A new report released yesterday by the Health and Human Services Department’s Inspector General urged Medicare to recalculate dialysis payments “to reflect current trends in drug acquisition costs.” Hospital-based dialysis clinics are being hurt the most, the report said.

The Centers for Medicare and Medicaid Services should revise the base rate and payment bundling for end-stage renal disease drugs, taking into account payment disparities between independent and hospital-based dialysis services, the report said.

Related: MedPAC report recommends no increase in dialysis facility payment

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. This March report is a follow-up to see if the pricing within the payment bundle is accurate.

The IG did the study by looking at first-quarter 2012 average acquisition costs for the 11 drugs that were separately billable prior to the implementation of the ESRD payment bundle. Data was gathered from three large dialysis chains, a random sample of 200 independent (i.e., freestanding) dialysis facilities not affiliated with the chains, and 200 hospital-based dialysis facilities. The IG 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 the IG collected for the 2010 report, investigators determined the extent that facility acquisition costs have changed in relation to the amounts estimated by the PPI for Prescription Drugs. To compare the prior and current payment methodologies for ESRD drugs, the IG compared the drugs’ ASP-based payment amounts in first-quarter 2012 to the amounts paid under the ESRD base rate.

The results, the IG said, indicated that CMS’s current approach to paying for prescription drugs within the bundle––reimbursing at 106% of the manufacturer-reported average sales price, is not an accurate means of calculating price changes over time. Based on data from the first quarter of 2012, the IG said that independent dialysis facilities could purchase ESRD drugs for less than the reimbursement amounts provided by the ESRD base rate (9% below, in the aggregate), but average acquisition costs for hospital-based dialysis facilities exceeded reimbursement amounts (5% above, in the aggregate), the IG said. The discrepancy, the IG said, is that even thought dialysis facilities’ average acquisition costs for the majority of drugs under review have decreased over the past three years, average costs for erythropoiesis-stimulating drugs, like epoetin alfa, which represent more than three-quarters of the drug costs at the surveyed facilities, have increased by at least 17%. “We also found that although acquisition costs for most drugs decreased, the PPI for Prescription Drugs estimated a 25% increase in drug costs—meaning that this proxy was not an accurate predictor of cost changes for most drugs under review.

Separate rates for independent, hospital facilities

To resolve the issue, the IG recommended that CMS rebase (i.e., redetermine the basis of) the ESRD base rate to reflect current trends in drug acquisition costs, and distinguish payments in the ESRD base rate between independent and hospital-based dialysis facilities.

The OIG report is available here.