Medicare Dialysis Facilities: Beneficiary Access Stable and Problems in Payment System Being Addressed
Published: 2004-06-25T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Medicare covers about 90 percent of patients with end-stage renal disease (ESRD), the permanent loss of kidney function. Most ESRD patients receive regular hemodialysis treatments, a process that removes toxins from the blood, at a dialysis facility. A small percentage dialyzes-at home. From 1991 through 2001, the ESRD patient population more than doubled, from about 201,000 to 406,000. As the need for services grows, so do concerns about beneficiary access to and Medicare payment for dialysis services. The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 directed GAO to study beneficiaries' access to dialysis services. In this report, GAO (1) assessed the supply of dialysis facilities and the services they provide, overall and relative to beneficiary residence, and (2) assessed the extent to which Medicare payments for dialysis services are adequate and the methodology is appropriate. In order to assess the supply of dialysis facilities, GAO used Facility Surveys collected by the Centers for Medicare & Medicaid Services (CMS) and outpatient claims, the bills submitted to Medicare by providers of certain outpatient services from 1998 through 2001. To assess the adequacy of Medicare payment and the appropriateness of the payment methodology, GAO used 2001 Medicare cost reports and outpatient claims submitted by freestanding dialysis facilities.
section_title: What GAO Found
paragraphs: GAO found that from December 31, 1998, through December 31, 2001, the total number of dialysis facilities nationwide increased at about the same rate as the Medicare dialysis population, 16 and 15 percent, respectively, and the total number of stations (that is, treatment areas and equipment, including dialysis machines, needed to dialyze the patient) increased by over 24 percent, a rate greater than the growth in the Medicare dialysis population. The dialysis industry opened facilities in more counties across the country, although facilities were more likely to be available to beneficiaries in urban counties than in rural counties. In addition, while almost all facilities provided in-facility hemodialysis, fewer facilities provided home dialysis. GAO estimates that total payments to freestanding dialysis facilities exceeded providers' allowable costs by 3 percent in 2001. Although payments were higher than costs overall, payments did not meet costs for small facilities. In addition, composite rate payments, intended to cover the costs of dialysis services associated with a treatment, including nursing, supplies, social services, and certain laboratory tests, were 11 percent less than the costs of providing those services, while payments for separately billed drugs, drugs not included in the composite rate, exceeded the costs of those services by 16 percent. Because of this imbalance, providers have an incentive to maximize the use of profitable separately billed drugs to compensate for inadequate payments under the composite rate. CMS generally agreed with GAO's findings. The agency noted that it has been working to redesign the payment system since 2000. Under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), the Secretary of Health and Human Services is required to develop a report by October 1, 2005 detailing the elements and features necessary in the design and implementation of a broader payment system that includes separately billed drugs. MMA also requires the Secretary to conduct a 3-year demonstration project, beginning January 1, 2006, that uses a broader payment system incorporating patient characteristics identified in the report.

section_title: Letter
paragraphs: Medicare covers approximately 90 percent of all individuals who have end- stage renal disease (ESRD), the permanent loss of kidney function, and  treatment of the disease results in substantial costs to the Medicare  program. In 2001, Medicare spent an average of approximately $46,600 on  services for each beneficiary with ESRD, while the average per-beneficiary  spending across the entire Medicare population was about $6,200. ESRD- related expenditures have increased rapidly and are expected to continue  to increase. From 1991 through 2001, the number of individuals with ESRD  more than doubled, increasing from about 201,000 to 406,000. During the  same time, while total Medicare expenditures increased by 108 percent,  ESRD program expenditures increased by 166 percent, to almost   $15.4 billion in 2001. The ESRD population is projected to reach  approximately 650,000 by 2010.
Although some receive kidney transplants, most individuals with ESRD  depend on regular treatments of dialysis, a process in which excess fluids  and wastes are removed from the blood. In 2001, about 90 percent of all  dialysis patients underwent hemodialysis, typically three times per week,  at one of almost 4,000 outpatient renal dialysis facilities nationwide. In  that same year, less than 1 percent of hemodialysis patients dialyzed at  home, and nearly all peritoneal dialysis (PD) patients dialyzed at home.  Nationwide, about 200 hemodialysis patients dialyze five to seven times  per week, known as daily hemodialysis, which is thought by some  clinicians to improve patient outcomes.
Dialysis facilities furnish services to patients through one of two methods:  they provide hemodialysis and supplies and other support services in the  facility, or they provide equipment, supplies, and support services to  beneficiaries who dialyze at home. Regardless of whether a beneficiary  dialyzes at home or in a facility, Medicare pays the facility a fixed,  prospectively determined amount per treatment, known as the composite  rate, generally for up to three dialysis treatments per week. The composite  rate covers many commonly used services and items; certain other items,  including some drugs and supplies, are paid for separately. Medicare  adjusts the composite rate to account for variation in area wages;  however, there is no adjustment for length of treatment, treatment  method, or beneficiary condition. By paying facilities a fixed amount,  Medicare seeks to encourage them to operate efficiently, as facilities  retain the difference if their payments exceed their costs of providing  necessary services.
The composite rate has not been regularly updated, and is less than $4  higher today than when it was implemented in 1983. Despite the lack of a  regular update, the dialysis industry has remained profitable over the years  by increasing productivity and efficiency. In recent reports, the Medicare  Payment Advisory Commission (MedPAC) has found that overall facility  profits have steadily declined even though Medicare payments for  separately billed drugs have exceeded facility costs. MedPAC has also  found that the composite rate is covering progressively less of the costs of  composite rate services. Representatives of the dialysis industry have  stated that Medicare payments are inadequate overall, and that these low  payments are resulting in facility closures in certain geographic areas and  may eventually lead to decreased access for beneficiaries nationwide. In  2000, the Medicare, Medicaid, and SCHIP Benefits Improvement and  Protection Act of 2000 (BIPA) required the Secretary of the Department of  Health and Human Services (HHS) to develop a payment system that  includes clinical laboratory tests and drugs that are routinely used but  billed separately. With the enactment of the Medicare Prescription Drug,  Improvement, and Modernization Act of 2003 (MMA), the Secretary of  HHS was required to continue development of a broader payment system.
BIPA directed us to examine Medicare beneficiaries’ access to dialysis  services. As agreed with the committees of jurisdiction, we (1) assessed  the supply of dialysis facilities and the services they provide, both overall  and relative to beneficiary residence; (2) assessed the extent to which  Medicare payments for dialysis services are adequate and the payment  methodology is appropriate; and (3) reviewed whether increased use of  daily hemodialysis can improve patient care.
In order to measure the supply of dialysis facilities, we used the 1998  through 2002 Facility Survey files, which include information on the  number of hemodialysis stations and the services provided at each  facility. These surveys are administered to all dialysis facilities, hospital- based and freestanding, by the Centers for Medicare & Medicaid Services  (CMS), the agency responsible for managing Medicare. To identify  beneficiaries on dialysis and their residence, we analyzed the 1998 through  2001 Medicare outpatient claims, the bills submitted by providers of  certain outpatient services to receive Medicare payment. These claims  were the most recent data available at the time of our analysis. We  assessed the reliability of the facility survey and claims data and found  them suitable for our purposes.
To assess the adequacy of Medicare payment and the appropriateness of  the payment methodology, we analyzed Medicare freestanding dialysis  facility cost reports from 1998 through 2001 and Medicare outpatient  claims data from 2000 and 2001. We performed this analysis in aggregate  for all freestanding facilities and for different sizes of facilities, with size  defined using the total number of treatments provided at a facility. The  Medicare payment methodology is the same for freestanding and hospital- based dialysis facilities, but we did not analyze cost reports or claims for  hospital-based facilities because their reported costs are affected by  decisions in allocating costs between the hospital and the dialysis facility.  In 2001, about 84 percent of all dialysis facilities nationwide were  freestanding. We assessed the reliability of the cost report and claims data.  We excluded cost reports that had questionable data or that did not cover  at least 300 days. We found the remaining cost reports and the claims data  suitable for our purposes. We interviewed patient advocate organizations,  clinicians, manufacturers of dialysis equipment, and representatives of the  dialysis industry, and made site visits to three dialysis facilities.
In order to review daily hemodialysis, we surveyed the relevant scientific  literature, interviewed physicians who provide daily hemodialysis, and  visited a dialysis facility providing daily hemodialysis. Appendix I contains  a more complete description of our methodology. We conducted our work  from July 2002 through June 2004 in accordance with generally accepted  government auditing standards.
subsections: section_title: Background
paragraphs: Individuals with ESRD are eligible for Medicare benefits regardless of  their age. In 2001, Medicare covered about 90 percent of the 406,000  individuals with the disease. ESRD occurs when an individual’s kidneys  have regressed to less than 10 percent of normal baseline function.  Without functioning kidneys, excess wastes and fluids in the body rise to  dangerous levels, and certain hormones are no longer produced. The lack  of one such hormone, erythropoietin, results in anemia, a condition in  which an insufficient number of red blood cells are available to carry  oxygen throughout the body. Diabetes and hypertension are the two  principal causes of ESRD.
subsections: section_title: ESRD Population Growth
paragraphs: The ESRD population has grown steadily over the years and is expected to  continue to increase. From 1991 through 2001, the total number of  individuals with ESRD increased from about 201,000 to 406,000, with an  average annual growth rate of 7 percent. While the growth rate declined to  about 5 percent in the late 1990s as a result of better preventive  treatments, experts believe this decline to be temporary. Increases in the  African-American and Hispanic populations, which have particularly high  rates of diabetes, are expected to overwhelm this trend and lead to even  greater growth rates in the future.
section_title: Renal Dialysis Treatment
paragraphs: In order to survive, individuals with ESRD require kidney transplantation  or dialysis, a process in which excess fluids and wastes are removed from  the blood. In 2001, about 292,000, or 72 percent, of all individuals with  ESRD underwent dialysis, while the remaining 28 percent, or about  114,000 individuals, were transplant recipients. Transplantation is not a  practical option for most individuals with ESRD because suitable donated  organs are scarce. Also, many individuals are older and less healthy by the  time they develop irreversible kidney failure, making them medically  unsuitable for transplant. From 1991 through 2001, the total number of  dialysis patients increased at an average annual growth rate of about 7  percent, the same as the ESRD population overall.
In 2001, most dialysis patients received services from one of almost 4,000  hospital-based or freestanding dialysis facilities located in the 50 states  and the District of Columbia. These facilities provide hemodialysis, as well  as drugs and related clinical and support services for patients who dialyze  at home or in a facility. In addition, some facilities provide training for  home dialysis and may furnish the equipment and supplies necessary for  home dialysis treatment. In 1973, when Medicare benefits were extended  to individuals with ESRD, the majority of dialysis facilities were owned  and operated by hospitals. By 2001, however, almost 84 percent of all  dialysis facilities nationwide were freestanding. In addition, for-profit  dialysis facility chains have represented an increasing share of the market.  By 2001, the four largest for-profit chains accounted for about two-thirds  of all freestanding facilities, and they provided treatment to about two- thirds of all dialysis patients.
Dialysis can be administered using two methods: hemodialysis and PD.  During hemodialysis, a dialysis machine pumps blood through an artificial  kidney, called a hemodialyzer, and returns the cleansed blood to the body.  Hemodialysis is usually administered three times a week at a dialysis  facility, although patients may choose to undergo hemodialysis at home  with the assistance of a caregiver. In-facility hemodialysis has become the  dominant treatment method since the introduction of dialysis in the 1960s.  In 2001, about 90 percent of all dialysis patients underwent in-facility  hemodialysis, and less than 1 percent underwent hemodialysis at home.
In PD, the peritoneal membrane, which surrounds a patient’s abdomen,  acts as a natural blood filter, thus eliminating the need for blood to leave  the body and filter through a machine. Patients remove the wastes and  excess fluids from their abdomen manually throughout the day, or a  machine automates the process while they sleep at night. Unlike  hemodialysis, these patients generally dialyze at home. PD became an  alternative to hemodialysis in the 1970s, and utilization peaked in the early  1990s, when more than 15 percent of all dialysis patients used this  treatment method. By 2001, however, utilization had declined to about 8  percent of the dialysis population.
Hemodialysis performed five to seven times per week, referred to as “daily  hemodialysis,” more closely approximates the body’s continuous cleansing  of the blood than the conventional regimen of three hemodialysis  treatments per week. Between dialysis treatments, excess wastes and  fluids build up in the patient’s blood, and many dialysis patients  experience side effects such as hypertension, anemia, and low energy  levels, which may adversely affect their clinical outcomes and quality of  life. Because of these side effects, dialysis patients have high rates of  hospitalization and often take several medications. Daily hemodialysis can  take place either at home or in a facility, and proponents have asserted  that it leads to improved quality of life, fewer hospitalizations, reduced use  of medications, and overall cost savings to Medicare.
section_title: Medicare Payment
paragraphs: Since 1983, Medicare has paid dialysis facilities a composite rate for each  dialysis treatment it administers, generally up to a maximum of three  treatments per beneficiary per week. The composite rate is a prospectively  determined payment amount designed to cover the cost of services  associated with a single dialysis treatment, including nursing and other  clinical services, social services, supplies, equipment, and certain  laboratory tests and drugs. Because the composite rate is prospectively  determined, providers receive a fixed payment regardless of how much the  services actually cost them to deliver. The initial fixed payment amount  was derived from the median costs of providing medical services to  beneficiaries across a sample of dialysis facilities. A prospective payment  methodology encourages providers to control the costs and utilization of  the services they provide, as they retain any difference between the  payment and their costs.
In 1972, 40 percent of all dialysis patients underwent hemodialysis at  home. In 1981, the Congress passed legislation establishing a new system  for the payment of outpatient dialysis services for Medicare beneficiaries.  The changes were designed to reduce program costs by encouraging home  dialysis rather than in-facility dialysis. Under the system, a single  prospectively determined rate was implemented for home and in-facility  dialysis. However, the percentage of patients who undergo dialysis at  home has declined since 1983, the year the composite rate was  implemented. In 1983, the proportion of dialysis patients dialyzing at  home, whether with hemodialysis or PD, was 12 percent. By December 31,  2001, less than 9 percent of dialysis patients dialyzed at home.
The composite rate has changed minimally since 1983, when the rate  averaged about $131 for hospital-based facilities and $127 for freestanding  facilities. The Congress passed legislation that decreased the rate by $2 in  1986 and increased it in 1991, 2000, and 2001 to about $135 for hospital- based facilities and $131 for freestanding facilities. From its  implementation in 1983 through the end of 2003, the real dollar value of  the composite rate declined by about 65 percent. The dialysis industry  remained profitable under this relatively flat payment by increasing  efficiency and productivity. However, industry representatives state that  efficiency or productivity improvements can no longer make up for the  lack of payment increases. They also state that although the number of  dialysis facilities has been increasing throughout the last decade, declining  profits may reverse that trend and eventually lead to decreased access for  Medicare beneficiaries.
While the composite rate was intended to pay for all services associated  with dialysis treatment, Medicare pays separately for certain drugs and  laboratory tests that have become routine treatments since 1983. These  drugs include, but are not limited to, epoetin (EPO), vitamin D, and iron.  Medicare’s payment for EPO, a bioengineered protein that substitutes for  erythropoietin and is used to treat anemia, is statutorily set at $10 for  every 1,000 units administered; all other separately billed drugs are paid  at 95 percent of their average wholesale price (AWP). The Medicare  composite rate includes payment for 16 laboratory tests deemed to be  routine for dialysis patients. For any of the approximately 1,350 other  laboratory tests that beneficiaries may receive, payment is made under a  fee schedule to the clinical laboratory that performs the test.
Although facilities are paid under a prospective payment system, CMS  requires them to complete annual cost reports that are consistent with  Medicare cost principles. These reports include cost information for  separately billed drugs as well as items paid through the composite rate.  Medicare cost principles were designed to ensure that Medicare pays for  the expenses related to medical care for beneficiaries, and that those costs  are reasonable and allowable. The agency periodically audits cost reports  to remove unreasonable and nonallowable costs and, in the past, has  calculated the difference between facility costs as reported on the cost  reports and their allowable costs, referred to as an audit adjustment. The  Balanced Budget Act of 1997 required the agency to audit dialysis facility  cost reports, beginning in 1996, at least once every 3 years.
In recent years, the Congress has moved toward a broader payment  bundle for dialysis services. In 2000, BIPA required the Secretary of HHS  to develop a payment system that includes clinical laboratory tests and  drugs that are routinely used, but are currently billed separately from  dialysis treatment. BIPA also required the Secretary to submit a report  and recommendations on this system to the Congress. CMS issued the  report in 2003, concluding that currently available data appear sufficient to  expand the payment bundle to include those services. In December 2003,  MMA mandated that effective January 1, 2005, a payment system be  implemented combining the composite rate payment with the amount by  which payments for separately billed drugs exceed their acquisition costs.  Drugs that are currently paid separately will continue to be paid outside  this system. This system must adjust for certain beneficiary characteristics  and geographic differences in cost. In addition, the Secretary is required  to submit a report to the Congress by October 1, 2005, that details the  elements and features for the design and implementation of a bundled  payment system including certain drugs that are currently billed  separately. The Secretary is then required to establish a 3-year  demonstration project, beginning January 1, 2006, using a payment system  that accounts for patient characteristics identified in the report.
section_title: Dialysis Facilities Increased at Same Rate as Beneficiary Population, but Supply Varied Geographically and by Treatment Method
paragraphs: From 1998 through 2001, the total number of hospital-based and  freestanding dialysis facilities increased at about the same rate as the  Medicare dialysis population, and the total number of dialysis stations, or  treatment areas devoted to providing dialysis to patients, increased at a  greater rate than the Medicare dialysis population. The dialysis industry  opened facilities in more counties across the country, although the  number of facilities available to beneficiaries living in urban counties was  greater than in rural counties. In addition, while almost all facilities  provided hemodialysis, fewer facilities provided home dialysis.
subsections: section_title: Growth in Number of Dialysis Facilities Kept Pace with Growth in Beneficiary Population
paragraphs: Based on our analysis of the CMS Facility Survey files, the total number of  hospital-based and freestanding dialysis facilities increased from 3,415 to  3,960, or about 16 percent, from December 31, 1998, through December 31,  2001. Over the same period, the number of ESRD beneficiaries on dialysis  increased about 15 percent. While the annual growth in facilities slowed  each year, this occurred primarily because of a decrease in new facilities,  not because of an increase in closures. From 1998 through 2001, the  number of facilities closing each year amounted to less than 1 percent of  those that were operating at the end of that year.
Because facilities vary in size, a more specific indicator of their capacity to  provide hemodialysis is the number of dialysis stations in use at dialysis  facilities. From December 31, 1998, through December 31, 2001, we  estimate that the number of stations increased by over 24 percent, from  about 53,100 to about 66,100, exceeding the growth rate of the dialysis  population. The annual growth rate of stations was over 10 percent in  2001, much higher than the 5 percent growth rate of the Medicare dialysis  population in that year.
In addition, the dialysis industry expanded services to a larger portion of  the country. The percentage of counties that had at least one dialysis  facility increased from 41 to 47 percent, so that a total of 1,466 counties  had at least one dialysis facility in 2001 (see fig. 1). While another 1,599  counties had at least one beneficiary on dialysis but no facility in 2001,  most of these counties were adjacent to at least one other county that had  a dialysis facility. Of the counties that were not adjacent to another county  with a facility, many were concentrated in areas of the West and Midwest.  Beneficiaries living in these counties either traveled to another facility or  dialyzed at home.
The supply of facilities in counties with beneficiaries on dialysis has  remained stable. The percentage of beneficiaries on dialysis who resided  in counties with at least one facility increased from 89 to 91 percent from  1998 through 2001. In addition, the average number of facilities per county,  weighted by the number of beneficiaries in each county, increased from 11  to 12 from 1998 through 2001, as did the weighted average number of  stations, which rose from 201 to 234.
section_title: More Dialysis Facilities Available in Urban Counties Than in Rural Counties
paragraphs: While overall beneficiary access to dialysis facilities remained stable, more  facilities are available to beneficiaries on dialysis who reside in urban  counties than to beneficiaries on dialysis in rural counties. From 1998  through 2001, the percentage of urban beneficiaries with at least one  facility in their counties increased slightly from 97 to 98 percent, while the  percentage of rural beneficiaries with at least one facility in their counties  increased, but remained much lower, from 61 to 67 percent (see fig. 2).
Furthermore, beneficiaries on dialysis residing in urban counties had more  dialysis facilities available in their counties. From 1998 through 2001, the  average number of facilities per urban county, weighted by the number of  beneficiaries in each county, increased from 14 to 15 (see fig. 3), and the  weighted average number of stations increased from 252 to 296 (see fig. 4).  From 1998 through 2001, the weighted average number of facilities per  rural county remained at 1, although the weighted average number of  stations increased from 10 to 13.
Across rural areas, substantial variation may exist in the supply of dialysis  facilities. For example, 73 percent of beneficiaries on dialysis in Florida’s  33 rural counties had at least one facility in their counties in 2001, while  only 39 percent of beneficiaries on dialysis in Michigan’s 58 rural counties  had at least one facility in their counties. Although such differences could  potentially be explained by differences in the geographic size of rural  counties, rural counties in both Michigan and Florida average roughly 695  square miles.
The number of dialysis facilities may be lower or nonexistent in certain  geographic locations for certain reasons. The population of beneficiaries  on dialysis is relatively small, and it may not be financially feasible to  operate facilities in areas that do not have a sufficient number of  beneficiaries needing dialysis. For example, while nearly 73 percent of  counties were designated as rural in 2001, only 22 percent of beneficiaries  on dialysis lived in those counties; about half of all rural counties were  home to 15 or fewer beneficiaries on dialysis. Also, many industry  representatives we interviewed stated that it was difficult to recruit and  retain nurses to staff facilities. Shortages of nurses can hamper the  industry’s ability to open facilities or keep facilities sufficiently staffed in  certain geographic areas.
section_title: Number of Facilities Providing Home Dialysis Much Lower Than Number of Facilities Providing Hemodialysis
paragraphs: Dialysis facilities provided in-facility hemodialysis almost universally, but  the number of facilities providing home dialysis (PD and home  hemodialysis) was much lower and declining. According to our analysis of  the CMS Facility Survey files, 98 percent of dialysis facilities provided  hemodialysis each year from 1998 through 2001. Over the same period, the  percentage of dialysis facilities providing PD decreased from 46 to 40  percent, and the percentage of dialysis facilities providing home  hemodialysis decreased from 10 to 8 percent.
Beneficiaries on dialysis also had more facilities available in their counties  that provided hemodialysis than home dialysis. The percentage of  beneficiaries on dialysis who had a facility providing hemodialysis in their  counties increased from 89 to 91 percent from 1998 through 2001 (see fig.  5). In contrast, the percentage of beneficiaries on dialysis who had a  facility providing PD in their counties slightly decreased, from 76 to 75  percent, and the percentage of beneficiaries on dialysis who had a facility  providing home hemodialysis in their counties declined from 47 to 45  percent. From 1998 through 2001, the average number of facilities  providing hemodialysis per county, weighted by the number of  beneficiaries in each county, increased slightly from 10 to 12 (see fig. 6).  Over the same period, the weighted average number of facilities providing  PD per county fell from 6 to 5, and on average, only 1 facility per county  provided home hemodialysis.
In rural counties, the number of facilities offering home dialysis remained  low. From 1998 through 2001, the percentage of rural beneficiaries on  dialysis with a facility providing hemodialysis in their counties increased  from 61 to 67 percent (see fig. 7). In contrast, the percentage of rural  beneficiaries on dialysis with a facility providing PD increased slightly  from 27 to 28 percent, and the percentage of rural beneficiaries with a  facility providing home hemodialysis increased from 3 to 4 percent.  Beneficiaries on dialysis in rural counties had a weighted average of one  facility providing hemodialysis per county and no facility providing PD or  home hemodialysis. In addition, there were rural counties with  beneficiaries on dialysis but no facilities. These beneficiaries dialyzed  either in a neighboring county or at home.
The number of facilities providing home dialysis may have been low for  several reasons. Some providers and nephrologists we interviewed stated  that many physicians are either unfamiliar with home dialysis or believe  that patients have better outcomes with in-facility hemodialysis. They also  reported that home programs are often not financially feasible for facilities  unless there is a substantial number of patients receiving the treatment  method, because facilities must hire staff to train and manage the care of  these patients. Some providers and nephrologists also stated that facilities  have a financial disincentive to provide home dialysis, because greater  utilization of PD may result in unused hemodialysis stations and may  reduce the need for certain profitable drugs like EPO. They also reported  that PD may be favorable for beneficiaries in rural areas, where facilities  can be more distantly located.
section_title: Total Medicare Payments to Freestanding Dialysis Facilities Exceeded Costs, but Current Payment Methodology Is Not Appropriate
paragraphs: We estimate that after adjusting to exclude nonallowable costs, total  payments to freestanding dialysis facilities exceeded providers’ costs in  2001. Although payments were higher than costs overall, payments to  small facilities were lower than costs. In addition, while composite rate  payments were well below the costs of those services, separately billed  drug payments far exceeded the costs of those services. Because of this  imbalance in the payment structure, providers have an incentive to  maximize the use of profitable separately billed drugs to compensate for  inadequate payments under the composite rate.
subsections: section_title: Payments to Freestanding Facilities Generally Exceeded Allowable Costs, but Small Facilities Were an Exception
paragraphs: We estimate that Medicare payments to freestanding dialysis facilities  exceeded their Medicare-allowable costs by 3 percent, on average. In  order to calculate this percentage, we used costs as reported on dialysis  facilities’ cost reports and used an adjustment to exclude nonallowable  costs. Before the adjustment, we estimate that on average, payments were  1 percent below costs, a payment-to-cost ratio of 0.99, for composite rate  services and separately billed drugs in 2001. Past agency audits have  demonstrated that dialysis facilities have included nonallowable costs in  their cost reports. The Health Care Financing Administration (HCFA)  conducted audits of a random sample of 1988 and 1991 dialysis facility  cost reports and found that providers’ allowable costs were about 90  percent and 89 percent, respectively, of reported costs. HCFA also audited  the 1996 reports but did not calculate a similar percentage of reported  costs that were allowable. When MedPAC compared the 1996 cost  reports before and after auditing, it found that the allowable cost per  treatment for composite rate services and separately billed drugs for  freestanding facilities was about 96 percent of the reported cost per  treatment. Because providers have historically included nonallowable  costs on their cost reports, we applied MedPAC’s adjustment, which is the  most conservative and most recent adjustment, to our payment-to-cost  ratio of 0.99 and derived an adjusted payment-to-cost ratio of 1.03 for 2001.
Although we calculated an overall payment-to-cost ratio for 2001 only,  MedPAC has reported a decrease in these ratios from 1.14 in 1996 to 1.04  in 2001.
Although payments exceeded costs overall in 2001, they did not exceed  costs for all sizes of facilities. For example, payments were well below  allowable costs for small facilities, with an adjusted payment-to-cost ratio  of 0.91 (see table 1). Given the fixed costs a facility incurs in terms of  staffing, equipment, supplies, and rent, revenue from the small patient  base in these facilities may not be sufficient to meet costs.
section_title: Current Payment Methodology Is Not Appropriate
paragraphs: The Medicare payment methodology for dialysis services is not  appropriate. In 2001, composite rate payments to freestanding facilities,  intended to cover the costs of a variety of services associated with a  dialysis treatment, such as nursing, supplies, social services, and certain  laboratory tests, were well below the costs of those services. In addition,  the composite rate does not include all the services beneficiaries on  dialysis typically receive, and does not account for variation in service  utilization and costs among beneficiaries. Separately billed drug payments,  however, far exceeded the costs of those items. Because utilization of  separately billed drugs is largely unconstrained, providers have an  incentive to overutilize them to compensate for lower payments under the  composite rate. In addition, composite rate payments for home dialysis  treatments far exceeded the costs of those services, but payments for  home dialysis training were well below the costs of those services.
We estimate that from 1998 through 2001, composite rate payments were  well below the costs of composite rate services. During these years, the  unadjusted payment-to-cost ratio for composite rate services was below  1.00 and steadily decreased every year, falling from 0.94 to 0.89 (see table  2).
Furthermore, the composite rate does not pay for all services routinely  provided during a dialysis session. While the composite rate was designed  to pay for services associated with a single dialysis session, certain items  or services introduced since the creation of the rate are paid separately.  We determined that three separately billed drugs, EPO, vitamin D, and  iron, and drug-related supplies were provided to most dialysis  beneficiaries and frequently accompanied hemodialysis treatments (see  table 3). For example, 98 percent of beneficiaries received EPO in 2001  and, on average, at every dialysis treatment.
The composite rate also does not adjust for factors that may affect the  cost of providing dialysis services. Providers we interviewed told us that  certain beneficiaries require more services than others because of the  presence of conditions including diabetes, hypertension, vascular access  problems, and other physical impairments. They stated that care for these  beneficiaries may be more costly due to additional staff time, additional  resources, or more frequent dialysis. There is currently no adjustment to  the composite rate to account for variation in the costs of providing  services to beneficiaries who consume more resources than average.
While composite rate payments were well below costs, we estimate that  payments for separately billed drugs far exceeded the costs of those drugs  in 2001, with an unadjusted payment-to-cost ratio of 1.16. Because  utilization of separately billed drugs is largely unconstrained and because  payments for these items exceeded costs, providers have an incentive to  overutilize them. Representatives from one of the largest chain providers  and several nephrologists we interviewed reported that this incentive to  overutilize exists because separately billed drug payments compensate for  losses on composite rate services. However, several nephrologists and  researchers we interviewed also reported that beneficiaries who undergo  PD, or who otherwise dialyze more frequently than three times per week,  have a reduced need for separately billed drugs.
In addition to the imbalance in payment between composite rate services  and separately billed drugs, an imbalance exists between payments for  home dialysis treatments and home dialysis training. Two industry  representatives and representatives of a patient advocacy organization we  interviewed stated that Medicare payments for home dialysis training do  not cover the costs of the service. We found that in 2001, the unadjusted  payment-to-cost ratio for composite rate payments for home dialysis  treatments was 1.11 and for home dialysis treatments and training  combined was 1.04. The unadjusted payment-to-cost ratio for composite  rate payments for home dialysis training alone was 0.38, indicating that  payments were well below costs. A perception that facilities are losing  money on the initial home dialysis training, even though payments are  above costs for the training and treatment combined, may serve as a  disincentive to offering the home dialysis treatment method.
section_title: Daily Hemodialysis Appears Promising, but Rigorous Data Are Lacking
paragraphs: Daily hemodialysis, which is performed five to seven times per week, may  improve patients’ clinical outcomes and quality of life because it more  closely approximates the body’s continuous cleansing of the blood. The  literature indicates that daily hemodialysis patients have a greater amount  of toxin removed from their bodies, or a more adequate dialysis dosage,  than conventional hemodialysis patients. Dialysis dosage is important  because research suggests that inadequate dosage correlates with  increased mortality. In addition, studies report that anemia and  malnutrition, two serious conditions associated with increased morbidity  and mortality, improve with daily hemodialysis, as does patient quality of  life. For example, patients on daily hemodialysis experience less fatigue  and enjoy a wider range of dietary choices. Studies also report that  patients on daily hemodialysis have a reduced need for medication,  including EPO and drugs to control blood pressure, and a reduced  number of hospitalizations.
Although studies on daily hemodialysis report improvements in patient  outcomes, these studies are limited in size and scope. The daily  hemodialysis patient base is extremely small, given that few dialysis  facilities provide the treatment, and those that do have few patients using  it. Although no national data exist on the utilization of daily hemodialysis,  nephrologists we spoke with who provide daily hemodialysis estimate that  approximately 200 patients are undergoing the treatment nationwide.  Published studies are principally nonrandomized and have small sample  sizes, typically fewer than 25 patients, and therefore do not provide  definitive evidence supporting the treatment. Specifically, studies do not  evaluate whether observed improvements in mortality can be attributed to  the treatment itself or to some other factor. To definitively assess the  treatment, more rigorous data are needed.
Dialyzing more frequently has drawbacks. Although patients may  experience better outcomes, daily hemodialysis increases the number of  times a patient connects to the hemodialysis machine, and may increase  transportation costs if a patient chooses to dialyze at a facility rather than  at home. Such increased burdens may outweigh the benefits for a  significant number of patients. Even so, providers and nephrologists we  interviewed estimated that anywhere from 10 to 50 percent of the dialysis  population would choose to undergo daily hemodialysis.
Several studies, each of which evaluated the costs of one to two facilities,  have found that facility costs increase upon implementation of daily  hemodialysis. Industry representatives reported that despite the possible  benefits of daily hemodialysis, it is not currently financially feasible to  offer it to a large number of Medicare beneficiaries because Medicare does  not routinely pay for more than three dialysis treatments per week.  However, if beneficiaries who undergo daily hemodialysis have a reduced  need for other Medicare services, such as drugs and inpatient stays, the  Medicare program may realize overall cost savings.
Research currently being conducted by the National Institutes of Health  (NIH) may provide more rigorous data on daily hemodialysis, although it  will not determine whether there is an overall cost savings to Medicare.  With partial funding from CMS, NIH has funded four centers to test  whether it is feasible to randomize a representative sample of patients into  either conventional or daily hemodialysis. The trials will track a number of  patient outcomes for at least 6 months, including anemia, nutritional  status, blood pressure, medication use, and hospitalizations, but they are  not designed to enroll enough patients to conclusively determine whether  differences in mortality or hospitalizations are significant. Trial results,  which will not be available until 2007, will determine whether NIH should  continue with a large-scale trial that would measure the impact of more  frequent dialysis on mortality or cardiovascular outcomes or both.
section_title: Concluding Observations
paragraphs: From December 31, 1998, through December 31, 2001, beneficiary access  to dialysis facilities and services appeared stable. The total number of  dialysis facilities nationwide increased at about the same rate as the  Medicare dialysis population, and the total number of stations nationwide  increased at a faster rate than the Medicare dialysis population. Over the  same period of time, the number of counties with at least one facility  increased.
On average, Medicare payments to freestanding dialysis facilities for  composite rate and separately billed services combined exceeded  providers’ estimated allowable costs by 3 percent in 2001. However,  composite rate payments were well below the costs of composite rate  services, and separately billed drug payments far exceeded the costs of  separately billed drugs. The current payment methodology gives providers  an incentive to overutilize separately billed drugs in order to compensate  for losses on composite rate services and does not account for possible  cost differences in treating beneficiaries. A payment methodology that  bundled the services a facility provides into a prospective payment  amount would encourage providers to control the costs and utilization of  these items, as they retain the difference if their payments exceed their  costs of providing necessary services. A system that is based on allowable  costs and accounts for possible cost differences in treating beneficiaries  would ensure that Medicare pays appropriately for the efficient delivery of  services.
As required by law, CMS is currently designing a bundled prospective  payment system. In 2003, CMS reported to the Congress that currently  available data appear sufficient to expand the payment bundle to include  drugs and other services currently paid separately. MMA requires the  Secretary of HHS to issue a second report by October 1, 2005, that details  the elements and features for the design and implementation of a bundled  system, and then implement a 3-year demonstration project beginning  January 1, 2006, that is based on that system.
section_title: Agency and External Reviewer Comments and Our Evaluation
paragraphs: We received written comments on a draft of this report from CMS (see  app. II). We also received technical comments from NIH, which we  incorporated where appropriate, and oral comments from seven external  reviewers. The external reviewers represented industry and patient  organizations. They included the American Association of Kidney Patients  (AAKP); the Renal Physicians Association (RPA); Dialysis Clinic, Inc.  (DCI), the largest nonprofit dialysis chain; Fresenius Medical Care (FMC),  the largest for-profit dialysis chain; the National Kidney Foundation, a  foundation for the prevention and treatment of kidney disease; the  National Renal Administrators Association (NRAA), which represents  employees at dialysis facilities; and the Renal Leadership Council (RLC),  an association representing the four largest for-profit dialysis facility  chains.
subsections: section_title: CMS Comments and Our Evaluation
paragraphs: In commenting on a draft of this report, CMS generally agreed with our  findings and our conclusion that all outpatient dialysis services should be  bundled into a single prospective payment amount based on facilities’  allowable costs. Although in the draft report we had also recommended  that CMS redesign the prospective payment system for dialysis facilities to  bundle the costs of services, including separately billed drugs, into one  payment amount, in its comments CMS noted that it would not have the  statutory authority to implement such a system. CMS also noted that MMA  requires the Secretary of HHS to report to the Congress by October 1,  2005, on the elements and features necessary in the design and  implementation of a broader payment system. The Secretary is also  required to conduct a 3-year demonstration project, beginning January 1,  2006, using a payment system incorporating patient characteristics  identified in the report. CMS also asked that we recognize its research on a  bundled payment system that has been under way since October 2000. As  a result of these comments, we deleted the recommendation in the draft  report. In addition, although MMA was discussed in our draft report, we  more prominently highlighted it and CMS’s research in the report.
CMS also stated that while our findings on beneficiary access were  reassuring, it is concerned that we did not specifically address access  issues at the regional level. According to CMS, its staff has been told that  hospitals in certain regions, such as New England and New York, are  having difficulty discharging and placing ESRD patients in dialysis  facilities in those areas. We acknowledged in the draft report that supply  varied geographically and by treatment method. We based our findings on  aggregate indicators, such as trends in numbers of stations and facilities  relative to the beneficiary population, which all suggested that access had  been stable from 1998 through 2001. We would not have been able to  identify the extent to which supply has changed since 2001, as 2001 data  were the most recent available at the time of our analysis.
section_title: Industry and Patient Organization Comments
paragraphs: Comments from the industry representatives and patient organizations  centered on three different areas: beneficiary access to dialysis, the data  used in our analysis of Medicare payment adequacy, and the  appropriateness of the current payment methodology.
Many comments addressed our finding that beneficiary access to dialysis  is stable. Five external reviewers stated that Medicare payments are  currently inadequate, and due to inadequate payments, facilities are  closing in areas where Medicare beneficiaries constitute a high percentage  of dialysis patients. RPA specifically was concerned that facilities may try  to maximize their numbers of private-pay patients and minimize their  numbers of Medicare beneficiaries in the future. Three external reviewers  asserted that access is currently decreasing due to staffing shortages at  available facilities, particularly with respect to nurses. These reviewers  also stated that certain minority populations, such as Native Americans,  and certain areas of the country, such as rural and inner city areas, are  currently experiencing access problems.
Several external reviewers commented on access issues specifically  related to home dialysis. NRAA agreed with our finding that payment for  home training is inadequate and therefore serves as a barrier to home  dialysis. RPA agreed that one reason for low utilization of PD is that PD  patients use less of the profitable separately billed drugs. AAKP provided  the same assertion and added that the lack of training for nephrologists  serves as a barrier to home dialysis.
Industry representatives expressed concerns regarding our payment  analysis, specifically the use of data from 2000 and 2001 and our  application of an audit adjustment to facility cost data. DCI stated that  facility costs have risen since 2001; therefore, our analysis does not reflect  current conditions. FMC, RLC, and NRAA stated that using an audit  adjustment based on 1996 cost reports does not result in an accurate  assessment of costs; they asserted that the amount of nonallowable costs  that facilities include on their cost reports has decreased since 1996.
Several groups commented on the appropriateness of the current payment  methodology. Two industry representatives, DCI and RLC, acknowledged  that an incentive exists to overutilize separately billed drugs in order to  compensate for losses on composite rate services, and the physician  association, RPA, acknowledged that there is excessive use of these drugs.  However, another industry group, NRAA, stated that our assertion that an  incentive to overutilize exists was extreme. In addition, four external  reviewers were concerned that bundling costs would create an incentive  for facilities to either underserve beneficiaries or to accept only those  beneficiaries who use relatively few resources. Four external reviewers  were concerned that there would be no regular update to the payment rate  if a bundled rate was established, which could limit access to new  technology.
section_title: Our Evaluation of Industry and Patient Organization Comments
paragraphs: Concerning the comments that access is decreasing overall, for certain  regions and certain populations and for home dialysis, we acknowledged  in the draft report that supply may vary geographically and by treatment  method. However, also as noted in the draft report, we based our finding  that beneficiary access to dialysis is stable on aggregate indicators, such as  trends in numbers of stations and facilities relative to the beneficiary  population. In particular, we noted that few facilities closed from 1998  through 2001, with the number of facilities closing each year amounting to  less than 1 percent of those operating at the end of the year. We were not  able to analyze the adequacy of facility staffing due to a lack of adequate  data.
With respect to our adjustment of facility cost data, BIPA required that we  use audited cost data when analyzing the adequacy of Medicare payment.  Although CMS is currently auditing the 2001 cost reports, the agency’s last  completed audit was of the 1996 cost reports. Given the increase in health  care costs over time, we did not believe it was appropriate to assess the  adequacy of Medicare payment using only 1996 cost reports. In order to  satisfy the requirements of our mandate, we estimated the percentage of  costs on the unaudited 2001 cost reports that were Medicare allowable. To  do so, we relied on an audit adjustment calculated by MedPAC. MedPAC’s  adjustment was based on the 1996 cost reports and was lower than the  previous two audit adjustments calculated by HCFA in 1988 and 1991. We  believe it is appropriate to apply MedPAC’s 1996 audit adjustment to 2001  costs because it is the most recent of the last three audit adjustments. We  also noted in the draft report that it is the most conservative of the three  adjustments.
With respect to our conclusion that the current payment methodology is  not appropriate, we acknowledge that a prospective payment could create  an incentive to underserve beneficiaries, because providers retain the  difference if their payments exceed their costs. However, this incentive  exists under all prospective payment systems. If the bundled payment  amount is based on facilities’ allowable costs of delivering services, and  takes into account possible cost differences in treating beneficiaries,  facilities will be financially better equipped to deliver the appropriate level  of service to each beneficiary.
Industry representatives and patient organizations also raised several  issues that went beyond the scope of our report. These issues included  whether Medicaid and physician payments are adequate and the Medicare  definition of allowable costs.
Reviewers also made technical comments, which we incorporated where  appropriate.
We are sending copies of this report to the Administrator of CMS and  appropriate congressional committees. The report is available at no charge  on GAO’s Web site at http://www.gao.gov. We will also make copies  available to others on request.
If you or your staffs have any questions, please call me at (202) 512-7119.  Another contact and key contributors to this report are listed in appendix  III.
section_title: Appendix I: Scope and Methodology
paragraphs: In conducting this study, we analyzed the Centers for Medicare & Medicaid  Services (CMS) Facility Survey files, Medicare cost reports, and Medicare  outpatient claims. We interviewed officials from CMS and the National  Institute of Diabetes & Digestive & Kidney Diseases. We also interviewed  representatives from the American Association of Kidney Patients,  American Nephrology Nurses’ Association, Forum of End Stage Renal  Disease (ESRD) Networks, National Kidney Foundation, National Renal  Administrators Association, and Renal Physicians Association;  representatives from five national dialysis facility chains, a national  manufacturer of dialysis equipment, and several private health insurance  companies; and nephrologists who provide daily hemodialysis. We  conducted site visits at three dialysis facilities, one of which provides daily  hemodialysis, and interviewed officials at these facilities.
To analyze the supply of freestanding and hospital-based dialysis facilities,  we used the Facility Survey files from 1998 through 2002, and to identify  ESRD beneficiaries on dialysis, we used Medicare outpatient claims from  1998 through 2001, the most recent years for which data were available at  the time of our analysis. From the Facility Survey files, we identified all  dialysis facilities operating the entire year, opening during the year, and  closing during the year, and the number of stations at each facility. We  identified a facility as offering a treatment method if it provided at least  one treatment or had at least one patient using that method. From the  Medicare outpatient claims, we identified Medicare ESRD beneficiaries  receiving dialysis each year, and their residence by ZIP code. We then  calculated the number of dialysis facilities operating the entire year and  the number of beneficiaries receiving dialysis for each county in the 50  states and in the District of Columbia, which we considered a county. We  determined the average number of facilities and stations in each county,  weighted by the number of beneficiaries in each county. We defined a  county as urban if it was in a metropolitan statistical area and as rural if it  was outside a metropolitan statistical area, as determined by the Office of  Management and Budget. We assessed the reliability of the Facility Survey  file and claims data by analyzing trends in the number of beneficiaries on  dialysis and dialysis facilities over time and comparing these to trends  reported by CMS. We determined that the data were reliable for our  purposes.
To calculate payment-to-cost ratios for composite rate services only, we  used cost reports for freestanding renal dialysis facilities from 1998  through 2001, the most recent data available. The Medicare payment  methodology is the same for freestanding and hospital-based dialysis  facilities, but we did not analyze cost reports or claims for hospital-based  facilities because their reported costs are affected by decisions in  allocating costs between the hospital and the dialysis facility. In 2001,  about 84 percent of all dialysis facilities nationwide were freestanding. We  first edited the cost reports to exclude those facilities located outside the  50 states or the District of Columbia, those with cost reporting periods less  than 300 days, and those that reported composite rates outside the range  of possible rates from the Medicare program. We excluded 577 of the 2,983  cost reports, or about 19 percent. From the remaining cost reports, we  calculated each provider’s total Medicare payments and total reported  costs. We calculated the proportion of total cost attributable to Medicare  beneficiaries using the proportion of each facility’s treatments that was  furnished to Medicare beneficiaries. We summed payments and costs  across all providers to obtain payment-to-cost ratios from 1998 through  2001 weighted by total Medicare payments received by each facility.  Additionally, we stratified ratios by dialysis treatment method, as reported  in the cost reports. We assessed the reliability of the cost report data by  comparing our payment-to-cost ratios to those published by the Medicare  Payment Advisory Commission. We determined that the data were reliable  for our purposes.
In order to calculate 2001 payment-to-cost ratios for overall costs, that is,  composite rate services and separately billed drugs, we used 2001 cost  reports for freestanding renal dialysis facilities and 2000 and 2001  Medicare outpatient claims data. We first edited the cost reports to  exclude those facilities located outside the 50 states or the District of  Columbia, those with cost reporting periods fewer than 300 days, and  those that reported composite rates outside the range of possible rates  from the Medicare program. Payment information for individual drugs is  not available on Medicare outpatient claims prior to July 1, 2000, and  therefore we did not calculate these ratios for years prior to 2001. We  used the claims data to obtain payments for separately billed drugs, as  they are not available in the cost reports. We obtained the total costs of  separately billed drugs from the cost reports and calculated the proportion  attributable to Medicare beneficiaries using the proportion of each  facility’s treatments that was furnished to Medicare beneficiaries. We then  added our previously calculated composite rate payments and costs and  summed total payments and total costs for all providers to obtain an  overall payment-to-cost ratio for 2001 weighted by total Medicare  payments received by each facility. We stratified the ratios by size. We  defined the size of the facility based on the 25th and 75th percentiles of  total dialysis treatments each facility reported in its cost report. Small  facilities are those reporting a number of dialysis treatments less than the  25th percentile, medium facilities are those reporting a number of dialysis  treatments greater than or equal to the 25th percentile and less than or  equal to the 75th percentile, and large facilities are those reporting a  number of treatments greater than the 75th percentile. We could not  calculate these ratios by treatment method, as separately billed drug costs  are not reported by treatment method on the cost report.
In order to identify separately billed items or services frequently billed in  association with in-facility hemodialysis, we used 2001 Medicare  outpatient claims data. We limited our claims population to those that  reported only in-facility hemodialysis and no other treatment method. We  defined “frequently billed” as those separately billed services that were  billed over 100,000 times annually. We excluded laboratory services  because these are typically billed directly to Medicare by the laboratory,  not by the dialysis facility. Medicare instructs providers to record each  drug administration on the claim separately, and accordingly, we defined  one administration of a drug as one record on the claim. It is possible,  however, that some providers aggregate the units of several  administrations. To the extent this is the case, the billing frequencies for  these specific drugs likely underestimate the actual administration  frequencies.
To review cost and clinical data on daily hemodialysis, we examined 25  articles obtained through a MEDLINE literature search for studies on daily  hemodialysis published from 1998 through 2002. We examined an  additional 11 articles referred to us during our interviews.
We conducted our work from July 2002 through June 2004 in accordance  with generally accepted government auditing standards.
section_title: Appendix II: Comments from the Centers for Medicare & Medicaid Services
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: Kevin J. Dietz, Joanna L. Hiatt, Maria Martino, and Yorick F. Uzes made  major contributions to this report.