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[Federal Register Volume 66, Number 84 (Tuesday, May 1, 2001)]
[Notices]
[Pages 21770-21774]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-10865]

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

[HCFA-1182-PN]
RIN 0938-AK75

Medicare Program; Revision of Payment Rates for End-Stage Renal 
Disease (ESRD) Patients Enrolled in Medicare+Choice Plans

AGENCY: Health Care Financing Administration (HCFA), HHS.

ACTION: Proposed notice.

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SUMMARY: This notice proposes a new payment methodology, effective 
January 2002, for beneficiaries with End-Stage Renal Disease (ESRD) who 
are enrolled in Medicare+Choice (M+C) plans. The proposed methodology 
would implement section 605 of the Medicare, Medicaid, and SCHIP 
Benefits Improvement and Protection Act of 2000 (BIPA). Section 605 
requires the Secretary to increase ESRD M+C payment rates, using 
appropriate adjustments, to reflect the demonstration rates (including 
the risk adjustment methodology associated with those rates) of the 
social health maintenance organization ESRD capitation demonstrations. 
Briefly, the approach that we propose follows:
     Base State-level per capita rates on 100 percent of 
estimated State per capita ESRD fee-for-service expenditures in a base 
year.
     Adjust State per capita rates by age and sex factors, in 
order to pay more accurately, given differences in costs among ESRD 
patients.
    The effect of the new ESRD M+C payment methodology would be to 
increase Medicare's Fiscal Year (FY) 2002 ESRD payments by an estimated 
$25 million (for 9 months of costs, given the effective date of January 
2002). Total ESRD M+C payment increases for FY 2003 through FY 2005 are 
estimated to be $40 million annually.
    The payment methodology proposed in this notice would govern M+C 
payments for enrollees with ESRD in 2002. M+C organizations are 
required to submit Adjusted Community Rate (ACR) proposals setting 
forth their M+C plan benefits, premiums, and cost-sharing for 2002 by 
July 1, 2001. M+C organizations need information on the payments they 
will receive for ESRD enrollees to prepare their ACR submissions. 
Section 605(c) of BIPA provided that this notice had to be published no 
later than 6 months after the enactment of BIPA or June 20, 2001. Yet 
section 605(c) also requires that the ``final'' ESRD methodology be 
published no later than July 1, 2001. In light of these deadlines, and 
the need of M+C organizations for final information on ESRD payment 
rates to prepare the ACR proposals, we find that affording the public a 
full 60-day comment period would be ``impracticable'' and ``contrary to 
the public interest,'' and that there is ``good cause'' for shortening 
the 60-day comment period we normally provide to 30 days.

DATES: We will consider comments if we receive them at the appropriate 
address, as provided below, no later than 5 p.m. on May 31, 2001.

ADDRESSES: Mail written comments (1 original and 3 copies) to the 
following address ONLY: Health Care Financing Administration, 
Department of Health and Human Services, Attention: HCFA-1182-PN, P.O. 
Box 8013, Baltimore, MD 21244-8013.
    To ensure that mailed comments are received in time for us to 
consider them, please allow for possible delays in delivering them.
    If you prefer, you may deliver your written comments (1 original 
and 3 copies) to one of the following addresses: Room 443-G, Hubert H. 
Humphrey Building, 200 Independence Avenue, SW., Washington, DC 20201, 
or

[[Page 21771]]

Room C5-16-03, 7500 Security Boulevard, Baltimore, MD 21244-8013.
    Comments mailed to the above addresses may be delayed and received 
too late for us to consider them.
    Because of staff and resource limitations, we cannot accept 
comments by facsimile (FAX) transmission. In commenting, please refer 
to file code HCFA-1182-PN. Comments received timely will be available 
for public inspection as they are received, generally beginning 
approximately 3 weeks after publication of a document, in Room C5-12-08 
of the Health Care Financing Administration, 7500 Security Blvd., 
Baltimore, MD, on Monday through Friday of each week from 8:30 a.m. to 
5 p.m. Please call (410) 786-7197 to view these comments.
    For information on ordering copies of the Federal Register 
containing this document and electronic access, see the beginning of 
the SUPPLEMENTARY INFORMATION.

FOR FURTHER INFORMATION CONTACT: Anne Hornsby, (410) 786-1181.

SUPPLEMENTARY INFORMATION:
    Copies: To order copies of the Federal Register containing this 
document, send your request to: New Orders, Superintendent of 
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I. Background

    Section 605 of the Medicare, Medicaid, and SCHIP Benefits 
Improvement and Protection Act of 2000 (BIPA) amends section 
1853(a)(1)(B) of the Social Security Act (the Act) by adding the 
following sentence at the end: ``In establishing such rates, the 
Secretary shall provide for appropriate adjustments to increase each 
rate to reflect the demonstration rate (including the risk adjustment 
methodology associated with such rate) of the social health maintenance 
organization end-stage renal disease capitation demonstrations 
(established by section 2355 of the Deficit Reduction Act of 1984, as 
amended by section 13567(b) of the Omnibus Budget Reconciliation Act of 
1993), and shall compute such rates by taking into account such factors 
as renal treatment modality, age, and the underlying cause of the end-
stage renal disease.'' The amendment will apply to payments for months 
beginning with January 2002.
    Currently, M+C ESRD capitation payments are based on State-level 
rates that are not risk-adjusted. ESRD M+C base payment rates are set 
at 95 percent of State average fee-for-service costs in a base year 
(1997), which is consistent with other M+C rates. ESRD rates include 
the costs of beneficiaries with Medicare as Secondary Payer and the 
costs of beneficiaries who have functioning grafts 3 years or less from 
date of transplant. Note that for the purpose of M+C payment, ``ESRD 
beneficiaries'' includes beneficiaries with ESRD, whether entitled to 
Medicare because of ESRD, disability, or age.

A. ESRD Managed Care Demonstration Project

    Beneficiaries with ESRD are the only group prohibited from 
enrolling in Medicare risk HMOs and M+C organizations, although a 
beneficiary who develops ESRD after enrolling with an organization that 
offers an M+C plan may remain enrolled with the organization under an 
M+C plan. In 1996, the Congress required the Secretary to conduct an 
ESRD Managed Care Demonstration Project to assess whether it is 
feasible to allow year-round open enrollment in managed care for 
Medicare ESRD patients of all ages. As of December 2000, there were two 
such Demonstration sites, one in California with approximately 1,200 
enrollees and a second in Florida with approximately 600 enrollees.
    The ESRD Demonstration introduced 100 percent risk-adjustment into 
ESRD capitation payments. We calculated separate monthly capitation 
rates by treatment modality (dialysis, transplant, or functioning 
graft), and then adjusted the dialysis and functioning graft rates for 
age (0-19, 20-64, or 65+ years old) and original cause of renal failure 
(diabetes or other cause).
    Further, the Demonstration tested whether offering additional 
benefits not covered by Medicare enhanced effective treatment of this 
population. The statute mandated that we pay ESRD Demonstration sites 
100 percent of estimated per capita fee-for-service expenditures in 
that State, rather than the 95 percent paid to managed care plans 
outside the Demonstration. To justify the extra 5 percent, ESRD 
Demonstration sites agreed to provide additional benefits, for example, 
nutritional supplements.
    Finally, the Demonstration did not allow ESRD patients with 
Medicare as Secondary Payer to enroll in the sites. Therefore, we 
excluded fee-for-service beneficiaries with Medicare as Secondary Payer 
from calculation of the base payment rates. Excluding Medicare as 
Secondary Payer beneficiaries increased the Demonstration rates about 
20 percent over rates paid outside the Demonstration.

B. ESRD Demonstration Experience With the Capitated Payment System

    Preliminary assessments reveal that the administrative demands of 
implementing the methodology employed in the ESRD Demonstration were 
substantial and complex. HCFA and the Demonstration sites experienced 
difficulty with ensuring accurate and timely collection of data on 
treatment modality; data problems also occurred with the original cause 
adjuster. In large part, this was because to determine payment status, 
we had to rely on nonbilling documents. For example, the documentation 
of a transplant involves a detailed medical form that must travel from 
transplant center to organ transplant network to us. Often we did not 
receive these forms timely. Working with the Demonstration sites, we 
have had to create complex processes for retroactive adjustments and 
reconciliations because of delays in receipt of the appropriate 
documentation.
    This assessment is based on our preliminary analysis of issues that 
have arisen during the ESRD Demonstration. The final evaluation of the 
ESRD Demonstration is forthcoming. Meanwhile, we are pursuing further 
improvements to the payment system for ESRD beneficiaries enrolled in 
managed care. Given our ongoing discussion with the Demonstration sites 
about system problems affecting payment, however, we are prospectively 
changing the ESRD Demonstration payment methodology. Demonstration 
payments will no longer be risk-adjusted. We will pay the unadjusted 
base capitation rate until this interim approach is superseded by 
implementation of the risk-adjusted ESRD M+C payment methodology 
proposed in this notice.

[[Page 21772]]

II. Provisions of the Proposed Notice

A. Calculation of State-Level Per Capita ESRD Rates at 100 Percent of 
State Fee-for-Service Costs

    As noted above, BIPA requires that ESRD Managed Care Demonstration 
rates be increased ``to reflect'' the Demonstration rate, ``including'' 
the risk adjustment methodology used under the Demonstration. We 
discuss our approach to reflecting the Demonstration risk adjustment 
methodology in section II.B below. To increase the base rate to 
``reflect'' the ESRD Demonstration rate, we propose to calculate ESRD 
M+C payment rates based on 100 percent of our current best estimate of 
actual 1997 State per capita ESRD fee-for-service costs, which is 
consistent with the approach provided for in the statutory provisions 
establishing the ESRD Demonstration. To bring the per capita ESRD rates 
forward to CY 2002, we will apply the M+C methodology under the 
Balanced Budget Act of 1997 (BBA), whereby the annual State capitation 
rate is the largest of the blended capitation rate, the minimum amount 
rate, and the minimum percentage increase rate. Our reasons for 
selecting this approach follow.
    Increasing the original 1997 ESRD M+C payment rates to an amount 
representing 100 percent of our current estimates of actual 1997 State 
per capita ESRD fee-for-service costs results in an increase in the 
original 1997 rates of approximately 1 percent. To determine monthly 
per capita rates that are 100 percent of State fee-for-service costs in 
1997, we returned to the 1997 rates, since that was selected as the 
base year for payments under the BBA payment methodology. To illustrate 
why paying 100 percent of a rate based on our current estimate of 1997 
costs only increases the original 1997 rates by 1 percent, we have 
conducted preliminary analysis of the 1997 rates using average per 
capita costs for the nation. (To calculate the new ESRD rates, we will 
use fee-for-service costs on a State-by-State basis.)
    Our analysis of the 1997 rates reveals that the national per capita 
rate promulgated in 1997 (based on September 1996 calculations) is 
about 4.1 percent higher than our current best estimate of the actual 
1997 fee-for-service costs on which the rates are to be based.
     The basis for the 1997 monthly per capita ESRD rates was 
the monthly U.S. Per Capita Costs (USPCC) for ESRD of $3,861.
     In contrast, our best estimate in 2001 of actual monthly 
ESRD per capita cost for 1997 is $3,710. The difference is 
approximately 4.1 percent.
    Under the M+C methodology set forth in the BBA, the original 1997 
rates were the basis for all future rates, with no provision for 
correcting over or under estimates. This means that on average, in 1997 
we paid managed care organizations an amount representing about 99 
percent of the actual Medicare Average Annual Per Capita Cost (AAPCC) 
for 1997, rather than the assumed 95 percent of the AAPCC. To pay M+C 
organizations 100 percent of estimated State per capita ESRD fee-for-
service costs for 1997, therefore, we will increase the 1997 rates by 
approximately 1 percent.\1\ As noted above, this approach is fully 
consistent with the legislation providing for the ESRD Demonstration, 
which provided for payment at 100 percent of the AAPCC, and did not 
link this to a particular rate book or at any point to M+C payment 
rates.
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    \1\ Note 4: the 4 percent differential in 1997 (between the 
national per capital rate promulgated in 1997 and our best estimate 
in 2001 of 1997 costs) is projected to grow to almost 25 percent by 
2002. This is because the underlying growth trends for ESRD fee-for-
service costs from 1997 to 2002 are negative, while the M+C payment 
rates have increased at a minimum of 2 percent per year, as provided 
in the BBA. Current estimates of the actual ESRD fee-for-service 
cost trends from 1997 to 2002 project a decrease of approximately 7 
percent. In contrast, the guaranteed 2 percent increase per year (3 
percent in 2001 under BIPA) equates to an increase of approximately 
11.5 percent. The result is a differential of almost 25 percent by 
2002.
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    Post-1997 ESRD Demonstration payment rates were updated using the 
BBA methodology, which resulted in the minimum 2 percent increase each 
year. To further ``reflect the Demonstration rate,'' we propose to do 
the same under the new ESRD methodology, notwithstanding the fact that 
actual fee-for-service costs did not increase at this rate, but 
actually decreased (see footnote 1). ESRD M+C payment rates outside the 
Demonstration also were increased 2 percent under the BBA methodology.
    In summary, we propose to increase the 1997 payment rate produced 
by the pre-BIPA M+C payment methodology by approximately 1 percent to 
get to 100 percent of actual fee-for-service costs for 1997, thus 
fulfilling the BIPA mandate that new ESRD rates be increased to 
``reflect'' the Demonstration rates, which are based on a 100 percent 
standard.

B. Risk Adjust the Base Payment Rates By Age and Sex

    As noted above, section 605 of BIPA requires that the increase in 
ESRD rates to reflect Demonstration rates include the risk adjustment 
methodology associated with such rates. The methodology in place at the 
time BIPA was enacted was set forth above in section I.A. While the 
Demonstration methodology included several components, the bulk of the 
effect of risk adjustment is attributable to adjustment for age. For 
the reasons that follow, after taking into account the possibility of 
other categories of risk adjustment used in the ESRD Demonstration, we 
are proposing to adjust M+C ESRD rates only for age and sex. We believe 
that this ``reflects'' the most significant effects of the ESRD 
Demonstration methodology. To increase the power of the age adjustment 
compared to the ESRD Demonstration age adjustment, we will change from 
a 3-category age classification to the 10-category classification 
currently used in the M+C payment methodology.
    We decided not to create separate rates for treatment modality or 
adjust for original cause of kidney failure for several reasons. First, 
when we implement the comprehensive risk adjustment model (adding 
ambulatory and outpatient diagnoses to the existing hospital-diagnosis 
system), we expect to incorporate ESRD M+C enrollees into the single 
risk-adjusted payment system. This will allow us to capture co-
morbidity information in addition to demographic information and basic 
disease markers for ESRD beneficiaries.
    In addition, research indicates that increased age is the single 
best correlate of ESRD mortality. The ESRD population enrolled in 
managed care is on average older than the ESRD fee-for-service 
population (see table below). (This is due to the current restrictions 
on ESRD enrollment in M+C organizations.) Our research comparing the 
1998 Medicare HMO ESRD population with the fee-for-service population 
reveals the following contrasts (Eggers 2000).

------------------------------------------------------------------------
                                                             Percent of
                                               Percent of    ESRD  fee-
                                                ESRD HMO        for-
                     Age                       population      service
                                                (percent)    population
                                                              (percent)
------------------------------------------------------------------------
Age 75+.....................................            28            15
65-74.......................................            41            22
45-64.......................................            24            39
0-44........................................             7            24
------------------------------------------------------------------------

    We reviewed other evidence before selecting an interim risk 
adjustment methodology based on age and sex, including the following:
     Eggers et al. (2001) found that when taking age into 
account, M+C organizations were transplanting at the

[[Page 21773]]

same rates as fee-for-service organizations in 1998.
     A detailed study of capitation models for ESRD (The Lewin 
Group and URREA 2000) shows that age is a much more important factor 
predicting 1996 fee-for-service spending for within-year transplant 
patients, functioning graft patients, and pediatric dialysis patients 
than it is for adult hemodialysis patients. The study notes, however, 
that ESRD patients enrolled in Medicare HMOs with Medicare as primary 
payer are not included in the sample of patients analyzed, so we do not 
know whether the study findings are accurate for the M+C ESRD 
population, which is on average older than the fee-for-service ESRD 
population.
    Taking into consideration the current enrollment restrictions in 
the M+C program and the resulting age distribution of ESRD M+C 
enrollees, we have concluded that adjusting for age and sex and using a 
more detailed age categorization obviates the need to include treatment 
modality and original cause as factors in this interim methodology.
    HCFA's Office of the Actuary developed the following age/sex 
factors for ESRD beneficiaries enrolled in M+C plans. These factors 
will be used in making payments for ESRD beneficiaries starting in 
January 1, 2002. For a given ESRD enrollee, the appropriate age/sex 
factor will be multiplied by the standardized statewide payment rates 
in the M+C ratebook. Prior to January 2002, there are no adjustments 
for age and sex for M+C ESRD beneficiaries.

           Age/Sex Demographic Factors for M+C ESRD Enrollees
------------------------------------------------------------------------
                                        Part A              Part B
               Age               ---------------------------------------
                                    Male     Female     Male     Female
------------------------------------------------------------------------
0-34............................       .55       .70       .70       .75
35-44...........................       .65       .70       .80       .80
45-54...........................       .70       .85       .85       .90
55-59...........................       .80       .95       .90      1.00
60-64...........................       .90      1.10       .90      1.10
65-69...........................      1.15      1.35      1.10      1.20
70-74...........................      1.25      1.45      1.15      1.25
75-79...........................      1.30      1.55      1.20      1.25
80-84...........................      1.40      1.60      1.20      1.25
85+.............................      1.45      1.60      1.20      1.25
------------------------------------------------------------------------

    Given current enrollment restrictions, we estimate that, under the 
proposed methodology, the age- and sex-adjusted average ESRD payment 
per beneficiary will result in a significant increase in payments to 
M+C organizations for their ESRD enrollees.
    When ESRD M+C enrollees are incorporated into the comprehensive 
risk adjustment system (adding ambulatory and outpatient diagnoses to 
the existing hospital-diagnosis system), payments for ESRD patients 
will be adjusted using the same adjusters used for other enrollees, 
thus incorporating information on basic disease markers and co-
morbidities into calculations of ESRD payments.
    Preliminary findings from the ESRD Demonstration, which allowed 
ESRD beneficiaries of all ages to enroll, indicate that the age 
distributions at the Demonstration sites were very similar to the ESRD 
age distribution in fee-for-service Medicare. A change in the law to 
allow ESRD beneficiaries of all ages to enroll in M+C plans would 
result in moderation of the average payment increases expected from the 
proposed methodology, because we would expect a shift in the age 
distribution of the M+C ESRD population toward younger enrollees.
    Although the ESRD Managed Care Demonstration did not enroll 
beneficiaries with Medicare as Secondary Payer, we are unable to 
exclude from the M+C program any beneficiaries with Medicare as 
Secondary Payer who develop ESRD. Therefore, these ESRD beneficiaries 
with Medicare as Secondary Payer will be included in the program and 
payment rates. Due to data limitations, we do not expect to make 
separate payment adjustments.

III. Collection of Information Requirements

    This document does not impose information collection and 
recordkeeping requirements. Consequently, it need not be reviewed by 
the Office of Management and Budget under the authority of the 
Paperwork Reduction Act of 1995 (44 U.S.C. 35).

IV. Response to Comments

    Because of the large number of items of correspondence we normally 
receive on Federal Register documents published for comment, we are not 
able to acknowledge or respond to them individually. We will consider 
all comments we receive by the date and time specified in the DATES 
section of this preamble, and, if we proceed with a subsequent 
document, we will respond to the major comments in the preamble to that 
document.

V. Regulatory Impact Statement

    We have examined the impacts of this rule as required by Executive 
Order 12866 (September 1993, Regulatory Planning and Review) and the 
Regulatory Flexibility Act (RFA) (September 19, 1980 Public Law 96-
354). Executive Order 12866 directs agencies to assess all costs and 
benefits of available regulatory alternatives and, if regulation is 
necessary, to select regulatory approaches that maximize net benefits 
(including potential economic, environmental, public health and safety 
effects, distributive impacts, and equity). A regulatory impact 
analysis (RIA) must be prepared for major rules with economically 
significant effects ($100 million or more annually).
    We have determined that this proposed notice is not a major rule 
with economically significant effects. There are approximately 18,000 
ESRD beneficiaries enrolled in M+C plans. The additional cash 
expenditures for these ESRD M+C beneficiaries under this BIPA provision 
are estimated to be: $25 million in 2002; $40 million in 2003; $40 
million in 2004; $40 million in 2005; and $45 million in 2006. These 
estimates assume continuation of the current restrictions on enrollment 
in the M+C program for ESRD beneficiaries. These estimates include the 
impact of adjusting for age and sex and the impact

[[Page 21774]]

of raising the ESRD base rates by 1 percent. Since the proposed notice 
results in increases in total expenditures of less than $100 million 
per year, this notice is not a major rule as defined in Title 5, United 
States Code, section 804(2) and is not an economically significant rule 
under Executive Order 12866.
    The RFA requires agencies to analyze the economic impact on small 
entities, and if an agency finds that a regulation imposes a 
significant burden on a substantial number of small entities, it must 
explore options for reducing the burden. For purposes of the RFA, small 
entities include small businesses, nonprofit organizations, and 
government agencies. Most hospitals and most other providers and 
suppliers are small entities, either by nonprofit status or by having 
revenues of $7.5 million or less annually. For purposes of the RFA, 
most managed care organizations are not considered to be small 
entities. Individuals and States are not included in the definition of 
a small entity.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a rule may have a significant impact on 
the operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 603 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a Metropolitan 
Statistical Area and has fewer than 100 beds.
    Section 202 of the Unfunded Mandates Reform Act of 1995 also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule that may result in expenditure in anyone year by 
State, local, or tribal governments, in the aggregate, or by the 
private sector, of $110 million. This proposed notice would have no 
consequential effect on State, local, or tribal governments, and the 
private sector cost of this rule falls below these thresholds as well.
    We have reviewed this proposed notice under the threshold criteria 
of E.O. 13132, Federalism. We have determined that the proposed notice 
would not significantly affect the rights, roles, and responsibilities 
of the States.
    We have examined the economic impact of this notice on M+C 
organizations and find that the overall impact is positive. However, 
because the number of ESRD patients enrolled in M+C organizations 
represents a very small fraction of M+C organizations' annual receipts 
and because a small number of M+C organizations qualify as small 
entities under the RFA, the Secretary is initially certifying that this 
notice will not have a significant impact on a substantial number of 
small entities. To our knowledge, no small rural hospitals will be 
affected by this notice, so the Secretary is also initially certifying 
that this notice will not have a significant impact on a substantial 
number of small rural hospitals.
    In accordance with the provisions of E.O. 12866, this proposed 
notice was reviewed by OMB.

Works Cited

    Eggers, Paul W., Diane L. Frankenfield, Joel W. Greer, William 
McClellan, William F. Owen, Jr., and Michael V. Rocco, ``Comparison 
of Mortality and Intermediate Outcomes between Dialysis Patients 
Enrolled in HMO and Fee for Service,'' February 2001. Under review 
at the American Journal of Kidney Disease.
    Eggers, Paul. ``Outcome of ESRD Patients in HMOs.'' RPA/REF 2000 
Annual Meeting. Washington DC March 25-27, 2000.
    The Lewin Group and University Renal Research and Education 
Association (URREA). ``Capitation Models for ESRD: Methodology and 
Results.'' Prepared for Renal Physicians Association, American 
Society of Nephrology, American Society of Transplant Physicians, 
American Society for Pediatric Nephrology, and Amgen. January 7, 
2000.

    Section 1853(a)(1)(B) of the Social Security Act (42 U.S.C. 1395w-
23(a)(1)(B))

(Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare-Hospital Insurance; and Program No. 93.774, Medicare-
Supplementary Medical Insurance Program)

    Dated: March 19, 2001.
Michael McMullan,
Acting Deputy Administrator, Health Care Financing Administration.
    Dated: April 12, 2001.
Tommy G. Thompson,
Secretary.
[FR Doc. 01-10865 Filed 4-26-01; 3:48 pm]
BILLING CODE 4120-01-P
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