Epogen is typically administered  to Medicare ESRD patients intravenously. Under this authority, CMS determined  that Medicare would pay for the separately billable ESRD drugs using the  method required by the MMA to pay physicians for these drugs—that is,  106 percent of the drug’s ASP. New Payment Provisions Reduced Subsidy from Separately Billable Drugs but Did Not Eliminate Incentives to Overuse These Drugs

Since 2003, several legislative and regulatory changes have been  implemented affecting Medicare’s composite rate for routine ESRD  services and payment rates for separately billable ESRD drugs. For Epogen, the most  frequently used drug, several months of data indicate that the per-patient  use of this drug continues to rise, although at a slower rate than under pre- MMA payment rates. The base composite rate was increased by 1.6 percent in  2005 and 2006 and the composite rate total was further increased through  a “drug add-on” payment, which shifted some of the payments for  separately billable drugs to the composite rate. The most significant changes to the ESRD payment system are the  changes in payment rates for separately billable drugs. Since 2006, when the payment method for separately billable  drugs changed to ASP + 6 percent, Medicare’s payment rates have varied  from quarter to quarter but have remained relatively consistent with the  lower 2005 payments based on average acquisition costs. The practical aspects of ASP are several: it is based on actual  transactions and is a better proxy for providers’ acquisition costs than  Medicare’s previous methods to pay for these drugs; ASP is the most  recent publicly available price information, as it is updated quarterly, and  is therefore timely for rate-setting purposes; and price data from  manufacturers are administratively easier for CMS to collect than  obtaining such data from health care providers. The ASP payment method is of particular concern with respect to Epogen  because it is the only product available in the ESRD market for anemia  management. The ASP method relies on market forces to achieve a  favorable payment rate for Medicare—that is, one that is sufficient to  maintain beneficiary access but not overly generous for providers and  therefore wasteful for taxpayers. For this reason, Medicare’s ASP method may not be  appropriate for Epogen, which is the product of a single manufacturer has no competitor products in the ESRD market. The lack of price  competition may be financially insignificant for noncompetitive products  that are rarely used, but for Epogen, which is pervasively and frequently  used, the lack of price competition could be having a considerable effect  on Medicare spending. Consistent with  payment policy, the Congress has required CMS to develop a system tha would no longer pay for each injectable ESRD drug under a separate rat but would bundle payment for these drugs together with other ESRD  services under a single rate. A bundled rate would have advantages for  achieving efficiency and greater clinical flexibility. In  creating one payment bundle for a group of associated items and services  provided during an episode of care, Medicare encourages providers to  operate efficiently, as providers retain the difference if Medicare’s  payment exceeds the costs they incur to provide the services. These individuals commented that CMS’s monitoring policy, which currently focuses on overutilization of Epogen,  would need to refocus its attention on underutiliza under a bundled payment system ESRD patients received appropriate  levels of Epogen and other dialysis-related drugs and services. Implementation of Bundled Payment System for ESRD Services Could Be Years Away

The MMA mandated a two-pronged approach for CMS to study the  creation of a bundled payment method. It required CMS to submi to the Congress on a bundled payment system design in October 2005 an start a 3-year bundling demonstration in January 2006. The report had not been issued nor had the  demonstration been launched as of November 2006. mandated report. Officials could not tell us when the report  would be available.
Why GAO Did This Study

Medicare covers dialysis--a process that removes excess fluids and toxins from the bloodstream--for most individuals with end-stage renal disease (ESRD), a condition of permanent kidney failure. The Centers for Medicare & Medicaid Services (CMS) pays for certain dialysis services under a type of bundled rate, called a composite rate, and, for certain dialysis-related drugs, pays a separate rate per dose each time the drug is administered. These drugs are referred to as "separately billable" and are paid at 6 percent above manufacturers' average sales price (ASP). Recently, the Congress required CMS to explore the creation of a bundled payment for all ESRD services, including separately billable drugs. GAO was asked to examine (1) recent changes in payments for ESRD services, (2) the ASP payment method of setting rates for separately billable ESRD drugs, and (3) CMS efforts to develop a bundled payment method that includes all ESRD drugs. GAO obtained information for this study from CMS, the U.S. Renal Data System, ESRD experts, and previously issued GAO reports.

What GAO Found

The effect of several legislative and regulatory changes since 2003 has been to raise the composite rate while reducing Medicare's pre-2005 generous payments for separately billable ESRD drugs. In 2005, when the first legislative change was implemented, Medicare expenditures for certain separately billable drugs dropped 11.8 percent. In 2006, Medicare regulation changed the payment for these drugs to a method based on ASP. Since then, Medicare's payment rates have varied from quarter to quarter but have remained relatively consistent with the lower 2005 payment rates. Medicare's cost containment efforts have targeted the most expensive of the separately billable drugs--Epogen--for which program spending totaled $2 billion in 2005. Epogen is used to treat anemia in ESRD patients; most patients receive this drug at nearly every dialysis session. Recent data indicate that Epogen use per patient continues to rise, although more slowly than in previous years. Several unknowns about the composition of ASP and the lack of empirical evidence for the percentage level added to ASP make it difficult for CMS to determine whether the ASP-based payment rates are no greater than necessary to achieve appropriate beneficiary access. Paying for Epogen under the ASP method is of particular concern. The ASP method relies on market forces to moderate manufacturers' prices; but Epogen is the product of a single manufacturer and has no competitor products in the ESRD market. Without competition, the power of market forces to moderate price is absent. For rarely used products, the lack of price competition may be financially insignificant, but for Epogen, which is pervasively and frequently used, the lack of price competition could be having a considerable effect on Medicare spending. In 2003, the Congress required CMS to issue a report and conduct a demonstration of a system that would bundle payment for ESRD services, including drugs that are currently billed separately, under a single rate. The bundled payment approach, used to pay for most Medicare services, encourages providers to operate efficiently, as they retain the difference if Medicare's payment exceeds the costs they incur to provide the services. GAO and others have found that a bundled rate for all ESRD services would have advantages for achieving efficiency and clinical flexibility in treating ESRD patients. CMS's demonstration testing the feasibility of a bundled rate, mandated to start in January 2006, is delayed, as is the completion of the agency's mandated report to the Congress on bundling. The report was due in October 2005; as of November 2006, CMS officials could not tell us when the report would be available.