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PART IV
Reimbursement and Quality

OBRA 1987 asked the Institute of Medicine to examine quality of care in the ESRD program and to determine how quality is affected by reimbursement. In this section, the committee offers its answers to these two questions. Chapter 9 provides background information about current reimbursement policies and the way they developed over the history of the ESRD program. Chapter 10 reviews available data (including a new study commissioned by the committee) that bear on "the effect of reimbursement on quality of treatment." The conclusions drawn from this review have implications for dialysis reimbursement policy. Reimbursement issues are discussed and recommendations are offered in Chapter 11, in the light of the committee's conclusions about the effect of reimbursement on quality.

Chapter 12 reviews the data available to answer the second question in OBRA 1987, i.e., to evaluate "quality of care ... as measured by clinical indications, functional status of patients, and patient satisfaction." Data were found to be limited, because systematic quality assessment and assurance activities have not been implemented in the ESRD program. Therefore, Chapter 12 also discusses methods for assessing and assuring quality and suggests how they can be applied in the ESRD program.



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Kidney Failure and the Federal Government PART IV Reimbursement and Quality OBRA 1987 asked the Institute of Medicine to examine quality of care in the ESRD program and to determine how quality is affected by reimbursement. In this section, the committee offers its answers to these two questions. Chapter 9 provides background information about current reimbursement policies and the way they developed over the history of the ESRD program. Chapter 10 reviews available data (including a new study commissioned by the committee) that bear on "the effect of reimbursement on quality of treatment." The conclusions drawn from this review have implications for dialysis reimbursement policy. Reimbursement issues are discussed and recommendations are offered in Chapter 11, in the light of the committee's conclusions about the effect of reimbursement on quality. Chapter 12 reviews the data available to answer the second question in OBRA 1987, i.e., to evaluate "quality of care ... as measured by clinical indications, functional status of patients, and patient satisfaction." Data were found to be limited, because systematic quality assessment and assurance activities have not been implemented in the ESRD program. Therefore, Chapter 12 also discusses methods for assessing and assuring quality and suggests how they can be applied in the ESRD program.

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Kidney Failure and the Federal Government This page in the original is blank.

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Kidney Failure and the Federal Government 9 Medicare ESRD Payment Policy This chapter describes Medicare payment policy for kidney transplantation and dialysis services for ESRD beneficiaries provided by treatment facilities and physicians. Covered services for kidney transplantation include organ procurement, surgical procedure, postoperative care for three years, and immunosuppressive therapy for one year after transplantation. Dialysis services include both inpatient and outpatient treatment (whether provided in a facility or a patient's home) by either hemodialysis or peritoneal dialysis. The chapter focuses mainly on Medicare outpatient dialysis reimbursement, by far the largest part of ESRD costs, and emphasizes the facility component; inpatient dialysis treatment is addressed only briefly. ESRD patients, as Medicare beneficiaries, are entitled to all Medicare-covered services, not just ESRD-related services. KIDNEY TRANSPLANT SERVICES Medicare's payment policies for kidney transplantation are summarized below, first for the hospital component (organ acquisition and the transplant procedure) and then for the physician component (organ acquisition, the procedure, and posttransplant care). Renal Transplant Center Reimbursement Medicare reimburses the hospital renal transplant center (RTC) separately for kidney acquisition and the surgical procedure. Kidney acquisition costs include the surgical removal of organs from donors, living as well as cadaver; the transportation, preservation, and tissue typing of recovered organs; pretransplant costs incurred by donors, potential recipients, and re-

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Kidney Failure and the Federal Government cipients, including listing potential recipients on a registry (waiting list) and laboratory testing for compatibility between donor kidney and potential recipient; and public and professional education. Medicare pays an RTC 100 percent of kidney acquisition costs on a reasonable-cost basis. The center, in turn, pays the other organizations involved in the acquisition process—organ procurement organizations (OPOs), donor hospitals, and independent laboratories.1 At the end of the RTC hospital's fiscal year, any necessary adjustments are made on the basis of a comparison of charges with actual costs. Payment for the transplant procedure itself is made under Diagnostic-Related Group (DRG) 302, kidney transplant surgery. This includes the surgical procedure and in-hospital preoperative care but not long-term follow-up. For hospitals reimbursed under the Prospective Payment System (PPS), the average charge for DRG 302 in FY 1988 was $38,700, with an average length of stay of 18 days (Jolene Hall, Prospective Payment Assessment Commission, personal communication, 1990). In 1983, when the Medicare PPS for hospital inpatient services was established, HCFA considered including kidney acquisition services in DRG 302. The unique characteristics of organ procurement activities and the desirability of maintaining an adequate supply of kidneys, however, led HCFA to retain reimbursement for kidney acquisition on a reasonable-cost basis separate from the DRG. In 1987, the DHHS Office of Inspector General recommended including organ acquisition costs under DRG 302 (OIG, 1987). HCFA agreed in principle but expressed concern about the potential negative effect of such action on organ supply. The OIG, in a 1988 follow-up report, acknowledged the merit of this view but called for a demonstration project of organ acquisition under a DRG as a way to generate data on this issue (OIG, 1988). Physician and Medication Reimbursement Physicians are reimbursed separately for organ retrieval, transplantation-procedure-related charges, and follow-up care. In the case of retrieval of a cadaver organ, an allowance for physician payment is included in the overall Medicare payment to the RTC for acquisition, and the center pays the physician. A physician who retrieves a living-donor kidney, however, is reimbursed directly for 100 percent of the reasonable charge up to a limit of $1,250. The donor bears no out-of-pocket expense. Procedure-related services for which physicians are reimbursed include the transplant operation, all preoperative care, and 60 days of postsurgery care, including management of immunosuppression. Physician payment for the kidney transplant procedure is based on the lesser of a maximum allowance or the amount allowed on a reasonable-charge basis. The process for updating

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Kidney Failure and the Federal Government the fee for transplant services also differs slightly from that applied to other physicians' charges.2 The physician is reimbursed separately for the removal of a recipient's own nonfunctioning kidney(s) when that is required. Immunosuppressive drugs administered on an outpatient basis to transplant patients are reimbursed for the first year after a transplant. Subsequently, patients pay either on an out-of-pocket basis or through their supplemental insurance. (But see the committee's recommendation in Chapter 8.) OUTPATIENT DIALYSIS SERVICES Medicare's payment policy is described for outpatient dialysis services, for both facility and physician reimbursement. Facility Reimbursement Outpatient dialysis facility reimbursement is often compared to the PPS and thus it is useful to note some similarities and important differences between the two (Table 9-1). Under the PPS and ESRD program, both the DRG payments and the dialysis Composite Rates are established prospectively. The PPS is based on a patient classification system (DRGs) which establishes per-case fixed prices for services delivered to hospitalized Medicare beneficiaries for a given diagnosis (or set of related diagnoses). The ESRD Composite Rate, on the other hand, has no patient classification system but assumes that dialysis patients are homogeneous for payment purposes and pays at a fixed per treatment rate for one service, outpatient dialysis. The Composite Rate is similar to a single DRG system. Both systems were originally based on cost reports, neither has been rebased, and only the PPS provides for an annual update of payment rates. For hospitals, Medicare payments, on average, account for approximately 35 percent of inpatient revenues. For most dialysis facilities, however, Medicare is the dominant payer. Although national data are not available, various sources indicate that Medicare accounts for between 60 and 85 percent of independent dialysis facilities' revenues (Community Psychiatric Centers, 1989; REN Corporation-USA, 1989). Payments from non-Medicare sources result, first, from Medicare beneficiary liabilities for medical deductibles and copayments and, second, from the Medicare-as-secondary-payer (MSP) requirements of OBRA 1981 and OBRA 1990 (see Chapter 7), and are made by private health insurance, state Medicaid programs, state kidney programs, and out-of-pocket payments by beneficiaries. Historical Overview Medicare's payment policy for outpatient dialysis services from 1973 to 1983 reimbursed independent renal facilities on a reasonable-charge basis

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Kidney Failure and the Federal Government TABLE 9-1 Comparison of the Inpatient Hospital Prospective Payment System (PPS) and ESRD Outpatient Dialysis Payment Policy Features Prospective Payment System Hospital Inpatient Reimbursement End-Stage Renal Disease Facility Outpatient Reimbursement Design Prospectively set national rate Per-discharge (case) basis Prospectively set national rate Per-treatment basis Payment components Standardized amount DRG weights Composite rate No patient classification system Original cost basis 1981 Cost reports 1977, 1978, 1979 Cost reports Rebasing No No Updating Yearly update for change in market basket, discretionary adjustment factor, case-mix change No update process Payment adjustments Differential standardized amounts Dual rates for hospital-based and independent units   Area wage index Indirect teaching Medicare case mix Disproportionate share Area wage index Exceptions criteria Rural referral centers Sole community hospitals Atypical service intensity Extraordinary circumstances Isolated essential facilities Self-dialysis training costs Frequency of dialysis education costs Exemptions Hospitals and distinct-part units providing psychiatric, pediatric, rehabilitation, and other long-term services Capital costs Organ acquisition Certified registered nurse anesthetists None

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Kidney Failure and the Federal Government and hospital-based facilities on a reasonable-cost basis for both in-center and home dialysis services (Table 9-2). Under the Interim Regulations, effective July 1, 1973, reimbursement for independent as well as hospital units was limited by a screen of $138 per treatment that acted essentially as a payment ceiling (38 Fed. Reg. 17210, June 19, 1973). This screen remained in effect for 11 years (from July 1, 1973, through July 31, 1983). Home dialysis was paid for separately, and facilities managing home patients were reimbursed on a reasonable-cost basis. Because independent units were paid the lesser of the screen or reasonable charges and only four units submitted charges less than the screen, most units were paid at the same nominal $138-per-treatment rate.3 Hospital-based outpatient units were paid the lesser of the screen or reasonable costs. An exceptions process, however, allowed providers to obtain payment amounts in excess of the screen on the basis of actual costs. Although fewer than 10 independent units were granted exceptions, many hospital units received them during this period (48 Fed. Reg. 21255, May 11, 1983). According to HCFA, the large number of exceptions granted to hospital-based units resulted in an average payment per treatment of $159 before 1982. Congressional hearings on the ESRD program were held in 1976, 1977, and 1978, prompted by the rapid growth of ESRD program expenditures and a concurrent decline in the proportion of patients treated by home dialysis (Rettig, 1980). On June 13, 1978, Pub. L. No. 95-292, amending the Social Security Act, was enacted with the central purpose to encourage home dialysis and transplantation. A major provision in the law, related to outpatient dialysis facility services, called for the Secretary to establish, on a "cost-related or other economical and equitable basis," a prospective reimbursement rate for providers of dialysis services. Even though regulations were issued for various provisions of the law from 1978 onward, HCFA did not issue a Notice of Proposed Rulemaking related to outpatient dialysis facility reimbursement until 1980. These proposed rules, however, were rejected by the incoming Reagan administration in 1981. Congress, in Section 2145 of OBRA 1981 (Pub. L. No. 97-35, August 13, 1981), again directed the Secretary to establish a prospective reimbursement system for outpatient dialysis. The 1981 legislation, however, called for a single composite weighted formula for hospital-based facilities that included home and center patients, and a similar rate for independent facilities. The implementation of this dialysis-specific prospective rate was proposed by HCFA in a Notice of Proposed Rulemaking in 1982 (47 Fed. Reg. 6556, February 12, 1982). A final rule in May 1983, effective August 1, 1983 (48 Fed. Reg. 21254, May 11, 1983), established the composite rate. Separate rates were thus established for hospital-based and independent outpatient dialysis facilities. Payments for home dialysis and for center

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Kidney Failure and the Federal Government TABLE 9-2 Medicare Payment for Facility Outpatient Dialysis Services   Before 1983 1983–86 1986 to Present Type of payment Hospital-based Lesser of reasonable costs or screen Composite rate Composite rate Independent Lesser of reasonable charge or screen Composite rate Composite rate Payment ceiling (screen)a       Hospital-based $138 $138 $138 Independent $138 $138 $138 Base rate       Hospital-based None $127 $125 Independent None $123 $121 Average rateb       Hospital-based $159 $131 $129 Independent $138 $127 $125 Home dialysis Reasonable-cost basis Same rate as in-center dialysis Same rate as in-center dialysis Training   $20 for each self-dialysis and home dialysis training session, up to three times per week; $12 for each continuous ambulatory peritoneal dialysis training session per day, up to a maximum of 15 sessions Erythropoietin (EPO)c     $40 per EPO treatment for any dose up to 9,999 units; an additional $30 for a dose of 10,000 units or more when administered to patient in renal dialysis facilities a Under the Initial Method of reimbursement, $12 was included for physician activities, resulting in a screen of $150. If the Alternate Reimbursement Method was selected, the screen was $138. Under either method, $5 of the screen accounted for laboratory testing. b With wage index adjustment. c Effective date of June 1, 1989.

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Kidney Failure and the Federal Government dialysis patients were each consolidated into a single base composite rate, with the average composite rate being $131 and $127 per treatment, respectively4 (Table 9-2). A geographic wage rate adjustment was then applied to the labor portion of the base composite rate to derive a specific composite rate for each facility. These average composite rates were down from the pre-August 1983 average rate of $159 for hospital-based units and $138 for independent units. After issuing the 1983 rule, HCFA also established more specific exceptions criteria and a more rigorous exceptions process with the intent of granting fewer exceptions than under earlier procedures. In 1986, HCFA proposed to reduce the base composite rate on average by $6 per treatment (51 Fed. Reg. 17537, May 13, 1986). Simultaneously, it proposed to change the methodology for calculating the base rate from weighting the facility median cost per treatment by the number of facilities in each stratum (a statistical grouping of facilities that HCFA based on the number of dialysis stations in each facility) to weighting by the number of treatments in each stratum. HCFA stated that this change in methodology was supported by data that showed that 80 percent of all treatments were furnished by less than 50 percent of all renal facilities. HCFA had used this methodology when it audited a sample of facility cost reports in 1983, and the analysis showed that the Medicare costs of all renal facilities had decreased, partly because of the change in payment methodology. According to HCFA, audited data for 1986 continued to show that the Medicare costs of a dialysis treatment had not increased. Congress, responding to this HCFA proposal in OBRA 1986, limited the reduction to $2 per treatment and froze the new rate for two fiscal years through September 30, 1988. The base composite rates were then reduced by HCFA from $127 to $125 for hospital-based facilities and from $123 to $121 for independent units, effective October 1, 1986 (Table 9-1). The basis for calculating the cost per treatment, however, reverted to the initial methodology used in 1983, i.e., weighting the facility median cost by the number of facilities in each stratum. OBRA 1986 also authorized financing of the ESRD networks by a $0.50 per treatment reduction of the facility payment. The profile of the reimbursement rate for outpatient dialysis from 1974 through 1989 is shown in Figure 9-1 for independent units only. The rate for hospital-based outpatient units would have been higher for the period from the beginning of the program in 1973 until the introduction of the composite rate in 1983; thereafter, the rates would have been similar. The figure indicates the nominal rates and the effect of adjusting for inflation by the GNP price deflator. On an adjusted basis, the 1989 average composite rate for independent units was less than $54 in 1974 dollars, a 61 percent reduction over this period.

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Kidney Failure and the Federal Government FIGURE 9-1 Outpatient Dialysis Reimbursement Rates for Independent Units, 1973–89 (current and constant dollars) NOTES: GNP deflator used to calculate constant dollars. The same nominal rate applied to all independent units for 1973–83; after 1984, the rate is the average for all independent units. SOURCE: HCFA Current Policy Current payment policy, then, includes the following elements. First, the cost base for the current composite rates remains the audited 1977–79 Medicare cost reports for a sample of 105 hospital-based and independent facilities. Second, as has been true for the entire history of the ESRD program, no process exists to update the rates annually for inflation or other factors that influence costs. Changes in payment rates are proposed only when HCFA determines that cost report data justify rate revision. There is no adjustment for inflation. The only adjustment made to the base composite rate is the area wage index, applied annually to account for geographic differences in wages and salaries. Third, the current rates are based on the facility median cost per treatment weighted by the number of facilities in each stratum, rather than weighted by the number of treatments in each stratum (as proposed in 1986). Fourth, until OBRA 1990 was enacted, the existing base composite rates, for both hospital-based and independent facilities, and including both center and home patients, were those established in 1983, as reduced by $2 in

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Kidney Failure and the Federal Government 1986. In OBRA 1989, a sequester provision further reduced the composite rates by 2 percent from October 1, 1989, until March 30, 1990, and by 1.5 percent from April 1 to September 30, 1990. OBRA 1990 continued the sequester reduction through December 31, 1990; effective January 1, 1991, the application of the sequester was removed, and the composite rates were increased by $1 per treatment. Fifth, the dual rate structure, required by statute, is reflected in base composite rates of $125 for hospital-based units and $121 for independent facilities (Table 9-2). The specific difference in rates, however, derives from a policy decision, not from a detailed analysis of the relative costs of treatment by type of facility. Sixth, facility-specific composite rates are determined by applying the area wage index to the labor portion of the base composite rate, an adjustment performed annually.5 Facility-specific rates are limited to a maximum of $138 per treatment, unless an exception has been obtained, and a minimum wage index of 0.9 times the labor portion of the base rate or $116 for independent units and $120 for hospital-based renal facilities. The upper limit was to prevent any excessive payment levels due to possible deficiencies in the area wage index. The lower limit on the wage index was to alleviate any adverse effect on rural facilities. Seventh, facilities receive an additional $20 per treatment above the composite rate for self-care and home hemodialysis training. Training is limited to three sessions per week for as many sessions as needed. Facilities receive an additional $12 per treatment for each CAPD training session; these sessions are limited to one per day up to a maximum of 15 sessions. These policies are currently under review by HCFA. An exceptions policy exists by which a facility may request a higher payment on the basis that its allowed costs exceed the composite rate.6 One or more of the following criteria are used by HCFA to determine whether a facility's costs per treatment justify an exception: atypical service intensity (service mix), extraordinary circumstances, isolated essential facilities, self-dialysis training costs, and frequency of dialysis.7 These criteria actually constitute a set of crude case-mix adjusters. If a facility is granted an exception based on one or more of the criteria, the composite rate for that facility is then increased. In some cases, the increased rate only applies to certain dialysis patients, such as pediatric patients or those requiring self-dialysis training. In other cases, such as isolated essential facilities, atypical service intensity, and extraordinary circumstances, the increased rate applies to all dialysis treatments performed at that facility. According to HCFA, the approval rate for exceptions is 75 percent. No specified methodology or formula is used to calculate an exceptions adjustment to the rate. The amounts of exception increases appear somewhat arbitrary and do not derive from the criteria on which the exception was

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Kidney Failure and the Federal Government Faced with this cost differential, an aggressive marketing campaign by HIC, and the prospect that others would follow suit, Congress, in OBRA 1989, limited the payment for home dialysis equipment and supplies under Method II to that authorized under the composite rate (Method I). This policy reduces the incentive for an organization to establish a supply company for the purpose of receiving payment under Method II. Independently, OBRA 1989 capped payment for continuous cycling peritoneal dialysis (CCPD) provided under Method II at 130 percent of the composite rate.9 HIC, in December 1989, announced that it would cease to provide staff-assisted home dialysis as of February 1, 1990. Consequently, during much of 1990, HCFA, the ESRD networks, national organizations of physicians, nurses, and administrators, and individual providers sought to identify HIC patients and transfer them to the care of another provider. In addition, GAO (1990) examined various options to providing home dialysis aides. In the process, it became clear that some patients were ''hardship'' cases, variously described as confined to a bed or wheelchair, unable to transfer without help, lacking transportation to a dialysis unit, or having a medical condition that made such travel risky. Several legislative proposals resulted in OBRA 1990 (Section 4202) authorizing a 3-year demonstration of the cost-effectiveness and safety of staff-assisted home dialysis. Special Provisions for Recombinant Human Erythropoietin (EPO) EPO is the first recombinant DNA biological to be introduced into the treatment of dialysis patients. It was approved by FDA in June 1989 for use in the treatment of anemia, which affects most dialysis patients (FDA, 1989). Effective June 1, 1989, Medicare covered EPO administered in renal dialysis facilities (HCFA, 1989). HCFA set an interim reimbursement rate that would pay dialysis facilities $40 per EPO treatment for any dose up to 9,999 units and an additional $30 for any dose of 10,000 units or more. The payment for EPO was not incorporated into the composite rate because not all patients were expected to receive it, nor were all those receiving it expected to have the same prescribed dose. Only the product cost is recognized for EPO administered in dialysis facilities. Any additional staff time, supplies, and laboratory services required in the administration of EPO are currently absorbed by facilities in the composite rate payment. Estimates of these additional administrative costs vary. In November 1989, HCFA extended Medicare coverage to include EPO administered in a physician's office with reimbursement on a dose-related, reasonable-charge basis. The physician can also bill Medicare for any additional supplies, such as needles and syringes, used in the administration of the biological. In some cases, staff time for administering the biological can

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Kidney Failure and the Federal Government also be reimbursed. Home dialysis patients wishing to administer EPO themselves were not covered in 1989 and 1990 because of the statutory prohibition against Medicare coverage of self-administered drugs. Two reports preceded congressional action in 1990. An OTA report (1990) dealt with EPO payment issues. Second, a report by the DHHS Office of Inspector General (OIG, 1990) argued that the reimbursement arrangement permitted facilities to be paid $40 per dose, but to administer dosages lower than the amount of EPO purchased for this amount and to make money in the process. Congress, in OBRA 1990, Section 4201(c), however, made two important changes in EPO policy. First, it authorized self-administration of EPO by home patients without medical supervision, effective July 1, 1991. Second, it changed the basis for payment to $11 per 1,000 units, effective January 1, 1991, with the payment to be adjusted annually by the implicit price deflator of the gross national product.10 Physician Reimbursement Under the original 1973 Interim Regulations, Medicare included the physician payment within the payment to the treatment facility. Under this arrangement, Medicare allowed $12 per dialysis session for the physician's supervisory care, although this amount could be negotiated between the physician and the unit. Physicians were paid on a fee-for-service basis for all care provided for home dialysis patients. They could also bill Medicare on a reasonable-charge basis for other nonsupervisory outpatient care and for all inpatient care provided to hospitalized patients.11 The initial method, as it was known, generated substantial protest from physicians who objected to being paid as salaried employees of treatment units. Since no per-dialysis fee was acceptable to Medicare, an alternative concept of a global fee, to be paid monthly, was proposed by the nephrologists and accepted by Medicare, pending concurrence by the American Medical Association (AMA). The AMA, although reluctant to accept any capitation of physician services, was persuaded that physician services for outpatient dialysis were similar to a standard obstetrical fee or a fee for elective services where a set of predictable services needed for a particular condition was covered by a single charge. Given AMA assent, Medicare then introduced a direct physician payment option, the Alternative Reimbursement Method (ARM), in July 1974 (SSA, 1974). Under the ARM, renal physicians were given a monthly capitation payment for all routine outpatient dialysis care provided to ESRD beneficiaries. The monthly charge was based on a multiple of a brief office visit that assumed 20 visits for center dialysis patients and 14 for home patients. The lower amount for home patients reflected Medicare's judgment that these

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Kidney Failure and the Federal Government patients were seen less often than center patients. The ARM payment amounts varied geographically. By 1981, approximately 75 percent of all dialysis services billed by physicians were reimbursed under the ARM. Physicians assumed that the charge would be adjusted in a manner consistent with standard Medicare practice for allowable charges. The office visit code was adjusted infrequently, however; the ARM itself was modestly increased only once, in 1978. In August 1983, regulations established a monthly capitation payment (MCP) system (48 Fed. Reg. 21254, May 11, 1983), which eliminated the initial method and replaced the ARM. The MCP system, like the ARM, pays physicians a single predetermined amount per patient per month for the outpatient dialysis services. Unlike the ARM, a physician now receives the same amount for home patients as for facility patients. The average MCP rate for physician outpatient services was initially $184.60, with minimum and maximum limits of $144 to $220 per month. In August 1986, the MCP was reduced by more than $10, resulting in an average current rate of $173.07 per patient per month with upper and lower payment limits of $132 and $203 per month. HCFA reduced the MCP because it concluded that the amount of time necessary to treat home patients was less than that required for in-center patients (51 Fed. Reg. 9530, March 19, 1986). The initial rate-setting payment calculation used prevailing-charge rates for visit services: a brief follow-up visit for an established patient (90040) as the unit of service multiplied to produce a rate. Visit service codes do not represent uniform or explicit services, practices vary widely, and intermediaries' rates vary correspondingly. Payment rates have been established, therefore, that differ across geographic regions. This variability also applies to the MCP payment formula: Each locality has a different MCP rate simply because payment for the brief visit varies under the reasonable-charge system of reimbursement. The MCP floor of $132 and cap of $203, however, restrict payment variation across the country. The MCP was assumed by many nephrologists and by Medicare to cover the dialysis prescription, supervision of dialysis care, review and modification of the prescription, plus internist services for which another specialist was not required. The nephrologist was paid as the primary-care physician for the dialysis patient. The explicit reductions in the physician's monthly rate and the absence of adjustment for inflation, when coupled with the increasing age and complexity of the patient population, have raised concerns about the effects of physician payment on patient care. The IOM staff analyzed HCFA BMAD data for 1987 for allowed charges to physicians and nonphysicians (ambulance services, medical suppliers, independent laboratories, and others). These charges totaled $866.1 million in 1987 and represent 3 percent of all Medicare Part B charges of $28.9

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Kidney Failure and the Federal Government billion for that year; they do not include Part B charges (or payments) to facilities for outpatient dialysis. Of the total, physician charges for ESRD beneficiaries accounted for 76 percent (or $659 million) broken down as follows: internal medicine and nephrology, 35 percent; general surgery, thoracic surgery, and anesthesia, 16 percent; and other medical specialties, 24 percent. The allocation of charges between dialysis and transplant patients and between renal and nonrenal purposes is not known. Internal medicine and nephrology are grouped together as a conservative way to estimate care provided by nephrologists. The surgical category would include charges for fistula operations (for dialysis patients), transplant procedures, as well as other nonrenal surgical procedures (for dialysis as well as transplant patients). Although further analysis is needed, especially of changes over time, the data indicate that a significant amount of care of ESRD beneficiaries is provided by nonnephrologists. This pattern may be appropriate or it may reflect referral by nephrologists of ESRD patients to other specialists for care that they might have personally provided in the past. These developments appear to challenge the role of the nephrologist as primary physician for the dialysis patient and may disrupt the continuity of care received by the dialysis patient. The committee did not examine this issue to any extent but believes that it deserves further consideration in the context of a quality assurance system oriented to patient outcomes and guided by information about patient complexity. In OBRA 1989, Congress enacted comprehensive physician payment reform for all of Medicare, which called for a Medicare Fee Schedule (MFS) based on a resource-based relative-value scale. All Medicare-covered services paid on the basis of reasonable charges will be affected by this fee schedule, which is to be implemented effective October 1, 1991. In 1990, HCFA announced that the MCP for dialysis physician services would not be included under the MFS. HCFA's rationale is twofold: First, from a legal standpoint, it believes that the MCP is exempt from the fee schedule because the physician payment reform act language deals with reasonable charges and the MCP does not fall under the reasonable-charge provision.12 Second, from a practical standpoint, the MCP is set by HCFA and not calculated by carriers on the basis of reasonable charges. The 1974 visit code used as the basis for the MCP in 1983 has effectively dictated payment, although that was not intended originally. Since the MCP is not included in the fee schedule, it is unclear how or when HCFA will update the MCP. Several possible modifications to current policy exist: The current formula could be retained, using visit codes as proxies, and payments would be derived from the relative values for these visit codes under the fee schedule;

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Kidney Failure and the Federal Government The current formula could be revised, using different services for proxies of physician's outpatient dialysis services; or The current formula could be retained and the MCP simply updated by some process. INPATIENT DIALYSIS SERVICES This section briefly describes current Medicare policy for payment for inpatient dialysis treatment to the hospital and the physician. Hospital Reimbursement By way of background, data on ESRD program expenditures indicate that inpatient spending has grown more rapidly than outpatient spending in recent years (Table 9-3). Before 1980, payments for inpatient hospital stays consistently ranged between 25 and 28 percent of all ESRD program payments, and outpatient payments constantly claimed over 55 percent. Since the early 1980s, however, inpatient spending has claimed a larger share of program expenditures. By 1988, for example, payments for ESRD hospital stays accounted for 36 percent of Medicare ESRD payments, whereas outpatient expenditures had fallen to 40 percent of the total. Regrettably, the literature on hospitalization of ESRD patients is very sparse. Dialysis patients are hospitalized for several purposes—initial stabilization, subsequent renal-related problems, but usually for nonrenal problems requiring inpatient care. In general, dialysis patients are not admitted as inpatients for renal purposes, but for the primary diagnosis leading to renal failure in the case of initial stabilization, or for the precipitating diagnosis in subsequent admissions. ESRD patients are chronically ill people who have a greater number of comorbid conditions (not unique to them) than non-ESRD patients. However, they are more vulnerable to these conditions because of their underlying renal failure.13 The hospitalization of ESRD patients under the PPS system has not been analyzed to any extent. For example, DRG 316 (renal failure without dialysis) is used for both acute renal failure and ESRD patients, although the distribution is not known. According to Medpar file data from the Prospective Payment Assessment Commission (personal communication from Jolene Hall, July 1990), there were 39,500 admissions under this DRG in 1988, the average hospital charge was $7,100, and the average length of stay was 9.35 days. However, a study of hospitalization episodes in (old) ESRD Network 8 (Nebraska and Iowa), which occurred between July 1 and December 31, 1983, showed that 7.6 percent of admissions were coded DRG 316 (Cobe Laboratories, n.d.). Similarly, in 1988, 6.9 percent of the inpatients with dialysis treatments at the Henry Ford Health Care Corporation were classi-

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Kidney Failure and the Federal Government TABLE 9-3 Medicare ESRD Benefit Payments, by Type of Service, 1974–87 (in millions of dollars and as percent of total)     Inpatient Payments Outpatient Payments Year Total ESRD Payments $ Millions % Annual Increase % Total ESRD $ Millions % Annual Increase % Total ESRD 1974 229 65 — 28.4 136 — 59.4 1975 361 99 52 27.4 205 51 56.8 1976 512 136 37 26.6 290 41 56.6 1977 641 164 21 25.6 368 27 57.4 1978 800 209 27 26.1 453 23 56.6 1979 1,011 268 28 26.5 558 23 55.2 1980 1,253 345 29 27.5 666 19 49.6 1981 1,477 436 26 29.5 733 10 49.6 1982 1,662 520 19 31.3 782 7 47.1 1983 1,898 625 20 32.9 855 9 45.0 1984 2,003 732 17 36.5 867 1 43.3 1985 2,128 822 12 38.6 830 -4 39.0 1986a 2,423 904 10 37.3 980 18 40.4 1987a 2,702 973 8 36.0 1,095 12 40.5 1988a 3,011 1,084 11 36.0 1,213 11 40.3 NOTE: These figures may underestimate the actual benefit payments; see note 10. a Data are incomplete because of outstanding bills. SOURCE: HCFA, ESRD Quarterly Statistical Summary.

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Kidney Failure and the Federal Government fied as DRG 316 (David F. Shepherd, Greenfield Health Systems Corporation, personal communication, December 1990). DRG 317 (renal failure with dialysis) is practically never used; there were 1,550 discharges from PPS hospitals in 1988, with an average hospital charge of $2,675 and an average length of stay of 3.4 days. This DRG accounted for a single case at Henry Ford in that year. Jencks and Kay (1987) examined the relationship between total Medicare charges per hospitalization and eight beneficiary characteristics to determine whether DRG-based payment resulted in misclassification of certain classes of patients. One of eight patient characteristics they used was younger ESRD beneficiaries who were less than 65 years of age when discharged. These patients accounted for 0.97 percent of discharges in the study sample (5 percent of all discharges in 1983). Their charges were 5.1 percent higher than those for other beneficiaries. Discharges were concentrated in a few DRGS: 65 percent of younger patients with ESRD fell in the 20 most frequent DRGs; no other beneficiary characteristic (nursing home residents, prior hospitalization, the poor, those over 79 years of age, those over 84 years of age; the disabled less than 65 years of age, and older disabled patients) had more than 55 percent and most had less than half in these 20 DRGs. The main purpose of this exploratory study was to examine the relationship of severity of illness to hospitalization costs, and the potential for discrimination against severely ill patients. They found, overall, that the effect was more subtle than expected. Trude and Carter (1989) examined PPS data to determine the likelihood that patients with certain characteristics would become DRG outliers, defined as those DRG cases falling in the 5 percent of the longest stay and the 5 percent of the largest losses. They note a previous study by Guterman (1986) that found that ESRD patients were more likely to become length-of-stay outliers and cost outliers, and had higher average costs and charges. Trude and Carter found that ESRD patients not coded into DRGs 302–333 (the major diagnostic categories for kidney diseases) were a greater risk of becoming the most costly 5 percent of cases for hospitals compared to all hospitalized non-ESRD patients and to those ESRD patients assigned to DRGs 302–333. These few studies serve to indicate how little is known about the hospitalization of ESRD patients. A careful analysis of the experience of such patients under the DRG system deserves further attention.14 The questions that might be addressed include the following: For what medical and surgical conditions are ESRD patients most frequently hospitalized? How likely are such cases to become outliers (length-of-stay and cost)? What is the distribution of hospitalized ESRD patients within a given DRG among all outliers (days and cost), the 5 percent outlier tail, and the non-outliers? What change is occurring over time?

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Kidney Failure and the Federal Government Physician Reimbursement In 1973, physicians could bill Medicare on a reasonable-charge basis for all inpatient care of ESRD dialysis patients. With the introduction of the ARM in 1974, renal physicians were given the option of continuing to receive the monthly capitation payment during a patient's hospitalization or billing separately for each service on a reasonable-charge basis. Physicians selecting the latter option had their ARM payment (and later their MCP payment) for outpatient dialysis services reduced by one-thirtieth for each day a patient was hospitalized.15 The difference in payment between the outpatient dialysis MCP and the reasonable-charge basis for inpatient care varies with the services provided to the patient. HCFA data indicate that payments on a reasonable-charge basis are dramatically higher. Payment under the inpatient dialysis codes fall between $50 and $500 per treatment depending upon the level of the code and the area of the country. Separate charges are billed for seeing patients on non-dialysis days. The average MCP payment for inpatient care, on the other hand, is $55 for an average stay of 9 days, based on a daily reduction of the average MCP of $5.77 (one-thirtieth of $173.07). HCFA believes that the majority of physicians bill on the reasonable-charge basis for inpatient dialysis visits. Before April 1989, physicians billed for inpatient dialysis services using 18 special CPT-4 codes, which were related to the severity of the patient's condition (acute, chronic, stable, or unstable) rather than a definition of the service. It is unclear whether these codes, established by carriers after consultation with renal physicians in their areas, accorded with HCFA policy. One GAO report (1985) found that almost all of the dialysis visits were billed and paid as acute (highest) or chronic-level (lowest) visits. Furthermore, some carriers were claims based on an hourly rate for inpatient physician services provided during dialysis treatment. This coding methodology differed significantly from how Medicare determined payments for other hospital visits. Procedure codes generally used by Medicare for surgical procedures or office and hospital visits describe the service provided unrelated to severity. According to the 1985 GAO report, the severity coding used by renal physicians for dialysis hospital visits resulted in average daily Medicare amounts that were nearly twice the average allowed other specialists for non-ESRD hospital visits. This was followed in several areas by paying only a visit charge and denying dialysis as a physician procedure. In April 1989, after prolonged negotiations with the Renal Physicians Association which insisted that dialysis is a procedure directed and supervised by a nephrologist, HCFA instructed carriers to accept dialysis as a procedure with four new CPT codes. These codes reflect one visit during dialysis or more than one visit as markers of service levels for hemodialysis. The rates for the

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Kidney Failure and the Federal Government new codes were derived from prior dialysis procedure rates. All other visits to the dialysis patient on non-dialysis days were handled as standard inpatient visits. These charges vary among localities and are updated similar to other physician procedures, based on more recent fee screens. According to HCFA, the new codes reduce or have no effect on the level of payment. NOTES 1.   Independent OPOs establish a standard rate annually with Aetna, the single intermediary for IOPOs. They bill the RTC at this rate. The IOPO is then paid by the RTC out of its Medicare acquisition payment. Hospital OPOs are generally associated with a single hospital RTC and submit claims to the intermediary serving the parent hospital. 2.   Under the customary-, prevailing-, reasonable-charge system, the prevailing charge is adjusted by the Medicare Economic Index (MEI) when the MEI is less than the increase in the prevailing charge for that procedure for a carrier. In the case of kidney transplants, the prevailing charge is updated by the lesser of the MEI or the percentage change from one year to the succeeding year in the weighted average of the carrier's prevailing charge for a unilateral nephrectomy. This exception to Medicare policy for setting charges was established in 1973 because no historical charge data on kidney transplantation were available. This policy could be reviewed since such data now exist. It is unclear, however, whether current policy restrains the increase in the prevailing charge more than if the increase were based on the carrier's prevailing-charge data for kidney transplants. Furthermore, since policy is the lesser of the MEI or the percentage change in carrier's prevailing charges, the MEI may be the increase factor regardless of which prevailing-charge data are used (either unilateral nephrectomy or kidney transplant). 3.   Medicare reimbursed 80 percent of the $138; the beneficiary's share was 20 percent of the $138, or approximately $28. 4.   The HCFA justification for the different rates was that services were essentially the same, but that hospital units had higher overhead costs. HCFA found no basis for accepting the arguments that patient complexity or case mix differed in a discernible way, and chose instead to rely on exceptions requests to deal with such alleged differences. Different percentages were recognized in the composite rates for home dialysis patients: 23.5 percent for hospital-based facilities and 10.5 percent for independent units. 5.   Effective October 1, 1986, the wage index consisted of a blend of 80 percent of the Bureau of Labor Statistics (BLS) wage index and 20 percent of the HCFA gross hospital wage index for the Metropolitan Statistical Areas (as designated by the Office of Management and Budget). The wage index revised for October 1, 1987, reflects a 60/40 BLS/HCFA split. The index has not been revised since 1987. 6.   The exceptions review process generally coincides with payment policy changes and is typically open for a 180-day period. The last open period began December 1, 1989, and closed May 29, 1990. 7.   Education costs were once used as an exceptions process criterion but no longer apply. 8.   National Kidney Patients Ass'n v. Otis R. Bowen, Civil Action No. 88-3251 (D.D.C. December 22, 1988). 9.   Under Method II, the cap for CCPD is 130 percent of the Method I rate. Therefore, some incentive for a facility to establish a supply company in order to bill under Method II continues to exist. 10.   According to Joseph Eschbach, M.D. (University of Washington), early data from studies in progress in Europe show that daily subcutaneous self-administration of EPO corrects anemia in the majority of hemodialysis and CAPD patients at approximately one-third of

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Kidney Failure and the Federal Government     the dose administered intravenously three times a week during dialysis (personal communication, July 16, 1990). 11.   For all other nonrenal-related services provided by a nephrologist, in either the home, the outpatient unit (hospital-based or independent facility), or an inpatient setting, the payment is determined on the reasonable-charge basis. In fact, most bills for outpatient services are denied, since such services are typically included within the MCP. 12.   Reimbursement of the MCP is described in Section 1881.b.3.B of the Social Security Act; a description of reasonable charges is in Section 1842.b. 13.   One manual listed these basic coding principles for admitting ESRD patients under the DRG system: (1) The principal diagnosis is the condition established after study to be chiefly responsible for admission of the patient to the hospital. (2) The underlying cause should be designated as the principal diagnosis when disease manifestations were a direct result of that condition. (3) Complications of treatment should be coded according to the nature of the complication whenever a specific code exists for the condition. (4) The principal procedure is the one most related to the principal diagnosis or the procedure performed for definitive treatment rather than for diagnostic purposes or for handling a complication. (5) Coding should be as complete as possible—i.e., code all diagnoses and procedures performed. (6) V-codes should be used only when a patient is admitted for purposes other than acute illness or for suspected conditions ruled out (Cobe Laboratories, Inc., n.d.). 14.   Technically, since October 1, 1984, current policy provides additional payments to hospitals whose total discharges of Medicare ESRD beneficiaries having non-ESRD-related DRGs (excluding transplant patients) account for 10 percent or more of all their Medicare discharges. According to HCFA, however, no more than 12 hospitals per year qualify for this extra payment. 15.   The physician payment for inpatient dialysis services may be updated and increased each year, whereas the outpatient MCP has remained constant since 1986. Over time, then, the one-thirtieth reduction corresponds to a small percentage of total Medicare payments for outpatient dialysis services. REFERENCES Cobe Laboratories, Inc. n.d. Hospital Reimbursement for ESRD Admissions Under the DRG System. Lakewood, Colo. Community Psychiatric Centers. 1989. Proxy Statement, July 12, Laguna Hills, Calif. FDA (Food and Drug Administration). 1989. Summary Basis of Approval for Epoetin Alfa. ELA #87-0535, PLA #87-0536. Washington, D.C., June. GAO (General Accounting Office). 1985. Changes needed in Medicare payments to physicians under the Medicare End Stage Renal Disease program. Washington, D.C., February. GAO. 1989. Payments for home dialysis much higher under reasonable charge method. GAO/HRD-90-37. Washington, D.C., October. GAO. 1990. Medicare: Options to provide home dialysis aides. GAO/HRD-90-153. Washington, D.C., August. Guterman S. 1986. A descriptive analysis of PPS outlier payment policy. Unpublished study. HCFA (Health Care Financing Administration). 1989. Part 1 — Chapter 27: Reimbursement for ESRD Services and Transplant Services. Medicare Provider Reimbursement Manual: Transmittal No. 11. Baltimore, Md., July. Jencks SF, Kay T. 1987. Do frail, disabled, poor, and very old Medicare beneficiaries have higher hospital charges? JAMA 257:198–202. OIG (Office of Inspector General, U.S. Department of Health and Human Services). 1987. Organ acquisition costs: An overview. Washington, D.C., September.

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Kidney Failure and the Federal Government OIG. 1988. Kidney acquisition costs: A management advisory report. Washington, D.C., November. OIG. 1990. The effect of the interim payment rate for the drug Epogen on Medicare expenditures and dialysis facility operations. Draft report. Washington, D.C., May. OTA (Office of Technology Assessment). 1990. Recombinant erythropoietin: Payment options for Medicare. OTA-H-451. Washington, D.C.: Government Printing Office . REN Corporation-USA. 1989. Prospectus, November 28. Nashville, Tenn. Rettig RA. 1980. The politics of health cost containment: End-stage renal disease. Bull NY Acad Med 56:115–138. SSA (Social Security Administration, Bureau of Health Insurance). 1974. Alternative reimbursement method of monthly payments to physicians for services rendered to patients on maintenance dialysis. Intermediary Letter No. 74-29(A)(3). June. Trude S, Carter GM. 1989. A description of expensive and long-staying patients. N-2998-HCFA. The RAND Corporation. Santa Monica, Calif.