How will bundled rate for ESRD drugs and services affect you?

August 20, 2007

The new bundled payment would adjust for differences across dialysis facilities for the services paid for under the composite rate and the drugs that are currently billed separately.

Prior to Jan. 1, 2006, Medicare reimbursed independent and hospital-based dialysis facilities for separately billable ESRD drugs using different methods. Independent dialysis facilities generally were reimbursed for separately billable drugs at either their acquisition cost or 106% of their average sales price (ASP). Hospital-based dialysis facilities usually were reimbursed for drugs on a reasonable cost basis. Beginning Jan. 1, 2006, the Centers for Medicare & Medicaid Services enacted several significant changes to the drug reimbursement methods used for dialysis facilities. One revision included paying all dialysis facilities manufacturers' ASP plus 6% for all separately billable ESRD drugs and biologicals, with the exception of certain vaccines, blood, and blood products.

Currently, CMS reimburses independent and hospital facilities for most items related to dialysis services, such as labor costs, related supplies and equipment, and certain medications and laboratory tests, based on a prospective payment system known as the "composite rate." Paying under a composite rate is a common form of Medicare payment known as "bundling." Medicare's composite rate for routine dialysis and related services was introduced in 1983 and was the program's first bundled rate.

The government believes that a bundled payment encourages providers to operate efficiently. "Dialysis facilities are already operating efficiently; however, a bundled payment for services and drugs would force facilities to operate more efficiently," stated Neeta O'Mara, Pharm.D., BCPS, clinical pharmacist at Dialysis Clinic Inc. in New Jersey. However, some injectable drugs utilized during dialysis treatments and certain laboratory tests are not covered under the composite rate and are paid for separately on a per-service basis. These items are referred to as separately billable.

Results of study

The Office of the Inspector General conducted a survey of a random sample of independent and hospital-based dialysis facilities to compare the Medicare reimbursement amounts for separately billable ESRD drugs and the ASP of these drugs in independent and hospital dialysis centers. It obtained third-quarter 2006 data on the total amount paid, discounts and rebates received, and total units purchased for 11 high-expenditure, separately billable ESRD drugs (see box). The findings showed that acquisition costs for the same drug may vary based on the type and chain affiliation of the facility, causing some facilities (especially hospital-based facilities) to potentially experience greater gaps in reimbursement for certain drugs than others.

Independent facilities could typically acquire the majority of the selected separately billable drugs for less than the Medicare reimbursement. Overall drug costs among chain facilities were somewhat less than those among the nonchain facilities. In contrast, average acquisition costs among the hospital-based dialysis facilities for almost half the drugs under review exceeded the Medicare reimbursement amounts. O'Mara believes that there could be some facilities that may not be able to absorb the costs if a bundled payment is implemented for both drugs and services.

Over time, Medicare's composite rate has not been automatically adjusted for inflation, which means that it covered less of the costs to provide routine dialysis treatment. At the same time, payments for separately billable drugs generally exceed the facilities' costs to obtain the drugs. As a result, some dialysis facilities relied on Medicare's payments for separately billable drugs to subsidize the composite rate payment that remained flat for two decades. Dialysis centers operate on a low margin of profit and cannot afford to lose money. "Unlike the past, we no longer make large profits on medications," O'Mara said.