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. In 2001, about 90 percent of all dialysis patients underwent in-facility  hemodialysis, and less than 1 percent underwent hemodialysis at home. Dialysis Facilities Increased at Same Rate as Beneficiary Population, but Supply Varied Geographically and by Treatment Method

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. 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. Although payments were higher than costs overall, payments to  small facilities were lower than costs. 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. Current Payment Methodology Is Not Appropriate

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. 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. 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. 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. 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. These issues included  whether Medicaid and physician payments are adequate and the Medicare  definition of allowable costs. Appendix I: Scope and Methodology

In conducting this study, we analyzed the Centers for Medicare & Medicaid  Services (CMS) Facility Survey files, Medicare cost reports, and Medicare  outpatient claims. 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 excluded laboratory services  because these are typically billed directly to Medicare by the laboratory,  not by the dialysis facility.
Why GAO Did This Study

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.

What GAO Found

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.