In general, under a prospective payment system, covered services must be defined before a rate can be established. From the outset of the ESRD program, the outpatient dialysis facility reimbursement rate has been an all-inclusive payment for a comprehensive "bundle" of institutional and home dialysis services, including nursing services, supplies, equipment, drugs, and administration associated with a dialysis treatment episode. Dialysis and kidney transplantation services covered by Medicare are currently specified in Chapter 27 of the Medicare Provider Reimbursement Manual, as "Reimbursement for ESRD and Transplant Services."² Chapter 27 includes instructions and procedures regarding payment for home and in-center dialysis treatment; the ESRD items and services included under the composite rate; other ESRD items and services that are separately billable, such as laboratory tests, injectable drugs, and blood furnished to dialysis patients; the calculation and payment of bad debt; recordkeeping and submission of cost reports; the exceptions process; and the appeals process.

An item or service included under the composite rate is paid for through the composite rate payment to the facility, unless specifically excluded. Inclusion of an item or service under the composite rate does not depend on how frequently it is needed or the number of dialysis patients who require it. Items or services not included under the composite rate are covered only if they are not part of a routine dialysis service and have been listed as billable.

The current HCFA approach to stipulating the services to be included within the composite rate is largely empirical and involves several steps. First, the Medicare Provider Reimbursement Manual (HCFA, 1989) lists the general services that are to be included in the composite rate in terms of those historically determined by providers as necessary; HCFA modifies the list over time as clinical knowledge and practice change. This list does not specify a quality standard regarding services to be delivered, but relies on providers to set an implicit standard, with the specific mix of services to be determined by each provider. Although Medicare regulations establish some structural standards for care, and state health code requirements set additional standards (mostly structural), none of these efforts attempts to describe what an adequate set of dialysis services includes.

Second, HCFA establishes the reimbursement rate on the basis of audited facility costs and proposes revisions on the basis of subsequent cost reports. Although the processes for revising the composite rate are controversial, as discussed below, they are relatively well understood. No formal processes exist for periodically relating changes in the services included under the composite rate to the reimbursement rate itself. Under such an arrangement, providers cannot be certain that reimbursement rates will be set at a level that is sufficient to meet the costs of a continually changing high-quality "bundle of services" that they consider necessary. On the other