBRA-90 also required us to report on the various
effects this extension was having on dialysis costs. 

This is the second of two reports intended to meet OBRA-90's
requirement.  Our first report analyzed the number of beneficiaries
affected by the extension, the extent to which the extension shifted
costs from Medicare to employer-sponsored plans, and the extension's
effect on ESRD patients' ability to obtain employment and health care
coverage.\3 This second report examines the extension's impact on (1)
the amount of money that dialysis providers receive and (2) the
out-of-pocket payments made by Medicare beneficiaries as their share
of medical costs. 

--------------------
\1 In this report, employer health plans include any group health
insurance provided through employment, including a labor union group
health plan. 

\2 Specifically, OBRA-90 extended the Medicare secondary payer (MSP)
provision for ESRD beneficiaries from the first year of treatment to
the first 18 months of entitlement.  Because of complexities in the
law governing Medicare entitlement for ESRD, the length of the OBRA
extension varies from beneficiary to beneficiary.  For most
beneficiaries, the OBRA extension potentially lengthens the employer
coverage by 6 to 9 months. 

\3 See Medicare:  Millions in End-Stage Renal Disease Expenditures
Shifted to Employer Health Plans (GAO/HRD-93-31, Dec.  31, 1993). 

   BACKGROUND
------------------------------------------------------------ Letter :1

In 1991, Medicare paid nearly $6 billion in health care expenditures
for about 150,000 patients with ESRD.  Medicare pays for dialysis on
the basis of a predetermined amount per treatment session.  This
predetermined amount, called the "composite rate," is based on the
national median cost of furnishing dialysis treatments but varies
from provider to provider to reflect differences in labor costs in
different areas and conditions such as whether the provider is a
hospital or a freestanding provider.\4

Medicare pays separately for other ESRD-related services, which
include administration of erythropoietin (a drug used in ESRD
treatments), physician services, and laboratory tests. 

In 1981, the Congress amended the Social Security Act to make
Medicare the secondary payer for the first year's medical expenses of
certain ESRD beneficiaries.  OBRA-90 extended this period to the
first 18 months of Medicare entitlement.  Under this provision, the
employer-provided plan pays up to the limits of its coverage.  As the
secondary payer during this period, Medicare then pays any remaining
amount up to the Medicare composite rate, or the billed amount,
whichever is lower.\5 After this 18-month period has ended, the roles
are reversed:  Medicare becomes the primary payer, and the
employer-provided plan becomes the secondary payer.  When Medicare is
the primary payer, it pays 80 percent of the composite rate, and the
secondary payer is responsible for the remaining 20 percent.  In both
scenarios, there is generally little beneficiary out-of-pocket
expense, as long as the employer plan coverage remains in force.\6
Table 1 summarizes these payment responsibilities. 

                           Table 1
           
           Summary of ESRD Payment Responsibilities

                    Payment
                    responsibility      Payment
                    during first 18     responsibility after
                    months of Medicare  18 months of
                    entitlement         Medicare entitlement
------------------  ------------------  --------------------
Who pays as         Employer-provided   Medicare
primary             group health plan

Method of           Up to the limit of  80 percent of
determining         its coverage        composite rate (or
primary payment                         charges, if
                                        lower)

Who pays as         Medicare            Employer-provided
secondary                               group health plan

Method of           Remainder needed    20 percent of
determining         to bring total      composite rate
secondary payment   payment to
                    composite rate
------------------------------------------------------------
The Congress has continued to examine the question of how long the
primary payment period should be for employer-provided health plans. 
The Omnibus Budget Reconciliation Act of 1993 continued the 18-month
period through September 30, 1998, after a provision to extend the
period to 24 months was rejected in conference committee.  The
administration's Health Security Act, as introduced in the Congress
in 1993, proposes to make the MSP ESRD provisions permanent. 

In our first report, we estimated the OBRA extension would shift $56
million of medical expenditures from Medicare to employer-provided
plans each year.  Since that time, more complete data have become
available.\7 We recomputed our estimate using this more complete
information and now project the annual Medicare savings from the OBRA
extension to be $87 million. 

--------------------
\4 Freestanding providers offer specific health care services outside
the traditional settings of hospitals, nursing homes, and physicians'
offices. 

\5 When Medicare pays approved providers, providers must accept the
Medicare composite rate as payment in full, and cannot bill
beneficiaries for additional amounts. 

\6 A beneficiary could have out-of-pocket expenses if the employer
plan payment were insufficient to pay for Medicare's deductible and
coinsurance.  However, the results of our study show this situation
to be highly unlikely. 

\7 Our original estimate used data from a 2-month period
(November-December 1991) as a basis for the annual projection.  For
our new estimate, we were able to use more complete data that had
since become available (November 1991-July 1992). 

   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :2

To assess the effect of the OBRA extension on the amounts providers
receive for dialysis, we reviewed records from a nationwide sample of
55 dialysis providers.\8 For each provider, we obtained relevant
billing and payment documents for services provided between December
14 and December 21, 1992, to patients with an employer group health
plan (EGHP) that was the primary payer.  We compared the amounts
received by providers for dialysis when EGHPs were the primary payer
with amounts the providers would have received if Medicare had been
the primary payer. 

To assess the extension's effect on out-of-pocket costs borne by
Medicare beneficiaries, we discussed payment rules and employer-plan
actions with dialysis providers and with officials of the Health Care
Financing Administration (HCFA), the agency responsible for the
general administration of the Medicare program, and we reviewed
relevant Medicare regulations.  Appendix I contains a more detailed
discussion of our methodology. 

--------------------
\8 Our sample excludes three providers who had no dialysis patients
during the sample time frames, and one provider who indicated that
the billing documents for the time frame were lost.  The sample of
providers was based on random selection of those dialysis providers
that we found in our earlier review to be treating beneficiaries
affected by the OBRA ESRD extension.  Appendix I provides more
details on our sampling approach. 

   RESULTS IN BRIEF
------------------------------------------------------------ Letter :3

The OBRA extension of employer-provided health care plans' obligation
as primary payer has increased amounts that providers receive for
dialysis by an estimated $41 million per year.  This increase
occurred because employer-sponsored plans generally paid dialysis
providers more than the cost-based Medicare rates.  The additional
revenue is relatively small when viewed in the aggregate, increasing
total provider revenues for dialysis by about 1.8 percent.  However,
because the higher payments involve no increase in the type or level
of services provided, they generally represent profits for the
providers that receive them. 

The extension should not affect most ESRD patients' out-of-pocket
expenses, because specific payment provisions insulate ESRD patients
with dual coverage from being singled out for increased out-of-pocket
expenditures.  A beneficiary's out-of-pocket expenses could increase
significantly if employer plans responded to higher ESRD costs by
limiting dialysis coverage for all beneficiaries, not just those with
ESRD.  However, we found only a few instances in which this situation
had occurred. 

   EXTENSION RESULTS IN HIGHER
   PAYMENTS TO PROVIDERS
------------------------------------------------------------ Letter :4

The providers in our sample received an average of 80 percent more
when employer-provided health insurance plans acted as the primary
payer for kidney dialysis services than they would have received if
Medicare had been the primary payer.  On average, providers received
$690 per week for such services, compared with $383, which they would
have received under the Medicare composite rate (see fig.  1). 
Medicare paid very little of the $690 as a secondary payer--on
average, about $6--because 50 of the 55 providers received payments
from employer-provided plans that, on average, already exceeded the
providers' composite rate for Medicare.\9 If Medicare had been the
primary payer, on average it would have paid $306 of the $383
composite rate, and the employer-provided plans would have paid the
remaining $77. 

   Figure 1:  Amounts Providers
   Receive for Dialysis When
   Medicare Is Primary Payer
   Versus When Medicare Is the
   Secondary Payer

   (See figure in printed
   edition.)

Notes:  The average Medicare composite rate for dialysis was $383 in
1992.  With Medicare as primary payer, Medicare would pay $306 of
this amount, and the employer health care plan, $77.  With Medicare
as the secondary payer, the average amount received by the provider
was $690.  Of that amount, the employer health care plan paid $684
and Medicare, $6. 

Because erythropoietin is used directly in dialysis treatments, and
because of congressional interest in knowing about the extension's
effect on expenditures for erythropoietin, we also compared the
amounts received for erythropoietin from employer-sponsored plans
with amounts that would have been received if Medicare had been the
primary payer.\10 As with payments for dialysis, payments for
erythropoietin were also considerably higher than they would have
been if Medicare had been the primary payer.  The mean amount for the
employer plan payment was about $17 for 1,000 units of
erythropoietin, about 55 percent more than the $11 per 1,000 units
the provider would have received if Medicare were the primary payer. 

The increased payments to providers reflect higher levels of
reimbursement provided under most employer-sponsored plans than under
Medicare.  While Medicare bases its composite rate on an analysis of
how much dialysis actually costs, most employer-sponsored plans base
their payment on reimbursing the provider for a certain percentage of
the bill.  Some employer plans set flat rates for dialysis that were
more than twice the provider's Medicare composite rate. 

The increased payments were particularly pronounced at for-profit
providers.  (In our sample, most freestanding facilities were
for-profit operations, while hospitals and some freestanding
facilities were nonprofit.) On average, for-profit providers charged
higher rates than nonprofit providers did and, as a result, received
substantially more in payments from employer plans.  Dialysis
payments to nonprofit providers averaged $184 more than Medicare
rates, while payments to for-profit providers averaged about $415
more than Medicare rates. 

A few of the employer-sponsored plans providing reimbursements to the
providers in our sample have established payment rates closer to the
Medicare amounts.  As a result, plans differed substantially in the
amounts they would pay for dialysis.  Appendix II shows the variance
in weekly payments to providers for individual patients. 

--------------------
\9 Average payments under employer-provided plans ranged from $36
less than the Medicare composite rate to more than $1,000 above it. 
In all, 39 of the 50 plans whose payments were above Medicare's
composite rate exceeded the composite rate by more than $100, and 8
exceeded it by more than $600. 

\10 We did not study payments for physician services, for separately
billable laboratory tests, or for pharmaceuticals other than
erythropoietin. 

   EXTENSION INCREASES PROVIDER
   REVENUES MARGINALLY, BUT ADDS
   TO PROFITS
------------------------------------------------------------ Letter :5

Although dialysis providers were paid about 80 percent more than the
Medicare composite rate for dialysis treatments when insurers were
billed as the primary payer, the extension applies to only about 2.3
percent, or about 2,700, of dialysis patients at any given time in
the United States.\11 As a result, we estimate that the overall
impact of this provision is to increase provider revenues for
dialysis services by about 1.8 percent, or an estimated $41 million
per year.\12

Although the increase represents a small portion of total ESRD
revenues, it can create a substantial increase in profit for
individual providers.  In May 1993, we reported that when
non-hospital-based providers were reimbursed at the Medicare rate,
their median profit margin was about 12.7 percent.\13 Because the
OBRA-90 extension increases provider revenue without affecting
provider costs, the additional revenue amounts, in most cases,
represent additional profits for providers that treat patients who
fall under the extension.\14

--------------------
\11 The percentage of dialysis patients covered by the OBRA-90
extension of the MSP provision is low for several reasons.  First,
the OBRA-90 MSP extension applies only to those beneficiaries who are
between their first 12 months of treatment and 18 months of
entitlement.  Second, under the OBRA extension in effect at the time
of our review, Medicare was not the secondary payer for ESRD
beneficiaries eligible for Medicare because of age or disability. 
OBRA-93 extended the provision to include ESRD beneficiaries that
also become entitled to Medicare because of age or disability.  We
estimate that this change would increase the number of beneficiaries
covered by the extension by about 5 percent. 

\12 This estimate is based on multiplying the following three
factors:  (1) the $19,000 average cost of providing a full year of
dialysis treatment to Medicare beneficiaries, (2) the average
increase of 80 percent that our sample of dialysis providers were
receiving when billing employer-provided plans as the primary payer,
and (3) the 2,700 dialysis patients covered under the OBRA-90
extension at any given time. 

\13 See Medicare:  Renal Facility Cost Reports Probably Overstate
Costs of Patient Care (GAO/HRD-93-70, May 18, 1993). 

\14 We estimate that the additional 1.8 percent in revenue caused by
the extension would increase the median profit margin for
non-hospital-based providers from its current level of 12.7 percent
to 14.2 percent. 

   IMPACT ON OUT-OF-POCKET COSTS
   IS INSIGNIFICANT UNLESS
   EMPLOYER HEALTH PLANS LIMIT
   DIALYSIS COVERAGE
------------------------------------------------------------ Letter :6

Out-of-pocket costs for an ESRD beneficiary who has both Medicare and
employer coverage are generally not affected by the OBRA extension. 
Our review of payment rules indicates that only rarely will it matter
to the beneficiary whether Medicare or the employer plan pays first. 
In particular, specific provisions insulate ESRD patients with dual
Medicare-employer coverage from the likelihood of out-of-pocket
expenditures for such services as dialysis, transplant surgery, and
in-patient hospital admissions. 

ESRD patients may experience increased out-of-pocket expenses,
however, if an employer plan limits dialysis coverage.  In the
absence of employer plan coverage, Medicare may become the sole
payer,\15 and beneficiaries may be required to pay the 20-percent
Medicare copayment--a copayment that amounts to over $390 per month
for the average Medicare dialysis and erythropoietin usage rate we
found in our study. 

While at the time of our review few plans had dropped benefits for
ESRD beneficiaries, we found evidence that some plans may be
considering limiting their coverage.  Plans could limit their
coverage in several ways. 

  They could eliminate dialysis coverage for all beneficiaries, not
     just those with ESRD.  The Internal Revenue Code imposes a
     25-percent excise tax on employers' health insurance expenses if
     the plan differentiates between benefits provided ESRD
     individuals and others.  In a July 1993 written response to an
     inquiry by the Health Insurance Association of America, HCFA
     stated that eliminating dialysis only for ESRD patients would
     violate the nondifferentiation provision.  However, HCFA also
     stated that plans would not violate the provision if they
     eliminated coverage for all types of dialysis--that is, not only
     the chronic, long-term dialysis (generally outpatient) provided
     ESRD patients, but also the acute, short-term (generally
     inpatient) dialysis provided to non-ESRD patients. 

  They could limit the length of coverage.  One employer plan in our
     study has for at least 5 years--well before the effective date
     of OBRA-90--limited dialysis coverage to 18 months, ceasing to
     pay for dialysis about 3 months before Medicare would normally
     become the primary payer.\16 This 18-month limit renders
     ineffective the secondary payer provision for its last 3 months
     and makes the patient the secondary payer thereafter, greatly
     increasing out-of-pocket costs.  While the limit applies to all
     dialysis patients, it may have a disproportionate effect on ESRD
     patients because only ESRD patients would normally require a
     regular course of dialysis to live.  Similar concerns exist with
     regard to a second employer plan we found that limits its
     coverage to 12 dialysis treatments per year--approximately 1
     month of dialysis.  HCFA commented that, in its view, these
     coverage limitations do not violate the nondifferentiation
     provision. 

  They could limit their role as secondary payer.  According to one
     provider in our sample, since January 1993 (nearly 2 years after
     the OBRA-90 effective date), some plans have restructured their
     benefits so they pay only the first 80 percent of charges.  Once
     they are no longer the primary payer, to Medicare or any other
     insurer, they pay nothing on the grounds that the 80 percent for
     which they are responsible has been paid by another payer. 
     (Formerly, as secondary payer to Medicare, they usually paid
     everything left over after Medicare had paid the first 80
     percent of the Medicare allowable rate.) This change in plan
     structure can leave the Medicare beneficiary responsible for a
     copayment of up to an estimated $400 per month for dialysis and
     erythropoietin, based on our sample of patients.  HCFA's
     position is that this action does not violate the ESRD
     nondifferentiation provision. 

One provider told us of other employer plans that dropped coverage
for dialysis as soon as employer plan patients become entitled to
Medicare.  Since, according to HCFA, this practice would probably
violate the Medicare secondary payer statute, we have referred these
cases to HCFA field offices for investigation and possible referral
to the Internal Revenue Service for enforcement action. 

--------------------
\15 Medicaid and other income-based assistance programs may be
available to assist poorer patients. 

\16 Employer plans generally are the sole payer for the first 3
months of dialysis because Medicare entitlement generally does not
begin until the start of the third month after the month in which
dialysis began.  Employer plans then become the primary payer, with
Medicare as the secondary payer, for the next 18 months. 

   CONCLUSION
------------------------------------------------------------ Letter :7

Extending employer-provided plans' obligation as primary payer for
ESRD patients so far has not generally caused employer group health
plans either to (1) limit their payments for dialysis to Medicare
rates or (2) react in ways that would adversely affect beneficiaries'
out-of-pocket costs.  Most plans continue to reimburse providers at
rates that are substantially above what Medicare would pay. 

As employer-sponsored plans react to increasing costs, they will have
greater incentive to search for ways to reduce their expenditures. 
Although during the 18-month coordination period employer-provided
plans cannot reduce benefits in ways that discriminate against ESRD
patients who are Medicare-eligible, they could conceivably reduce
these benefits--as a few plans already have done--by making
across-the-board changes that apply to all beneficiaries, not just to
those who are Medicare-eligible.  Alternatively, to reduce costs,
EGHPs could set dialysis payment rates similar to those that Medicare
uses. 

   AGENCY COMMENTS
------------------------------------------------------------ Letter :8

In providing written comments on our draft report, HCFA clarified its
position that insurers can, in certain ways, limit dialysis coverage
for Medicare beneficiaries without violating the MSP provisions. 
Accordingly, we revised our draft to characterize HCFA's position as
it was expressed in its written comments. 

HCFA further expressed the view that employers may increasingly
include these and other permitted coverage limitations in their plans
as they become more aware of them in the future. 

HCFA suggested other technical changes, which we incorporated into
the draft where appropriate.  A copy of HCFA's detailed comments is
in appendix III. 

---------------------------------------------------------- Letter :8.1

We are sending copies of this report to the Secretary of Health and
Human Services, the Administrator of the Health Care Financing
Administration, the Director of the Office of Management and Budget,
and other interested parties.  Copies also will be made available to
others upon request. 

Please call me on (202) 512-7123 if you have any questions about this
report.  Other major contributors to this report are listed in
appendix IV. 

Leslie G.  Aronovitz
Associate Director,
 Health Financing Issues

OBJECTIVES, SCOPE, AND METHODOLOGY
=========================================================== Appendix I

The Omnibus Budget Reconciliation Act of 1990 modified the Medicare
secondary payer provision for end-stage renal disease beneficiaries
by effectively extending the period during which employer group
health plans are required to pay before Medicare does.\1 OBRA-90
directed that GAO study the impact of this change in the MSP
provision and submit a final report not later than January 1, 1995. 
Our 1992 report, Medicare:  Millions in End-Stage Renal Disease
Expenditures Shifted to Employer Health Plans, addressed three of the
reporting objectives.\2 This report addresses two other objectives,
namely to provide information relating to the act's impact on

  the amount of money that dialysis providers receive and

  the out-of-pocket payments made by Medicare beneficiaries as their
     share of medical costs. 

--------------------
\1 Specifically, OBRA-90 modified the MSP provision for ESRD
beneficiaries by applying it to the first 18 months of Medicare
eligibility or entitlement rather than the first 12 months of
treatment.  Medicare entitlement generally begins 3 months after the
start of treatment. 

\2 GAO/HRD-93-31, Dec.  31, 1993.  OBRA-90 also asked GAO to report
on the appropriateness of applying the extension to all group health
plans.  However, prior to beginning our work, Committee staff
informed us that this subject was no longer of interest to the
Committees.  Accordingly, we did not include this objective in our
review. 

   ESTIMATING THE EFFECT OF
   OBRA-90 ON THE AMOUNT PROVIDERS
   RECEIVE FOR DIALYSIS
--------------------------------------------------------- Appendix I:1

To estimate the effect of OBRA-90 on the amount paid for dialysis
treatments for ESRD-only beneficiaries with employer coverage, we
used a sample of 59 of the over 1,700 U.S.  kidney dialysis providers
(1988 data).  To determine this sample, we first identified the 373
ESRD-only beneficiaries in the beneficiary sample we obtained for our
earlier report who were still in need of dialysis as of February 1,
1991, and who responded to our questionnaire that they had employer
coverage on February 1, 1991.  After removing 12 for whom we had no
dialysis-provider identification and 2 who received dialysis at a
federal facility, we randomly selected 60 beneficiaries and
identified the 59 dialysis providers that our Health Care Financing
Administration beneficiary data showed as the most recent dialysis
provider for these beneficiaries.  We used these dialysis providers
as our study group. 

From these 59 dialysis providers, we requested copies of all bills
submitted to employer group health plans (or their health insurance
carriers/administrators) as primary payers for services rendered to
Medicare beneficiaries during the period December 14-18, 1992.  We
also asked for copies of all matching explanation-of-benefit
statements received from the employer group health plans.  We
received documents from 55 providers for nearly 600 patients.  Three
of the 59 providers in our sample had no dialysis patients in this
time frame who had payers primary to Medicare.  Another provider
reported that the billing documents for December 1992 were lost.  We
held telephone discussions with providers to clarify bills, payments,
or billing practices used when Medicare was the primary payer. 

To simplify our analysis of dialysis charges, we first restated in
terms of a weekly amount all the charges for dialysis, whether
administered three times a week at a medical facility, daily in the
beneficiary's home, or in any other way.  Finally, we determined the
amount by which the carrier payment exceeded or fell short of the
Medicare composite rate--the amount that Medicare and the employer
plan would pay jointly if Medicare were the primary payer.  In making
this determination, we applied three simplifying assumptions: 

  We assumed that, if the provider had billed Medicare as the primary
     payer, the provider would have received the full composite rate
     (the first 80 percent from Medicare, the final 20 percent from
     the employer plan).  This assumption is based on Medicare
     payment rules that prevent providers from billing the employer
     plan as secondary payer more than is necessary to bring their
     total reimbursement up to the Medicare composite rate. 

  We established a cutoff date of June 30, 1993, for our study--more
     than 6 months after the services had been provided.  In the 41
     instances where the employer plan had not paid the provider by
     this cutoff date, we assumed that the provider would eventually
     receive payment equal to the Medicare composite rate.  In some
     cases, we subsequently learned of payments received after June
     30, 1993, which were greater than the Medicare composite rate. 
     This assumption may, therefore, be a conservative one in that in
     these cases it understates payments by employer plans. 

  In instances where the employer plan paid less than the Medicare
     composite rate and less than the provider's charge, we discussed
     secondary billing with the provider.  When the provider's
     practice was to bill Medicare as the secondary payer, we
     adjusted the amount received by the provider to account for the
     additional payment for which Medicare would be responsible.\3

Over all the patients in our study, we calculated the mean amount by
which the weekly payment made by the employer plan exceeded the
Medicare composite rate for a week.  We also performed this
calculation for each individual dialysis provider. 

Finally, in formulating our methodology, we visited dialysis centers
and held discussions with management and financial staff about their
billing practices.  We also held discussions with HCFA officials in
regard to payment rules. 

--------------------
\3 In making this adjustment, we assumed that Medicare would pay the
difference between the EGHP payment and the Medicare composite rate. 

   DETERMINING THE EFFECT OF
   OBRA-90 ON OUT-OF-POCKET
   EXPENDITURES FOR ESRD
   INDIVIDUALS
--------------------------------------------------------- Appendix I:2

To determine the specific effect of the OBRA-90 extension on
out-of-pocket expenditures for ESRD individuals, we held discussions
with HCFA officials and examined payment rules.  In addition, when we
contacted dialysis providers by telephone as part of our work under
the previous objective, we asked whether any EGHPs had limited the
number of months for which they covered dialysis since February 1,
1991--the effective date of the OBRA-90 ESRD Medicare secondary payer
provision.  We obtained further detailed information about any such
limits and also discussed the limits with representatives of the
EGHPs setting them.  We were particularly concerned with such limits
because they would greatly increase out-of-pocket costs for
beneficiaries; in the absence of employer-plan coverage for dialysis,
the beneficiaries would be responsible for the coinsurance amount,
paying 20 percent of the Medicare allowable rate (this 20 percent
would equal over $300 per month for dialysis alone). 

Finally, we obtained information from an attorney at the Department
of Health and Human Services and a HCFA official on the legality of
such limits and reviewed correspondence between the Health Insurance
Association of America and HCFA on this matter. 

We performed our work from March 1993 to September 1993.  We did not
independently examine the internal and automatic data processing
controls for HCFA's database of dialysis providers, from which we
drew certain information about the providers in our sample.  With
this exception, we performed our work in accordance with generally
accepted government auditing standards. 

DISTRIBUTION OF MEDICARE COMPOSITE
RATES
========================================================== Appendix II

Appendix II provides a distribution of the amounts by which weekly
payments for individual patients differed from the weekly Medicare
composite rate.  As shown, the spread of values is substantial. 
While weekly payment levels for 139 of the 583 patients exceeded the
matching Medicare rates by $500 or more, for 77 patients the weekly
payment levels were actually lower than the matching Medicare rates. 

   Figure II.1:  Amounts by Which
   EGHP Weekly Payments for
   Dialysis Differed From the
   Medicare Composite Rate

   (See figure in printed
   edition.)

Note:  For 41 patients, the dialysis provider had not received
payment as of June 30, 1993, and we set the payment amount equal to
the Medicare rate on the conservative assumption that the provider
would get at least that much. 

(See figure in printed edition.)Appendix III
COMMENTS FROM THE HEALTH CARE
FINANCING ADMINISTRATION
========================================================== Appendix II

(See figure in printed edition.)

(See figure in printed edition.)

MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IV

Sarah F.  Jagger, Director, Health Financing and Policy Issues,
 (202) 512-7119
Frank C.  Pasquier, Assistant Director, (206) 287-4861
W.  R.  Eichner, Evaluator-in-Charge
Joel I.  Grossman, Social Science Analyst
Katherine M.  Iritani, Advisor
Evan L.  Stoll, Jr., Computer Specialist
Desiree W.  Whipple, Writer/Editor
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