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Rate increase expected for drug add-on reimbursement

Dialysis Reimbursement & Quality Advisor Discontinued, October 1, 2005

Experts discuss the benefits, detriments of proposed changes to 2006 physician fee schedule

The Centers for Medicare & Medicaid Services (CMS) caught at least one mistake in its proposed changes to the 2006 physician fee schedule.

In a memo released September 1, CMS corrected its proposed ESRD drug add-on adjustment. The catch amounts to an overall renal drug reimbursement rate increase of 2.6%, from 8.7% to 11.3% in 2006. That's the good news.

However, as of presstime, renal care advocates raced to meet the September 30 deadline to suggest additional changes to the reimbursement rate. Some have difficulties with proposed changes to the wage index used to calculate the composite rate. Others expressed dismay about hospitals' drug reimbursement rates.

Whether industry suggestions become CMS adjustments won't be known until November or December when the agency announces its findings.

"It was obvious to us that [CMS] had made a mistake. We thought it forgot some billing codes," says LeAnne Zumwalt, regarding the correction. Zumwalt is a member of the Renal Leadership Council, a coalition of dialysis agencies and providers, which lobbies government officials in Washington, DC.

Sure enough, CMS says it minimized costs for iron sucrose, sodium ferric gluconate, and calcitriol, according to its September press release.

"After an analysis of the 2003 expenditure data used to assign weights to the top 10 ESRD drugs, we determined that our data did not appropriately account for three J code changes that were implemented in 2003," the release states.

Zumwalt, vice president of investor relations at DaVita, a provider of dialysis services based in El Segundo, CA, says the codes weren't included in the 2003 version of the reimbursement rules because the drugs hadn't been invented yet.

"It's a unique industry," Zumwalt says. "In the '70s and '80s, all we did was take blood out and put it back in . . . But in the 1990s, pharmacies replaced a lot of the [biological functions] of the kidneys [with drugs]. Today, pharmacy expenses represent 37% of the total costs" of dialysis center expenses.

Increasing costs add to providers' fiscal burdens

Section 623 of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA) includes major changes to how dialysis providers get paid for services after January 1, 2005.

ESRD is the only Medicare disease entitlement, according to Mark Feigal, chief operating officer of Healthcare Design Specialists in Longmont, CO. That makes Medicare the biggest buyer of dialysis services and gives the agency ultimate control over reimbursement rules.

Further, dialysis providers haven't received a federally approved reimbursement boost since 2001. In February, CMS published a proposed rule for new Conditions for Coverage. The changes marked the first for dialysis facilities in nearly 20 years.

These changes color the background on which dialysis centers operate and, according to some, make this year's alterations to the physician fee schedule that much more difficult to take.

Jeffery S. Spiers, an administrator with Community Physicians Dialysis Centers of Clark County (OH) Dialysis, says that over the years providers billed Medicare for more EPO, a drug which treats anemia associated with renal failure, than they necessarily needed.

"It was the only way for some [dialysis agencies] to break even," Spiers says.

Feigal says CMS monitors EPO utilization by requiring a hematocrit reading on the dialysis claims. If the hematocrit is over 36%, they require medical justification. If it is over 37.5%, they may choose to do a postpayment audit, during which they will look at a three month rolling average.

In 1996, Medicare reimbursed EPO at $11 per every 1,000 units. CMS later reduced the reimbursement rate to $10 per 1,000 units and at the beginning of 2005 reduced it again to $9.76. Under the proposed Medicare changes, the rate will fall to $9.25.

CMS made the change to try to remove the profit incentive for dialysis providers, says Spiers. Combine those changes with an increase on the price of EPO, and many dialysis providers could be put in the poor house.

"The [CMS] projection of 11.3% [total drug add-on reimbursement] doesn't take into account the fact that drug costs are going to increase," says Zumwalt. "We're lobbying on [Capitol] Hill because the payment doesn't equal the cost."

Average sales price too low for private centers

Although CMS worked with the renal community to fix the error with regard to iron sucrose, sodium ferric gluconate, and calcitriol, some say the agency miscalculated the average sales price (ASP) by depending on statistics from large dialysis providers.

"It's an insane mess," says Rick Collins, chief operating officer for Sceptre Management Solutions, Inc., a dialysis billing firm based in Oklahoma.

Collins says CMS looked at the large dialysis providers to see what they paid for ESRD drugs. They also looked at about 100 smaller dialysis providers, Collins says. Because larger chains have greater buying power, they may pay less for drugs than smaller, standalone dialysis centers. But CMS tried to come up with one price for everyone.

"The result is that the big guys come out a little in front and the little guys come out a little behind," says Collins.

"The small, independently owned facility doesn't have the purchasing power of the larger groups," agrees Feigal.

"What CMS creates is an environment in which only the large providers can survive, and this hurts competition dramatically. Reduced competition means fewer options for dialysis patients," Collins says.

Hospital payments skew drug reimbursement rates

According to Zumwalt, hospitals provide 15% of the total dialysis treatments in the country, roughly 5 million of the 35 million treatments offered annually.

In its September release, CMS also corrected the weight for EPO, which incorrectly included expenditures for hospital-based facilities.

"Since the purpose of the weighting was to allocate the drug spread to all other drugs paid using the proposed ASP-plus-6% pricing, hospital-based data should not have been included because we had proposed to continue paying for other hospital-based facility drugs based on cost," according to the CMS September release.

Zumwalt says CMS knew the hospital margin for EPO as well as the EPO margin for freestanding dialysis facilities. It also considered the profit margin for freestanding facilities in relation to other drugs but did not request profit margins for hospitals in relation to other drugs.

CMS then pooled all the costs together and divided them among hospitals, freestanding dialysis facilities, and outpatient facilities.

But "the pie is not whole," says Zumwalt. "There's a piece missing."

"The drug add-on was meant for independent [dialysis centers]. But CMS interpreted the law to provide a single add-on for everyone," says Kathy Lester, an attorney with Patton Boggs, LLP, in Washington, DC.

Lester, whose firm supports Kidney Care Partners, an alliance of kidney care providers, says interpretation essentially shifts money from the independent firms to the hospital-based dialysis facilities.

CMS did not require hospitals to provide profit estimates, Zumwalt says. Instead, the agency simply applied independent agency profit margins to hospital dialysis centers. That gives hospitals a double boost, she says.

"What we would like to see is the same methodology applied to all dialysis facilities. Pick your method and stick to it," says Zumwalt.

The problem could be resolved one of three ways, she says:

1. Find hospital drug profits and add them to the overall costs for dialysis providers. That way, everyone gets paid the same across settings (e.g., hospitals, freestanding dialysis centers, and outpatient treatment centers).

2. Estimate costs for hospitals and add them to the equation. "It's not the same as having hard data but it could work," Zumwalt says.

3. Complete a separate study of the difference in drug costs across the board.

"There are several ways to attack this problem," she says. "We'd be happy with anything that is fair."

Understanding the dialysis funding balance

To make up for the reduction in drug payments, CMS also revamped the composite rate for dialysis providers.

The composite payment rate, says Feigal, is what dialysis centers are paid from Medicare for routine expenses. Wages, supplies, electricity, and other overhead costs fall into this category.

CMS' goal has been to take away the profitability of pharmacy and supposedly add it back to the treatment side because it is supposed to be budgeting-neutral, says Feigal.

"However, budget-neutral for one provider might be a loss for a smaller independent provider or providers in areas with much higher costs," Feigal says.

To understand the changes, it's necessary to understand the overall shift in ESRD Medicare coverage.

Spiers says adjusting the wage index boosts payments to dialysis centers in high cost-of-living areas, such as New York City. Centers in rural areas, such as his own in Ohio, won't receive the same wage index increase but will still feel the pinch of decreasing drug reimbursements.

"Congress didn't make any more money available," Spiers says. "It's a shell game. There's some logic there initially, but we're just robbing Peter to pay Paul."

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