APPENDIX E
Cost Estimates for Expanded Medicare Benefits: Skin Cancer Screening, Medically Necessary Dental Services, and Immunosuppressive Therapy for Transplant Recipients

Allen Dobson, Ph.D.,* Joan DaVanzo, Ph.D., and Jesse Kerns, M.P.P.

INTRODUCTION

The Lewin Group was commissioned by the Institute of Medicine (IOM) Committee on Medicare Coverage Extensions to prepare cost estimates for selected expansions of Medicare benefits. Congress, in the Balanced Budget Act of 1997, requested that the IOM examine Medicare coverage for certain preventive and other benefits. The Lewin Group prepared cost estimates for the following services:

  • skin cancer screening,

  • medically necessary dental services (in connection with treatment of specific diagnoses), and

  • elimination of the 3-year limit on immunosuppressive therapy.

The purpose of these cost estimates is to supplement the committee’s analysis of the clinical evidence about the effectiveness of these services. For each topic, we consulted with the committee on specific coverage extension options to be examined.

The following sections summarize our cost estimates for these services, the data sources used for these estimates, and the key assumptions that underlie these estimates. The estimates are based on a series of assumptions, some of which have supporting evidence or data but others of which are best guesses based on committee and consultant judgment in the absence of such information. For each condition or service, the estimates are intended to suggest the order of

*  

Senior Vice President, Senior Manager, and Associate, The Lewin Group.



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Extending Medicare Coverage for Preventive and Other Services APPENDIX E Cost Estimates for Expanded Medicare Benefits: Skin Cancer Screening, Medically Necessary Dental Services, and Immunosuppressive Therapy for Transplant Recipients Allen Dobson, Ph.D.,* Joan DaVanzo, Ph.D., and Jesse Kerns, M.P.P. INTRODUCTION The Lewin Group was commissioned by the Institute of Medicine (IOM) Committee on Medicare Coverage Extensions to prepare cost estimates for selected expansions of Medicare benefits. Congress, in the Balanced Budget Act of 1997, requested that the IOM examine Medicare coverage for certain preventive and other benefits. The Lewin Group prepared cost estimates for the following services: skin cancer screening, medically necessary dental services (in connection with treatment of specific diagnoses), and elimination of the 3-year limit on immunosuppressive therapy. The purpose of these cost estimates is to supplement the committee’s analysis of the clinical evidence about the effectiveness of these services. For each topic, we consulted with the committee on specific coverage extension options to be examined. The following sections summarize our cost estimates for these services, the data sources used for these estimates, and the key assumptions that underlie these estimates. The estimates are based on a series of assumptions, some of which have supporting evidence or data but others of which are best guesses based on committee and consultant judgment in the absence of such information. For each condition or service, the estimates are intended to suggest the order of *   Senior Vice President, Senior Manager, and Associate, The Lewin Group.

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Extending Medicare Coverage for Preventive and Other Services magnitude of the costs to Medicare of extending coverage, but they could be considerably higher or lower than what Medicare might actually spend were coverage policies changed. The text and tables in this appendix will allow readers to vary some of the assumptions and calculate alternative estimates. We followed generic Congressional Budget Office (CBO) estimation practices such as not discounting future costs to present value. Our analytic process required estimations of both gross and net costs to Medicare for the 5-year period 2000–2004. Gross costs are the direct costs to Medicare of the services, and net costs are the gross costs minus the potential cost offsets (e.g., avoided hospitalization costs due to prevented infections) that Medicare would realize as a result of covering these services. Estimates of cost offsets are derived from the committee’s analysis of the available research and expert judgement. We also reduced our cost estimates to account for cost-sharing offsets of 20% and premium offsets of 25% per CBO standards.1 Numbers in the tables may not total exactly due to rounding. Projections of the Medicare Part B population for the years 2000 through 2004, as well as other sources of Medicare Part A and Part B population statistics (such as race and sex), were provided by the Health Care Financing Administration (HCFA) Office of the Actuary. The following sections discuss each of these estimates in detail. SKIN CANCER SCREENING For each of the coverage extension options considered here, Medicare would cover skin cancer screening for basal cell carcinoma, squamous cell carcinoma, and malignant melanoma. We assume skin cancer screening would be made available to all Medicare Part B beneficiaries. Gross costs to Medicare of screening are built from estimates of the target population, and estimates of the costs of the services provided. Medicare net costs would be derived by offsetting Medicare savings from gross costs, but none were identified from the literature on skin cancer screening. The major determinant of cost for Medicare coverage of skin cancer screening is the size of the target population. With more than 39 million enrollees in Medicare Part B, the costs depend on how many Medicare enrollees participate in skin cancer screenings. We consider gross and net costs of three possible approaches to skin cancer screening: 1   The Medicare Part B premium offset is set at 25% of Part B expenditures for the elderly Medicare population only. Because most transplant recipients qualify for Medicare based on disability or diagnosis of end-stage renal disease rather than age, premium offsets were not deducted from gross cost estimates for dental care or immunosuppressive therapy for transplant recipients.

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Extending Medicare Coverage for Preventive and Other Services Approach 1: Single-step screening is covered for all Medicare Part B beneficiaries. Approach 2: Medicare Part B beneficiaries are identified as “high risk” during a visit to a primary care physician and then screened. Approach 3: Medicare Part B beneficiaries self-select themselves as high risk based on public outreach campaign and go to a dermatologist for screening. Approaches 2 and 3 both require appraisal of patients as high risk. There are many indicators of high risk for skin cancer, including fair skin, light eyes, history of sunburns or sun exposure, multiple moles on body, and so forth. We assume approximately 10% of the Medicare-aged population fall into the high risk of skin cancer category. This estimate is based on an estimate of the relevant background paper author (Appendix B) and a study referenced in that paper.2 Each estimating approach yields a different volume of biopsies, skin cancer detection, and cost. The 5-year costs of the three approaches and the total biopsy yield are shown in Table E-1. These cost estimates would be offset by premium increases for Medicare beneficiaries. The CBO uses a 25% reduction in direct costs due to these offsets. The costs of these three approaches taking the premium offset into account are shown in Table E-2. The methodology of the cost per screen and cost per biopsy and a discussion of additional costs from induced demand for other Medicare services follow in the next section. Later sections discuss the three screening alternatives and the cost estimates for each. Cost-per-Screen-and-Biopsy Methodology Some basic cost assumptions underlie our gross cost estimates. All costs are determined for year 2000, then increased at 2% per year. We assume the cost of a screen as an add-on to physician visit is $20. This assumption is based on the average increase of one level in the Medicare non-facility-based reimbursement for a physician visit in 1998, which was $19. The cost of a screen as an independent physician visit is $50. This assumption is based on the weighted average reimbursement for a level 3 visit (one-third from new patient code 99203 and two-thirds from established patient code 99213) in 1998, which was $49. We use data from the Relative Value Unit (RVU) reimbursement rates for 1999 from the Federal Register.3 The 1999 conversion factor was 34.7315. Because the RVU and conversion-factor derived values yield the “Medicare allowed” 2   MacKie RM, Freudenberger T, Aitchison TC. Personal risk-factor chart for cutaneous melanoma, Lancet 2:487–490, 1989. 3   Federal Register, Vol. 63, No. 211, November 2, 1998.

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Extending Medicare Coverage for Preventive and Other Services TABLE E-1 Estimated Total Cost (in millions) and Total Number of Biopsies Resulting from Three Approaches to Skin Cancer Screening   2000 2001 2002 2003 2004 Total Total No. of Biopsies Approach 1 $225.9 $232.6 $239.4 $246.8 $254.8 $1,199.4 1,422,090 Approach 2 96.8 99.4 102.0 104.8 107.8 510.8 1,486,674 Approach 3 37.8 38.8 39.8 40.9 42.1 199.5 660,744 TABLE E-2 Estimated Cost (in millions) with Offset Due to 25% Part B Premium Increases for Three Approaches to Skin Cancer Screening   2000 2001 2002 2003 2004 Total Total No. of Biopsies Approach 1 $169.4 $174.4 $179.6 $185.1 $191.1 $899.5 1,422,090 Approach 2 72.6 74.5 76.5 78.6 80.8 383.1 1,486,674 Approach 3 28.4 29.1 29.9 30.7 31.6 149.6 660,744

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Extending Medicare Coverage for Preventive and Other Services charge, which customarily includes a 20% copay from the Medicare enrollee, the Medicare cost per screen is reduced by 20%. Therefore, the add-on cost is reduced to $16 from $20, and the independent visit cost is reduced to $40 from $50. These figures reflect the actual cost to Medicare for these services. The cost of a biopsy is assumed to be $90, a figure supplied by a dermatologist on the committee. Case-Finding Approach 1: All Medicare Part B Beneficiaries Are Screened Under this approach, Medicare Part B beneficiaries may be screened during any visit to a primary care physician. We estimate a total 5-year net cost of $1.12 billion for case-finding approach 1, as detailed in Table E-3. The 5-year gross cost estimate is also $1.12 billion because there was no evidence of cost offsets substantiated by the current literature. Methodology We assume a majority of Medicare Part B beneficiaries visit a primary care physician each year. Health services research and Medicare data indicate that (1) not all patients will be offered screening due to physician time pressures, lack of familiarity or agreement with recommendations for screening, or other factors; and (2) some beneficiaries will decline screening due to time pressure, modesty, or other factors. Based on information summarized in Chapter 3 of this report, we assume that 30% of Medicare Part B beneficiaries will be screened each year.4 We then assume that those found with suspicious lesions will be referred to a dermatologist for a second screen. We assume 5% of those screened will be referred to and see a dermatologist, and 50% of those referred will receive a biopsy. Case-Finding Approach 2: Only Those Identified as High Risk Are Screened Under this approach, Medicare Part B beneficiaries may be identified as high risk during any visit to a primary care physician. We estimate a total 5-year net cost of $510.8 million for case-finding approach 2, as detailed in Table E-4. The 5-year gross cost estimate is also $510.8 million because there was no evidence of cost offsets substantiated by the current literature. 4   Projections of the annual number of screens are calculated as 30% of total Medicare Part B enrollment projections for 2000–2004 by the HCFA Office of the Actuary.

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Extending Medicare Coverage for Preventive and Other Services TABLE E-3 Estimated Total Cost of Approach 1 to Skin Cancer Screening   2000 2001 2002 2003 2004 Total Annual number of “high-risk” screens 11,153,400 11,259,000 11,363,400 11,485,200 11,622,600 NA Cost of initial screen $16 $16 $17 $17 $17 NA Total cost of initial screens (millions) $178.5 $183.7 $189.2 $195.0 $201.3 $947.7 Proportion receiving referral 5% 5% 5% 5% 5% NA Number receiving referrals 557,670 562,950 568,170 574,260 581,130 2,844,180 Cost per referred screen $40 $41 $42 $42 $43 NA Total cost of referred screens (millions) $22.3 $23 $23.6 $24.4 $25.2 $118.5 Proportion who receive biopsy 50% 50% 50% 50% 50% NA Number who receive biopsy 278,835 281,475 284,085 287,130 290,565 1,422,090 Cost per biopsy $90 $92 $94 $96 $97 NA Total cost of biopsy (millions) $25.1 $25.8 $26.6 $27.4 $28.3 $133.3 Total cost, Approach 1 (millions) $225.9 $232.6 $239.4 $246.8 $254.8 $1,199.4

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Extending Medicare Coverage for Preventive and Other Services TABLE E-4 Total Cost of Approach 2 to Skin Cancer Screening   2000 2001 2002 2003 2004 Total Annual number of “high-risk” screens 2,933,460 2,952,630 2,970,810 2,992,320 3,017,520 NA Cost of initial screen $16 $16 $17 $17 $17 NA Total cost of initial screens (millions) $46.9 $48.2 $49.5 $50.8 $52.3 $247.6 Proportion receiving referral 20% 20% 20% 20% 20% NA Number receiving referrals 586,692 590,526 594,162 598,464 603,504 2,973,348 Cost per referred screen $40 $41 $42 $42 $43 NA Total cost of referred screens (millions) $23.5 $24.1 $24.7 $25.4 $26.1 $123.8 Proportion who receive biopsy 50% 50% 50% 50% 50% NA Number who receive biopsy 293,346 295,263 297,081 299,232 301,752 1,486,674 Cost per biopsy $90 $92 $94 $96 $97 NA Total cost of biopsy (millions) $26.4 $27.1 $27.8 $28.6 $29.4 $139.3 Total cost, Approach 2 (millions) $96.8 $99.4 $102.0 $104.8 $107.8 $510.8

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Extending Medicare Coverage for Preventive and Other Services Methodology We assume a majority of the aged Medicare part B population visits a primary care physician each year but that not all physicians will assess patients for skin cancer risk. We assume that 10% of the aged Medicare Part B population will be identified as high risk, be offered screening, and accept it. (Some additional beneficiaries who are at high risk due to past diagnosis of cancerous or precancerous skin lesions will have yearly skin examinations as a part of usual follow-up care.) We then assume that those found with suspicious lesions are referred to a dermatologist for a second screen. We assume 20% of those screened will be referred, and 50% of those referred to a dermatologist will receive a biopsy. Screening Approach 3: Mass Screening, Beneficiaries at High Risk Self-Select Under this approach, a public information campaign targets the 10% of the Medicare population who are at high risk for skin cancer for a direct screen by a dermatologist. We estimate a total 5-year net cost of $199.5 million for this mass screening approach, detailed in Table E-5. The 5-year gross cost estimate is also $199.5 million because there was no evidence of cost offsets substantiated by the current literature. Methodology We assume that self-identification of risk is reasonably accurate and that 20% of those who identify themselves as at high risk will elect to seek clinical screening. Of the group who elect screening, 20% are assumed to have a biopsy. Some high-risk individuals already self-identify warning signs of cancer (rather than just a risk factor such as fair skin) and seek physician examination, which Medicare now covers. Also, other individuals with a past diagnosis of a cancerous or precancerous skin lesion will see physicians for examinations as part of covered follow-up care. The assumption for this scenario is that an additional 20% of high-risk people will seek screening who would not have done so in the absence of a new mass screening program. To the extent, however, that a mass screening program brings in those who would have sought an examination anyway, then estimated new costs to Medicare would be lower than presented here. MEDICALLY NECESSARY DENTAL SERVICES The cost estimates considered here assume that Medicare would cover certain dental services determined to be medically necessary in connection with treatment of the following specific conditions: cancer of the head or neck, leukemia,

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Extending Medicare Coverage for Preventive and Other Services TABLE E-5 Estimated Total Cost of Approach 3 to Skin Cancer Screening   2000 2001 2002 2003 2004 Total All Medicare Part B aged population 32,594,000 32,807,000 33,009,000 33,248,000 33,528,000 NA Proportion “high risk” 10% 10% 10% 10% 10% NA Proportion of “high risk” who elect screen 20% 20% 20% 20% 20% NA Number screened 651,880 656,140 660,180 664,960 670,560 3,303,720 Cost per screen $40 $41 $42 $42 $43 NA Total cost of screens (millions) $26.1 $26.8 $27.5 $28.2 $29.0 $137.6 Proportion who receive biopsy 20% 20% 20% 20% 20% NA Number who receive biopsy 130,376 131,228 132,036 132,992 134,112 660,744 Cost per biopsy $90 $92 $94 $96 $97 NA Total cost biopsies (millions) $11.7 $12.0 $12.4 $12.7 $13.1 $61.9 Total cost, Approach 3 (millions) $37.8 $38.8 $39.8 $40.9 $42.1 $199.5

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Extending Medicare Coverage for Preventive and Other Services lymphoma, organ transplantation, and congenital or acquired valvular and heart disease. The basis for selecting the medical conditions listed above is H.R. 1288 (introduced April 1997). Medically necessary dental care is defined in H.R. 1288 “as a direct result of, or will have a direct impact on” treatment of these conditions. The portion of H.R. 1288 that states, “Dental services shall be considered to be cost-effective if furnished in connection with treatment of an individual with…” any of the above four conditions is disregarded because the focus here is on cost estimates not cost-effectiveness. In our construction of cost estimates for dental services associated with the specified medical conditions, we reviewed previous cost estimates of these benefits developed by the HCFA Office of the Actuary (produced by the Actuarial Research Corporation), the CBO, and the Federation of Special Care Organizations in Dentistry. Our estimates are only for coverage of dental services in the year of the procedure. If services after the intervention are covered by Medicare in years following surgery, radiation, chemotherapy, or other treatment, the cost estimates could be substantially higher. Total Five-Year Gross and Net Costs for All Conditions We estimate a total 5-year net cost of $207.7 million for the total dental benefits under consideration, as detailed in Table E-6. The 5-year gross cost estimate is $213.3 million, less a $5.6 million offset from cost savings for one condition. A Medicare premium offset of 25% would reduce the 5-year net costs to $155.8 million. The CBO regularly reduces cost estimates by 25% to account for this premium offset. We determined there was evidence of cost savings of $5.6 million for radiation therapy of the head or neck preventive dental services. There was no other evidence of cost offsets substantiated by the current literature. Our cost estimate for medically necessary dental services is substantially lower than comparable estimates conducted by the CBO and the HCFA Office of the Actuary. These estimates are the first to estimate the number of Medicare beneficiaries likely to be affected by the policy based on incidence data for each condition. The HCFA Office of the Actuary estimated costs for the five conditions, but it estimated that a fixed percentage of all dental visits of Medicare beneficiaries would be covered under this benefit, essentially a “top-down” approach. In contrast, the cost estimates in this report constitute a “bottom-up” approach, beginning with incidence data for each condition and building the estimate based on these data. The methodology for our “cost-per-case” estimate, an essential element of each estimate, follows. Subsequent sections discuss the individual cost estimates for each condition and the underlying methodology for each estimate.

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Extending Medicare Coverage for Preventive and Other Services TABLE E-6 Estimated Cost (in millions) of Dental Care for Five Selected Conditions with Offset Due to 25% Part B Premium Increases   2000 2001 2002 2003 2004 Total Radiation therapy for head or neck cancer with savings from prevented ORN $2.1 $2.3 $2.5 $2.6 $2.8 $12.9 Leukemia 3.7 3.9 4.2 4.4 4.6 20.9 Lymphoma 5.8 6.1 6.4 6.8 7.2 32.3 Organ transplantation 4.1 4.4 4.8 5.2 5.6 24.2 Heart valve repair or replacement 18.4 20.7 23.2 26.0 29.2 117.5 Total net cost for five conditions 32.1 35.2 38.6 42.4 46.6 207.7 Medicare premium offset (25%) 8.0 8.8 9.6 10.6 11.7 51.9 Total net cost less premium offset 24.1 26.4 28.9 31.8 35.0 155.8

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Extending Medicare Coverage for Preventive and Other Services 5-year savings to the federal share of the Medicaid program of approximately $49 million.12 The following sections detail gross and net costs for both Medicare-eligible kidney transplants and total population kidney transplants and other organ costs. Kidney Immunosuppressive Gross and Net Cost Estimates We have produced two cost estimates for kidney immunosuppressive coverage: Medicare-eligible kidney population: an estimate of costs and savings associated with extended coverage for kidney recipients who retain Medicare eligibility beyond 3 years (approximately two-thirds of this population). Entire population: an estimate of costs and savings associated with extended coverage for all kidney recipients originally covered by Medicare (under the ESRD program, the entire population that receives a Medicare-covered transplant receives immunosuppressive coverage regardless of other Medicare eligibility status). Our rationale for producing both estimates is the possibility that extended coverage could apply to either the subset of this population that remains Medicare eligible after 3 years (due to either disabled or aged status) or the entire Medicare transplant population (as the whole ESRD kidney transplant population receives coverage for 3 years). Total Net Costs of Medicare-Eligible and “Entire” Kidney Transplant Population Coverage Extension We estimate a total 5-year net cost of $566 million for extending immunosuppressant coverage for the Medicare-eligible kidney transplant population. This estimate incorporates a 5-year gross cost estimate of $1.12 billion, and a 5-year cost savings offset estimate of $554 million, as shown in Table E-17. We estimate a total 5-year net cost of $848 million for a coverage extension for the “entire” kidney transplant population. This estimate incorporates a 5-year gross cost estimate of $1.68 billion and a 5-year cost savings offset estimate of $830 million, as shown in Table E-18. 12   This value is produced by the equation [0.66X=$6 million] and solving for X. It assumes Medicaid immunosuppressant costs increase at 4% per year.

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Extending Medicare Coverage for Preventive and Other Services TABLE E-17 Estimated Net Cost (in millions) for Medicare-Eligible Kidney Transplant Population Only   2000 2001 2002 2003 2004 Total Gross cost $173.1 $195.5 $220.8 $249.3 $281.6 $1,120.2 Cost savings 57.2 108.9 116.0 129.0 142.8 553.9 Net cost 115.8 86.6 104.8 120.4 138.8 566.3 TABLE E-18 Estimated Net Cost (in millions) for “Entire” Kidney Transplant Population   2000 2001 2002 2003 2004 Total Gross cost $260.9 $293.9 $331.0 $372.8 $419.9 $1,678.4 Cost savings 86.3 163.9 174.1 193.0 213.1 830.4 Net cost 174.6 129.9 156.9 179.8 206.7 848.0

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Extending Medicare Coverage for Preventive and Other Services The methodology and assumptions that underlie both the gross cost estimates and the cost offset estimates for each level of coverage are discussed below. The cost savings for each coverage scenario differ because the potential savings from avoided graft failure are based on different initial population estimates (i.e., there are more greater-than-3-year grafts in the overall transplant population than in the Medicare-eligible population, therefore, a greater number of failed grafts could be prevented with extended coverage). Gross and Net Cost Estimates for Medicare-Eligible Kidney Transplant Population In this section we consider the gross and net costs of extended coverage for the Medicare-eligible kidney transplant population. Gross costs are the annual costs of immunosuppressive therapy for all Medicare-eligible kidney transplant recipients with graft survival greater than 3 years, and net costs are the gross costs less the avoided costs due to this extended coverage. The 5-year gross cost estimate of this coverage is $1.12 billion, as shown in Table E-19. We estimated potential 5-year cost savings of $553 million attributable to extended immunosuppressive coverage of kidney transplant recipients. These cost savings yield a total estimated 5-year net cost of $566 million as already shown in Table E-17. Methodology The numbers of kidney transplant recipients with grafts longer than 3 years, and of the subset of this population that retains Medicare eligibility after 3 years, were supplied by Dr. Paul Eggers, Director, Division of Beneficiaries Research, HCFA. We assume the Medicare-eligible greater-than-3-year kidney graft population will grow at an 8.6% annual rate. This rate is derived from the 3-year average growth rate from 1995 through 1997. This figure is also consistent with historical trends data, increasing patient and graft survival, and the limited pool of donor organs. This population estimate is then reduced by 25% to account for graft recipients who receive coverage through other insurance (see discussion above). Cost savings are derived from assumed reductions in: the number of grafts that fail due to noncompliance with drug regimen associated with cost pressure; the resultant costs of surgery to remove failed grafts; the cost of dialysis for these patients; and the cost of retransplantation for those who lose their graft and subsequently receive a new transplant.

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Extending Medicare Coverage for Preventive and Other Services TABLE E-19 Estimated Gross Cost (in millions) of Extended Immunosuppressive Drug Therapy for Medicare-Eligible Kidney Transplant Population   2000 2001 2002 2003 2004 Total Kidney graft patient >3 years, Medicare eligible (less secondary payer) 32,048 34,804 37,797 41,048 44,578 NA Cost per year of immunotherapy $5,400 $5,616 $5,841 $6,074 $6,317 NA Gross cost $173.1 $195.5 $220.8 $249.3 $281.6 $1,120.2

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Extending Medicare Coverage for Preventive and Other Services We assume an annual graft failure rate due to cost pressure of 2.5%. This assumption is based on the weighted average failure rate of kidney grafts after 3 years of 7% (cadaveric donor 8%, living donor 5%).13 We then assume that one-third of these failures are due to noncompliance with immunosuppressive therapy due to cost pressure. This figure was agreed upon by the consultant who authored Appendix D and Dr. Eggers, and informed by some cited evidence from “natural” experiments as described in Appendix D. The “cost-of-loss” measure incorporates all costs in the year of failure, including surgery, treatment, hospitalization, and dialysis costs for that year. The failed-graft population returns to dialysis. The “cost of dialysis” includes all direct medical costs associated with dialysis. Certain factors remove patients from the failed-graft-returned-to-dialysis pool. Data suggest 12% annual mortality after graft failure, so the failed graft population is reduced by this rate annually. Because approximately 10% of all renal transplants are retransplants, we assume 10% of the failed-graft pool receive new transplants each year. Since the cost of retransplantation would have been avoided if the graft had not failed, the associated costs of retransplantation for these patients are also potential cost savings. The cost-of-loss, dialysis, and retransplantation values were provided by Dr. Eggers, HCFA. The results are displayed in Table E-20. We estimated potential 5-year cost savings of $553 million attributable to extended immunosuppressive coverage of kidney transplant recipients. These cost savings would offset gross costs. Gross and Net Costs of “Entire” Population Kidney Transplants In this section we consider the gross and net costs of extended coverage for the entire kidney transplant population, shown in Table E-21. Gross costs are the annual costs of immunosuppressive therapy for all kidney transplant recipients with graft survival greater than 3 years; net costs are gross costs less the avoided costs due to extending coverage. The 5-year gross cost estimate of this coverage is $1.68 billion. We estimated potential 5-year cost savings of $830 million attributable to extended immunosuppressive coverage of kidney transplant recipients. These cost savings yield a total estimated 5-year net cost of $848 million, as shown already in Table E-18. 13   UNOS database.

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Extending Medicare Coverage for Preventive and Other Services TABLE E-20 Estimated Cost (in millions) Due to Loss of Renal Grafts Attributed to Cost Pressure on Beneficiaries, Medicare-Eligible Population Only   2000 2001 2002 2003 2004 Total Graft failure rate from cost pressure 2.5% 2.5% 2.5% 2.5% 2.5% NA Annual >3-year failed grafts 801 870 945 1,026 1,114 NA Prior number of >3-year failed grafts — 625 616 675 733 NA Total >3-year failed grafts 801 1,495 1,561 1,702 1,847 NA Cost of loss $61,057 $62,278 $63,523 $64,794 $66,090 NA Total annual cost of removal (millions) $48.9 $93.1 $99.2 $110.3 $122.1 $473.5 Per unit cost of dialysis $53,042 $54,103 $55,185 $56,289 $57,415 NA Total cost of dialysis (millions) — $68.0 $129.1 $185.7 $239.3 $622.1 Number retransplanted (10% of total) 80 150 156 170 185 NA Cost per retransplantation $103,607 $105,679 $107,793 $109,949 $112,148 NA Total costs of retransplantations (millions) $8.3 $15.8 $16.8 $18.7 $20.7 $80.4 Total cost due to graft loss $57.2 $108.9 $116.0 $129.0 $142.8 $553.9

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Extending Medicare Coverage for Preventive and Other Services TABLE E-21 Estimated Gross Cost of Immunosuppressive Drug Therapy for “Entire” Kidney Transplant Population   2000 2001 2002 2003 2004 Total Kidney graft patient >3 years, total population (less secondary payer) 48,315 52,325 56,668 61,372 66,466 NA Cost per year of therapy $5,400 $5,616 $5,841 $6,074 $6,317 NA Total gross cost (millions) $260.9 $293.9 $331.0 $372.8 $419.9 $1,678.4

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Extending Medicare Coverage for Preventive and Other Services Methodology The numbers of kidney transplant recipients with grafts longer than 3 years, and of the subset of this population that retains Medicare eligibility after 3 years, were supplied by Dr. Paul Eggers, Director, Division of Beneficiaries Research, HCFA. We assume the Medicare-eligible greater than 3-year kidney graft population will grow at an 8.6% annual rate. This rate is derived from the 3-year average growth rate from 1995 through 1997. This figure is also consistent with historical trends data, increasing patient and graft survival, and the limited pool of donor organs. This population estimate is then reduced by 25% to account for graft recipients who receive coverage through other insurance (see discussion above). Cost savings are derived from assumed reductions in: the number of grafts that fail due to noncompliance with drug regimen associated with cost pressure; the resultant costs of surgery to remove failed grafts; the cost of dialysis for these patients; and the cost of retransplantation for those who lose their graft and subsequently receive a new transplant. We assume an annual graft failure rate due to cost pressure of 2.5%. This assumption is based on the weighted average failure rate of kidney grafts after 3 years of 7% (cadaveric donor 8%, living donor 5%).14 We then assume that one-third of these failures are due to noncompliance with immunosuppressive therapy due to cost pressure. This figure was agreed upon by the consultant who authored Appendix D and Dr. Eggers, and informed by some evidence described in Appendix D. The cost of loss measure incorporates all costs in the year of failure, including surgery, hospitalization, and dialysis for that year. The failed-graft population returns to dialysis. The cost of dialysis includes all direct medical costs associated with dialysis. Certain factors remove patients from the failed-graft-returned-to-dialysis pool. Data suggest 12% annual mortality after graft failure, so the failed-graft population is reduced by this rate annually. Because approximately 10% of all renal transplants are retransplants, we assume 10% of the failed graft pool receive new transplants each year. Since the costs of retransplantation would have been avoided if the graft had not failed, the associated cost of retransplantation for these patients are also potential cost savings. The cost-of-loss, dialysis, and retransplantation values were provided by Dr. Eggers, HCFA. We estimated potential 5-year cost savings of $830 million attributable to extended immuno- 14   UNOS database.

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Extending Medicare Coverage for Preventive and Other Services suppressive coverage of kidney transplant recipients. These cost savings would offset gross costs. The results are displayed in Table E-22. Heart, Liver, and Lung Gross and Net Cost Estimates We estimate a total 5-year gross cost of $212 million for the extension of immunosuppressive therapy coverage for heart, liver, and lung transplant recipients. There were no cost offsets, therefore, the 5-year net cost estimate is also $212 million. These costs, displayed in Table E-23, apply to all immunosuppressive therapy for Medicare-eligible heart, liver, and lung transplant recipients with graft survival greater than 3 years. Methodology We estimated the number of grafts with greater-than-3-year survival by combining historical Medicare covered transplants (MEDPAR data) and graft survival rates from UNOS. These estimates were determined in conjunction with Dr. Eggers. We estimated a projected rate of increase for each organ population (heart, liver, and lung), based on historical rates of population growth and transplant trends: heart: estimated to grow at rates from 17% (2001) to 10% (2004), liver: estimated to grow at rates from 20% (2001) to 10% (2004), and lung: estimated to grow at rates from 40% (2001) to 10% (2004). The only viable cost offset found due to heart, liver, and lung extended coverage is retransplantation, which is an expensive procedure (often costing as much as $300,000, according to the background paper author). However, virtually all retransplants of these organs occur within the first year following the transplant; therefore few cost offsets can be attributed to a greater-than-3-year coverage extension. Also, graft failure due to chronic rejection is low in liver transplant patients, the most common category after kidney transplants.

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Extending Medicare Coverage for Preventive and Other Services TABLE E-22 Estimated Cost (in millions) Due to Loss of Renal Grafts Attributed to Cost Pressure on Patients, “Entire” Transplant Population Avoided Costs 2000 2001 2002 2003 2004 Total Graft failure rate from cost pressure 2.5% 2.5% 2.5% 2.5% 2.5% NA Annual >3-year failed grafts 1,208 1,308 1,417 1,534 1,662 NA Prior number of >3-year failed grafts — 942 926 1,012 1,096 NA Total >3-year failed grafts 1,208 2,250 2,343 2,547 2,757 NA Cost of loss $61,057 $62,278 $63,523 $64,794 $66,090 NA Total annual cost of removal (millions) $73.7 $140.1 $148.8 $165.0 $182.2 $709.9 Per unit cost of dialysis $53,042 $54,103 $55,185 $56,289 $57,415 NA Total cost of dialysis (millions) — $68.0 $129.1 $185.7 $239.3 $622.1 Number retransplanted (10% of total) 121 225 234 255 276 NA Cost per retransplantation $103,607 $105,679 $107,793 $109,949 $112,148 NA Total costs of retransplantations (millions) $12.5 $23.8 $25.3 $28.0 $30.9 $120.5 Total cost due to graft loss $86.3 $163.9 $174.1 $193.0 $213.1 $830.4

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Extending Medicare Coverage for Preventive and Other Services TABLE E-23 Estimated Gross Cost of Immunosuppressive Therapy for Heart, Liver, and Lung Transplant Patients   2000 2001 2002 2003 2004 Total Annual heart >3 years 1,863 2,179 2,506 2,757 3,032 NA Annual liver >3 years 1,735 2,082 2,395 2,634 2,897 NA Annual lung >3 years 217 304 395 474 521 NA Total graft patient >3 years 5,815 6,566 7,297 7,867 8,455 NA Cost per year of immunosuppressive therapy $5,400 $5,616 $5,841 $6,074 $6,317 NA Gross cost in millions $31.40 $36.87 $42.62 $47.79 $53.41 $212.1