End-Stage Renal Disease: CMS Should Improve Design and Strengthen Monitoring of Low-Volume Adjustment
Released: 2013-03-01T00:00:00

Letter

Background

End-Stage Renal Disease (ESRD)

Treatment options for individuals with ESRD include kidney transplants or maintenance dialysis. Kidney transplants are not a practical option on a wide scale, as suitable donated organs are scarce. Consequently, dialysis is the treatment used by most individuals with ESRD. Hemodialysis, the most common form of dialysis, is generally administered three times a week at facilities that provide these services. During hemodialysis, a machine pumps blood through an artificial kidney and returns the cleansed blood to the body. Other dialysis options include receiving hemodialysis at home and peritoneal dialysis.

Low-Volume Payment Adjustment (LVPA)

To have been eligible to receive the LVPA in 2011, a facility must have established that it met the CMS regulatory criteria that, during each of the 3 previous years, it (1) provided fewer than 4,000 total dialysis treatments and (2) had not opened, closed, or changed ownership. CMS guidance provided additional detail on the application of these criteria.

To establish eligibility, a facility must provide an attestation statement to its designated Medicare contractor, which is responsible for verifying that the facility has met the eligibility criteria. Only after the facility has submitted its attestation and its designated Medicare contractor has verified that the facility meets the eligibility criteria will a facility begin to receive the LVPA for its Medicare-covered dialysis treatments provided to adult beneficiaries. CMS requires facilities to provide an attestation because some of the information the Medicare contractors need to assess a facility’s eligibility—in particular, facilities’ cost reports for the year preceding the payment year—may be unavailable to the Medicare contractors until several months after the payment year begins. In cases where the Medicare contractors could not make a final eligibility determination at the beginning of the payment year, they were to conditionally approve LVPA payments; then, once the necessary information becomes available, the Medicare contractors are required to reassess the facility’s eligibility for the LVPA. If a Medicare contractor determines that a facility that received the LVPA was actually ineligible, the contractor is expected to recoup all LVPA payments made to that facility within 6 months of that determination.

LVPA Did Not Effectively Target Low-Volume Facilities That Appeared Necessary for Ensuring Access to Care and Had High Costs

Many of the 326 facilities eligible for the 2011 LVPA were located near other facilities, indicating that they might not have been necessary for ensuring access to care. Certain facilities with relatively low volume that were not eligible for the LVPA had above-average costs and appeared to have been necessary for ensuring access to care. Moreover, the design of the LVPA provides facilities with an adverse incentive to restrict their service provision to avoid reaching the 4,000 treatment threshold.

Many LVPA-Eligible Facilities Appeared Unnecessary for Ensuring Access to Care—Nearly 30 Percent Were Located within 1 Mile of Another Facility

Many LVPA-eligible facilities in 2011 were located near other dialysis facilities, indicating that they might not have been necessary for ensuring access to care. While LVPA-eligible facilities were more isolated compared with all dialysis facilities (see fig. 1), nearly 30 percent of LVPA-eligible facilities were located within a mile of another facility, and more than 3 percent of LVPA-eligible facilities shared an address with another facility that was not eligible and was owned by the same company. In addition, more than half—approximately 54 percent—of LVPA-eligible facilities were 5 miles or less from another facility. These results indicate that the patients using many LVPA-eligible facilities may have had access to multiple facilities for receiving dialysis care, which suggests that the LVPA does not effectively target facilities that appear necessary for ensuring access to dialysis care.

Many LVPA-eligible facilities were located near high-volume facilities, suggesting that these LVPA-eligible facilities may not have warranted a payment adjustment because they were located in areas with a population base sufficient to support high-volume facilities. Approximately 35 percent of the 326 LVPA-eligible facilities were located within 5 miles of a high-volume facility.94 percent were located in urban areas, compared with 51 percent of all LVPA-eligible facilities.

Certain Ineligible Facilities Had Above-Average Costs and Appeared Necessary for Ensuring Access to Care; LVPA Design May Introduce Adverse Incentives

Compared with all freestanding facilities in our cost analysis, freestanding LVPA-eligible facilities had substantially higher costs per dialysis treatment in 2011, but other freestanding facilities that provided a relatively low volume of treatments were ineligible for the LVPA, even though they were isolated and incurred above-average costs, because they exceeded the treatment threshold. The average cost per treatment for the 216 freestanding facilities that were LVPA-eligible was $272, compared with $235 for all freestanding facilities—a difference of approximately 16 percent.freestanding facilities that provided a relatively low volume of treatments, were isolated, and incurred above-average costs. For example, if the volume threshold was raised to 5,000 dialysis treatments, 203 additional freestanding facilities would have been eligible for the 2011 LVPA. Of these 203 facilities, 68 and 25 were located more than 15 miles and 25 miles, respectively, from another facility, indicating that these facilities likely were important for ensuring access to care. On average, costs per dialysis treatment for these two groups of isolated facilities exceeded the average for all freestanding facilities by approximately 9 percent each— $21 and $22, respectively.

However, the 2011 LVPA did not target other The design of the LVPA also raises concerns because it provides facilities with an adverse incentive to restrict their service provision to avoid reaching the 4,000 treatment threshold. Facilities that reach this threshold lose eligibility for the next 3 calendar years. For example, for a facility that provided 3,999 total treatments in 2010 and met all other eligibility criteria for the LVPA, providing an additional treatment would have caused the facility to lose eligibility for the LVPA for the next 3 calendar years, resulting in an estimated $390,000 in lost revenue from Medicare for 2011 through 2013.

CMS has implemented an adjustment in another payment system that decreases as facility volume increases—an approach which, if applied to the LVPA, could diminish the incentive for providers to limit service provision by making the loss of potential revenue smaller for supplying additional services. In addition, such an adjustment—referred to as a tiered or phased-out adjustment—could more closely align the LVPA with the decline in cost per treatment that occurs as volume increases. For example, among freestanding facilities that met the other LVPA eligibility criteria, the average cost per treatment for facilities that would have qualified under a 3,000 treatment threshold was $290; the average cost per treatment for facilities that would have failed a 3,000 treatment threshold but qualified under a 4,000 treatment threshold was $263, and the average cost per treatment for facilities that would have failed a 4,000 treatment threshold but qualified under a 5,000 treatment threshold was $256.

Under the adjustment, hospitals received increased payments per discharge if the hospital provided fewer than 1,600 discharges a year. The amount of the adjustment was as much as 25 percent for hospitals with fewer than 200 discharges and decreased linearly until it was phased out for hospitals with 1,600 or more discharges.

Medicare Overpaid Facilities Ineligible for the 2011 LVPA and Did Not Pay Some Eligible Facilities; Primary Causes Were Unclear Guidance and Insufficient Monitoring

Medicare overpaid an estimated $5.3 million for the LVPA to dialysis facilities that did not meet the eligibility requirements established by CMS and did not pay about $6.7 million to facilities eligible for the LVPA. The guidance that CMS issued for implementation of the regulatory requirements was sometimes unclear and not always available when needed, and the misunderstanding of LVPA eligibility likely was exacerbated because CMS conducted limited monitoring of the Medicare contractors’ administration of LVPA payments.

Medicare Overpaid Facilities Ineligible for the 2011 LVPA by an Estimated $5.3 Million and Did Not Pay an Estimated $6.7 Million to Some Eligible Facilities, including Those That Did Not Request Payments

Medicare overpaid 83 dialysis facilities that were ineligible for the LVPA in 2011 by an estimated $5.3 million, which was nearly one-quarter of the approximately $22.7 million in LVPA payments made that year. (See fig. 2.) These facilities were ineligible because, on the basis of applicable data and methods specified by CMS in its guidance (and clarified through our interviews with CMS), they did not meet the regulatory requirements of having (1) provided under 4,000 dialysis treatments in each of the 3 years preceding the payment year and (2) not opened, closed, or had a change of ownership in the 3 years preceding the payment year. Medicare contractors are expected to recoup payments made in error within 6 months of detecting the error, but as of January 2013, CMS did not know whether any of these overpayments had been recouped.

These overpayments were of two types: payments to dialysis facilities that were ineligible at the beginning of 2011 and payments to facilities that were potentially eligible given the data available at the beginning of 2011 but proved ineligible when all pertinent information became Most of these payments—about $4.8 million—were to available.73 facilities that were clearly ineligible at the beginning of the year because data available prior to 2011 showed that the facility did not meet one or more of the eligibility criteria. The remaining $0.5 million was paid to 10 facilities that met the eligibility criteria for 2008 and 2009, but when data on 2010 activity became available were shown not to have met the eligibility criteria for that year. In cases where Medicare contractors could not make a final eligibility determination at the beginning of the payment year, they were to conditionally approve LVPA payments, reassess eligibility when facilities’ 2010 data became available, and, for facilities determined to be ineligible, recoup payments within 6 months of determining ineligibility.

Furthermore, many eligible dialysis facilities did not receive any LVPA payments in 2011 and others received payments for only part of the year. These nonpayments amounted to about $6.7 million and affected 273 facilities. Seventy-nine eligible facilities did not receive payments for any treatments; these payments would have amounted to about $3.4 million. It is probable that these facilities did not claim the LVPA—that is, they did not attest to their eligibility, as required in regulations—although it is also possible that some attested to their eligibility and were incorrectly denied by their Medicare contractor. Another 194 facilities received some but not all payments for which they were eligible—in total accounting for another estimated $3.3 million in nonpayments. Thirty-two facilities did not start receiving LVPA payments until part way through the year, but then consistently received payments for all treatments for the remainder of the year. These are likely facilities that were late in attesting to their eligibility, resulting in LVPA nonpayments of about $0.9 million. For the remaining estimated $2.4 million in nonpayments to 162 facilities, the reason is less clear because there is no discernible pattern. For example, some facilities received payments for several months, did not receive payments for 1 or more subsequent months, and then started receiving payments again. Other facilities received payments for some but not all treatments within a given month for multiple months in a row. We cannot explain the cause of these payment inconsistencies, but the inconsistencies could suggest problems with the claims payment system. Many of the overpayments to ineligible facilities showed a similar lack of pattern, which also could suggest problems with the claims payment system.

In 2011, CMS correctly paid the LVPA to 249 facilities for at least some of their treatments; these payments totaled an estimated $17.4 million. Fifty-five of these facilities received about $4.2 million in payments for all their treatments. CMS paid the remaining estimated $13.2 million to the 194 eligible facilities that received the LVPA for only some treatments.

Unclear and Late Guidance and Insufficient Monitoring Were Primary Contributors to Payment Problems

Although CMS provided opportunities for Medicare contractors and facilities to ask clarifying questions regarding its implementation of the requirements for LVPA eligibility, the guidance for implementing these requirements was sometimes unclear and not always available when needed. For example, the majority of the facilities that incorrectly received the LVPA—54 of 83—were hospital-affiliated facilities that failed the volume threshold. Eventually, CMS specified that Medicare contractors should combine the treatments of a hospital’s affiliated dialysis facilities in determining whether the LVPA requirement for fewer than 4,000 treatments had been met. While this method of applying the regulatory requirement is logical because hospital-affiliated facilities do not file individual cost reports, CMS did not issue explicit guidance on this topic until July 2012.

CMS guidance to Medicare contractors for determining whether a facility had met the LVPA requirement of not having opened, closed, or changed ownership during the 3 years preceding the payment year was neither clear nor timely. According to our interviews with CMS officials, the agency’s intention was for contractors to verify that each of the facility’s cost reports for the previous 3 years covered exactly 12 months; however the connection between the regulatory requirement and the duration of the cost-reporting periods has not been explicitly made in CMS guidance. (For example, an October 2010 internal technical direction letter stated that, in order to meet the LVPA eligibility verification requirements, Medicare contractors needed to confirm that fewer than 4,000 total treatments were provided for each of the 12-month cost-reporting periods—however, it was not clear which regulatory verification requirement(s) the sentence was implementing.) CMS officials explained that three cost-reporting periods of exactly 12 months (which need to be consecutive) are a time frame that would exhibit business practice patterns that demonstrate a facility is consistently low-volume and that, because cost reports correspond with the facility’s fiscal year, using them provides a snapshot of a facility’s financial ability to incur costs for furnishing renal dialysis. Furthermore, CMS officials noted that having three cost-reporting periods of exactly 12 months each was a reasonable method of assessing the regulatory requirement because, generally, if a facility opened, closed, or had a change in ownership (in which case the facility may receive a new provider number), this would cause a break in the cost-reporting period and thus lead a facility to have one or more cost reports that spanned fewer than 12 months. In July 2011, CMS issued public guidance clarifying that the relevant periods during which a facility had not opened, closed, or had a change in ownership were the three cost-reporting periods before the payment year and not the 3 calendar years before the payment year.helped clarify that the 12-month rule was sufficient for assessing that a facility had not opened, closed, or had a change in ownership, as of January 2013, no CMS guidance has been explicit on this topic, and no guidance has stated that each cost-reporting period must be exactly 12 months.

Unclear and late guidance for determining whether a facility had opened, closed, or changed ownership led to misunderstanding about which facilities were eligible, and at least some of the misunderstanding persisted as of September 2012. For example, when we questioned a representative of a large dialysis organization in September 2012 about some of the organization’s facilities that we found to have not received the 2011 LVPA despite being eligible, the representative still believed those facilities were ineligible because they had a change in ownership during the previous 3 calendar years. In fact, these facilities were still eligible for the 2011 LVPA because the change in ownership occurred after the end of the facilities’ 2010 cost-reporting period and they therefore had 2008, 2009, and 2010 cost reports that each covered exactly 12 months. In addition, when we questioned the representative about some of the organization’s facilities that we found to have incorrectly received the 2011 LVPA, the representative still believed those facilities met all the regulatory requirements and therefore had been eligible. However, because these facilities opened in December 2007 and complied with CMS’s general requirement that cost reports not span less than a month, they had a 2008 cost report that spanned slightly more than 12 months. This made these facilities ineligible for the 2011 LVPA. When we shared this example with CMS, a CMS official stated that the agency had not considered the possibility that a facility could have a cost report spanning more than 12 months. Additionally, when we questioned a representative from a different large dialysis organization in September 2012 about some of that organization’s facilities that we found to have incorrectly received the 2011 LVPA, the representative still believed that those facilities had been eligible because the changes in ownership for those facilities did not result in new provider numbers. However, these facilities were ineligible because the changes in ownership caused a break in the cost-reporting period and thus the facilities had at least one cost report that spanned fewer than 12 months.

While CMS has continued to issue clarifying guidance and provide Medicare contractors and facilities with opportunities to ask clarifying questions, evidence shows that CMS’s guidance for determining LVPA eligibility was not fully and correctly implemented. In particular, none of the estimated $5.3 million in 2011 overpayments had been recouped by June 2012, based on an analysis of claims, and CMS was not aware of any overpayments that had been recouped by January 2013. This suggests that many Medicare contractors either had not yet discovered the payments made in error or were not aware of their obligation to reassess facilities’ eligibility once the cost report for the previous year became available and to recoup overpayments within 6 months of discovery. Another possible reason for overpayment or nonpayment of the LVPA is that some of the guidance was sent only to Medicare contractors and was not publicly available. Medicare contractors are responsible for ensuring that facilities receive any required information based on this guidance, and that function is particularly important for the LVPA because in order to receive the LVPA a facility must first attest to its eligibility, which it will do only if it believes it is eligible. We do not know the extent to which continued misunderstanding of LVPA eligibility stems from Medicare contractors’ failure to share the relevant portions of this nonpublic guidance or from facilities’ not understanding the guidance that they received.

Much of the misunderstanding and resulting payment problems related to eligibility were exacerbated by CMS’s limited monitoring of the Medicare contractors and its consequent limited knowledge about implementation of the LVPA. While CMS requested information about the 2011 LVPA from Medicare contractors in October 2011 and again in July 2012, as of January 2013, it had not yet verified whether the information it received was complete or in a usable form. In particular, CMS still did not know which facilities were eligible for the 2011 LVPA, which facilities had attested to being eligible for the adjustment, nor which facilities received the 2011 LVPA.

Conclusions

CMS intended the LVPA to encourage small ESRD facilities to continue operating in areas where beneficiary access might be jeopardized if such facilities closed. However, as designed, the LVPA does not effectively achieve this goal because it does not target all relatively low-volume, high-cost facilities that are in areas where beneficiaries may lack other dialysis care options, and it targets some facilities that appeared unnecessary for ensuring access to dialysis, such as dialysis facilities located in close proximity to other facilities. In addition, facilities currently face a large loss in potential revenue if they reach the LVPA treatment threshold. This creates an adverse incentive for facilities to restrict their service provision to avoid reaching the treatment threshold.

In addition to these concerns about more appropriately targeting the LVPA, we also found significant issues associated with its implementation, including frequent LVPA overpayments. These overpayments primarily stemmed from unclear and untimely CMS guidance and persisted because of CMS’s insufficient monitoring of Medicare contractors. Without clear, timely guidance and stronger monitoring of Medicare contractors’ implementation of the guidance, Medicare may continue to pay facilities that are not eligible for the LVPA and to not pay many facilities that are eligible. Although the amount of money involved was small—overpayments and nonpayments totaling about $12 million in 2011 for the $10.1 billion ESRD program—payment problems with the adjustment undermined its purpose, which is to encourage small ESRD facilities to continue operating in areas where beneficiary access might be jeopardized without them.

Recommendations for Executive Action

To more effectively target facilities necessary for ensuring access to care, we recommend that the Administrator of CMS consider restricting the LVPA to low-volume facilities that are isolated.

To reduce the incentive for facilities to restrict their service provision to avoid reaching the LVPA treatment threshold, we recommend that the Administrator of CMS consider revisions such as changing the LVPA to a tiered adjustment.

To ensure that future LVPA payments are made only to eligible facilities and to rectify past overpayments, we recommend that the Administrator of CMS take the following four actions: require Medicare contractors to promptly recoup 2011 LVPA payments that were made in error; investigate any errors that contributed to eligible facilities not consistently receiving the 2011 LVPA and ensure that such errors are corrected; take steps to ensure that CMS regulations and guidance regarding the LVPA are clear, timely, and effectively disseminated to both dialysis facilities and Medicare contractors; and improve the timeliness and efficacy of CMS’s monitoring regarding the extent to which Medicare contractors are determining LVPA eligibility correctly and promptly redetermining eligibility when all necessary data become available.

Agency and Industry Comments and Our Evaluation

We received written comments on a draft of this report from HHS, which are reprinted in appendix I. HHS agreed with our recommendations and stated it would explore refinements to the design of the LVPA and take actions to improve its implementation. HHS also provided technical comments, which we incorporated as appropriate.

With regard to our recommendation that CMS consider restricting the LVPA to low-volume facilities that are isolated, HHS stated that CMS will explore potential refinements. HHS stated that other factors, in addition to geographic isolation, may contribute to an ESRD facility being low-volume and that the department had studied the costs of both rural and nonrural facilities and decided not to implement an adjustment on the basis of rural location. We did not analyze all the reasons facilities were low-volume, nor did we recommend a payment adjustment for rural facilities. However, we believe that providing increased payments to facilities in close proximity to one another may not be warranted. We also note that, while facilities certified on or after January 1, 2011, that apply for the LVPA must combine all of the treatments provided by facilities under common ownership within 25 miles to determine eligibility, this restriction does not ensure that only isolated facilities receive the LVPA. For example, two facilities not under common ownership could be located in close proximity and still receive the LVPA.

In response to our recommendation to consider revisions such as changing the LVPA to a tiered adjustment, HHS stated that it would explore whether refinements to the LVPA are necessary. HHS stated that the incentive for facilities to limit dialysis services would exist regardless of where the decrease in payment occurred. We agree that such a change would not eliminate the incentive to limit dialysis services, but we believe it would reduce the incentive.

HHS concurred with our recommendation about ensuring proper payments and rectifying past overpayments. HHS also listed specific actions it plans to take to implement the recommendation, including using multiple methods to communicate with Medicare contractors and ESRD facilities to deliver clear and timely guidance.

We invited two organizations to provide oral comments on our draft report: the Kidney Care Council (KCC), which represents dialysis facility companies, and the National Renal Administrators Association (NRAA), which represents independent dialysis facilities. Representatives from these organizations expressed their appreciation for the opportunity to review the draft.

Both KCC and NRAA noted that facilities within close proximity to another facility may still be necessary for ensuring access to dialysis care (for example, if the other facility is operating at capacity) or access to choice of dialysis modality (for example, if the other facility does not offer the same dialysis options). While these situations may occur, if CMS determines a single larger facility could provide appropriate services where two or more smaller facilities exist now, paying the LVPA to the existing smaller facilities may not be warranted.

NRAA agreed with our finding that CMS guidance on LVPA eligibility was unclear and not transparent to facilities. Additionally, NRAA noted that CMS’s guidance requiring that hospitals—but not large dialysis organizations—sum the treatments across all of their affiliated facilities when determining eligibility for the LVPA was inconsistent. We agree there is some inconsistency; however, it will be somewhat reduced starting in 2014 as CMS requires that facilities certified after January 1, 2011, sum their treatments across all facilities that are under common ownership and within 25 miles. NRAA also disagreed with the statement that hospital cost reports are the only source of information on total treatments provided by hospital-affiliated facilities. As we note in the report, CMS officials told us that cost reports are the only source of total treatments.

Both KCC and NRAA requested more details on GAO’s recommendations related to improving the design of the LVPA. Our recommendations—that CMS should (1) more effectively target facilities necessary for ensuring access to care by considering restricting the LVPA to low-volume facilities that are isolated and (2) reduce the incentive for facilities to restrict their service provision by considering revisions such as changing the LVPA to a tiered adjustment—outlined the factors CMS should consider in improving the LVPA. We did not specify details of the design because we believe CMS should have flexibility in how to more effectively target facilities necessary for ensuring access to care and reduce their incentive to restrict service provision.

KCC urged GAO to recommend that CMS pay out LVPA payments that CMS failed to make. We believe facilities are best positioned to determine and pursue their own rights to appeal Medicare claims determinations.

Technical comments from KCC and NRAA were incorporated in the draft as appropriate.

We are sending copies of this report to the Secretary of Health and Human Services. The report will also be available at no charge on our website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me at (202) 512-7114 or cosgrovej@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report.

Appendix I: Comments from the Department of Health and Human Services

Appendix II: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the individual named above, Phyllis Thorburn, Assistant Director; Todd D. Anderson; Alison Binkowski; William Black; George Bogart; Elizabeth T. Morrison; Brian O’Donnell; and Jennifer Whitworth made key contributions to this report.