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Update: Medicare Payments for End Stage Renal Disease Drugs


Prior to 2011, Medicare paid dialysis facilities for the treatment of end stage renal disease (ESRD) using a combination of a fixed rate (known as the "composite rate") and separate payment amounts based on average sales prices (ASPs) for certain drugs. As of January 2011, Federal law required CMS to bundle Medicare reimbursement for almost all ESRD treatments-including drugs that were previously billed separately-into one payment rate. By implementing the bundled rate, CMS sought to eliminate incentives to overuse separately billable drugs and to promote equitable payment and access to services in ESRD facilities that treat more costly patients. CMS is required to update this rate annually to reflect changes in the price of goods and services used to provide ESRD care. CMS used the PPI for Prescription Drugs, a price proxy published by the Bureau of Labor Statistics, to update the prescription drugs portion of the base rate for the ESRD payment bundle. However, a 2010 OIG study questioned the accuracy of this price proxy when used to estimate changes in prices for ESRD drugs.


We obtained first-quarter 2012 average acquisition costs for the 11 drugs that were separately billable prior to the implementation of the ESRD payment bundle by surveying 3 large dialysis chains, a random sample of 200 independent (i.e., freestanding) dialysis facilities not affiliated with these chains, and 200 hospital-based dialysis facilities. We compared the average acquisition costs for each facility type to the amounts paid for these drugs under the base rate for the ESRD payment bundle. Using first-quarter 2009 data that we collected for the 2010 OIG report, we determined the extent that facility acquisition costs have changed in relation to the amounts estimated by the PPI for Prescription Drugs. Finally, to compare the prior and current payment methodologies for ESRD drugs, we compared the drugs' ASP based payment amounts in first quarter 2012 to the amounts paid under the ESRD base rate.


In the first quarter of 2012, independent dialysis facilities could purchase ESRD drugs for less than the reimbursement amounts provided by the ESRD base rate (9 percent below, in the aggregate), but average acquisition costs for hospital based dialysis facilities exceeded reimbursement amounts (5 percent above, in the aggregate). In the past 3 years, dialysis facilities' average acquisition costs for the majority of drugs under review have decreased, but average costs for epoetin alfa, a drug that represented more than three-quarters of the drug costs in responding facilities, have increased by at least 17 percent. We also found that although acquisition costs for most drugs decreased, the PPI for Prescription Drugs estimated a 25 percent increase in drug costs-meaning that this proxy was not an accurate predictor of cost changes for most drugs under review. Lastly, we found that if the ASP-based reimbursement had remained in effect for the first quarter of 2012, payment amounts for the bundle of ESRD drugs would have differed by less than a dollar per treatment.


Federal law required CMS to reduce the ESRD payment bundle's base rate for 2014 to reflect changes in utilization and should take into account recent drug sales and pricing data. Our findings show that acquisition costs for most of the drugs under review have decreased, but the costs for drugs that represented the majority of facilities' total drug costs have increased. This means that any savings resulting from a decrease in utilization may potentially be offset by the drugs' cost increase. In addition, although independent dialysis facilities could acquire the majority of ESRD drugs for less than Medicare reimbursement, any reductions to the ESRD base rate could potentially harm hospital-based dialysis facilities because these facilities had difficulty purchasing ESRD drugs for less than reimbursement, in the aggregate.

Therefore, we recommend that CMS rebase (i.e., redetermine the basis of) the ESRD base rate to reflect current trends in drug acquisition costs, as required by law; distinguish payments in the ESRD base rate between independent and hospital-based dialysis facilities; and consider updating the ESRD payment bundle using a factor that takes into account drug acquisition costs. CMS did not explicitly state whether it concurred with our first recommendation, did not concur with our second recommendation, and concurred with our third recommendation.