Understanding why Dialysis Treatments are so Expensive

by Erik D. Fuglestad**

If you have recently seen any full commercial dialysis claims, you understand how incredibly expensive dialysis treatments have become.  But why are dialysis treatments so expensive?  The following article will try to shed some light on this question and in doing so will provide you with some useful information that could help protect your clients from being financially drained by the dialysis providers.

Dialysis is a procedure that helps keep kidney disease patients alive by removing waste from blood when the patient’s kidneys can no longer do so. Amendments to the Social Security Act passed by Congress and signed by then President Richard M. Nixon provided Medicare coverage for End Stage Renal Disease (ESRD) patients.  This law is viewed as a lifesaver for kidney disease patients that otherwise would not have been able to pay for the life saving treatments.  How did this law, which has helped so many kidney disease patients pay for their life saving treatments, become a contributing factor in the escalation of dialysis pricing for commercial payers?

ESRD is a unique illness that entitles patients to Medicare coverage based solely on their diagnosis of ESRD.  It has been widely reported that Medicare is the primary payer for more than 80% of all patients receiving dialysis treatment in the United States.  Medicare has only had a handful of price increases for dialysis providers over the years.  The dialysis providers rely on the revenue that they generate from commercial payers (insurance carriers, self-funded healthcare plans, labor unions, government sponsored insurance pools and alike) to help grow their companies.

There are numerous factors involved with the escalation in pricing of commercial dialysis claims.   The primary reason is Medicare Secondary Payer regulations which give dialysis providers a defined window of opportunity to bill commercial payers as the primary for dialysis treatments.  The current coordination period is a three month waiting period after the first date of dialysis followed by 30 months with Medicare as a secondary payer.  The providers are trying to generate as much revenue as possible in this defined 33 month period of time.

Medicare pricing is also a contributing factor in the escalation of commercial pricing.  Medicare reimbursement for dialysis has gone through several methodologies.  The different methodologies were implemented by Medicare to try to keep the costs of the ESRD program down and addressed different ways that the dialysis providers were artificially propping up their Medicare reimbursements.

The Composite Rate System, a reimbursement method used by Medicare where providers were paid a composite rate for the treatment which was adjusted by zip code and metropolitan statistical areas, did not change much between 1983 and 2005.  Providers were also reimbursed for separately billable injectable drugs (Vitamin D, Iron, Antibiotics, and eventually Epogen) as well as other ancillary services. Drug reimbursement rates were set based on Average Wholesale Prices (AWP), but these AWP rates did not accurately portray the real cost to providers.  Overall this system underpaid providers on the dialysis treatments and significantly overpaid them on the separately billable drugs and ancillary items.  This type of incentive to over-utilize medications and ancillary items was clearly not in the best interest of the federally funded Medicare program or dialysis patients and lead to the replacement of the Composite Rate System by the Basic Case-Mix Adjusted Composite Rate system in November 2003.

The Medicare Prescription Drug Improvement and Modernization Act in November 2003 called for the creation of the Basic Case-Mix Adjusted Composite payment rate system.  This system was a slight change to the previous methodology.  Medicare began to pay providers less for separately billable drugs as they switched from AWP numbers, that were clearly higher than the costs to providers, to a methodology based on Average Sales Price (ASP) which was based on what providers were actually paying for the drugs, not the AWP.  To offset this change in reimbursement for separately billable drugs the composite rates were increased by the drug add-on which added close to 15% on top of the existing dialysis treatment rates.  Several other payment rate variables were also factored into the reimbursement rate at this time such as the patient’s age, height and weight.

The “Basic Case-Mix adjusted Composite rate system” was replaced by a single bundled rate known as the “Bundled ESRD PPS rate” for services beginning January 1, 2011. This new rate will fluctuate based on the location of the facility as well as patients’ characteristics such as their height,  weight and age.  The new bundled ESRD PPS rate for 2011 is a big change from past methodologies as providers will now have to worry about supplying formerly separately billable drugs under the new bundled rate.

In the past, when confronted with changes to the reimbursement methodologies, the dialysis providers have leaned heavily on their commercial patients to offset any decrease in reimbursement from Medicare and to expect anything different from the providers is not consistent with their past practices.

Another contributing factor in the escalation of pricing is the patient mix.  Currently almost 4 out of 5 dialysis patients are Medicare primary patients which providers are being billed and paid at Medicare rates.  If the providers want to increase their revenue per treatment, one of the standard metrics used by the investor community to analyze the future profitability for the provider, the provider will need to increase their commercial rate to an amount that will be able to prop up the flat Medicare reimbursement rates from 80% of their patients.

The next factor that is driving the cost of dialysis is the consolidation in the marketplace.  Fresenius Medical Care, Inc. (FMC) and Davita, Inc. are the two biggest providers and they treat almost 70% of the dialysis patients in the country.  These two providers are also publicly traded companies that are accountable to their investors.  Investors are always looking for consistent gains in profits and dividends and, in order to provide these consistent gains, the providers are forced to raise the rates on the 20% of their population that is commercially paid because they cannot raise rates on the Medicare patients.  Furthermore, industry consolidation has also made it difficult to maintain any type of choice or options in certain sections of the country when choosing a dialysis provider.

Mergers and acquisitions in many cases lead to the practice of using the fee schedule of the provider with the higher prices as the fee schedule for the new company.

Another contributing factor when there is a merger or acquisition is that it is not uncommon for the provider with the higher priced fee schedule to become the standard fee schedule for the entire new company.

The last factor involved with the expense of dialysis treatment is the pricing for separately billable drugs such as Epogen, Vitamin D and Iron.   The providers are routinely marking up the drugs by more than 15 times the Average Sales Price to generate additional revenue, which in some cases can account for a larger component of the total price than the dialysis treatment.

There are multiple options available in the marketplace when trying to contain the cost of dialysis treatments including relying on PPO discounts, direct negotiated settlements with providers, and plan document limitations.  Payers should thoroughly investigate each methodology with their clients and research the firm they choose to partner with.  Due to the amount of money at stake, mistakes in adjudicating dialysis claims are quickly noticed by most providers and could have serious unintended consequences on the plan.

In summary, the dialysis patient mix is about 80% Medicare primary and 20% commercially paid.  The dialysis provider market is dominated by two large, publicly traded organizations. Each of these providers has stated that the Medicare reimbursement rate is not sufficient for them to operate at a profit and must rely heavily on the commercial payers to subsidize the Medicare payers.  Due to frequent consolidation in the marketplace, there are many areas of the country that lack substantial competition.  There are cost containment options available and payers should research them all.

** Erik D. Fuglestad, the Director of Dialysis Claims Settlement for EthiCare Advisors, Inc., is a former dialysis industry executive. Erik often writes and lectures about dialysis claims reimbursement to the self-funded industry. Erik is a graduate of the University of Massachusetts, Dartmouth with a Bachelor’s degree in Political Science and a minor in Spanish. He has attended several technical and industry courses as well. Erik enjoys competing in several amateur hockey leagues and spending time with his children.

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EthiCare Advisors, Inc.
 Medical Claims Settlement Specialists

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