Federal Register, Volume 74 Issue 187 (Tuesday, September 29, 2009)

[Federal Register Volume 74, Number 187 (Tuesday, September 29, 2009)]
[Proposed Rules]
[Pages 49922-50102]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-22486]

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Part II

Department of Health and Human Services

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Centers for Medicare & Medicaid Services

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42 CFR Parts 410, 413 and 414

Medicare Programs; End-Stage Renal Disease Prospective Payment System;
Town Hall Meeting on End-Stage Renal Disease Prospective Payment
System; Proposed Rule and Notice

Federal Register / Vol. 74, No. 187 / Tuesday, September 29, 2009 /
Proposed Rules

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 410, 413 and 414

[CMS-1418-P]
RIN 0938-AP57

Medicare Programs; End-Stage Renal Disease Prospective Payment
System

AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION: Proposed rule.

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SUMMARY: This proposed rule would implement a case-mix adjusted bundled
prospective payment system (PPS) for Medicare outpatient end-stage
renal disease (ESRD) dialysis facilities beginning January 1, 2011, in
compliance with the statutory requirement of the Medicare Improvements
for Patients and Providers Act (MIPPA), enacted July 15, 2008. The
proposed ESRD PPS would replace the current basic case-mix adjusted
composite payment system and the methodologies for the reimbursement of
separately billable outpatient ESRD services.

DATES: To be assured consideration, comments must be received at one of
the addresses provided below, no later than 5 p.m. on November 16,
2009.

ADDRESSES: In commenting, please refer to file code CMS-1418-P. Because
of staff and resource limitations, we cannot accept comments by
facsimile (FAX) transmission.
You may submit comments in one of four ways (please choose only one
of the ways listed):
1. Electronically. You may submit electronic comments on this
regulation to http://www.regulations.gov.
Follow the instructions under the ``More Search Options'' tab.
2. By regular mail. You may mail written comments to the following
address ONLY: Centers for Medicare & Medicaid Services, Department of
Health and Human Services, Attention: CMS-1418-P, P.O. Box 8010,
Baltimore, MD 21244-8010.
Please allow sufficient time for mailed comments to be received
before the close of the comment period.
3. By express or overnight mail. You may send written comments to
the following address ONLY: Centers for Medicare & Medicaid Services,
Department of Health and Human Services, Attention: CMS-1418-P, Mail
Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850.
4. By hand or courier. If you prefer, you may deliver (by hand or
courier) your written comments before the close of the comment period
to either of the following addresses: a. For delivery in Washington,
DC--Centers for Medicare & Medicaid Services, Department of Health and
Human Services, Room 445-G, Hubert H. Humphrey Building, 200
Independence Avenue, SW., Washington, DC 20201.
(Because access to the interior of the Hubert H. Humphrey Building
is not readily available to persons without Federal government
identification, commenters are encouraged to leave their comments in
the CMS drop slots located in the main lobby of the building. A stamp-
in clock is available for persons wishing to retain a proof of filing
by stamping in and retaining an extra copy of the comments being
filed.)
b. For delivery in Baltimore, MD--Centers for Medicare & Medicaid
Services, Department of Health and Human Services, 7500 Security
Boulevard, Baltimore, MD 21244-1850.
If you intend to deliver your comments to the Baltimore address,
please call telephone number (410) 786-9994 in advance to schedule your
arrival with one of our staff members.
Comments mailed to the addresses indicated as appropriate for hand
or courier delivery may be delayed and received after the comment
period.
Submission of comments on paperwork requirements. You may submit
comments on this document's paperwork requirements by following the
instructions at the end of the ``Collection of Information
Requirements'' section in this document.
For information on viewing public comments, see the beginning of
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: William Cymer, (410) 786-4533. Lynn
Riley, (410) 786-1286, (ESRD Quality Incentive Program.)

SUPPLEMENTARY INFORMATION: Inspection of Public Comments: All comments
received before the close of the comment period are available for
viewing by the public, including any personally identifiable or
confidential business information that is included in a comment. We
post all comments received before the close of the comment period on
the following Web site as soon as possible after they have been
received: http://www.regulations.gov. Follow the search instructions on
that Web site to view public comments.
Comments received timely will also be available for public
inspection as they are received, generally beginning approximately 3
weeks after publication of a document, at the headquarters of the
Centers for Medicare & Medicaid Services, 7500 Security Boulevard,
Baltimore, Maryland 21244, Monday through Friday of each week from 8:30
a.m. to 4 p.m. To schedule an appointment to view public comments,
phone 1-800-743-3951.

Table of Contents

I. Background
A. Origins of the Composite Payment System
B. Statutory Authority for a Bundled ESRD PPS
1. BIPA
2. MMA
3. The Basic Case-Mix Adjustment
4. MIPPA
II. Overview of the Proposed ESRD PPS
III. The Proposed ESRD PPS Bundle
A. Composite Rate Services
B. ESAs and Their Oral Forms
C. Other Drugs and Biologicals and Their Oral Equivalents
D. Diagnostic Laboratory Tests and Other Items and Services
E. Home Dialysis Patients (Method I and II) and Self Dialysis
Training
1. Payment for Home Dialysis
a. Method I--The Composite Rate
b. Method II--Dealing Directly With Suppliers
2. Self Dialysis Training
F. Physician Services
IV. Unit of Payment
A. Administrative Complexity Due to Phase-In
B. Administrative Complexity Due to Interruptions in Service
C. No Incentive To Discourage Skipped Treatments
V. Data Sources
A. Patient Claims Data
B. Medicare Cost Reports
C. Patient Claim and Cost Report Summary Data 2004-2006
D. Data for the Case-Mix Analyses, 2004-2006
E. Prescription Drug Event Data CY 2007
VI. Analytical Approach
VII. Development of Budget-Neutral ESRD Bundled Base Rate
A. Calculation of the CY 2007 Unadjusted Rate per Treatment
B. Determining the Update Factors for the Budget-Neutrality
Calculation
C. Standardization Adjustment
D. Calculation of the Budget-Neutrality Adjustment
a. Outlier Adjustment
b. 98 Percent Budget Neutrality Adjustment
E. Calculation of Transition Budget-Neutrality Adjustment
VIII. Cost Regression Used To Develop Proposed Payment Adjustment
Factors
A. Proposed Regression Analysis
1. Dependent Variables
a. Average Cost per Treatment for Composite Rate Services
b. Average Medicare Allowable Payment (MAP) for Separately
Billable Services

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2. Independent Variables
a. Control Variables
b. Proposed Case-Mix Adjustment Variables
B. Proposed Patient-Level Adjustments
1. Patient Age
2. Patient Sex
3. Body Surface Area and Body Mass Index
a. Body Surface Area
b. Body Mass Index
4. Onset of Dialysis (New Patient Adjustment)
5. Co-morbidities
6. Race/Ethnicity
a. REMIS Data Analysis
b. EBD Data Analysis
c. Concerns With Available Race/Ethnicity Data
d. CMS Initiative To Evaluate Healthcare Disparities Based on
Race and Ethnicity
7. Modality
C. Proposed Facility-Level Adjustments
1. Wage Index
2. Low-Volume Adjustment
a. Statutory Authority
b. Defining a Low-Volume Facility
c. Defining the Percent of Increase
3. Alaska/Hawaii Facilities
4. Rural
5. Site Neutral ESRD PPS Rate
D. Determination of ESRD PPS Payment Adjusters
IX. Pediatric Patients
A. Current System
B. Selection of a Pediatric Composite Rate Payment Adjustment
C. Selection of a Pediatric Separately Billable Payment
Adjustment
D. A Combined Composite Rate and Separately Billable Payment
Model for Pediatric Patients
X. Other Proposed Adjustments
A. Outlier Policy
1. Eligibility for Outlier Payment
a. ESRD Outlier Services
b. Predicted ESRD Outlier Services MAP Amounts
c. Estimating the Imputed ESRD Outlier Services MAP Amounts
i. Data Used To Estimate Imputed ESRD Outlier Services MAP
Amounts
ii. Determining Imputed per Treatment ESRD Outlier Services MAP
Amount
d. Outlier Percentage and Fixed Dollar Loss Amounts
2. Outlier Payments
3. Hypothetical Outlier Payment Examples
4. Application of Outlier Policy During the Transition and in
Relation to the ESA Monitoring Policy
XI. Comprehensive Payment Model Examples
XII. ESRD Market Basket
A. Background
B. Cost Category Weights
C. Price Proxies
D. ESRD Bundled Market Basket Increases
E. ESRD Bundled Labor-Related Share
XIII. Proposed Implementation of the ESRD PPS
A. Transition Period
1. New ESRD Facilities
2. Limitation on Beneficiary Charges Under the Proposed ESRD PPS
and Beneficiary Deductible and Coinsurance Obligations
B. Claims Processing
1. Consolidated Billing
a. Laboratory Tests
b. Drugs and Biologicals
c. Home Dialysis
2. Expansion of the Data Elements Reported on Claims
C. Operational Issues Surrounding Payment for Self Administered
ESRD-related Drugs and Biologicals
XIV. Evaluation of Existing Policies and Other Issues
A. Exceptions Under the Case-Mix Adjusted Composite Payment
System
B. Erythropoiesis Stimulating Agent (ESAs) Monitoring Policy
C. ESRD Facility Network Deduction
D. Bad Debt
E. Limitation on Review
F. 50 Percent Rule Utilized in Laboratory Payments
G. Medicare as a Secondary Payer
XV. Quality Incentives in the End-Stage Renal Disease (ESRD) Program
XVI. Collection of Information Requirements
XVII. Regulatory Impact Analysis
A. Overall Impact
B. Anticipated Effects
1. Effects on ESRD Facilities
2. Effects on Other Providers
3. Effects on the Medicare & Medicaid Programs
4. Effects on Medicare Beneficiaries
C. Alternatives Considered
D. Accounting Statement and Table
E. Conclusion
Regulations Text
Addenda

Acronyms

Because of the many terms to which we refer by acronym in this
proposed rule, we are listing the acronyms used and their
corresponding meanings in alphabetical order below:

Act The Social Security Act
BIPA Medicare, Medicaid, and SCHIP (State Children's Health
Insurance Program) Benefits Improvement and Protection Act of 2000
(Pub. L. 106-554)
BMI Body mass index
BN Budget neutrality
BSA Body surface area
CBSA Core-Based Statistical Area
CDC Centers for Disease Control and Prevention
CFR Code of Federal Regulations
CMS Centers for Medicare & Medicaid Services
CPM Clinical performance measure
CR Composite rate
CROWN Consolidated Renal Operations in a Web-Enabled Network
CY Calendar year
DME Durable medical equipment
EDB Enrollment Data Base
EPO Epoetin alfa
ESA Erythropoiesis stimulating agent
ESRD End stage renal disease
FI Fiscal intermediary
FY Fiscal year
GAO Government Accountability Office
HD Hemodialysis
IHS Indian Health Service
Kt/V A measure of dialysis adequacy where K is dialyzer clearance, t
is dialysis time, and V is total body water volume
LDO Large dialysis organization
MAC Medicare Administrative Contractor
MAP Medicare allowable payment
MCP Monthly capitation payment
MedPAC Medicare Payment Advisory Commission
MIPPA Medicare Improvements for Patients and Providers Act of 2008
(Pub. L. 110-275)
MMA Medicare Prescription Drug, Improvement, and Modernization Act
of 2003 (Pub. L. 108-173)
MSA Metropolitan Statistical Area
NEC Not elsewhere classified
NIH National Institutes of Health
NOS Not otherwise specified
NQF National Quality Forum
OMB Office of Management and Budget
OSCAR Online State Certification and Reporting System
PD Peritoneal dialysis
PFS Physician fee schedule
PPS Prospective payment system
PDE Prescription drug event
PVD Peripheral vascular disease
REMIS Renal Management Information System
RRB Railroad Retirement Board
RRT Renal replacement therapy
SB Separately billable
SIMS ESRD Standard Information Management System
SSA Social Security Administration
UM-KECC University of Michigan, Kidney Epidemiology & Cost Center
URR Urea reduction ratio

I. Background

A. Origins of the Composite Payment System

Section 299I of the Social Security Amendments of 1972, Public Law
92-603, established the end-stage renal disease (ESRD) program under
Medicare. That law extended Medicare coverage to individuals regardless
of age who have permanent kidney failure, requiring either dialysis or
kidney transplantation to maintain life, and meet certain other
eligibility criteria. On July 1, 1973, the Medicare program extended
benefits to about 11,000 beneficiaries with ESRD. In calendar year
1974, the program paid benefits of about $229 million for dialysis,
transplant, and other services. By 1979, the number of beneficiaries
had grown to 42,500, with payments reaching $985 million.
Because of concern over the rapid escalation in expenditures for
the ESRD program, the Congress enacted legislation in 1978 (Pub. L. 95-
292, ``ESRD Program Amendments of 1978''), which amended title XVIII of
the Social Security Act (the Act) to add new section 1881, which
governs Medicare payment for ESRD benefits. In particular, section
1881(b)(2)(B) of the Act directed us to publish regulations
establishing methods and procedures to determine the costs incurred by
ESRD providers and renal dialysis facilities in

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furnishing covered services to individuals with ESRD, and to determine,
on a cost-related or other equitable and economically efficient basis,
payment amounts for part B services furnished by such providers and
facilities to individuals with ESRD. Section 1881(b)(2)(B) of the Act
also provided that we establish a prospective reimbursement method for
those services with incentives for encouraging facilities to be more
efficient and provide cost-effective care.
The enactment of the Omnibus Budget Reconciliation Act of 1981,
Public Law 97-35, resulted in a further directive for implementing
changes to the ESRD payment system. Section 2145 of Public Law 97-35
amended section 1881 of the Act by requiring the Secretary to provide
by regulation a method for determining prospectively the amounts of
payments for dialysis services furnished by providers of services and
renal dialysis facilities to individuals in a facility, and to such
individuals at home. In particular, the law required that such method
be based on a single composite weighted formula (``composite rate'')
(which takes into account the mix of patients who receive services at a
facility or at home and the relative costs for furnishing such
services) for hospital-based facilities and such a single composite
rate for other renal dialysis facilities, or that payment be based on
such other method or combination of methods which differentiate between
hospital-based and other renal dialysis facilities, and which would
more effectively encourage more efficient delivery of dialysis services
and would provide greater incentives for increased use of home
dialysis.
As a result of these statutory requirements, on February 12, 1982,
we published a proposed rule on reimbursement for outpatient dialysis
services (47 FR 6556) to implement section 1881 of the Act, as amended
by section 2145 of Public Law 97-35. The regulations provided that each
facility would receive a payment rate per dialysis treatment
(``composite rate''), that is adjusted for geographic differences in
area wage levels for the treatment furnished in the facility or at
home. We refer to the methodology for payment of outpatient maintenance
dialysis services on a per-treatment basis as the ``composite payment
system''.
Final regulations implementing the composite payment system were
published on May 11, 1983 (48 FR 21254). The initial payment rates,
which were developed from Medicare cost reports for fiscal years ending
in 1977, 1978, and 1979, were established at $127 per treatment for
independent facilities and $131 for hospital-based facilities. The
composite payment system was effective August 1, 1983. It was limited
to payments for the costs incurred by dialysis facilities furnishing
outpatient maintenance dialysis, including some routinely provided
drugs, laboratory tests, and supplies, whether furnished by hospital-
based and independent facilities in a facility or at home. We
established separate rates for hospital-based and independent dialysis
facilities, and provided a process under which facilities with costs in
excess of their payment rates could seek exceptions to those rates
under specified circumstances.
With regard to home dialysis, this system was the basis for
reimbursing home dialysis furnished by hospital-based and independent
facilities (``Method I''). (The other is ``Method II,'' under which the
beneficiary works directly with a durable medical equipment supplier to
obtain the supplies and equipment needed.) For further information on
the distinctions between Method I and Method II, see section III.E of
this proposed rule.
The composite payment system implemented in 1983 was relatively
comprehensive with respect to the renal dialysis services included as
part of the composite payment bundle. However, a substantial portion of
expenditures for renal dialysis services are excluded from the
composite payment system and reimbursed in accordance with the
respective fee schedules or other payment methodologies. For example,
payment for erythropoiesis stimulating agents (ESAs) such as epoetin
alfa (EPO, for example, Epogen[supreg]) and darbepoetin alfa
(ARANESP[supreg]) used to treat anemia, and vitamin D analogues
(paracalcitol, doxercalciferol, calcitriol), is made outside of the
composite payment system as separately billable services. These
separately billable services currently comprise about 40 percent of
total spending for outpatient maintenance dialysis. The present payment
for outpatient maintenance dialysis under Medicare represents a mix of
prospective payment, fee-for-service, and other payment rules.
Subsequent inflation increases to the composite payment system
applied only in response to specific statutory directives. For example,
between 1983 and 2001, the payment rates were increased only three
times. A $1.00 increase per treatment was effective January 1, 1991 as
a result of the enactment of the Omnibus Budget Reconciliation Act of
1990, Public Law 101-508. The rates were not revised again until the
enactment of the Medicare, Medicaid, and SCHIP Balanced Budget
Refinement Act of 1999, Public Law 106-113, which increased the
payments by 1.2 percent effective January 1, 2000 and January 1, 2001,
respectively.
During the last few years, policymakers and other interested
parties, including the Medicare Payment Advisory Commission (MedPac)
and the Government Accountability Office (GAO), have examined the
Medicare outpatient maintenance dialysis payment system and suggested a
bundled prospective payment approach. See Medicare Payment Advisory
Commission (MedPAC): Report to the Congress: Medicare Payment Policy,
March 2001, March 2005, and March 2007, and GAO Report GAO-07-77, End
Stage Renal Disease: Bundling Medicare's Payment for Drugs with Payment
for All ESRD Services Would Promote Efficiency and Clinical
Flexibility, November 2006. We believe that a fully bundled PPS would
combine composite rate dialysis services with separately billable
services under a single payment, adjusted to reflect patient
differences in resource needs or case-mix. As in any PPS, dialysis
facilities would keep the difference if Medicare payments exceeded
costs for the bundled services, and would be liable for the difference
if costs exceeded Medicare payments.
Aside from resulting in a single comprehensive payment for all
services included in the bundle, we believe a bundled ESRD PPS would
have several objectives. These include eliminating incentives to
overuse profitable separately billable drugs, particularly EPO, the
targeting of greater payments to ESRD facilities with more costly
patients to promote both equitable payment and access to services, and
the promotion of operational efficiency. Because of the increased
flexibility a bundled PPS would provide in the delivery of outpatient
maintenance dialysis services, we believe that it could also increase
desirable clinical outcomes, resulting in an enhanced quality of care.

B. Statutory Authority for a Bundled ESRD PPS

1. BIPA
The Congress has twice required studies on the bundling of
additional services into the composite payment system. In section
422(c)(2) of the Medicare, Medicaid, and SCHIP Benefits Improvement and
Protection Act of 2000 (BIPA), Public Law 106-554, the Congress
required the Secretary

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to issue a report on a bundled system that would include separately
billable drugs and clinical laboratory services routinely used in
furnishing dialysis. The Secretary submitted this report, Toward a
Bundled Outpatient Medicare End Stage Renal Disease Prospective Payment
System, to Congress in May 2003. That report contained three major
findings that would form the basis for the subsequent development of a
bundled ESRD PPS:
1. Currently available administrative data are adequate for
proceeding with the development of an expanded outpatient ESRD PPS.
2. Case-mix adjustment is potentially feasible based on available
clinical information for ESRD patients in order to pay facilities
appropriately for treating more costly resource intensive patients.
3. Current quality review initiatives provide a basis for
monitoring the impact of a bundled ESRD PPS after implementation, to
ensure quality of care does not deteriorate in response to the system's
efficiency incentives.
The Secretary's May 2003 report contained recommendations and
conclusions drawn from research, which CMS had initiated on its own
prior to the enactment of the law. In September 2000, the Kidney
Epidemiology and Cost Center of the University of Michigan (UM-KECC)
was awarded a multi-phased research contract. That research led to UM-
KECC's August 2002 report, An Expanded Medicare Outpatient End Stage
Renal Disease Prospective Payment System, Phase I Report. This report
provided useful information on many of the issues that would need to be
addressed before a bundled ESRD PPS could be implemented, and formed
the foundation for the Secretary's May 2003 report.
2. MMA
The Medicare Prescription Drug, Improvement, and Modernization Act
of 2003 (MMA), Public Law 108-173, also required the Secretary to
submit to the Congress a report detailing the elements and features for
the design and implementation of a bundled ESRD PPS. Section 623(f)(1)
of the MMA specified that such a system should include the bundling of
separately billed drugs, clinical laboratory tests, and other items
``to the maximum extent feasible''. That section also required the
report to include a description of the methodology to be used to
establish payment rates and that the report, detailing the design of an
appropriate bundled payment system, be submitted to the Congress by
October 1, 2005. Section 623(e) of the MMA also required a
demonstration project testing the feasibility of using a fully bundled
case-mix adjusted ESRD PPS.
In addition to requiring a report on a bundled ESRD PPS, section
623 of the MMA amended section 1881(b) of the Act, by requiring
significant revisions to the composite payment system. Specifically,
section 623 of the MMA required:
An increase of 1.6 percent to the composite payment rates
effective January 1, 2005.
An add-on to composite rate payments to account for the
difference in payments for separately billable drugs based on a revised
drug pricing methodology compared to the previous method.
A ``basic'' case-mix adjustment to an ESRD facility's
composite payment rate reflecting a ``limited number of patient
characteristics.''
That total payments under the basic case-mix adjusted
composite payment system be budget neutral.
An annual increase to the basic case mix adjusted payment
amounts based on projected growth in expenditures for separately billed
drugs (the ``growth update'').
That payment rates be adjusted by a geographic index, as
determined appropriate by the Secretary (and phased-in to the extent
such index differed from the previous payment system).
Reinstatement of the composite rate exceptions process,
eliminated for most dialysis facilities beginning December 31, 2000
under BIPA, for ESRD pediatric facilities, effective October 1, 2002.
On August 5, 2004 and November 15, 2004, we published a proposed
rule and final rule (69 FR 47487 through 47730 and 69 FR 66235 through
66915), respectively, implementing the provisions affecting the
composite payment system effective January 1, 2005, as set forth in
section 623 of the MMA. We refer to the modified composite payment
system as the ``basic case-mix adjusted composite payment system''. The
development and application of the basic case-mix adjustments, using
regression based adjustment factors for the patient variables of age,
body surface area, and low body mass index, are explained in each of
those rules. (For more information, we refer readers to 69 FR 47529 and
69 FR 66323, respectively.) The product of the specific adjusters for
each patient, multiplied by the otherwise applicable composite payment
rate, yielded the basic case-mix adjustment required by the MMA. The
basic case-mix adjusted composite payment system was effective April 1,
2005, and was derived from UM-KECC's research summarized in its report,
Methodology for Developing a Basic Case-Mix Adjustment for the Medicare
ESRD Prospective Payment System (May 19, 2004 report and April 1, 2005
addendum).
Subsequent to our implementation of the MMA requirements discussed
above, UM-KECC continued its research to develop a case-mix adjusted
ESRD PPS that would combine composite rate and separately billable
services. UM-KECC reported its findings and recommendations in a final
report submitted to CMS in February 2008, End Stage Renal Disease
Payment System: Results of Research on Case-Mix Adjustment for an
Expanded Bundle. That report is available on the Internet at: http://www.sph.umich.edu/kecc/assets/documents/UM-KECC_Expanded_ESRD_Bundle.pdf. Individuals requiring special assistive technology may
contact CMS at 410-786-4533 between the hours of 8:30 a.m. and 5 p.m.
e.d.t. for assistance. UM-KECC's final report formed the basis for the
Secretary's February 2008 Report to Congress, A Design for a Bundled
End Stage Renal Disease Prospective Payment System, mandated under
section 623(f)(1) of the MMA.
The aspects of the basic case-mix adjusted composite payment system
implemented as a result of section 1881(b)(12) of the Act, as added by
section 623(d)(1) of the MMA, are important because they provide a
foundation for the development of the case-mix adjusted bundled ESRD
PPS required under Public Law 110-275, the Medicare Improvements for
Patients and Providers Act of 2008 (MIPPA). Accordingly, we briefly
describe below the basic case-mix adjustment under the current
composite payment system before turning to the relevant provisions of
MIPPA and the development of the proposed ESRD PPS.
3. The Basic Case-Mix Adjustment
Resources required to furnish routine dialysis such as staff and
equipment time vary by patient. For example, all other things being
equal, larger patients cost more to deliver the same dose of dialysis
than do smaller patients. Also, severely debilitated or aged patients
may require more staff time than do younger healthier patients. Because
of the variation in resources required to furnish routine dialysis to
individuals with varying patient characteristics, facilities that treat
a greater than average proportion of resource-intensive patients could
be economically disadvantaged if they are paid a rate

[[Page 49926]]

based on average resources. In addition, patients who are costlier than
average to dialyze may face difficulties gaining access to care because
a fixed composite payment rate could create a disincentive to treat
such patients. The purpose of a case-mix adjustment based on patient
characteristics is to make higher payments to ESRD facilities treating
more resource-intensive patients, according to objective quantifiable
criteria. Such an adjustment also would reduce the disincentives to
treat or provide the optimal dose of dialysis to such patients.
The costs of providing the routine maintenance dialysis services
that are paid under the composite rate are reported on the Medicare
cost reports for hospital-based and independent ESRD facilities (Forms
CMS 2552-96 and CMS 265-94, respectively). Patient-specific data
related to the costs of furnishing composite rate services are not
collected because these costs are included as part of the composite
rate and are not separately billed. However, earlier UM-KECC research
revealed considerable variability in costs and patient characteristics
among dialysis facilities, and that several patient characteristics
predicted facility costs. See Wolfe, R. et al., An expanded Medicare
outpatient end stage renal disease prospective payment system, Phase I
report, University of Michigan, Kidney Epidemiology and Cost Center,
August 2002; Hirth, R.A., et al., Is case-mix adjustment necessary for
an expanded dialysis bundle? Health Care Financing Review, Summer 2003,
24, pp. 77-88; Kidney Epidemiology and Cost Center: Methodology for
developing a basic case-mix adjustment for the Medicare ESRD
prospective payment system, May 19, 2004 report and April 1, 2005
addendum, prepared under contract no. N-12004-11-504200 for the Centers
for Medicare and Medicaid Services.
In order to determine a basic case-mix adjustment that could be
applied to each ESRD facility's composite rate, UM-KECC further
examined the relationship between facility-level costs for composite
rate services based on the Medicare cost reports for hospital-based and
independent facilities, and the average characteristics of patients
treated by the facility. The research used data from Medicare cost
reports for 3,254 independent and hospital-based ESRD facilities for
2000 to 2002, patient characteristics/co-morbidity data from CMS's
Medical Evidence Form 2728 for 1995 through 2002, and Medicare claims
for approximately 360,000 ESRD patients. See Hirth, R.A., et al.,
Economic impact of case-mix adjusting the dialysis composite rate,
Journal of the American Society of Nephrology, 16, 2005, pp. 1172-1176,
and Wheeler, John R. C., et al., Understanding the basic case-mix
adjustment for the composite rate, American Journal of Kidney Diseases,
47, No. 4, April 2006, pp. 666-671. Based on standard techniques of
multiple regression analysis, UM-KECC found that age and body size had
significant relationships to composite rate costs. The body size
variables were body surface area (BSA) and low body mass index (BMI),
calculated based on a patient's height and weight.
A BMI less than 18.5 kg/m\2\ is considered a clinical measure of
underweight status and is an indicator of patients who are malnourished
or suffering from co-morbidities such as wasting syndrome. BSA is
closely associated with the duration and intensity of dialysis required
to achieve targets for dialysis adequacy. Facilities with a larger
proportion of patients with a greater than average BSA, or with a BMI
lower than 18.5, were found to have greater composite rate costs. The
research also revealed a U-shaped relationship between age and
composite rate costs, with the youngest and oldest age groups incurring
greater costs for composite rate services due to resource needs.
Although several co-morbidities were found to have statistically
significant relationships to composite rate costs, CMS did not adopt
them to develop the basic case-mix system mandated by the MMA for a
number of reasons. For instance, the relationship of some co-
morbidities to the composite rate costs was not stable over time. In
addition, establishment of the diagnostic criteria used in connection
with specific co-morbidities required further study.
A few findings were surprising. For example, several patient
characteristics, notably type 1 or type 2 diabetes, which generally are
important with regard to the etiology of ESRD, did not show
statistically significant relationships to composite rate costs for
renal dialysis services. While the result that facilities with the
greatest number of oldest patients incurred greater composite rate
costs was expected, the finding that facilities with a higher
proportion of patients in the youngest age group (a group that excludes
pediatric patients or those less than age 18) incurred greater
composite rate costs as well, was unexpected.
The outcome of UM-KECC's research was a set of basic case-mix
adjusters or multipliers for ESRD patients based on three variables.
These variables were: (1) The patient's age (five groups), (2) BSA (a
patient-specific value based on incremental differences from the
national patient average), and (3) BMI category (two groups, value
either less than, or equal to/greater than 18.5 kg/m\2\). CMS also
developed a special adjuster for pediatric patients outside of UM-
KECC's research methodology based on analysis of a sample of Medicare
cost reports. The adjuster for each of these three variables is
multiplied by the facility's composite rate to yield the current
``basic'' case-mix adjustment for each ESRD patient according to the
specified patient characteristics.
These adjusters were as follows:

------------------------------------------------------------------------
Composite rate
Age group multiplier
------------------------------------------------------------------------
< 18.................................................... *1.62
18-44................................................... 1.223
45-59................................................... 1.055
60-69 (reference group)................................. 1.000
70-79................................................... 1.094
80+..................................................... 1.174
Body Surface Area (BSA): ..............
(per 0.1m\2\ change in BSA from national average of 1.037
1.84)................................................
Low Body Mass Index (BMI): ..............
(<18.5kg/m\2\)........................................ 1.112
------------------------------------------------------------------------
* Developed by CMS. The age, BSA, and BMI multipliers do not apply under
the basic case-mix adjustments for patients under age 18.

The above multipliers were derived from the coefficients of the
regression model used to predict facility differences in composite rate
costs based on UM-KECC's research. For example, the case-mix adjuster
for a 47 year old ESRD patient who is underweight (BMI < 18.5 kg/
m²) and has a BSA of 2.0 m² would be calculated
as follows:

Age Adjuster.............................. 1.055
BSA Adjuster.............................. 1.037 (2.0-1.84)/0.1 = 1.060
Low BMI Adjuster.......................... 1.112
Case-Mix Adjuster......................... 1.055 x 1.060 x 1.112 =
1.244

The resulting case-mix adjustment factor of 1.244 for this patient
would be multiplied by the facility's otherwise applicable wage
adjusted composite payment rate.
The basic case-mix adjustment mandated under the MMA only affects
the composite rate. It does not reflect costs associated with
separately billable services. Separately billable services,
particularly injectable drugs, are a significant component of the total
dialysis resources used for each patient. Prior to the enactment of
MIPPA on July 15, 2008, however, CMS did not have authority to bundle
those services into a case-mix adjusted PPS.

[[Page 49927]]

4. MIPPA
The implementation of the basic case-mix adjustments to the
composite payment system effective April 1, 2005, and the Secretary's
February 2008 Report to Congress, suggested that an expanded or bundled
ESRD PPS which combined composite rate and separately billable services
to yield case-mix adjusted payments was technically feasible. The
report defined a payment bundle of dialysis-related services, described
the methodology used to develop the regression based case-mix adjusters
and the base period payment rates to which the case-mix adjusters would
be applied, and discussed numerous other issues relevant to the
bundling of outpatient dialysis services under a system of prospective
payments. As a result of the July 15, 2008 enactment of MIPPA, section
153(b) of MIPPA amended section 1881(b) of the Act to require the
implementation of an ESRD bundled payment system effective January 1,
2011 (herein referred to as the ``ESRD PPS''). Consistent with the
language under the statute, we will refer to hospital-based and
independent renal dialysis facilities as ``providers'' and
``facilities'', respectively, and when addressing both types of
facilities, we will collectively refer to such entities as ``ESRD
facilities'', as set forth in proposed Sec. 413.171. Section 153(b) of
MIPPA specifies the following:
The Secretary must implement a payment system under which
a single payment is made to a provider of services or a renal dialysis
facility for ``renal dialysis services'' in lieu of any other payment,
and for such services and items furnished for home dialysis and self-
care home dialysis support services.
A definition for the ``renal dialysis services'' that are
included in the bundle.
The estimated amount of total payments under the ESRD PPS
for 2011 must be equal to 98 percent of the estimated total amount of
payments for renal dialysis services paid under Medicare, including
payments for drugs, that would have been made with regard to services
in 2011 if the new system was not implemented. Such estimate must be
made based on per patient utilization data from 2007, 2008, or 2009,
whichever year has the lowest per patient utilization.
The ESRD PPS must include adjustments for case-mix
variables, high cost outlier payments, and low-volume facilities and
provide for a four-year transition (phase-in) period, with all
facilities transitioned into the bundled ESRD PPS on January 1, 2014.
ESRD facilities may make a one-time election before January 1, 2011, to
be paid under the ESRD PPS and not go through the transition period.
The ESRD PPS may include other payment adjustments, as the
Secretary determines appropriate, including the use of a geographic
index, and potential adjustments for pediatric patients and rural
dialysis centers, and may provide for a unit of payment as the
Secretary specifies (for example, per treatment or per unit of time).
The ESRD PPS payment amounts must be annually increased by
an ESRD bundled market basket beginning in 2012, and during the
transition.
Section 623(e) of the MMA, which requires a demonstration
project of the use of a case-mix adjusted bundled ESRD PPS, be
repealed.
Section 153(a)(1) of MIPPA also requires that the composite payment
rates be increased by 1.0 percent effective for services furnished on
or after January 1, 2009, and before January 1, 2010, and increased by
1.0 percent for services furnished on or after January 1, 2010. In
addition, section 153(a)(2) of MIPPA requires that the payment rate for
dialysis services furnished on or after January 1, 2009, by ESRD
providers of services, be the same as the payment rate for such
services furnished by renal dialysis facilities. On November 19, 2008,
we published the CY 2009 Physician Fee Schedule final rule (73 FR
69754), implementing the site neutral composite rate for ESRD
facilities, and the CY 2009 1.0 percent increase to the composite rate.
We expect to publish the CY 2010 1.0 percent increase to the composite
rate in the CY 2010 Physician Fee Schedule final rule.
In the following sections of this notice of proposed rulemaking, we
describe the ESRD PPS we are proposing to implement effective January
1, 2011, in compliance with the statutory requirements of MIPPA.

II. Overview of the Proposed ESRD PPS

This proposed rule would implement a case-mix adjusted bundled PPS
for Medicare outpatient ESRD dialysis patients beginning January 1,
2011, in accordance with the statutory provisions set forth in section
153(b) of MIPPA. We propose to implement this new system as described
in proposed Sec. 413.172 and Sec. 413.215. The proposed ESRD PPS
would replace the current basic case-mix adjusted composite payment
system and methodologies for the reimbursement of separately billable
outpatient ESRD services. Specifically, we propose that the ESRD PPS
would combine payments for composite rate and separately billable
services into a single base rate of $198.64 developed from CY 2007
claims data. Under the proposed rule, the base rate would be
subsequently adjusted using patient-specific case-mix adjustment
factors developed from separate equations for composite rate and
separately billable services. The case-mix adjusters would include
variables for age, body surface area (BSA), low body mass index (BMI),
gender, eleven co-morbidity categories, and the onset of renal
dialysis. These proposed adjustment factors were developed using
standard techniques of multiple regression to yield case-mix adjusted
payments per treatment. The per treatment payment amounts would also be
adjusted to reflect urban and rural differences in area wage levels
using an area wage index developed from Core Based Statistical Areas
(CBSAs definitions). The proposed rule also provides that ESRD
facilities treating patients with unusually high resource requirements
as measured through their utilization of identified services beyond a
specified threshold would be entitled to outlier payments, that is,
additional payments beyond the otherwise applicable case-mix adjusted
bundled prospective payment amount. The proposed ESRD PPS also provides
for special adjustments for pediatric patients and for facilities
treating a low volume of ESRD patients, as well as a 4-year transition
(phase-in) period under which facilities would receive a blend of
payments under the prior case-mix adjusted composite payment system and
the new ESRD PPS.

III. The Proposed ESRD PPS Bundle

Section 1881(b)(14)(A)(i) of the Act, as added by section 153(b) of
MIPPA, specifies that the ESRD PPS must represent a single payment to
ESRD facilities for ``renal dialysis services'' in lieu of any other
payment, and home dialysis supplies, equipment, and support services
furnished pursuant to section 1881(b)(4) of the Act. Section
1881(b)(14)(B) of the Act, which identifies the renal dialysis services
that are to be included in the ESRD PPS payment bundle, provides the
following:

* * * the term ``renal dialysis services'' includes--
(i) Items and services included in the composite rate for renal
dialysis services as of December 31, 2010;
(ii) Erythropoiesis stimulating agents and any oral form of such
agents that are furnished to individuals for the treatment of end
stage renal disease;
(iii) Other drugs and biologicals that are furnished to
individuals for the treatment of

[[Page 49928]]

end stage renal disease and for which payment was(before application
of this [new ESRD PPS]) made separately under this title, and any
oral equivalent form of such drug or biological; and
(iv) Diagnostic laboratory tests and other items and services
not described in clause (i) that are furnished to individuals for
the treatment of end stage renal disease.

The methodology, which we subsequently describe, for the
development of the proposed ESRD PPS, generally identifies the renal
dialysis services that we propose to include in the proposed payment
bundle in accordance with our interpretation of the statute. We also
discuss in more detail below the definition for renal dialysis services
under section 1881(b)(14)(B) of the Act.

A. Composite Rate Services

Section 1881(b)(14)(B)(i) of the Act requires that the ESRD PPS
payment bundle include composite rate services. As we indicated
previously, the current case-mix adjusted composite payment system
represents a limited PPS for a bundle of outpatient renal dialysis
services that includes maintenance dialysis treatments and all
associated services including historically defined dialysis-related
drugs, laboratory tests, equipment, supplies, and staff time. It
applies to Medicare beneficiaries receiving dialysis in ESRD facilities
and to patients who have elected Method I home dialysis. (Under Method
I, the ESRD facility with which the home patient is associated assumes
responsibility for furnishing all home dialysis equipment, supplies,
and home support services included in the provision of composite rate
services. (See section 2740 of CMS Pub. 15-1.)) The ESRD facility
receives reimbursement under the current case-mix adjusted composite
payment system. For all other ESRD outpatient services not included in
the composite payment rate under the current system, such items and
services are billed separately in accordance with Medicare fee
schedules and other payment methodologies under Part B and Part D. We
propose to include in the proposed ESRD PPS those items and services
included in the composite rate for renal dialysis services as of
December 31, 2010, including self-dialysis training services, such as
labor, supplies, and equipment(for greater detail, see discussion on
self-dialysis training sessions in section E.2). Therefore, these costs
for such composite rate services would be included in our computation
of the proposed ESRD PPS base rate as explained in section VII. of this
proposed rule. This not only would include payments for the costs of
services directly related to dialysis, including payments for the costs
of self-dialysis training sessions, but also payments authorized in
accordance with the composite payment rate exception provisions set
forth in 42 CFR 413.180 through 413.186. The costs for composite rate
services are also included in our development of the composite rate
regression model used to create the two equation patient specific case-
mix adjusters that would be applied to the base rate. Composite rate
services are defined in proposed Sec. 413.171.

B. ESAs and Their Oral Forms

Section 1881(b)(14)(B)(ii) of the Act requires that ESAs and any
oral form of such agents that are furnished to individuals for the
treatment of ESRD be included in the ESRD PPS payment bundle. Epoetin
alfa (EPO, for example, Epogen[reg]) and darbepoetin (ARANESP[reg]) are
injectable ESAs, which are currently separately billable outside of the
case-mix adjusted composite payment system. Payments for EPO[reg] and
ARANESP[reg] would be included in the calculation of the proposed ESRD
PPS base rate. These agents would also be included in the separately
billable regression model used to create the two equation patient
specific case-mix adjusters for the proposed ESRD PPS. We are currently
unaware of any other injectable ESAs or oral forms of such ESAs used
for the treatment of ESRD. However, should such agents become available
subsequent to the implementation of the ESRD PPS on January 1, 2011,
these agents would be considered renal dialysis services and subject to
payment under the ESRD PPS. That is, consistent with the statute, we
propose that no additional payment would be provided for such agents
outside of the bundle of renal dialysis services included in the ESRD
PPS. The inclusion of ESA's and their oral forms as renal dialysis
services in the ESRD PPS payment bundle is set forth in proposed
Medicare regulation 413.171.

C. Other Drugs and Biologicals and Their Oral Equivalents

Section 1881(b)(14)(B)(iii) of the Act specifies that other drugs
and biologicals that were furnished to individuals for the treatment of
ESRD and for which payment was made separately under this title, prior
to the implementation of the ESRD PPS, and their oral equivalent forms,
must be included in the ESRD PPS payment bundle. Given the reference to
``this title,'' we interpret clause (iii) as requiring the inclusion in
the ESRD PPS payment bundle all drugs and biologicals that were
separately billable prior to the implementation of MIPPA under title
XVIII of the Act. Therefore, we believe the ESRD PPS payment bundle
would include all drugs and biologicals formerly separately payable
under Medicare Part B and Part D. We recognize that an alternative
reading of the last part of clause (iii) with respect to the phrase
``and any oral equivalent form of such drug or biological'' could be
interpreted to limit the scope of the drugs and biologicals included in
the bundle to only oral versions of injectables (or other non-oral
routes of administration). However, we believe that this reading of the
statute is unduly constrained. Therefore, our view is that the intent
of clause (iii) is to include all drugs and biologicals formerly
payable under either Medicare Part B or Part D used to treat ESRD,
regardless of the route of administration.
We believe that the exclusion of oral drugs and biologicals for
which there is no injectable equivalent (or other non-oral form of
administration) from the ESRD PPS would defeat one of the very purposes
of the new system--the inclusion of all renal dialysis services
furnished to ESRD patients in a comprehensive payment bundle to which a
reasonable payment amount can be attached empirically. In addition, the
exclusion of oral drugs and biologicals for which there is no
injectable (or other non-oral) version does not make sense from a
payment policy perspective. Such a policy would result in the gradual
growth of excluded services from the ESRD PPS payment bundle, and the
progressive erosion of the payment system, as new oral-only drugs and
biologicals for the treatment of ESRD emerge. Moreover, we believe the
inclusion of such drugs and biologicals is supportable under clause
(iv). That is, we believe the language under clause (iv) addressing
``other items and services not covered in clause (i),'' provides
sufficient authority to include all drugs and biologicals, including
oral-only drugs and biologicals, used to treat ESRD in the ESRD PPS
payment bundle. Therefore, we are proposing that drugs and biologicals
used to treat ESRD that were separately payable prior to January 1,
2011, be included as part of the proposed ESRD PPS payment bundle.
Accordingly, we propose to include such drugs and biologicals in the
development of the proposed patient-specific case-mix adjusters and in
the calculation of the proposed ESRD base rate to which the adjusters
would be

[[Page 49929]]

applied. We identified specific National Drug Codes (NDCs) for drugs
and biologicals previously payable under part D that we propose to
include in the payment bundle. However, we propose that the ESRD PPS
will apply, regardless of the emergence of new drugs or biologicals, or
different NDCs for the classes of drugs and biologicals included in the
ESRD PPS bundle. Finally, section 1881(b)(14)(B) of the Act
specifically excludes vaccines from the payment bundle and, therefore,
vaccines will not be included in the proposed ESRD PPS. We are seeking
comments on our proposals above.
We have found that eleven drugs and biologicals accounted for 99.7
percent of the payments under Part B for all injectable drugs and
biologicals that were furnished to outpatient ESRD patients in CY 2007.
These drugs and biologicals are epoetin alfa (EPO[reg]), darbepoetin
alfa (ARANESP[reg]), calcitriol, doxercalciferol, paracalcitol, iron
sucrose, sodium ferric gluconate, levocarnitine, alteplase recombinant,
vancomycin, and daptomycin. These drugs and biologicals, as well as the
others comprising 0.3 percent of the total payments for drugs and
biologicals under Part B in CY 2007, would be included in the proposed
ESRD PPS payment bundle. Of the top eleven injectable drugs and
biologicals, several have oral versions. For example, levocarnitine,
and the vitamin D analogues calcitriol, doxercalciferol, and
paricalcitol are also available in oral form. The oral versions of
these drugs are currently covered under Medicare Part D. Other drugs
used to treat ESRD are available only in oral form and are currently
payable under Part D. These include cinacalcet hydrochloride, lanthanum
carbonate, calcium acetate, sevelamer hydrochloride, and sevelamer
carbonate. Consistent with our interpretation of section
1881(b)(14)(B)(iii) of the Act, we propose that payments for all drugs
and biologicals furnished to ESRD patients and separately billable
prior to January 1, 2011, would be included under the proposed ESRD PPS
payment bundle as renal dialysis services. Under this proposal,
separate billing for these services would be prohibited. The proposed
ESRD PPS methodology, both with respect to the computation of the case-
mix adjusters and the calculation of the proposed ESRD base rate to
which the adjusters would be applied, includes payments for these
services. The inclusion of other drugs and biologicals and their oral
equivalents as renal dialysis services in the ESRD PPS payment bundle
is set forth in proposed Sec. 413.171.

D. Diagnostic Laboratory Tests and Other Items and Services

Section 1881(b)(14)(B)(iv) of the Act requires that diagnostic
laboratory tests not included under the composite payment rate (that
is, currently separately billable laboratory tests) must be included as
part of the ESRD PPS payment bundle. We propose to define such
laboratory tests as laboratory tests that are separately billed by ESRD
facilities as of December 31, 2010, and laboratory tests ordered by a
physician who receives monthly capitation payments (MCPs) for treating
ESRD patients that are separately billed by independent laboratories.
Because many of the same diagnostic laboratory tests can be performed
for both ESRD and non-ESRD patients, we believe that this approach for
including laboratory services appropriately captures tests for
inclusion in the payment bundle. We propose that payments for these
laboratory services would be included in the development of the
proposed patient-specific case-mix adjusters and in the proposed ESRD
base rate to which the adjusters would be applied.
Section 1881(b)(14)(B)(iv) of the Act also requires that the ESRD
PPS payment bundle include ``other items and services not described in
clause (i)''. We believe that this language can be reasonably
interpreted to include other separately billable items and services
used in the treatment of ESRD, such as supplies. Examples of such items
and services would include, but not be limited to, items such as
syringes, specialized tubing, as well as blood and blood products,
which facilities may furnish during the dialysis treatment. We also
believe that the language also can be interpreted to include the cost
of other self-dialysis training services in the ESRD PPS (for further
detail on self-dialysis training, see section E.2. below). We propose
that such items and services be included in the ESRD PPS bundle. The
inclusion of diagnostic laboratory tests and other items and services
as renal dialysis services in the ESRD PPS payment bundle is set forth
in proposed Sec. 413.171.

E. Home Dialysis Patients (Method I and II) and Self-Dialysis Training

Section 1881(b)(4) of the Act authorizes the Secretary to make
payment to providers of services and renal dialysis facilities, and to
suppliers of home dialysis supplies and equipment, for the cost of home
dialysis supplies and equipment and self-care home dialysis support
services furnished to patients for self-care home dialysis. As a result
of section 153(b) of MIPPA, as explained above, section
1881(b)(14)(A)(i) of the Act requires the Secretary to implement a
payment system under which a single payment is made under this title to
an ESRD facility for renal dialysis services and for such services and
items furnished pursuant to section 1881(b)(4) of the Act. As we
explained above, we also believe that self-dialysis training services
would be considered renal dialysis services as defined in section
1881(b)(14)(B) of the Act. As a result, we are proposing that the costs
of home dialysis services furnished to both Method I and Method II home
dialysis patients under the current basic case-mix adjusted payment
system, as well as self-dialysis training services, must be combined
into a single payment under the proposed ESRD PPS.
1. Payment for Home Dialysis
Currently, Hemodialysis, Continuous Cycling Peritoneal Dialysis
(CCPD), Intermittent Peritoneal Dialysis (IPD) and Continuous
Ambulatory Peritoneal Dialysis (CAPD) treatment modalities may be
performed at home by appropriately trained patients. Medicare
beneficiaries dialyzing at home must complete a Medicare Beneficiary
Form (CMS-382) selecting between two methods of payment (Method I or
Method II) as described below.
a. Method I--The Composite Rate
If a Medicare home dialysis patient chooses Method I, the ESRD
facility with which the patient is associated must assume
responsibility for providing all home dialysis equipment and supplies
as well as providing home support services and receives the composite
payment rate for such services. Support services needed to furnish home
dialysis services include, but are not limited to: (1) Periodic
monitoring of a patient's adaptation to home dialysis and performance
of dialysis; (2) visits by trained technical personnel made in
accordance with a plan prepared by a professional team; (3) unscheduled
visits on an as needed basis; and (4) providing, installing, repairing,
testing, and maintaining home dialysis equipment including appropriate
water testing and treatment. For these services, the ESRD facility
receives, in accordance with Sec. 414.330(a), the same Medicare
dialysis payment rate as it would receive for an in-facility patient
under the basic case-mix adjusted composite payment system. Under
Method I, the ESRD facility bills the Medicare Administrative
Contractor/Fiscal

[[Page 49930]]

Intermediary (MAC/FI) and the beneficiary is responsible for paying the
Medicare Part B deductible and the 20 percent coinsurance on the
Medicare rate to the facility.
b. Method II--Dealing Directly With Suppliers
In accordance with regulations at Sec. 414.330(a)(2), a Medicare
ESRD beneficiary can elect to obtain home dialysis equipment and
supplies from a supplier, that is not a Medicare approved dialysis
facility (Method II). If a beneficiary elects Method II, the
beneficiary will deal directly with a single Medicare Durable Medical
Equipment, Prosthetics, Orthotics and Supplies (DMEPOS) supplier to
secure the necessary supplies and equipment to dialyze at home. The
selected DMEPOS supplier (not a dialysis facility) must accept
assignment and bills the Durable Medical Equipment Medicare
Administrative Contractor (DME MAC). The beneficiary is financially
responsible to the supplier for any unmet Medicare Part B deductible
and for the 20 percent Medicare Part B coinsurance requirement. The
amount of Medicare payment under Method II for home dialysis equipment
and supplies may not exceed $1,974.25 per month for CCPD and $1,490.85
per month (57 FR 54186, published November 17, 1992) for all other
modalities of home dialysis.
For each beneficiary it serves, the supplier is required to
maintain a written agreement with an approved ESRD facility to provide
backup and support services. An ESRD facility that has a written
agreement to supply backup and support services bills the MAC/FI for
services provided under the agreement. Under Method II, an ESRD
facility may be paid up to $121.15 (57 FR 54186, published November 17,
1992) per month for home dialysis support services, such as arranging
for the provision of all ESRD related laboratory tests and billing for
the laboratory tests that are included in the composite payment rate.
An ESRD facility may not be paid for home dialysis equipment or
supplies under Method II.
Based on 2004-2006 data, only 3.1 percent of renal facilities
report support service costs furnished to Medicare Method II home
dialysis patients. The data also show that the number of Method II
patients is small and has significantly declined over the study period
(that is, 2004-2006) as shown below.

------------------------------------------------------------------------
Patients Year
------------------------------------------------------------------------
5289......................................................... 2004
4465......................................................... 2005
2635......................................................... 2006
------------------------------------------------------------------------

We are proposing that payment for all home dialysis services
excluding physicians' services (See section III.F. below regarding the
exclusion of physicians' services) would be included in the bundled
payment to the ESRD facility, under the proposed ESRD PPS.
In addition, as we indicated, section 1881(b)(14)(A)(i) of the Act
requires that a single payment for renal dialysis services and items
and services under section 1881(b)(4) be made to an ESRD facility.
Therefore, since we are proposing that the costs of home dialysis
services furnished under Method I and Method II (see section V Data
Sources), regardless of home treatment modality, would be included in
the proposed ESRD PPS, we also are proposing that the Method II home
dialysis approach in its present form would no longer exist under the
proposed ESRD PPS. With regard to payment limits for home dialysis
services, in accordance with 6203(b) of Public Law 101-239, we
published a final rule on November 17, 1992 implementing (57 FR 54179),
Medicare program payment changes for home dialysis. In section
413.330(c), we set payment limits on what Medicare would pay for home
dialysis supplies, equipment, and home support services as explained
above. Accordingly, effective January 1, 2011, we propose to revise
Sec. 414.330 to reflect that payment as established in section
1881(b)(14) of the Act will be the basis for home dialysis supplies,
equipment, and home support services and therefore, Medicare would pay
for home dialysis equipment, supplies and support services only under
the prospective payment rate established in proposed 413.210 and
payment limits previously established for such would no longer apply.
We also note, that this proposal would not eliminate Method I in its
present form. Therefore, effective January 1, 2011, a supplier could
only furnish, under an arrangement with the ESRD facility, home
dialysis equipment and supplies to a Medicare home dialysis
beneficiary, and then the supplier would need to look to the ESRD
facility for payment. We believe that this would reduce the
administrative burden of maintaining two payment methods for home
dialysis patients, since we believe that section 1881(b)(14)(A)(i)
requires that all Medicare home dialysis patients would be paid under
the ESRD PPS. We invite public comments on this proposal.
2. Self-Dialysis Training
Currently, Medicare covers home hemodialysis training and two forms
of PD training programs. Home dialysis and self-dialysis can only be
performed after an ESRD patient has completed an appropriate course of
training. The scope of training services that a certified facility
provides to ESRD patients is described in Sec. 494.100(a). Medicare
pays the ESRD facility its case-mix adjusted composite rate plus $12
per training treatment for CAPD and $20 per training treatment for
CCPD. For hemodialysis training, Medicare pays the ESRD facility its
case-mix adjusted composite rate plus $20 per training treatment
(Medicare Claims Processing Manual, Chapter 8, Outpatient ESRD
Hospitals, Independent Facility, and Physician/Supplier Claims, Section
50.8, Training and Retraining). We point out that effective January 1,
2011, under the proposed ESRD PPS, ESRD facilities would no longer
receive an add-on of $12 for CAPD and $20 for hemodialysis and CCPD to
the otherwise applicable payment amount per treatment for the costs of
training. In addition, ESRD facility training expenses are included in
the base period payment rate to which the combined rate and payment
multiplier in the proposed two-equation model is applied.
As we indicated, section 1881(b)(14)(B) of the Act, as added by
section 153(b) of MIPPA, specifies the renal dialysis services that
must be included in the ESRD PPS. Since self-dialysis training is used
to train patients for the treatment modality of home dialysis with
little or no help, we believe that these services would be considered
``renal dialysis services.'' As we indicated above, services related to
self-training would meet the definition under clauses (i) and (iv) of
section 1881(b)(14)(B) of the Act. As such, we propose to include the
cost of self-dialysis training in the proposed ESRD PPS. We evaluated
the current training cost reported by ESRD facilities (see section V
Data Sources) to train ESRD patients for home dialysis. Training costs
have been included in the composite rate payment adjusters in the
proposed ESRD PPS. In section VIII.A. of this proposed rule, we point
out that total composite rate costs included in the per treatment
calculation include costs incurred for training expenses, as well as
all home dialysis costs. We used the ESRD facilities cost reports to
identify provider costs for training rather than payments. Therefore,
in this proposed rule we propose to include

[[Page 49931]]

these costs in the composite rate portion of the two-equation ESRD PPS
model described in section VI of this proposed rule. We believe that
including training and home dialysis costs in the ESRD PPS would
provide increased flexibility to dialysis centers for greater use of
less costly PD and alternative treatment regimens such as nocturnal
dialysis, home hemodialysis using compact portable dialysis machines,
and shorter but more frequent dialysis sessions. For these reasons, we
are proposing to include training and home dialysis costs in the
proposed ESRD PPS, as set forth in proposed Sec. 413.217. Training
costs were included in the calculation of the composite rate costs used
to develop the regression-based adjustment factors for the composite
rate portion of the two-equation model described in section VIII. In
addition, the base rate to which the patient-specific case-mix
adjustment factors are applied includes payments to ESRD facilities for
training expenses. Because we are proposing that training costs under
the ESRD PPS would be treated no differently than any other overhead
expense, an explicit adjustment to the bundled payment amount for HD
and PD training expenditures would not be necessary. We are seeking
comments on our proposal to include home dialysis training services in
the proposed ESRD PPS.

F. Physicians' Services

Section 1881(b)(14)(A)(i), as added by MIPPA, states as follows in
pertinent part:

``* * * the Secretary shall implement a payment system under which a
single payment is made under this title to a provider of services or
a renal dialysis facility for renal dialysis services (as defined in
subparagraph (B)) in lieu of any other payment * * * and for such
services and items furnished pursuant to [section 1881(b)(4)].''

We believe this provision generally governs payment to ESRD
facilities. With regard to physicians' services related to renal
dialysis, such services are addressed in section 1881(b)(3) of the Act.
At this time, we do not intend to significantly modify payment for
physicians' services. Any changes with regard to the payment for
physicians' services related to renal dialysis would be addressed in
future rulemaking. Therefore, the scope of this proposed rule generally
will be limited to payment for home dialysis and renal dialysis
services furnished by ESRD facilities.

IV. Unit of Payment

Under section 1881(b)(14)(C) of the Act, as added by section 153(b)
of MIPPA, the ESRD PPS may provide for payment on the basis of renal
dialysis services furnished during a week, or month, or such other
appropriate unit of payment as the Secretary specifies. Approximately
92 percent of ESRD beneficiaries requiring outpatient dialysis undergo
hemodialysis (HD), usually furnished in a facility. A small but
increasing number of patients perform HD at home. The most typical
schedule is 3 treatments per week, with each treatment averaging 3 to 4
hours. The remaining 8 percent of patients use peritoneal dialysis
(PD). PD is usually done at home, with or without machine assistance.
Unlike HD, which involves the circulation of the patient's blood and
filtration of toxins using an artificial kidney machine, PD removes
blood toxins through the draining of the dialysate from the lining of
the abdomen or peritoneum several times a day. A form of PD, sometimes
referred to as continuous cycling PD, is done with machine assistance
while the patient sleeps, either at home or in specially designated
areas at the ESRD facility.
Since the inception of the composite payment system in 1983, ESRD
facilities have been reimbursed the applicable payment per treatment,
with a maximum of 3 treatments for each full week a patient undergoes
outpatient dialysis, unless additional treatments are justified by
medical necessity. The 3-times weekly payment approach has applied
regardless of whether the mode of dialysis is HD or PD. For example, an
ESRD facility's payment for a Method I home patient on PD for 21 days
would be equal to 21/7 x 3 or 9 times the composite rate per treatment.
Both the Secretary's May 2003 and February 2008 reports on the
development of a bundled ESRD PPS discussed the limitations of the per
treatment method of payment under the composite payment system. For
example, some have charged that the composite payment system's 3 times
weekly payment structure, regardless of dialysis modality, has
discouraged innovative treatment approaches that could lead to better
clinical outcomes and an enhanced quality of life for patients. We
believe that the argument is two-fold. First, the reliance on
separately billable services as a source of revenue growth for ESRD
facilities has potentially impeded the greater use of less costly PD
(which typically uses fewer separately billable drugs and less provider
and facility overhead expense). Second, others argue that constraining
payment based on number of treatments may reduce the use of alternative
treatment regimens such as increased frequency nocturnal dialysis, home
HD using compact portable dialysis machines, and shorter but more
frequent dialysis sessions (for example, 1.5 to 2 hours, five or six
days per week).
These critics have maintained that combining composite rate and
separately billable services during a specified interval of time would
provide ESRD facilities the financing flexibility to use whatever forms
of dialysis were in the best interests of the patient. Because ESRD
facilities generally submit to Medicare a bill for all outpatient
dialysis services furnished to a patient during the month, an ESRD PPS
based on monthly payments was suggested as an alternative in the
Secretary's February 2008 Report to Congress. As we indicated above,
section 1881(b)(14)(C) of the Act, as added by section 153(b) of MIPPA,
gives the Secretary the discretion to establish an ESRD PPS based on an
interval of time, or other appropriate unit of payment. In this notice
we are proposing to establish an ESRD PPS which relies on a per
treatment unit of payment. We propose to continue the present per
treatment basis of payment in which ESRD facilities would be paid for
up to three treatments per week, unless medical necessity justified
more than three weekly treatments. ESRD facilities treating patients on
PD or home HD would also receive payments for up to three treatments
for each week of dialysis, unless medical necessity justified the
furnishing of additional treatments. Our reasons for continuing the
present per treatment method of payment under the proposed ESRD PPS are
set forth below.

A. Administrative Complexity Due to Phase-In

Section 1881(b)(14)(E)(i) of the Act provides for a 4-year phase-in
(transition), in equal increments for the implementation of the ESRD
PPS. That is, the payments beginning January 1, 2011, must consist of a
blend of the payment amounts under the new system and the prior payment
rates in the following proportions:

------------------------------------------------------------------------
Prior
New PPS payment
Effective (percent) amounts
(percent)
------------------------------------------------------------------------
1/1/2011...................................... 25 75
1/1/2012...................................... 50 50
1/1/2013...................................... 75 25
1/1/2014...................................... 100 0
------------------------------------------------------------------------

[[Page 49932]]

Although ESRD facilities could elect to be excluded from the phase-
in, in accordance with section 1881(b)(14)(E)(ii) of the Act,
application of the phase-in under a monthly ESRD PPS would mean that a
portion of each ESRD facility's total payments, would be based on a
monthly payment methodology, while a portion would be based on the
current per treatment system. We believe that combining a monthly ESRD
PPS with the current per treatment methodology during the transition
period would unduly complicate billing and increase the likelihood of
payment errors and processing delays.

B. Administrative Complexity Due to Interruptions in Service

A monthly payment approach under the ESRD PPS likely would not pose
a problem for patients who receive their dialysis treatments at a
single ESRD facility throughout the month with no interruptions in
service. However, we note that this situation applies to about 81
percent of patient months. Approximately 19 percent of outpatient
dialysis patients incur an interruption of service or receive their
treatments at more than one facility during a month. The combination of
intervening events in the available data for CYs 2004-2006 is shown in
Table 1.
BILLING CODE 4120-01-P

[[Page 49933]]

[GRAPHIC] [TIFF OMITTED] TP29SE09.000

BILLING CODE 4120-01-C
To properly account for events which interrupt a patient's
outpatient dialysis, the days associated with these intervening events
would have to be tracked and counted so that a pro rata reduction to
the otherwise applicable monthly payment amount could be determined.
This becomes especially cumbersome if a patient receives treatments at
more than one facility and an interruption in service occurs (for
example, due to hospitalization). Although Table 1 reveals that this
circumstance occurs in less than 1 percent of patient months, the
administrative complexity involved in monitoring events, which cause an
interruption in the patient's normal schedule of receiving dialysis
treatments, particularly where multiple

[[Page 49934]]

facilities are involved, would be considerable.
Table 1 shows that for CY 2006, 79.05 percent of patient months did
not involve an intervening event and did not include transfer to
another facility. These patient months, when included with CY 2006
events that also account for an interruption of dialysis due to
hospitalization, start of dialysis later in the month, or death/
withdrawal from dialysis, account for 94.09 percent of CY 2006 patient
months. One option that we considered for the approximately 15 percent
of patient months in which a patient did not undergo a full month of
dialysis due to hospitalization, onset of dialysis later in the month,
or death/withdrawal from dialysis, was applying a prorated monthly
payment rate to cover these situations, and reverting to a per
treatment payment methodology for all other situations. However, we
believe that this approach would be too administratively complex. For
example, under this approach a facility could find that some of its
patients would be paid a full monthly ESRD PPS rate, those with an
interruption in service would be paid a prorated monthly rate, and
others would be paid based on a per treatment method.

C. No Incentive To Discourage Skipped Treatments

A monthly ESRD PPS would afford facilities the maximum degree of
clinical flexibility in treating patients. Facilities could provide
whatever mode and frequency of dialysis, were in the best interests of
the patient. However, under a monthly ESRD PPS, we believe that
facilities may make less of an effort to discourage patients from
skipping treatments. Because facilities do not receive reimbursement
for skipped sessions under the current per treatment payment system, we
are very concerned that a monthly ESRD PPS would provide no incentives
for discouraging skipped treatments. Therefore, implementation of a
monthly ESRD PPS would require either a stringent monitoring system to
ensure the skipping of treatments does not become a byproduct of the
new PPS's incentives, or require that a minimum number of treatments
must be furnished to each patient in a month to ensure quality of care
does not deteriorate. Both options would undercut two of the
principles, which are part of the foundation of the new ESRD PPS,
administrative simplicity and clinical flexibility.
Given the difficulties of implementing a monthly ESRD PPS during a
transition period in which a per treatment methodology applies, we are
proposing to continue the present per treatment payment methodology in
connection with the proposed ESRD PPS, as set forth in proposed Sec.
413.215. We may reconsider this decision after the transition period
has ended. Some of the factors that we may evaluate at that time are
whether the ESRD PPS has resulted in improved clinical outcomes, the
degree to which facilities have increased the utilization of other
modes of dialysis such as home PD, and whether interested stakeholders
at that time would favor a monthly or other per unit of time payment
methodology. We especially encourage comments from the industry and
from organizations representing dialysis patients on our proposal to
continue the per treatment methodology under the proposed ESRD PPS. In
the following sections, we describe the data sources and analytical
techniques used to develop the proposed per treatment ESRD PPS.

V. Data Sources

As discussed above, section 1881(b)(14)(B) of the Act, as added by
section 153(b) of MIPPA, defines the renal dialysis services that must
be included in the ESRD PPS. Based on our interpretation of the
statute, we are proposing to construct the payment bundle using the
following Medicare cost and payment information:
Composite rate services as measured using composite rate
costs as calculated from the Medicare cost reports;
Drugs and biologicals (for example, injectables) that are
separately billed by ESRD facilities on Medicare outpatient
institutional claims;
Drugs and biologicals (for example, oral) used to treat
ESRD patients obtained from claims submitted by Part D stand-alone
prescription drug plans;
Laboratory tests that are separately billed by ESRD
facilities on Medicare outpatient institutional claims;
Laboratory tests ordered by a physician who receives MCPs
for treating ESRD patients that are separately billed by independent
laboratories;
Other items and services separately billed by ESRD
facilities that are used in conjunction with injectable medications or
laboratory tests, such as blood products, syringes, and other dialysis
supplies that are billed on Medicare outpatient institutional claims.
While cost information for composite rate services is available
from the Medicare cost reports, the cost report does not contain
information on the costs of the separately billable categories of
services noted above. Accordingly, the methodology described in this
notice of proposed rulemaking applicable to separately billable
services relies on separately billable payment information from
Medicare claims.
The descriptive statistics, case-mix model, and other analyses
presented in this proposed rule are based primarily on CMS claims files
for Medicare ESRD patients, and the Medicare cost reports for hospital-
based ESRD outpatient dialysis providers and independent ESRD
facilities. Resource utilization for separately billable services was
based on patient-level Medicare outpatient claims for CYs 2004 through
2006. Since composite rate cost information is available only at the
facility level, resource utilization for composite rate services was
measured using the Medicare cost reports for each outpatient dialysis
provider and facility (that is, hospital-based and independent
facility). For the case-mix model for the proposed ESRD PPS, we relied
on Medicare claims and cost reports for CY 2004 through CY 2006,
because those years represented the latest most complete data available
for the preparation of this proposed rule.
With regard to the budget neutrality requirement under section
1881(b)(14)(A)(ii) of the Act, which requires that the estimated total
amount of payments for 2011 for renal dialysis services be equal to 98
percent of the estimated total amount of payments for renal dialysis
services, that would have been made for services furnished in 2011 if
the ESRD PPS had not been implemented, we are required to use per
patient utilization data from 2007, 2008, or 2009, whichever has the
lowest per patient utilization. To comply with this provision of the
statute, we plan to evaluate available claims for Medicare ESRD
beneficiaries for CYs 2007, 2008, and 2009 to determine which year
resulted in the lowest average payment amount per treatment. Because
the lowest payment amount per treatment would reflect the lowest
utilization of outpatient ESRD services among patients absent evidence
that per unit prices for those services declined, we believe that
selection of the CY with the lowest payment per treatment for
calculation of the ESRD base rate would comply with section
1881(b)(14)(A)(ii) of the Act.
Currently, the latest payment information from Medicare claims that
is available in sufficient time for the preparation of this proposed
rule is for CY 2007. Cost report information subsequent to CY 2006, and
Medicare claims data subsequent to CY 2007, could not be evaluated
given the necessary lead time required to prepare this proposed rule.
We plan to examine

[[Page 49935]]

available Medicare cost report information for CYs subsequent to 2006
in developing the case-mix adjusters to ensure use of the latest
available data, and available payment data from Medicare claims for CY
2008 and CY 2009 to comply with the lowest per patient utilization
requirement of section 1881(b)(14)(a)(ii) of the Act, in preparing the
final rule. Any later payment data used in developing the ESRD PPS
published in the final rule, would be updated in accordance with the
methodology explained elsewhere in this proposed rule. (See Section
VII., Development of Budget-Neutral ESRD Bundled Base Rate.)
We used several data sources for evaluating the patient and
facility characteristics that were also used with the case-mix
analyses. Patient demographic information was obtained from the Renal
Management Information System (REMIS)/Consolidated Renal Operations in
a Web-Enabled Network (CROWN), and the ESRD Standard Information
Management System (SIMS). These data sources include the Medical
Evidence Report Form (Form 2728), which is completed at the onset of
renal replacement therapy (RRT), which is either dialysis or
transplantation to sustain life at the onset of kidney failure. Patient
body size measures were developed from the height and weight values
reported on the Form 2728. Beginning April 1, 2005, these values were
obtained from the patient claims for outpatient dialysis. Patient co-
morbidities were measured using the Form 2728, supplemented with
diagnoses reported on Medicare hospital inpatient, skilled nursing
facility, hospital outpatient, hospice, home health agency, and
physician claims. The claims diagnoses were used to identify co-
morbidities that were not abstracted using the Form 2728, and to
capture changes in patient condition subsequent to the onset of kidney
failure. Because diagnoses reported on laboratory claims may represent
a suspected condition subject to testing rather than an established
diagnosis, laboratory claims were not used to identify co-morbidities
in the case-mix models.
We measured dialysis facility characteristics using a combination
of SIMS (ownership type and geographic location), the Medicare cost
reports (facility size), the Online State Certification and Reporting
System or OSCAR (hospital affiliation for satellite units), and other
available information (for example, identifying facilities with
composite payment rate exceptions).

A. Patient Claims Data

The outpatient facility paid claims file is the primary source of
information for payments ESRD facilities receive for the treatment of
ESRD patients. The ``type 72X'' bills provided the detailed data for
dialysis payments. The claims files used for the analyses in this
proposed rule are based on patients with at least one claims record for
dialysis. We used carrier claims and durable medical equipment claims
to track dialysis-related payments to other providers such as
independent laboratories.
The case-mix models were based on claims from CYs 2004, 2005, and
2006. These were the most complete CY records available for use with
the Medicare cost reports from the same periods to develop the payment
methodology, given the lead time necessary for the preparation of this
proposed rule. We plan to use available CY data subsequent to 2006 data
in developing the payment methodology in connection with the final
rule. The number of Medicare claims, patients, dialysis sessions, and
ESRD facilities represented in the source claims data are shown in
Table 2. We have also provided the same information for CY 2003 for
comparison purposes.

Table 2--Medicare Dialysis Patients, Treatments, ESRD Facilities, and Claims by Year, 2003-2007
----------------------------------------------------------------------------------------------------------------
2003 2004 2005 2006 2007
----------------------------------------------------------------------------------------------------------------
Medicare Dialysis Patients\1\.................. 298,617 308,561 318,531 324,836 328,841
Hemodialysis Equivalent Dialysis Treatments 32,692,581 34,088,570 35,097,820 35,948,738 36,667,669
\2,3\.........................................
ESRD Facilities................................ 4,365 4,523 4,668 4,810 4,955
Patient Month Claims........................... 2,830,215 2,934,505 3,037,965 3,095,996 3,155,553
----------------------------------------------------------------------------------------------------------------
\1\ Includes home dialysis patients for whom payments were made under Method II.
\2\ Hemodialysis-equivalent treatments were capped at 20 per month. The number of dialysis treatments for Method
II patients was estimated using the average number of hemodialysis-equivalent treatments per month reported
for Method I peritoneal dialysis patients during that year (which ranged from 12.50 to 12.66 during 2003-07).
\3\ Includes PD in which one week of PD is considered equivalent to 3 HD treatments.

B. Medicare Cost Reports

We obtained facility-level cost and treatment data from the CMS
Medicare Hospital Cost Report (Form CMS 2552-96) and the CMS Medicare
Independent Renal Dialysis Facility Cost Report (Form CMS 265-94). The
number of available cost reports for CYs 2004 through 2006 that
contained necessary cost and treatment data for purposes of the
composite rate cost analyses are shown in Table 3.

Table 3--Available Cost Reports by ESRD Facility Type, 2003-2006 \1\
----------------------------------------------------------------------------------------------------------------
ESRD facility type 2003 2004 2005 2006
----------------------------------------------------------------------------------------------------------------
Facilities (Independent).................................... 3,689 3,852 4,025 4,140
Providers (Hospital Based).................................. 455 451 448 433
---------------------------------------------------
Total................................................... 4,144 4,303 4,471 4,573
----------------------------------------------------------------------------------------------------------------
\1\ Based on the June 2008 quarterly update of HCRIS. Includes cost reports with composite rate cost and
treatment fields greater than 0.

For most ESRD facilities, a single cost report encompassed the
entire calendar year. For FY cost reports that spanned two CYs, we used
a weighted average based on the proportion falling in each CY.

C. Patient Claim and Cost Report Summary Data, 2004-2006

The case-mix models were based on data sets that linked claims and
cost

[[Page 49936]]

report records for each year from CY 2004 through CY 2006. The claims
data for patients treated in hospital satellite facilities were matched
to the parent hospital using OSCAR, since cost reports are only
submitted by the parent facility. Table 4 shows the resulting analysis
files that included both claims and cost report data for measuring
separately billable and composite rate resource utilization.

Table 4--Medicare Dialysis Patients, Treatments, ESRD Facilities, and Claims for Patients and Facilities With
Measured Costs per Treatment, by Year, 2004-2006 \1\
----------------------------------------------------------------------------------------------------------------
2004 2005 2006
----------------------------------------------------------------------------------------------------------------
Medicare Dialysis Patients...................................... 301,625 311,787 317,734
Hemodialysis Equivalent Dialysis Treatments..................... 33,056,812 34,062,969 34,963,270
ESRD Facilities................................................. 4,228 4,376 4,489
Patient Month Claims............................................ 2,732,001 2,826,580 2,897,424
----------------------------------------------------------------------------------------------------------------
\1\ Includes patient months and ESRD facilities with Medicare hemodialysis-equivalent treatments >0 from the
outpatient dialysis facility claims and measured composite rate costs from the cost reports.

D. Data for the Case-Mix Analyses, 2004-2006

The case-mix analyses required data for several patient and
facility characteristics. After the exclusion of statistical outliers
or otherwise unusable records, the data shown in Table 4 were reduced
to yield the data set used in the primary analyses for both composite
rate and separately billable services. Table 5 summarizes these
records.

Table 5--Medicare Dialysis Patients, Treatments, ESRD Facilities, and Claims Final Analysis Sample by Year, 2004-
2006 \1\
----------------------------------------------------------------------------------------------------------------
Pooled, 2004-
2004 2005 2006 2006
----------------------------------------------------------------------------------------------------------------
Medicare Dialysis Patients...................... 290,102 298,314 303,967 453,789
Hemodialysis Equivalent Dialysis Treatments..... 31,450,123 32,303,018 33,148,355 96,901,496
ESRD Facilities................................. 3,794 3,948 4,072 4,250
Patient Month Claims............................ 2,604,033 2,685,413 2,751,735 8,041,181
----------------------------------------------------------------------------------------------------------------
\1\ Based on the sample of dialysis patients and ESRD facilities included in the case-mix analyses for both
composite rate and separately billable services.

The primary case-mix analyses relied on pooled data from CY 2004
through CY 2006, which included a total of 8,041,181 Medicare ESRD
patient months. The case-mix analyses included 95.4 percent of patients
with Medicare outpatient dialysis claims during CYs 2004-2006. Over the
3-year period, the case-mix analyses included data for 453,789 Medicare
ESRD patients treated in 4,250 ESRD facilities.

E. Prescription Drug Event Data, CY 2007

We obtained the total CY 2007 payments for Medicare Part D drugs
from Part D claims submitted by prescription drug plans (drugs formerly
covered under Part D prior to the ESRD PPS). The claims were restricted
to Part D claims submitted on behalf of Medicare ESRD beneficiaries
with valid type 72X claims in CY 2007 and Part D coverage. We used
claims for the following classes of drugs to calculate the estimated
Part D payments for drugs used to treat ESRD (formerly covered under
Part D) for inclusion in the ESRD PPS payment bundle:

------------------------------------------------------------------------
Drug class Ingredient name
------------------------------------------------------------------------
Vitamin D analogue........................ Calcitriol.
Paracalcitol.
Doxercalciferol.
Calcimimetic.............................. Cinacalcet hydrochloride.
Oral phosphate binder..................... Lanthanum carbonate.
Calcium acetate.
Sevelamer hydrochloride.
Sevelamer carbonate.
------------------------------------------------------------------------

The National Drug Codes (NDCs) used to identify the above drugs in
the Part D claims are shown below in Table 6.

Table 6--List of National Drug Codes Used To Identify Former Part D Drugs for the ESRD PPS
----------------------------------------------------------------------------------------------------------------
Ingredient name NDC Strength Trade name
----------------------------------------------------------------------------------------------------------------
Drug Class: Vitamin D Analogues
----------------------------------------------------------------------------------------------------------------
Calcitriol............................. 260530051 0.25 MCG................... Calcitriol Capsules.
540007 0.25 MCG................... Calcitriol Capsules.
930657 0.25 MCG................... Calcitriol Capsules.
930658 0.5 MCG.................... Calcitriol Capsules.
1791578 0.25 MG.................... Calcitriol Capsules.
1791603 0.5 MCG.................... Calcitriol Capsules.
4800657 0.25 MCG................... Calcitriol Capsules.
4800658 0.5 MCG.................... Calcitriol Capsules.
110140011 0.25 MCG................... Calcitriol Capsules.
142880007 0.25 MCG................... Calcitriol Capsules.
178560007 0.25 MCG................... Calcitriol Capsules.

[[Page 49937]]

548684584 0.25 MCG................... Calcitriol Capsules.
551548251 0.25 MCG................... Calcitriol Capsules.
647250048 0.25 MG.................... Calcitriol Capsules.
647250049 0.5 MG..................... Calcitriol Capsules.
543120 1 MCG/ML................... Calcitriol Oral Solution.
682589030 0.5 MCG.................... Calcitriol Capsules.
548683461 0.25 MCG................... Rocaltrol Capsules.
604910562 0.5 MCG.................... Rocaltrol Capsules.
49115 1 MCG/ML................... Rocaltrol Oral Solution.
Paricalcitol........................... 744314 2 MCG...................... Zemplar Capsules.
744315 4 MCG......................
744317 1 MCG......................
110140056 2 MCG......................
110140057 4 MCG......................
242360664 1 MCG......................
511294272 1 MCG......................
551540001 1 MCG......................
551546971 1 MCG......................
Doxercalciferol........................ 110140017 0.5 MCG.................... Hectorol Capsules.
110140018 2.5 MCG....................
511293550 2.5 MCG....................
584680120 0.5 MCG....................
584680122
584680121 2.5 MCG....................
----------------------------------------------------------------------------------------------------------------
Drug Class: Calcimimetic
----------------------------------------------------------------------------------------------------------------
Cinacalcet Hydrochloride............... 682589225 30 MG...................... Cinacalcet HCL Tablet.
632850074 66 MG...................... Sensipak Tablets.
1791845 30 MG...................... Sensipar Tablets.
548685616 30 MG...................... Sensipar Tablets.
555130073 33 MG...................... Sensipar Tablets.
555130074 66 MG...................... Sensipar Tablets.
555130075 99 MG...................... Sensipar Tablets.
632850073 30 MG...................... Sensipar Tablets.
632850075 K99 MG..................... Sensipar Tablets.
----------------------------------------------------------------------------------------------------------------
Drug Class: Oral Phosphate Binder
----------------------------------------------------------------------------------------------------------------
Lanthanum Carbonate.................... 540920252 500 MG..................... Fosrenol Chewable Tablets.
540920253 750 MG.....................
540920254 1000 MG....................
635520250 750 MG.....................
635520251 1000 MG....................
635520252 500 MG.....................
Calcium Acetate........................ 540026 667 MG..................... Calcium Acetate Capsules.
142880954 667 MG..................... Calcium Acetate Capsules.
597306402 667 MG..................... PhosLo Gelcaps.
1791371 667 MG..................... PhosLo Tablets.
1791934 ........................... PhosLo Tablets.
522680200 667 MG..................... PhosLo Tablets.
548683460 667 MG..................... PhosLo Tablets.
548685691 ........................... PhosLo Tablets.
647250260 667 MG..................... PhosLo Tablets.
Sevelamer Hydrochloride................ 178560020 400 MG..................... Crenagel Tablets.
260530308 800 MG..................... Renagel Tablet.
260530394 400 MG..................... Renagel Tablet.
6155613 800 MG..................... Renagel Tablets.
178560021 800 MG..................... Renagel Tablets.
242360660 400 MG..................... Renagel Tablets.
511293461 800 MG..................... Renagel Tablets.
548685615 800 MG..................... Renagel Tablets.
551549726 400 MG..................... Renagel Tablets.
551549727 800 MG..................... Renagel Tablets.
580160778 800 MG..................... Renagel Tablets.
584680020 400 MG..................... Renagel Tablets.
584680021 800 MG..................... Renagel Tablets.
613920721 400 MG..................... Renagel Tablets.
647250284 400 MG..................... Renagel Tablets.
647250285 800 MG..................... Renagel Tablets.
654970020 400 MG..................... Renagel Tablets.

[[Page 49938]]

654970021 800 MG..................... Renagel Tablets.
675440656 800 MG..................... Renagel Tablets.
682990002 400 MG..................... Renagel Tablets.
682990021 800 MG..................... Renagel Tablets.
584680130 800 MG..................... Renvela Tablets.
711144207 403 MG..................... Sevelamer Hydrochloride
Capsules.
68258-9013 800 MG..................... Sevelamer Hydrochloride
Tablets.
68258-9070 400 MG..................... Sevelamer Hydrochloride
Tablets.
Sevelamer Carbonate.................... 68299-0130 800 MG..................... Renvela Tablets.
----------------------------------------------------------------------------------------------------------------

Table 7 shows the number of Medicare ESRD beneficiaries for which
valid type 72X claims were filed in CY 2007, number of ESRD
beneficiaries with Part D drug coverage from PDP plans, and number of
beneficiaries with Part D claims for the above oral drugs. CY 2006 data
are shown for comparison purposes only, as they were not used to
calculate the ESRD base rate.

Table 7--Medicare Dialysis Patients With Payments for Part D Drugs, 2006 and 2007
----------------------------------------------------------------------------------------------------------------
2006 2007
---------------------------------------------------------------
Patients % Patients %
----------------------------------------------------------------------------------------------------------------
ESRD patients with Medicare payments on 324,836 .............. 328,841 ..............
outpatient dialysis facility claims *..........
ESRD patients with Medicare payments on 207,035 63.74 219,451 66.73
outpatient dialysis facility claims and any
payment for Part D drugs.......................
ESRD patients with Medicare payments on 159,570 49.12 175,132 53.26
outpatient dialysis facility claims and any
payment for Part D drugs included in the ESRD
PPS **.........................................
----------------------------------------------------------------------------------------------------------------
** Includes ``type 72X'' outpatient institutional claims.
** Includes Vitamin D Analogs (Calcitriol, Paracalcitol, and Doxercalciferol), Calcimimetics (Cinacalcet
Hydrochloride), and Oral Phosphate Binders (Lanthanum Carbonate, Calcium Acetate, Sevelamer Hydrochloride, and
Sevelamer Carbonate).

VI. Analytical Approach

In this proposed rule, we are presenting a case-mix model that UM-
KECC has developed using standard techniques of multivariate
regression. In multivariate or multiple regression, a set of
independent or predictor variables are tested to determine the extent
they can predict or ``explain'' the variation in a related dependent or
predicted variable. The unit of analysis in such models is important
because the level at which resource use can be measured differs for
composite rate and separately billable services. We can measure
separately billable services for individual patients using the payment
information obtained from Medicare claims. However, the available
measure of resource use for composite rate services consists of costs
from the Medicare cost reports. These costs do not distinguish patient-
specific differences within ESRD facilities, because they combine
treatment costs for all ESRD patients.
In the Secretary's February 2008 report to Congress, we described
two approaches for developing the case-mix models using multivariate
regression. Under the first approach, referred to as the one-equation
model, composite rate costs and separately billable payments for all
patients treated in each ESRD facility are added together. When the
result is divided by the number of corresponding ESRD treatments, the
predicted or dependent variable of bundled services reflects a
facility-level model of combined composite rate and separately billable
services. This approach has the relative simplicity of having the case-
mix adjustments based on a single statistical model estimated at the
facility level.
The other approach, which we refer to as the two-equation model,
relies on two separate regression equations, one to predict variation
in composite rate costs at the facility level, and the other to predict
variation in separately billable payments at the patient level. This
approach has the advantage of measuring patient-level variation in the
utilization of separately billable services available from the Medicare
claims. It also permits combining separate composite rate and
separately billable regression equations into a single payment
equation.
The case-mix model, which we have adopted in developing the
proposed ESRD PPS, is based on the two-equation model. The basis for
our selection of the two-equation model was set forth in the
Secretary's February 2008 report to Congress:

In an extensive series of analyses, UM-KECC determined that
application of the one-equation bundled PPS model (that is, a
facility-level model) yielded very different regression coefficients
for a number of potential case-mix adjusters compared to the two-
equation bundled PPS model. These differences were attributed to the
correlation between the tested case-mix variables and unobserved
facility characteristics. UM-KECC concluded that a patient-level
model would have the advantage of reducing potential bias related to
unobserved facility characteristics, would result in more precise
coefficient estimates, and yield greater stability in these
estimates over time. A patient-level model for the separately
billable services can be combined with a facility-level model for
composite rate services to yield a single payment equation.

This is the approach adopted to develop the case-mix adjusters for
the ESRD PPS described in this proposed rule.
For those interested, a more extensive and detailed mathematical
explanation of the two-equation model used to develop the case-mix
adjusters is contained in UM-KECC's February 2008 report, End Stage
Renal Disease Payment System: Results of Research on

[[Page 49939]]

Case-Mix Adjustment for an Expanded Bundle (see pp. 38-44 and Technical
Appendix C).

II. Development of ESRD PPS Base Rate

The patient-specific case-mix adjustments developed from the two-
equation regression model for composite rate and separately billable
services, which we have described in section VIII. of this proposed
rule, would be applied to a base payment rate per treatment (``base
rate''). The base rate would also be adjusted to reflect ESRD facility
differences in area wage levels using a proposed wage index as
described in section VIII.C. In this section, we describe the
calculation of the proposed ESRD base rate, as set forth in proposed
Sec. 413.220, and the computation of the reduction factors used to
adjust the base rate for projected outlier payments and budget
neutrality in accordance with sections 1881(b)(14)(D)(ii) and
1881(b)(14)(A)(ii) of the Act. The base rate presented in this proposed
rule, and defined in proposed Sec. 413.171, was calculated entirely
from CY 2007 Medicare claims data. The proposed base rate, which
represents the average Medicare allowable payment (MAP) for composite
rate and separately billable services, was developed from CY 2007
claims data. We used claims data for CY 2007 in connection with the
preparation of this proposed rule because such data were the latest
available. We expect to have claims data for CY 2008 and partial claims
information for CY 2009 in connection with our preparation of the final
rule. Comparing per treatment payment amounts developed from available
claims data for CYs 2007, 2008, and 2009 would permit a determination
as to which year resulted in the ``lowest per patient utilization'' of
dialysis services as required in accordance with section
1881(b)(14)(A)(ii) of the Act. The components of the proposed base rate
based on CY 2007 claims data and the methodology used to project the
base rate to CY 2011 (the first year of the ESRD PPS), are described
below.

A. Calculation of the CY 2007 Unadjusted Rate per Treatment

Sections 1881(b)(14)(A)(i) and 1881(b)(14)(B) of the Act, as added
by MIPPA, specify the renal dialysis services, and other items and
services, which must be included in the payment bundle of the ESRD PPS.
Table 8 shows the payments for the various components which comprise
the renal dialysis services which we propose to include in our
development of the base rate using available CY 2007 claims data, in
accordance with our interpretation of the statute. We first describe
each of the components of the ESRD PPS payment bundle included in the
CY 2007 unadjusted rate per treatment. Thereafter, we describe the
adjustments used to calculate the ESRD PPS base rate from the CY 2007
unadjusted rate per treatment.
BILLING CODE 4120-01-P

[[Page 49940]]

[GRAPHIC] [TIFF OMITTED] TP29SE09.001

[[Page 49941]]

BILLING CODE 4120-01-C
1. Composite Rate Services
The first component of the ESRD PPS payment bundle shown in Table 8
is ``Outpatient dialysis and other composite rate services''. This line
item refers to total CY 2007 payments for composite rate services as
obtained from ESRD facility claims (bill type 72X claims). This total
includes all composite rate payments to ESRD facilities, including
exception payments made in accordance with Sec. 413.182 through Sec.
413.186. Claims from ESRD facilities that did not have a valid county
code, such that the relevant CBSA-based wage index (see section
VIII.C.) could not be determined, were excluded. In addition, claims
for patients with a missing birth date, which is necessary in order to
calculate the basic case-mix adjustment under the composite payment
system, were also excluded.
2. Dialysis Support Services
We computed a total amount for the next component of the ESRD PPS
payment bundle shown in Table 8, ``Dialysis support services''. This
total represents total payments for support services furnished to
Method II home dialysis patients, and reported under subcategory 5 of
revenue codes 082X through 085X on the type 72X claims.
3. Part B Drugs and Biologicals
The next component of the ESRD PPS bundle shown in Table 8 is
``Part B drugs and biologicals''. We found that total payments for the
top 11 Part B drugs and biologicals reported on the type 72X claims,
accounted for 99.7 percent of total spending for Part B drugs. Monthly
payments for Epogen were capped to reflect no more than 30,000 units
per treatment, as amounts in excess of this value were considered
clinically implausible.
4. Laboratory tests
Another component of the ESRD PPS bundle shown in Table 8 is
``Laboratory tests billed by dialysis facilities or ordered by
physicians receiving monthly capitation payments for treating ESRD
patients''. Payments for laboratory tests represent the total amount
paid to dialysis facilities for outpatient laboratory tests billed on
the type 72X claims, as well as payments for laboratory tests ordered
by physicians receiving MCP amounts and billed on carrier claims. We
identified laboratory tests ordered by physicians receiving MCP using
the list of physicians for CY 2006, which was the latest available list
at the time of this proposed rule. The estimates for total laboratory
payments will be updated using the list of CY 2007 MCP physicians in
connection with the publication of the final rule.
5. DME Supplies and Equipment
``DME supplies and equipment'' is another component of the ESRD PPS
payment bundle. Payments for these items and services were obtained
from the CMS 1500 claims for Method II home patients.
6. Supplies and Other Services Billed by Dialysis Facilities
This category of the ESRD PPS payment bundle primarily includes
payments for syringes used in the administration of intravenous drugs
during the provision of outpatient dialysis. These supplies and
services were billed by the dialysis facilities on the type 72X claims.
7. Former Part D Drugs
This amount represents total payments on behalf of the ESRD
beneficiaries with Part D coverage in CY 2007 for Part D drugs and
biologicals which we consider furnished for the treatment of ESRD.
These drugs and biologicals, which are identified by class below, were
obtained from CY 2007 Part D claims submitted on behalf of the Medicare
ESRD beneficiaries with valid type 72X claims in CY 2007 with Part D
coverage, using the NDC codes for the following drugs and biologicals:

Vitamin D Analogues

Calcitriol
Paracalcitol
Doxercalciferol

Calcimimetic

Cinacalcet hydrochloride

Oral phosphate binder

Lanthanum carbonate
Calcium acetate
Sevelamer hydrochloride
Sevelamer carbonate

The NDC codes used to identify the above drugs and biologicals are
shown in the Appendix in Table C.
The number of Medicare ESRD beneficiaries for which valid type 72X
claims were filed in CY 2007, number of ESRD beneficiaries with Part D
drug coverage, and number of beneficiaries with Part D claims for the
specified drugs and biologicals noted above, are shown in Table 9. CY
2006 data are also shown in Table 9 for comparison purposes.

Table 9--Medicare Dialysis Patients With Payments for Part D Drugs, 2006 and 2007
----------------------------------------------------------------------------------------------------------------
2006 2007
---------------------------------------------------------------
Patients % Patients %
----------------------------------------------------------------------------------------------------------------
ESRD patients with Medicare payments on 324,836 .............. 328,841 ..............
outpatient dialysis facility claims *..........
ESRD patients with Medicare payments on 207,035 63.74 219,451 66.73
outpatient dialysis facility claims and any
payment for Part D drugs.......................
ESRD patients with Medicare payments on 159,570 49.12 175,132 53.26
outpatient dialysis facility claims and any
payment for Part D drugs included in the ESRD
PPS **.........................................
----------------------------------------------------------------------------------------------------------------
* Includes ``type 72X'' outpatient institutional claims.
** Includes Vitamin D Analogs (Calcitriol, Paracalcitol, and Doxercalciferol), Calcimimetics (Cinacalcet
Hydrochloride), and Oral Phosphate Binders (Lanthanum Carbonate, Calcium Acetate, Sevelamer Hydrochloride, and
Sevelamer Carbonate).

The payment total for former Part D drugs includes payments by
Medicare prescription drug plans, and all payments made by or on behalf
of ESRD beneficiaries for the specified drugs. As noted in Table 9, the
payment total for former Part D drugs only includes data for the 66.73
percent of ESRD beneficiaries who were enrolled in Part D. As a result,
we do not have patient-specific information on the cost of drugs (part
D equivalent drugs) for the remaining third of ESRD beneficiaries who
do not have Part D coverage. To the extent these beneficiaries have
drug coverage through their employer or other insurance, we do not have
access to specific usage or payment information for these medications.
Nonetheless, when the ESRD PPS is implemented January 1, 2011, former

[[Page 49942]]

Part D drugs would become renal dialysis services in accordance with
section 1881(b)(14)(ii)(B) of the Act. As such, ESRD facilities would
be responsible for providing ESRD-related oral drugs formerly covered
under Part D to their patients.
We are considering use of a proxy to capture the costs associated
with ESRD-related drugs for those patients without Part D coverage. One
possible approach would be for us to include payments under the Retiree
Drug Subsidy (RDS) program which is described below. We believe that as
the RDS payments could be made for ESRD-related drugs under title XVIII
of the Act, use of RDS data would be consistent with section
1881(b)(14)(A)(ii) which requires that in implementing the ESRD PPS,
the Secretary must ensure that the estimated total amount of payments
under this title for 2011 for renal dialysis services equals 98 percent
of the estimated total amount of payments that would have been made
under this title if the ESRD PPS were not implemented.
The RDS program was enacted in December 2003 by section 101 of the
MMA. The program, which was effective January 1, 2006, was designed to
support existing retiree benefit arrangements by providing subsidy
payments to plan sponsors (that is, employers and unions). Subsidy
payments to qualifying drug plan sponsors (for example, employers,
unions) equal 28 percent of each qualifying retiree's allowable costs
for prescription drugs otherwise covered by Medicare Part D, that are
attributable to such drug costs between an applicable cost threshold
and cost limit. For plan years ending in 2007, the applicable cost
threshold is $265 and the cost limit is $5350.
Based on CMS' Office of the Actuary's most recent CY 2007, we
provided subsidy payments totaling $3.8 billion on behalf of 7.0
million beneficiaries. Plans submit aggregate qualifying cost data and
a list of eligible beneficiaries. We could determine the number of ESRD
qualifying covered retirees under the RDS as a percentage of all
qualifying covered retirees under RDS. We could further estimate the
ESRD-related percentage of the $3.8 billion in subsidy payments and add
this amount to the estimated aggregate payments in 2007. We note that
since we do not receive patient-specific information on drug usage
under the RDS program, it would not be possible to capture the effect
of these drugs on the patient and facility-level adjustment factors. We
refer readers to 42 CFR Sec. 423.880 through Sec. 423.894 for more
information on the RDS provisions. We invite public comment on this
approach and other possible approaches to enable us to capture drug
payment information for all Medicare ESRD patients.
8. Total MAP
The total MAP amount represents the total payments made in CY 2007
for the composite rate and separately billable categories described
above (that is, the sum of the payments for the items and services
described in 1. through 7.) We propose to use the total MAP amount as
the ESRD PPS base rate amount.
9. Total Medicare Hemodialysis-Equivalent Sessions
In order to calculate the proposed ESRD PPS base rate per
treatment, it was necessary to divide the total MAP amount described
above by the number of Medicare HD-equivalent sessions. The number of
Medicare HD-equivalent sessions represents the total Medicare
treatments for outpatient dialysis as reported on the type 72X claims
submitted by dialysis facilities. PD patient weeks were converted to
HD-equivalent sessions. For this purpose one week of PD was considered
equivalent to three HD treatments. Accordingly, a patient on PD for 21
days would have (21/7) x 3 or 9 HD-equivalent sessions. In determining
the total number of Medicare treatments, the number of HD-equivalent
sessions were capped at 20 per patient per month. We propose to use the
total number of CY 2007 Medicare HD-equivalent dialysis sessions,
36,523,791, to calculate the ESRD PPS base rate.
10. Average MAP per Treatment
We divided the total MAP in item 8, $9,239,987,362, by the total
Medicare hemodialysis-equivalent sessions in item 9, 36,523,791, to
yield an unadjusted rate per treatment for renal dialysis services in
CY 2007. This unadjusted rate per treatment is $252.99. We propose to
update this per treatment amount to reflect CY 2011 prices, and to
standardize it to eliminate the effects of the case-mix and wage index
adjustments in order to ensure duplicate payments do not occur under
the ESRD PPS through the subsequent introduction of these variables in
the payment formula. We also propose to further reduce the projected CY
2011 payment rate for estimated outlier payments, and the budget
neutrality offset as set forth in sections 1881(b)(14)(D)(ii) and
1881(b)(14)(A)(ii) of the Act, respectively. This is the proposed
amount per treatment that would be multiplied under the ESRD PPS to
reflect patient-specific differences in case-mix, and other adjustments
as set forth in section 1881(b)(14)(D) of the Act. We refer to this
projected CY 2011 payment rate, after application of the
standardization, outlier, and budget neutrality offsets, as the ESRD
PPS base rate. The proposed definition of the base rate is set forth in
proposed Sec. 413.171. Our proposed methodology for calculating the
base rate to reflect the standardization, outlier, and budget
neutrality reductions is explained in the sections that follow.

B. Determining the Update Factors for the Budget-Neutrality Calculation

In order to estimate payments under the current payment system for
each facility in CY 2011, the first year of the ESRD PPS, the
components of the CY 2007 unadjusted per treatment rate were updated to
reflect estimated 2011 prices, using the methodology as described in
greater detail below. It is necessary to estimate 2011 payments under
the current ESRD payment system (including all separately billable
items) for each facility in order to meet the statutory budget-
neutrality requirement for the ESRD PPS. Section 1881(b)(14)(A)(ii) of
the Act requires that the ESRD PPS payment system be 98 percent budget
neutral in 2011. In other words, the estimated total amount of payments
under the ESRD PPS in 2011, including any payment adjustments, must
equal 98 percent of the estimated total amount of payments for renal
dialysis services that would have been made with respect to services in
2011 if the ESRD PPS system had not been implemented. Therefore, we
must first estimate what ESRD facilities would have been paid under the
current system in CY 2011, by updating the 2007 payments to reflect
2011 prices. We then divide the total estimated CY 2011 payments by the
number of CY 2007 treatments to determine the CY 2011 average payment
per treatment. We do not make adjustments for future changes in
treatments as this would require us to make assumptions about patient
specific characteristics. If we were to project CY 2011 treatments we
would increase the current basic case-mix adjusted composite payments
by the same amount. This would in effect have no impact on the
calculation of the per treatment amount. This CY 2011 unadjusted per
treatment payment amount becomes the basis for meeting the budget
neutrality requirement. Below we describe the update factors used to
estimate CY 2011 payments for each component.
1. Composite Rate Services
In order to update the basic case-mix adjusted composite payments
to 2011,

[[Page 49943]]

we began with the CY 2009 base composite rate ($133.81) and the CY 2009
drug add-on percentage of 15.2 percent. In accordance with section
153(a) of MIPPA and 1881(b)(14) of the Act, we updated the composite
rate by 1.0 percent for CY 2010 and by the estimated ESRD bundled
market basket percentage increase minus 1 percentage point (1.5
percent) for CY 2011 resulting in a 2011 composite rate of $137.18. A
full description of the ESRD bundled (ESRDB) market basket is presented
in section XII. of this proposed rule. We are proposing to use this
base composite rate for CY 2011, which includes ESRD bundled market
basket minus 1 percentage point, to update the CY 2010 composite rate
for purposes of establishing the ESRD PPS base rate, given that we
interpret section 1881(b)(14)(F)(ii) to require us to update the
composite rate portion of the blend by the market basket percentage
minus 1.0 percentage point in all years of the transition (which
includes CY 2011). Therefore, using the market basket in this way would
be a consistent approach. As described in section XII. of this
preamble, we are proposing a market basket increase of 2.5 percent for
CY 2011. Therefore, we are proposing a 1.5 percent update to the
composite rate for CY 2011, resulting in a CY 2011 composite rate of
$137.18 ($135.15 * 1.015). We note that the drug add-on percentage is
reduced from 15.2 to 14.8 as a result of the increases to the composite
rate in CYs 2010 and 2011. Since the drug add-on is calculated as
percentage of the base composite rate, the drug add-on percentage
decreases with increases in the composite rate. The CY 2009 Physician
Fee Schedule final rule provides details on why increases to the base
composite rate require decreases to the drug add-on percentage to
ensure that the total drug add-on dollar amount remains the same (73 FR
69755). We intend to update the drug add-on, if necessary, for the ESRD
PPS final rule.
We used the applicable facility-level and patient-level basic case-
mix adjustments from the CY 2007 claims to re-compute payment using the
applicable basic case-mix adjustments applied to a 100 percent CBSA
wage-adjusted composite rate using the most recently available ESRD
wage index, which is the CY 2009 final rule ESRD wage index with a 0.60
floor. We did this to use the most recent wage indexes available in
estimating 2011 payments. The other components of the bundle, which are
discussed below do not have payments which are computed with wage
indexes. We used a 0.60 floor because we anticipate that floor will be
in effect in CY 2011. We have been reducing the wage index floor by .05
every year and we expect to continue this policy. (More information on
CBSAs and the wage index floor is presented in section VIII.C.1 of this
proposed rule).
In addition, payment rates to facilities that have chosen to retain
their exceptions under the basic case-mix composite payment system are
not updated because, once approved, the exception amounts were fixed
payment amounts, and hence the 2007 amounts represent the 2011 amounts.
See the CY 2005 PFS final rule for a discussion regarding the
application of statutory increases to exception amounts (69 FR 66332).
2. Self-Dialysis Support Services for Method II Patients
The allowance per month under Method II for home dialysis support
services may not exceed $121.15 per month for all forms of dialysis.
Since home dialysis support services for Method II patients are subject
to a monthly capitation payment that is not increased, the CY 2007
amounts represent the CY 2011 amounts.
3. Part B Drugs and Biologicals
Under the current system, payments for ESRD drugs and biologicals
under Part B are paid on average sales price plus 6 percent (ASP+6
percent) methodology. We reviewed ASP prices for four quarters of 2006,
2007, 2008 and two quarters of 2009 for the top eleven separately
billable drugs. Given the variability shown in the prices over the last
several years and the lack of a clear pattern, we propose to use the
2009 prices as proxy for 2011 values. At the time of the final rule, we
will reevaluate this decision based on additional quarters of ASP drug
pricing data. Thus, we used the growth from the average of the quarters
for 2007 to the average of the two available quarters of 2009. For
other ESRD-related Part B drugs, we used a weighted average of the top
eleven Part B drugs to update those drug prices to 2011. Since the top
eleven drugs represent 99.7 percent of total separately billable Part B
drug payments, we believe that the overall weighted average was
representative for the remaining 0.3 percent. See Table 10 for the
growth factor that was applied to the 2007 drug payment levels.

Table 10
------------------------------------------------------------------------
Price
Drugs and biologicals updates
(percent)
------------------------------------------------------------------------
EPO......................................................... 1.7
Paricalcitol................................................ -2.8
Sodium--ferric--glut........................................ -0.5
Iron--sucrose............................................... 4.8
Levocarnitine............................................... -19.0
Doxercalciferol............................................. 17.8
Calcitriol.................................................. -14.1
Vancomycin.................................................. -11.1
Alteplase................................................... 2.3
Aranesp..................................................... -8.2
Daptomycin.................................................. 13.9
Other injectables........................................... 1.1
------------------------------------------------------------------------

4. Laboratory Tests
We updated payments for laboratory tests paid through the
laboratory fee schedule to 2011 using projected CPI-U increases and any
legislative adjustments that would be applied to this fee schedule.
This is the statutory update required for lab services. This amount
totaled a growth of 5.1 percent from 2007 to 2011.
5. DME Supplies and Equipment
Since payments for supplies and equipment for Method II patients
are subject to a monthly capitation payment that has not increased, the
CY 2007 amount represents the 2011 amounts.
6. Supplies and Other Services
This category primarily includes the $0.50 administration fee for
separately billable Part B drugs. Since this fee has not increased,
there was no price update.
7. Former Part D Drugs
Former Part D drugs were updated by the growth rates for overall
prescription drug prices that were used in the National Health
Expenditure Projections. See http://www.cms.hhs.gov/NationalHealthExpendData/03_NationalHealthAccountsProjected.asp#TopOfPage for further reference on
the National Health Expenditure Projections. Since we do not currently
have enough data to establish a trend for Part D prices and since we
use this price growth in the overall Part D projections, we believe it
is an adequate proxy. This amount totaled a growth of 12.2 percent from
2007 to 2011.
Once we determined updated CY 2011 payments for each component of
the items and services discussed above, we added the components
together to determine each ESRD facility's total payments under the
current payment system in CY 2011. These estimated total 2011 MAPs
divided by the total 2007 Medicare HD-equivalent sessions

[[Page 49944]]

yield the unadjusted per treatment base rate for renal dialysis
services in CY 2011 of $261.58.
We used $261.58 as the starting point for further adjustments in
determining the proposed ESRD PPS per treatment base rate. The 2011
unadjusted average payment per treatment of $261.58 was then used in
the payment model to estimate total payments under the proposed ESRD
PPS in CY 2011. These CY 2011 ESRD PPS estimated payments were based on
treatment data from the CY 2007 claims file.

C. Standardization Adjustment

CY 2011 payments under the proposed ESRD PPS were initially
estimated without a budget-neutrality adjustment, using the unadjusted
CY 2011 average payment per treatment amount of $261.58. We calculated
the PPS payments using treatment counts from the 2007 claims file. The
wage index and all applicable proposed patient-level and facility-level
adjustments were applied to the unadjusted CY 2011 average payment per
treatment to determine the estimated payment amount under the proposed
ESRD PPS for each treatment and ESRD facility. We note that to simulate
payments, we used the latest available final CY 2009 ESRD wage indexes,
with no floor. While we anticipate a 0.60 floor for the ESRD wage index
for the current basic case-mix composite payment system, we are
proposing to eliminate the wage index floor for the ESRD wage index to
be used for the proposed ESRD PPS in CY 2011 (see section VIII.C.1 for
a detailed discussion of the ESRD wage index).
Next, we standardized the ESRD PPS payments in order to account for
the overall positive effects of the proposed ESRD PPS case-mix patient
and facility adjustment factors and wage indexes. We must standardize
payments in order to ensure that total projected PPS payments are equal
to the payments under the current basic case-mix adjusted composite
payment system. In order to standardize the ESRD PPS payments, we
compared the proposed ESRD PPS amounts calculated from the treatment
counts in the 2007 claims file to the current system payments from the
2007 Medicare claims file updated to 2011 (as explained in greater
detail in section VII.B. above). A standardization factor was
calculated by dividing total estimated payments in 2011 under the
current payment system by estimated payments under the proposed ESRD
PPS in 2011. The standardization factor was calculated to be 0.7827, or
a reduction of 21.73 percent. As a result, the CY 2011 unadjusted per
treatment base rate of $261.58 was reduced by 21.73 percent to $204.74.
We are proposing that the base rate per treatment be further
modified by the adjustments described below.

D. Calculation of the Budget-Neutrality Adjustments

a. Outlier Adjustment
Section 1881(b)(14)(D)(ii) of the Act provides that the ESRD PPS
shall include a payment adjustment for high cost outliers due to
unusual variations in the type or amount of medically necessary care,
including variations in the amount of erythropoiesis-stimulating agents
necessary for anemia management. We believe the payment adjustment
under section 1881(b)(14)(D)(ii) of the Act for outlier cases should be
applied in a budget neutral manner, as doing so will ensure that
estimated total payments under the proposed ESRD PPS equals 98 percent
of the estimated total amount of payments for renal dialysis services
that would have been made with respect to services in 2011 if the ESRD
PPS system had not been implemented.
To ensure that the proposed outlier policy under the ESRD PPS is
budget neutral, we propose to reduce the base rate by the proposed
outlier percentage, or 1 percent. Specifically, we propose to reduce
the base rate from $204.74 to $202.69. We did this to account for the 1
percent of aggregate ESRD PPS payments estimated to be made as outlier
payments. We then re-estimated the prospective payment amounts with the
new reduced base rate of $202.69, allowing 1 percent of payments to be
outliers. The appropriate outlier payment amount for each treatment was
determined as described in greater detail in section X.A.2 of this
proposed rule. The outlier amount was computed for all treatments, and
the total outlier payment, across all treatment amounts was added to
the prospective payment amount for all treatments.
In summary, we are proposing an outlier percentage of 1 percent;
therefore, the proposed base rate per treatment must include a
reduction of 1 percent. Thus the proposed standardized base rate of
$204.74 was reduced by 1 percent to yield a proposed base rate of
$202.69.
b. 98 Percent Budget Neutrality Adjustment
Section 1881(b)(14)(A)(ii) of the Act requires that the proposed
ESRD PPS payment system be 98 percent budget neutral. In other words,
the estimated total amount of payments under the ESRD PPS in 2011,
including any payment adjustments, must equal 98 percent of the
estimated total amount of payments for renal dialysis services that
would have been made with respect to services in 2011 if the ESRD PPS
had not been implemented. Therefore, we reduced the 2011 standardized
base rate per treatment, which was already adjusted for 1 percent
outlier payments, by an additional two percent, from $202.69, to yield
a proposed base rate of $198.64.
To summarize, the proposed base rate per treatment with an outlier
adjustment and budget neutrality was calculated to be $198.64. This
amount includes a 21.73-percent reduction from $261.58 to account for
standardization to the projected CY 2011 current system payment per
treatment, a 1-percent reduction to account for proposed outlier
payments, and a 2-percent reduction for the required 98-percent budget
neutrality. The outlier policy we are proposing is set forth at
proposed Sec. 413.237.

E. Calculation of Transition Budget-Neutrality Adjustment

Section 1881(b)(14)(E)(i) of the Act requires the Secretary to
provide ``a four-year phase-in'' of the payments under the ESRD PPS for
renal dialysis services furnished on or after January 1, 2011, with
payments under the ESRD PPS ``fully implemented for renal dialysis
services furnished on or after January 1, 2014.'' Although the statute
uses the term ``phase-in,'' for purposes of the proposed ESRD PPS, we
will use the term ``transition'' to be consistent with other Medicare
payment systems.
Section 1881(b)(14)(E)(ii) of the Act permits ESRD facilities to
make a one-time election to be excluded from the transition. An ESRD
facility that elects to be excluded from the transition receives
payments for renal dialysis services provided on or after January 1,
2011 based on 100 percent of the payment rate under the ESRD PPS,
rather than a blended payment based in part on the payment rate with
regard to the current basic case-mix adjusted composite payment system
and in part on the payment rate under the ESRD PPS. The implementation
of the transition is discussed in section XIII.A of this proposed rule.
The transition period policy is set forth in proposed Sec. 413.239.
Section 1881(b)(14)(E)(iii) of the Act also requires that we make
an adjustment to payments for renal dialysis services provided by ESRD
facilities during the transition so that the estimated total amount of
payments under the ESRD PPS, including payments under the transition,
equals

[[Page 49945]]

the estimated total amount of payments that would otherwise occur under
the ESRD PPS without such a transition. The transition budget
neutrality adjustment would be comprised of two parts. First, we would
make a payment adjustment under the basic case-mix adjusted composite
payment system portion of the blended rate during the transition, in
addition to computing a factor that would make the estimated total
amount of payments under the ESRD PPS including payments under the
transition equal the estimated total amount of payments that would
otherwise occur without such a transition. We describe each part in
detail in the paragraphs that follow.
First, to ensure that estimated total payments during the
transition equal the estimated total amount of payments that would
otherwise occur without such a transition, in addition to accounting
for payments for composite rate services and items and services that
are separately billable under Part B, it is necessary to reflect
payments for ESRD-related Part D drugs that are currently separately
payable under Title XVIII. Specifically, as we discussed in section
III. of this proposed rule, section 1881(b)(14)(B) of the Act defines
renal dialysis services to include, among other things, certain drugs
and biologicals, including drugs and biologicals that were separately
payable under Parts B and D. Under the current ESRD basic case-mix
adjusted composite payment system, ESRD facilities generally do not
furnish oral drugs and biologicals to their ESRD patients. ESRD
patients currently acquire these drugs and biologicals either through
Medicare Part D, private insurance, or independently.
As described in section III. of this proposed rule, we are
proposing to include renal dialysis service drugs formerly covered
under Part D under the proposed ESRD PPS. As a result, we are further
proposing that ESRD facilities would be required to furnish these and
any other self-administered ESRD-related drugs to beneficiaries either
directly or under arrangement.
As further discussed in section VII. of this proposed rule, the
cost of the drugs and biologicals currently separately payable under
Part D that we propose to be designated as Part B renal dialysis
services for purposes of the proposed ESRD PPS, would be reflected in
the ESRD PPS portion of the blended payment. That is, once the ESRD PPS
is implemented on January 1, 2011, ESRD-related Part D drugs would
become Part B renal dialysis service drugs and would no longer be
separately covered under Part D. This is due to section
1881(b)(14)(A)(1) of the Act, which specifies that after January 1,
2011, a single payment is made under title XVIII for renal dialysis
services furnished by ESRD facilities in lieu of any other payment for
such services, as well as the new statutory definition under section
1881(b)(14)(B) of the Act. In addition, we note that ESRD-related Part
D drugs are not part of the basic case-mix adjusted composite payment
system or otherwise covered under Part B (in contrast to other
separately billable ESRD-related items and services). As a result, ESRD
facilities that elect to go through the transition would have no
mechanism by which to receive payment for former Part D drugs with
regard to the basic case-mix adjusted composite payment system portion
of the payment blend (though such services would be captured with
regard to the portion of the blended payment for the ESRD PPS). Because
ESRD-related Part D drug payments would not be included in the portion
of the blend based on the basic case-mix adjusted composite payment
system, payments to ESRD facilities that elect to go through the
transition may be understated during the transition.
Additionally, as required by section 1881(b)(14)(A)(ii) of the Act
and described in section VII.D.b of this preamble, the estimated total
amount of payments under the proposed ESRD PPS in 2011, including any
payment adjustments, must equal 98 percent of the estimated total
amount of payments for renal dialysis services under title XVIII that
would have been made with respect to services in 2011 if the ESRD PPS
system had not been implemented. As we noted, Part D drugs are not part
of the basic case-mix adjusted composite payment system or otherwise
covered under part B as separately billable ESRD-related items or
services. However, because the payments for the ESRD-related Part D
drugs proposed for inclusion in the ESRD PPS were made under title
XVIII, we are required to include such items in the 98 percent budget
neutrality adjustment.
Thus, to be consistent with the 98 percent budget neutrality
requirement and to make estimated payments during the transition equal
payments without the transition, we propose to provide a $14.00 per
treatment adjustment to the portion of the blend with regard to the
basic case-mix adjusted composite payment system. This amount is based
on the 2011 per treatment ESRD-related Part D drug payments included in
the proposed ESRD PPS base rate. We first computed the 2007 per Part D
payment per treatment described in section VII.A. We then updated this
amount to 2011 by applying the 12.2 percent update factor described in
section VII.B.
We further propose that the $14 per treatment adjustment that would
be made to the portion of the blend with regard to the basic case-mix
adjusted composite payment system would be made without regard to basic
case-mix adjustments or wage index adjustments. This is because ESRD-
related Part D drugs were not included in the development of the
adjustments for the basic case-mix adjusted composite payment system.
We considered an alternative approach for meeting the statutory
transition budget neutrality adjustment. Under this approach, we would
exclude estimated payments for ESRD-related Part D drugs from the
estimated 2011 payments related to the basic case-mix adjusted
composite payment system. That is to say, we would not pay ESRD
facilities for the ESRD-related Part D drug payment with regard to the
basic case-mix adjusted composite payment system portion of the blended
payment during the transition, and therefore, we estimate that ESRD
facilities may receive smaller blended payment amounts during the
transition. Excluding ESRD-related Part D drugs from the basic case-mix
adjusted composite payment portion of the blended payment would likely
lower blended payments under the transition and, as a result, we
estimate that many more facilities would elect to be paid 100 percent
of the ESRD PPS rather than electing to go through the transition.
These facilities would have to give up their option to go through the
transition in order to receive 100 percent ESRD PPS payments for ESRD-
related Part D drugs. The transition provides a more gradual change to
ESRD PPS for those facilities that would receive lower payments under
the proposed ESRD PPS. We believe it is more equitable to provide a $14
per treatment adjustment the portion of the blend related to the basic
case-mix adjusted composite payment system. In addition, we believe
that the transition budget neutrality adjustment should not change
facilities' incentives with respect to whether or not to opt out of the
transition. This approach would change the incentives because excluding
ESRD-related Part D drugs from portion of the blended payment related
to the basic case-mix adjusted composite payment system might lower
blended payments under the transition, thereby increasing the incentive
to elect to be paid under 100 percent ESRD PPS. This approach also
would skew the impact analysis because it compares payment amount
related to the basic case-mix adjusted composite

[[Page 49946]]

payment system without Part D payments, while payments under the
proposed ESRD PPS include payments for Part D drugs. For the impact
analysis to accurately represent payments that are included in the
proposed ESRD PPS and be consistent with the 98 percent budget
neutrality requirement, we believe we need to include payments for
ESRD-related Part D drugs in our estimate of what ESRD facilities would
be paid in 2011 for both the basic case-mix adjusted composite payment
system and the proposed ESRD PPS, had an ESRD PPS not been implemented.
For these reasons we rejected this alternative.
Accordingly, in order to make ESRD PPS budget neutral during the
transition with respect to ESRD-related Part D drugs, we propose to
make a $14 per treatment adjustment to the portion of the blend related
to the basic case-mix adjusted composite rate payment system.
The second part of the transition budget neutrality adjustment
addresses the overall effect of the ESRD facilities' decision whether
to be paid under the transition versus being paid under the ESRD PPS.
In the absence of such an adjustment, total payments would be higher
under the transition payment system (blended payment amount) than under
a 100 percent fully implemented PPS payment system, as we presume that
each provider would likely choose the option that is most beneficial to
them. In other words, we believe ESRD facilities that estimate that
their aggregate payments will be higher under the transition than under
the ESRD PPS likely will elect to be paid under the transition. This in
turn would increase the total payments paid by CMS, with total payments
then likely to exceed the 98 percent budget neutrality target amount,
as discussed in section VII.D.b of this proposed rule. We interpret
this provision as requiring, during the first 3 years of the
transition, a budget neutrality adjustment applied to all payments to
ESRD facilities (both those paid under the transition and those
electing to be paid under the ESRD PPS) to offset the additional
payments to those ESRD facilities that elect to be paid a blended
payment under the transition rather than to be paid based on 100
percent of the payment amount under the proposed ESRD PPS. Thus, we are
proposing to create a transition budget neutrality adjustment factor to
be applied to all payments to ESRD facilities during the transition.
This transition budget neutrality adjustment factor is intended to make
the estimated total payments under the transition equal our estimate of
total payments under the ESRD PPS were there no transition.
One alternative we considered was applying the budget neutrality
adjustment factor to the 2011 ESRD PPS base rate only. However, we
believe this approach would unfairly penalize those facilities that opt
to be paid based on 100 percent of the payment amount under the ESRD
PPS, as it would lower all of their payments. Those facilities that are
paid on a blended payment methodology would only have 25 percent of
their payment lowered in CY 2011, as only 25 percent of the blended
payment is based on the payment amount under the proposed ESRD PPS.
Thus, in effect, this approach would result in those facilities
electing to be paid based on 100 percent of the payment rate under the
ESRD PPS subsidizing those electing to be paid under the transition. In
addition, we believe that the transition budget neutrality adjustment
should not change facilities' incentives with respect to whether or not
to opt out of the transition. This alternative would change the
incentives by lowering payments under the ESRD PPS by a larger
percentage than the blended payments under the transition, thereby
increasing the incentive to elect to be paid under the transition. For
these reasons we rejected this alternative.
Another alternative we considered was applying the adjustment only
to the blended payments for facilities that elect to be paid under the
transition. However, we believe that this approach would unfairly
penalize those ESRD facilities that choose to be paid under the
transition, as it would lower their payments but would not lower the
payments to those facilities that elect to be paid based on 100 percent
of the payment rate under the ESRD PPS. Similar to the alternative in
the previous paragraph, this alternative would also affect ESRD
facilities' incentives with respect to whether or not to opt out of the
transition, and thus we also rejected this alternative.
We therefore propose to apply the transition budget neutrality
adjustment factor to all ESRD payments, including the component of the
blended rates based on the current basic case-mix adjusted composite
payment system. We propose this approach, because we believe that it
would not unfairly penalize one group, it would evenly distribute the
effect of the transition budget neutrality adjustment, and it would not
change ESRD facilities' incentives with respect to whether to opt out
of the transition.
In calculating the transition budget neutrality adjustment factor,
we propose to first determine the estimated increase in payments under
the transition and then determine an offset factor. In order to do
this, we must first make assumptions on which facilities would choose
to opt out of the transition and be paid based on 100 percent of the
payment rate under the ESRD PPS in 2011. In order to estimate which
ESRD facilities will and will not elect to opt out of the transition,
we are proposing to estimate aggregate payments for each ESRD facility
under both the current basic case-mix adjusted composite payment
system, including payments for separately billable services, and the
proposed ESRD PPS (based on 100 percent of the payment amount under the
ESRD PPS). We are assuming that facilities that would receive higher
aggregate payments under the proposed ESRD PPS would elect to be paid
based on 100 percent of the payment rates under the ESRD PPS.
Conversely, ESRD facilities that would receive higher aggregate
payments under the current basic case-mix adjusted composite payment
system would elect to be paid the blended rate under the transition.
Based on this approach, we estimate that 36 percent of ESRD
facilities will choose to be excluded from the transition and that 64
percent of ESRD facilities will choose to be paid the blended rate
under the transition. Consequently, we estimate that during the first
year of the transition, total payments to all ESRD facilities would
exceed the estimated payments under the ESRD PPS in the absence of the
transition. Thus, in order to maintain the 98 percent budget neutrality
required by section 1881(b)(14)(E)(iii) of the Act during the initial
year of the transition period, we are proposing to reduce all payments
to ESRD facilities in CY 2011 by a factor that is equal to 1 minus the
ratio of the estimated payments under the ESRD PPS were there no
transition (that is, 98 percent of total estimated payments that would
have been made under the current basic case-mix adjusted payment
system) to the total estimated payments under the transition, or 3.0
percent. For 2011, application of this factor would result in a 3.0
percent reduction in all payments to ESRD facilities. We propose to
apply this adjustment to both the blended payments made under the
transition and payments made under the 100 percent ESRD PPS. We propose
to calculate similar factors for CYs 2012 and 2013 that would allow a
blended payment system to be budget neutral to a fully implemented 100
percent ESRD PPS.
We invite comments on the calculation and application of the

[[Page 49947]]

proposed two part transition budget neutrality adjustment factor.

VIII. Cost Regression Used To Develop Proposed Payment Adjustment
Factors

A. Proposed Regression Analysis

1. Dependent Variables
The proposed two-equation regression approach used to develop the
proposed ESRD PPS includes a facility-based regression model for
composite rate service, and a patient-level regression model for
separately billable services. The measures of resource use that were
specified as the dependent variables in each of the two equations are
explained below.
a. Average Cost per Treatment for Composite Rate Services
We measured resource use for the maintenance dialysis services
included in the current bundle of composite rate services using ESRD
facility data obtained from the Medicare cost reports for hospital-
based ESRD providers and independent ESRD facilities. The average
composite rate cost per treatment for each ESRD facility was calculated
by dividing the total reported allowable costs for composite rate
services for CYs 2004, 2005, and 2006 (Worksheet B, column 11, rows 7-
16 on CMS 265-94; Worksheet I-2, column 11, rows 2-11 on CMS 2552-96)
by the total number of dialysis treatments and Worksheet C, column 1,
rows 1-10 on CMS 265-94; Worksheet I-4, column 1, rows 1-10 on CMS
2552-96). Continuous ambulatory peritoneal dialysis (CAPD) and
continuous cycling peritoneal dialysis (CCPD) patient weeks were
multiplied by 3 to obtain the number of hemodialysis equivalent
treatments. We point out that our computation of the total composite
rate costs included in this per treatment calculation includes costs
incurred for training expenses, as well as all costs incurred by ESRD
facilities for home dialysis patients. The resulting composite rate
cost per treatment was adjusted to eliminate the effects of varying
wage levels among the areas in which ESRD facilities are located using
the CY 2009 ESRD wage index and the estimated labor-related share of
costs from the composite rate market basket. The description of that
labor-related share was contained in the Secretary's 2008 Report to
Congress. That is, 53.711 percent of each ESRD facility's composite
rate cost per treatment was divided by the ESRD wage index to control
for area wage differences. No floor or ceiling was imposed on the wage
index values used to deflate the composite rate costs per treatment. We
applied a natural log transformation to the wage-deflated composite
rate costs per treatment to better satisfy the statistical assumptions
of the regression model, and to be consistent with existing methods of
adjusting for case-mix, in which a multiplicative payment adjuster is
applied for each case-mix variable. As with other health care cost
data, there was skewness in the cost distribution for composite rate
services in which a relatively small fraction of observations account
for a disproportionate fraction of costs. Cost per treatment values
which were determined to be unusually high or low in accordance with
predetermined statistical criteria were excluded from further analysis.
(For an explanation of the statistical methodology used to identify
outlier composite rate costs per treatment, see pp 45-48 of UM-KECC's
February 2008 report.)
b. Average Medicare Allowable Payment (MAP) for Separately Billable
Services
Resource use for separately billable dialysis related services was
measured at the patient level using the payment data on the Medicare
claims for CYs 2004-2006. This time period corresponded to the most
recent 3 years of Medicare cost report data that were available to
measure resource use for composite rate services. Measures of resource
use included the following separately billable services: injectable
drugs billed by ESRD facilities, including ESAs; oral forms of ESAs and
other oral drugs used to treat ESRD payable under Medicare part D;
laboratory services provided to ESRD patients, billed by freestanding
laboratory suppliers and ordered by physicians who receive monthly
capitation payments for treating ESRD patients, or billed by ESRD
facilities; other services billed by ESRD facilities, including support
services for Method II home patients; medical equipment and supplies
for Method II home patients billed by durable medical equipment
suppliers.
We obtained Medicare claims data for separately billable services
for CYs 2004-2006 for patient months in which outpatient dialysis was
provided and Medicare was the primary payer. For oral drugs (formerly)
covered under Medicare part D, we used CY 2007 claims data for ESRD
beneficiaries with Medicare part D coverage. Measures of resource use
were based on MAPs, which were calculated using the payment data on the
claims. Currently, the only payment data available for Part D claims
are for CYs 2006 and 2007. However, these data were not available in
sufficient time to be included in the development of the proposed
separately billable case-mix adjusters, given the lead time necessary
for the preparation of the proposed rule. We expect that additional
Part D claims data will be available for the preparation of the final
rule. Therefore, we intend to include appropriate available payment
data from Part D claims for CYs 2006 through 2008 in our development of
the regression based case-mix adjusters for the overall payment model,
and will address their inclusion in the final rule. Payments for Part D
drugs were included in the proposed ESRD base rate, which relied on
claims for CY 2007. See section VII.A.7.
Medicare payments were inflated by a factor of 1.25 for services
that have a 20 percent patient coinsurance (for example, most
injectable drugs) to yield the MAP. For laboratory tests that have no
patient coinsurance obligation, the Medicare payment is identical to
the MAP. As required under section 1881(b)(14)(B) of the Act, as added
by section 153(b)(1) of MIPPA, vaccines are excluded from the ESRD PPS
and therefore, were excluded from the computation of separately
billable drugs. The MAP amounts do not include the annual part B
payment deductible, which may apply to separately billable services
because we were unable to determine whether the deductible amount was
incurred in connection with another part B service. We point out that
the part B payment deductible can apply in connection with any part B
service, not just outpatient dialysis related services.
For the case-mix analyses, MAP values based on CY 2004 through 2006
claims were adjusted to approximate drug payments for the current year.
In CY 2007 the top 11 separately billed Part B drugs accounted for
approximately 99.8 percent of drug expenditures for Medicare ESRD
beneficiaries. We repriced the MAPs for these drugs in 2004, 2005, and
2006 by using a ratio. That ratio was obtained by dividing the Medicare
payment rate in the first quarter of 2008 by the Medicare payment rate
in 2004, 2005, and 2006. This repricing was done for the following
injectable drugs: epoetin alfa, darbepoetin alfa (ARANESP[supreg]),
iron dextran, iron sucrose, sodium ferric gluconate, calcitriol,
doxercalciferol, paracalcitol, levocarnitine, alteplase recombinant,
and vancomycin. (Although iron dextran was among the top 11 drugs in
CYs 2004-2006, it was superseded by daptomycin in CY 2007.) The
resulting MAP closely reflects the current prices based on Medicare
reimbursement rates. The ratios used to

[[Page 49948]]

adjust the MAPs for the 11 specified injectable drugs are shown in
Table 11.
BILLING CODE 4120-01-P
[GRAPHIC] [TIFF OMITTED] TP29SE09.002

BILLING CODE 4120-01-C
The adjusted MAP values were standardized to reflect the number of
Medicare outpatient dialysis treatments reported on the claims. This
approach is consistent with the unit of payment under the current
composite payment system. For patients who received PD during the
month, the number of PD days reported on the claims was multiplied by
\3/7\ to obtain the number of HD-equivalent treatments. For example, 7
PD days were converted to 3 treatments since hemodialysis is typically
performed 3 times per week. Monthly treatments reported on the claims
were capped at 20 treatments in excess of this number were considered
implausible. The average MAP per treatment for EPO was limited to no
more than 30,000 units, since higher doses were considered clinically
suspect or inappropriate. The ratio of the adjusted MAP values for
separately billable services divided by the total number of treatments
was used to calculate the average adjusted MAP per treatment. As with
the analysis of composite rate services, we applied a natural log
transformation to the values of the separately billable MAPs per
treatment, with statistical outlier values excluded from further
analysis employing the same criteria used to identify aberrant
composite rate costs.
2. Independent Variables
Two major types of independent or predictor variables were included
in the composite rate and separately billable regression equations--
case-mix payment variables and control variables. Case-mix payment
variables were included as factors that may be used to adjust payments
in either the composite rate or the separately billable equation.
Control variables, which generally represent characteristics of ESRD
facilities such as size, type of ownership, facility type (whether
hospital-based or independent), etc., were specifically included to
obtain more accurate estimates of the payment impact of the potential
payment variables in each equation. Control variables were excluded
from consideration as actual payment adjusters because they represent
facility characteristics rather than patient characteristics. In the
absence of using control variables in each regression equation, the
relationship between the payment variables and measures of resource use
may be biased.
a. Control Variables
Seven control variables were included in the regression analysis.
They were: (1) Renal dialysis facility type (hospital-

[[Page 49949]]

based versus independent facility); (2) facility size (<3,000 for less
than three years, 3,000 to 5,000, 5,000-10,000, and >10,000 dialysis
treatments); (3) type of ownership (independent, large dialysis
organization, regional chain, unknown); (4) whether the ESRD facility
received a composite rate payment exception between November 1993 and
July 2001; (5) adequacy of dialysis, based on the percentage of
patients having a urea reduction ratio (URR) <65 percent; (6) rural
versus urban location; and (7) calendar year. Calendar years 2004,
2005, and 2006 were included as a control variable in analyses that
pooled three years of data.
b. Proposed Case-Mix Adjustment Variables
Section 1881(b)(14)(D)(i) of the Act requires that the ESRD PPS
include a payment adjustment based on case-mix, but gives the Secretary
broad discretion with regard to the selection of patient-specific
measures which would comprise the case-mix adjusters. As part of our
case-mix analysis, we identified the same patient demographic variables
used in connection with the basic case-mix adjusters under the current
composite payment system: Age (five groups, excluding patients less
than age 18), BSA, and low BMI (values less than 18.5 kg/m\2\). BSA was
calculated as a function of height (H, in centimeters) and weight (W,
in kilograms) using the following formula:

BSA = 0.007184 x H\(0.725)\ x W\(0.425)\

BMI values below 18.5 kg/m\2\ were used to identify patients who were
underweight. BSA and low BMI are currently used as part of the basic
case-mix adjustment for the composite payment system.
The same set of independent variables was included in both the
composite rate and separately billable regression equations. To define
the independent variables for each equation, however, it was necessary
to link patient and facility-level data. For example, measures for
patient characteristics (for example, female gender) were included as
potential payment variables in the facility level composite rate
equation, while measures for facility characteristics (for example,
hospital-based or independent facility) were included as control
variables in the patient level separately billable equation. For the
composite rate equation, we defined case-mix measures using data for
all Medicare dialysis patients treated in each facility. Specifically,
we determined the percentage of a facility's patients having each
patient characteristic. For example, patient's sex was measured as the
percentage of patients that were female. For the equation of the
separately billable MAPs, we defined measures for facility
characteristics using data for all facilities that treated each
Medicare dialysis patient.
These patient and facility control variables were weighted to give
greater emphasis to patient and facility observations that accounted
for more of the care that was delivered, based on the number of
dialysis treatments. For example, in defining facility-level case-mix
measures, the characteristics of patients who were treated at the
dialysis facility for twelve full months (for example, with 13
treatments each month), were given twelve times as much weight as the
characteristics of patients who were treated at the facility for only
one month (for example, with 13 treatments). Similarly, to define
patient-level measures for the control variables, the characteristics
of the facility that treated the patient for nine full months were
given three times as much weight as the characteristics of the facility
that treated the patient for the remaining three full months. The
resulting case-mix variables were examined as potential payment
variables in the composite rate equation (for example, percent female
and average BSA among patients in each facility). This was the same
approach used to define the basic case-mix measures under the composite
payment system. The resulting facility variables were included as
control variables in the separately billable equation (for example,
percent of a patient's treatment furnished in a hospital-based
facility). In the sections that follow, we describe how we considered
and evaluated independent variables for use as potential case-mix
adjusters in the proposed ESRD PPS to determine their relationship to
composite rate costs and separately billable payments.

B. Proposed Patient-Level Adjustments

The following are the patient level adjustments we considered for
the proposed ESRD PPS. The patient level adjustments that we are
proposing are set forth at proposed Sec. 413.235.
1. Patient Age
Section 1881(b)(14)(D)(i) of the Act requires that the ESRD PPS
include a payment adjustment based on case-mix that may take into
account a patient's age. Consequently, we analyzed age as part of the
regression analysis and found that age is a strong predictor of
variation in payments for ESRD patients. In addition, age is an
objective measure and data on age are readily available.
As discussed previously in section I.B.3., the basic case-mix
adjusted composite payment system currently in effect includes payment
adjustments for age. As shown in Table 12 below, there are five age
groupings and payment adjustment factors that describe the distribution
of the patient population:

[[Page 49950]]

[GRAPHIC] [TIFF OMITTED] TP29SE09.086

As we found when we developed the current basic case-mix adjusted
composite payment system, the regression analysis for the proposed ESRD
PPS indicates that MAPs rise as a patient's age increases. We analyzed
information on patient age from the REMIS system and compared the costs
for each age group to a reference group. Although the reference group
for age under the current basic case-mix adjusted composite payment
system was ages 60-69, the reference group used for the proposed ESRD
PPS was determined to be ages 45-59. We selected the 45-59 age range as
the reference group because it was identified as the lowest cost group
and results in positive adjustments for all age categories except for
the 45-59 age group, and avoids age adjustments that are less than one.
In addition, we determined the age groupings based upon stability of
the data and the similarity of the adjustments for the ages within the
group.
The proposed regression analysis for the proposed ESRD PPS revealed
the following: (1) Patients in the 18-44 age grouping were 19.4 percent
more costly than the reference group; (2) Patients age 45-59 were the
reference group; (3) Patients age 60-69 were 1.2 percent more costly
than the reference group; (4) Patients age 70-79 were 5.7 percent more
costly than the reference group; and (4) Patients over 80 years of age
were 7.6 percent more costly than patients in the reference group.
This U-shaped relationship of age with average composite rate per
treatment costs in the proposed ESRD PPS is similar to the pattern we
observed in developing the current basic case-mix adjusted composite
payment system. That is, elevated costs were observed for the youngest
and oldest adult age groups (ages 18-44 and 80+, respectively) compared
to the reference age group.
Based on age, the model indicates that one of the largest
increments in cost is for pediatric patients. We note, however, that
using the current regression-based approach, the precision of the
pediatric multiplier is limited by the small fraction of pediatric
patients in most ESRD facilities and would distort the results. Due to
the relatively small number of pediatric patients, we are proposing to
use a separate regression analysis for pediatric patients, as discussed
in section IX of this proposed rule.
Under the ESRD PPS, we are proposing payment adjustment factors for
five age groups as shown in Table 13 below.

Table 13--Patient Age
------------------------------------------------------------------------
Variable Multiplier
------------------------------------------------------------------------
Ages 18-44................................................. 1.194
Ages 45-59................................................. 1.000
Ages 60-69................................................. 1.012
Ages 70-79................................................. 1.057
Ages 80+................................................... 1.076
------------------------------------------------------------------------

2. Patient Sex
Section 1881(b)(14)(D)(i) of the Act requires that the ESRD PPS
include a payment adjustment based on case-mix that may take into
account a number of variables and may include ``other appropriate
factors.'' Consequently, we analyzed patient sex as part of the
regression analysis and found that patient sex is a strong predictor of
variation in payments for ESRD patients. In addition, patient sex is an
objective measure and data on patient sex are readily available. In the
regression analysis for the proposed ESRD PPS, we found that female
ESRD patients are more costly to treat than male ESRD patients. We
discuss below, prior research related to patient adjusters for males/
females in prior rulemaking for the current basic case-mix adjusted
composite payment system, before addressing our proposal for such a
case-mix adjuster.
In the CY 2005 Physician Fee Schedule (PFS) proposed rule (69 FR
47487 through 47730), published August 5, 2004, we included an
adjustment for gender as part of our proposal for the current basic
case-mix adjusted composite payment system. We analyzed the effect of a
combination of gender and age on composite rate costs compared to the
lowest cost combination (that is, female ages 65-79). No data on
separately billable services was analyzed because those services are
excluded from the basic case-mix adjusted composite payment system. We
found that male patients were consistently more costly than females.
However, we did not include an adjustment for gender because of the
availability of certain data.
As we explained in the CY 2005 PFS final rule with comment period
(69 FR 66235 through 66915), published on November 15, 2004, gender was
proposed as a surrogate measure for body size. We believed that using
height and weight to measure body size would be better predictors of
facility variation in composite rate costs, however, that information
was not available on claims at the time the CY 2005 PFS proposed rule
was published, whereas gender was reported on the outpatient bill.

[[Page 49951]]

During development of the final basic case-mix adjusted composite
payment system, we became aware that the National Uniform Billing
Committee would be approving the use of two new value codes for
reporting weight and height after publication of the final rule. We
determined that mandatory reporting of such data would enable the
development of case-mix measures that reflected the superior predictors
related to body size, that is BMI and BSA. As a result, we adopted in
the final rule BSA and low BMI, and eliminated gender as a patient
classification variable for purposes of case-mix adjustment.
In developing the proposed ESRD PPS, we again analyzed the extent
to which the regression model explains composite rate and separately
billable payments based on a patient's sex and, as a result of that
analysis, are proposing an adjustment based on a patient's sex. (We
believe using the term sex is a more accurate term than gender. Sex is
defined as a classification according to an individual's reproductive
function while gender is defined in terms of masculine/feminine
characteristics). In analyzing more current data on patient sex from
the REMIS system, we found that MAPs (including both composite rate and
separately billable services) were higher for female patients even when
body size measures are included. In the regression analysis, we found
that females were 13.2 percent more costly on a per treatment basis
than males primarily due to differences in use of ESAs between male and
female patients. Therefore, we are proposing an adjustment of 13.2
percent for female patients. We are soliciting public comments around
unintended consequences of providing a payment adjustment for female
patients that may lead to admission practices favoring female patients.
Decisions for the final rule regarding this adjustment would be made
based on analysis of more current data and public comments received on
this issue.
3. Body Surface Area and Body Mass Index
Section 1881(b)(14)(D)(i) of the Act requires that the bundled ESRD
PPS must include a payment adjustment based on case-mix that may take
into account patient weight, BMI, and other appropriate factors.
Consequently, we evaluated height and weight because the combination of
these two characteristics allows us to analyze two measures of body
size; BSA and BMI. For this proposed rule, we analyzed both BSA and low
BMI (<18.5kg/m\2\) individually as part of the regression analysis and
found that both body size measures are strong predictors of variation
in payments for ESRD patients. In addition, both BSA and low BMI are
objective measures and the necessary data, that is, height and weight,
to compute the BSA and low BMI are readily available from patient
claims.
a. Body Surface Area
As discussed previously in section I.B.3, the current basic case-
mix adjusted composite payment system includes a payment adjustment for
BSA. The regression analysis conducted for the current basic case-mix
adjusted composite payment system indicated that composite rate costs
rise as a patient's BSA increases. The payment adjustment factor for
BSA in the current basic case-mix adjusted composite payment system is
1.037. This adjustment factor implies a 3.7 percent elevated cost for
every 0.1m\2\ increase in BSA. The increased costs suggest that there
are longer treatment times and additional resources for larger
patients.
As discussed in the CY 2005 PFS final rule with comment period, we
chose to include BSA as a payment variable because effective January 1,
2005, we were able to collect height and weight data from patient
claims (for purposes of calculating the BSA) and determined that
including the BSA variable improved the model's ability to predict the
costs of the composite rate service compared to using BMI or weight
alone. We adopted the DuBois and DuBois formula for BSA because based
on our research, this formula was the most widely known and accepted.
This formula is: BSA = W\0.425\ * H\0.725\ * 0.007184 (DuBois D. and
DuBois, EF. ``A Formula to Estimate the Approximate Surface Area if
Height and Weight be Known'': Arch. Int. Med. 1916 17:863-71.), where w
and h represent weight in kilograms and height in centimeters,
respectively.
In addition, we explored a number of options for setting the
reference values for the BSA. We examined the distributions for both
the midpoint of the BSA and the count of dialysis patients by age, body
surface and low BMI. Based on that analysis, we set the reference point
at a BSA of 1.84 (the national patient average). Setting the reference
point at the average BSA reflects the relationship of a specific
patient's BSA to the average BSA of all patients. Therefore, some
adjusters would be greater than 1.0 and some would be less than 1.0. In
this way, we were able to minimize the magnitude of the budget
neutrality offset to the composite payment rate. (For more information
on this discussion, we refer readers to 69 FR 66239.)
The BSA factor is defined as an exponent equal to the value of the
patient's BSA minus the reference BSA of 1.84 divided by 0.1. The BSA
adjustment factor of 1.037 is then exponentiated based on the
calculated BSA factor as 1.037^{(BSA-1.84)/0.1}
As we found when we developed the current basic case-mix adjusted
composite payment system, the regression analysis conducted for this
proposed rule indicates that MAPs rise as a patient's BSA increases.
However, we have found that the case-mix adjustment based on a
patient's BSA under the proposed ESRD PPS reflects slightly different
values from those used in connection with the current basic case-mix
methodology under the composite payment system. The BSA case-mix
adjustment factor in connection with the current basic case-mix
adjustment was 3.7 percent for every 0.1 m\2\ change in BSA from the
national average of 1.84. The BSA case-mix adjustment factor under the
proposed ESRD PPS is 3.4 percent for every 0.1 m\2\ change in BSA from
a national average of 1.87 based on updated and more complete data.
In the regression analysis we conducted for this proposed rule, we
found that BSA continues to be a strong predictor of cost variation
among ESRD patients. Accordingly, we are proposing 1.034 as a payment
adjustment factor for BSA in the proposed ESRD PPS.
b. BMI
As discussed previously in section I.B.3, the current basic case-
mix adjusted composite payment system includes a payment adjustment for
low BMI (<18.5 kg/m\2\). The regression analysis conducted for the
current basic case-mix adjusted composite payment system indicated that
those patients who are underweight consume more resources than other
patients. The payment adjuster factor for low BMI in the current basic
case-mix adjusted composite payment system is 1.112. This adjustment
serves as a surrogate for the severity of co-morbid conditions
associated with malnourishment in the dialysis population.
As discussed in the CY 2005 PFS final rule with comment period, we
elected to include low BMI as a payment variable because effective
January 1, 2005, we were going to be able to collect height and weight
data from patient claims and including the low BMI variable improved
the model's ability to predict the costs of the composite rate services
compared to using BMI or weight alone. We chose the measure of low BMI
as

[[Page 49952]]

less than 18.5 kg/m\2\ because it was consistent with the CDC and the
NIH's definition for malnourishment. Furthermore, our exploration of
alternative BMI thresholds did not improve the model's ability to
predict the costs of composite rate services. (For more information on
this discussion, we refer readers to 69 FR 66329.)
Based on the regression analysis conducted for this proposed rule,
we found that low BMI continues to be a strong predictor of cost
variation among ESRD patients. For the proposed ESRD PPS, we are
proposing 1.020 as a payment adjustment factor for low BMI. Further
discussion of co-morbidities and low BMI as case-mix adjusters can be
found below in section VIII.B. of this proposed rule.
4. Onset of Dialysis (New Patient Adjustment)
Section 1881(b)(14)(D)(i) of the Act, as added by MIPPA, requires
that the ESRD PPS include a payment adjustment based on case-mix that
may take into account a patient's length of time on dialysis.
Consequently, we analyzed length of time patients have been receiving
dialysis. The regression analysis performed for this proposed rule
showed that patients who are in their first four months of dialysis
have higher costs. This means that individuals who have been newly
diagnosed with ESRD have higher costs for the first 4 months of
dialysis. We looked at the amount of separately billable payments
relative to the number of months the patient has been on dialysis.
After reviewing the separately billable payment amounts for patients
ranging from one month to twelve months since onset of dialysis, we
found that there was a drop in the amount of separately billable
payments after four months on dialysis. These higher costs for new
patients may be due to stabilization of the patient's condition;
administrative and labor costs associated with the patients being new
to dialysis either in-center or home setting; or initial costs incurred
to train patients and their caregivers to perform home dialysis.
Based on our analysis and for purposes of the ESRD PPS, we propose
to define onset of dialysis beginning with the starting date as
reported on the ESRD Medical Evidence Report Form through the first 4
months a patient is receiving dialysis.
Accordingly, we are proposing an adjustment of 1.473 for patients
in their first 4 months of dialysis. This adjustment factor is based on
the results of regression analysis conducted for this proposed rule as
described above. We are proposing that this adjustment be applied to
both in-facility and home dialysis patients. We acknowledge that there
may be patients whose first 4 months of initial dialysis occur when
they are not eligible for the Medicare ESRD benefit. In these
circumstances, no adjustment would be made. We also acknowledge that
eligibility for the ESRD benefit may occur during the first 4 months.
In that situation, only the period of time in the first 4 months of
dialysis that occurs while the patient is under the ESRD benefit would
apply. In other words, the onset of dialysis adjustment is made only in
the initial first 4 months of dialysis and for the period of time that
the individual is eligible for the ESRD benefit.
5. Co-morbidities
As discussed above, section 1881(b)(14)(D)(i), as added by section
153(b) of MIPPA, requires that the bundled ESRD PPS include a payment
adjustment based on case-mix that may take into account patient co-
morbidities. Consequently, we analyzed co-morbidities as part of the
regression analysis and found that certain co-morbidities are
predictors of variation in payments for ESRD patients. The intent of
the proposed co-morbidity adjustment is to recognize the increased
costs associated with co-morbidities by providing additional payments
for certain conditions that occur concurrently with the need for
dialysis. In other words, co-morbidities are specific patient
conditions that are secondary to the patient's principal diagnosis that
necessitates dialysis, yet have a direct affect on dialysis. In
addition, co-morbidities are an objective measure and data are readily
available.
In the CY 2005 PFS proposed rule (69 FR 47529 through 47533), we
proposed case-mix adjustments for a limited number of patient
characteristics including a large number of specific co-morbidities.
Using linear regression analyses, we assessed the relationship of
patient characteristics and co-morbidity measures to per session cost
and Medicare payments to ESRD facilities. We noted that we were able to
develop case-mix adjustment factors for a limited number of patient
characteristics, which were modest predictors of variation in average
costs for composite rate services. However, as ESRD facilities did not
list individual composite rate items and services on dialysis claims,
the available data did not identify use of resources by individual
patients. We acknowledged that ESRD facilities could under report or
not report co-morbidities as there was no requirement to do so as the
current basic case-mix adjusted composite payment system does not
provide for co-morbidity payment adjusters. In an attempt to obtain
information on co-morbidities, in the CY 2005 PFS final rule with
comment, ESRD facilities were encouraged to report co-morbidities.
Therefore, we used a combination of data sources (discussed below), to
determine co-morbidities for ESRD patients on maintenance dialysis.
A stepwise regression analysis was conducted for the current basic
case-mix adjusted composite payment system to identify case-mix factors
that explained statistically significant variation in ESRD facility
costs. Stepwise regression is used when there are a large number of
potential explanatory variables with variables added or removed from
the regression model to identify a subset of predictors and the highest
R². The forward (step-up) method begins with no variables in
the model with variables individually included if they are
statistically significant (no additional variables have a p-value level
<0.05). Backward (step-down) method begins with a model of all
variables and eliminates the least significant variables until no
nonsignificant variables remain (until all remaining variables have a
p-value <0.10). The step-up method was performed to identify payment
variables while the step-down method was performed to determine how
much co-morbidity categories affected the R². As a result of
our analysis, four patient characteristic variables (sex, age, AIDS and
peripheral vascular disease) were found to be modest predictors of cost
variation among ESRD facilities.
In the CY 2005 PFS proposed rule, we explained that a number of co-
morbidities were analyzed, including several that did not have
statistically significant relationships to facility costs, as well as
co-morbidity conditions that were excluded due to lack of data. For
example, we explained that a patient's history of cancer was associated
with higher costs; however, we found the measure too broad to be
clinically meaningful. We indicated that we would continue to evaluate
cancer as a potential variable for refinement purposes.
We also discussed in that proposed rule that we explored whether
diabetes as a co-morbidity is predictive of high resource use and found
that the predictive power of diabetes was dependent on whether
peripheral vascular disease (PVD) was part of the model. We explained
that PVD was always statistically significant, when accounted for,
while most diabetic measures were not strongly associated with facility
costs. Therefore, we

[[Page 49953]]

proposed a case-mix adjustment for PVD diagnoses. We note that 73
percent of patients with diabetes also included PVD. (For more
information on this discussion, we refer readers to 69 FR 47531).
In the CY 2005 PFS final rule with comment period, which
implemented the current basic case-mix adjusted composite payment
system, we acknowledged that although the regression modeling suggested
the inclusion of co-morbidities in the basic case-mix adjusted
composite payment system, we were concerned that the available data to
determine patient level co-morbidities might not accurately reflect
relevant diagnoses. For example, we explained that AIDS would not
likely be recorded on claims for outpatient dialysis patients and that
requiring its inclusion could create powerful incentives for ESRD
facilities to circumvent confidentiality requirements (69 FR 66326). We
also explained that we found that the predictive power of diabetes was
dependent on whether PVD, which was statistically significant, was part
of the model (69 FR 47531). However, most measures of diabetes were not
strongly associated with ESRD facility costs. While we proposed a case-
mix adjustment for PVD in the CY 2005 PFS proposed rule (69 FR 47531),
we received comments indicating that there was apparent disagreement
among clinicians as to whether certain diagnoses are reflective of PVD
in ESRD patients. Therefore, we eliminated the case-mix adjustment for
PVD in the CY 2005 PFS final rule with comment period.
There also were other factors that contributed to our decision not
to include patient-level co-morbidities in the basic case-mix adjusted
composite payment system. For example, with regard to substance abuse,
we acknowledged in the CY 2005 PFS proposed rule, while the presence of
alcohol and drug dependence was found to be predictive of higher
facility level costs, we did not propose an adjustment as we believed
substance abuse was underreported. Accordingly, we concluded that we
would not include co-morbidities as a case-mix adjustment. However, we
did establish the case-mix adjustments based on age, BMI, and BSA. Our
analysis indicated that patients with extremely low or high BMI were
costly to treat and included these as we believed this factor could be
an important measure of resource consumption related to the composite
rate services and could serve as a surrogate for the severity of co-
morbidities. We also noted that the average patient BSA was found to be
statistically significant and a consistent predictor of average
treatment costs, indicating higher costs for larger adult patients. As
discussed above, in the CY 2005 PFS final rule with comment period, we
indicated that while co-morbidities were not part of the current basic
case-mix adjusted composite payment system, we encouraged all
facilities to report co-morbid conditions on the claims in order to
enable future refinements to the basic case-mix adjustments that would
reflect the type of co-morbidities that beneficiaries receiving ESRD
services have which would provide a better database from which we can
develop future case-mix measures for the ESRD PPS.
As discussed in section VIII.A, we retained UM-KECC to assist us in
developing a case-mix adjustment for the proposed ESRD PPS. One of the
tasks was the identification of specific diagnoses within co-morbidity
categories. For this proposed rule, to capture changes in patient
conditions, patient co-morbidities were measured using a combination of
the co-morbidities reported on the Medical Evidence Form (CMS-2728) to
obtain co-morbidities at the onset of dialysis adjustment, and
diagnoses reported on the Medicare claims to identify co-morbidities
not obtained from the Medical Evidence Form (CMS-2728).
We began with a long list of patient characteristics based on
diagnostic categories developed for the Medicare Advantage Program and
categories developed for the co-morbidities on the Medical Evidence
Form (CMS 2728). We also used co-diagnoses reported in multiple types
of Medicare claims (inpatient dialysis and other outpatient, skilled
nursing facility, physician/supplier, hospice, and home health). We are
soliciting recommendations on the type of claims that reflect the co-
morbidities for beneficiaries receiving renal dialysis services that
could be used in future analyses.
We acknowledge the likelihood that some diagnoses reported on
laboratory claims may represent a condition being excluded by the test,
and therefore, diagnoses reported on laboratory claims were not used. A
potential limitation of excluding laboratory claims from the
identification process is that we may have underestimated the frequency
of certain conditions. Patient characteristics considered for inclusion
in the model are based on the magnitude and statistical significance of
relationship to composite rate costs and separately billable payments.
To ensure that each potential case-mix adjuster has a relationship
to cost which is statistically significant and to ensure that the
magnitude of the relationship is economically meaningful, patient co-
morbidities having statistically significant, low magnitude association
with cost, as well as co-morbidities with ambiguous definitions were
excluded. Several patient co-morbidities having statistically
significant, low magnitude association with cost in the preliminary
models and additional co-morbidities with ambiguous definitions, high
prevalence, or both, were excluded.
A refined list of case-mix co-morbidities comprised of 1,022 ICD-9-
CM diagnoses codes were evaluated for persistence of effect and cost.
The resulting co-morbidity categories were cardiac arrest;
pericarditis; substance abuse; positive HIV status and AIDS;
gastrointestinal tract bleeding; cancer since 1999 (excludes non-
melanoma skin cancer); septicemia/shock; opportunistic infections
(pneumonias); aspiration and specified bacterial pneumonias;
pneumococcal pneumonia, empyema, lung abscess; monoclonial gammopathy;
myelodysplastic syndrome; leukemia; hereditary hemolytic anemias and
sickle cell anemia; lymphoma; hepatitis B; and multiple myeloma.
We used the stepwise regression model in analyzing co-morbidity
data for case-mix adjustments in the proposed ESRD PPS. The
relationship between patient characteristics and cost for composite
rate services was estimated using a facility level regression model, as
patient level data are not available. In other words, the average
patient characteristics are related to the reported facility costs.
A patient level model was used to identify potential payment
adjusters for separately billable services. The regression model,
weighted by the number of dialysis sessions examined the same refined
list of patient characteristics used in the model of composite rate
costs. Eleven co-morbidity variables had statistically significant
relationships to cost. However, the magnitude of the co-morbidity
effects varied substantially. The largest payment multipliers were
associated with gastrointestinal (GI) bleeding (31.6 percent), HIV/AIDS
(31.6 percent), bacterial and other pneumonias/opportunistic infections
(30.7 percent), hereditary hemolytic/sickle cell anemias (22.6 percent)
and pericarditis (19.5 percent). As infections, GI bleeding and
pericarditis are acute conditions with a diagnosis not exceeding 3
months, these diagnoses would result in a temporary payment adjustment.
The chronic conditions

[[Page 49954]]

result in a permanent increase on payment which we believe may tend to
have a more persistent effect on cost. For example, cancer diagnosis
would be eligible for a payment adjustment if the cancer diagnosis has
a direct effect on the cost of ESRD treatment. In other words, the fact
that an individual has or had cancer would not in itself imply that a
co-morbidity payment adjustment is warranted as the adjustment is
intended to adjust for higher patient costs. The same applies for any
diagnosis in any of the co-morbidity categories.
While the modeling approach used separate equations for the
composite rate and separately billable services to select patient
characteristics as payment variables, we combined the estimated payment
multipliers for composite rate and separately billable services. The
payment multipliers were calculated as the weighted average of the
composite rate and separately billable multipliers. The weights reflect
each component's proportion of the total estimated costs, so that the
resulting case-mix adjustment reflects the overall relationship between
patient characteristics and estimated costs for the proposed ESRD PPS.
We note that cancer is included in the proposed co-morbidity
adjustment diagnoses. As discussed above, we indicated in the CY 2005
PFS proposed rule that although a history of cancer was associated with
higher costs, it was found that the measure was too broad to be
meaningful. Subsequent to the research we performed in support of the
basic case-mix adjusted composite payment system, we investigated the
relationship between specific categories of cancer and costs. In an
effort to create more clinically homogenous groups, we began with
clinical categories that were developed for risk adjustment under the
Medicare Advantage program. The source for these cancer diagnoses was
the Medicare claims, based on any occurrence since 1999. Starting with
all cancers except for non-melanoma skin cancers, we split them into
groups of cancers that were used by the Medicare Advantage Program
namely, lung; upper digestive tract and other severe cancers; lymphatic
system, head, and other major cancers; metastatic cancers; breast,
prostate, colorectal, and other cancers and tumors; lymphoma; multiple
myeloma; and leukemia. We performed analyses to estimate the
relationship between these diagnostic categories and separately
billable MAPs. These analyses demonstrated statistically significant
associations between each of the cancer categories and SB MAP. In fact,
the coefficient estimates were similar across categories. To advance
the goal of parsimony in the model, we recombined the categories.
We also note that AIDS is included as a co-morbidity case-mix
adjustment although it had been eliminated as an adjustment from the
current basic case-mix adjusted composite payment system as reporting
of AIDS was limited due to confidentiality requirements (69 FR 66326.)
However, we found that inclusion of HIV/AIDS in the proposed ESRD PPS
increases the explanatory power of the model and provides higher
payments for patients who are substantially more costly to treat. We
recognize that these benefits must be balanced against the goal to
maintain patient confidentiality in this sensitive clinical area. The
model that we are currently proposing is the result of applying a
combination of empirical results and our policy decision regarding the
appropriateness of adjusting for specific patient characteristics. We
recognize that this may result in difficulties for ESRD facilities
required by State law to maintain patient confidentiality and therefore
are unable to comply with reporting HIV/AIDS diagnoses on claims. We
also acknowledge facilities may not be aware of patients' HIV/AIDS
status. We are specifically soliciting comments on our proposal to
include HIV/AIDS diagnoses in the proposed model.
Based upon our analysis, we are proposing adjustments for the
following eleven co-morbidity categories under the proposed ESRD PPS as
indicated in table 14 below, and seek comment on each adjustment.

Table 14--Co-Morbidity Case-Mix Adjustment
------------------------------------------------------------------------
Modeled case-
mix
Case-mix adjustment co-morbidity adjustment
\1\
------------------------------------------------------------------------
Alcohol/Drug Dependence................................... 1.150
Cardiac Arrest............................................ 1.032
Pericarditis (0-3 months ago)............................. 1.195
HIV/AIDS.................................................. 1.316
Hepatitis B............................................... 1.089
Infection (0-3 months ago
Septicemia............................................ 1.234
Bacterial Pneumonia and Other Pneumonias/Opportunistic 1.307
Infections...........................................
Gastrointestinal Tract Bleeding (0-3 months ago).......... 1.316
Hereditary Hemolytic or sickle cell anemias............... 1.226
Cancer Since 1999 (exclude nonmelanoma skin cancer)....... 1.128
Myelodysplastic Syndrome.................................. 1.084
Monoclonial Gammopathy.................................... 1.021
------------------------------------------------------------------------
\1\ Payment multipliers were calculated as the weighted average of the
composite rate and separately billable multipliers. The weights used
reflect each component's proportion of the total estimated costs so
that the resulting case-mix adjustment reflects the overall
relationships between patient characteristics and estimated costs for
an expanded bundle of services.

Diagnoses that relate to earlier periods of care and have no
bearing on the current RRT are excluded from the proposed co-morbidity
case-mix adjustment. Therefore, we are proposing that in order to be
eligible for the proposed co-morbidity payment adjustment, the co-
morbid condition must exist (or have existed within the past 3 months
for the diagnoses, as noted above) and affect treatment. For each
claim, we are proposing that an ESRD facility may receive only one co-
morbidity case-mix adjustment per co-morbidity category, but it may
receive an adjustment for more than one co-morbidity category.
We are proposing that in order to receive a co-morbidity payment
adjustment, the appropriate ICD-9-CM code that corresponds to the
specific condition/disease that results in increased costs to ESRD
facilities is to be placed on the claims and that coding guidelines are
to be used in determining the appropriate codes. This includes using V
codes for those conditions that reflect that a patient had a disease/
condition in the past and that the disease/condition has no effect on
the cost of providing RRT. That is to say, we propose that these V
codes (that is, history of a disease) for past disease/condition are
not subject to any co-morbidity payment adjustment. We note we will
issue through sub-regulatory guidance, any changes in codes eligible
for a co-morbidity payment adjustment in the event of any changes in
coding (for example, ICD-10-CM) in the future.
We performed analyses on FY 2007 dialysis claims to determine the
extent that specific diagnoses within the eleven co-morbidity
categories are on ESRD claims. We found that less than 50,000 claims
out of three million (representing 1.7 percent of 3 million claims) had
a diagnostic code corresponding to the co-morbidity categories eligible
for a co-morbidity payment adjustment. Of these, 40,609 diagnoses
related to septicemia and shock; 2,853 related to cancer; 1,933

[[Page 49955]]

related to Hepatitis B, and 973 to HIV/AIDS.
We also analyzed the ICD-9-CM diagnostic codes as identified by UM-
KECC. A complete list of the codes identified by UM-KECC is found in
Table A of the Addenda.
Table B, which can be found in the Addenda represents the codes
associated with diseases/conditions that would be recognized for the
purposes of an ESRD co-morbidity payment adjustment.
Please note that we have eliminated specific ICD-9-CM codes
associated with specific diseases/conditions that we propose would not
be recognized for purposes of a co-morbidity payment adjustment. These
ineligible codes are discussed further below.

ICD-9-CM Codes With Their Associated Conditions/Diseases Not Recognized
for the Purposes of a Co-morbidity Payment Adjustment

Based on our analyses, we are proposing that conditions/diseases
associated with the following ICD-9 codes will not be recognized for
the purposes of a co-morbidity case-mix adjustment. We explain the
reason for not recognizing these codes in the sections discussed below.
We are soliciting comments regarding the conditions/diseases associated
with the excluded codes. We are also soliciting suggestions of ICD-9-CM
codes for conditions/diseases associated with which we should consider
for future refinements.

1. ICD-9-CM Co-morbidities Not Affecting Costs in Outpatient ESRD
Facility and Not Recognized for Co-morbidity Payment Adjustment(s)

We believe that patients with the following co-morbidity
condition(s) in Table 15 below, would not result in higher costs in an
ESRD facility. We believe that patients with these acute conditions/
diseases, many which are highly communicable, would not receive
dialysis in an outpatient setting and therefore, a history of these
conditions/diseases would not have an impact on ESRD provider/facility
costs. Therefore, we are proposing that these conditions would not be
recognized for purposes of the proposed co-morbidity adjustment. We are
soliciting comments on these ICD-9-CM codes and their associated
diseases/conditions.

Table 15--ICD-9-CM Co-Morbidities Not Affecting Costs in Outpatient ESRD
Facility and Not Recognized for Co-Morbidity Payment Adjustment(s)
------------------------------------------------------------------------

-------------------------------------------------------------------------
Drug and/or Alcohol Induced Mental Disorders
------------------------------------------------------------------------
291.0 Delirium tremors.
291.1 Alcohol psychosis, alcoholic amnestic syndrome.
291.2 Alcoholic psychosis, other alcohol dementia.
291.3 Alcoholic psychosis, alcoholic withdrawal hallucinosis.
291.4 Alcoholic psychosis, idiosyncratic alcohol intoxication.
291.5 Alcoholic psychoses, alcohol jealousy.
------------------------------------------------------------------------
Hepatitis B
------------------------------------------------------------------------
070.20 Viral hepatitis B with hepatic coma acute or unspecified w/o
hepatitis delta.
070.21 Viral hepatitis B w/hepatic coma acute or unspecified w/hepatitis
delta.
070.22 Viral hepatitis B w/hepatic coma chronic w/o hepatitis delta.
070.23 Viral hepatitis B w/hepatic coma chronic w/hepatitis delta.
------------------------------------------------------------------------
Septicemia and Shock
------------------------------------------------------------------------
020.2 Septicemic plague.
020.3 Primary pneumonic plague.
036.2 Meningococcemia.
038.3 Septicemia due to anaerobes.
040.82 Toxic shock syndrome.
054.5 Herpetic septicemia.
771.81 Newborn septicemia.
------------------------------------------------------------------------
Bacterial pneumonias/opportunistic infections/pneumococcal pneumonias
------------------------------------------------------------------------
003.22 Salmonella pneumonia.
006.4 Amebic lung abscess.
007.4 Cryptosporidosis.
020.4 Secondary pneumonic plague.
021.2 Pulmonary tularemia.
022.1 Pulmonary anthrax.
031.2 Disseminated mycobacteria.
039.1 Pulmonary actinomycosis.
078.5 Cytomagalovirus disease.
112.4 Candidiasis lung.
112.5 Candidiasis disseminated.
114.0 Primary coccidioidomycosis pulmonary.
114.4 Chronic pulmonary coccidioidomycosis.
115.05 Histoplasma capsulatum pneumonia.
115.15 Histoplasma duboisii pneumonia.
115.95 Histoplasmosis unspecified pneumonia.
117.3 Aspergillosis.
117.5 Cryptococcosis.
117.7 Zygomycosis (phycomycosis/mucomycosis).
121.2 Paragonimiais.
122.1 Echinoccus granulosis lung.

[[Page 49956]]

130.0 Toxoplasmosis meningoencephalitis.
130.4 Toxoplasmosis pneumonitis (strep pneumoniae pneumonia).
130.8 Multisystemic disseminated toxoplasmosis.
136.3 Pneumocytosis.
------------------------------------------------------------------------

2. ICD-9-CM NEC/NOS/Unspecified Codes Not Recognized for Purposes of a
Co-Morbidity Payment Adjustment(s) Payment

The following ICD-9-CM codes/diagnoses in Table 16 are designated
as not otherwise specified (NOS); not elsewhere specified (NEC) or are
unspecified. As these codes are general and do not provide meaningful
identification of a disease, we are proposing that these ICD-9-CM
codes/diagnoses will not be recognized for purposes of a co-morbidity
case-mix adjustment.

Table 16--ICD-9-CM NEC/NOS/Unspecified Codes Not Recognized for Purposes
of a Co-Morbidity Payment Adjustment(s) Payment
------------------------------------------------------------------------

-------------------------------------------------------------------------
Cancer (Excludes Non-Melanoma Skin Cancer)
------------------------------------------------------------------------
141.9 malignant neoplasm tongue NOS.
142.8 malignant neoplasm major salivary NEC.
142.9 malignant neoplasm salivary NOS.
143.8 malignant neoplasm gum NEC.
143.9 malignant neoplasm gum NOS.
144.9 malignant neoplasm mouth floor NOS.
145.5 malignant neoplasm palate NOS.
145.9 malignant neoplasm mouth NOS.
146.9 malignant neoplasm oropharynx NOS.
147.8 malignant neoplasm nasopharynx NEC.
147.9 malignant neoplasm nasopharynx NOS.
148.9 malignant neoplasm hypopharynx NOS.
149.0 malignant neoplasm pharynx NOS.
150.8 malignant neoplasm esophagus NEC.
150.9 malignant neoplasm esophagus NOS.
151.8 malignant neoplasm stomach NEC.
151.9 malignant neoplasm stomach NOS.
152.9 malignant neoplasm small bowel NOS.
153.8 malignant neoplasm colon NEC.
153.9 malignant neoplasm colon NOS.
154.3 malignant neoplasm anus NOS.
154.8 malignant neoplasm rectum/anus NEC.
155.2 malignant neoplasm liver NOS.
156.9 malignant neoplasm biliary NOS.
157.9 malignant neoplasm pancreas NOS.
158.9 malignant neoplasm peritoneum NOS.
159.0 malignant neoplasm intestine NOS.
159.1 malignant neoplasm spleen NEC.
159.8 malignant neoplasm gastrointestinal/intra-abdominal NEC.
159.9 malignant neoplasm gastrointestinal tract ill-defined.
160.9 malignant neoplasm access sinus NOS.
161.9 malignant neoplasm larynx NOS.
162.8 malignant neoplasm bronchus/lung NEC.
162.9 malignant neoplasm bronchus/lung NOS.
163.8 malignant neoplasm pleura NEC.
163.9 malignant neoplasm pleura NOS.
164.8 malignant neoplasm mediastinum NEC.
164.9 malignant neoplasm mediastinum NOS.
165.0 malignant neoplasm upper respiratory NOS.
165.9 malignant neoplasm respiratory system NOS.
170.9 malignant neoplasm bone NOS.
171.7 malignant neoplasm trunk NOS.
171.8 malignant neoplasm soft tissue NEC.
171.9 malignant neoplasm soft tissue NOS.
172.8 malignant melanoma skin NEC.
172.9 malignant melanoma skin NOS.
172.3 malignant melanoma face NEC/NOS.
174.8 malignant neoplasm breast NEC.
174.9 malignant neoplasm breast NOS.
175.9 malignant neoplasm male breast NEC.
176.9 Kaposi's sarcoma NOS.
179.9 malignant neoplasm uterus NOS.
180.9 malignant neoplasm cervix uteri NOS.

[[Page 49957]]

183.8 malignant neoplasm adnexa NEC.
183.9 malignant neoplasm adnexa NOS.
184.4 malignant neoplasm vulva NOS.
184.8 malignant neoplasm female genitals NEC.
184.9 malignant neoplasm female genitals NOS.
187.4 malignant neoplasm penis NOS.
187.9 malignant neoplasm male genital NOS.
187.8 malignant neoplasm male genital NEC.
188.8 malignant neoplasm bladder NEC.
188.9 malignant neoplasm bladder NOS.
189.8 malignant neoplasm urinary NEC.
189.9 malignant neoplasm urinary NOS.
190.9 malignant neoplasm eye NOS.
191.6 mal neoplasm cerebellum NOS.
191.8 malignant neoplasm brain NEC.
191.9 malignant neoplasm brain NOS.
192.8 malignant neoplasm nervous system NEC.
192.9 malignant neoplasm nervous system NOS.
194.8 malignant neoplasm endocrine NEC.
194.9 malignant neoplasm endocrine NOS.
195.8 malignant neoplasm site NEC.
196.9 malignant neoplasm lymph node NOS.
197.3 secondary malignant neoplasm respiratory NEC.
197.8 secondary malignant neoplasm gastrointestinal NEC.
198.82 secondary malignant neoplasm genital.
198.89 secondary malignant neoplasm NEC.
199.1 malignant neoplasm NOS.
200.80 other variant unspecified extranodal.
208.20 subacute leukemia unspecified cell without remission.
208.21 subacute leukemia unspecified cell with remission.
208.80 other leukemia unspecified cell type without remission.
208.81 other leukemia unspecified cell type with remission.
208.90 leukemia NOS without remission.
208.91 leukemia NOS with remission.
209.00 malignant carcinoid tumor small intestine unspecified portion.
209.10 malignant carcinoid tumor large intestine unspecified portion.
209.20 malignant carcinoid tumor of unknown primary site.
209.25 malignant carcinoid tumor of foregut, NOS.
209.26 malignant carcinoid tumor of midgut, NOS.
209.27 malignant carcinoid tumor of hindgut, NOS.
209.29 malignant carcinoid tumor of other sites.
209.30 malignant poorly differentiated neuroendocrine cancer, any site.
237.70 neurofibromatosis NOS.
237.9 uncharacteristic behavior neurologic nervous system NEC.
239.6 brain neoplasm NOS.
259.2 other endocrine disorders, carcinoid syndrome.
------------------------------------------------------------------------
Drug and/or alcohol induced mental disorders
------------------------------------------------------------------------
291.81 alcohol psychosis other specified alcohol psychosis/alcohol
withdrawal.
291.89 alcohol psychosis, other specified alcohol psychosis, other.
291.9 alcoholic psychoses/unspecified alcohol psycho.
292.0 drug withdrawal.
292.11 paranoid/hallucinatory drugs induced, drug-induced organic
delusion syndrome.
292.12 drug psychiatric disorder with hallucinations.
292.2 pathologic drug intoxication.
292.81 other specified drug-induced mental disorders, drug-induced
delirium.
292.82 other specified drug-induced mental disorders, drug-induced
dementia.
292.84 other specified drug-induced mental disorders, drug-induced
organic affective syndrome.
292.89 other specified drug-induced mental disorders, other.
292.9 unspecified drug-induced mental disorders.
303.00 acute alcohol intoxication-unspecified.
303.01 alcohol dependent syndrome, acute alcohol intoxication,
continuous.
303.90 alcohol dependence syndrome, other & unspecified alcohol
dependence unspecified.
304.00 drug dependence, opioid, unspecified.
304.10 drug dependence barbiturate/similarly acting sedative/hypnotic
dependence unspecified.
304.20 drug dependence, cocaine unspecified.
304.30 drug dependence, cannabis unspecified.
304.40 drug dependence amphetamine/other psychostimulator unspecified.
304.50 drug dependence hallucinogen unspecified.
304.60 other specified drug dependence unspecified.
304.70 drug dependence opioid type w/other drug unspecified.
304.80 drug depend comb w/o opioid type unspecified.

[[Page 49958]]

304.90 drug dependence unspecified depend unspecified.
305.00 nondependence drug abuse alcohol unspecified.
571.3 alcoholic liver damage unspecified.
V11.3 personal mental disorder history alcoholism.
------------------------------------------------------------------------
Pericarditis
------------------------------------------------------------------------
420.0 acute pericarditis in diseases classified elsewhere.
420.99 other/unspecified pericarditis other.
------------------------------------------------------------------------
HIV/AIDS
------------------------------------------------------------------------
079.53 HIV-2 infection other disease.
------------------------------------------------------------------------
Septicemia and shock
------------------------------------------------------------------------
038.10 septicemia, staphylococcal unspecified.
038.19 septicemia, staphylococcal other.
038.9 septicemia other unspecified.
785.59 other shock: endotoxic, gram negative hypovolemia.
------------------------------------------------------------------------
Bacterial Pneumonias/Opportunistic Infections/Pneumococcal Pneumonias
------------------------------------------------------------------------
482.30 streptococcus pneumonia unspecified.
482.39 streptococcus other strep pneumonia.
482.40 pneumonia due to staphlococcus unspecified.
482.49 pneumonia due to other staphlococcus pneumonia.
482.83 pneumonia due to other gram negative bacteria.
482.89 pneumonia due to other specified bacteria.
484.7 other systemic mycoses pneumonia.
------------------------------------------------------------------------
Gastrointestinal tract bleeding
------------------------------------------------------------------------
531.40 chronic/unspecified gastric ulcer w/hemorrhage w/o obstruction.
531.41 chronic/unspecified gastric ulcer w/hemorrhage w/obstruction.
531.60 chronic/unspecified gastric ulcer w/hemorrhage/perforation w/o
obstruction.
531.61 chronic/unspecified gastric ulcer w/hemorrhage/perforation w/
obstruction.
532.40 chronic/unspecified duodenal ulcer w/hemorrhage w/o obstruction.
532.41 chronic/unspecified duodenal ulcer w/hemorrhage w/obstruction.
532.60 chronic/unspecified duodenal ulcer w/hemorrhage/perforation w/o
obstruction.
532.61 chronic/unspecified duodenal ulcer w/hemorrhage/perforation w/
obstruction.
533.40 chronic/unspecified peptic ulcer w/hemorrhage w/o obstruction.
533.41 chronic/unspecified peptic ulcer w/hemorrhage w/obstruction.
533.60 chronic/unspecified peptic ulcer w/hemorrhage/perforation w/o
obstruction.
533.61 chronic/unspecified peptic ulcer w/hemorrhage/perforation w/
obstruction.
534.40 chronic/unspecified gastrojejunal ulcer w/hemorrhage w/o
obstruction.
534.41 chronic/unspecified gastrojejunal ulcer w/hemorrhage w/
obstruction.
534.60 chronic/unspecified gastrojejunal ulcer w/hemorrhage/perforation
w/o obstruction.
534.61 chronic/unspecified gastrojejunal ulcer w/hemorrhage/perforation
w/obstruction.
------------------------------------------------------------------------
Hereditary hemolytic anemias/sickle cell anemias
------------------------------------------------------------------------
282.69 sickle-cell disease other sickle-cell disease w/crisis.
282.9 hereditary hemolytic anemia unspecified.
------------------------------------------------------------------------

3. ICD-9-CM Benign Tumor Codes Not Recognized for Co-Morbidity Payment
Adjustment(s)

As noted previously, the intent of the case-mix adjustment is to
provide additional payment for conditions which are predictors of
variation of average costs. Although the regression analysis identified
cancer as a co-morbidity category because it resulted in higher costs,
we believe that this would exclude benign tumors. Therefore, we are
proposing that the following benign tumor codes/diagnoses in Table 17
will not be recognized for the proposed cancer co-morbidity payment
adjustment.

Table 17--ICD-9-CM Benign Tumor Codes Not Recognized for Co-Morbidity
Payment Adjustment(s)
------------------------------------------------------------------------
209.40 Benign carcinoid tumor small intestine unspecified portion.
-------------------------------------------------------------------------
209.40 Benign carcinoid tumor small intestine, unspecified portion.
209.41 Benign carcinoid tumor of the duodenum.
209.42 Benign carcinoid tumor of the jejunum.
209.43 Benign carcinoid tumor of the ileum.
209.50 Benign carcinoid tumor large intestine, unspecified portion.
209.51 Benign carcinoid tumor of the appendix.
209.52 Benign carcinoid tumor of the cecum.

[[Page 49959]]

209.53 Benign carcinoid tumor ascend colon.
209.54 Benign carcinoid tumor of the transverse colon.
209.55 Benign carcinoid tumor descend colon.
209.56 Benign carcinoid tumor of the sigmoid colon.
209.57 Benign carcinoid tumor of the rectum.
209.60 Benign carcinoid tumor unknown primary site.
209.61 Benign carcinoid tumor bronchus/lung.
209.62 Benign carcinoid tumor thymus.
209.63 Benign carcinoid tumor of the stomach.
209.64 Benign carcinoid tumor of the kidney.
22.5 Benign neoplasm brain/other nervous system parts.
225.0 Benign neoplasm brain.
225.1 Benign neoplasm cranial nerves.
225.2 Benign neoplasm cerebral meninges.
225.3 Benign neoplasm spinal cord.
225.4 Benign neoplasm spinal meninges.
225.8 Benign neoplasm nervous system NEC.
225.9 Benign neoplasm nervous system NOS.
226 Benign neoplasm thyroid.
227.3 Benign neoplasm pituitary.
227.4 Benign neoplasm pineal gland.
------------------------------------------------------------------------

.4. ICD-9 Codes as Category Headings and Not Recognized for Co-
Morbidity Payment Adjustment(s)
We are proposing that the following ICD-9-CM codes/diagnoses in
Table 18 will not be recognized for purposes of a co-morbidity case-mix
adjustment because these codes are ICD-9-CM category headings not be
used to identify diagnoses.

Table 18--ICD-9 Codes as Category Headings and Not Recognized for Co-
Morbidity Payment Adjustment(s)
------------------------------------------------------------------------

-------------------------------------------------------------------------
Cancer (excludes non-melanoma skin cancer)
------------------------------------------------------------------------
141 malignant neoplasm tongue.
142 malignant neoplasm major salivary/parotid.
143 malignant neoplasm gum.
144 malignant neoplasm floor of mouth.
145 malignant neo other/unspecified mouth parts.
146 malignant neoplasm oropharynx.
147 malignant neoplasm nasopharynx.
148 malignant neoplasm hypopharynx.
149 mal neoplasm other/ill-defined lip/oral cavity/pharynx.
150 malignant neoplasm esophagus.
151 malignant neoplasm stomach.
152 malignant neoplasm intestine/duodenum.
153 malignant neoplasm colon.
154 malignant neo rectum/rectosigmoid junction/anus.
155 malignant neoplasm liver/intrahepatic bile ducts.
156 malignant neoplasm gall bladder/extrahepatic bile ducts.
157 malignant neoplasm pancreas.
158 malignant neoplasm retroperitoneum/peritoneum.
159 malignant neoplasm other/ill-defined digest org/peritoneum.
160 malignant neoplasm nasal cavities/middle ear/access sinuses.
161 malignant neoplasm larynx.
162 malignant neoplasm trachea/bronchus/lung.
163 malignant neoplasm pleura.
164 malignant neoplasm thymus/heart/mediastinum.
------------------------------------------------------------------------
Cancer (excludes non-melanoma skin cancer)
------------------------------------------------------------------------
165 malignant neoplasm other/ill-defined respiratory system/
intrathoracic.
170 malignant neoplasm bone/articular cartilage.
171 malignant neoplasm connective/other soft tissue.
172 malignant melanoma skin.
174 malignant neoplasm female breast.
175 malignant neoplasm male breast.
176 Kaposi's sarcoma.
180 malignant neoplasm cervix uteri.
182 malignant neoplasm uterine body.
183 malignant neoplasm ovary/other uterine adnexa.
184 malignant neoplasm other/unspecified female genitals.
186 malignant neoplasm testis.

[[Page 49960]]

187 malignant neoplasm penis/other male genitals.
188 malignant neoplasm bladder.
189 malignant neoplasm kidney/other/unspecified urinary organs.
190 malignant neoplasm eye.
191 malignant neoplasm brain.
192 malignant neoplasm other/unspecified nervous system.
194 malignant neoplasm other endocrine/related structures.
195 malignant neoplasm other/ill-defined sites.
196 secondary/unspecified malignant neoplasm lymph nodes.
197 secondary malignant neoplasm respiratory/digestive systems.
198 secondary malignant neoplasm other specified sites.
199 malignant neoplasm without site specification.
200 lymphosarcoma & reticulosarcoma.
200.1 lymphosarcoma/reticulosarcoma/lymphosarcoma.
200.2 lymphosarc/reticulosarcoma, Berkett tumor/lymphoma.
------------------------------------------------------------------------
Cancer (excludes non-melanoma skin cancer)
------------------------------------------------------------------------
200.8 lymphosarcoma/reticulsarcoma other variants.
201 Hodgkin's disease.
201.0 Hodgkin's disease Hodgkin's paragranuloma.
201.1 Hodgkin's disease Hodgkin's granuloma.
201.2 Hodgkin's disease Hodgkin's sarcoma.
201.4 Hodgkin's disease lymphocystic-histiocytic.
201.5 Hodgkin's disease nodular sclerosis.
201.6 Hodgkin's disease mixed cellularity.
201.7 Hodgkin's disease lymphocytic depletion.
201.9 Hodgkin's disease unspecified.
202 other malignant neoplasm lymphoid/histiocytic tissue.
202.0 nodular lymphoma.
202.1 other malignant neoplasm lymphoid/histiocytic tissue; mycosis
fungoides.
202.2 other malignant neoplasm lymphoid/histiocytic tissue; Sezary's
disease.
202.3 other malignant neoplasm lymphoid/histiocytic tissue; malignant
histiocytosis.
202.4 other malignant neoplasm lymphoid/histiocytic tissue, leukemic
reticuloendotheliosis.
202.5 other malignant neoplasm lymphoid/histiocytic tissue, Letterer-
Siwe disease.
202.6 other malignant neoplasm lymphoid/histiocytic tissue, malignant
mast cell tumors.
202.8 other lymphomas.
202.9 other malignant neoplasm lymphoid/histiocytic tissue, other/
unspecified.
203 multiple myeloma/immunoproliferative neoplasms.
203.0 multiple myeloma.
203.1 plasma cell leukemia.
203.8 other immunoproliferative neoplasms.
204 lymphoid leukemia.
204.0 acute lymphoid leukemia.
204.1 chronic lymphoid leukemia.
------------------------------------------------------------------------
Cancer (excludes non-melanoma skin cancer)
------------------------------------------------------------------------
204.2 subacute lymphoid leukemia.
204.8 lymphoid leukemia other.
204.9 lymphoid leukemia unspecified.
205 myeloid leukemia.
205.0 acute myeloid leukemia.
205.1 chronic myeloid leukemia.
205.2 subacute myeloid leukemia.
205.3 myeloid leukemia, myeloid sarcoma.
205.8 myeloid leukemia other.
205.9 myeloid leukemia unspecified.
206 monocytic leukemia.
206.0 acute monocytic leukemia.
206.1 chronic monocytic leukemia.
206.2 subacute monocytic leukemia.
206.8 monocytic leukemia other.
206.9 monocytic leukemia unspecified.
207 other specified leukemia.
207.0 other specified leukemia, acute erythremia/erythroleukemia.
207.1 other specified leukemia, chronic erythremia.
207.2 other specified leukemia megakaryocytic leukemia.
207.8 other specified leukemia other.
208 leukemia unspecified cell type.
208.0 acute leukemia unspecified cell type.
208.1 chronic leukemia unspecified cell type.
208.2 subacute leukemia unspecified cell type.

[[Page 49961]]

208.8 leukemia unspecified cell type other.
208.9 leukemia unspecified cell type unspecified.
22.5 benign neoplasm brain/other nervous system parts.
237.7 neurofibromatosis.
------------------------------------------------------------------------
Drug and/or Alcohol Induced Mental Disorders
------------------------------------------------------------------------
291 Alcoholic psychosis.
291.8 Alcohol psychoses, other specified alcohol psychosis.
292 Drug psychoses.
292.1 Paranoid/hallucinatory induced by drugs.
292.8 other specified drug-induced mental disorders.
303 alcohol dependence syndrome.
303.0 alcohol dependence syndrome, acute alcohol intoxication.
303.9 alcohol dependence syndrome, other & unspecified alcohol
dependence.
304 drug dependence.
304.0 drug dependence, opioid.
304.1 drug dependence barbiturate/similarly acting sedative/hypnotic
dependence.
304.2 drug dependence, cocaine.
304.3 drug dependence, cannabis.
304.4 drug dependence, amphetamine/other psychostimulant.
304.5 drug dependence hallucinogen.
304.6 other specified drug dependence.
304.7 drug dependence opioid type with other drug.
304.8 drug dependence combination without opioid.
304.9 drug dependence unspecified dependence.
305.0 nondependence drug abuse alcohol.
------------------------------------------------------------------------
Pericarditis
------------------------------------------------------------------------
420 acute pericarditis.
420.9 other/unspecified pericarditis.
------------------------------------------------------------------------
Hepatitis B
------------------------------------------------------------------------
070.2 viral hepatitis B w/hepatic coma.
070.3 viral hepatitis B w/o hepatic coma.
------------------------------------------------------------------------
Septicemia and Shock
------------------------------------------------------------------------
031 diseases due to other mycobacteria.
038 septicemia.
038.1 septicemia, staphylococcal.
038.4 septicemia due to other gram negative organisms.
------------------------------------------------------------------------
Bacterial pneumonias/opportunistic infections/pneumococcal pneumonias
------------------------------------------------------------------------
482 other bacterial pneumonias.
482.3 streptococcus pneumonia.
482.4 pneumonia due to staphylococcus.
482.8 pneumonia due to other specified bacteria.
507 pneumonitis due to solids & liquids.
510 empyema.
513 lung/mediastinum abscess.
------------------------------------------------------------------------
Gastrointestinal Tract Bleeding
------------------------------------------------------------------------
531.0 acute gastric ulcer w/hemorrhage.
531.2 acute gastric ulcer w/hemorrhage/perforation.
531.4 chronic/unspecified gastric ulcer w/hemorrhage.
531.6 chronic/unspecified gastric ulcer w/hemorrhage/perforation.
532.0 acute duodenal ulcer w/hemorrhage.
532.2 acute duodenal ulcer w/hemorrhage/perforation.
532.4 chronic/unspecified duodenal ulcer with hemorrhage.
532.6 chronic/unspecified duodenal ulcer without hemorrhage/perforation.
533.0 acute peptic ulcer w/hemorrhage.
533.2 acute peptic ulcer w/hemorrhage/perforation.
533.4 chronic/unspecified peptic ulcer w/hemorrhage.
533.6 chronic/unspecified peptic ulcer w/hemorrhage/perforation.
534.0 acute gastrojejunal ulcer w/hemorrhage.
534.2 acute gastrojejunal ulcer w/hemorrhage/perforation.
534.4 chronic/unspecified gastrojejunal ulcer w/hemorrhage.
534.6 chronic/unspecified gastrojejunal ulcer w/hemorrhage/perforation.
------------------------------------------------------------------------

[[Page 49962]]

Hereditary hemollytic anemias/sickle cell anemias
------------------------------------------------------------------------
282 hereditary hemolytic anemias.
282.4 Thalassemias.
282.6 sickle-cell disease.
------------------------------------------------------------------------
Myelodysplastic Syndrome
------------------------------------------------------------------------
238.7 neoplasm other lymphatic/hematopoietic tissues includes
myelodysplastic syndrome.
------------------------------------------------------------------------

6. Race/Ethnicity
Section 1881(b)(14)(D)(i) of the Act requires that the ESRD PPS
include a payment adjustment based on case-mix that may take into
account a patient's race and ethnicity. Consequently, we analyzed race
and ethnicity as part of the regression analysis for the proposed ESRD
PPS to inform our proposal for this rule.
Prior to the enactment of MIPPA, we considered race and ethnicity
as potential patient level payment adjusters. First, race was one of
the 35 patient characteristics that were examined in developing the
basic case-mix adjustments to the ESRD composite rate required under
section 1881(b)(12) of the Act. Ultimately, however, the final basic
case-mix adjusted composite payment system published in the CY 2005 PFS
final rule with comment period did not include adjustments for race and
ethnicity. (For more information, we refer readers to 69 FR 66330.)
We again considered race and ethnicity as potential patient level
payment adjusters as part of our research for the Secretary's 2008
Report to Congress. In the Report, we concluded that although race and
ethnicity perhaps had a statistically significant relationship with
costs and payments, such indicators were judged not to be suitable for
making payment distinctions in a bundled ESRD PPS given that race/
ethnicity is not objectively measured.
Specifically, because there is no quantifiable mechanism by which
to measure one's race or ethnicity, the classification is commonly
based on self-reported information. We believed that more measurable
indicators of cost and payment would be the patient's underlying
clinical conditions. We further noted in the Report a demonstrated
significance that race has on provider costs and drug utilization,
indicating that this adjustment may warrant further consideration in
the development and implementation of a new ESRD PPS. We note that any
relationship between race/ethnicity and costs and payments revealed in
the analyses conducted for purposes of this ESRD PPS proposed rule is
discussed further in the sections that follow.
The regression analysis conducted for purposes of this proposed
rule relied on two separate data sources for race and ethnicity status
to assess the extent to which race and ethnicity would account for cost
factors that are otherwise unexplained in the model. The first analysis
was based on race and ethnicity data retrieved from the Renal
Management Information System (REMIS) and the second analysis was based
on data retrieved from the Medicare Enrollment Database (EDB). In Table
19 below, the table captures the key differences in racial and ethnic
categorizations between the REMIS and EDB databases.

Table 19--Race/Ethnicity of Medicare Dialysis Patients 1, 2
----------------------------------------------------------------------------------------------------------------
Medicare Enrollment Database
REMIS/CMS Form 2728 Percent (EDB) Percent
----------------------------------------------------------------------------------------------------------------
Race: .............. Race: ..............
American Indian/Alaskan Native............ 1.6 North American Native.......... 1.4
Asian/Pacific Islander.................... 3.6 Asian.......................... 2.7
Black..................................... 38.5 Black.......................... 37.7
White..................................... 55.2 White.......................... 48.7
Other..................................... 1.1 Hispanic....................... 5.2
Unknown................................... <0.1 Other.......................... 2.1
.............. Unknown........................ 2.2
Ethnicity:
Hispanic.................................. 12.2
Not Hispanic.............................. 83.8
Unknown................................... 4.0
----------------------------------------------------------------------------------------------------------------
\1\ n = 890,776 patient years.
\2\ Hispanic ethnicity is reported separately from race on CMS Form 2728 (the Medical Evidence Form), while
Hispanic is a race category in the Medicare Enrollment Database.

Most notably, REMIS data includes both beneficiary race and
ethnicity designations whereas EDB data includes ethnicity as a racial
category. For example, an individual self-identifying as being of
Hispanic ethnicity and White race would be reflected as both Hispanic
and White in the REMIS database but this same individual would be
categorized as either Hispanic or White in EDB. A summary of each
analysis is set forth below.
a. REMIS Data Analysis
REMIS, a tracking system for the ESRD patient population for both
Medicare and non-Medicare patients, is populated by the ESRD Networks
with race and ethnicity data that are collected on the ESRD Medical
Evidence Report (Form CMS-2728). The form is completed, signed and
certified by the patient's physician at the onset of ESRD treatment.

[[Page 49963]]

As noted previously, the proposed ESRD PPS model set forth is based
on 2004-2006 data. During this 3-year timeframe, two versions of the
Medical Evidence Report Form were used, each with differing
categorizations for race and ethnicity.
The earlier version (dated 6/1997), included three ethnicity
categories from which to choose--(1) Hispanic: Mexican, (2) Hispanic:
Other, and (3) Non-Hispanic. The form did not specify whether to check
one or more ethnicity categories. In addition, the form included nine
race categories from which to choose--(1) White, (2) Black, (3)
American Indian/Alaskan Native, (4) Asian, (5) Pacific Islander, (6)
Mid-East/Arabian, (7) Indian sub-Continent, (8) Other, specify, and (9)
Unknown. The form instructed individuals to check the one race category
that applied.
The later version (dated 6/2004), includes two ethnicity categories
from which to choose--(1) Not Hispanic or Latino and (2) Hispanic or
Latino (including country/area of origin or ancestry). While the form
does not include instructions for selecting ethnicity, it is assumed
that the individual would choose one of the two categories. In
addition, the form includes five race categories from which to choose--
(1) White, (2) Black or African American, (3) American Indian/Alaskan
Native, (4) Asian, and (5) Native Hawaiian or Other Pacific Islander.
This form instructs individuals to check all race categories that
apply.
Reporting using the later version (dated 6/2004) became mandatory
on June 1, 2005. Therefore, for purposes of our analysis using REMIS
race and ethnicity data, beneficiaries for whom the Medical Evidence
Report Form 2728 was completed prior to June 2005 comprise the race and
ethnicity categories of the earlier version of the form whereas
beneficiaries for whom the Medical Evidence Report Form was completed
between June through December of 2005 and 2006 comprise the race and
ethnicity categories of the later version of the form. We note that for
comparison purposes between the two versions of the Medical Evidence
Form, it was necessary to designate the following beneficiaries into
the category of ``Other'': (1) beneficiaries for whom more than one
racial category was marked on the 2004 version of the form and (2)
beneficiaries for whom the Mid-East/Arabian or the Indian sub-Continent
categories were marked on the 1997 version of the form.
Relying on REMIS as the basis of race and ethnicity data, it was
possible to evaluate the potential for race and ethnicity to predict
differences in composite rate costs among ESRD facilities as well as
differences in MAP for separately billable services at the patient
level.
In our analysis using REMIS data in examining race, we found that
combined composite rate and separately billable payments are lowest in
the category ``Asian/Pacific Islander.'' As a result, this category was
used as the reference group. Compared to the reference group, ``Native
American/Alaskan Natives'' are 12.6 percent costlier; ``Whites'' are
14.2 percent costlier; ``Blacks'' are 20.7 percent costlier; and
individuals in the category ``Other'' are 64.6 percent costlier. As
noted previously, for purposes of our analysis, it was necessary to
default beneficiaries into the ``Other'' category to reconcile
differences between the two versions of the Medical Evidence Report
Form and in instances where multiple race categories were selected on
the form. As a result of defaulting individuals into the ``Other''
category, we believe that this designation may fail to reflect an
individual's true racial status.
In our analysis using REMIS data in examining ethnic background, we
found that non-Hispanic patients are 6.5 percent more costly than
Hispanic patients.
b. EDB Data Analysis
The EDB is the source of enrollment and entitlement information for
all people who are or were ever entitled to Medicare. The EDB is
populated with race and ethnicity data that come from the Social
Security Administration (SSA). The SSA's race and ethnicity data are
collected on the SS-5 form. Unlike CMS' Medical Evidence Report Form
that captures both race and ethnicity, the SSA's SS-5 form combines
these two elements, instructing the individual to voluntarily select
one of the following 5 categories: (1) Asian, Asian-American or Pacific
Islander; (2) Hispanic; (3) Black (Not Hispanic); (4) North American
Indian or Alaskan Native; or (5) White (Not Hispanic). The SS-5 form is
completed when an individual does the following: (1) applies for a
social security number; (2) requests a replacement of the social
security card; or (3) requests changes to personal information on their
record, such as a name change (Social Security Administration Web site
instructions http://www.ssa.gov/online/ss-5.pdf). Prior to 1980, the
SS-5 form included 3 categories for race: White, Black or Other.
The EDB is also populated with data collected by the Railroad
Retirement Board (RRB). However, the data are not inclusive of race and
ethnicity as these elements are not collected or maintained within the
RRB's system. In 1964, the RRB began requiring new railroad industry
employees to obtain social security numbers from the SSA, despite
ineligibility for Social Security benefits. As a result, race or
ethnicity data voluntarily specified by these individuals are reflected
in EDB. However, the EDB does not include race or ethnicity on behalf
of railroad industry beneficiaries lacking social security numbers;
that is, those individuals entering the RRB system prior to 1964. As a
result, the race and ethnicity of these individuals is defaulted to
``Unknown'' within EDB.
Each January, CMS creates a finder file consisting of those
beneficiaries who were added to CMS' EDB during the previous calendar
year as well as all living beneficiaries whose race is identified as
``Other'' or ``Unknown.'' This finder file is sent to the SSA to be
processed against their Numerical Identification file, referred to as
``NUMIDENT'', which contains the expanded race categories captured on
the SS-5 form. When the results are returned to us, the EDB is updated
with the latest information. During subsequent iterations of this
annual process, we do not include those beneficiaries that were
processed in previous years into the subsequent finder file unless the
race was either ``Unknown'' or ``Other.''
In addition to the NUMIDENT file provided by the SSA, several other
efforts have been undertaken in an attempt to improve the validity of
EDB data including (1) a one-time, voluntary survey of beneficiaries,
conducted by CMS in 1997, whose race was identified as ``Unknown'' or
``Other,'' and (2) coordination with the Indian Health Service (IHS)
since 2000 on a quarterly basis to record beneficiaries race as
American Indian or Alaskan native. Despite these efforts, researchers
have identified concerns with CMS' continued reliance on SSA race and
ethnicity data collected through the SS-5 form, pointing to
deficiencies in data among the smaller minority groups of Asians,
Hispanics, and American Indians/Alaskan Natives. A study of 2002 data
revealed that only 52 percent of Asian, 33 percent of Hispanic, and 33
percent of American Indian/Alaskan Native Medicare beneficiaries can be
correctly identified in the Medicare data (McBean, M, ``Medicare Race
and Ethnicity Data Report.'' December 2004.). However, EDB codes are
generally reliable for White and Black affiliations (Waldo, D,
``Accuracy and Bias of Race/Ethnicity Codes in the

[[Page 49964]]

Medicare Enrollment Database.'' HCFA Review Vol. 26 No. 2 (Winter 2004-
2005): 61-72).
Linking race and ethnicity data from the EDB to ESRD patients, we
evaluated the potential for race and ethnicity to predict differences
in composite rate costs among ESRD facilities, as well as differences
in MAP for separately billable services at the patient level.
In our analysis using EDB data in examining race and ethnicity, we
found that combined composite rate and separately billable payments are
lowest among those individuals categorized as ``Other'' and
``Hispanic.'' In using the category ``Asian'' as the reference group,
individuals categorized as ``Other'' and ``Hispanic'' have
approximately 6 percent and 4 percent lower costs, respectively than
the reference group. Individuals categorized as ``North American
Native'' have 7.4 percent higher costs; individuals categorized as
``White'' have 11.9 percent higher costs; and individuals categorized
as ``Black'' have 17.8 percent higher costs. Please see Table 20 below.
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c. Concerns With Available Race/Ethnicity Data
There are several specific concerns with the quality of the REMIS
and the EDB data. The race and ethnicity data in REMIS have been
collected with different versions of the Medical Evidence Report Form,
making it difficult to accurately assess the effect of race and
ethnicity on composite rate costs and separately billable payments.
That is, a significant portion of the payment is reflected in the
default category ``Other''. In addition, while not relevant for
purposes of modeling the ESRD PPS, we are concerned about relying on
the race and ethnicity data collected from the Medical Evidence Report
Form for purposes of future refinements to the ESRD PPS. This form is
routinely completed and signed by the physician at the ESRD facility.
To mitigate the potential for provider manipulation of Medical Evidence
Report Form in the interest of racial or ethnic payment adjustment, we
would expect that ESRD facilities would accurately document race or
ethnicity within the patient's medical record along with any care
planning activities that may be based on the individual's race or
ethnicity. There are also concerns related to relying on EDB data for
modeling race and ethnicity data within the proposed ESRD PPS.
Specifically, race and ethnicity classification on behalf of some
segments of the population is either unavailable or defaulted into the
``Unknown'' category within EDB, for example, RRB beneficiaries that
entered the RRB system prior to 1964. In addition, we have concerns
regarding the race and ethnicity data for individuals entering the SSA
system via the enumeration at birth (EAB) process that has been in
place since 1989. The EAB process allows the parent, at the time of the
child's birth, to indicate on the child's birth certificate that they
are interested in obtaining a social security number (SSN) for their
child. Therefore, the parent is not required to file a separate
application for an SSN for the child. The State vital statistics office
receives the request with the birth registration data from the hospital
and then forwards this information to SSA. Absent the SS-5 form that
includes race and ethnicity fields, we are not aware of any current
mechanism by which these data elements are captured by the SSA on
behalf of individuals entering the SSA system via the EAB process.
We note that relying on EDB data for purposes of ESRD PPS modeling
is that they are not updated in real time. To the extent a beneficiary
completes a new SS-5 form for any of the reasons discussed above and
there are changes in race information, those changes are not currently
reflected in CMS' EDB data in real time. Rather, they occur only after
the annual NUMIDENT update.
In addition to the REMIS and EDB data concerns, racial and ethnic
categories are not well defined as evidenced by the ongoing changes to
the instruments used in collecting these data. Lastly, it is not
possible to quantify an individual's race absent a genetic test to
determine racial status. This presents the greatest challenge when
considering individuals who identify with more than one race.
Collection tools such as the SSA's SS-5 form and the Census Bureau's
survey instrument depend on the individual to self select the one
racial category with which they associate. While the current Medical
Evidence Report Form allows for selection of more than one racial
category, absent a mechanism for establishing a primary race, it is
difficult to conduct comparisons without first defaulting those with
multiple race selections into the ``Other'' category.
In summary, the analyses of REMIS and EDB race and ethnicity data
demonstrate associations between these patient characteristics and
facility level composite rate costs and patient level separately
billable payments. As such, including these factors may improve the
predictive value of the proposed ESRD PPS. However, we have concerns
about whether the data are of sufficient quality upon which to base
payment adjustments. The race or ethnicity status designations within
the current CMS data systems may fall short in assigning individuals to
the most correct racial and ethnic categories and reflecting the unique
and measurable traits of individuals. As a result, ESRD facilities may
be overpaid for certain patients and underpaid for others. However, to
the extent that including race and ethnicity in the model explains
additional variation in treatment costs not otherwise reflected, such
adjustments may be warranted. We specifically invite public comment on
the data issues presented in this section, other data sources for race
and ethnicity we should consider, and specifically, the need for
adjustments for race and ethnicity in the final ESRD PPS. It is
important to note that any adjustments for race would result in
additional reductions to the base rate through the standardization
process described in section VII.C.
d. CMS Initiatives to Evaluate Health Disparities Based on Race and
Ethnicity
In accordance with MIPPA, we plan to explore opportunities for
improving Medicare program data on race and ethnicity. Specifically,
section 185 of MIPPA amends the Act to add new section 1809 entitled
``Addressing Health Care Disparities.'' This section charges the
Secretary with several key

[[Page 49967]]

tasks and goals including (1) evaluating approaches for Medicare data
collection that will allow for collection and evaluation of data on
disparities in health care services and performance based on race,
ethnicity and gender; (2) submitting several Reports to Congress that
describe the evaluation of Medicare data and make recommendations for
improving the identification of health care disparities for Medicare
beneficiaries; and (3) implementing the identified approaches for the
ongoing, accurate, and timely collection and evaluation of data on
health care disparities on the basis of race, ethnicity and gender.
In addition to the tasks associated with MIPPA section 185 that
will focus on addressing health care disparities, health care
disparities across several settings of care are currently being
monitored by the Quality Improvement Organization (QIO) Program. In
three cases, active intervention projects are underway to reduce health
care disparities. As part of this department-wide effort, we will
continue to explore additional approaches to improve the accuracy of
this data. Some of these approaches will involve cooperation with
entities outside of the Department of Health and Human Services (for
example, the SSA), as described above. The first Report to Congress
summarizing the possible approaches is due January 1, 2010.
In summary, we believe that the analyses that we will conduct for
purposes of developing the Reports to Congress will serve as the basis
for improving the accuracy of Medicare race and ethnicity data.
7. Modality
Section 1881(b)(14)(D)(iv) of the Act, as added by section 153(b)
of MIPPA, gives the Secretary the discretionary authority to establish
an ESRD PPS, which may include payment adjustments as the Secretary
determines appropriate. PD, which is the primary mode for home
dialysis, is a substantially less costly mode of dialysis compared to
in-center HD. Therefore, the Act gives the Secretary the authority to
develop an ESRD PPS, which would establish payment rates based on
dialysis modality.
Table K.5 from the 2008 Annual Data Report of the U.S. Renal Data
System indicates that the average annual cost for all HD patients in
2006 was $71,889, whereas the corresponding figure for PD patients was
$53,327 (Table K.7). Data from the Medicare cost reports and Medicare
claims for CYs 2004-2006 show a similar difference in resource
utilization, with PD patients incurring significantly lower composite
rate and separately billable expenses.

Comparison of Composite Rate Costs by Modality, CY 2004-06 \1\
----------------------------------------------------------------------------------------------------------------
Hemodialysis Peritoneal dialysis
---------------------------------------------------------------
Average Average
Facility type Facility years composite rate Facility years composite rate
(n) cost per (n) cost per
treatment treatment
----------------------------------------------------------------------------------------------------------------
Freestanding.................................... 11,058 $159.60 3,839 $150.39
Hospital based.................................. 878 248.92 349 155.99
---------------------------------------------------------------
Total....................................... 11,936 168.99 4,188 151.15
----------------------------------------------------------------------------------------------------------------
\1\ Based on the Medicare Independent Renal Dialysis Facility and Hospital Cost Reports. ESRD facilities that
opened or closed or reported less than one full dialysis patient year for the modality (156 hemodialysis-
equivalent treatments) during the calendar year were excluded. Excludes potential outliers using a standard
outer fence methodology that was applied on the log scale. Average CR costs were weighted by the total
hemodialysis-equivalent treatments in the facility.

Comparison of Separately Billable Medicare Allowable Payments by Modality, CY 2004-06 \1\
----------------------------------------------------------------------------------------------------------------
Hemodialysis Peritoneal dialysis
----------------------------------------------------------------------------------------------------------------
Average separately Average separately
Patient facility months (n) billable MAP per Patient facility billable MAP per
treatment months (n) treatment
----------------------------------------------------------------------------------------------------------------
2,817,067........................................... $87.20 186,296 $35.15
----------------------------------------------------------------------------------------------------------------
\1\ Based on the Medicare claims. MAP for the top 11 injectable drugs were repriced to reflect the payment rates
used in the first quarter of 2008. MAP for EPO were capped at 30,000 units per treatment. Average SB MAPs were
weighted by the Medicare hemodialysis-equivalent treatments in each patient facility month.

Despite this distinction, we are proposing not to develop an ESRD
PPS which uses type of dialysis modality as a payment variable, despite
the increased predictive power a modality variable would yield in the
resulting regression equations. Because composite rate costs and
separately billable payments are lower for PD, the use of a modality
payment variable would result in substantially lower payments for PD
patients. The payment rates for HD patients would be slightly higher,
because of the greater volume of HD patients, and the exclusion of PD
patients from the average payment amount that would apply to HD
patients. We believe that the substantially lower payments for PD
patients that would result if modality were used as a payment adjuster
in the ESRD PPS would discourage the increased use of PD for patients
able to use that modality. Because we want to encourage home dialysis,
in which PD is currently the prevailing mode of treatment, we are
proposing an ESRD PPS which does not rely on separate payment rates
based on modality. By establishing prospective payment rates that are
higher for PD patients than they otherwise would be if separate
payments were established based on modality, we believe home dialysis
will be encouraged for patients able to use PD. We invite comment on
this approach.
However, we note that the case-mix adjustments we are proposing for
pediatric patients, described in section IX. of the proposed rule,
distinguish between HD and PD as a payment variable. The small number
of pediatric

[[Page 49968]]

dialysis patients, the limited ability of the two-equation regression
model to accurately predict the separately billable MAP for pediatric
patients, and the far greater prevalence of PD among pediatric
patients, led us to examine alternative approaches in devising case-mix
adjustments for those patients. The pediatric payment adjustments
described in section IX., use modality, in part, to determine the case-
mix adjusters for pediatric dialysis patients. Except for pediatric
patients, modality is not otherwise used in developing the proposed
case-mix adjustments under the ESRD PPS.

C. Proposed Facility-Level Adjustments

1. Wage Index
Section 1881(b)(14)(D)(iv)(II) of the Act, as added by section
153(b) of MIPPA, specifies that the ESRD PPS may include such other
payment adjustments as the Secretary determines appropriate, such as a
payment adjustment by a geographic index, such as the index referred to
under the existing basic case-mix adjusted composite payment system, as
the Secretary determines to be appropriate.
In the current basic case-mix adjusted composite payment system, we
use an index based on hospital wage and employment data from Medicare
cost reports. In the CY 2006 PFS final rule with comment period (70 FR
70167), we announced our adoption of the Office of Management and
Budget's (OMB's) CBSA-based geographic area designations to develop
revised urban/rural definitions and corresponding wage index values for
purposes of calculating ESRD composite rates under the basic case-mix
adjusted composite payment system. OMB's CBSA-based geographic area
designations are described in OMB Bulletin 03-04, originally issued
June 6, 2003, and is available online at: http://www.whitehouse.gov/omb/bulletins/b03-04.html. In addition, OMB has published subsequent
bulletins regarding CBSA changes, including changes in CBSA numbers and
titles. We stated that this and all subsequent ESRD rules and notices
are considered to incorporate the CBSA changes published in the most
recent OMB bulletin that applies to the hospital wage index (73 FR
69758). The OMB bulletins may be accessed online at: http://www.whitehouse.gov/omb/bulletins/index.html.
We also stated that we intended to update the ESRD wage index
values annually (70 FR 70167). The ESRD wage index values used in the
basic case-mix adjusted composite payment system are calculated without
regard to geographic reclassifications authorized under section
1886(d)(8) and (d)(10) of the Act and utilize pre-floor hospital data
that are unadjusted for occupational mix (71 FR 69685; 73 FR 69758). We
apply the current ESRD wage index to a 53.711 labor share of the
composite rate. As we indicated, this labor share was developed from
the labor-related components of the ESRD composite rate market basket
(70 FR 70168). The ESRD wage index in the current basic case-mix
adjusted composite payment system applies a wage index budget
neutrality factor to ensure that the ESRD wage index is made in a
budget neutral manner (70 FR 70170). As we previously noted, in our
current basic case-mix adjusted composite payment system, we
incorporate the wage index budget neutrality factor into the wage
index. We compute a wage index factor and adjust it so that wage index
budget neutrality can be achieved by the labor share component only.
For purposes of the current basic case-mix adjusted composite
payment system, section 1881(b)(12)(D) of the Act required the
Secretary to adjust payment rates, as the Secretary determined
appropriate, and if the Secretary applied a geographic adjustment that
differed from the current index applied under the old (composite rate)
system, the Secretary would be required to phase in such an index over
a multi-year period. Under this authority, CMS elected a 4-year
transition from the wage index based on MSAs to an updated wage index
based on CBSAs. This 4-year transition began in CY 2006 and ended in CY
2009, when ESRD facilities receive a wage adjusted composite rate that
is computed using 100 percent CBSAs in CY 2009 (70 FR 70167).
For the proposed ESRD PPS, we are proposing to use the same method
and source of wage index values as we have been using for the basic
case-mix adjusted composite payment system. Specifically, we propose
that the ESRD wage index values used in the proposed ESRD PPS be
calculated without regard to geographic reclassifications authorized
under section 1886(d)(8) and (d)(10) of the Act, and utilize pre-floor
hospital data that are unadjusted for occupational mix. We also propose
to use the OMB's CBSA-based geographic area designations to define
urban/rural areas and corresponding wage index values. OMB's CBSA-based
geographic area designations are described in OMB Bulletin 03-04,
originally issued June 6, 2003, and is available online at: http://www.whitehouse.gov/omb/bulletins/b03-04.html.
In addition, as we indicated above, OMB has published subsequent
bulletins regarding CBSA changes, including changes in CBSA numbers and
titles. We propose that this and all subsequent ESRD PPS rules and
notices are considered to incorporate the CBSA changes published in the
most recent OMB bulletin that applies to the hospital wage index. The
OMB bulletins may be accessed online at: http://www.whitehouse.gov/omb/bulletins/index.html. Consistent with those definitions, we are
proposing to define urban and rural areas in proposed Sec. 413.231(b)
of this proposed rule as follows: The term ``urban area'' would mean a
Metropolitan Statistical Area or a Metropolitan division (in the case
where a Metropolitan Statistical Area is divided into Metropolitan
Divisions), as defined by OMB. The term ``rural area'' would mean any
area outside an urban area.
Under the current basic case-mix adjusted composite payment system,
we apply a floor as a substitute wage index for areas with very low
wage index values. However, we have gradually reduced the ESRD wage
index floor from 0.90 in CY 2005, to 0.85 in CY 2006, 0.80 in CY 2007,
0.75 in CY 2008, and 0.70 in CY 2009 (73 FR 69758). We also stated that
a gradual reduction was needed to ensure that patient access in areas
that have low wage index values, and that we would continue to reassess
the need for a wage index floor in future years.
For the ESRD PPS proposed rule, we are proposing not to adopt a
wage index floor, as we believe we have provided a gradual reduction to
the ESRD wage index floor through the existing basic case-mix adjusted
composite payment system and that the impact on ESRD facilities will be
minimal. We note that ESRD facilities affected by the floor may opt to
go through the transition to the ESRD PPS, where the portion of their
payment that is based on the ESRD PPS will be gradually increased from
25 percent of their payments in 2011 to 100 percent of their payments
in 2014. We intend to continue to gradually reduce the ESRD wage index
floor for the portion of the payment that is based on the current basic
case-mix adjusted composite payment system. Applying a gradual
reduction only to the floor that applies to the existing basic case-mix
adjusted composite payment system ESRD wage index will accelerate the
decline in the floor so that ESRD facilities are less dependent on the
floor and at the end of the transition we would apply their actual wage
index values.

[[Page 49969]]

In CY 2006, while adopting the CBSA designations, we identified a
small number of ESRD facilities in both urban and rural areas where
there are no hospital data from which to calculate ESRD wage index
values. Since there are ESRD facilities in these areas, we developed
policies for each of these areas, and we provide the details of these
policies below (72 FR 66283). The areas with ESRD facilities that have
no hospital data are rural Massachusetts, rural Puerto Rico, and
Hinesville, GA (CBSA 25980). In the CY 2008 PFS final rule with comment
(72 FR 66283), we stated that we would continue to evaluate exiting
hospital wage data and possibly wage data from other sources such as
the Bureau of Labor Statistics, to determine if other methodologies
might be appropriate for imputing wage index values for areas without
hospital wage data for CY 2009 and subsequent years. To date, no data
from other sources, superior to that currently used in connection with
the inpatient hospital PPS wage index, have emerged. Therefore, for
purposes of the proposed ESRD PPS, we are proposing to continue with
our current policies for rural Massachusetts and Hinesville, Georgia:
For rural Massachusetts, we propose to adopt the
methodology originally adopted for CY 2008 for establishing a wage
index value for rural Massachusetts. Because we had used the same wage
index value for 2 years with no update, we believed it was appropriate
to establish a methodology which employed reasonable proxy data for
rural areas (including rural Massachusetts) and also permitted annual
updates to the wage index based on that proxy data. We used the average
wage index values from all contiguous CBSAs as a reasonable proxy for
rural Massachusetts. In determining an imputed rural wage index, we
interpret the term ``contiguous'' to mean sharing a border. In the case
of Massachusetts, the entire rural area consists of Dukes and Nantucket
Counties. We determined that the borders of Dukes and Nantucket
counties are contiguous with CBSA 12700, Barnstable Town, MA and CBSA
39300, Providence-New Bedford-Fall River, RI-MA. We propose to continue
to use this methodology that averages the wage index values for the
contiguous CBSAs, Barnstable Town, MA (CBSA 12700) and Providence-New
Bedford-Fall River, RI-MA (CBSA 39300) for an imputed wage index value
for rural Massachusetts for CY 2011.
For Hinesville, GA (CBSA 25980), which is an urban area
without specific hospital wage data, we propose to continue to use the
methodology that was adopted in the CY 2007 PFS final rule (71 FR 231),
which was to impute a wage index value for Hinesville, GA, using the
average proposed ESRD wage index value for all urban areas within the
State of Georgia.
With regard to rural Puerto Rico, we are proposing a different
policy under the proposed ESRD PPS. In particular, we have previously
applied the ESRD wage index floor for rural Puerto Rico because all
areas in Puerto Rico that have a wage index were eligible for the ESRD
wage index floor. However, as we stated earlier in this section, for
the proposed ESRD PPS, we are proposing to eliminate the use of a wage
index floor under the proposed ESRD PPS wage index. Therefore, for
rural Puerto Rico, we propose to use the value for rural Puerto Rico
(0.4047) that has been used by other payment systems that do not use a
wage index floor. This wage index value is the latest available wage
index value for rural Puerto Rico and is currently used for rural
Puerto Rico by other payments systems that do not have a wage index
floor. We note that there are currently no ESRD facilities located in
rural Puerto Rico.
We are also proposing to use the labor share as measured by the
proposed ESRD bundled market basket, which is 38.160 percent (as
described in section XII. of this proposed rule). We note that the
labor-related share from the proposed ESRD bundled market basket
(38.160 percent) is lower than the labor-related share from the
existing ESRD composite rate index (53.711 percent) because there are
no labor costs associated with the separately billable portion of the
proposed ESRD bundled market basket. Our proposed adjustment for wages
is set forth in proposed Sec. 413.231. For this proposed rule, we used
the most current final wage index that was available at the time
analysis was completed. This was the final CY 2009 wage index data. As
stated earlier in this section, the ESRD wage index values used in the
basic case-mix adjusted composite payment system are calculated without
regard to geographic reclassifications authorized under section
1886(d)(8) and (d)(10) of the Act and utilize pre-floor hospital data
that are unadjusted for occupational mix (71 FR 69685; 73 FR 69758). We
are proposing to use the same wage index for the ESRD PPS.
As we previously noted, in our current basic case-mix adjusted
composite payment system, we incorporate the wage index budget
neutrality factor into the wage index values. Since the CY 2009 ESRD
wage index has the same values as the FY 2009 SNF PPS wage index, we
recommend that entities wishing to replicate our analysis refer to the
FY 2009 final rule where the FY 2009 Skilled Nursing Facility (SNF) PPS
wage index was published. The FY 2009 SNF PPS final rule (73 FR 46415)
includes tables with these wage index values. Table 8 shows the wage
index values for urban areas (73 FR 46441 through 46462) and table 9
shows the wage index values for rural areas (73 FR 46462).
Since the ESRD PPS will be implemented in CY 2011, we believe it is
appropriate to use CY 2011 wage index values. However, the wage data
will not yet be available when the ESRD PPS final rule is published.
Therefore, we propose to include the proposed CY 2011 ESRD PPS wage
index data for purposes of the ESRD PPS (that would not include any
wage index budget neutrality adjustment) along with the CY 2011
proposed update to the existing basic case-mix adjusted composite
payment system. We anticipate that this would be published in the CY
2011 Physician Fee Schedule proposed rule, which we expect to be
published in the summer of 2010. We also propose to publish the final
CY 2011 ESRD PPS wage index along with the CY 2011 final rule update to
the existing basic case-mix adjusted composite payment system. We
anticipate that this would be published in the CY 2011 Physician Fee
Schedule final rule, which we expect to be published in November of
2010.
2. Low-Volume Adjustment
a. Statutory Authority
Section 1881(b)(14)(D)(iii) of the Act requires a payment
adjustment that ``reflects the extent to which costs incurred by low-
volume facilities (as defined by the Secretary) in furnishing renal
dialysis services exceed the costs incurred by other facilities in
furnishing such services, and for payment for renal dialysis services
furnished on or after January 1, 2011, and before January 1, 2014, such
payment adjustment shall not be less than 10 percent.''
b. Defining a Low-Volume Facility
As indicated above, section 1881(b)(14)(D)(iii) of the Act
authorizes the Secretary to define ``low-volume facilities'' for
purposes of a payment adjustment in the proposed ESRD PPS. We believe
the low-volume adjustment should encourage small ESRD facilities to
continue to provide access to care to an ESRD patient population where
providing that care would otherwise be problematic. UM-KECC has
performed analyses using data from CMS Medicare cost reports, SIMS, and
OSCAR for years 2004-2006 to assist us in determining

[[Page 49970]]

what the ESRD facility-level characteristics are that best demonstrate
what is a low-volume facility.
To begin our process of developing the methodology for defining a
low-volume facility, we set parameters for ESRD facility size. In this
explanation and throughout this section, the term `year' is established
by the ESRD facility's final-settled cost report, where the final-
settled cost report reports costs for 12-consecutive months. Under the
initial categorization, an ESRD facility with less than 5,000
treatments per year was considered small, a ESRD facility with 5,000 to
10,000 treatments per year was considered medium, and an ESRD facility
with 10,000 treatments per year or more was considered large. The
average ESRD facility size is relatively close to 10,000 treatments and
this threshold has been used by others, for example, MedPAC.
With the data compiled and analyzed by UM-KECC, we were interested
to see the distribution of ESRD facility size across the different ESRD
facility ownership types. For purposes of defining a low-volume
facility, we chose to categorize all ESRD facilities into four ESRD
facility ownership types; (1) Independent, (2) regional chains, (3)
Large Dialysis Organizations (LDOs), and (4) unknown ownership type. Of
the hospital-based ESRD facilities, we found that 75.5 percent are
independent, 10.7 percent are members of a regional chain/other
category, 0.7 percent are members of an LDO, and 13.2 percent have
unknown chain status. UM-KECC's comparison between ESRD facility size
and ownership type, (Table 21: ESRD facility size and ownership type,
2004-2006), indicated that ownership varies with ESRD facility size and
smaller ESRD facilities, especially those with less than 3,000
treatments, are relatively more likely to be independent than larger
ESRD facilities. For example, 31 percent of ESRD facilities with less
than 3,000 treatments are independent while only 18 percent of ESRD
facilities with more than 10,000 treatments are independent.
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UM-KECC's comparison also indicated that while smaller ESRD
facilities are less likely to be members of an LDO than larger ESRD
facilities, a relatively large fraction of smaller ESRD facilities are
members of an LDO. For an example, 61.4 percent of ESRD facilities with
less than 5,000 treatments and 41.9 percent of ESRD facilities with
less than 2,000 treatments are members of an LDO. As a result of the
comparison between ESRD facility size and ESRD facility ownership type,
we chose to use ESRD facility ownership type as a variable in a two-
equation regression analysis to test whether cost varies by ESRD
facility ownership type within a ESRD facility size category.
With the data analyzed by UM-KECC, we were also interested to see
the distribution of ESRD facility size across ESRD facilities that have
an urban or rural status. UM-KECC`s comparison of ESRD facility size
and urban/rural status, (Table 22: ESRD facility size and rural status,
2004-2006 (n=11,814)), indicated that nearly half of the small ESRD
facilities are rural and larger ESRD facilities are less likely to be
rural.

[[Page 49971]]

Table 22--ESRD Facility Size and Rural Status, 2004-2006 (n=11,814)*
[Preliminary]
--------------------------------------------------------------------------------------------------------------------------------------------------------
ESRD facility rural status
--------------------------------------------------------------------------------------------------------
Total dialysis sessions at ESRD facility based Rural Urban All
on Cost Reports --------------------------------------------------------------------------------------------------------
Facility % of Facility % of Facility % of
years (n) % of row column years (n) % of row column years (n) % of row column
--------------------------------------------------------------------------------------------------------------------------------------------------------
<1,000......................................... 11 19.6 0.4 45 80.4 0.5 56 100 0.5
1 to 2,000..................................... 78 47.3 2.9 87 52.7 1.0 165 100 1.4
2 to 3,000..................................... 210 49.3 7.7 216 50.7 2.4 426 100 3.6
3 to 4,000..................................... 312 44.4 11.5 390 55.6 4.3 702 100 5.9
4 to 5,000..................................... 334 41.1 12.3 481 59.0 5.3 815 100 6.9
5 to 10,000.................................... 1164 28.8 42.8 2877 71.2 31.6 4041 100 34.2
10,000+........................................ 611 10.9 22.5 4998 89.1 55.0 5609 100 47.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total...................................... 2720 23 100.0 9094 77 100.0 11814 100 100.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Excludes facilities that opened or closed during the year. Based on data reported in SIMS.

UM-KECC's comparison also indicated that because most ESRD
facilities are urban, even with the lower percentage of small ESRD
facilities in urban areas, more urban ESRD facilities than rural ESRD
facilities would benefit from a low-volume payment adjustment. As a
result of the comparison between ESRD facility size and urban/rural
status, we chose to use urban/rural status as a variable in a two-
equation regression analysis to test whether cost varies by urban/rural
status within a ESRD facility size category.
UM-KECC was able to develop a two-equation regression analysis
using the variables discussed above (Table 23: Analysis for ESRD
facility size, rural/urban status, and ownership type, 2004-2006 Model
2 and Table 24: Analysis for ESRD facility size, rural/urban status,
and ownership type, 2004-2006 Model 4).
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[[Page 49973]]

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In Table 23, UM-KECC split the ESRD facility size variable into 7
categories including rural/urban status with increments of 1,000
treatments (<1,000, 1,000-1,999, 2,000-2,999, 3,000-3,999, 4,000-4,999,
5,000-10,000, and 10,000+). They then estimated ESRD facility-level
models for composite rate costs and patient-level models for separately
billable MAP per treatment. UM-KECC attempted to exclude ESRD
facilities whose small number of treatments might be a temporary
phenomenon (for example, ESRD facilities that opened, changed
ownership, or closed). This was done using the initial certification
date reported in OSCAR and the date of ESRD facility closure reported
in SIMS. Changes of ownership where the new owner of the existing ESRD
facility continues under the existing ESRD facility's provider number
were included in the analysis. UM-KECC's analysis indicated that
composite rate costs per treatment decline substantially as ESRD
facility size increases and separately billable MAPs per treatment do
not change substantially by ESRD facility size. UM-KECC's analysis also
indicated that by controlling for ESRD facility size, being a member of
an LDO does not lower costs and rural ESRD facilities do not report
higher costs than urban ESRD facilities.
UM-KECC's two-equation regression analysis gave us the ability to
see what other factors can be targeted to ensure that we have the right
population of ESRD facilities that are low-volume. From UM-KECC's
comparisons discussed above, we were able to determine that small rural
ESRD facilities did not have higher composite rate costs in any of the
small ESRD facility categories when compared to small urban ESRD
facilities. In Table 24 we were able to see interactions between LDO
status/small ESRD facility size/rural vs. urban status. We found that
small ESRD facilities owned by LDOs were shown to have higher costs
than small ESRD facilities that are non-LDOs.
We further evaluated how many dialysis treatments per year would
best describe low-volume. As mentioned above, we began with our
definition of a small ESRD facility, that is, less than 5,000
treatments. UM-KECC was able to provide us with another two-equation
regression analysis that controlled for ESRD facility size and divided
the small ESRD facility size variable into 3 categories; less than
2,000 treatments, less than 3,000 treatments, and less than 4,000
treatments. (Table 25: Analysis for low-volume ESRD facility size,
2004-2006).

[[Page 49974]]

Table 25--Analysis for Low-Volume ESRD Facility Size, 2004-2006--Include Additional Controls for ESRD Facility Size: Model 1
[Preliminary January 29, 2009]
--------------------------------------------------------------------------------------------------------------------------------------------------------
*Facility level log-linear model of average **Patient level log-linear model of MAP per
cost per session (n=11,814) R-sq: 45.8%, session (n=890,776) R-sq: 8.7%, Average
Average $169.67/session $82.45/session Combined payment
Variable ------------------------------------------------------------------------------------------------ multiplier[supcaret]
Modeled CR CR payment Modeled CR CR payment
multiplier p-value multiplier[supcaret] multiplier p-value multiplier[supcaret]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Facility size < 2,000 treatments 1.497 <.0001 1.439 0.878 0.0929 0.876 1.254
during each year from 2004-06....
Facility size < 2,000 treatments 1.520 <.0001 1.000 1.055 0.0002 1.000 1.000
during current year but not
during all 3 years...............
Facility size 2,000-4,999 1.290 <.0001 1.000 0.992 0.0101 1.000 1.000
treatments.......................
Facility size 5,000-9,999 1.122 <.0001 1.000 1.011 <.0001 1.000 1.000
treatments.......................
Facility size 10,000+ treatments.. 1.000 ref 1.000 1.000 ref 1.000 1.000
Rural............................. 0.997 0.4674 .................... 0.981 <.0001 .................... ....................
--------------------------------------------------------------------------------------------------------------------------------------------------------

Table 26--Model 2
--------------------------------------------------------------------------------------------------------------------------------------------------------
*Facility level log-linear model of average **Patient level log-linear model of MAP per
cost per session (n=11,814) R-sq: 46.0%, session (n=890,776) R-sq: 8.7%, Average
Average $169.67/session $82.45/session Combined payment
Variable ------------------------------------------------------------------------------------------------ multiplier[supcaret]
Modeled CR CR payment Modeled CR CR payment
multiplier p-value multiplier[supcaret] multiplier p-value multiplier[supcaret]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Facility size < 3,000 treatments 1.383 <.0001 1.330 0.940 <.0001 0.938 1.202
during each year from 2004-06....
Facility size < 3,000 treatments 1.478 <.0001 1.000 0.976 0.0036 1.000 1.000
during current year, but not
during all 3 years...............
Facility size 3,000-4,999 1.268 <.0001 1.000 1.000 0.9622 1.000 1.000
treatments.......................
Facility size 5,000-9,999 1.122 <.0001 1.000 1.011 <.0001 1.000 1.000
treatments.......................
Facility size 10,000+ treatments.. 1.000 ref 1.000 1.000 ref 1.000 1.000
Rural............................. 0.997 0.4419 .................... 0.981 <.0001 .................... ....................
--------------------------------------------------------------------------------------------------------------------------------------------------------

Table 27--Model 3
--------------------------------------------------------------------------------------------------------------------------------------------------------
*Facility level log-linear model of average **Patient level log-linear model of MAP per
cost per session (n=11,814) R-sq: 45.9%, session (n=890,776) R-sq: 8.7%, Average
Average $169.67/session $82.45/session Combined payment
Variable ------------------------------------------------------------------------------------------------ multiplier[supcaret]
Modeled CR CR payment Modeled CR CR payment
multiplier p-value multiplier[supcaret] multiplier p-value multiplier[supcaret]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Facility size < 4.000 treatments 1.348 <.0001 1.300 0.978 0.0002 0.976 1.194
during each year from 2004-06....
Facility size < 4,000 treatments 1.373 <.0001 1.000 0.997 0.5825 1.000 1.000
during current year, but not
during all 3 years...............
Facility size 4,000-4,999 1.237 <.0001 1.000 0.999 0.766 1.000 1.000
treatments.......................
Facility size 5,000-9,999 1.122 <.0001 1.000 1.011 <.0001 1.000 1.000
treatments.......................
Facility size 10,000+ treatments.. 1.000 ref 1.000 1.000 ref 1.000 1.000
Rural............................. 0.997 0.427 .................... 0.981 <.0001 .................... ....................
--------------------------------------------------------------------------------------------------------------------------------------------------------
[supcaret] The potential low-volume payment adjustment was calculated relative to all other facilities combined (i.e., using a weighted average of the
other ESRD facility size coefficients).
* Other variables included in the CR model are age, female, body surface area, duration of RRT: <4 month, alcohol/drug dependence, HIV/AIDS, hepatitis
B, bacterial pneumonia and other pneumonias/opportunistic infections, hereditary hemolytic or sickle cell anemias, cancer, calendar year, ESRD
facility ownership type, composite rate payment exception, and % of patients in the ESRD facility with URR <65%.
** Other variables included in the SB model are age, female, body surface area, low BMI, duration of RRT: <4 month, alcohol/drug dependence, cardiac
arrest, pericarditis, HIV/AIDS, hepatitis B, septicemia, bacterial pneumonia and other pneumonias/opportunistic infections, gastro-intestinal tract
bleeding, hereditary hemolytic or sickle cell anemias, cancer, myelodysplastic syndrome, monoclonal gammopathy, calendar year, ESRD facility ownership
type, composite rate payment exception, and % of patients in the ESRD facility with URR <65%.

We found that the cost multipliers for small ESRD facilities are
greater than 1.1 for any of the definitions for small ESRD facility
size with respect to number of treatments per year and that they
decline for successively higher cutoffs for defining small ESRD
facilities. We also found that if a payment multiplier fully reflects
the cost multiplier, there will be a strong disincentive for ESRD
facilities to increase volume above cutoff. However, to the extent that
a payment multiplier is smaller than the cost multiplier, this
disincentive is somewhat diminished.
Since UM-KECC's analyses included data that spanned a 3-year period
(2004-2006), we further evaluated the three ESRD facility size
categories that we applied in the previous paragraph's regression
analysis, that is, less than 2,000 treatments, less than 3,000
treatments, and less than 4,000

[[Page 49975]]

treatments per year. We were interested to see the number of small ESRD
facilities that were able to maintain their ESRD facility size status
each year of the 3-year period.
In this evaluation, we excluded ESRD facilities that opened,
changed ownership, or closed during any one of the 3 years used for
data. Status as a ``closed'' ESRD facility was based on information in
the SIMS that the ESRD facility closed. Status as an ``opening'' ESRD
facility was based on the initial Medicare certification date reported
in OSCAR. Changes of ownership where the new owner of an existing ESRD
facility continues under the existing ESRD facility's provider number
were included in the analysis. We found there were 25 dialysis ESRD
facilities that provided less than 2,000 treatments annually across the
3-year period (2004-2006), 89 ESRD facilities provided less than 3,000
treatments annually across the 3-year period, and 241 ESRD facilities
provided less than 4,000 treatments annually across the 3-year period.
These data indicate that ESRD facilities that provide less than 2,000
treatments per year across the 3-year period would result in low-volume
adjustments being applied to very few ESRD facilities. These data also
indicate that ESRD facilities that provide less than 4,000 treatments
across the 3-year period would apply to almost 10 times more the number
of ESRD facilities that provided less than 2,000 treatments and almost
3 times more the number of ESRD facilities that provided less than
3,000 treatments.
Accordingly, we propose to use a threshold of ESRD facilities that
provide less than 3,000 treatments per year across the 3-year period.
The threshold at 3,000 treatments strikes a balance between
establishing an increment in payment that reflects the substantially
higher treatment costs incurred by low-volume facilities (an increment
that decreases relatively quickly as the low-volume threshold is
raised) but still applies to a sufficiently large number of ESRD
facilities to have an impact.
As mentioned above, the statute gives the Secretary the authority
to define ``low-volume facilities''. Based on the above results, we
propose in Sec. 413.232, that a ``low-volume facility'' is an ESRD
facility that meets the following criteria: (1) Furnished less than
3,000 treatments in each of the 3 years preceding the payment year; and
(2) has not opened, closed, or received a new provider number due to a
change in ownership during the 3 years preceding the payment year. In
the event an ESRD facility provides 3,000 or more treatments during
their payment year, that is, no longer eligible for the low-volume
adjustment; the ESRD facility would stop receiving the adjustment at
the time they reach their 3,000th treatment. Where a change of
ownership occurs and the new owner receives a new provider number
during the 3-year period, the ESRD facility would not be eligible for
the adjustment until it demonstrates that it meets the low-volume
criteria under its new provider number. We are aware that there are
Medicare-certified ESRD facilities that solely furnish support services
and training for home peritoneal dialysis and home hemodialysis ESRD
beneficiaries. Therefore, we are concerned that it may not be
appropriate to extend low-volume eligibility to these types of
facilities. We also are concerned that a treatment threshold may create
an incentive for ESRD facilities to turn away patients rather than lose
their low-volume status. We are requesting comment on the change of
ownership element of our proposed definition, the appropriateness of
applying the low-volume adjustment to training ESRD facilities, and the
possible unintended effects of having a treatment threshold.
We believe that this approach would identify appropriate ESRD
facilities for an adjustment and provide access to care for a
vulnerable patient population. Under this proposal, new ESRD facilities
would not be able to benefit from a low-volume adjustment until the 4th
year in operation. For example, an ESRD facility opening in 2008 would
need to meet the low-volume criteria for 2009, 2010, and 2011 to be
eligible for the low-volume adjustment in 2012.
We are very concerned about potential misuse of the proposed 20.2
percent low-volume adjustment (the proposed figure is discussed below).
Specifically, our concern is that the low-volume adjustment could
incentivize dialysis companies to establish small ESRD facilities in
close geographic proximity to other ESRD facilities, thereby leading to
unnecessary inefficiencies, in order to obtain the low-volume
adjustment. To address our concern, we are proposing additional
criteria described below in connection with the proposed definition
discussed above.
We propose, for purposes of determining the number of treatments
under the proposed definition of a low-volume facility, that the number
of treatments considered furnished by the ESRD facility would be equal
to the aggregate number of treatments actually furnished by the ESRD
facility and the number of treatments furnished by other ESRD
facilities that are both: (i) Under common ownership with and; (ii) 25
road miles or less from the ESRD facility in question. Under our
proposal, ``common ownership'' means the same individual, individuals,
entity, or entities directly or indirectly own 5 percent or more of
each ESRD facility. Our intention is to create a disincentive for
commonly-owned ESRD facilities to purposively establish new ESRD
facilities in close geographic proximity to other ESRD facilities,
which could lead to unnecessary inefficiencies. The 25 road mile
threshold is a standard that is used for low-volume adjustments in
Medicare. For example, this criterion is used in the prospective
payment system for inpatient hospital services. We are soliciting
comment on our proposed definition of a ``low volume facility'' and our
proposed geographic requirement with regard to determining the number
of treatments furnished. We are also requesting comment concerning
other potential vulnerabilities of the proposed low-volume definition
and ways to address them.
Although we propose to limit the application of the low-volume
adjustment to ESRD facilities with common ownership in a certain
geographic location for purposes of determining the number of
treatments under the proposed definition, we propose to grandfather
those commonly owned ESRD facilities that have been in existence and
certified for Medicare participation on or before December 31, 2010.
Specifically, ESRD facilities that are in existence and certified for
Medicare participation prior to January 1, 2011, will be exempt from
treatment determination requirement and the geographic proximity
restriction discussed above. We intend to monitor this grandfathering
provision for abuse on a going forward basis and invite comment on the
vulnerability it may present and ways to address them.
We also intend to work with our Regional Offices to monitor changes
in the ESRD industry's behaviors and emerging trends in the ESRD
industry nationwide. In this way, we would be able to monitor survey
and certification activities and impose additional safeguards that
maybe necessary in the interest of program integrity.
In order to identify which existing ESRD facilities meet the low-
volume criteria, we propose that ESRD facilities could attest to the
FI/MAC that they qualify as a low-volume facility. In this approach the
FI/MAC would verify the ESRD facility's attestation of their low-volume
status using the ESRD facility's final-settled cost reports. We invite
comments on this approach and welcome other suggestions to identify

[[Page 49976]]

existing low-volume facilities. Instruction as to how the FIs/MACs
would implement the proposed ESRD PPS will be provided in future
guidance.
c. Defining the Percent of Increase
As discussed above, section 1881(14)(D)(iii) of the Act also
requires the ESRD PPS to include a ``payment adjustment that reflects
the extent to which costs incurred by low-volume facilities (as defined
by the Secretary) * * * and for payment for renal dialysis services
furnished on or after January 1, 2011, and before January 1, 2014, such
payment adjustment not be less than 10 percent.'' Based on the
definition described above and on the analysis discussed above in Table
26, Model 2, limiting the low-volume category to ESRD facilities that
had not open, closed, or received a new provider number due to a change
in ownership and remained small, that is, less than 3,000 treatments
during all 3 years from 2004-2006 and including additional controls for
ESRD facility size, the resulting low-volume payment adjustment was
determined to be 20.2 percent. This chart takes into consideration
paying the low-volume facilities based on the model's multiplier
relative to the weighted average of the multipliers of the other ESRD
facility size classes, therefore the extra payment would be calculated
relative to an ESRD facility of typical size, not a ESRD facility in
the largest size category.
Using our proposed low-volume criteria, we measured the payments
received by these ESRD facilities and determined that 76.4 percent of
ESRD facilities meeting the proposed low-volume criteria would get an
adjustment of 10 percent or more increase in payment relative to what
they received under the current system (see Table 28: Measured costs,
current payments and proposed payment per dialysis session for an
expanded bundle, 2006).
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Based on the analysis provided by UM-KECC, we are proposing a 20.2
percent increase to the base rate to account for the costs incurred by
low-volume facilities for renal dialysis services furnished on or after
January 1, 2011, and before January 1, 2014.
The proposed low-volume adjustment policy is set forth in proposed
Sec. 413.232. We invite comments on the low-volume facility proposed
adjustment.
For purposes of determining the appropriate adjustment for the low-
volume facilities defined above, we are considering other options in
addition to the 20.2 percent adjustment we described. As mentioned
previously, section 1881(14)(D)(iii) of the Act requires the payment
adjustment for low-volume facilities be not less than 10 percent during
the transition. We

[[Page 49978]]

believe that adopting the statutory adjustment of 10 percent would
provide relief to low-volume facilities of the costs they incur to
provide services. In addition, providing a lower payment adjustment
results in less of a decrease in the ESRD PPS base rate which would
apply to treatments furnished by all ESRD facilities.
Another option for the low-volume adjustment would be the midpoint
between the statutory adjustment of 10 percent and the results of our
data analysis which is 20.2 percent. We believe that a 15 percent
increase could establish an appropriate adjustment amount that would
provide low-volume facilities the incentive to utilize resources more
efficiently and control their costs.
We invite comments on these alternative options for determining the
percent low-volume adjustment.
3. Alaska/Hawaii Facilities
Section 1881(b)(14)(D)(iv) of the Act permits the Secretary to
include other payment adjustments as the Secretary determines
appropriate. The basic case-mix adjusted composite payment system
currently does not provide a separate adjustment for ESRD facilities
located in Hawaii and Alaska. However, some prospective payment
systems, such as the hospital inpatient PPS and the inpatient
psychiatric facility PPS, provide a cost of living adjustment (COLA)
for facilities located in Alaska and Hawaii. These COLA adjustments are
applied to the non-labor portion of the payment and are based on the
rationale that the wage index adjustment to the labor portion of the
payment is not sufficient to provide for the higher costs incurred by
facilities in Alaska and Hawaii. For example, the same supplies used by
an ESRD facility located in Hawaii cost more because there are
additional (higher) transportation costs incurred to receive the same
supplies compared to an ESRD facility located in the mainland United
States. Analysis completed for the 2008 Report to Congress indicated
there was no need for a COLA for these areas. After all adjustments
(including wage and other adjustments), our analysis of ESRD facilities
located in Alaska and Hawaii did not demonstrate any adverse impact
from the proposed ESRD PPS.
Our analysis continues to support that the proposed ESRD PPS would
adequately reimburse ESRD facilities located in Alaska and Hawaii.
Therefore, we are not proposing to adopt COLA adjustments for ESRD
facilities in Alaska and Hawaii under the proposed ESRD PPS. We invite
public comments on this proposal.
4. Rural
Section 1881(b)(14)(D)(iv)(III) of the Act provides that the ESRD
PPS may include payment adjustments as the Secretary determines
appropriate such as a payment adjustment for facilities located in
rural areas. Accordingly, we analyzed rural status as part of the
regression analysis for the proposed ESRD PPS to inform our proposal
for this rule.
As discussed previously in section VIII. C. 1. of the proposed
rule, we are proposing to define rural facilities in proposed Sec.
413.231(b)(2) as facilities that are outside a Metropolitan Statistical
Area or a Metropolitan division (in the case where a Metropolitan
Statistical Area is divided into Metropolitan Divisions), as defined by
OMB. To decrease distortion among independent variables, rural
facilities were considered control variables rather than payment
variables.
We do not believe that the proposed ESRD PPS would result in
decreased access to care for beneficiaries residing in rural areas
based on the results of the impact analysis. Specifically, as
illustrated in the impact table in Table 48, the proposed ESRD PPS
reveals an overall decrease in payment of 2.5 percent for rural
facilities under the proposed ESRD PPS in 2011 as compared to the
current basic case-mix adjusted composite payment system. However, 2
percent of this amount is associated with the statutory requirement
that payments under the ESRD PPS equal 98 percent of what ESRD
facilities would have received had this ESRD PPS not been implemented
(98 percent of payments to ESRD facilities under the current payment
system). In summary, this analysis reveals that rural ESRD facilities
would be adequately reimbursed under the proposed ESRD PPS.
We also included facility treatment volume as a control variable in
the payment model. Based on the analysis conducted by UM-KECC, 66 of
the 166 ESRD facilities that met the low volume criteria discussed
further in section VIII.C.2 of this proposed rule are located in rural
areas. Thus, some of the effects of rural status on cost and payment
are captured via the low volume payment adjustments. Therefore, we are
not proposing a facility level adjustment that is based on rural
location. We invite public comments on this proposal.
5. Site Neutral ESRD PPS Rate
For dialysis services furnished prior to January 1, 2009, the basic
case-mix composite rate differentiated between hospital-based and
independent ESRD facilities. That is to say, the composite rate for
hospital-based facilities was on average $4.00 more per treatment more
than the composite rate for independent dialysis facilities.
Section 1881(b)(12)(A) of the Act, as amended by section 153(a)(2),
requires a site neutral composite rate so that the payment rate for
services furnished on or after January 1, 2009, by hospital-based
facilities is the same as the payment rate paid to independent renal
dialysis facilities under the current system. In addition, section
1881(b)(12)(A) of the Act, as amended by section 153(a)(2) of MIPPA,
requires that in applying the geographic index to hospital-based
facilities, the labor share shall be based on the labor share otherwise
applied to the renal dialysis facilities. In the CY 2009 final rule (72
FR 69881 and 69935), we revised Sec. 413.174, which described the
methodology for prospective rates for ESRD facilities, to conform to
the statutory requirement.
Section 1881(b)(14)(A)(i) of the Act, as amended by section 153(b)
of MIPPA, provides that for services furnished on or after January 1,
2011, the Secretary shall implement a payment system under which a
single payment is made under this title to ESRD facilities for renal
dialysis services, in lieu of any other payment. Therefore, the site
neutral payment provisions discussed above will automatically be
incorporated under the ESRD PPS and used to establish a single base
rate that will apply to ESRD facilities.

D. Determination of ESRD PPS Payment Adjusters

We have described the selection of patient characteristics as
potential case-mix adjusters using a modeling approach that has relied
on separate regression equations for CR and SB services. The predictive
power of the separate estimating equation for CR services in terms of
the proportion of variance explained (R\2\) was 46.0 percent. The
comparable figure for the SB regression equation was 8.7 percent. The
overall estimated R\2\ for the ESRD PPS payment model is 39.0 percent.
While the case-mix adjustments were based on separate estimating
equations, the equations can be combined into a single payment formula
for the ESRD PPS.
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[[Page 49980]]

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Table 29 shows how the payment adjusters from the separate CR and
SB regressions were combined. The first two columns in Table 29
represent the CR and SB model results for each of the regression
equations, carried to three significant figures. The third column of
Table 29 presents a single payment multiplier for each patient
characteristic based on its relationship to resource use for both CR
and SB services. The payment adjusters in the third column (PmtMultEB)
were calculated as the weighted average of the CR and SB multipliers.
The weights correspond to each component's proportion of the sum of the
average CR costs and SB payments per treatment for CYs 2004-2006, as
shown in Table 30.

[[Page 49981]]

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BILLING CODE 4120-01-C
The weights were calculated using the 3 years of pooled data. Based
on this analysis, the average cost for CR services per treatment as
computed from the Medicare cost reports was $169.67. The average MAP
per treatment for SB services based on Medicare claims for the same
period was $82.45. Based on total estimated costs of $252.12 per
treatment ($169.67 + $82.45), the relative weights are weightCR = 0.673
for composite rate services ($169.67/$252.12) and weightSB = 0.327 for
separately billable services ($82.45/$252.12). The payment multipliers
presented in the third column of Table 29 were calculated as PmtMultEB
= 0.673 x PmtMultCR + 0.327 PmtMultSB. In this manner, the separate
case-mix adjusters for composite rate and separately billable services
were combined to obtain a single set of multipliers (shown in the third
column of Table 29) to compute the payment rates under the proposed
ESRD PPS.
Six co-morbidities were identified as payment adjusters for
separately billable services only, as they did not have a statistically
significant association with composite rate costs based on the
regression results. These patient characteristic variables have a
composite rate multiplier in Table 29 of 1.000. For these co-
morbidities, there is no payment adjuster for composite rate services.
Therefore, the payment multiplier is equal to 0.673 x 1.000 + 0.327 x
PmtMultSB. The payment multipliers in the third column of Table 29
reflect the combined results from the two-equation model previously
described in this proposed rule, and represent the case-mix adjustment
factors that we propose to apply to the base rate to compute the
payment amount per treatment under the proposed ESRD PPS.

IX. Pediatric Patients

Section 1881(b)(14)(D)(iv)(I) of the Act, as added by section
153(b) of MIPPA, gives the Secretary the discretionary authority to
develop pediatric payment adjustments in connection with the ESRD PPS.
Below we discuss the current system with regard to ESRD facilities that
furnish renal dialysis services to pediatric patients, as well as our
proposed methodology for developing a pediatric payment adjustment
under the proposed ESRD PPS.

A. Current System

The current basic case-mix adjusted composite payment system uses a
set of case-mix adjusters or multipliers based on three variables--age,
BSA, and low BMI. Employing the same 2000 to 2002 data and regression
methodology used to derive the basic case-mix adjusters, we attempted,
when implementing the current payment system, to develop case-mix
adjusters for outpatient ESRD patients under age 18. However, we found
that for the approximately 600 Medicare pediatric patients for whom
claims were available from 2000 through 2002, the results were highly
variable and statistically unstable, and therefore, inappropriate for
the development of case-mix adjusters in accordance with the same
methodology otherwise applicable to adult Medicare ESRD patients (see
69 FR 66326-27 published November 15, 2004). Section 623(b)(1)(D) of
the MMA amended section 422(a)(2) of BIPA to provide that beginning
October 1, 2002, ESRD facilities in which at least 50 percent of
patients are under age 18, are considered ESRD pediatric facilities,
and are eligible for a pediatric exception to the composite payment
rate. However, due to the relative costliness of pediatric ESRD
patients, we believed that it was appropriate to develop a temporary
methodology applicable to ESRD facilities, which furnish outpatient
dialysis to pediatric patients, regardless of whether the facility met
the definition of a pediatric facility. Our intent was to rely on a
temporary methodology pending the completion of research, which could
yield empirically based case-mix adjusters under a bundled ESRD PPS.
In the CY 2005 PFS final rule with comment period, published on
November 15, 2004 (69 FR 66327), implementing the basic case-mix
adjustment to the composite payment system we described the methodology
used to develop a 62 percent pediatric increase (that is, an adjustment
factor of

[[Page 49982]]

1.62) automatically applied to the composite payment rate per treatment
for any facility furnishing outpatient dialysis services to pediatric
patients. That factor was based on the average amount of the atypical
services exceptions granted for 20 ESRD facilities, each of which
sought and received an exception for the atypical costs incurred for
the treatment of outpatient pediatric patients, compared to the average
unadjusted composite payment rate (that is, the payment without regard
to exception amounts) for these same 20 facilities. We explained that
application of the pediatric adjustment factor of 1.62 in lieu of an
explicit pediatric case-mix adjustment was temporary, and would be
eliminated once an appropriate methodology, preferably one applicable
to both pediatric and adult Medicare patients, could be developed.
The Secretary's 2008 Report presented a design for a case-mix
adjusted ESRD PPS, which included not only composite rate services but
also separately billable dialysis services, weighted in accordance with
the two-equation model described in section VIII. of this notice of
proposed rulemaking.
In applying the case-mix adjustment factors resulting from the two-
equation regression model described in the Secretary's 2008 Report to
pediatric patients, we noted the following:

[P]ediatric dialysis patients are comparatively rare among
Medicare dialysis patients, comprising about 0.2 percent of the
population. The impact of the BSA adjustment in the above example is
a payment reduction of over 37 percent, compared to the age related
increase of 9.1 percent. UM-KECC has performed analyses which
demonstrate that the predicted separately billable MAP falls
substantially short of the actual separately billable MAP for
pediatric patients (that is, those less than age 18). This occurs
because the BSA multiplier of 1.035 does not accurately reflect the
relationship between BSA and separately billable services for
pediatric patients because of their small size and relative rarity
in the Medicare dialysis population. Given the small number of
pediatric patients, there is a lack of statistical robustness in the
payment model with respect to those patients. The data limitations
do not permit a ready solution to this problem. We are currently
examining approaches to determine if modifications to the regression
based payment methodology for pediatric patients is feasible.
See Secretary's February 2008 Report to Congress, pp. 47-48.

Based on UM-KECC research subsequent to the issuance of the
Secretary's 2008 Report, we believe that a separate regression based
case-mix model is feasible for pediatric patients using a limited
number of variables. In the following sections, we describe the payment
model used to develop the payment adjusters which we are proposing to
apply for Medicare pediatric ESRD patients.

B. Selection of a Pediatric Composite Rate Payment Adjustment

One approach to developing a payment adjustment is to use the
results of an updated composite rate cost model. Such a model could
employ one or several age categories for pediatric patients. Table 31
presents a model of composite rate costs for the purpose of
demonstrating a method for arriving at a pediatric composite rate
multiplier, with a single pediatric age category. This model was
estimated using Medicare cost report, claims, and other data for CYs
2004-2006. The model uses ESRD facility data on composite rate costs
and average patient characteristics. Because pediatric patients
comprise such a low percentage of the total patient load of most
facilities, the measures of many patient characteristics at the
facility level (that is, the average patient characteristics at the
facility) are dominated by the characteristics of adult patients.
Therefore, while average patient characteristics are shown in Table 31
in the model, they are only used as control variables. That is, while
statistically significant payment adjusters may be shown in Table 31
for patient characteristic variables, there is no actual associated
payment adjustment that would apply to composite rate services for
pediatric patients. For example, the pediatric composite rate cost
model assumes no payment adjustment for body size (BSA or low BMI),
gender, duration of renal replacement therapy, or co-morbidities. The
key coefficient is the one for the age less than 18 variable. The
estimated regression-based multiplier of 1.199 reflects an increase in
the composite rate portion of the base payment rate of 19.9 percent for
patients less than 18, relative to patients age 45-59. The model shown
in Table 31 with a single pediatric age category is the model we are
proposing to use to adjust the composite rate portion of the proposed
ESRD for pediatric patients.
BILLING CODE 4120-01-P

[[Page 49983]]

[GRAPHIC] [TIFF OMITTED] TP29SE09.091

BILLING CODE 4120-01-C
The type of cost model shown in Table 31 could also employ multiple
pediatric age categories. However, because of the small number of
patients in each pediatric age category, the payment adjusters, based
on the coefficients of the age variables, are unstable. Therefore, with
respect to a payment adjustment applicable to composite rate services
for pediatric patients, we believe that a single age

[[Page 49984]]

category is most appropriate. Although the proposed payment adjuster of
1.199 for the composite rate portion of the ESRD PPS for pediatric
patients is substantially less than the current adjustment of 1.62, we
point out that this is an empirically developed measure derived from
data for all Medicare outpatient ESRD pediatric patients treated by
ESRD facilities. The 1.62 value was developed from only those
facilities that sought and obtained an exception to their otherwise
applicable composite payment rates.

C. Selection of a Pediatric Separately Billable Payment Adjustment

Although the number of pediatric patients is small, we believe that
it is feasible to estimate a payment model for separately billable
services furnished to pediatric patients. However, the small sample
size limits statistical power and results in a more limited set of
potential payment adjusters. Unlike the adult separately billable
payment model, which includes multipliers for particular patient co-
morbidities, age, body size, and other variables, we evaluated
pediatric separately billable payment models based on categories
defined by patient characteristics including age, the presence of co-
morbidities, and dialysis modality. This model structure is feasible
because of the relatively small number of characteristics generating
adjustments.
We considered several factors in developing the payment model for
separately billable services: The number and definition of the age
categories; the number and set of co-morbidities; the reflection of
modality as a payment variable; and the potential inclusion of other
patient characteristics, such as gender, onset of renal dialysis, and
history of transplantation. We developed several exploratory models for
separately billable services furnished to pediatric patients in order
to develop the model proposed in this notice.
All of the analyses were performed using log-linear regression
models of the average separately billable MAP per treatment during the
year as the dependent variable. The data were pooled over the 3-year
period CY 2004-2006, resulting in up to three yearly observations for
each pediatric patient. The potential payment multipliers that were
estimated by the model often required a statistical ``smearing''
adjustment to limit retransformation bias.
Under statistical ``smearing'', a correction factor is applied to
the predictions from a model that is estimated on the logarithmic scale
(for example, the log of the average MAP per treatment). In the context
of examining healthcare cost data that are not normally distributed,
retransformation bias may occur when converting predicted values that
are made on the log scale (that is, log dollars) back to the original
scale (that is, dollars), yielding biased estimates of the mean cost in
dollars. In order to make valid inferences about the relationships
between patient characteristics and the MAPs (that is, in dollars), it
is essential that retransformation bias be limited as much as possible.
Because the difference between the measured MAP and predicted MAP for
each observation (that is, the residuals) did not vary in the desired
random pattern, indicating correlation between the variance of the
residuals and some of the patient characteristics in each model
(statistically known as ``heteroscedasticity''), separate smearing
factors were applied by patient subgroup. The smearing adjustments were
based on the average retransformed residual for each patient category.
For further information on the use of statistical smearing,
retransformation, and heteroscedasticity, see Duan, N., Smearing
estimate: a nonparametric retransformation method, Journal of the
American Statistical Association, 78, 1983, pp. 605-610, and Manning,
W. G., The logged dependent variable, heteroscedasticity, and the
retransformation problem, Journal of Health Economics, 17, 1998, pp.
283-295.
We examined numerous separately billable payment models to
determine the most appropriate age categories (defined by two age
groups), and the selection of co-morbidity categories, defined as two
groups (no co-morbidities, and the presence of one or more of the co-
morbidities listed in the footnotes to Table 32). Individual co-
morbidities that were considered for inclusion in the co-morbidity
categories were each identified as statistically significant predictors
of separately billable MAP per treatment based on a stepwise regression
model. Some of the more important factors which we considered before
arriving at the pediatric payment model we are proposing in this notice
of proposed rulemaking are discussed below. Because our consideration
of each of these factors resulted in the pediatric payment adjustments
we are proposing in this rule, we invite comment on their use.
(1) Use of two age categories <13, and 13-17
Because of the small number of pediatric patients, we limited the
number of age groups to two. Because the data revealed a natural break
relating to increased body size and greater utilization of resources
corresponding with the onset of adolescence, we defined the pediatric
age categories as less than 13, and age 13-17.
(2) Omission of hyperparathyroidism as a co-morbidity
Hyperparathyroidism had a relatively low reported incidence in the
claims data. However, hyperparathyroidism clinically is a frequently
encountered condition in pediatric dialysis patients. This co-morbidity
has a relatively high potential for overreporting compared to other co-
morbidities. Because hyperparathyroidism was associated with a
relatively small payment increase, omitting this diagnosis from the
list of co-morbidities generating a payment adjustment increases the
potential payment multipliers for other co-morbidities. However, given
the widespread occurrence of hyperparathyroidism in the pediatric
dialysis patient population, we believe its omission results in minimal
distortion in the adjusters for most payment categories. We invite
comment on our proposal to omit hyperparathyroidism as a co-morbidity
in our proposed pediatric payment model.
(3) Capping Separately Billable MAP per Treatment at $289.00 per
Treatment for All Pediatric Patients
The cap of $289.00 was based on a standard outer fence method for
identifying statistically aberrant values. (For a further explanation
on the application of this method, see p. 46 of UM-KECC's February 2008
report, ``End Stage Renal Disease Payment System: Results of Research
on Case-Mix Adjustment for an Expanded Bundle'' and footnote 35 of the
Secretary's February 2008 Report to Congress, both cited previously in
this proposed rule. The outer fence was defined as the 75th percentile
of the separately billable MAP per treatment, plus three times the
interquartile range, which is the 75th percentile minus the 25th
percentile.) Capping the separately billable MAP does not lead to
substantially different payment multipliers. The standard deviation of
the prediction error falls substantially for some of the payment
groups, especially those that were quite large. Some of this reduction
may be

[[Page 49985]]

due to the elimination of erroneous data through the capping mechanism.
In any case, the fact that the case-mix payment adjusters did not
materially change regardless of the application of the standard outer
fence method for eliminating aberrant values suggests that the
predicted payments are not biased through the inclusion of valid or
invalid values.
(4) Adjustment for Dialysis Modality
Our analysis revealed that the main problem with a separately
billable payment model that does not recognize modality is that it
results in an underpayment for HD and an overpayment for PD. For models
that did not pay differentially by modality, the average prediction
errors were all positive for PD and negative for HD. The errors in both
directions were large relative to the predicted means. By contrast, the
prediction errors in models that distinguish payment by modality were
much smaller and did not consistently favor PD over HD. Hence, payment
by modality reduces the difference between actual and predicted
payments. In doing so, it reduces the incentive to steer patients to a
particular modality based purely on the payment implications. It also
substantially improves the predictive power of the payment models.
However, payment by modality introduces an inconsistency with how
modality is treated currently under the basic case-mix adjusted
composite payment system, and with how we are proposing to treat it for
adults under the proposed ESRD PPS. There are a small number of payment
groups with relatively large differences between actual and predicted
payments even when the models adjust for modality. Paying by modality
for pediatric patients is also inconsistent with the payment goal of
encouraging home dialysis. However, we note that partly because of the
popularity of PD among pediatric patients, it may not be necessary to
encourage home therapies for this population. In addition, paying by
modality doubles the number of payment categories from four to eight,
increasing administrative complexity. We are specifically soliciting
comments on our proposal to use modality as a payment variable in our
pediatric payment model.
(5) Exclusion of Other Patient Characteristic Variables
Among the other patient characteristics that were considered as
potential payment adjusters for separately billable pediatric services,
gender, and onset of dialysis (that is, the start of dialysis within 4
months of the current treatment), were not identified as statistically
significant predictors of MAP using CY 2004-2006 data. Based on models
that included adjustments for age, dialysis modality, and number of co-
morbidities, history of transplantation was associated with a higher
separately billable MAP per treatment. However, the inclusion of an
additional adjustment for history of transplantation did not
substantially improve the explanatory power of the model, or
substantially reduce the prediction errors for most patient subgroups.
In addition, its inclusion would double the number of payment
categories in the model from 8 to 16, six of which had very small
numbers of patients (less than 50 patients).
Given the results of the analyses described, we are proposing a
pediatric payment adjustment for separately billable services that uses
two age categories (http://www.cms.hhs.gov/ESRDGeneralInformation/Downloads/ESRDReportToCongress.pdf.
1. Eligibility for Outlier Payment
We are proposing that an ESRD facility would be eligible for an
additional payment under the ESRD PPS where the facility's imputed,
average per treatment costs for ESRD outlier services furnished to a
beneficiary exceed the predicted per treatment MAP amount for outlier
services plus the fixed dollar loss amount, as indicated in proposed
Sec. 413.237(b). We propose to base eligibility for outlier payments
on ESRD outlier services, that is, only those items and services that
are separately billable under Medicare Part B with regard to the
current basic case-mix adjusted composite payment system and renal
dialysis service drugs proposed for inclusion in the ESRD PPS bundle
that currently are covered under Medicare Part D, rather than all items
and services comprising the bundled payment under the proposed ESRD
PPS.
The comprehensive listing of our outlier policy definitions are set
forth in Sec. 413.237 of this proposed rule.
a. ESRD Outlier Services
Section 1881(b)(14)(D)(ii) of the Act provides that the ESRD PPS
shall include a payment adjustment for high cost outliers due to
unusual variations in the type or amount of medically necessary care,
including variations in the amount of erythropoiesis stimulating agents
necessary for anemia management.
We believe that any unusual variation in the cost of the renal
dialysis services comprising the base rate under the proposed ESRD PPS
is likely to be due to variation in the items and services that
currently are separately billable under Part B and those renal dialysis
service drugs currently covered under Part D. Therefore, including
these items and services that are either currently separately billable
under Part B or covered under Part D under the proposed ESRD PPS
creates new financial risk for ESRD facilities. In addition,
significant variations in these services may impair access to
appropriate care, as an ESRD facility may have a disincentive to
provide adequate treatment to those ESRD patients likely to have
significantly higher than average costs. We believe these concerns
could be addressed by an outlier policy.
As set forth in proposed Sec. 413.237(a), we are proposing to base
eligibility for outlier payments under the ESRD PPS on a comparison of
the predicted MAP amounts and imputed MAP amounts for (1) items and
services that currently are separately billable under Medicare Part B,
including ESRD-related drugs, ESRD-related laboratory tests, and ESRD-
related services; and (2) renal dialysis service drugs proposed for
inclusion in the ESRD PPS bundle that currently are covered under
Medicare Part D. From this point forward, we refer to these services as
the ``ESRD outlier services.''
As described further in section XIV, of this proposed rule, we are
considering the extent to which the 50 percent rule that pertains to
the Automated Multi-Channel Chemistry (AMCC) separately billable
laboratory tests under the basic case mix adjusted composite payment
system should continue to apply in the context of the proposed ESRD
PPS.
Section 1881(b)(14) prohibits the unbundling of services, including
laboratory services. Thus, under the proposed ESRD PPS, Medicare would
not make separate payment for laboratory tests, rendering the 50
percent rule irrelevant for payment purposes. The 50 percent rule's
relevance would be limited to its use in determining eligibility for
outlier payment.
As described above, we are proposing to define outlier services as
items and services that currently are separately billable under
Medicare Part B, including ESRD-related drugs, ESRD-related laboratory
tests, and ESRD-related services; and (2) renal dialysis service drugs
proposed for inclusion in the ESRD PPS bundle that currently are
covered under Medicare Part D. Under this proposal, to ensure that the
AMCC tests qualify as separately billable under the basic case mix
adjusted composite payment system, and thus, qualify as outlier
services, it would be necessary for ESRD facilities to continue
applying the 50 percent rule under the proposed ESRD PPS. Conversely,
excluding AAMC tests to which the 50 percent rule apply from the
definition of outlier services would negate the need to apply the 50
percent rule under the proposed ESRD PPS.
We believe that the overall impact of excluding the AMCC tests to
which the 50 percent rule applies from the definition of outlier
services would be small. As shown in table 8, laboratory tests comprise
3.45 percent of the total MAP amount which is the basis of the ESRD PPS
base rate. The subset of laboratory tests associated with the AMCC
tests to which the 50 percent rule applies under the basic case mix
adjusted composite payment system comprises an even smaller proportion
of the overall base rate. As a result, we are considering excluding
AAMC tests to which the 50 percent rule apply from the definition of
outlier services, thus negating the need to apply the 50 percent rule
under the proposed ESRD PPS. We request public comments on whether or
not to include the the AMCC tests to which the 50 percent rule applies
within the definition of outlier services and retain the 50 percent
rule under the proposed ESRD PPS. We also invite comment on our
proposal to limit the ESRD outlier services to items and services
currently separately billable under Part B and those renal dialysis
service drugs currently covered under Part D.
We note that if we also were to base eligibility for outlier
payments on

[[Page 49989]]

variation in the cost of all items and services included in the ESRD
PPS bundle, including those services included in the bundle under the
current ESRD basic case-mix adjusted composite payment amount
(hereinafter the ``composite rate items and services''), this may
require an expansion in the data that we currently collect from ESRD
facilities, which would increase ESRD facilities' reporting burden.
Specifically, if we were to base eligibility for outlier payments on
variation in the cost of all items and services included in the ESRD
PPS bundle, we would need to compare a more comprehensive predicted MAP
amount for a treatment to the ESRD facility's more comprehensive
imputed MAP amount for the treatment. However, composite rate items and
services, and the ESRD facilities' costs associated with providing
these items and services, are not listed individually on the claims. As
a result, it would not be possible to compare an imputed MAP amount for
the more comprehensive definition of outlier services, that is, all
items and services included in the ESRD PPS bundle, to the predicted
MAP amount for these items and services.
To correct this deficiency, we could collect patient-level data
reflecting the cost of the composite rate items and services. Under
this approach, we believe that it would be necessary to revise the ESRD
facility claim form. For example, ESRD facilities would need to report
by line item all composite rate services and the associated charges of
each of those services. However, we are not proposing revisions to the
ESRD facility claim.
We believe that under a bundled payment system, in the future we
may be able to simulate ESRD facility costs for outlier services using
charges on the claims and applying the cost-to-charge ratios calculated
using the cost reports. However, this data would only become available
after the 2011 cost reports had been settled.
b. Predicted ESRD Outlier Services MAP Amounts
Predicted outlier services MAP amounts for a patient would be
determined by multiplying the adjusted average outlier services MAP
amount, described further below, by the product of the patient-specific
case-mix adjusters applicable using the outlier services payment
multipliers used in the regression analysis to compute the payment
adjustments.
As described previously in section VIII. of this proposed rule, the
predicted separately billable MAP amounts are based on the patient-
level regression model for separately billable services. Thus, it is
possible to predict patient-specific separately billable MAP amounts
for these services by multiplying the average separately billable MAP
amounts by the separately billable case-mix adjusters. However,
although in this proposed rule we have included the cost of the Part D
drugs in the base rate, the Part D drugs have not been incorporated
into the separately billable services regression model that generates
case-mix payment adjusters. Therefore, we are unable to predict payment
for renal dialysis service drugs proposed for inclusion in the ESRD PPS
that are currently covered under Medicare Part D. As a result, the
predicted MAP amounts are understated. Nonetheless, within this
proposed rule, our references to predicted outlier services MAP amounts
assume the inclusion of these additional drugs to demonstrate the way
in which the outlier policy would apply when these additional drugs are
incorporated into the regression model for purposes of the final rule.
For the final rule we intend to incorporate these drugs into the
regression analysis to derive a comprehensive predicted MAP amount for
all proposed ESRD outlier services, including (1) the items and
services that currently are separately billable under Medicare Part B
and (2) renal dialysis service drugs proposed for inclusion in the ESRD
PPS that currently are covered under Medicare Part D.
Specifically, for the final rule, the separately billable case-mix
adjusters could either be updated to reflect Part D drugs, assigning
appropriate weights to the separately billable and Part D portions of
the outlier services case-mix adjusters, or distinct payment
multipliers for the Part D drugs could be developed.
Please refer to Table 34 below for the list of case-mix adjustment
multipliers for outlier services for adult patients.

Table 34--Payment Multipliers for an Expanded Bundle of Services, Ages 18 and Older, 2004-06
----------------------------------------------------------------------------------------------------------------
Estimated payment multipliers Modeled case-
based on a two-equation model mix adjust-
-------------------------------- ment 3,4
Variable Composite rate Outlier ---------------
services \1\ services \2\
-------------------------------- PmtMult EB
PmtMult CR PmtMult SB
----------------------------------------------------------------------------------------------------------------
Adjustments for dialysis patient characteristics:
Age:
18-44................................................... 1.280 1.018 1.194
45-59................................................... 1.000 1.000 1.000
60-69................................................... 1.014 1.006 1.012
70-79................................................... 1.105 0.960 1.057
80+..................................................... 1.150 0.923 1.076
Female.......................................................... 1.124 1.149 1.132
Body surface area (BSA, per 0.1 m\2\; mean BSA = 1.87).......... 1.035 1.033 1.034
Underweight (BMI <18.5)......................................... [caret] 1.000 1.060 1.020
Time since onset of renal dialysis: < 4 months.................. 1.508 1.401 1.473
Alcohol/drug dependence (claims since 2000 or 2728)............. 1.155 1.139 1.150
Cardiac arrest (claims since 2000 or 2728)...................... [caret] 1.000 1.098 1.032
Pericarditis from same month to three months ago................ [caret] 1.000 1.595 1.195
HIV/AIDS (claims since 2000 or 2728)............................ 1.363 1.220 1.316
Hepatitis B (claims since 2000)................................. 1.115 1.035 1.089
Specified infection from same month to 3 months ago
Septicemia.............................................. [caret] 1.000 1.715 1.234
Bacterial pneumonia and other pneumonias/opportunistic 1.256 1.412 1.307
infections.............................................
Gastro-intestinal tract bleeding from same month to 3 months ago [caret] 1.000 1.965 1.316
Hereditary hemolytic or sickle cell anemias (claims since 2000). 1.248 1.179 1.226

[[Page 49990]]

Cancer (claims since 2000; excludes non-melanoma skin 1.143 1.097 1.128
cancer)
Myelodysplastic syndrome (claims since 2000)............ [caret] 1.000 1.257 1.084
Monoclonal gammopathy (claims since 2000)....................... [caret] 1.000 1.063 1.021
Low volume facility adjustment
Facility size < 3,000 treatments during each year from 1.383 0.940 1.202
2004-06................................................
----------------------------------------------------------------------------------------------------------------
[caret] A multiplier 1.000 was used for factors that lacked statistical significance in models of resource use
or lacked stability over time in the estimated multipliers.
\1\ The CR payment multipliers (PmtMultCR) are based on a facility level log-linear regression model of the
average composite rate cost/session for 2004-06 (n = 11,814 facility years). This model also included facility
characteristics (an indicator of low volume facilities as a potential payment variable as well as control
variables for other facility size categories, urban/rural location, calendar year, facility ownership type,
composite rate payment exception, and % of patients in the facility with URR < 65%) and the percent of
pediatric patients as additional covariates (R-sq = 46.0%).
\2\ Although we refer to outlier services, these multipliers are limited to the inclusion of items and services
that currently are separately billable under Medicare Part B and do not reflect renal dialysis service drugs
proposed for inclusion in the ESRD PPS that are currently covered under Medicare Part D. Based on a patient
level log-linear regression model of separately billable Medicare Allowable Payments/session for 2004-06 (n =
890,776 patient years) that included included facility characteristics (an indicator of low volume facilities
as a potential payment variable as well as control variables for other facility size categories, urban/rural
location, calendar year, facility ownership type, composite rate payment exception, and % of patients in the
facility with URR<65%) as additional covariates (R-sq = 8.7%).
\3\ The combined payment multipliers for patient characteristics were calculated as PmtMultEB =
WeightCRxPmtMultCR + WeightSBxPmtMultSB, where PmtMultCR is the estimated multiplier from a facility level
model of composite rate costs and PmtMultSB is the estimated multiplier from a patient level model of
separately billable costs. Based on total estimated costs of $169.67 per session for composite rate services,
$82.45 per session for separately billable services, and $252.12 per session for an expanded bundle ($169.67 +
$82.45), the relative weights are WeightCR = 0.673 for composite rate services ($169.67/$252.12) and WeightSB
= 0.327 for separately billable services ($82.45/$252.12).
\4\ To determine the incremental payment for low volume facilities, the low volume facility payment multiplier
was calculated relative to all other facilities combined. The estimated low volume coefficients from the
regression models (which correspond to the CR and SB multipliers of 1.383 and 0.940, respectively, in the
table above) were first divided by the weighted average of the other facility size coefficients in the models.
A similar weighting procedure to that described above for the other payment multipliers was then used in
calculating the resulting low volume adjustment of 1.202. The same payment adjustment is being used for both
adult and pediatric patients in a low volume facility.

Please refer to Table 35 below for the list of case-mix adjustment
multipliers for outlier services for pediatric patients.

Table 35--Calculating Combined Payment Multipliers for Pediatric Patients Based on Adjustments for Age, Modality, and Comorbidity
--------------------------------------------------------------------------------------------------------------------------------------------------------
Patient characteristics Payment multipliers
-------------------------------------------------------- -----------------------------------------------
Modeled Outlier
Cell outlier Services\2\ CR payment Expanded
Age Modality Comorbidities\1\ services\2\ payment multiplier bundle payment
multiplier multiplier (PmtMultCR) multiplier
(PmtMultSB) (PmtMultEB)
--------------------------------------------------------------------------------------------------------------------------------------------------------
1.................................. <13 PD................... None.................. 1.000 0.149 1.199 0.963
2.................................. <13 PD................... 1 or more............. 1.485 0.221 1.199 0.980
3.................................. <13 Hemo................. None.................. 3.861 0.576 1.199 1.059
4.................................. <13 Hemo................. 1 or more............. 5.647 0.842 1.199 1.119
5.................................. 13-17 PD................... None.................. 1.508 0.225 1.199 0.980
6.................................. 13-17 PD................... 1 or more............. 2.244 0.335 1.199 1.005
7.................................. 13-17 Hemo................. None.................. 5.831 0.869 1.199 1.125
8.................................. 13-17 Hemo................. 1 or more............. 8.534 1.272 1.199 1.215
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\The comorbidity adjustment is based on the presence of HIV/AIDS (2728 or claims since 2000), septicemia within 3 months, diabetes (2728 or claims
since 2000), and cardiac arrest (2728 or claims since 2000).
\2\Although we refer to outlier services, these multipliers are limited to the inclusion of items and services that currently are separately billable
under Medicare Part B and do not reflect renal dialysis service drugs proposed for inclusion in the ESRD PPS that are currently covered under Medicare
Part D.

To generate the adjusted average outlier services MAP amount that
is multiplied by the product of the patient-specific outlier services
case-mix adjusters, we begin with the average outlier services MAP
amount per treatment. The average outlier services MAP amount per
treatment is based on payment amounts reported on 2007 claims and
adjusted to reflect projected prices for 2011. As discussed above,
payments for Part D drugs are not included. The average MAP amount per
treatment for outlier services is then adjusted by the case-mix and
wage adjustment standardization factor, a MIPPA reduction of .98, and
the outlier policy of .99 resulting in the adjusted average outlier
services MAP amount by which the product of the patient-

[[Page 49991]]

specific outlier services case-mix adjusters are multiplied.
The proposed adjusted average outlier services MAP amount is
$64.54. As illustrated in the hypothetical examples in section X.A.3,
the adjusted average outlier services MAP amount would be multiplied by
the product of the patient-specific outlier services payment
multipliers to yield the predicted outlier services MAP amount.
As described further in section X.A.1.d., the fixed dollar loss
amount would be added to this amount.

Table 36--Adjusted Average Outlier Services MAP Amount
------------------------------------------------------------------------

------------------------------------------------------------------------
Average outlier services MAP amount per $84.99
treatment \1\...............................
Adjustments
Standardization for case mix and wage 0.7827
adjustments \2\.........................
MIPPA reduction.......................... 0.98
Outlier policy........................... 0.99
Adjusted average outlier services MAP amount $64.54
\3\.........................................
------------------------------------------------------------------------

Patient age
-------------------------
18 and
<18 older
------------------------------------------------------------------------
Fixed dollar loss amount that is added to the $174.31 $134.96
predicted MAP to determine the outlier
threshold \4\................................
------------------------------------------------------------------------
\1\ Excludes patients for whom not all case mix measures were available
to calculate projected payments under an expanded bundle.
\2\ Applied to the average outlier MAP per treatment.
\3\ Because Part D drugs are not yet reflected in the outlier services
payment multipliers, this number is understated. This is the amount to
which the separately billable (SB) payment multipliers are applied to
calculate the predicted outlier services MAP for each patient.
\4\ The fixed dollar loss amounts were calculated using 2007 data to
yield total outlier payments that represent 1% of total projected
payments for an expanded ESRD PPS. These amounts correspond to 1.963
times the standard deviation of the prediction error for ages <18 and
1.952 times the standard deviation of the prediction error for ages 18
and older.

c. Estimating the Imputed ESRD Outlier Services MAP Amounts
As discussed above, we propose to base eligibility for outlier
payments on a comparison of an ESRD facility's predicted Medicare
Allowable Payment (MAP) amount per treatment for the ESRD outlier
services to the facility's imputed MAP amount per treatment for the
ESRD outlier services. We discuss above our proposed methodology for
determining the predicted outlier services MAP amounts for a patient.
In estimating a provider's imputed costs, under some Medicare PPSs,
such as the Hospital Inpatient Prospective Payment System, we estimate
a provider's costs by applying a provider-specific cost-to-charge ratio
to the covered charges for the treatment. The cost-to-charge ratio is
based in part on the provider's cost report. Under other Medicare PPSs,
we estimate a provider's costs using available data. For example, under
the Prospective Payment System for Home Health Agencies we impute the
cost for each episode by multiplying the national per-visit amount of
each discipline by the number of visits in the discipline and computing
the total imputed cost for all disciplines (42 CFR Sec. 484.240(d)).
For the reasons discussed below, we are proposing to estimate an ESRD
facility's imputed costs for the ESRD outlier services based on
available data rather than a provider-specific cost-to-charge ratio.
Although ESRD facilities currently identify costs associated with
certain ESRD outlier services such as EPO and vaccines, our analysis
revealed that other ESRD-related drugs and biologicals appear to be
under-reported or not reported. For this reason, we do not believe that
a cost-to-charge ratio that would be based on such reported information
would accurately reflect an ESRD facility's cost for drugs. We
therefore are proposing to estimate a provider's costs based on
available data, rather than applying a cost-to-charge ratio to facility
charges to impute their cost.
As described in greater detail below, the imputed separately
billable MAP amounts would be based on pricing mechanisms currently in
place for these services. Whereas, in the case of Part D drugs proposed
for inclusion in the ESRD PPS, we have not proposed a preferred pricing
mechanism for the imputed MAP amounts but rather, solicit comments on
several approaches for imputing these drug prices.
i. Data Used to Estimate Imputed ESRD Outlier Services MAP Amounts
With respect to estimating the imputed MAP amounts of ESRD outlier
services that are separately billable under Part B, we propose to use
Average Sales Prices (ASP) data for the Part B ESRD-related drugs
(which is updated quarterly) and annual laboratory fee schedules for
the previously separately billable laboratory tests. We propose to use
various pricing mechanisms for the other separately billable ESRD-
related services. Specifically, for medical/surgical supplies used to
administer separately billable drugs, we propose to estimate MAP
amounts based on the predetermined fees that apply to these items under
the current base case-mix adjusted composite payment system. For
example, we pay $0.50 for each syringe identified on an ESRD facility's
claims form. For other medical/surgical supplies such as IV sets and
gloves, the claims processing manual currently allows Medicare
contractors to elect among various options to price these supplies,
such as the Drug Topics Red Book, Med-Span, or First Data Bank (CMS Pub
100-04, Chapter 8, Section 60.2.1). We propose that the FI/MAC would
continue to use the pricing mechanisms that are currently in place for
items and services that currently are separately billable under Part B
to estimate costs for these other medical/surgical supplies.
Finally, payment for blood, supplies used to administer blood, and
blood processing fees furnished by hospital-based ESRD facilities under
the current basic case-mix adjusted composite payment system is based
on a reasonable cost basis. Payment for blood, supplies used to
administer the blood, and blood processing fees, on behalf of patients
in independent ESRD facilities currently is made at the lower of the
actual charge on the bill or a reasonable charge that the MAC/FI
determines. We are proposing to estimate hospital-based and independent
ESRD facilities' costs for blood, supplies used to administer blood,
and blood processing fees using the pricing mechanisms that are
currently in place for items and services that currently are separately
billable

[[Page 49992]]

under Part B. We are not in this proposed rule, specifying the
mechanism by which we propose to estimate the imputed MAP amounts for
drugs formerly covered under Medicare Part D but that would become
renal dialysis service drugs when the ESRD PPS would be implemented in
2011. Rather, we request public comment on the following potential
approaches for estimating the imputed MAP amounts of these drugs and on
alternative approaches.

Approach 1:

First, although we believe ASP pricing data for renal dialysis
service drugs currently covered under Part D would facilitate the
computation of the estimated costs of these drugs, we do not collect
ASP pricing information under section 1927 of the Act for these drugs.
We request public comment on whether manufacturers would be willing to
submit ASP pricing data for renal dialysis service drugs currently
covered under Part D on a voluntary basis.

Approach 2:

An alternate approach for estimating the imputed MAP amounts of
renal dialysis service drugs proposed for inclusion in the ESRD PPS but
currently covered under Part D would be to use data retrieved from the
online Medicare Prescription Drug Plan Finder. (This online tool,
available at medicare.gov provides the prices that are charged by each
Part D plan's network pharmacy.) For example, the Part D drug prices
for each drug designated as a Part B renal dialysis service could be
estimated based on a national average price charged by all Part D plans
and their network pharmacies. We believe that establishing a single
national average price for each drug designated as a Part B renal
dialysis service would be consistent with the approach for Part B drugs
in which we use national ASP pricing.
These national average prices could be updated on an ongoing basis
using data on the Medicare Prescription Drug Plan Finder. Similar to
the way in which we update Part B ASP pricing, national average
Medicare Prescription Drug Plan Finder prices could be updated on a
quarterly basis. The prices reflected in the Medicare Prescription Drug
Plan Finder are reflective of the prices that are negotiated by larger
buying groups. As a result, our primary concern with this pricing
approach is that such prices may fail to reflect the drug prices that
smaller facilities may pay in acquiring these drugs and could therefore
disadvantage these facilities.

Approach 3:

An alternative approach for estimating the imputed MAP amounts of
renal dialysis service drugs proposed for inclusion in the ESRD PPS but
currently covered under Part D would be to use Wholesale Acquisition
Cost (WAC). Because WAC is the manufacturer's list price to
wholesalers, we believe that it is more reflective of the price paid by
the end user than the Average Wholesale Price. In addition, as set
forth in CMS Pub 100-04, Chapter 17, Section 20.1.3, payment allowance
limits for drugs and biological that are not included in the ASP
Medicare Part B Drug Pricing File or Not Otherwise Classified (NOC)
Pricing File, other than new drugs that are produced or distributed
under a new drug application (or other application) approved by the
Food and Drug Administration, are based on the published Wholesale
Acquisition Cost (WAC) or invoice pricing, except under OPPS where the
payment allowance limit is 95 percent of the published AWP. As a
result, we believe that this pricing mechanism would be consistent with
pricing that currently occurs for drugs that are separately billable
under Part B.

Approach 4:

Another alternative option for estimating the imputed MAP amounts
of the renal dialysis service drugs proposed for inclusion in the ESRD
PPS bundle but currently covered under Part D would be to use the
national average prescription drug event (PDE) data that is submitted
for each Part D claim. To correct for the lag time for receipt of
complete PDE data by CMS, we would update the most recent PDE data by
the CPI update for drugs.

Approach 5:

A final approach for estimating the imputed MAP amounts for renal
dialysis service drugs currently covered under Part D would be to
require ESRD facilities to list on their claims forms their costs for
the renal dialysis service drugs proposed for inclusion in the ESRD PPS
but currently covered under Part D. The facility cost that would be
reported on the claim would need to be the amount after accounting for
manufacturer rebates, discounts, and other price concessions. Under
this approach, payment would be based on an ESRD facility's cost as
identified on the claim. As indicated previously, while it may be
possible to use cost-to-charge ratios on the cost report to simulate
cost in the future, that information would not be available when the
ESRD PPS would begin in 2011.
We believe that most, if not all, of the renal dialysis service
drugs proposed for inclusion in the ESRD PPS but currently covered
under Part D have clinical treatment indications beyond ESRD, such as
for the treatment of bone disease in advanced chronic kidney disease
patients. These drugs therefore will continue to be covered under Part
D for these other indications. Consequently, Part D pricing information
would continue to be available for these drugs and could be used in the
computation of outlier eligibility and payment under the approaches
2, and 4 discussed above.
We request public comment on the potential approaches set forth
above for estimating the imputed MAP amounts of renal dialysis service
drugs proposed for inclusion in the ESRD PPS bundle that currently are
covered under Part D. We are also interested in any other potential
data sources for estimating the imputed MAP amount of those ESRD-
related drugs currently paid under Part D.
ii. Determining Imputed Per Treatment ESRD Outlier Services MAP Amount
ESRD facilities currently submit claims on a monthly basis that
identify line item dates of service. For purposes of determining
whether an ESRD facility would be eligible for an outlier payment, it
would be necessary for the ESRD facility to identify the actual ESRD
outlier services furnished to the patient. Specifically, we are
proposing that the ESRD facility would identify by line item on the
monthly claim, all ESRD outlier services furnished to the patient. We
would then estimate the imputed MAP amount for these services applying
one of the proposed methodologies discussed above in section X.A.1.
c. i. The imputed outlier services MAP amounts for each of these
services would be aggregated and then divided by the corresponding
number of treatments identified on the claim to yield the imputed
outlier services MAP amount per treatment. An ESRD facility would be
eligible for an outlier payment if the imputed average outlier services
MAP amount per treatment exceeds the sum of the predicted, outlier
services MAP amount per treatment and the fixed dollar loss amount, as
described below.
d. Outlier Percentage and Fixed Dollar Loss Amounts
As discussed in section VII.D.a, we are proposing that payments
under section 1881(b)(14)(D)(ii) of the Act for outlier cases be
applied in a budget

[[Page 49993]]

neutral manner. Therefore, to ensure that the proposed outlier policy
under the ESRD PPS is budget neutral, we propose to reduce the base
rate by the proposed outlier percentage, or the percentage of total
ESRD PPS payments that are intended for payment of outlier cases, as
defined in proposed Sec. 413.220(b)(4).
Using an outlier loss sharing percentage of 80 percent (which is
discussed in the following section), we considered various percentages
from 1 percent to 3 percent of aggregate payments and the fixed dollar
loss amount that is computed from these two factors. (As discussed
below, we are proposing separate fixed dollar loss amounts for the
pediatric and adult populations.) The appropriate outlier amount was
determined by comparing the predicted outlier services MAP amount
(which, for the reasons explained previously was limited to items and
services that were separately billable under Medicare Part B), for the
treatment plus the fixed dollar loss amount to the imputed per
treatment ESRD outlier services MAP amount. For example, using an
outlier percentage of 1 percent, if the total outlier payment amount
for all providers was determined to be higher or lower than 1 percent
of the total payments under the proposed ESRD PPS, then the fixed
dollar loss amount was adjusted accordingly. This was done in an
iterative fashion until the fixed dollar amount produced total outlier
payment amounts for all ESRD facilities equal to 1 percent of total
payments. We applied a similar process to identify the fixed dollar
loss amount associated with other outlier percentages.
We analyzed outlier percentages from 1 to 3 percent of total ESRD
PPS payments and the corresponding fixed dollar loss amounts and
percentage of patient months qualifying for outlier payments, which are
presented in Table 37.

Table 37--Impact of Outlier Percentage on Patient Months Qualifying for Outlier Payment
----------------------------------------------------------------------------------------------------------------
1% 1.5% 2% 2.5% 3%
----------------------------------------------------------------------------------------------------------------
Age 18 and Older: Patient months qualifying for outlier 5.3% 7.3% 9.3% 11.5% 13.8%
payment.................................................
Age < 18: Patient months qualifying for outlier payment.. 2.6% 3.8% 5.7% 7.6% 10.7%
Age 18 and Older: fixed dollar loss amount............... $134.96 $109.24 $89.88 $74.32 $61.67
Age < 18: Fixed dollar loss amount....................... $174.31 $124.32 $90.04 $65.62 $47.70
----------------------------------------------------------------------------------------------------------------

Based on consideration of the various outlier percentages, we are
proposing that the outlier percentage would be 1 percent of total ESRD
PPS payments. We believe an outlier percentage of 1 percent strikes an
appropriate balance between our objectives of paying an adequate amount
for the most costly patients while providing an appropriate level of
payment for those patients who do not qualify for outlier payments. In
addition, this outlier percentage is consistent with other Medicare
PPSs, such as the 1 percent policy paid under the Outpatient PPS.
The fixed dollar loss amounts that would be added to the predicted,
outlier services MAP amounts would differ for adult and pediatric
patients due to differences in the usage of separately billable
services among adult and pediatric patients, especially drugs. As a
result, we are proposing separate fixed dollar loss amounts, defined in
proposed Sec. 413.237(a)(4-5) of $134.96 for adult patients and
$174.31 for pediatric patients.
2. Outlier Payments
The loss sharing percentage is the percentage of costs exceeding
the fixed dollar loss amount that is paid by Medicare. We considered
various loss sharing percentages for the proposed ESRD PPS outlier
policy. We are proposing an 80 percent loss sharing percentage because
this percentage is consistent with certain other Medicare payment
systems, including the Inpatient Rehabilitation Facility and Home
Health PPSs, and, more importantly, is consistent with the amount
Medicare pays, in general, for Part B services.
In addition, while for the reasons stated above we believe it is
important to ensure that we pay ESRD facilities an outlier payment that
is an adequate amount for treatments involving high costs, at the same
time we want to preserve the efficiency incentives inherent under a
prospective payment system. We believe an 80 percent loss sharing
percentage strikes a reasonable balance between these policy
objectives. In particular, we note that to the extent the cost to ESRD
facilities of the inputs required to deliver additional services beyond
the outlier threshold (the sum of the predicted outlier services MAP
amount plus the fixed dollar loss amount) is greater than the 80
percent loss sharing ratio, there would be less incentive to increase
utilization of outlier services inappropriately to receive outlier
payments.
We propose to implement an annual monitoring process that would
identify patterns of increased utilization of outlier services and any
associated outlier payments across ESRD facilities. For example, we
would be most interested in identifying ESRD facilities that receive
significant outlier payments. We believe that this monitoring effort
would prevent potential abuse and provide us with an outlet for
addressing abuse.
For treatments eligible for outlier payments, we are proposing that
the per treatment outlier payment equal 80 percent (the loss sharing
percentage) of the imputed average ESRD outlier service MAP amounts in
excess of the sum of the predicted, outlier services MAP amount per
treatment and the fixed dollar loss amount, as specified in proposed
Sec. 413.237(c). For treatments eligible for the outlier payment, the
outlier payment would be added to each ESRD PPS per treatment payment
amount.
3. Hypothetical Outlier Payment Examples
Please refer to the hypothetical outlier examples for both adult
and pediatric patients set forth below for an illustration of (1) the
way in which predicted and imputed ESRD outlier services MAP amounts
are calculated and compared in determining eligibility for outlier
payment, and (2) the way in which outlier payments would be calculated.
Hypothetical Example--Adult Patient:
Martha, a 66 year old female who is 167.64 cm. tall, weighs 105 kg.
and has three co-morbid conditions; HIV/AIDS, septicemia and hereditary
hemolytic or sickle cell anemia. As described in hypothetical example
number 4 within section XI. of this proposed rule, a patient of this
weight and height is not below the threshold for underweight status and
thus would not qualify for a low BMI adjustment.
The formula for calculation of a patient's BSA is:

BSA = 0.007184 * heightcm ^.725 * weightkg ^.425

Martha's BSA is calculated as:

[[Page 49994]]

BSAMartha = 0.00718 * 167.64^.725 * 105^.425
= 0.007184 * 40.9896 * 7.2278
= 2.1284

As identified in table 29, the separately billable multiplier for
BSA would be 1.033. Martha's case-mix adjustment based on her BSA of
2.1284 would be:

= 1.033 ^{(2.1284-1.87/0.1)} = 1.088
= 1.033 ^2.584
= 1.088

Step 1: Determine the predicted, ESRD outlier services MAP amount.
The product of the patient-level outlier services case-mix
adjusters as identified in table 34:= 66 year old: 1.006, female:
1.149, BSA: 1.088, HIV/AIDS: 1.220, septicemia: 1.715, and hereditary
hemolytic or sickle cell anemias: 1.179

= 1.006 * 1.149 * 1.088 * 1.220 * 1.715 * 1.179
= 3.10231

The adjusted, average, ESRD outlier services MAP amount

= $64.54

The adjusted, average ESRD outlier services MAP amount * product of
the outlier services case-mix adjusters:

=$64.54 * 3.10231
= $200.22

Step 2: Determine the imputed average, per treatment, ESRD outlier
services MAP amount.

The imputed monthly ESRD outlier services amount = $4000
The corresponding total number of treatments = 10
The imputed, average, per treatment, outlier services MAP amount =
= $4000/10
= $400

Step 3: Add the fixed dollar loss amount to the predicted, ESRD
outlier services MAP amount.

The fixed dollar loss amount = $134.96
The predicted, ESRD outlier services MAP amount = $200.22
= $200.22 + $134.96
= $335.18

Step 4: Calculate outlier payment.
Outlier payment = imputed average, per treatment, outlier services
MAP amount--(predicted, ESRD outlier services MAP amount plus the fixed
dollar loss amount) * loss sharing percentage:

= ($400 - $335.18) * .80
= $64.82 * .80
= $51.22

Hypothetical Example--Pediatric Patient:
John, a 13 year old hemodialysis pediatric patient with 1 or more
co-morbidities.
Step 1: Determine the predicted, ESRD outlier services MAP amount.
As identified in table 35, the patient-level ESRD outlier services
case-mix adjuster:
=13 year old hemodialysis patient with 1 or more co-morbidities

= 1.272
The adjusted, average, ESRD outlier services MAP amount = $64.54
The adjusted, average, ESRD outlier services MAP amount * the
product of the outlier services case-mix adjusters:

= $64.54 * 1.272
= $80.09

Step 2: Determine the imputed, average, per treatment, ESRD outlier
services MAP amount.
The imputed monthly ESRD outlier services amount = $4000
The corresponding total number of treatments = 10
The imputed, average, per treatment, outlier services MAP amount =
= $4000/10
= $400
Step 3: Add the fixed dollar loss amount to the predicted, ESRD
outlier services MAP amount.

The fixed dollar loss amount = $174.31
The predicted, ESRD outlier services MAP amount = $80.09
= $80.09 + $174.31
= $254.40
Step 4: Calculate outlier payment.
Outlier payment = imputed, average, per treatment, outlier services
MAP amount - (predicted, ESRD outlier services MAP amount plus the
fixed dollar loss amount) * loss sharing percentage:

= ($400 - $254.40) * .80
= $145.60 * .80
= $116.48

The outlier payment amount would be added to the ESRD PPS payment
amount, per treatment. For a detailed description of calculating the
ESRD PPS payment amount per treatment, please refer to the hypothetical
examples in section XI. of this proposed rule.
4. Application of Outlier Policy During the Transition and in Relation
to the ESA Monitoring Policy
As discussed in section XIII. A. of this proposed rule, section
1881(b)(14)(E)(i) of the Act requires the Secretary to provide a four-
year transition from the current basic case-mix adjusted composite
payment system to the ESRD PPS for renal dialysis services furnished
beginning January 1, 2011. Under the transition, ESRD facilities would
receive a blended rate based in part on the payment rates under the
current basic case-mix adjusted composite rate payment system and in
part on the payment rates under the ESRD PPS. Section
1881(b)(14)(E)(ii) of the Act permits ESRD facilities to make a one-
time election to be excluded from the transition from the current case-
mix adjusted composite payment system to the ESRD PPS. Those ESRD
providers and facilities that elect to be excluded from the transition
would receive payments for renal dialysis services provided on or after
January 1, 2011 based on 100 percent of the payment rate under the ESRD
PPS, rather than a blended rate.
As indicated above, the current ESRD basic case-mix adjusted
composite payment system does not provide for outlier payments. Rather,
the proposed outlier payment policy would be limited to the proposed
ESRD PPS. We therefore propose that for those ESRD facilities that do
not elect to be excluded from the 4-year transition, outlier payments
would be limited to the portion of the blended rate based on the
payment rates under the proposed ESRD PPS.
Nothing within this proposed outlier payment policy would replace
the claims monitoring implications related to the utilization of
separately billable erythropoiesis-stimulating agents (ESAs) including
currently available epoetin alfa (EPOGEN[supreg], or EPO), darbepoetin
alfa (ARANESP[supreg]) or any ESAs that may be developed in the future
and used by beneficiaries receiving renal dialysis services. As we
discuss in section XIV.B of this proposed rule, we are evaluating the
extent to which we could continue to apply the ESA Monitoring Policy
under the proposed ESRD PPS. We are also considering ways in which
outlier payments would be computed under the proposed ESRD PPS. We
believe that any dosing reductions associated with the application of
the ESA Monitoring Policy would be factored in prior to determining
eligibility for outlier payment.
We expect that ESRD facilities would exercise prudent clinical
judgment in prescribing ESAs for patients who are resistant to these
drugs, so as not to over-prescribe with the intent of capitalizing on
outlier payments. However, we request public comments that would
outline additional safeguards to protect against overuse of ESAs among
the ESA-resistant patient population.

XI. Comprehensive Payment Model Examples

In section VIII., we demonstrated how the case-mix adjustments
based on separate estimating equations for CR and SB services (that is,
the two equation model), were combined to obtain a single payment
formula under

[[Page 49995]]

the proposed ESRD PPS. Table 29 in that section contained the proposed
case-mix adjustments applicable to adult patients. In section IX, we
presented our proposed pediatric payment model under the ESRD PPS.
Table 33 in that section contained the pediatric classification
categories and corresponding case-mix adjusters which we propose to
apply to pediatric ESRD patients. In this section, we explain how the
area wage index and the case-mix adjustments would be applied to the
proposed base rate described in section VII. reflecting combined CR and
SB services, resulting in a patient-specific per treatment payment
amount under the proposed ESRD PPS, as set forth in proposed Sec.
413.215. We demonstrate how the proposed case-mix adjustments presented
in Tables 29 and 33 would be applied for 7 hypothetical ESRD patients
to obtain the per treatment payment amounts under the ESRD PPS. The
product of the applicable case-mix adjustment factors is the patient
multiplier or PM. The ESRD PPS case-mix adjusters are shown in Table 29
for adult patients and Table 33 for pediatric patients. Each example
uses the base rate of $198.64, covering Part B renal dialysis services
and self-care home dialysis services as set forth under section
1881(b)(4) of the Act. Each example also assumes an ESRD wage index
value of 1.1000. Therefore, our starting point in each example prior to
determining the patient-specific PM is a wage index adjusted base rate
of $206.22. This amount was computed as follows:
Base rate $198.64
Labor-related share of base rate

($198.64 * .38160 = $75.80) 75.80

Wage index adjusted labor-related share

($75.80 * 1.1000) = $83.38 83.38

Non labor-related share of base rate

($198.64 * (1 - 0.38160) = $122.84 122.84

Wage index adjusted base rate

($83.38 + $122.84) = $206.22 $206.22

(The labor-related and non labor-related shares of the base rate (that
is, 38.160 percent and 1-0.38160 or 61.840 percent, respectively,
represent the labor-related and non labor-related components of the
bundled ESRD PPS market basket, described in section XII. of this
proposed rule.)

Example 1--Relatively Healthy ESRD Patient With no Co-morbidities; no
Outlier Payments Apply

John, a 45 year old male Medicare beneficiary, is 187.96 cm.
(1.8796 m.) in height and weighs 95 kg. John was diagnosed with ESRD in
early 2009 and has been on HD since August 2009. He has chronic
glomerulonephritis and hypertension, and has an AV fistula. The patient
also has secondary hyperparathyroidism.
Table 29 reveals that none of John's co-morbidities is among those
for which a case-mix adjustment applies. The only pertinent factors to
adjust the base rate amount are age, height, and weight. Using the
formula for BMI, we see that John is not underweight, having a BMI of
26.89 kg/m\2\, which is greater than the threshold value of 18.5, the
cut-off for underweight status:

BMI = weightkg/height (m\2\)
= 95/1.8796\2\
= 95/3.5329
= 26.89

Therefore, there is no case-mix adjustment for low BMI. The formula
for calculation of a patient's BSA is:

BSA = 0.007184 * heightcm\.725\ * weightkg\.425\

John's BSA is calculated as:

BSAJohn = 0.007184 * 187.96\.725\ * 95\.425\
= 0.007184 * 44.5346 * 6.9268
= 2.2161
Using the Table 29 multiplier of 1.034, John's case-mix adjustment
based on his BSA of 2.2161 is computed as follows:

PmtMultBSA = ^{1.034(2.2161-187)/0.1}
= 1.034^3.461
= 1.1227

John's PM would reflect the applicable case-mix adjustments from
Table 29 for both age and BSA and may be expressed as:

PM = PmtMultage * PmtMultBSA
= 1.000 * 1.1227
= 1.1227

The ESRD PPS payment rate per treatment would be:

$206.22 * 1.1227 = $231.52

Example 2--Same as Example 1, Except Dialysis Began November 15, 2010

John's PM would have to include the adjustment for the onset of
dialysis because the treatments for which we are calculating the
payment amount occur within 4 months of November 15, 2010. This
particular adjustment would continue to apply for treatments furnished
between January 1, 2011 and March 15, 2011. The applicable case-mix
adjustments would be for a patient new to dialysis, age, and BSA, and
may be expressed as:

PM = PmtMultDialOnset * PmtMultage * PmtMultBSA
= 1.473 * 1.000 * 1.1227
= 1.6537

The ESRD PPS payment rate per treatment would be:

$206.22 * 1.6537 = $341.03

Example 3--Same as Example 1, with outlier payments. (For a description
of the outlier payment methodology, see section X.)

John normally receives HD 3 times weekly. However, in January 2011
he suffered a compound ankle fracture and was hospitalized for 5 days.
During the hospitalization John did not undergo any dialysis
treatments. After John was discharged and he resumed receiving
outpatient dialysis, it was noted that John's dialysis clinical
indicators were depressed, requiring additional laboratory testing and
above average doses of several injectable drugs, particularly EPO[reg],
to bring them to normal levels. During January, John, who received HD
at his usual facility, received only 9 treatments. The facility
submitted a bill for allowable total SB drugs and biologicals,
laboratory tests, and supplies for January totaling $3000.00.
John's dialysis facility would receive $231.52 for each of the 9
treatments it furnished. The SB MAP per treatment averaged $3000.00/9
or $333.33 per session. We first determine if John's dialysis facility
would be entitled to outlier payments:
Using Table 29 we compute the predicted SB MAP per treatment based
on SB case-mix adjustments for BSA and age.

BSA PmtMultSB = 1.033 ^{(2.2161-1.87)/0.1}
= 1.033 \3.461\
= 1.1189
Age PmtMultSB = 1.000
PMSB = 1.1189 * 1.000 = 1.1189
SB MAP per treatment (see section X.A.1.b) $64.54

The case-mix adjusted predicted SB MAP is:
$64.54 * 1.1189 = $72.21
The fixed dollar loss amount for the predicted SB MAP, reflecting
the case-mix adjustments for BSA and age, becomes:

$72.21 + $134.96 = $207.17

Because John's average SB MAP for services furnished was $333.33,
which exceeds the case-mix adjusted fixed dollar loss amount of
$207.17, John's ESRD facility is eligible for outlier payments beyond
the otherwise applicable $231.52 ESRD PPS amount. The outlier payments
are computed as follows:
Amount in excess of fixed dollar loss amount

($333.33--$207.17) = $126.16
Loss sharing ratio 80%

Outlier payments per treatment

($126.16 * .80) = $100.93 $100.93

[[Page 49996]]

Outlier payments

($100.93 * 9 treatments) = $908.37

The total ESRD payments to this facility on behalf of John for
January would be:
Regular ESRD payments

$231.52 * 9 = $2083.68
Outlier payments 908.37
Total payments $2992.05

Example 4--ESRD Patient With Multiple Co-morbidities

Mary, a 66 year old female, is 167.64 cm. in height and weighs 105
kg. She has diabetes mellitus, a history of chronic Hepatitis B,
parathyroidism, and liver cirrhosis. She was diagnosed with ESRD in
2005, esophageal varices in 2006, and had a diagnosis of upper
gastrointestinal (GI) bleeding in January 2011. Mary receives HD at an
ESRD facility which qualifies for the low volume adjustment. We will
not repeat the calculation for BMI in this example. Suffice it to say
that this patient does not have a BMI less than 18.5 kg/m\2\, the
required threshold for underweight status. Table 29 reveals that the PM
in this example must be calculated to reflect the case-mix adjustments
for gender, BSA, Hepatitis B, and upper GI bleeding, as well as a
facility low volume adjustment. The formula for calculation of a
patient's BSA is:

BSA = 0.007184 * heightcm\.725\ * weightkg\.425\
Mary's BSA is calculated as:

BSAMary = 0.00718 * 167.64\.725\ * 105\.425\
= 0.007184 * 40.9896 * 7.2278
= 2.1284

Based on the Table 29 multiplier of 1.034, Mary's case-mix
adjustment based on her BSA of 2.1284 would be:

PmtMultBSA = 1.034 ^{(2.1284-1.87)/0.1}
= 1.034 \2.584\
= 1.0902

Mary's PM, including application of the low volume payment
adjuster, may be expressed as:

PM = PmtMultgender * PmtMultBSA * PmtMultHepB * PmtMultGIBleed *
PmtMultLV
= 1.132 * 1.0902 * 1.089 * 1.316 * 1.202
= 2.1259

The ESRD PPS payment rate per treatment applicable to Mary would
be:

$206.22 * 2.1259 = $438.40

Example 5--Aged ESRD Patient With Low BMI (< 18.5kg/m\2\) and History
of Hospitalization

Agnes, an 82 year old female, is 160.02 cm. (1.6002 m.) in height
and weighs 45.36 kg. She has longstanding type II diabetes mellitus and
was diagnosed with ESRD in 2004. The patient has coronary artery
disease and peripheral vascular disease. In January 2008 Agnes began
dialyzing with an upper arm AV fistula, which had been created in 2006.
In March 2009, after an unsuccessful attempt to declot the AV fistula
during hospitalization, Agnes experienced additional bleeding
complications, and has been dialyzed using a catheter ever since. In
December 2010, the patient was admitted to the hospital after suffering
an observed cardiac arrest during outpatient dialysis. She was
diagnosed with myocardial infarction, and underwent coronary artery
angioplasty and coronary artery stent placement during that
hospitalization. Agnes was again admitted to the hospital on January 3,
2011 for congestive heart failure, and discharged January 11. She
resumed outpatient dialysis on January 13, 2011.
We must first use Agnes' height and weight to determine if a case-
mix adjustment for low BMI applies, and the magnitude of the case-mix
adjustment for BSA. The patient's BMI is computed as follows:

BMI = weightkg/height(m \2\)
= 45.36/1.6002 \2\
= 45.36/2.5606
= 17.71

Agnes' BMI is less than 18.5. Therefore, her PM will include a 2.0
percent case-mix adjustment for underweight status.
The formula for calculation of a patient's BSA is:

BSA = 0.007184 * heightcm\.725\ * weightkg\.425\

Agnes' BSA is computed as:

BSAAgnes = 0.007184 * 160.02\.725\ * 45.36\.425\
= 0.007184 * 39.6302 * 5.0592
= 1.4404

Using the Table 29 multiplier of 1.034, Agnes' case-mix adjustment
based on her BSA of 1.4404 is calculated as follows:

PmtMultBSA = 1.034 ^{(1.4404-1.87)/0.1}
=1.034 ^(-4.296)
= .8662

Agnes's PM would reflect the applicable case-mix adjustments from
Table 29 for age, gender, BSA, low BMI, and cardiac arrest. It may be
expressed as:

M = PmtMultage * PmtMultgender * PmtMultBSA * PmtMultBMI *
PmtMultCardArrest
= 1.076 * 1.132 * .8662 * 1.020 * 1.032
= 1.1106

The ESRD PPS payment rate per treatment for Agnes would be:

$206.22 * 1.1106 = $229.03

Example 6--Pediatric ESRD Patient With 2 Co-morbidities; no Outlier
Payments Apply

Jonathan, a 24-month old male, began dialysis 8 months ago due to
autosomal recessive polycystic kidney disease. Jonathan inherited HIV/
AIDS from his mother, who has a history of drug abuse. Jonathan also
has diabetes. The patient undergoes PD, with the assistance of a
cycler.
Table 33 reveals that Jonathan has two qualifying co-morbidities,
diabetes and HIV/AIDS. Because Jonathan is less than 13 years old, and
undergoes PD, his pediatric classification group is category 2, for
which the PM is 0.980. Jonathan's ESRD PPS payment rate per treatment
would be:

$206.22 * 0.980 = $202.10
For as long as Jonathan is on PD, his treating dialysis facility
would receive 3 times $202.10 or $606.30 weekly.

Example 7--Pediatric ESRD Patient With 1 Co-morbidity; Outlier Payments
Apply. (For a Description of the Outlier Payment Methodology, See
Section X.)

Timmy is a 16 year old male with ESRD due to renal hypoplasia. The
patient was on PD until 2005, when he received a deceased donor kidney
transplant. Timmy's transplant failed in August 2007, and he has been
on HD since that time. The patient receives dialysis through an AV
fistula. Timmy has a history of post-transplant lymphoma, which is in
remission. He also has diabetes mellitus, which developed after the
kidney transplantation. Timmy weighs 66.2 kg. and is 161.6 cm in
height. He was hospitalized one month ago with Klebsiella bacteremia.
As part of his HD, Timmy receives Aranesp[reg] 60 mcg. IV q 2 weeks,
paracalcitol 4 mcg. IV 3 times a week, and iron dextran 100 mg. IV
every 2 weeks. The patient also takes 2 tablets (667 mg. each) of
calcium acetate 3 times per day. Timmy had 12 HD treatments in January
2011. The facility submitted a bill for allowable SB drugs and
biologicals, laboratory tests, and supplies totaling $3250.00.
Table 33 reveals that Timmy has 1 qualifying co-morbidity,
diabetes. Because Timmy is 16 and undergoes HD, his pediatric
classification group is category 8, for which the PM is 1.215. Timmy's
payment rate per treatment, without regard to outlier payments, would
be:

$206.22 * 1.215 = $250.56

Timmy's dialysis facility would receive $250.56 for each of the 12
treatments it furnished in January. Based on the total allowable billed
SB services of $3250, the SB MAP per

[[Page 49997]]

treatment averaged $3250/12 or $270.83 per session. We must determine
if Timmy's dialysis facility would be eligible for outlier payments.
Using Table 33, we must calculate the case-mix adjusted predicted
SB MAP. (See section X.A.1.b)

SB MAP * PmtMult = $64.54 * 1.272 = $82.09

The fixed dollar loss amount for the predicted SB MAP is:
$82.09 + $174.31 = $256.40

Because Timmy's average SB MAP for services furnished was $270.83,
which exceeds the case-mix adjusted fixed dollar loss amount of
$256.40, Timmy's ESRD facility is eligible for outlier payments beyond
the otherwise applicable $250.56 ESRD PPS amount. The outlier payments
are computed as follows:
Amount in excess of fixed dollar loss amount

($270.83--$256.40) = $14.43
Loss sharing ratio 80%

Outlier payments per treatment

($14.43 * .80) = $11.54 $11.54

Outlier payments
($11.54 * 12) = $138.48 $138.48

The total ESRD payments to this facility on behalf of Timmy for
January would be:
Regular ESRD payments

($250.56 * 12) = $3006.72 $3006.72

Outlier payments 138.48
Total payments $3145.20

XII. ESRD Bundled Market Basket

Under section 1881(b)(14)(F)(i) of the Act, as added by section
153(b) of MIPPA, beginning in 2012, the ESRD bundled payment amounts
are required to be annually increased by an ESRD market basket increase
factor minus 1.0 percentage point. The statute further provides that
the market basket increase factor should reflect the changes over time
in the prices of an appropriate mix of goods and services used to
furnish renal dialysis services. As noted in section VII.B of this
proposed rule, under section 1881(b)(14)(F)(ii) of the Act, the ESRD
bundled rate market basket will also be used to update the composite
rate portion of ESRD payments during the PPS phase-in period from 2011
through 2013.
As required under section 1881(b)(14) of the Act, effective for CY
2012, CMS has developed an all inclusive ESRD bundled rate (ESRDB)
input price index. Although ``market basket'' technically describes the
mix of goods and services used to produce ESRD care, this term is also
commonly used to denote the input price index (that is, cost
categories, their respective weights, and price proxies combined)
derived from that market basket. Accordingly, the term ``ESRDB market
basket'' as used in this document refers to the ESRDB input price
index.
A market basket has historically been used under the Medicare
program to account for the price increases of the requisite inputs
associated with the services furnished by providers. The percentage
change in the ESRDB market basket reflects the average change in the
price of goods and services purchased by ESRD facilities in providing
renal dialysis services. Since we are proposing a single payment rate
for both operating and capital-related costs, the proposed ESRDB market
basket for ESRD facilities includes both operating and capital-related
costs.
The following discussion includes an explanation of the methodology
and results of the proposed ESRDB market basket. First, we describe the
methodology behind the development of the proposed cost category
weights. Next, we explain the basis for the selection of each price
measure used to proxy the rate of price change for each expenditure or
cost category. Next, we present the results of the proposed ESRDB
market basket, and finally we propose our definition of the ESRDB
labor-related share.
The ESRDB market basket is constructed in three steps. First, a
base period is selected and total base period expenditures are
estimated for a set of mutually exclusive and exhaustive spending
categories. Then, the proportion of total costs that each category
represents is determined. These proportions are called cost or
expenditure weights. Each expenditure weight category is then matched
to an appropriate price or wage variable, referred to as a price proxy.
These price proxies are price index levels derived from publicly
available statistical series that are published on a consistent
schedule, preferably at least on a quarterly basis. Finally, the
expenditure weight for each category is multiplied by the index level
of the respective price proxy to arrive at a weighted index level for
each cost category. The sum of the products (that is, the expenditure
weights multiplied by the price levels) for all cost categories yields
the aggregate index level of the market basket in a given year.
Repeating this step for different time periods produces a series of
market basket index levels over time. Dividing an index level in one
period by an index level in an earlier period produces a rate of growth
in the input price index over that time period.
We are proposing to use CY 2007 as the base year for the
development of the ESRDB market basket cost weights. The cost weights
for this proposed ESRDB market basket are based on the cost report data
for independent ESRD facilities.
We refer to the market basket as a CY market basket because the
base period for all price proxies and weights are set to CY 2007 = 100.
Source data included CY 2007 Medicare cost reports (Form CMS-265-94),
supplemented with 2002 data from the U.S. Department of Commerce,
Bureau of the Census' Business Expenditure Survey (BES). The BES data
were aged to 2007 using appropriate price proxies to estimate price
growth. The price proxies used for the aging of the BES data come from
publicly available price indexes such as various producer price indexes
(PPI), consumer price indexes (CPI), or employment cost indexes (ECI).
All of these price proxies are published by the U.S. Department of
Labor, Bureau of Labor Statistics (BLS). We are proposing to use CY
2007 because it is the most recent year that both relatively complete
Medicare cost report data and supplemental BES data is available.
Analysis of Medicare cost reports for CY 2002 through CY 2006 showed
little difference in cost weights compared to CY 2007. Medicare cost
reports from hospital-based ESRD providers were not used to construct
the proposed ESRDB market basket because data from independent ESRD
facilities tend to better reflect the actual cost structure faced by
the ESRD facility itself, and are not influenced by the allocation of
overhead over the entire institution, as can be the case with hospital-
based providers. This approach is consistent with our standard
methodology used in the development of other market baskets,
particularly those used for updating the skilled nursing facility PPS
and home health PPS.

Cost Category Weights

Using Worksheets A, A2, and B from the CY 2007 Medicare cost
reports, we first computed cost shares for nine major expenditure
categories: Wages and Salaries, Employee Benefits for direct patient
care, Pharmaceuticals, Supplies, Laboratory Services, Blood Products,
Administrative and General and Other (A&O), Housekeeping and
Operations, and Capital-Related costs. Edits were applied to include
only cost reports that had total costs greater than zero. In order to
reduce potential distortions from outliers in the calculation of the
cost weights for the major expenditure categories, cost values for each
category less than the 5th percentile or greater than the 95th
percentile were excluded from the

[[Page 49998]]

computations. The resulting data set included information from
approximately 3,572 independent ESRD facilities' cost reports from an
available pool of 3,970 cost reports. Expenditures for the nine cost
categories as a proportion of total expenditures are shown in Table 38.
[GRAPHIC] [TIFF OMITTED] TP29SE09.009

Some costs that are required to be included in the ESRD bundled
payment are not reported on the Medicare cost report. As a result, we
supplemented Medicare cost report data with expenditure estimates for
various ESRD-related drugs currently covered by Medicare Part D, as
well as with additional lab expenses. The estimates for both of the
aforementioned expenditures were provided by KECC. There are also costs
that are reported on the Medicare cost report, but are not included in
the ESRD bundled payment. As a result, we removed the expenses related
to vaccine costs from total expenditures since these are excluded from
the ESRD bundled payment, but reported on the Medicare cost report.
We are proposing to expand the expenditure categories developed
from the Medicare cost reports to allow for a more detailed expenditure
decomposition. To expand these cost categories, BES data were used as
the Medicare cost reports do not collect detailed information on the
items in question. Those categories include: benefits for all
employees, professional fees, telephone, utilities, and all other
services. We chose to separately break out these categories to more
accurately reflect changes in ESRD facility costs. We describe below
how the initially computed categories and weights were modified to
yield the final ESRDB market basket expenditure categories and weights
presented in this proposed rule.

Wages and Salaries

The weight for wages and salaries for direct patient care that was
initially computed was derived from Worksheet B of the Medicare cost
report. However, because Worksheet B only includes direct patient care
salaries, it was necessary to derive a methodology to include all
salaries, not just direct patient care salaries, in order to calculate
the appropriate market basket cost weight. This was accomplished in the
following steps.
(1) From the trial balance of the cost report (Worksheet A), we
computed the ratio of salaries to total costs in each cost center. The
cost centers for which we calculated this ratio were drugs,
housekeeping and operations, A&O, supplies, blood and blood products,
laboratories, capital-related machinery, and EPO.
(2) We then multiplied the ratios computed in step 1 by the total
costs for each corresponding cost center from Worksheet B. This
provided us with an estimate of non-direct patient care salaries for
each cost center.
(3) The estimated non-direct patient care salaries for each of the
cost centers on Worksheet B estimated in step 2 were subsequently
summed and added to the direct patient care salary figure (resulting in
a new total salaries figure).
(4) The estimated non-direct patient care salaries (see step 2)
were then subtracted from their respective cost categories to avoid
double-counting their values in the total costs.
As a result of this process, we moved from an estimated Wages and
Salaries cost weight of 20.965 percent (as estimated using only direct
patient care salaries as a percent of total costs found on the Medicare
cost report) to a weight of 25.106 percent (capturing both direct and
non-direct patient care salaries and, again, dividing that by total
costs found on the Medicare cost report), as seen in Table 38.
When we add the expenditures related to lab expenses that were
previously paid for under the Medicare fee schedule and not included in
the Medicare cost report and the ESRD-related drug expenditures
currently covered under Part D that were not included in the Medicare
cost report, and remove the estimated vaccine costs that are to be paid
outside of the bundle, then the cost weight for the Wages and Salaries
category falls to 22.798 percent.
The final adjustment made to this category is to include contract
labor costs. These costs appear on the Medicare cost report, however,
they are embedded in the Administrative and General and Other category
and cannot be disentangled using the Medicare cost reports alone. To
move the appropriate expenses from the A&O category to Wages and
Salaries, we used data from the BES. We first summed total contract
labor costs in the survey. We then took 80 percent of that figure and
added it to Wages and Salaries. At the same time, we subtracted that
same amount from A&O. The 80 percent figure that was used was
determined by taking salaries as a percentage of total compensation
(excluding contract labor). The resulting cost weight for Wages and
Salaries increases to 24.516 percent.

Benefits

The Benefits weight was derived from the 2002 BES data aged forward
to 2007 as a benefit share for all employees is not available from the
ESRD Medicare cost report. The cost report only reflects benefits for
direct patient care. In order to include the benefits related to non-

[[Page 49999]]

direct patient care, we estimated this marginal increase from the BES
Benefits weight. This resulted in a Benefits weight that was 0.672
percentage point larger (5.748 vs. 5.076) than the Benefits weight for
direct patient care calculated directly from the cost reports. To avoid
double-counting and to ensure all of the market basket weights still
totaled 100 percent, we removed this additional 0.672 percentage point
for Benefits from Pharmaceuticals, Biological Products, Administrative
and General and Other, Supplies, Laboratory Services, Housekeeping and
Operations, and the Capital-related Machinery components. This
calculation reapportions the benefits expense for each of these
categories using a method similar to the method used for distributing
non-direct patient care salaries as described above.
The final adjustment made to this category is to include contract
labor costs. Once again, these costs appear on the Medicare cost
report, however, they are embedded in the Administrative and General
and Other category and cannot be disentangled using the Medicare cost
report alone. To move the appropriate expenses from the A&O category to
Benefits, we followed the same methodology used to apportion contract
labor wages and salaries noted immediately above. For Benefits, we
applied the remaining 20 percent of total contract labor costs, as
estimated using the BES, and included that in the Benefits cost weight.
At the same time, we subtracted that same amount from A&O. The 20
percent figure that was used was determined by summing direct patient
care benefits (as estimated using the Medicare cost report) and non-
direct patient care benefits (as estimated using the BES) and taking
that sum as a percentage of total compensation (excluding contract
labor). The resulting cost weight for Benefits increases to 6.177
percent.

Utilities

We developed a weight for Utility expenses using the 2002 BES data,
as utilities are not separately identified on the Medicare cost report.
We aged the 2002 utility expenditures to 2007. We then disaggregated
the Utilities category to reflect three subcategories: Electricity,
Fuel (natural gas), and Water and Sewerage. We computed the ratio of
each BES category to the total BES operating expenses. We then applied
each ratio to the total operating expense percentage share as
calculated from the cost reports, including the additions of ESRD-
related drugs currently covered under Part D and additional lab
expenses, to estimate the ESRD facility weight for each utility
expenditure category. These amounts were then deducted from the share
of the combined Operation & Maintenance of Plant and Housekeeping cost
category, where the expenses are included on the Medicare cost report
(but cannot be separately identified). The resulting Electricity, Fuel
(Natural Gas), and Water and Sewerage ESRDB market basket weights are
0.586, 0.111, and 0.483 percent, respectively, yielding a combined
Utilities cost weight of 1.180 percent.

Pharmaceuticals

The proposed ESRDB market basket includes expenditures for all
drugs, including separately billable drugs and ESRD-related drugs
currently covered under Medicare Part D. We were able to calculate an
expenditure weight for pharmaceuticals directly from the Drugs cost
center on Worksheet B plus the expenditures of EPO which are reported
on worksheet A2 of the Medicare cost reports. Vaccine expenditures,
which are mandated as separately reimbursable, were excluded when
calculating this cost weight. Section 1842(o)(1)(A)(iv) of the Act
requires that influenza, pneumococcal, and hepatitis B vaccines
described in subparagraph (A) or (B) of section 1861(s)(10) of the Act
be paid based on 95 percent of average wholesale price (AWP) of the
drug. Since these drugs are excluded from other prospective payment
systems, we exclude them from the proposed ESRDB market basket, as
well. We estimate that expenditures for these three vaccines are
approximately 1 percent of the total Medicare-allowable payments for
separately billable drugs. 2007 expenditures for ESRD-related drugs
currently covered under Part D were added to cost report totals.
Finally, to avoid double-counting, the weight for the
Pharmaceuticals category was reduced to exclude the estimated share of
non-direct patient care salaries and benefits associated with the Drugs
and Epoetin cost centers. This resulted in a proposed ESRDB market
basket weight for Pharmaceuticals of 30.743 percent. EPO expenditures
accounted for 19.351 percentage points of the Pharmaceuticals weight,
ESRD-related drugs currently covered under Part D accounted for 4.681
percentage points of the Pharmaceuticals weight, and all other drugs
accounted for the remaining 6.710 percentage points of the
Pharmaceuticals weight.

Blood Products

We calculated the weight for Blood Products in the ESRDB market
basket using the separately billable expenditure amounts for the Whole
Blood and Packed Red Blood Cells cost center on Worksheet A of the
Medicare cost report. We then added the expenditures for A&O for Whole
Blood and Packed Red Blood Cells from Worksheet B to the net expenses
from worksheet A to arrive at a total expenditure amount for Blood
Products. This total was divided by total expenses to derive a weight
for the Blood Products component in the bundled rate market basket.
Similar to other expenditure category adjustments, we reduced the
computed weight to exclude non-direct patient care salaries and
benefits associated with the Blood cost centers. The proposed adjusted
Blood Products market basket weight is 0.035 percent.

Supplies

We calculated the weight for Supplies included in the bundled rate
using the reimbursable and separately billable expenditure amounts for
the Supplies cost center on Worksheet B of the Medicare cost report.
Supplies that are separately billable are reported as a separate line
item on the cost reports and were also included. This total was divided
by total expenses to derive a weight for the Supplies component in the
ESRDB market basket. The computed weight for this category was reduced
by the non-direct patient care salaries and benefits associated with
the Supplies cost center. The resulting proposed market basket weight
for Supplies is 8.543 percent.

Laboratory Services

We calculated the weight for Laboratory Services included in the
bundled rate using the reimbursable and separately billable expenditure
amounts for the Laboratory cost center on Worksheet B of the Medicare
cost report. The cost report expenditures do not include laboratory
services paid for under the Medicare fee schedule, only facility-
furnished laboratory tests. Since a large majority of laboratory tests
are paid via the fee schedule, we adjusted the laboratory fees upward.
The inflation factor was computed from the ratio of ESRD facility
Medicare laboratory payment data to the other facility Medicare
laboratory payment data. This provides a measure of the extent to which
laboratory services fall under the Medicare fee schedule. For 2007, we
increased the laboratory expenditures by a factor of 16.298, as
estimated by KECC. The weight for this category was similarly reduced
by the non-direct patient care salaries and benefits associated with
the Laboratory cost center. The resulting proposed

[[Page 50000]]

market basket weight for Laboratory Services is 4.875 percent.

Housekeeping and Operations

We developed a market basket weight for this category using data
from Worksheet A of the Medicare cost reports. Worksheet B combines the
capital-related costs for buildings and fixtures with the Operation and
Maintenance of Plant (Operations) and Housekeeping cost centers, so we
were unable to calculate a weight directly from Worksheet B. We
separated these expenses from capital-related costs because we believe
housekeeping and operations expenditures, such as janitorial and
building services costs, are largely service-related and would be more
appropriately proxied by a service-related price index. To avoid
double-counting, we subtracted from the Housekeeping and Operations
weight the utilities proportion described above, as well as the non-
direct patient care salaries and benefits share associated with the
Operations and Housekeeping cost center. The resulting proposed market
basket weight for Housekeeping and Operations is 1.766 percent.

Administrative and General and Other (A&O)

We computed the proportion of total A&O expenditures using the A&O
cost center data from Worksheet B of the Medicare cost reports minus
the A&O expenditures related to the Blood Products category. As
described above, we exclude contract labor from this cost category and
apportion these costs to the salary and benefits cost weights. Similar
to other expenditure category adjustments, we then reduced the computed
weight to exclude salaries and benefits associated with the A&O cost
center. The resulting A&O cost weight is 13.617 percent. This A&O cost
weight is then fully apportioned to derive detailed cost weights for
Professional Fees, Telephone, All Other Labor-related Services, and All
Other Nonlabor-related Services.

Professional Fees

A separate weight for Professional Fees was developed using the
2002 BES data aged to 2007. Professional fees include fees associated
with the following: Advertising, accounting, bookkeeping, legal,
management, consulting, administrative, and other professional services
fees. To estimate professional fees, we first calculated the ratio of
BES professional fees to a total of administrative and other expenses
from BES. We applied this ratio to the A&O total cost weight to
estimate the proportion of ESRD facility professional fees. The
resulting weight is 1.692 percent. This proposed cost weight is then
separated into Labor-related Professional Fees (1.478 percent) and
Nonlabor-related Professional Fees (0.214 percent), which is described
in more detail below.

Telephone

Because telephone service expenses are not separately identified on
the Medicare cost report, we developed a Telephone Services weight
using the 2002 BES expenses aged to 2007. We estimated a ratio of
telephone services expenses to total administrative and other expenses
from BES. We applied this ratio to the total A&O cost weight to
estimate the proportion of ESRD facility telephone expenses. The
resulting proposed market basket cost weight for Telephone Services is
0.590 percent.

All Other Labor-related Services

A separate weight for All Other Labor-related Services was
developed using the 2002 BES data aged to 2007. All other labor-related
services include repair and maintenance fees. We estimated a ratio of
all other labor-related services expenses to total administrative and
other expenses from BES. We applied this ratio to the total A&O cost
weight to estimate the cost weight for ESRD facility All Other Labor-
related Services. The resulting proposed market basket cost weight is
1.163 percent.

All Other Nonlabor-related Services

A separate weight for All Other Nonlabor-related Services was
developed using the 2002 BES data aged to 2007. Non labor-related
services include insurance, transportation, shipping, warehousing,
printing, data processing services, and all other operating expenses
not otherwise classified. We estimated a ratio of all other nonlabor-
related services expenses to total administrative and other expenses
from BES. We applied this ratio to the total A&O cost weight to
estimate the cost weight for ESRD facility All Other Nonlabor-related
Services. The resulting proposed market basket cost weight is 10.172
percent.

Capital

We developed a market basket weight for the Capital category using
data from Worksheet B of the Medicare cost reports. Capital-related
costs include depreciation and lease expense for buildings, fixtures,
movable equipment, property taxes, insurance, the costs of capital
improvements, and maintenance expense for buildings, fixtures, and
machinery. Because housekeeping and operations costs are included in
the Worksheet B cost center for Buildings and Fixtures capital-related
expense, we excluded these costs and developed a separate expenditure
category as noted above. Similar to the methodology used for other
market basket cost categories with a salaries component, we computed a
share for non-direct patient care salaries and benefits associated with
the Capital-related Machinery cost center. We used Worksheet B to
develop two capital-related cost categories, one for Buildings and
Fixtures, and one for Machinery. We reasoned this was particularly
important given the critical role played by dialysis machines.
Likewise, because price changes associated with Buildings and Fixtures
could move differently than those associated with Machinery, we felt
that separate price proxies would be more appropriate to track price
changes for the different capital-related categories over time. The
resulting proposed market basket weights for Capital-related Buildings
and Equipment and Capital-related Machinery are 6.653 and 1.894
percent, respectively.
Table 39 lists all of the expenditure categories in the ESRDB
market basket and their corresponding CY 2007 cost weights and proxies,
as developed in accordance with the methodology described above.

[[Page 50001]]

Table 39--ESRDB Market Basket Cost Categories, Price Proxies, and Cost
Weights
------------------------------------------------------------------------
Cost Price/wage ESRDB
------------------------------------------------------------ market
basket
------------
CY 2007
Category Variable weights
------------
(Percent)
------------------------------------------------------------------------
Total Compensation................. ...................... 30.693
Wages and Salaries................. ECI--Health Care and 24.516
Social Assistance
(Civilian).
Employee Benefits.................. ECI--Benefits Health 6.177
Care and Social
Assistance (Civilian).
Utilities.......................... ...................... 1.180
Electricity........................ PPI--Commercial 0.586
Electric Power.
Natural Gas........................ PPI--Commercial 0.111
Natural Gas.
Water and Sewerage................. CPI--Water & Sewerage. 0.483
All Other Materials................ ...................... 44.196
Pharmaceuticals.................... PPI--Prescription 30.743
Drugs.
Blood Products..................... PPI--Blood and Organ 0.035
Banks.
Supplies........................... PPI- Medical, 8.543
surgical, and
personal aid devices.
Laboratories....................... PPI--Medical 4.875
Laboratories.
All Other Services................. ...................... 15.383
Telephone.......................... CPI--Telephone 0.590
Services.
Housekeeping and Operations........ PPI--Building, 1.766
cleaning, and
maintenance.
Labor-Related...................... ...................... 2.641
Professional fees Labor-Related.... ECI--Compensation 1.478
Professional and
Related (Priv.).
All Other Labor-Related Services... ECI--Compensation 1.163
Service Occupations
(Priv.).
Nonlabor-Related................... ...................... 10.386
Professional fees Nonlabor-Related. ECI--Compensation 0.214
Professional and
Related (Priv.).
All Other Nonlabor-Related Services CPI--All items less 10.172
food and energy.
Capital Costs...................... ...................... 8.547
Capital Related-Building and CPI--Residential Rent. 6.653
Equipment.
Capital Related-Machinery.......... PPI-Electrical 1.894
Machinery and
Equipment.
------------------------------------------------------------------------

Price Proxies

Once we determined the proposed CY 2007 ESRDB market basket
expenditure categories and weights, appropriate wage and price series
or proxies were selected to measure the rate of price change for each
category. All of the proxies are based on BLS data, and are grouped
into one of the following three BLS categories:
PPIs--PPIs measure changes in the prices producers receive for
their outputs. PPIs are the preferable price proxies for goods and
services that ESRD facilities purchase as inputs in producing dialysis
services, since these facilities generally make purchases in the
wholesale market. The PPIs that we use measure price change at the
final stage of production.
CPIs--CPIs measure changes in the prices of final goods and
services purchased by the typical consumer. Because these indexes may
not reflect the prices faced by a producer, we used CPIs only if an
appropriate PPI was not available, or if the expenditure more closely
resembled a retail rather than wholesale purchase. For example, we used
the CPI for telephone services as a proxy for the Telephone cost
category because there is no corresponding PPI, and we reasoned that
commercial and residential rates change similarly.
ECIs--ECIs measure the rate of change in employee wage rates and
employer costs for employee benefits per hour worked. They are fixed-
weight indexes that strictly measure changes in wages and benefits per
hour, and are not affected by shifts in employment mix.
We evaluated the price proxies using the criteria of reliability,
timeliness, availability, and relevance. Reliability indicates that the
index is based on valid statistical methods and has low sampling
variability. Timeliness implies that the proxy is published regularly,
preferably at least once a quarter. Availability means that the proxy
is publicly available. Finally, relevance means that the proxy is
applicable and representative of the cost category weight to which it
is applied. The CPIs, PPIs, and ECIs we propose to use meet these
criteria.

Wages and Salaries

We propose to use the ECI (Wages and Salaries) for Health Care and
Social Assistance Workers (Civilian) as the measure of price growth for
Wages and Salaries in the ESRDB market basket. We feel that this price
proxy most closely reflects both the types of occupations employed by
ESRD facilities, and the competitive nature of the dialysis and health
services labor markets.

Benefits

We propose to use the ECI for Employee Benefits for Health Care and
Social Assistance Workers (Civilian) as the measure of price growth for
Benefits in the ESRDB market basket. We selected this price proxy
because it most accurately represents the labor conditions associated
with ESRD facilities' employee benefit costs, similar to our finding
for wages and salaries.

Professional Fees

We propose to use the ECI (Compensation) for Professional and
Related Occupations (Private) as the proxy for professional fees. We
selected this price proxy because it includes occupations such as
lawyers, accountants, and bookkeepers that are represented in this cost
category.

Utilities

We propose to use the PPI for Commercial Electric Power and the PPI
for Commercial Natural Gas as the proxies for the Electricity and
Natural Gas cost categories, respectively. We propose to use the CPI
for Water and sewerage as the price proxy for the water and sewerage
cost category.

[[Page 50002]]

Capital-Related--Building and Equipment

We propose to use the CPI for Residential Rent as the price proxy
for the Capital-related Building and Equipment cost category. As
described earlier, this cost category includes building and fixtures,
leased buildings, fixed equipment, and moveable equipment. Because
machine equipment, particularly dialysis machines, is reflected in a
separate cost category, the bulk of the expenditures captured here are
for building and fixed equipment. Thus, we would prefer to have a proxy
that captures the price change associated with this type of capital
expense. While there can sometimes be differences in the price levels
for residential and commercial rent, we believe the CPI for Residential
Rent approximates the change in the underlying costs associated with
ESRD facilities' capital costs such as depreciation, interest, taxes,
and other capital costs. Given the lack of an ESRD-specific proxy for
capital costs, we believe that the CPI for Residential Rent represents
an adequate proxy for the changes in capital costs facing ESRD
facilities.

Capital-Related--Machinery

We propose to use the PPI for Electrical Machinery and Equipment as
the price proxy for the Capital-related Machinery cost category. This
PPI includes dialysis machines, which are a significant component of
machine equipment costs reported by ESRD facilities. Therefore, we
believe that this price proxy is the best measure of the price growth
of this cost category.

Pharmaceuticals

ESRD facilities use a variety of drugs during dialysis treatment
including EPO which is currently a separately billable drug and
accounts for the majority of ESRD facility drug expenses. We pay for
erythropoietic agents to treat chronic anemia in ESRD patients. At
present, Epogen[ssscopy] and Aranesp[ssscopy] (both manufactured by a
single supplier) are two of the prevailing erythropoietic drugs
available to treat anemia in ESRD patients. Medicare is the dominant
purchaser of EPO since it is mainly used to treat kidney dialysis
patients.
For the proposed ESRDB market basket, we propose to use the PPI for
Prescription Drugs as the price proxy for the Pharmaceuticals category.
We propose the use of this proxy for a variety of reasons. First, all
of the market baskets that we produce include price proxies that are
intended to reflect the efficient average price increase associated
with the purchase of the particular input category. Accordingly, we
have chosen to proxy the Pharmaceuticals cost category in the proposed
ESRD market basket, which includes the mix of all prescription drugs
purchased by dialysis facilities, by the PPI for Prescription Drugs
because it reflects price changes associated with the average mix of
all pharmaceuticals in the overall economy. Second, we anticipate the
price changes associated with the assortment of drugs administered in
ESRD facilities should, over time, be similar to the average
prescription drug price changes observed across the entire economy.
Finally, this price series was chosen as it is both publicly available
and regularly published.

Blood Products

We propose to use the industry PPI for Blood and Organ Banks as the
price proxy for this cost category. This is the price proxy that we
recently proposed to use in the 2006-based inpatient hospital market
basket (74 FR 24157).

Supplies

We propose to use the commodity-based PPI for Medical, Surgical,
and Personal Aid Devices as a proxy for changes in ESRD supply prices.
Many of the supplies used in dialysis are included in this PPI, such as
dialyzers, catheters, I.V. equipment, syringes, and other general
medical supplies used in dialysis treatment.

Laboratory Services

We propose to use the PPI for Medical Laboratories as the price
proxy for the ESRD Laboratory Services cost category. Most of the
laboratory tests used in dialysis are blood chemistry tests (a covered
component of the medical labs PPI). Additionally, some ESRD facilities
are using diagnostic imaging services to monitor patient site access,
and the points where waste exchange takes place (also a covered
component of the medical labs PPI).

Telephone

We propose to use the CPI for Telephone Services as the price proxy
for the Telephone cost category. This index is used as the price proxy
for Telephone Services in other market baskets produced by CMS.

Housekeeping and Operations

We propose to use the PPI for Building Cleaning and Maintenance
Services as the price proxy for the Housekeeping and Operations cost
category. This PPI includes housekeeping, janitorial, and maintenance
(excluding repairs) services, and is representative of the types of
costs included in this cost category.

All Other Labor-Related Services

We propose to use the ECI (compensation) for Service Occupations
(Private) as the price proxy for the All Other Labor-related Services
cost category. This category includes expenses related to repair
services. We feel that the service occupations most accurately reflect
the costs for these types of repair and maintenance services purchased
by ESRD facilities.

All Other Nonlabor-Related Services

We propose to use the CPI for All Items Less Food and Energy as the
price proxy for the All Other Nonlabor-related Services cost category.
This category includes costs such as data processing, purchasing,
taxes, home office costs, and malpractice costs. The costs represented
in this category are diverse and are primarily associated with the
purchase of services. These costs are best represented by a general
measure of inflation such as the CPI for All Items Less Food and
Energy. Food and energy are excluded from the index to remove the
volatility associated with those items. Additionally, energy prices are
already captured in the utility price proxies.

ESRDB Market Basket Increases

The proposed ESRDB market basket reflects the combination of
weights and proxies discussed above. Table 40 contains the forecasted
rate of growth for CY 2009 through CY 2019 for the ESRDB market basket.
Over this time period, the ESRDB market basket average increase is
projected to be 2.7 percent.

Table 40--Forecast of the 2007-Based ESRD Bundled Rate Market Basket
Percent Change, 2009 Through 2019
------------------------------------------------------------------------
Cy beginning January 1st ESRDB
------------------------------------------------------------------------
CY2009..................................................... 3.4
CY2010..................................................... 2.3
CY2011..................................................... 2.5
CY2012..................................................... 2.6
CY2013..................................................... 2.6
CY2014..................................................... 2.7
CY2015..................................................... 2.7
CY2016..................................................... 2.7
CY2017..................................................... 2.7
CY2018..................................................... 2.7
CY2019..................................................... 2.7
------------------------------------------------------------------------
Note: These percent changes do not reflect the -1 percentage point
update in the market basket as mandated by MIPPA.

[[Page 50003]]

Source: 2009 2nd Quarter Forecast from IHS Global Insight.

ESRD Labor-Related Share

The labor-related share of a market basket is determined by
identifying the national average proportion of operating costs that are
related to, influenced by, or vary with the local labor market. The
labor-related share is typically the sum of Wages and Salaries,
Benefits, Professional Fees, Labor-related Services, and a portion of
the Capital share from a given market basket.
We used the 2007-based ESRDB market basket costs to determine the
proposed labor-related share for ESRD facilities under a bundled
system. Under the proposed ESRDB market basket, the labor-related share
for ESRD facilities is 38.160 percent; as shown in Table 41 below.
These figures represent the sum of Wages and Salaries, Benefits,
Housekeeping and Operations, All Other Labor-related Services, 87
percent of the weight for Professional Fees (details discussed below),
and 46 percent of the weight for Capital-related Building and Equipment
expenses (details discussed below).

Table 41--ESRDB Market Baskets Labor-Related
------------------------------------------------------------------------
2007-based
ESRDB labor-
Share cost category related
share
(percent)
------------------------------------------------------------------------
Wages...................................................... 24.516
Benefits................................................... 6.177
Housekeeping and operations................................ 1.766
All other labor-related services........................... 1.163
Professional fees labor-related............................ 1.478
Capital labor-related...................................... 3.060
------------
Total.................................................... 38.160
------------------------------------------------------------------------

The labor-related share for Professional Fees (87 percent) reflects
the proportion of ESRD facilities' professional fees expenses that we
believe varies with local labor market. We recently conducted a survey
of ESRD facilities to better understand the proportion of contracted
professional services that ESRD facilities typically purchase outside
of their local labor market. These purchased professional services
include functions such as accounting and auditing, management
consulting, engineering, and legal services. Based on the survey
results, we determined that, on average, 87 percent of professional
services are purchased from local firms and 13 percent are purchased
from businesses located outside of the ESRD's local labor market. Thus,
we are proposing to include 87 percent of the cost weight for
Professional Fees in the labor-related share.
The labor-related share for capital-related expenses (46 percent of
ESRD facilities' adjusted Capital-related Building and Equipment
expenses) reflects the proportion of ESRD facilities' capital-related
expenses that we believe varies with local labor market wages. Capital-
related expenses are affected in some proportion by variations in local
labor market costs (such as construction worker wages) that are
reflected in the price of the capital asset. However, many other inputs
that determine capital costs are not related to local labor market
costs, such as interest rates. The 46-percent figure is based on
regressions run for the inpatient hospital capital PPS in 1991 (56 FR
43375). We use a similar methodology to calculate capital-related
expenses for the labor-related shares for rehabilitation facilities (70
FR 30233), psychiatric facilities, long-term care facilities, and
skilled nursing facilities (66 FR 39585).

XIII. Proposed Implementation for the ESRD PPS

A. Transition Period

Section 1881(b)(14) of the Act replaces the current basic case-mix
adjusted composite payment system with a case-mix adjusted bundled
prospective payment system, or the ESRD PPS, for Medicare outpatient
ESRD facilities beginning January 1, 2011. Section 1881(b)(14)(E)(i) of
the Act requires the Secretary to provide ``a four-year phase-in'' of
the payments under the ESRD PPS for renal dialysis services furnished
on or after January 1, 2011. Although the statute uses the term
``phase-in'', other Medicare payment systems use the term
``transition'' to describe the timeframe during which payments are
based on a blend of the payment rates under the prior payment system
and the new payment system. For purposes of this ESRD PPS proposed
rule, we will use the term ``transition'' to describe this timeframe.
Section 1881(b)(14)(E)(i) of the Act further requires that the
transition occur ``in equal increments,'' with payments under the ESRD
PPS ``fully implemented for renal dialysis services furnished on or
after January 1, 2014.'' In addition, section 1881(b)(14)(E)(ii) of the
Act permits an ESRD facility to make a one-time election to be excluded
from the transition from the current basic case-mix adjusted composite
payment system, with its payment amount for renal dialysis services
based entirely on the payment amount under the ESRD PPS. This election
must be made prior to January 1, 2011. In addition, section
1881(b)(14)(E)(iii) of the Act requires that we make an adjustment
during the transition so that payments during the transition equal the
estimated total amount of payments that would otherwise occur under the
ESRD PPS without such a transition. The transition budget-neutrality
adjustment is discussed further in section VII.E.
In accordance with section 1881(b)(14)(E) of the Act, we propose to
implement the transition from the current basic case-mix adjusted
composite payment system in equal increments, with renal dialysis
services and home dialysis furnished on or after January 1, 2014, paid
entirely based on the payment amount under the ESRD PPS. Specifically,
we propose that for renal dialysis services and home dialysis services
provided during the transition period beginning January 1, 2011 and
ending December 31, 2013, ESRD facilities receive a blended payment for
each dialysis treatment consisting of the payment amount under the
basic-case mix adjusted composite system and the payment amount under
the ESRD PPS. Therefore, because ESRD facilities would receive an all-
inclusive payment during the transition for all renal dialysis services
and home dialysis items and services, other entities, such as Method II
DME suppliers, laboratories, and Part D plans would no longer bill
Medicare beginning January 1, 2011. To the extent these entities
furnish items or services to ESRD patients, the entities would need to
seek payments from the patient's ESRD facility. Further discussion on
Method II DME suppliers, laboratories, and Part D plans can be found
below.
For CY 2011, we are proposing to make payments based on 75 percent
of the payment rate under the basic case-mix adjusted composite payment
system and 25 percent of the payment rate under the ESRD PPS. For CY
2012 we are proposing to make payment based on 50 percent of the
payment rate under the basic case-mix adjusted composite payment system
and 50 percent of the payment rate under the ESRD PPS. For CY 2013 we
are proposing to make payment based on 25 percent of the payment rate
under the basic case-mix adjusted composite payment system and 75
percent of the payment rate under the ESRD PPS. For renal dialysis
services furnished on or after January 1, 2014, we propose that payment
to ESRD facilities be based on 100 percent of the payment amount under
the ESRD PPS.
In particular, we propose that the portion of the blended rate
based on the

[[Page 50004]]

payment amount with regard to the basic case-mix adjusted composite
payment system would be comprised of the composite payment rate (which
is adjusted by the basic case-mix and a wage index), the drug add-on
amount, and payment amounts for items and services furnished to
dialysis patients that are currently separately paid under Part B by
Medicare to entities other than the ESRD facility. In addition to the
above components of the basic case-mix adjusted payment system, as part
of the transitional budget neutrality adjustment (describe in section
VII.E.), we are also proposing to include a 14 dollar adjustment to the
portion of the blended rate related to the basic case-mix adjusted
payment system during the transition. The 14 dollar adjustment to the
portion of the blended payment amount related to the basic case-mix
adjusted payment system accounts for the ESRD related drugs and
biological that are currently separately paid under Part D and are
being proposed to be included in the ESRD PPS base rate.
For the years during which the phase-in (transition) is applicable,
section 1881(b)(14)(F)(ii) of the Act requires the Secretary to
annually increase the portion of the proposed ESRD PPS that is based on
the composite rate that would otherwise apply if the ESRD PPS had not
been enacted. In particular, section 1881(b)(14)(F)(ii)(II) of the Act
requires the composite rate portion of the blended payment to be
updated annually by the ESRDB market basket minus 1.0 percentage point.
Our interpretation of section 1881(b)(14)(F)(ii) of the Act is that the
ESRDB market basket minus 1.0 percentage point would be applied only to
the composite payment rate portion of the blended payment amount for
each year of the transition (which includes CY 2011). A full
description of the ESRDB market basket is presented in section XII.
Therefore, for each year of the transition, we are proposing that
the composite payment rate portion of the blended amount would be
updated by a case-mix adjustment, the drug add-on adjustment, the
current wage index, the ESRDB market basket minus 1.0 percentage point,
and an adjustment to account for former ESRD-related Part D drugs to
maintain transitional budget neutrality. Payments for items and
services furnished to dialysis patients that are paid separately under
Part B with regard to the current composite payment rate methodology,
that is, ESRD-related laboratory tests, ESRD-related drugs, and ESRD-
related supplies, blood, and blood products would no longer be paid
separately. Instead, those items and services would be priced to
reflect how they are currently paid, for example, using a fee schedule
or ASP amount.
We note that there are ESRD facilities that have existing exception
amounts that are used for payment in lieu of the composite rate, drug
add-on payment, and basic case-mix adjustments (further discussion of
exceptions under the basic case-mix adjustment composite payment system
can be found in section I.B.3). Any existing exception amount would not
be updated by the ESRDB market basket throughout the transition.
The portion of the blended rate based on the payment amount under
the ESRD PPS includes the base rate and all applicable patient-level
and facility-level adjustments, as would be determined under proposed
Sec. 413.231 and Sec. 413.235. As set forth in proposed Sec.
413.237, we propose that the ESRD PPS portion of the blended rate would
also include outlier payments.
As specified in proposed Sec. 413.178, bad debt is paid separately
from the ESRD PPS and any payment for bad debt would occur at the time
a FI/MAC reviews an ESRD facility's cost report and makes a final
determination on if there are any overpayments/underpayments due to the
ESRD facility/Medicare. For more information regarding bad debt
payments see section XIV.D.
As previously noted, section 1881(b)(14)(E)(ii) of the Act gives an
ESRD facility the option to make a one-time election to be excluded
from the four-year transition from the current basic case-mix adjusted
composite payment system in the form and manner specified by the
Secretary. Once made, this election may not be rescinded. ESRD
facilities may choose to be paid the blended rate under the transition
period in order to give them time to determine the impact of the ESRD
PPS on their operations and to adjust their operations accordingly. We
believe ESRD facilities will choose to be excluded from the transition
if they conclude that they would benefit financially from the payment
amount under the ESRD PPS.
Section 1881(b)(14)(E)(ii) of the Act requires that ESRD facilities
wishing to be excluded from the transition make their election prior to
January 1, 2011, in the form and manner specified by the Secretary. We
are proposing that ESRD facilities notify CMS of their election choice
in a manner established by their respective FI/MAC no later than
November 1, 2010 regardless of any postmarks or anticipated delivery
dates. A timeframe of 60 days before implementation is consistent with
the timeframe that a FI/MAC is given to incorporate any updates to
rates. We are also proposing that those ESRD facilities that become
certified for Medicare participation and begin to provide renal
dialysis services between November 1, 2010 and December 31, 2010 would
notify their FI/MAC of their election choice at the time of enrollment.
Once an ESRD facility notifies their respective FI/MAC of their
election choice, on or before November 1, 2010 (or at the time of
enrollment for newly certified ESRD facilities that begin to provide
renal dialysis services between November 1, 2010 and December 31,
2010), the ESRD facility's election cannot be rescinded. We note that
section 1881(b)(14)(E)(ii) of the Act provides that all ESRD facilities
wishing to be excluded from the transition must make an election to be
excluded from the transition. We therefore are further proposing that
those ESRD facilities that fail to affirmatively make an election by
November 1, 2010, would be paid based on the blended amount under the
transition. Elections submitted by ESRD facilities that wish to be
excluded from the transition that are received, postmarked, or
delivered by other means after November 1, 2010 would not be accepted.
All ESRD facilities wishing to be excluded from the transition should
submit their election choice by the proposed deadline if they wish to
be excluded from the transition and paid entirely based on the payment
amount under the ESRD PPS for renal dialysis services furnished on or
after January 1, 2011. Instruction as to how the FIs/MACs would
implement the proposed ESRD PPS would be provided in future guidance.
If the FIs/MACs express concern about the November 1, 2010 date, we
would revisit the deadline in the ESRD PPS final rule. The proposed
transition period policy is set forth in proposed Sec. 413.239.
We are requesting public comment regarding our proposed blended
payment rates and our proposed process for making the election to be
excluded from the transition period.
1. New ESRD Facilities
Although the first sentence of section 1881(b)(14)(E)(i) of the Act
permits ``a provider of services or renal dialysis facility'' to make a
one-time election to be excluded from the transition, the second
sentence provides that this election must be made prior to January 1,
2011. Reading these two sentences together, we believe that only ESRD
facilities providing renal dialysis services to Medicare beneficiaries
before January 1, 2011, should have the option to choose whether to be
paid under the

[[Page 50005]]

transition or under the ESRD PPS. We further note that the transition
period provided for under section 1881(b)(14)(E)(i) of the Act is
intended to provide existing ESRD facilities time to adjust from
payments based on the current basic case-mix adjusted composite payment
methodology to bundled payments under the ESRD PPS. New ESRD facilities
that begin providing renal dialysis services and home dialysis to
Medicare beneficiaries on or after January 1, 2011, would not have
received payment under the current basic case-mix adjusted composite
payment system; therefore, we do not believe new ESRD facilities
require a transition period in order to make adjustments to their
operating procedures. Accordingly, we propose that ESRD facilities that
are certified for Medicare participation and begin providing renal
dialysis services and home dialysis on or after January 1, 2011, not
have the option to choose whether to be paid a blended rate under the
transition or the payment amount under the ESRD PPS. Rather, we propose
that new ESRD facilities be paid based on 100 percent of the payment
amount under the ESRD PPS.
As set forth in Sec. 413.171 of this proposed rule, we are
proposing to define a new ESRD facility as an ESRD facility that is
certified for Medicare participation on or after January 1, 2011.
2. Limitation on Beneficiary Charges Under the Proposed ESRD PPS and
Beneficiary Deductible and Coinsurance Obligations
Section 1833 of the Act governs payments of benefits for Part B
services and the cost sharing amounts for services that are considered
medical and other health services. In general, many Part B services are
subject to a payment structure that requires beneficiaries to be
responsible for a 20 percent coinsurance after the deductible (and
Medicare pays 80 percent). With respect to dialysis services furnished
by ESRD facilities to individuals with ESRD, under section
1881(b)(2)(a) of the Act, payment amounts are 80 percent (and 20
percent by the individual).
In this rule, we have proposed the items and services that would be
considered renal dialysis services included in the ESRD PPS payment
such as the composite rate related services, certain separately
billable drugs, former Part D drugs used in the treatment of ESRD,
laboratory testing, etc. We understand that certain items and services
such as laboratory tests and Part D drugs have different beneficiary
coinsurance structures. However, these items and services would be
considered renal dialysis services after the ESRD PPS is implemented
when furnished by an ESRD dialysis facility to an ESRD beneficiary.
Therefore, a 20 percent beneficiary coinsurance would be applicable to
the ESRD PPS payment for these services including any adjustments to
the ESRD PPS payment such as adjustments for case-mix, geographic wage
index, outlier, etc.
Thus, we are proposing that an ESRD facility receiving an ESRD PPS
payment may charge the Medicare beneficiary or other person only for
the applicable deductible and coinsurance amounts as specified in Sec.
413.176. The beneficiary coinsurance amount for the ESRD PPS base rate
is 20 percent of the total ESRD PPS payment (including payments made
under the transition). We note that the amount of coinsurance is based
on the proposed ESRD PPS payment for renal dialysis services and home
dialysis in 42 CFR part 413. In general, facilities are paid monthly by
Medicare for the ESRD services they furnished to a beneficiary even
though payment is on a per treatment basis. We are proposing to
continue this practice to pay ESRD facilities monthly for services
furnished to a beneficiary beginning January 1, 2011. During the
transition period before January 1, 2014, ESRD facilities that do not
elect to go 100 percent into the ESRD PPS in 2011 would receive a
blended payment amount of the prospective payment system in effect
prior to January 1, 2011, and the ESRD PPS payment amount for services
furnished to a beneficiary. ESRD Facilities would receive a monthly
payment that is a blended payment amount for services furnished to a
beneficiary. The services included in this blended monthly payment
amount would be subject to a 20 percent beneficiary coinsurance.
Additionally, in accordance with section 1881(b)(1) of the Act and
consistent with other established prospective payment systems policies,
we are proposing in Sec. 413.172(b) that an ESRD facility may not
charge a beneficiary for any service for which payment is made by
Medicare. This policy would apply, even if the ESRD facility's costs of
furnishing services to that beneficiary are greater than the amount the
ESRD facility would be paid under the proposed ESRD PPS.

B. Claims Processing

As indicated above, section 1881(b)(14)(A)(i) of the Act requires
the Secretary to implement a payment system under which a single
payment is made for renal dialysis services and other items and
services related to home dialysis. For example, those services would
include supplies and equipment used to administer dialysis in the ESRD
facility or at a patient's home, drugs, biologicals, laboratory tests,
and support services.
Implementation of the proposed ESRD PPS will require a significant
amount of changes to the way we process claims. Some of the changes
could entail consolidated billing rules and edits and the data elements
reported on claims, as discussed below.
1. Consolidated Billing
Since the ESRD PPS payment model represents an all-inclusive
payment for renal dialysis services and home dialysis items and
services, the ESRD facility itself is responsible for virtually all of
the services mentioned above that its patients receive. It is important
that billing and payment for these services, which could be provided by
other entities, such as laboratories, is made only to the ESRD facility
so that duplicate payment is not made by Medicare. Therefore, as stated
previously in section XIII.B, suppliers, laboratories, and Part D plans
would not be permitted to bill Medicare for renal dialysis services and
home dialysis items and services that they furnish to ESRD
beneficiaries. The consolidated billing approach essentially confers to
the ESRD facility itself the Medicare billing responsibility for all of
the renal dialysis services that its patients receive.
a. Laboratory Tests
ESRD patients generally have many co-morbid conditions and are
treated by other specialists for those conditions. As such, many of the
same laboratory tests ordered by a physician to monitor a patient's
ESRD, could also be ordered by other physician specialists treating the
ESRD patient for other medical conditions. Therefore, it is difficult
to differentiate between an ESRD related laboratory test and a test
ordered for another condition. While the ideal scenario would be to
require that payment for all potential ESRD related laboratory tests be
made only to the ESRD facility, ESRD facilities may not be able to
control the ordering of tests by physicians not treating the patient's
renal disease. A consolidated billing approach could identify the
source of a given laboratory test to allow separate payment when the
test was not ordered in connection with the patient's ESRD condition.
In order to ensure proper payment in all settings, we are exploring the
use of modifiers to identify those services furnished to ESRD
beneficiaries, which are excluded from the proposed ESRD PPS.

[[Page 50006]]

b. Drugs and Biologicals
Certain drugs and biologicals routinely furnished to ESRD
beneficiaries that are paid under the Medicare ESRD benefit are
included in the current basic case-mix adjusted composite rate. Other
ESRD-related injectable drugs are separately paid under Medicare Part
B. However, as mentioned above, section 1881(b)(14)(B) of the Act
requires the inclusion of all drugs and biologicals used for the
treatment of ESRD, including drugs and biologicals that were formerly
covered under Medicare Part D. Therefore, we would include these drugs
as part of the consolidated billing mechanism discussed above. As a
result of including these former Part D ESRD drugs and biologicals in
the proposed ESRD PPS, we are proposing that ESRD facilities would be
required to furnish these and any other self-administered ESRD-related
drugs to beneficiaries either directly or under arrangement. Such
arrangements would prevent potential Medicare overpayments made under
both Parts B and D. Further discussion regarding payment for former
Part D drugs and biologicals can be found in section III.C.
c. Home Dialysis
Section 1881(b)(14)(A)(i) of the Act requires the costs of home
dialysis supplies and services furnished under Method I and Method II,
regardless of home treatment modality, be included in the proposed ESRD
PPS. Thus, we are proposing that the Method II home dialysis approach
in its present form would no longer exist under the proposed ESRD PPS
effective January 1, 2011. This proposal does not eliminate Method I in
its present form. Therefore, a supplier could only furnish, under
arrangement with the ESRD facility, home dialysis equipment and
supplies to a Medicare home dialysis beneficiary, and the supplier
would have to look to the ESRD facility for payment. We believe that
this approach is simpler and would reduce the administrative burden of
maintaining two payment methods for home dialysis patients, as we
believe that section 1881(b)(14)(A)(i) of the Act requires that all
Medicare home dialysis supplies and services be paid under the proposed
ESRD PPS and such payment be made to the ESRD facility. Further
discussion of this proposal and information on home dialysis can be
found in section III.E.
2. Expansion of the Data Elements Reported on Claims
Under the current basic case-mix composite adjusted payment system,
ESRD facilities are paid a composite rate for each dialysis treatment
performed. Currently the composite rate includes a number of items and
services beyond the dialysis treatment itself. The services that are
billed on the claim do not provide any detail of the composite rate
items and services that are furnished to the patient beyond the
treatment itself. Examples of additional types of items and services
that are included in the composite rate but are not captured on the
claims and that we believe would be helpful in our ability to predict
composite rate costs are: time on machine, nutritional services, social
work services, and nursing services. We are not proposing additional
reporting requirements at this time, but we believe that collecting
additional data at patient-level is necessary for refinements to the
proposed case-mix adjustments of the proposed ESRD PPS payment model.
In the future, we may implement new reporting requirements where
data elements, such as time on machine, nutritional services, social
work services, and nursing services, would be relevant for case-mix
refinements. We are requesting public comment regarding these data
elements and other claim-based information that would identify patients
who are high cost. Identifying other factors that explain costs could
assist us in developing future patient-level adjusters that would
further refine the model that we used to develop the proposed ESRD PPS.
Detailed instruction as to how claims would be processed under the
proposed ESRD PPS will be provided in future guidance.

C. Operational Issues Surrounding Payment for Self Administered ESRD-
Related Drugs and Biologicals

As we discussed in section III. of this proposed rule, section
1881(b)(14)(B)of the Act defines renal dialysis services to include,
among other things, certain drugs and biologicals, including drugs and
biologicals that were separately payable under Parts B and D. Under the
current ESRD basic case-mix adjusted composite payment system, ESRD
facilities generally do not furnish oral drugs and biologicals to their
ESRD patients. ESRD patients currently acquire these drugs and
biologicals either through Medicare Part D, private insurance, or
independently.
As described in section III. of this proposed rule, we are
proposing to include renal dialysis service drugs formerly covered
under Part D under the proposed ESRD PPS. As a result, we are further
proposing that ESRD facilities would be required to furnish these and
any other self-administered ESRD-related drugs to beneficiaries either
directly or under arrangement. Regardless of the mechanism by which
these drugs would be furnished (directly or under arrangement), as ESRD
facilities assume responsibility for the provision of these drugs that
were formerly furnished by the Part D plans, we believe that some of
the Part D provisions set forth in the 42 CFR Part 423, would become
relevant for ESRD facilities. We are particularly interested in
assuring beneficiary access to these drugs. As such, we request public
comment on the extent to which Part D access requirements including,
but not limited to, pharmacy networks and formularies may be relevant
in the context of ESRD facilities' provision of renal dialysis service
drugs.
In addition, consistent with the patients' rights processes set
forth in Sec. 494.70(a) and the condition: governance processes set
forth in Sec. 494.180(e) of the conditions for coverage for ESRD
facilities, we would expect that the ESRD facilities would update their
grievance processes to account for all self-administered ESRD-related
drugs. Patients would continue to have access to both internal and
external grievance processes including the ESRD Network and the State
survey agency.
In the case of any ESRD facility that would seek to furnish drugs
directly by dispensing on-site, we would expect that such facility
comply with state pharmacy licensure requirements. As an alternative,
we believe that many ESRD facilities would forego the process of
becoming licensed as a pharmacy and instead, furnish renal dialysis
service drugs formerly covered under Part D under arrangement with a
licensed pharmacy. Under this scenario, the patient's MCP physician
would prescribe the drugs or biologicals. The patient would obtain
these drugs from a retail or mail order pharmacy with which the ESRD
facility has contracted. We would expect that the ESRD facility would
provide their patients with a listing of pharmacies with which it would
have arrangements with to dispense the renal dialysis service drugs.
As indicated in proposed Sec. 413.241 of this proposed rule, we
would further expect that the ESRD facilities would establish
arrangements with pharmacies in a manner that would facilitate
beneficiary access to renal dialysis service drugs. That is to say, at
a minimum, we would expect that the arrangement would take into account
variables like the terrain, whether the patient's home is located in an
urban or

[[Page 50007]]

rural area, the availability of transportation, the usual distances
traveled by patients in the area to obtain health care services, and
the pharmacy's capability to provide all classes of renal dialysis
service drugs to patients in a timely manner.
In addition, we would expect that ESRD facilities would coordinate
the provision of renal dialysis service drugs on behalf of traveling
patients to facilitate ongoing compliance with the plan of care during
periods of travel.
To prevent duplicate payment under both Part D and Part B for
bundled drugs and biologicals formerly covered under Part D, we are
considering the incorporation of an ESRD indicator on the Part D
eligibility information that would prevent Part D drug payments for
bundled ESRD drugs and biologicals at the pharmacy. For example,
similar to the Part D requirements in Sec. 423.120(c), ESRD facilities
could issue a card or other type of technology that its enrollees may
use to access renal dialysis service drugs through pharmacies with
which they have established arrangements.
The pharmacy would bill the ESRD facility for all renal dialysis
service drugs and biologicals included in the proposed ESRD PPS that
were dispensed, but would not be permitted to bill the patient for the
usual Part B coinsurance amount, nor treat these drugs in accordance
with the Part D rules. As discussed in section XIII.A.2. of this
proposed rule, the ESRD facility would collect applicable beneficiary
coinsurance that is based on the proposed ESRD PPS per treatment
payment amount.
As discussed in section VII. of this proposed rule, the cost of the
drugs and biologicals currently separately payable under Part D that we
propose to be designated as Part B renal dialysis services for purposes
of the proposed ESRD PPS, would be reflected in the ESRD PPS portion of
the blended payment. In addition, the mechanism by which we propose to
address payment for these drugs during the transition as an adjustment
to the blended payment related to basic case-mix adjusted composite
payment system is discussed in section VII.D.b. of this proposed rule.

XIV. Evaluation of Existing ESRD Policies and Other Issues

We reviewed existing ESRD policies to determine their applicability
to the proposed ESRD PPS. We propose to eliminate the exceptions for
isolated essential facilities, self dialysis training costs, atypical
service intensity (patient mix) and pediatric facilities that exist
under the case-mix adjusted composite payment system. We would maintain
the current erythropoeisis stimulating agent monitoring policy, bad
debt policy, reporting requirements for circumstances whereby Medicare
is the secondary payer (MSP), and the 50-cent deduction to fund the
ESRD Networks. We also propose to set forth in Sec. 413.195 the
limitation on review with regard to the ESRD PPS. In addition, we are
considering the extent to which the laboratory services 50 percent rule
would continue to apply under the proposed ESRD PPS.

A. Exceptions Under the Case-Mix Adjusted Composite Payment System

Section 1881(b)(7) of the Act and Sec. 413.182 generally address
exceptions to the composite payment rates. Section 422(a)(2) of BIPA
prohibited the granting of new exceptions to the composite payment
rates after December 31, 2000, but did allow the continuation of the
existing exceptions as long as the exception rate exceeded the
applicable composite payment rate. Section 623(b) of the MMA amended
section 422(a)(2) of BIPA to restore composite rate exceptions for
pediatric facilities that did not have an exception rate in effect as
of October 1, 2002. Section 422(a)(2)(D) of BIPA defined a pediatric
facility as a renal dialysis facility at least 50 percent of whose
patients are under 18 years of age.
In the calendar year (CY) 2005 Physician Fee Schedule (PFS)
proposed rule (69 FR 47535), we explained that section 422(a)(2)(C) of
BIPA provided that any ESRD composite rate exception in effect on
December 31, 2000, would continue as long as the exception rate exceeds
the applicable composite payment rate. We further explained that when
computing an exception amount, the facility's patient population and
the higher costs relating to case-mix are taken into consideration. We
indicated that we were proposing to allow each dialysis facility the
option of continuing to be paid at its exception rate or at the basic
case-mix adjusted composite rate. On April 1, 2004, we opened the
exception window for pediatric facilities and noted that the window
would close in September 27, 2004. In the CY 2005 PFS final rule with
comment period (69 FR 66332), we stated that the exception process was
opened each time there is a legislative change in the composite payment
rate or when we open the exception window. We indicated our intent to
open the pediatric exception windows on an annual basis. We also noted
that we would provide for the continuation of the home training
exception to allow for facilities with home training exceptions to
retain their current training exception rates as well as take advantage
of the case-mix adjusted rates for non-training dialysis.
While section 153 of the MIPPA does not directly address
exceptions, we believe that the ESRD PPS under section 1881(b)(14) of
the Act, creates an ESRD bundled prospective payment in lieu of payment
under previous ESRD payment systems and given that the ESRD PPS no
longer directly addresses changes in the ESRD composite rate, we
believe that the exceptions currently in place would no longer apply.
We also believe that we have addressed the higher costs relating to
case-mix through the patient characteristic adjustments and outlier
payments that are discussed in detail in sections VIII.B and X.A.
Therefore, we are proposing the elimination of the isolated essential
facility, self dialysis training costs, atypical service intensity
(patient mix) and pediatric facility exceptions effective for ESRD
renal dialysis services furnished on or after January 1, 2014 (at the
conclusion of the phase-in). In other words, any existing exceptions
would terminate effective for ESRD treatment on or after January 1,
2014. Additionally, no further exception windows would be open
effective for ESRD treatment furnished on or after January 1, 2011, the
effective date of the ESRD PPS. In the event that an ESRD facility
elects to receive full payment under the ESRD PPS for renal dialysis
services furnished on or after January 1, 2011, any existing exceptions
would no longer be recognized. In the event that an ESRD facility
elects to receive payment under the transition period, any existing
exceptions would be recognized for purpose of the basic case-mix
adjusted composite payment system portion of the blended payment
through the transition. We propose to include the periods of exceptions
and the elimination of the exceptions to the composite payment rates in
Sec. 413.180 of the regulations. With respect to appeals under Sec.
413.194(b) we point out that such appeals apply only to exceptions to
the composite rate granted before January 1, 2011.

B. Erythropoiesis Stimulating Agent (ESA) Monitoring Policy

In 2003, we solicited input from the ESRD community, in order to
develop an erythropoiesis stimulating agent (ESA) Monitoring Policy.
After input from the community, we implemented, through administrative
issuance, the first iteration of the monitoring policy effective for
services provided on or after April 1, 2006. On July 20, 2007, we
issued through administrative issuance, a revised policy effective for
services

[[Page 50008]]

furnished on or after January 1, 2008. We are currently evaluating the
extent to which we could continue the ESA Monitoring Policy for renal
dialysis services furnished on or after January 1, 2011. Specifically,
at the current time it is not known how the reduction in payment that
is currently applied to the separately billed ESAs would be applied
under the proposed ESRD PPS. As discussed in section X.A, we are also
continuing to evaluate how to establish eligibility for outlier
payments in instances where the ESA Monitoring Policy is implicated. We
request public comments on this issue to inform our evaluation.

C. ESRD Facility Network Deduction

Pursuant to section 1881(b)(7) of the Act, to fund the ESRD
Networks, 50 cents is deducted from the amount of each payment for each
treatment (subject to such adjustments as may be required to reflect
modes of dialysis other than hemodialysis). The reduction amount
applies to all treatment modalities. The methodology for calculating
the reduction is described in the Medicare Claims Processing Manual,
Pub. 100-04, Ch. 8, section 110. We would continue this deduction with
the ESRD PPS effective for services provided on or after January 1,
2011, with a 50 cent reduction per treatment from the payment made to
ESRD facilities under the ESRD PPS for facilities that elect to receive
payment under the ESRD PPS (subject to such adjustments as may be
required to reflect modes of dialysis other than hemodialysis). For
facilities that elect to receive ESRD payment during the transition, we
would apply the reduction methodology as described above to the blended
payment amount during the transition.

D. Bad Debt

Section 413.89 of the regulations and Chapter 3 of the Provider
Reimbursement Manual, Part 1 (PRM) (CMS Pub. 15-1) set forth the
general requirements and policies for payment of bad debts attributable
to unpaid Medicare deductibles and coinsurance amounts. Additional
requirements for ESRD facilities are set forth at Sec. 413.178.
Under the basic case-mix adjusted payment system, Medicare pays
ESRD facilities 80 percent of a prospectively set composite rate for
outpatient dialysis services. The Medicare beneficiary is responsible
for the remaining 20 percent as coinsurance, as well as any applicable
deductible amounts as set forth in Sec. 413.176 of the regulations. If
the ESRD facility makes reasonable collection efforts, as described in
the Section 310 of the PRM, but is unable to collect the deductible or
coinsurance amounts for items or services associated with the composite
rate, we consider the uncollected amount to be a ``bad debt'' if the
facility meets the requirements at Sec. 413.178 and Sec. 413.89 of
the regulations and Chapter 3 of this proposed rule.
At the end of the ESRD facility cost reporting period, Medicare
recognizes a facility's Medicare bad debts. However, Sec. 413.178(a)
requires CMS to reimburse ESRD facilities for its allowable bad debt up
to the facility's costs as determined under Medicare principles.
In developing the proposed changes to the ESRD payment system
described in this proposed rule, section 153(a)(4) of MIPPA states, as
a Rule of Construction, that, ``nothing in this subsection or the
amendments made by this subsection shall be construed as authorizing or
requiring the Secretary of Health and Human Services to make payments
under the payment system implemented under paragraph (14)(A)(i) of
section 1881(b) of the Social Security Act (42 U.S.C. 1395rr(b)), as
added by paragraph (1), for any unrecovered amount for any bad debt
attributable to deductible and coinsurance on items and services not
included in the basic case-mix adjusted composite rate under paragraph
(12) of such section as in effect before the date of the enactment of
this Act.''
Therefore, under the proposed ESRD PPS, bad debt payments will
continue to be made for the unpaid Medicare deductibles and coinsurance
amounts for only those items and services associated with the basic
case-mix adjusted composite rate. However, since the proposed single
ESRD payment rate is for items and services included in the composite
rate and for drugs and laboratory tests, we are proposing to use only
the composite rate portion of the proposed single ESRD payment rate to
determine bad debt payments. We are proposing that bad debt payments
for ESRD facilities would continue to be capped as required under Sec.
413.178(a). The Medicare cost report and instructions in the PRM, Part
2 (CMS Pub. 15-2) may be revised to report the case mix adjusted
composite rate payment and associated cost data necessary to compute
the ESRD facility bad debt payments.
In addition, we are proposing to make a conforming change to
regulation text at Sec. 413.178(d) regarding ESRD bad debt payment
made under the proposed ESRD payment system described in this proposed
rule. We are also including a cross-reference to Sec. 413.178 in Sec.
413.89(h) and (i).

E. Limitation on Review

In addition to requiring the establishment of the ESRD PPS, section
153(b) of MIPPA amends section 1881(b) of the Act to provide for a
limitation on review. Specifically, section 1881(b)(14)(G) of the Act
provides the following: ``There shall be no administrative or judicial
review under section 1869 of the Act, section 1878 of the Act or
otherwise of the determination of payment amounts under [section
1881(b)(14)(A)], the establishment of an appropriate unit of payment
under [section 1881(b)(14)(C)], the identification of of renal dialysis
services included in the bundled payment, the adjustments under
[section 1881(B)(14)(D)], the application of the phase-in under
[section 1881(b)(14)(E)], and the establishment of the market basket
percentage increase factors under [section 1881(b)(14)(F)].'' We
propose to codify this limitation on review in Sec. 413.195 of the
regulations.

F. 50 Percent Rule Utilized in Laboratory Payments

As specified in CMS Pub 100-04, Chapter 16, Sect. 40.6, for a
particular date of service to a beneficiary, if 50 percent or more of
the covered laboratory tests within an Automated Multi-Channel
Chemistry (AMCC) test are included under the composite rate payment,
then all submitted tests are included within the composite payment and
no separate payment in addition to the composite rate is made for any
of the separately billable tests. If less than 50 percent of the
covered laboratory tests within the AMCC are composite rate tests, then
all AMCC tests submitted are separately payable. When ordering ESRD-
related AMCC tests, ESRD facilities identify, for a particular date of
service, each test that is included in the composite rate and each test
that is not included. A ``non-composite rate test'' is defined as ``any
test separately payable outside the composite rate or beyond the normal
frequency covered under the composite rate that is reasonable and
necessary.''
During the transition period, the 50 percent rule would continue to
apply to the basic case mix adjusted composite payment system portion
of the blended payment. Under the proposed consolidated billing
provisions discussed further in section XIII B. of this proposed rule,
the ESRD facility itself would assume the Medicare billing
responsibility for all of the renal dialysis services that its patients
receive, including laboratory tests. As a result, the ESRD facilities
would apply the 50 percent rule billing procedures

[[Page 50009]]

including application of the relevant modifiers.
As described in section X of this proposed rule, under the proposed
ESRD PPS, Medicare would not make separate payment for laboratory
tests, rendering the 50 percent rule irrelevant for payment purposes.
The 50 percent rule's relevance would be limited to its use in
determining eligibility for outlier payment.
In addition, preliminary analyses reveal a small impact upon
removing from eligibility for outlier services the AMCC tests to which
the 50 percent rule applies. As a result, we are considering excluding
AAMC tests to which the 50 percent rule applies from the definition of
outlier services, thus negating the need to apply the 50 percent rule
under the proposed ESRD PPS. We plan to continue to evaluate the impact
of this approach and include further discussion in the final rule. We
request public comments on whether or not to include the AMCC tests to
which the 50 percent rule applies within the definition of outlier
services and retain the 50 percent rule under the proposed ESRD PPS.

G. Medicare as a Secondary Payer

Medicare may be a secondary payer (MSP) when the primary payer is a
group health plan for ESRD items and services furnished to Medicare
beneficiaries during the 30-month Medicare coordination of benefit
period. At this time, we are unable to identify the systems operations
and billing procedures impact of this relationship under the current
basic case-mix adjusted composite payment system, and we are exploring
how it will be utilized and managed under the proposed ESRD prospective
payment system. We believe that while there may need to be system
changes in order to process MSP claims under the Proposed ESRD
prospective payment system, there should be no impact on ESRD providers
and on primary payers. We will issue through administrative issuance,
any changes in the manner of reporting information, should that be
required. We are soliciting public comment on the operational issues of
MSP under the proposed ESRD payment system.

XV. Quality Incentives in the End-Stage Renal Disease (ESRD) Program

A. Introduction

Section 1881(h) of the Social Security Act (the Act), as added by
section 153(c) of the Medicare Improvements for Patients and Providers
Act of 2008 (MIPPA), requires the Secretary to develop a quality
incentive program (QIP) that will result in payment reductions to
providers of services and dialysis facilities that do not meet or
exceed a total performance score with respect to performance standards
established with respect to certain specified measures. As provided
under section 1881(h) of the Act, the payment reductions, which will be
up to 2.0 percent of the payments otherwise made to providers and
facilities under section 1881(b)(14), will apply to renal dialysis
services furnished on or after January 1, 2012, and the total
performance score that providers and facilities must meet or exceed in
order to receive their full payment will be based on a specific
performance period prior to this date. The payment reductions will
apply with respect to the year involved and will not be taken into
account when computing future payment rates.
The CMS is committed to developing and implementing an ESRD QIP,
and we intend to issue a subsequent proposed rule that makes detailed
proposals regarding how we plan to implement section 1881(h) of the
Act. However, in the interim, with one exception described below, we
believe it is important to describe the QIP conceptual model that CMS
is considering proposing for purposes of the payment reduction that
will apply with respect to renal dialysis services furnished on or
after January 1, 2012. Therefore, we will present the model below so
that the public has an opportunity to comment on it, and we will use
the comments to inform our evaluative, analytic, and guidance efforts
during the development of the QIP.
The one exception mentioned above is the measure set that will
apply for purposes of the CY 2012 payment reduction. We are making
specific proposals with respect to that measure set in this proposed
rule so that the public will be informed as early as possible regarding
the measures on which the performance standards will be based.

B. Background

Quality monitoring and provider accountability is important in the
ESRD payment system and has been done for over 30 years. We will
describe the evolution of our ESRD quality monitoring initiatives by
category below:
1. ESRD Network Organization Program
In the End-Stage Renal Disease Amendments of 1978 (Pub. L. 95-292),
Congress required the formation of ESRD Network Organizations to
further support the ESRD program. CMS currently contracts with 18 ESRD
Networks throughout the United States to perform oversight activities
and to ensure that dialysis patients are provided appropriate care. The
Networks' responsibilities include monitoring the quality and
improvement of care received, providing technical assistance to
patients who have ESRD and providers/facilities that treat ESRD
patients, and addressing patient grievances. In 1994, CMS and the
Networks, with input from the renal community, established the ESRD
Core Indicators Project (CIP). The ESRD CIP was CMS's first nationwide
population-based study designed to assess and identify opportunities to
improve the care of patients with ESRD. This project established the
first consistent clinical ESRD database. Information included in the
database included clinical measures thought to be indicative of key
components of care surrounding dialysis.
2. Clinical Performance Measures (CPMs)
Section 4558(b) of the Balanced Budget Act of 1997 required CMS to
develop and implement, by January 1, 2000, a method to measure and
report the quality of renal dialysis services furnished under the
Medicare program. To implement this legislation, CMS developed the ESRD
Clinical Performance Measures (CPM) Project, based on the National
Kidney Foundation's Dialysis Outcome Quality Initiative (NKF-DOQI)
Clinical Practice Guidelines. The purpose of the ESRD CPM Project is to
provide comparative data to ESRD facilities to assist them in assessing
and improving the care furnished to ESRD patients. Sixteen CPMs were
developed in 1998 to measure and report the quality of dialysis
services furnished under Medicare in the areas of hemodialysis and
peritoneal dialysis adequacy, anemia management, and vascular access
management. The first data collection effort for the ESRD CPMs began in
1999. These CPMs are calculated using information contained in
patients' records. CPMs are collected on a national random sample of
adult in-center hemodialysis patients, all in-center hemodialysis
patients less than 18 years of age, and a national random sample of
peritoneal dialysis patients. Data are collected annually and submitted
to CMS via a predominantly paper-based process. The CPMs are calculated
and released in the Department of Health and Human Services' Annual
Report on the ESRD CPM Project.

[[Page 50010]]

3. Dialysis Facility Compare (DFC)
Also in response to the Balanced Budget Act of 1997, we created
Dialysis Facility Compare (DFC) as a new feature on http://www.medicare.gov that was modeled after Nursing Home Compare. We worked
with a contractor and a consumer workgroup to identify dialysis
facility-specific measures that could be provided to the public for
consumer choice and information purposes. This tool was launched in
January 2001 on the http://www.medicare.gov Web site to provide
information to the public for comparing the quality of dialysis
facilities and providers across the country, including specific
information about services and the quality of care furnished by a
specific dialysis facility/provider. DFC captures administrative and
quality related data submitted by dialysis facilities and providers.
The key quality measures captured in this tool include facility-
level measures of anemia control, adequacy of hemodialysis treatment
and patient survival. Medicare claims data are used to calculate the
anemia management and dialysis adequacy rates and administrative data
(non-clinically based data such as demographic data, and data acquired
from the Social Security Administration and obtained from the CMS forms
2728 and 2746) used to determine the patient survival rates. The anemia
measure shows the raw number or the percentage of patients at a given
facility/provider whose anemia (low red blood cell count) was not
controlled. More specifically, the anemia measure is the percentage of
patients whose hematocrit levels are at 33 percent (33 percent out of
100 percent) or more (or hemoglobin levels of 11 g/dL or more). The
dialysis adequacy measure shows the raw number or the percentage of in-
center hemodialysis patients at a facility that get effective
treatments during dialysis. More specifically, the measure is the
percentage of patients with urea reduction ratio (URR) levels of 65
percent or more. The patient survival measure shows whether patients
treated at a certain facility generally live longer, as long, or not as
long as expected. These measures are updated annually on the DFC Web
site, usually at the end of the year, using data from the previous year
for the dialysis adequacy and anemia measures and data from the past
four years for the patient survival measure.
In November 2008, the anemia management measure was updated using
facility and claims data from 2007. Recent evidence about increased
risk of certain adverse events associated with the use of
erythropoiesis-stimulating agents (ESAs), which are used to treat
anemia, raised concerns about patients who have hemoglobin levels too
high, as well as patients whose hemoglobin levels are too low. The Food
and Drug Administration (FDA) responded by requiring manufacturers to
develop a Medication Guide (http://www.fda.gov/cder/drug/advisory/RHE200711.htm) and to ensure that this information is provided to
patients. The labeling guideline states ``The dosing recommendations
for anemic patients with chronic renal failure have been revised to
recommend maintaining hemoglobin levels within 10 g/dL to 12 g/dL''
(http://www.fda.gov/cder/drug/advisory/RHE200711.htm). As a result of
this guideline, DFC was revised to include two anemia measures: one
measure shows the percentage of patients whose hemoglobin levels are
considered too low (that is, below 10 g/dL), and a second measure shows
the percentage of patients whose hemoglobin levels are too high (that
is, above 12 g/dL). In addition, CMS has updated the way it reports
patient survival rates on DFC to reflect whether patients treated at a
provider/facility generally live longer than, as long, or not as long
as expected.
4. ESRD Quality Initiative
In 2004, the ESRD Quality Initiative was launched. The objective
was to stimulate and support significant improvements in the quality of
dialysis care. The initiative aimed to refine and standardize dialysis
care measures, ESRD data definitions, and data transmission to support
the needs of the ESRD program; empower patients and consumers by
providing access to facility service and quality information; provide
quality improvement support to dialysis providers; assure compliance
with conditions of coverage; and build strategic partnerships with
patients, providers, professionals, and other stakeholders. Components
of this Quality Initiative included the DFC, the CPM Project, and the
Fistula First Breakthrough Initiative.
5. ESRD Conditions for Coverage
The ESRD Conditions for Coverage final rule published on April 15,
2008, and contains revised requirements that dialysis providers and
facilities must meet in order to be certified under the Medicare
program. As part of the revised requirements, dialysis providers and
facilities are required to implement a quality assessment and
performance improvement program. In addition, providers and facilities
are required to submit the CPMs electronically on all their patients on
an annual basis. The CPMs were updated and expanded in April 2008
through a National Quality Forum (NQF) endorsement process. The current
CPMs include 26 measures in the areas of anemia management;
hemodialysis adequacy; peritoneal dialysis adequacy; mineral
metabolism; vascular access; patient education/perception of care/
quality of life; and patient survival. The anemia management measures
for patients receiving erythropoiesis-stimulating agents (ESAs) and the
urea reduction ratio (URR) measure (in-center hemodialysis) are not NQF
endorsed.
6. CROWNWeb
CMS has developed a new Web-based system, Consolidated Renal
Operations in a Web-Enabled Network (CROWNWeb) for the purposes of
collecting CPM data electronically from dialysis facilities. Use of the
CROWNWeb system will increase the efficiency of data collection for
both CMS and providers/facilities, improve data quality, and provide a
more stable and accessible platform for continual improvements in
functionality. In February 2009, CMS began implementing the CROWNWeb
system with a number of providers/facilities and plans to expand
reporting to additional providers/facilities as soon as practicable.

C. The ESRD Quality Incentive Program as Authorized by Section 1881(h)
of the Act

Recognizing the need for additional quality monitoring in an ESRD
payment system, Congress required in section 153 of MIPPA that the
Secretary implement an ESRD quality incentive program (QIP). We believe
that the QIP is the next step in the evolution of the ESRD quality
program because it measures provider/facility performance versus being
focused on reporting outcome data.
Specifically, section 1881(h) of the Act, as added by section
153(c) of MIPPA, requires the Secretary to develop a QIP that will
result in payment reductions to providers of services and dialysis
facilities that do not meet or exceed a total performance score with
respect to performance standards established with respect to certain
specified measures. As provided under this section, the payment
reductions, which will be up to 2.0 percent of payments otherwise made
to providers and facilities under section 1881(b)(14), will apply to
renal dialysis services furnished on or after January 1, 2012, and the
total performance score that providers and facilities must meet

[[Page 50011]]

or exceed in order to receive their full payment will be based on a
specific performance period prior to this date. Under section
1881(h)(1)(C), the payment reduction will only apply with respect to
the year involved and will not be taken into account when computing
future payment rates.
For the ESRD quality incentive program, section 1881(h) of the Act
generally requires the Secretary to: (1) Select measures; (2) establish
the performance standards that apply to the individual measures; (3)
specify a performance period with respect to a year; (4) develop a
methodology for assessing the total performance of each provider and
facility based on the performance standards with respect to the
measures for a performance period; and (5) apply an appropriate payment
reduction to providers and facilities that do not meet or exceed the
established total performance score.
We view the ESRD QIP required by section 1881(h) of the Act as the
next step in the evolution of the ESRD quality program that began more
than 30 years ago. Our vision is to develop a robust, comprehensive
ESRD QIP that builds on the foundation that has already been
established. As we move towards this larger goal, we understand the
importance of giving providers and facilities time to prepare for the
implementation of this new quality incentive program and to assess how
the new program will affect them.
Therefore, we are outlining below a conceptual model that describes
various components of an ESRD QIP that we are considering proposing in
a future proposed rule. We want to make clear that this is only a
model, with one exception. The exception, more fully described below,
is that we are proposing to initially adopt for the QIP three measures,
two of which assess anemia management and one which assesses
hemodialysis adequacy, which can be calculated using Medicare claims
data.
Our goal is to propose to implement other components of the QIP in
future rulemaking. Our purpose in describing a model in this proposed
rule is to notify the public regarding what we believe at this time to
be essential components of the QIP in the hope of receiving detailed
comments on those components. We also note that the model described
below represents our thinking on what we are considering implementing
only for payment consequence year 2012 because we anticipate that the
program will evolve as we conduct additional analyses, gather
experience, and respond to industry feedback.
1. Proposed Anemia Management and Dialysis Adequacy Measures
Section 1881(h)(2)(A)(i) of the Act requires that the measures
specified for the QIP include measures on anemia management that
reflect the labeling approved by the Food and Drug Administration for
such management, and measures on dialysis adequacy. To implement this
section, we are proposing that for the first QIP performance period, we
will adopt the two anemia management measures and one hemodialysis
adequacy measure that are currently used for DFC. Data needed to
calculate these measures can be collected from Medicare claims
submitted by ESRD providers and facilities on a patient-specific basis.
The anemia management measures used for DFC assess the percentage
of patients at a facility whose anemia was not controlled at both the
high and low ends of the FDA recommended hemoglobin levels.
Specifically, these measures are: (1) The percentage of patients at a
provider/facility whose hemoglobin levels were less than 10 g/dL, and
(2) the percentage of patients at a provider/facility whose hemoglobin
levels were greater than 12 g/dL.
Section 1881(h)(2)(A)(i) of the Act provides that the anemia
management measures must reflect the labeling approved by the FDA for
such management. The current FDA labeling guideline released November
8, 2007 for the administration of erythropoesis-stimulating agents
(ESAs) to patients with chronic kidney disease, including ESRD
patients, states ``The dosing recommendations for anemic patients with
chronic renal failure have been revised to recommend maintaining
hemoglobin levels within 10 g/dL to 12 g/dL.''
We believe that the proposed anemia management measures reflect the
approved FDA labeling for anemia management because they assess the
number of patients whose hemoglobin levels are at the low and high end
of the FDA label recommendation. In addition, we believe that it is
more appropriate to adopt two measures which together assess the high
and low ends of the FDA recommended hemoglobin level range, rather than
a single measure that reflects the percentage of patients who have
hemoglobin levels within the 10 through 12 g/dL range, because two
measures will provide a richer picture of provider/facility
performance. These data will also allow us to calculate the percentage
of patients who have hemoglobin levels within the 10 through 12 range
g/dL. Therefore, we propose to adopt these two anemia management
measures for the QIP.
Anemia data has been reported on Dialysis Facility Compare (DFC)
since January 2001. As we noted above, we updated the reporting of
anemia data for DFC in November of 2008 to be consistent with the new
FDA labeling guideline released in November 2007; however, the
methodology for calculating the provider/facility, state, and national
averages for anemia measures has not changed since the initial release
of DFC. We are proposing to use the same methodology we use to
calculate the anemia management measures for purposes of DFC to
calculate them for purposes of the QIP because the methodology is
consistent with how we have calculated that data since 2001. Under this
methodology, we will calculate the measures using hemoglobin data for
Medicare patients who have been diagnosed with ESRD for at least 90
days and whose Medicare claims submitted by providers/facilities
indicated the use of an ESA during that 90-day period. Data from
patients whose first ESRD maintenance dialysis starts before day 90 or
who have hemoglobin values of less than 5 or greater than 20 will be
excluded from the measure calculation. In addition, there must be for
the same patient at least 4 claims meeting this criteria for that data
to be included in the data for a specific provider or facility.
Technical details on the methodology we are proposing to use to
calculate the anemia measures are available on the University of
Michigan Kidney Epidemiology and Cost Center Web site at http://www.sph.umich.edu/kecc/assets/documents/facguide.pdf.
The hemodialysis adequacy measure (urea reduction ratio [URR]) that
we are proposing to adopt is also used for DFC and assesses the
percentage of patients at a provider or facility that get their blood
cleaned adequately (blood urea is removed during their in-center
hemodialysis). Specifically, this measure assesses the percentage of
hemodialysis patients at a provider or facility whose urea reduction
ratio (URR) is 65 percent or greater, a standard based on the National
Kidney Foundation's Kidney Disease Quality Initiative Clinical Practice
Guidelines (NKF-KDOQI). These guidelines are widely used and generally
accepted throughout the ESRD community. More information on the
calculation of the URR is available on the DFC Web site at http://www.medicare.gov. This measure has been endorsed by the National
Quality Forum (NQF), an organization that endorses quality measures
through a public consensus process, although we note that NQF

[[Page 50012]]

endorsement of dialysis adequacy measures is not a requirement under
section 1881(h)(2)(A)(i).
The methodology for calculating the provider/facility, state, and
national averages for the in-center hemodialysis measure has been used
since January 2001 with the initial release of DFC, and we are
proposing to use the same methodology to calculate the measure for
purposes of the QIP to be consistent with how that data has been
calculated since 2001. Under this methodology, we will calculate URR
data only for Medicare patients who have been diagnosed with ESRD and
received maintenance dialysis for at least 183 days from the date that
they received their first maintenance dialysis treatment, and whose
Medicare claims submitted by providers/facilities included a value for
the URR. In addition, there must be for the same patient at least 4
claims meeting the criteria above for that data to be included in the
data for a specific provider or facility. Technical details about the
methodology we are proposing to use to calculate the hemodialysis
adequacy measure are available on the University of Michigan Kidney
Epidemiology and Cost Center Website at http://www.sph.umich.edu/kecc/assets/documents/facguide.pdf.
We note that the data we need to calculate the proposed anemia
management and hemodialysis adequacy measures described above can be
collected through ESRD claims, which is the only complete provider and
facility level data set available to CMS at this time. For this reason,
we are proposing to adopt only the two anemia management measures and
one dialysis adequacy measure described above. Although we recognize
that section 1881(h)(2)(A)(i) states that the measures shall include
``measures on anemia management that reflect the labeling approved by
the Food and Drug Administration for such management and measures on
dialysis adequacy,'' only one dialysis adequacy measure is collected
nationally and available to determine provider and facility-specific
values. For this reason, we are proposing at this time to adopt only
one dialysis adequacy measure. We also note that section
1881(h)(2)(A)(iii) states that the measures shall include, to the
extent feasible, other measures as the Secretary specifies including
measures on iron management, bone mineral metabolism, and vascular
access (including for maximizing the placement of arterial venous
fistula). CMS is not proposing to adopt any measures in these
categories at this time since we are not currently collecting data that
would allow determination of provider and facility-specific performance
with respect to these categories of measures. We are working to
identify appropriate sources from which we can adequately capture data
to support the future adoption of additional measures. Finally, it is
not feasible to propose a patient satisfaction measure at this time
because there is no validated data collection tool available to collect
relevant and industry accepted patient satisfaction measure data.
Therefore, it is not feasible to propose more than the aforementioned
measures at this time because of the lack of complete and accurate
data. Subsequent rulemaking will address other measures.
2. Performance Standards for the ESRD QIP Measures
Section 1881(h)(4)(A) of the Act requires the Secretary to
establish performance standards with respect to the measures selected
for the QIP for a performance period with respect to a year. Section
1881(h)(4)(B) provides that the performance standards shall include
levels of achievement and improvement, as determined appropriate by the
Secretary. However, in our model, for the first performance period, we
would establish a performance standard for the proposed anemia
management and hemodialysis adequacy measures based on the special rule
in Section 1881(h)(4)(E). This provision requires the Secretary to
``initially'' use as a performance standard for the anemia management
and dialysis adequacy measures the lesser of a facility-specific
performance rate in the year selected by the Secretary under the second
sentence of section 1881(b)(14)(A)(ii), or a standard based on the
national performance rate for such measures in a period determined by
the Secretary. We would not include in this performance standard levels
of achievement or improvement because we do not believe that section
1881(h)(4)(E) requires that we include such levels. In addition, we
would interpret the term ``initially'' to apply only to the performance
period applicable for payment consequence year 2012. For subsequent
performance periods, we plan to propose performance standards under
section 1881(h)(4)(A). Such standards will include levels of
achievement and improvement, as required under section 1881(h)(4)(B).
As stated above, to implement the special rule for the proposed
anemia management and hemodialysis adequacy measures, we would need to
compare the performance of a provider or facility on these measures
during the year selected by the Secretary for purposes of calculating
the ESRD bundle with the performance of the provider or facility using
a performance standard based on the national performance rates for
these measures in a period determined by the Secretary. For purposes of
making this comparison in our model, the provider/facility-level
performance year referenced in section 1881(h)(4)(E)(i) would be 2007,
2008, or 2009, depending on which of those years is selected by the
Secretary for purposes of calculating the ESRD bundle. We would refer
to this year as the ``base utilization year.'' The provider/facility-
specific rates for 2007 are currently posted on the DFC Web site.
In terms of establishing a performance standard based on national
performance rates as required under section 1881(h)(4)(E)(ii), we are
considering adopting a standard that is equal to the average
performance of all dialysis providers and facilities based on 2008
data. These data for the anemia management and hemodialysis adequacy
measures will be posted on DFC in November 2009.
Although the 2008 data are not yet available on DFC, the national
averages currently posted on the DFC website for 2007 are
For the proposed anemia management measure (Anemia
Management Measure less than 10)--the percentage of Medicare patients
who have an average hemoglobin value less than 10.0 g/dL in a provider/
facility: 2 Percent
For the proposed anemia management measure (Anemia
Management Measure more than 12)--the percentage of Medicare patients
who have an average hemoglobin value greater than 12.0 g/dL in a
provider/facility: 44 Percent

For the proposed hemodialysis adequacy measure
(Hemodialysis Adequacy One)--the percentage of Medicare patients in a
provider/facility with URR levels above 65 percent: 95 Percent.
We expect that these averages will change for 2008.
This means that, for purposes of implementing the special rule in
our model for the proposed anemia management and hemodialysis adequacy
measures, the performance standard for the initial performance period
would be the lesser of (1) the provider/facility-specific rate for the
base utilization year, or (2) the national average results from 2008
claims data. If a provider or facility performed below the national
average, then we would

[[Page 50013]]

look at the provider/facility-specific rate for the base utilization
year to determine whether the provider/facility's performance during
the initial performance period meets or exceeds the performance
standard.
We note that the proposed hemodialysis adequacy measure would
assess hemoglobin values only in hemodialysis patients who receive
treatment at a provider or facility (and not in hemodialysis or
peritoneal dialysis patients treated at home). In addition, the
proposed hemodialysis adequacy measure would not assess hemoglobin
values in pediatric dialysis patients. Therefore, we are seeking public
input about this issue and ideas about whether and how we could assess
dialysis adequacy for home dialysis (home hemodialysis and peritoneal
dialysis) and pediatric dialysis.
3. Performance Period for the ESRD QIP Measures
Section 1881(h)(4)(D) of the Act requires the Secretary to
establish a performance period with respect to a year, and for that
performance period to occur prior to the beginning of such year.
Because we are required under section 1881(h)(1)(A) to implement the
payment reduction beginning with renal dialysis services furnished on
or after January 1, 2012, the first performance period would need to
occur prior to that date.
In selecting a performance period, we need to allow sufficient time
to calculate the provider/facility-specific scores, determine whether
providers and facilities meet the performance standards and prepare the
pricing files needed to implement applicable payment reductions
beginning on January 1, 2012. Among potential performance periods in
our model would be all or portions of 2010. However, we are also
considering other performance periods. We seek public comments about
performance periods and will propose a specific performance period in
future rulemaking.
4. Methodology for Calculating the Total Performance Score for the ESRD
QIP Measures
Section 1881(h)(3)(A)(i) of the Act requires the Secretary to
develop a methodology for assessing the total performance of each
provider and facility based on the performance standards with respect
to the measures selected for a performance period. Section
1881(h)(3)(A)(iii) states that the methodology must also include a
process to weight the performance scores with respect to individual
measures to reflect priorities for quality improvement, such as
weighting scores to ensure that providers/facilities have strong
incentives to meet or exceed anemia management and dialysis adequacy
performance standards, as determined appropriate by the Secretary. In
addition, section 1881(h)(3)(B) requires the Secretary to calculate
separate performance scores for each measure.
Finally, under section 1881(h)(3)(A)(ii), for those providers and
facilities that do not meet (or exceed) the total performance score,
the Secretary is directed to ensure that the application of the scoring
methodology results in an appropriate distribution of reductions in
payments to providers and facilities, with providers and facilities
achieving the lowest total performance scores receiving the largest
reductions.
As discussed earlier, we are proposing to adopt for the initial
performance period two anemia management measures and one hemodialysis
adequacy measure that are currently used for DFC. In our model, for
purposes of calculating the total performance of each provider and
facility during the initial performance period, we are considering
assigning 10 points to each of these measures. That is, if a provider
or facility meets the performance standard for one measure, then it
would receive 10 points for that measure, and if the provider or
facility meets the performance standards for all three measures, it
would receive a total performance score of 30 points.
In our model, we are considering, for scoring purposes, that a
provider or facility that does not meet the performance standard set
for a measure would receive fewer than 10 points, with the exact number
of points corresponding to how far from the set standard the provider/
facility's performance falls. Specifically, we are considering
implementing a scoring methodology that subtracts 2 points for each 2
percentage point increment range the provider or facility's performance
falls from the set performance standard. For example, if we used as the
performance standard during the initial performance period the national
average of 44 percent (based on 2007 DFC data) for one of the proposed
anemia management measures (percentage of patients whose hemoglobin
levels are greater than 12 g/dL), and a particular provider/facility
had 46 percent of patients with hemoglobin levels greater than 12 g/dL
during that period, the provider/facility would receive 8 points for
its performance on the measure because 46 percent is within the first 2
percentage point increment range from 44 percent (see Table 42 below).
However, applying the special rule for the initial performance period,
as required by section 1881(h)(4)(E), the provider/facility's
performance of 46 percent would become the performance standard for
scoring purposes, and the provider/facility would receive 10 points for
this measure (see Table 43 below).
Under our model, providers and facilities that exceed the
performance standards based on the national average for the period that
the Secretary has determined and if their performance rate improved
from the ``base utilization year'' then the provider or facility would
receive additional points. Using the 2007 DFC data again to illustrate,
if a provider/facility had 43 percent of patients with hemoglobin
levels greater than 12 g/dL during the initial performance period, the
provider/facility's performance would be better than the 2007 national
average of 44 percent. In addition, if the provider/facility had a
performance rate of 46 percent in the base utilization year then the
provider/facility's performance of 43 percent for the initial
performance period would also be better. Therefore, the provider/
facility would receive 12 points, which is an additional 2 points or a
``bonus'' (maximum bonus in this conceptual model) above the 10 points
that could be received for meeting the performance standard of a
measure. We believe providers and facilities should only receive
additional points if they achieve higher levels of performance, that
is, their actual performance exceeds the performance standard for the
national average for the period that the Secretary has determined and
improves above the base utilization year.
As we noted above, the right side of Table 42 that represents the
percentage of patients whose hemoglobin levels are greater than 12 g/
dL, illustrates how this scoring methodology could work for a provider/
facility for which, after applying the special rule, the performance
standard for the proposed anemia management measures is the national
performance rates for 2007. Likewise, Table 43 shows an example using a
provider/facility-specific rate as the performance standard (after
applying the special rule) for the proposed anemia management measures.
In addition, Table 44 illustrates how the scoring methodology would
work using the national performance rate for 2007 as the performance
standard (after applying the special rule) for the proposed
hemodialysis adequacy measure, and Table 45 shows an example of the
scoring for the proposed hemodialysis adequacy measure using a
facility-

[[Page 50014]]

specific rate as the performance standard (after applying the special
rule).
Note that the bolded rows show the performance standard for the
applicable measure.

Table 42--Model Scoring Methodology for Proposed Anemia Management Measures Using National Performance Rates in
2007 as the Performance Standards
----------------------------------------------------------------------------------------------------------------
Proposed anemia management measures
------------------------------------------------------------------------------
Percentage of patients whose Percentage of patients whose
hemoglobin levels are less than 10 g/ hemoglobin levels are greater than 12
Points dL g/dL
------------------------------------------------------------------------------
Distribution of Distribution of
Percentage facilities Percentage facilities
----------------------------------------------------------------------------------------------------------------
12 points**...................... Below 2 percent..... 2,523 Below 44 percent... 2,283
10 points........................ 2 percent........... 657 44 percent......... 73
8 points......................... 3 to 4 percent...... 884 45 to 46 percent... 155
6 points......................... 5 to 6 percent...... 358 47 to 48 percent... 143
4 points......................... 7 to 8 percent...... 149 49 to 50 percent... 228
2 points......................... 9 to 10 percent..... 54 51 to 52 percent... 76
0 point.......................... Over 11percent...... 119 Over 53 percent.... 1,786
----------------------------------------------------------------------------------------------------------------
* Provider/Facility must be above both performance standards to receive the bonus points for the anemia
management measures.

Table 43--Model Scoring Methodology for Proposed Anemia Management
Measures Using Facility-Specific Rates as the Performance Standards
------------------------------------------------------------------------
Proposed anemia management measures
-------------------------------------------
Percentage of Percentage of
patients whose patients whose
Points hemoglobin levels hemoglobin levels
are less than 10 g/ are less than 12 g/
dL dL
-------------------------------------------
Percentage Percentage
------------------------------------------------------------------------
12 points*.................. Below 3 percent..... Below 46 percent.
10 points................... 3 percent........... 46 percent
(Example of a (Example of a
facility-specific facility-specific
score). score).
8 points.................... 4 to 5 percent...... 47 to 48 percent.
6 points.................... 6 to 7 percent...... 49 to 50 percent.
4 points.................... 8 to 9 percent...... 51 to 52 percent.
2 points.................... 10 to 11 percent.... 53 to 54 percent.
0 point..................... Over 12 percent..... Over 55 percent.
------------------------------------------------------------------------
* Provider/Facility must be above both performance standards to receive
the bonus points for the anemia management measures.

Table 44--Model Scoring Methodology for Proposed Hemodialysis Adequacy
Measure Using National Performance Rates in 2007 as the Performance
Standard
------------------------------------------------------------------------
Proposed hemodialysis adequacy
measure
--------------------------------------
Points Percentage of
patients whose URR Distribution of
levels are greater facilities
than 65 percent
------------------------------------------------------------------------
12 points**...................... Over 95 percent.... 3,142
10 points........................ 95 percent......... 296
8 points......................... 93 to 94 percent... 417
6 points......................... 91 to 92 percent... 245
4 points......................... 89 to 90 percent... 181
2 points......................... 87 to 88 percent... 102
0 point.......................... Below 86 percent... 296
------------------------------------------------------------------------
** Provider/Facility must be above both performance standards to receive
the bonus points for the hemodialysis adequacy measure.

[[Page 50015]]

Table 45--Model Scoring Methodology for Proposed Hemodialysis Adequacy
Measure Using the Facility-Specific Rates as the Performance Standard
------------------------------------------------------------------------
Proposed hemodialysis
adequacy measure
-----------------------------
Points Percentage of patients whose
URR levels are greater than
65 percent
------------------------------------------------------------------------
12 points**............................... Above 92 percent.
10 points................................. 92 percent
(Example of a facility-
specific score).
8 points.................................. 90 to 91 percent.
6 points.................................. 88 to 89 percent.
4 points.................................. 86 to 87 percent.
2 points.................................. 84 to 85 percent.
0 point................................... Below 83 percent.
------------------------------------------------------------------------
Provider/Facility must be above both performance standards to receive
the bonus points for the hemodialysis adequacy measure.

Another example of how the scoring methodology might work follows
below. The example assumes that Facility A achieves the following
results during the initial performance period:
1. Anemia Management (less than 10 g/dL): Percentage of patients
whose hemoglobin levels are less than 10 g/dL is 4 percent.
2. Anemia Management (more than 12 g/dL): Percentage of patients
whose hemoglobin levels are greater than 12 g/dL is 43 percent.
3. Hemodialysis Adequacy: Percentage of patients whose URR levels
are greater than 65 percent is 93 percent.
The total performance score for Facility A would be 30 points.
Facility A would receive bonus points for the anemia management (more
than 12 g/dL) because the facility was above the national performance
standard for the period determined by the Secretary, which in this
example is 2007, and improved above the base utilization year, which is
also 2007 in this example. However, the facility would not receive
bonus points for the hemodialysis adequacy measure even though it
improved from its base utilization year because it did not receive a
percentage higher than the national average so the facility would
receive a score of 10 points. Table 46 shows how the total performance
score would be calculated for Facility A.

Table 46--Example of Total Performance Score Methodology Using Facility A
----------------------------------------------------------------------------------------------------------------
Facility performance Performance standard
Measure rate using special rule Score
----------------------------------------------------------------------------------------------------------------
Anemia Management: Percentage of 4 percent............... 3 Percent............... 8 points.
patients whose hemoglobin levels are (Use Table 43)..........
less than 10 g/dL.
Anemia Management: Percentage of 43 percent.............. 44 Percent and 46 12 points.
patients whose hemoglobin levels are Percent.
greater than 12 g/dL. (Use Tables 42 and 43)..
Hemodialysis Adequacy: Percentage of 93 percent.............. 92 Percent.............. 10 points.
patients whose URR levels are (Use Table 45)..........
greater than 65 percent.
----------------------
Total............................ 30 points.
----------------------------------------------------------------------------------------------------------------

We believe this total performance score methodology is appropriate
for the initial performance period in the new ESRD QIP because it is
basic and straightforward, allowing providers and facilities to
familiarize themselves with the new pay-for-performance quality system.
We plan to propose a total performance scoring methodology using the
applicable set of measures in future rulemaking. However, we are
seeking input on this model of a total performance score methodology to
be applied for payment consequence year 2012.
In our model, the initial scoring method weights each of the three
proposed measures equally. As we stated above, we also plan to
implement performance standards that include levels of achievement and
improvement after the initial performance period. From a clinical
perspective, we believe that providers and facilities may be concerned
about whether they have as much opportunity to improve their
performance on one of the proposed anemia management measures
(hemoglobin levels less than 10 g/dL) as they might with the other two
proposed measures. We are specifically soliciting comments on whether
this is truly a concern among providers and facilities and, if so,
whether we should consider assigning less weight to the measure based
on that concern. We are also soliciting comments on how reassigning
weights to measures in general (that is, less to some, more to others)
might affect providers and facilities in terms of the payment
consequence.
5. Application of Payment Reductions Using the Total Performance Score
With respect to the providers/facilities that do not meet (or
exceed) the total performance score, section 1881(h)(3)(A)(ii) of the
Act requires the Secretary to ensure that the application of the
scoring methodology results in an appropriate distribution of
reductions in payments among providers and facilities achieving
different levels of total performance scores, with providers and
facilities achieving the lowest total performance scores receiving the
largest reductions.
Under our model, for payment consequence year 2012, we are thinking
about implementing a sliding scale of payment reductions, where the
payment reduction for the lowest total performance score would be 2.0
percent.
Under our model, the minimum total performance score that providers
and facilities would need to achieve in order to avoid a payment
reduction would be 28 points. The range for the payment reductions is
shown in Table 6:

Table 47--Model Range of Payment Reductions
------------------------------------------------------------------------
Total performance score Percent of payment reduction
------------------------------------------------------------------------
28 to 30 Points........................... 0 Percent.
24 to 26 Points........................... .25 Percent.
20 to 22 Points........................... .50 Percent.
16 to 18 Points........................... .75 Percent.
12 to 14 Points........................... 1.0 Percent.
8 to 10 Points............................ 1.25 Percent.
4 to 6 Points............................. 1.50 Percent.
2 Points.................................. 1.75 Percent.

[[Page 50016]]

0 Points.................................. 2.0 Percent.
------------------------------------------------------------------------

Based on our example involving Facility A above, this facility
would not receive a payment reduction in 2012 because it achieved a
total performance score of 30 points.
We recognize that under our model, a provider or facility that
scores poorly on one measure could nonetheless receive no reduction in
payment because the provider or facility also exceeded the performance
standard for one or both of the other two measures. We are concerned
about this possibility and are considering proposing that, for any
measure for which a provider or facility receives 4 points or less, the
provider/facility receive a 0.25 percent payment reduction even if it
receives a total performance score of 28 points. We are seeking
comments on our modeled methodology for applying payment reductions in
2012.
6. Public Reporting of Measures
Section 1881(h)(6) requires the Secretary to establish procedures
for making information regarding performance under the QIP available to
the public, including information on the total performance score and
performance scores for individual measures achieved by each provider
and facility. Providers and facilities are required to have an
opportunity to review this information prior to it being made public.
The Secretary is also directed in section 1881(h)(6)(D) to post a list
of providers and facilities on the CMS Web site that indicates the
total performance score and the performance scores for individual
measures achieved by each provider and facility. In addition, under
section 1881(h)(6)(C), the Secretary is required to provide
certificates to providers and facilities that indicate the total
performance score achieved by the provider or facility, and the
provider or facility must prominently display the certificate in
patient areas.
We plan to establish procedures for making information available to
the public in a future rulemaking, but welcome comments on how to best
implement these statutory requirements.

XVI. Collection of Information Requirements

Under the Paperwork Reduction Act of 1995, we are required to
provide 60-day notice in the Federal Register and solicit public
comment before a collection of information requirement is submitted to
the Office of Management and Budget (OMB) for review and approval. In
order to fairly evaluate whether an information collection should be
approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act
of 1995 requires that we solicit comment on the following issues:
The need for the information collection and its usefulness
in carrying out the proper functions of our agency.
The accuracy of our estimate of the information collection
burden.
The quality, utility, and clarity of the information to be
collected.
Recommendations to minimize the information collection
burden on the affected public, including automated collection
techniques.
We are soliciting public comment on each of these issues for the
following sections of this document that contain information collection
requirements (ICRs):

A. ICRs Regarding a Low-Volume Adjustment (Sec. 413.232(f))

As discussed in section VIII.A.2.b. of this proposed rule, to
receive the low-volume adjustment, we propose that an ESRD facility
must provide an attestation to the Medicare administrative contractor
or fiscal intermediary that it has met the criteria to qualify as a
low-volume facility. The Medicare administrative contractor or fiscal
intermediary would verify the ESRD facility's attestation of their low-
volume status using the ESRD facility's final-settled cost reports.
The burden associated with the requirement is the time and effort
necessary for an ESRD facility attesting as a low-volume facility to
develop an attestation and submit it to the Medicare administrative
contractor or fiscal intermediary. In the 2006 data analysis conducted
by our contractor, UM-KECC, 489 ESRD facilities were identified as
below the low-volume threshold of 3,000 treatments per year. Of these
488 facilities, 166 met the additional low-volume criteria as specified
in Sec. 413.232 of this proposed rule. We estimate that it would
require an administrative staff member from each low-volume facility 5
minutes to develop the attestation and a negligible amount of time to
submit it to the Medicare administrative contractor or fiscal
intermediary. We further estimate several dozen additional ESRD
facilities may meet the criteria of a low-volume facility prior to
implementation of the ESRD PPS and therefore, we round the total number
of estimated low-volume facilities to 200. Therefore, we estimate that
the total initial ESRD facility burden would be 16.6 hours.

B. ICRs Regarding Transition Period (Sec. 413.239)

As discussed in section XIII.A. of this proposed rule, prior to
January 1, 2011, an ESRD facility may make a one-time election to be
excluded from the four-year transition to the ESRD PPS. That is, a
facility may elect to be paid entirely based on the proposed ESRD PPS
beginning January 1, 2011. Proposed Sec. 413.239(b) states that an
ESRD facility may make a one-time election to be paid for items and
services provided during transition based on 100 percent of the payment
amount determined under Sec. 413.215 of this part, rather than based
on the payment amount determined under paragraph (a) of this section.
The section specifies that such election must be submitted to the
facility's Medicare administrative contractor or fiscal intermediary no
later than November 1, 2010.
We estimate that it would require an accountant or financial
management staff member from each of the 4,921 ESRD facilities 1 hour
to simulate average aggregate payments under the proposed ESRD PPS and
compare them to average aggregate payments under the current basic
case-mix adjusted composite payment system, for a total of 4,921 hours.
In addition, for those facilities electing to be excluded from the
four-year transition, the burden associated with the requirement in
proposed Sec. 413.239(b) is the time and effort necessary to develop
an election and submit it to the Medicare administrative contractor or
fiscal intermediary. We estimate that it would require an
administrative staff member from each facility 15 minutes to develop
the notice and a negligible amount of time to submit it. We estimate
that 36 percent of the estimated 4,921 ESRD facilities, or 1,794 ESRD
facilities, would make the election no later than November 1, 2010.
Therefore, we estimate that the total one-time ESRD facility burden
would be 448.5 hours.

[[Page 50017]]

----------------------------------------------------------------------------------------------------------------
Burden per
Regulation section(s) OMB control Respondents Responses response Total annual
number (hours) burden (hours)
----------------------------------------------------------------------------------------------------------------
413.232........................ None........... 488 200 .083 16.6
413.239(b)..................... None........... 4,921 1,794 .25 448.5
----------------------------------------------------------------------------------------------------------------

If you comment on these information collection and recordkeeping
requirements, please do either of the following:
1. Submit your comments electronically as specified in the
ADDRESSES section of this proposed rule; or
2. Submit your comments to the Office of Information and Regulatory
Affairs, Office of Management and Budget, Attention: CMS Desk Officer,
CMS 1418-P. Fax: (202) 395-6974; or E-mail: [email protected].

XVII. Regulatory Impact Analysis

A. Overall Impact

We have examined the impacts of this rule as required by Executive
Order 12866 on Regulatory Planning and Review (September 30, 1993), the
Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-354),
section 1102(b) of the Social Security Act, section 202 of the Unfunded
Mandates Reform Act of 1995 (Pub. L. 104-4), Executive Order 13132 on
Federalism (August 4, 1999), and the Congressional Review Act (5 U.S.C.
804(2)).
Executive Order 12866 directs agencies to assess all costs and
benefits of available regulatory alternatives and, if regulation is
necessary, to select regulatory approaches that maximize net benefits
(including potential economic, environmental, public health and safety
effects, distributive impacts, and equity). A regulatory impact
analysis (RIA) must be prepared for major rules with economically
significant effects ($100 million or more in any 1 year). This proposed
rule is an economically significant rule because we estimate that the
requirement under section 1881(b)(14)(A)(ii) of the Act--that the
estimated total payments for renal dialysis services in CY 2011 equal
98 percent of the estimated total payments that would have been made if
the ESRD PPS were not implemented--equates to an approximate $200
million decrease in payments to ESRD facilities in CY 2011. In
addition, given this estimated impact, this proposed rule also is a
major rule under the Congressional Review Act. Accordingly, we have
prepared a RIA that to the best of our ability presents the costs and
benefits of the proposed rule. We request comments on the economic
analysis provided in this proposed rule.
The RFA requires agencies to analyze options for regulatory relief
of small businesses if a rule has a significant impact on a substantial
number of small entities. For purposes of the RFA, approximately 21
percent of ESRD dialysis facilities are considered small entities
according to the Small Business Administration's size standards, which
considers small businesses those dialysis facilities having total
Medicare revenues of $34.5 million or less in any 1 year, and 19
percent of dialysis facilities are nonprofit organizations. For more
information on SBA's size standards, see the Small Business
Administration's Web site at http://sba.gov/idc/groups/public/documents/sba_homepage/serv_sstd_tablepdf.pdf (Kidney Dialysis
Centers are listed as 621492 with a size standard of $34.5 million).
For purposes of the RFA, we estimate that approximately 21 percent of
ESRD facilities are small entities as that term is used in the RFA
(which includes small businesses, nonprofit organizations, and small
governmental jurisdictions). This amount is based on the number of ESRD
facilities shown in the ownership category in the impact Table 48.
Using the definitions in this ownership category, we consider the 550
facilities that are independent and the 471 facilities that are shown
as hospital-based to be small entities. The ESRD facilities that are
owned and operated by large dialysis organizations (LDOs) and regional
chains would have total revenues more than $34.5 million in any year
when the total revenues for all locations are combined for each
business (individual LDO or regional chain). Overall, a hospital based
ESRD facility (as defined by ownership type) is estimated to receive a
2.4 percent increase in payments under the new ESRD PPS for 2011. An
independent facility (as defined by ownership type) is estimated to
receive a 0.0 percent increase in payments under the proposed ESRD PPS
for 2011. Therefore, the Secretary has determined that this proposed
rule will not have a significant economic impact on a substantial
number of small entities.
The claims data we use to estimate payments to ESRD facilities in
this RFA and RIA does not identify which dialysis facilities are part
of an LDO, regional chain, or other type of ownership. As each
individual dialysis facility has its own provider number and bills
Medicare using this number. Therefore, in previous RFAs and RIAs
presented in proposed and final rules that updated to the basic case-
mix adjusted composite payment system, we considered each ESRD to be a
small entity for purposes of the RFA. However, we conducted a special
analysis for this proposed rule that enabled us to identify the ESRD
facilities that are part of an LDO or regional chain. The results of
this analysis are presented in the type of ownership category of impact
Table 48.
We do not believe ESRD facilities are operated by small government
entities such as counties or towns with populations 50,000 or less and
therefore, they are not enumerated or included in this initial RFA.
Individuals and States are not included in the definition of a small
entity.
In addition, section 1102(b) of the Act requires us to prepare a
regulatory impact analysis if a rule may have a significant impact on
the operations of a substantial number of small rural hospitals. Any
such regulatory impact analysis must conform to the provisions of
section 603 of the RFA. For purposes of section 1102(b) of the Act, we
define a small rural hospital as a hospital that is located outside of
a metropolitan statistical area and has fewer than 100 beds. We do not
believe this proposed rule has a significant impact on operations of a
substantial number of small rural hospitals because most dialysis
facilities are freestanding. While there are 188 rural hospital-based
dialysis facilities, we do not know how many of them are based at
hospitals with fewer than 100 beds. However, overall, the 189 rural
hospital-based dialysis facilities will experience an estimated 1.7
percent increase in payments. As a result, this rule will not have a
significant impact on small rural hospitals. Therefore, the Secretary
has determined that this proposed rule will not have a significant
impact on the operations of a substantial number of small rural
hospitals.
Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) also
requires that agencies assess

[[Page 50018]]

anticipated costs and benefits before issuing any rule whose mandates
require spending in any 1 year $100 million in 1995 dollars, updated
annually for inflation. In 2009, that threshold is approximately $133
million. While dialysis facilities will be paid approximately $200
million less, we do not believe that this proposed rule includes any
mandates that would impose spending costs on State, local, or tribal
governments in the aggregate, or by the private sector, of $133
million.
Executive Order 13132 establishes certain requirements that an
agency must meet when it promulgates a proposed rule (and subsequent
final rule) that imposes substantial direct requirement costs on State
and local governments, preempts State law, or otherwise has Federalism
implications. We do not believe this proposed rule will have a
substantial direct effect on State or local governments, preempt State
law, or otherwise have Federalism implications.
Payment for ESRD Bad Debt
The proposed changes to the ESRD bad debt payment in this proposed
rule are not changes to the existing ESRD bad debt payment methodology
and, therefore, there is no impact on ESRD payments from implementing
the Rule of Construction described in Section 153(a)(4) of MIPPA and
described elsewhere in this proposed rule.

B. Anticipated Effects

1. Effects on ESRD facilities
To understand the impact of the changes affecting payments to
different categories of ESRD facilities, it is necessary to compare
estimated payments in CY 2011 under the current basic case-mix adjusted
composite payment system (current payments) to estimated payments in CY
2011 under the proposed ESRD PPS, including payments to ESRD facilities
paid a blended rate under the transition (new payments). To estimate
the impact among various classes of ESRD facilities, it is imperative
that the estimates of current payments and new payments contain similar
inputs. Therefore, we simulated payments only for those ESRD facilities
that we are able to calculate both current payments and new payments.
ESRD providers were grouped into the categories based on
characteristics provided in the Online Survey and Certification and
Reporting (OSCAR) file and the most recent cost report data from the
Healthcare Cost Report Information System (HCRIS). We also used the
June 2008 update of CY 2007 National Claims History file as a basis for
Medicare dialysis treatments and separately billable drugs and
biologicals.
Table 48 shows the impact of the proposed ESRD PPS compared to
current payments to ESRD facilities under the basic case-mix composite
payment system, including all separately billable items. Column A of
impact Table 48 indicates the number of ESRD facilities for each impact
category and column B indicates the number of dialysis treatments (in
millions).

Table 48--Impact of Proposed Changes in Payments to ESRD Facilities for CY 2011 ESRD PPS
[Percent change in total payments to ESRD facilities (both program and beneficiaries)]
----------------------------------------------------------------------------------------------------------------
2011 Impact
2011 Impact assuming all
Number of Number of assuming facilities
Facility type facilities treatments blended and paid under
(in millions) 100% PPS 100% PPS
payments \1\ payments
----------------------------------------------------------------------------------------------------------------
A B C D
----------------------------------------------------------------------------------------------------------------
All Facilities.................................. 4,921 36.5 -2.0% -2.0%
Type: .............. .............. .............. ..............
Freestanding................................ 4,330 32.7 -2.5% -2.6%
Hospital based.............................. 591 3.8 2.1% 3.7%
Ownership Type: .............. .............. .............. ..............
Large dialysis organization................. 2,987 23.3 -3.1% -3.7%
Regional chain.............................. 753 5.9 -1.3% -0.3%
Independent................................. 550 4.0 0.0% 1.3%
Unknown..................................... 160 0.3 -1.2% 0.0%
Hospital based \2\.............................. 471 3.0 2.4% 4.0%
Geographic Location: .............. .............. .............. ..............
Urban....................................... 3,794 30.3 -1.9% -1.7%
Rural....................................... 1,127 6.3 -2.5% -3.4%
Census Region: .............. .............. .............. ..............
East North Central.......................... 778 5.8 -2.4% -2.4%
East South Central.......................... 384 2.8 -3.0% -4.4%
Middle Atlantic............................. 577 4.6 0.1% 1.2%
Mountain.................................... 267 1.6 -0.6% 0.8%
New England................................. 156 1.2 -1.3% 0.1%
Pacific..................................... 556 4.5 -1.9% -1.0%
South Atlantic.............................. 1,116 8.3 -2.5% -3.3%
West North Central.......................... 374 2.0 -1.2% -0.2%
West South Central.......................... 679 5.2 -3.1% -3.8%
Puerto Rico and Virgin Islands.............. 34 0.4 -2.9% -6.6%
State: .............. .............. .............. ..............
Alaska...................................... 4 0.0 -2.4% 0.3%
Hawaii...................................... 20 0.2 -2.3% -0.2%
Other....................................... 4,897 36.3 -2.0% -2.0%
Facility Size: .............. .............. .............. ..............
Less than 3,000 treatments \3\.............. 489 0.9 5.1% 6.0%
3,000 to 9,999 treatments................... 2,170 10.7 -2.5% -3.1%
10,000 or more treatments................... 2,206 24.8 -2.0% -1.8%

[[Page 50019]]

Unknown..................................... 56 0.1 -1.4% -1.4%
Percentage of Pediatric Patients: .............. .............. .............. ..............
Less than 2%................................ 4,808 36.1 -2.0% -2.0%
Between 2% and 19%.......................... 56 0.4 1.0% 2.3%
Between 20% and 49%......................... 12 0.0 -1.9% -4.9%
More than 50%............................... 45 0.1 -3.6% -11.7%
Prior Composite Rate Exception (IEF, Atypical): .............. .............. .............. ..............
Yes4........................................ 37 0.1 5.2% 4.6%
No.......................................... 4,884 36.4 -2.0% -2.0%
----------------------------------------------------------------------------------------------------------------
\1\ Assumed that 1794 out of 4921 Facilities choose to be excluded from the transition based on comparison of
payments under current system to payments under proposed ESRD PPS.
If payments under a 100% fully implemented ESRD PPS are higher than payments under current system, we assumed
that the facility would elect to be excluded from the transition.
\2\ Includes hospital based facilities not reported to have large dialysis organization or regional chain
ownership.
\3\ Of the 489 Facilities with less than 3,000 treatments, only 166 qualify for the low-volume adjustment. The
low-volume adjustment is mandated by Congress.
The impact to these Low volume Facilites is a 16.6% increase in payments.
\4\ These facilities that choose to retain their exception rate (either IEF or atypical) rather than be paid
under the current basic case-mix adjusted composite payment system.

Section 1881(b)(14)(E)(ii) of the Act provides all ESRD facilities
with the option to make a one-time election to be excluded from the
transition from the current payment system to the ESRD PPS (see section
VII.E of this proposed rule for details of this statutory provision).
Electing to be excluded from the 4-year transition means that the ESRD
facility receives payments for renal dialysis services provided on or
after January 1, 2011, based on 100 percent of the payment rate under
the proposed ESRD PPS, rather than a blended rate based in part on the
payment rate under the current payment system and in part on the
payment rate under the proposed ESRD PPS. In order to estimate which
ESRD facilities would and would not elect to opt out of the transition
and receive payment based on 100 percent of the payment amount under
the ESRD PPS, we are proposing to estimate both the aggregate payments
for each ESRD facility under the proposed ESRD PPS (based on 100
percent of the payment amount under ESRD PPS) and payments in the first
year of the transition (based on a blend of 25 percent of payments
under the proposed ESRD PPS and 75 percent of payments under the
current basic case-mix adjusted composite payment system). We then
assume that facilities that would receive higher aggregate payments
under the proposed ESRD PPS would elect to be paid based on 100 percent
of the payment amount under the proposed ESRD PPS, and facilities that
would receive higher aggregate payments under the first year of the
transition (based on a blend of 25 percent of payments under the
proposed ESRD PPS and 75 percent of payments under the current basic
case-mix adjusted composite payment system) will elect to be paid under
the transition. Based on these assumptions, we are estimating that 36
percent of ESRD facilities would choose to be excluded from the
transition and we estimate that 64 percent of ESRD facilities would
choose to be paid the blended rate under the transition.
Additionally, in accordance with section 1881(b)(14)(E)(iii) of the
Act and as described in section VII.E of this proposed rule, we are
proposing to apply a transition budget-neutrality adjustment factor to
all payments. The purpose of this factor is to make the estimated total
payments under the ESRD PPS equal the estimated total payments that
would have been made if there had been no transition. We estimate this
factor to be 0.970. Since the same factor would be applied to all
payments, including the blended payment rates under the transition, the
effect of the transition budget neutrality adjustment factor is the
same for all impact categories.
The overall effect of the proposed ESRD PPS, in the first year of
the transition, is shown in column C. This effect is determined by
comparing total estimated payments under the proposed ESRD PPS, which
includes blended payments and payments that are computed using our
assumption that 36 percent of ESRD facilities would elect to be paid
100 percent ESRD PPS and 64 percent of ESRD facilities would elect to
go through the transition. These payments have also been adjusted to
reflect the proposed transition budget-neutrality adjustment factor.
Total payments are then compared to payments that would have been made
to facilities for renal dialysis services provided during CY 2011 under
the basic case-mix adjusted composite payment system plus items and
services separately billable under Title XVIII, including ESRD-related
Part D drugs. In column C, the aggregate impact on all facilities is a
2.0 percent reduction in payments, which reflects the statutory 98
percent budget neutrality provision. Hospital-based ESRD providers of
services show a 2.1 percent increase because as a group they receive
higher payments under the proposed ESRD PPS than they would receive
under the current system. We believe that the model used to create the
proposed ESRD PPS adjustment factors more accurately predicts costs for
this provider category. Facilities with less than 3,000 treatments show
a 5.1 percent increase in payments under the proposed ESRD PPS because
many of these facilities are eligible to receive the low-volume
adjustment, which is a 20.2 percent adjustment per treatment. As with
hospital-based ESRD providers of services, we believe that the model
more

[[Page 50020]]

accurately predicts costs for this category. Facilities that chose to
retain a composite rate exception in the current system show a 5.2
percent increase in payments under the proposed ESRD PPS. This may be
explained by the fact that the current basic case-mix adjusted
composite payment system does not completely account for their higher
costs and that the proposed ESRD PPS more accurately accounts for the
higher costs of these facilities as a group. The largest decrease in
payments under the proposed ESRD PPS is for facilities with more than
50 percent pediatric patients which will experience a 3.6 percent
decrease. We believe this decrease may be a result of the current
system overpaying for pediatric patients, rather than the proposed ESRD
PPS underpaying this group of facilities. As described in more detail
in section IX of this proposed rule, the current system provides a 1.62
increase factor for pediatric patients. This factor was developed using
cost per treatment for pediatric facilities that had applied for and
received an exception under the current system. The current 1.62
adjustment factor was intended as a temporary adjustment and we stated
our intention to refine this adjustment (69 FR 66327). We believe that
the proposed pediatric patient adjustments under the proposed ESRD PPS
provide a more accurate estimate of costs for these pediatric patients
and therefore this provider category because they are now empirically
driven and tied to the proposed ESRD PPS base rate. While this provider
category will experience a decrease in payments under the proposed ESRD
PPS as compared to the current system, we believe the transition to the
ESRD PPS will provide a more gradual decrease.
Column D shows the effect if all ESRD facilities were paid 100
percent of the proposed ESRD PPS. In this column, we are showing a
hypothetical effect, as the statute provides for a 4-year transition to
a fully implemented ESRD PPS. We show this column as a comparison to
column C, in order to show how each impact category would have been
effected if the ESRD PPS had been fully implemented in 2011. In column
D, the overall effect for all facilities in aggregate is a 2.0 percent
reduction, which reflects the statutory 98 percent budget neutrality
provision. As with column C, we see the same categories of ESRD
facilities most impacted by the proposed ESRD PPS. However, in column D
the changes are generally more pronounced as those providers do not
have the mitigating effect of the transition. Since column D shows the
hypothetical effect if all ESRD facilities were to be paid 100 percent
of the ESRD PPS in the first year of the transition, we do not need to
apply the transition budget neutrality factor to column D. We believe
that the comparison of columns C and D shows that the statutory option
to transition does provide a more gradual affect for provider
categories that receive lower payments under the proposed ESRD PPS, as
well as the effect of the transition budget neutrality factor.
Generally, providers that do well under the proposed ESRD PPS show
larger increases in column D compared to column C because column D does
not reflect the transition budget neutrality adjustment. However, many
provider categories include a combination of providers that are
estimated to receive higher payments under the proposed ESRD PPS and
providers that are estimated to receive lower payments under the
proposed ESRD PPS. We believe the comparison of columns C and D also
shows that our proposal to apply the transition budget neutrality
factor to all payments does not penalize any one group, but rather it
evenly distributes the effect of this transition budget neutrality
factor among all provider types.
2. Effects on Other Providers
Under the proposed expanded bundle in the proposed ESRD PPS, other
provider types such as laboratories, DME suppliers, and pharmacies
would have to seek payment from ESRD facilities rather than Medicare.
This is because under the proposed ESRD PPS, Medicare is paying ESRD
facilities one combined payment for services that may have been
separately paid by Medicare in the past. As discussed in more detail in
section X.B of this proposed rule, the other provider types noted above
may continue to provide certain ESRD-related services, however,
beginning January 1, 2011, they may no longer bill Medicare directly
and instead must seek payment from ESRD facilities.
3. Effects on the Medicare and Medicaid Programs
We estimate that Medicare spending (total Medicare program
payments) for ESRD facilities over the next five years would be as
follows:

Table 49--Estimated Payments
------------------------------------------------------------------------
Estimated
Calendar year payments ($ in
billions)
------------------------------------------------------------------------
2011.................................................... 7.9
2012.................................................... 8.2
2013.................................................... 8.5
2014.................................................... 8.9
2015.................................................... 9.2
------------------------------------------------------------------------

These estimates are based on current estimates of annual increases
in the ESRDB market basket (discussed in detail in section XII of this
proposed rule) of 2.6 percent for CY 2012 and CY 2013, and 2.7 for CY
2014 and CY 2015. In addition, we estimate that there will be an
increase in fee-for-service Medicare beneficiary enrollment of 1.8
percent in CY 2011, 2.4 percent in CY 2012, 2.5 percent in CY 2013, 2.4
percent in CY 2014 and 2.3 percent in CY 2015.
Consistent with the requirement for 98 percent budget neutrality in
the initial year of implementation, we intend for estimated aggregate
payments under the proposed ESRD PPS to equal 98 percent of the
estimated aggregate payments that would have been made if the proposed
ESRD PPS were not implemented. Our methodology for estimating payment
for purposes of the budget neutrality calculation uses the best
available data.
4. Effects on Medicare Beneficiaries
Medicare beneficiaries are responsible for 20 percent coinsurance
on Part B renal dialysis services. The overall effect for all ESRD
facilities in aggregate is a 2 percent reduction in payments, which
reflects the statutory 98 percent budget neutrality provision. Since
Medicare beneficiaries are responsible for 20 percent coinsurance on
Part B renal dialysis services, this overall 2 percent reduction
translates to a 2 percent reduction to beneficiary coinsurance.

C. Alternatives Considered

In developing this proposed rule, we considered a number of
alternatives. We considered other adjustments, including race,
modality, and site of service. We considered alternative adjustments to
explain variation in cost and resource usage among patients and ESRD
facilities. For example, we considered alternatives in the outlier
policy, such as outlier percentages of 1.5, 2, 2.5, to 3 percent,
rather than the proposed 1 percentage policy. We also considered a
monthly payment, but instead proposed a per treatment payment.
We have discretion on some of the adjustments we are proposing,
however this has no impact on the aggregate amount of spending in the
first year of

[[Page 50021]]

the ESRD PPS (CY 2011). The statute requires a low-volume adjustment of
at least 10 percent and an outlier policy. However, the statute did
provide the Secretary with discretion in defining low-volume facilities
and establishing an outlier policy. These issues are discussed in
sections VIII.C and X.A, respectively. The sections referenced also
discuss our rationale for the policy decisions we made.

D. Accounting Statement and Table

Whenever a rule is considered a significant rule under Executive
Order 12866, we are required to develop an Accounting Statement showing
the classification of the expenditures associated with the provisions
of this proposed rule.
Table 50, below provides our best estimate of the decrease in CY
2011 Medicare payments under the ESRD PPS as a result of the changes
presented in this proposed rule based on the best available data. The
expenditures are classified as a transfer to the Federal Government of
$160 million dollars (or as a savings to the Medicare Program) and as a
transfer to beneficiaries of $40 million.

Table 50
------------------------------------------------------------------------
Category Primary estimate
------------------------------------------------------------------------
Transfers:
Annualized monetized transfers: ``on -$200 million.
budget''.
From whom to whom? Federal Government &
Beneficiaries to ESRD
Facilities.
------------------------------------------------------------------------
Note: The -$200 million from the Federal Government and Beneficiaries to
ESRD Providers is distributed as -$160 million from the Federal
Government to the ESRD Provider, and -$40 million from the
Beneficiaries to the ESRD Provider.

E. Conclusion

The impact analysis shows an overall decrease in payments to all
ESRD facilities for renal dialysis services of 2.0 percent. This is
because of the statutory requirement that payments under the ESRD PPS
in 2011 equal 98 percent of what ESRD facilities would have received
were the ESRD PPS not implemented (or 98 percent of payments to ESRD
facilities under the current payment system).
The analysis above, together with the remainder of this preamble,
provides an initial Regulatory Flexibility Analysis. The analysis
above, together with the remainder of this preamble, provides a
Regulatory Impact Analysis.
In accordance with the provisions of Executive Order 12866, this
regulation was reviewed by the Office of Management and Budget.

List of Subjects

42 CFR Part 410

Health facilities, Health professions, Kidney diseases,
Laboratories, Medicare, Reporting and recordkeeping requirements, Rural
areas, X-rays.

42 CFR Part 413

Health facilities, Kidney diseases, Medicare, Reporting and
recordkeeping requirements.

42 CFR Part 414

Administrative practice and procedure, Health facilities, Health
professions, Kidney diseases, Medicare, Reporting and recordkeeping
requirements.

For the reasons set forth in the preamble, the Center for Medicare
& Medicaid Services proposes to amend 42 CFR Chapter IV as set forth
below:

PART 410--SUPPLEMENTARY MEDICAL INSURANCE (SMI) BENEFITS

Subpart B--Medical and Other Health Services

1. The authority citation for part 410 is revised to read as
follows:

Authority: Secs 1102, 1834, 1871, 1881, and 1893 of the Social
Security Act (42 U.S.C. 1302. 1395m, 1395hh, and 1395ddd.

2. Section 410.50 is amended by revising paragraph (a) to read as
follows:

Sec. 410.50 Institutional dialysis services and supplies: Scope and
conditions.

* * * * *
(a) All services, items, supplies, and equipment necessary to
perform dialysis and drugs medically necessary and the treatment of the
patient for ESRD and, as of January 1, 2011, renal dialysis services as
defined in Sec. 413.171 of this chapter.
* * * * *

PART 413--PRINCIPLES OF REASONABLE COST REIMBURSEMENT; PAYMENT FOR
END-STAGE RENAL DISEASE SERVICES; OPTIONAL PROSPECTIVELY DETERMINED
PAYMENT RATES FOR SKILLED NURSING FACILITIES

3. The authority citation for part 413 continues to read as
follows:

Authority: Secs. 1102, 1812(d), 1814(b), 1815, 1833(a), (i),
and (n), 1861(v), 1871, 1881, 1883, and 1886 of the Social Security
Act (42 U.S.C. 1302, 1395d(d), 1395f(b), 1395(g), 1395I(a), (i), and
(n), 1395x(v), 1395hh, 1395rr, 1395tt, and 1395ww); and sec. 124 of
Public Law 106-113 (133 stat. 1501A-332).

Subpart F--Specific Categories of Costs

4. Section 413.89 is amended by adding a new paragraph (h)(3) to
read as follows:

Sec. 413.89 Bad debts, charity, and courtesy allowances.

* * * * *
(h) * * *
(3) ESRD facilities--
(i) Limitation on bad debt. The amount of ESRD facility bad debts
otherwise treated as allowable costs described in Sec. 413.178.
(ii) Exception. Bad debts arising from covered services paid under
a reasonable charge-based methodology or a fee schedule are not
reimbursable under the program. Additional exceptions for ESRD bad debt
payments are described in Sec. 413.178(d).

Subpart H--Payment for End-Stage Renal Disease (ESRD) Services and
Organ Procurement Costs

5. Section 413.170 is amended by revising the introductory text,
paragraph (a) and paragraph (b) to read as follows:

Sec. 413.170 Scope.

This subpart implements sections 1881(b)(2), (b)(4), (b)(7), and
(b)(12) through (b)(14) of the Act by--
(a) Setting forth the principles and authorities under which CMS is
authorized to establish a prospective payment system for outpatient
maintenance dialysis services in or under the supervision of an ESRD
facility that meets the conditions of coverage in part 494 of this
chapter and as defined in Sec. 413.171(c).
(b) Providing procedures and criteria under which a pediatric ESRD
facility (an ESRD facility with at least a 50 percent pediatric patient
mix as specified in Sec. 413.184 of this subpart) may receive an
exception to its prospective payment rate prior to January 1, 2011; and
* * * * *
6. Section 413.171 is added to read as follows:

Sec. 413.171 Definitions.

For purposes of this subpart, the following definitions apply:
Base rate. The average payment amount per-treatment, standardized
to remove the effects of case-mix and area wage levels and further
reduced for budget neutrality and the outlier percentage. The base rate
is the amount to which the patient-specific case-mix

[[Page 50022]]

adjustments and any ESRD facility adjustments described in Sec.
413.230, if applicable, are applied.
Composite Rate Services. Items and services used in the provision
of outpatient maintenance dialysis for the treatment of ESRD and
included in the composite rate established under section 1881(b)(7) and
section 1881(b)(12) of the Act, the basic case-mix adjusted composite
payment system.
ESRD facility. An ESRD facility is an independent facility or a
hospital-based provider of services (as described in Sec. 413.174(b)
and (c) of this chapter) including facilities that have a self-care
dialysis unit that furnishes only self-dialysis services as defined in
Sec. 494.10 of this chapter and meets the supervision requirements
described in part 494 of this chapter, and that furnishes institutional
dialysis services and supplies under Sec. 410.50 of this chapter.
New ESRD facility. A new ESRD facility is an ESRD facility (as
defined above), that is certified for Medicare participation on or
after January 1, 2011.
Renal dialysis services. Effective January 1, 2011, the following
items and services are considered ``renal dialysis services,'' and paid
under the ESRD prospective payment system under section 1881(b)(14) of
the Act:
(1) Items and services included in the composite rate for renal
dialysis services as of December 31, 2010;
(2) Erythropoiesis stimulating agents and any oral form of such
agents that are furnished to individuals for the treatment of ESRD;
(3) Other drugs and biologicals that are furnished to individuals
for the treatment of ESRD and for which payment was (prior to January
1, 2011) made separately under Title XVIII of the Act (including drugs
and biologicals with only an oral form), and any oral equivalent form
of such drug and biological;
(4) Diagnostic laboratory tests and other items and services not
described in paragraph (1) of this definition that are furnished to
individuals for the treatment of ESRD.
Separately Billable Items and Services. Items and services used in
the provision of outpatient maintenance dialysis for the treatment of
individuals with ESRD that were, prior to January 1, 2011, separately
payable under Title XVIII of the Act and not included in the payment
systems established under section 1881(b)(7) and section 1881(b)(12) of
the Act.
7. Section 413.172 is amended by revising paragraph (a), paragraph
(b) introductory text, and paragraph (b)(1) to read as follows:

Sec. 413.172 Principles of prospective payment.

(a) Payment for renal dialysis services as defined in Sec. 413.171
and home dialysis services as defined in Sec. 413.217 of this chapter
are based on payment rates set prospectively by CMS.
(b) All approved ESRD facilities must accept the prospective
payment rates established by CMS as payment in full for covered renal
dialysis services as defined in Sec. 413.171 or home dialysis
services. Approved ESRD facility means--
(1) Any independent ESRD facility or hospital-based provider of
services (as defined in Sec. 413.174(b) and Sec. 413.174(c) of this
part) that has been approved by CMS to participate in Medicare as an
ESRD supplier; or
* * * * *
8. Section 413.174 is amended as follows:
a. By revising paragraph (a).
b. By revising paragraphs (f) introductory text, (f)(3), and
(f)(4).
c. By adding a new paragraph (f)(5).
The revisions and additions read as follows:

Sec. 413.174 Prospective rates for hospital-based and independent
ESRD facilities.

(a) Establishment of rates. CMS establishes prospective payment
rates for ESRD facilities using a methodology that--
(1) Differentiates between hospital-based providers of services and
independent ESRD facilities for items and services furnished prior to
January 1, 2009, under section 1881(b)(7) and section 1881(b)(12) of
the Act;
(2) Does not differentiate between hospital-based providers of
services and independent ESRD facilities for items and services
furnished on or after January 1, 2009; and
(3) Requires the labor share be based on the labor share otherwise
applied to independent ESRD facilities when applying the geographic
index to hospital-based ESRD providers of services, on or after January
1, 2009.
* * * * *
(f) Additional payment for separately billable drugs and
biologicals. Prior to January 1, 2011, CMS makes additional payment
directly to an ESRD facility for certain ESRD-related drugs and
biologicals furnished to ESRD patients. Effective January 1, 2011, as
specified in section 1881(b)(14) of the Act, payment to an ESRD
facility for certain ESRD-related drugs and biologicals furnished to
ESRD patients on or after January 1, 2011 is incorporated within the
prospective payment system rates established by CMS in Sec. 413.230
and separate payment will no longer be provided.
* * * * *
(3) For drugs furnished prior to January 1, 2006, payment is made
to hospital-based ESRD providers of services on a reasonable cost
basis. Effective January 1, 2006, and prior to January 1, 2011, payment
for drugs furnished by a hospital-based ESRD provider of service is
based on the methodology specified in Sec. 414.904 of this chapter.
(4) For drugs furnished prior to January 1, 2006, payment is made
to independent ESRD facilities based on the methodology specified in
Sec. 405.517 of this chapter. Effective January 1, 2006, and prior to
January 1, 2011, payment for drugs and biologicals furnished by
independent ESRD facilities is based on the methodology specified in
Sec. 414.904 of this chapter.
(5) Effective January 1, 2011, payment for drugs and biologicals
furnished by ESRD facilities as defined in Sec. 413.171(c) is included
in the ESRD prospective payment system rate established in Sec.
413.230.
9. Section 413.176 is revised to read as follows:

Sec. 413.176 Amount of payments.

For items and services, for which payment is made under section
1881(b)(7), section 1881(b)(12), and section 1881(b)(14)of the Act:
(a) If the beneficiary has incurred the full deductible applicable
under Part B of Medicare before the dialysis treatment, Medicare pays
the ESRD facility 80 percent of its prospective rate.
(b) If the beneficiary has not incurred the full deductible
applicable under Part B of Medicare before the dialysis treatment, CMS
subtracts the amount applicable to the deductible from the ESRD
facility's prospective rate and pays the facility 80 percent of the
remainder, if any.
10. Section 413.178 is amended by revising paragraph (d) to read as
follows:

Sec. 413.178 Bad debts.

* * * * *
(d) Exceptions. (1) Bad debts arising from covered ESRD services
paid under a reasonable charge-based methodology or a fee schedule are
not reimbursable under the program.
(2) For services furnished on or after January 1, 2011, bad debts
arising from covered ESRD items or services that, prior to January 1,
2011 were paid under a reasonable charge-based methodology

[[Page 50023]]

or a fee schedule, including but not limited to drugs, laboratory
tests, and supplies are not reimbursable under the program.
11. Section 413.180 is amended by adding a new paragraph (l) to
read as follows.

Sec. 413.180 Procedures for requesting exceptions to payment rates.

* * * * *
(l) Periods of exceptions. (1) Prior to December 31, 2000, an ESRD
facility may receive an exception to its prospective payment rate for
isolated essential facilities, self dialysis training costs, atypical
service intensity (patient mix) and pediatric facilities.
(2) Effective December 31, 2000, an ESRD facility not subject to
paragraph (l)(3), is no longer granted any new exceptions to the
prospective payment rate as defined in Sec. 413.180(l).
(3) Effective April 1, 2004 through September 27, 2004, and on an
annual basis, an ESRD facility with at least 50 percent pediatric
patient mix as specified in Sec. 413.184 of this part, that did not
have an exception rate in effect as of October 1, 2002, may apply for
an exception to its prospective payment rate.
(4) For ESRD facilities that are paid a blended rate for renal
dialysis services provided during the transition described in Sec.
413.235(a) of this part, any existing exceptions for isolated essential
facilities, self dialysis training costs, atypical service intensity
(patient mix) and pediatric facilities is used as the payment amount in
place of the composite rate, for exceptions in effect prior to January
1, 2011 and will be terminated for ESRD services furnished on or after
January 1, 2014.
(5) For ESRD facilities that, in accordance with Sec. 413.235(b)
of this part, elect to be paid for renal dialysis services provided
during the transition based on 100 percent of the payment amount
determined under Sec. 413.220 any existing exceptions for isolated
essential facilities, self dialysis training costs, atypical service
intensity (patient mix) and pediatric facilities are terminated for
ESRD services furnished on or after January 1, 2011.
12. Section 413.195 is added to read as follows:

Sec. 413.195 Limitation on review.

Administrative or judicial review under section 1869 of the Act,
section 1878 of the Act, or otherwise is prohibited of the
determination of payment amounts under section 1881(b)(14)(A) of the
Act, the establishment of an appropriate unit of payment under section
1881(b)(14)(C) of the Act, the identification of renal dialysis
services included in the bundled payment, the adjustments under section
1881(b)(14)(D) of the Act, the application of the phase-in under
section 1881(b)(14)(E) of the Act, and the establishment of the market
basket percentage increase factors under section 1881(b)(14)(F) of the
Act.
13. Section 413.196 is amended by adding new paragraphs (c) and (d)
to read as follows:

Sec. 413.196 Notification of changes in rate-setting methodologies
and payment rates.

* * * * *
(c) Effective for items and services furnished on or after January
1, 2011, CMS adjusts the composite rate portion of the basic case-mix
adjusted composite payment system described in Sec. 413.220 by the
ESRD bundled market basket percentage increase factor minus 1.0
percentage point.
(d) Effective for items and services furnished on or after January
1, 2012, CMS updates on an annual basis the following:
(1) The per-treatment base rate and the composite rate portion of
the basic case-mix adjusted composite payment system described in Sec.
413.220 by the ESRD bundled market basket percentage increase factor
minus 1.0 percentage point.
(2) The wage index using the most current hospital wage data.
(3) The fixed dollar loss amount as defined in Sec. 413.237 of
this part to ensure that outlier payments continue to be 1.0 percent of
total payments to ESRD facilities.
14. Section 413.210 is added to read as follows:

Sec. 413.210 Conditions for payment under the end-stage renal disease
(ESRD) prospective payment system.

Items and services furnished on or after January 1, 2011, under
section 1881(b)(14)(A) of the Act and as identified in Sec. 413.217 of
this part, are paid under the ESRD prospective payment system described
in Sec. 413.215 through Sec. 413.235 of this part.
(a) Qualifications for payment. To qualify for payment, ESRD
facilities must meet the conditions for coverage in part 494 of this
chapter.
(b) Payment for items and services. CMS will not pay any entity or
supplier other than the ESRD facility for covered items and services
furnished to a Medicare beneficiary. The ESRD facility must furnish all
covered items and services defined in Sec. 413.217 of this part either
directly or under arrangements.
15. Section 413.215 is added to subpart H to read as follows:

Sec. 413.215 Basis of payment.

(a) Except as otherwise provided under Sec. 413.235 of this part,
effective January 1, 2011, ESRD facilities receive a predetermined per
treatment payment amount for items and services, specified under
section 1881(b)(14) of the Act and as defined in Sec. 413.217 of this
part, furnished to Medicare Part B fee-for-service beneficiaries.
(b) The per-treatment payment amount is the product of the per
treatment base rate described in Sec. 413.220 plus the applicable
adjustments described in Sec. 413.231 through Sec. 413.237 of this
part.
(c) In addition to the per-treatment payment amount, as described
in Sec. 413.215(a) of this part, the ESRD facility may receive payment
for bad debts of Medicare beneficiaries as specified in Sec. 413.178
of this part.
16. Section 413.217 is added to subpart H to read as follows:

Sec. 413.217 Items and services included in the ESRD prospective
payment system.

The following items and services are included in the ESRD
prospective payment system effective January 1, 2011:
(a) Renal dialysis services as defined in Sec. 413.171; and
(b) Home dialysis services, support, and equipment as identified in
Sec. 410.52 of this chapter.
17. Section 413.220 is added to subpart H to read as follows:

Sec. 413.220 Methodology for calculating the per-treatment base rate
under the ESRD prospective payment system effective January 1, 2011.

(a) Data sources. The methodology for determining the per treatment
base rate under the ESRD prospective payment system utilized:
(1) Medicare data available to estimate the average cost and
payments for items and services.
(2) ESRD facility cost report data capturing the average cost per
treatment.
(3) The lowest per patient utilization calendar year as identified
from Medicare claims for calendar years 2007, 2008, or 2009.
(4) Wage index values used to adjust for geographic wage levels
described in Sec. 413.231 of this part.
(5) An adjustment factor to account for the most recent estimate of
increases in the prices of an appropriate market basket of goods and
services provided by ESRD facilities.
(b) Determining the per treatment base rate for calendar year 2011.
The ESRD prospective payment system combines payments for the composite
rate items and services as defined in

[[Page 50024]]

Sec. 413.171 of this part and the items and services that, prior to
January 1, 2011, were separately billable items and services, as
defined in Sec. 413.171 of this part, into a single per treatment base
rate developed from 2007 claims data. The steps to calculating the per-
treatment base rate for 2011 are as follows:
(1) Average payments in CY 2007, 2008 or 2009. CMS computes the
average Medicare allowable payment for composite rate items and
services and separately billable items and services furnished in CY
2007, 2008 or 2009 to yield a per treatment base rate for 2007, 2008 or
2009 and selects the year with the lowest per patient utilization.
(2) Update of per treatment base rate to 2011. CMS updates the per-
treatment base rate under the ESRD prospective payment system in order
to reflect estimated per treatment costs in 2011.
(3) Standardization. CMS applies a reduction factor to the per
treatment base rate to reflect estimated increases resulting from the
facility-level and patient-level adjustments applicable to the case as
described in Sec. 413.231 through Sec. 413.237 of this part.
(4) Outlier percentage. CMS reduces the per treatment base rate by
1 percent to account for the proportion of the estimated total payments
under the ESRD Prospective Payment System that are outlier payments as
described in Sec. 413.237 of this part.
(5) Budget neutrality. CMS adjusts the per treatment base rate so
that the aggregate payments in 2011 are estimated to be 98 percent of
the amount that would have been made under title XVIII of the Social
Security Act if the ESRD prospective payment system described in Sec.
413.210 through Sec. 413.239 of this part were not implemented.
(6) First Four Years of the ESRD Prospective Payment System. During
the first four years of ESRD prospective payment system (January 1,
2011 to December 31, 2014), CMS adjusts the per-treatment base rate in
accordance with Sec. 413.239(d).
18. Section 413.230 is added to subpart H to read as follows:

Sec. 413.230 Determining the per treatment payment amount.

The per-treatment payment amount is the product of the per
treatment base rate established in Sec. 413.220, the facility-level
and patient-level adjustments described in Sec. 413.231, Sec. 413.232
and Sec. 413.235 of this part, and any outlier payment under Sec.
413.237.
19. Section 413.231 is added to subpart H to read as follows:

Sec. 413.231 Adjustment for wages.

(a) CMS adjusts the labor portion of the base rate to account for
geographic differences in the area wage levels using an appropriate
wage index (established by CMS) which reflects the relative level of
hospital wages and wage-related costs in the geographic area in which
the ESRD facility is located.
(b) The application of the wage index is made on the basis of the
location of the ESRD facility in an urban or rural area as defined in
this paragraph (b).
(1) Urban area means a Metropolitan Statistical Area or a
Metropolitan division (in the case where a Metropolitan Statistical
Area is divided into Metropolitan Divisions), as defined by OMB.
(2) Rural area means any area outside an urban area.
20. Section 413.232 is added to subpart H to read as follows:

Sec. 413.232 Low-volume adjustment.

(a) CMS adjusts the base rate for low-volume ESRD facilities, as
defined in paragraph (b) of this section.
(b) Definition of low-volume facility. A low-volume facility is an
ESRD facility that:
(1) Furnished less than 3,000 treatments in each of the 3 years
preceding the payment year; and
(2) Has not opened, closed, or had a change in ownership in the 3
years preceding the payment year.
(c) For the purpose of determining the number of treatments under
paragraph (b)(1) of this section, the number of treatments considered
furnished by the ESRD facility shall be equal to the aggregate number
of treatments furnished by the ESRD facility and the number of
treatments furnished by other ESRD facilities that are both:
(1) Under common ownership with, and
(2) 25 miles or less from the ESRD facility in question.
(d) The determination under paragraph (c) of this section does not
apply to an ESRD facility that was in existence and certified for
Medicare participation prior January 1, 2011.
(e) Common ownership means the same individual, individuals,
entity, or entities, directly, or indirectly, own 5 percent or more of
each ESRD facility.
(f) To receive the low-volume adjustment, an ESRD facility must
provide an attestation statement to the fiscal intermediary/MAC that
the facility has met all the criteria as established in paragraphs (a),
(b), (c), and (d) of this section.
21. Section 413.235 is added to subpart H to read as follows:

Sec. 413.235 Patient-level adjustments.

Adjustments to the per-treatment base rate may be made to account
for variation in case-mix. These adjustments reflect patient
characteristics that result in higher costs for ESRD facilities.
(a) CMS adjusts the per treatment base rate for adults to account
for patient age, patient sex (female), body surface area, low body mass
index, onset of dialysis (new patient), and co-morbidities, as
specified by CMS.
(b) CMS adjusts the per treatment base rate for pediatric patients
in accordance with section 1881(b)(14)(D)(iv)(I) of the Act, to account
for patient age, treatment modality, and the presence of co-
morbidities.
22. Section 413.237 is added to subpart H to read as follows:

Sec. 413.237 Outliers.

(a) The following definitions apply to this section.
(1) ESRD outlier services are separately billable items and
services as defined in Sec. 413.171 of this part and renal dialysis
service drugs proposed for inclusion in the ESRD prospective payment
system that currently are covered under Medicare Part D.
(2) Adult predicted ESRD outlier services Medicare allowable
payment (MAP) amount means the predicted per-treatment case-mix
adjusted amount for ESRD outlier services furnished to an adult
beneficiary by an ESRD facility as defined in Sec. 413.171.
(3) Pediatric predicted ESRD outlier services Medicare allowable
payment (MAP) amount means the predicted per-treatment case-mix
adjusted amount for ESRD outlier services furnished to a pediatric
beneficiary by an ESRD facility as defined in Sec. 413.171.
(4) Adult fixed dollar loss amount is the amount by which an ESRD
facility's imputed per-treatment MAP amount for furnishing ESRD outlier
services to an adult beneficiary must exceed the adult predicted ESRD
outlier services MAP amount to be eligible for an outlier payment.
(5) Pediatric fixed dollar loss amount: The amount by which an ESRD
facility's imputed per-treatment MAP amount for furnishing ESRD outlier
services to a pediatric beneficiary must exceed the pediatric predicted
ESRD outlier services MAP amount to be eligible for an outlier payment.
(6) Outlier Percentage: This term has the meaning set forth in
Sec. 413.220(c)(4).
(b) Eligibility for outlier payments:
(1) Adult beneficiaries. An ESRD facility will receive an outlier
payment for a treatment furnished to an adult beneficiary if the ESRD
facility's per-

[[Page 50025]]

treatment imputed MAP amount for ESRD outlier services exceeds the
adult predicted ESRD outlier services MAP amount plus the adult fixed
dollar loss amount. To calculate the ESRD facility's per-treatment
imputed MAP amount for an adult beneficiary, CMS divides the ESRD
facility's monthly imputed MAP amount of providing ESRD outlier
services to the adult beneficiary by the number of dialysis treatments
furnished to the adult beneficiary in the relevant month. A beneficiary
is considered an adult beneficiary if the beneficiary is 18 years old
or older.
(2) Pediatric beneficiaries. An ESRD facility will receive an
outlier payment for a treatment furnished to a pediatric beneficiary if
the ESRD facility's per-treatment imputed MAP amount for ESRD outlier
services exceeds the pediatric predicted ESRD outlier services MAP
amount plus the pediatric fixed dollar loss amount. To calculate the
ESRD facility's per-treatment imputed MAP amount for a pediatric
beneficiary, CMS divides the ESRD facility's monthly imputed MAP amount
of providing ESRD outlier services to the pediatric beneficiary by the
number of dialysis treatments furnished to the pediatric beneficiary in
the relevant month. A beneficiary is considered a pediatric beneficiary
if the beneficiary is under 18 years old.
(c) Outlier payment amount: CMS pays 80 percent of the difference
between:
(1) The ESRD facility's per-treatment imputed MAP amount for the
ESRD outlier services, and
(2) The adult or pediatric predicted ESRD outlier services MAP
amount plus the adult or pediatric fixed-dollar loss amount, as
applicable.
23. Section 413.239 is added to subpart H to read as follows:

Sec. 413.239 Transition period.

(a) Duration of transition period and composition of the blended
transition payment. ESRD facilities not electing under paragraph (b) of
this section to be paid based on the payment amount determined under
Sec. 413.230 of this part will be paid a per-treatment payment amount
for renal dialysis services (as defined in Sec. 413.171 of this part)
and home dialysis, provided during the transition as follows--
(1) For services provided on and after January 1, 2011 through
December 31, 2011, a blended rate equal to the sum of:
(i) 75 percent of the payment amount determined under the ESRD
payment methodology in effect prior to January 1, 2011 in accordance
with section 1881(b)(12) of the Act and items and services separately
paid under Part B; and
(ii) 25 percent of the payment amount determined in accordance with
section 1881(b)(14) of the Act;
(2) For services provided on and after January 1, 2012 through
December 31, 2012, a blended rate equal to the sum of:
(i) 50 percent of the payment amount determined under the ESRD
payment methodology in effect prior to January 1, 2011 in accordance
with section 1881(b)(12) of the Act and items and services separately
paid under Part B; and
(ii) 50 percent of the payment rate determined in accordance with
section 1881(b)(14) of the Act;
(3) For services provided on and after January 1, 2013 through
December 31, 2013, a blended rate equal to the sum of:
(i) 25 percent of the payment amount determined under the ESRD
payment methodology in effect prior to January 1, 2011 in accordance
with section 1881(b) (12) of the Act and items and services separately
paid under Part B; and
(ii) 75 percent of the payment amount determined in accordance with
section 1881(b)(14) of the Act;
(4) For services provided on and after January 1, 2014, 100 percent
of the payment amount determined in accordance with section 1881(b)(14)
of the Act.
(b) One-time election. Except as provided in paragraph (b)(2) of
this section, ESRD facilities may make a one-time election to be paid
for items and services provided during the transition based on 100
percent of the payment amount determined under Sec. 413.215 of this
part, rather than based on the payment amount determined under
paragraph (a) of this section.
(1) Except as provided in paragraph (b)(3) of this section, the
election must be received by each ESRD facility's Medicare
administrative contractor (MAC) by November 1, 2010, regardless of any
postmarks or anticipated delivery dates. Requests received, postmarked,
or delivered by other means after November 1, 2010 will not be
accepted. Once the election is made, it may not be rescinded.
(2) If the ESRD facility fails to submit an election, or the ESRD
facility's election is not received by CMS by November 1, 2010,
payments to the ESRD facility for items and services provided during
the transition will be based on the payment amounts determined under
paragraph (a) of this section.
(3) ESRD facilities that become certified for Medicare
participation and begin to provide renal dialysis services, as defined
in Sec. 413.171 of this part, between November 1, 2010 and December
31, 2010, must notify their designated contractor (MAC) of their
election choice at the time of enrollment.
(c) Treatment of new ESRD facilities. For renal dialysis services
as defined in Sec. 413.171, provided during the transition, new ESRD
facilities as defined in Sec. 413.171, are paid based on the per-
treatment payment amount determined under Sec. 413.215 of this part.
(d) Transition budget-neutrality adjustment. During the first 3
years of the transition (January 1, 2011 through December 31, 2013),
CMS adjusts all payments, including payments under this section, under
the ESRD prospective payment system so that the estimated total amount
of payment equals the estimated total amount of payments that would
otherwise occur without such a transition.
24. Section 413.241 is added to subpart H to read as follows:

Sec. 413.241 Pharmacy arrangements.

Effective January 1, 2011, the ESRD facility that enters into an
arrangement with a pharmacy to furnish renal dialysis service drugs
must ensure that the pharmacy is located such that it has the
capability to provide all classes of renal dialysis service drugs to
patients in a timely manner.

PART 414--PAYMENT FOR PART B MEDICAL AND OTHER HEALTH SERVICES

25. The authority citation for part 414 continues to read as
follows:

Authority: Secs 1102, 1871, and 1881(b)(l) of the Social
Security Act (42 U.S.C. 1302, 1395hh, and 1395rr(b)(l)).

Subpart E--Determination of Reasonable Charges Under the ESRD
Program

26. Section 414.330 is amended by--
A. Removing ``Sec. 413.170'' and adding in its place ``Sec.
413.210'' in paragraph (a)(1) and paragraph (b)(1).
B. Revising the heading of paragraph (a)(2).
C. Revising the heading of paragraph (b)(2).
D. Removing the paragraph heading and adding in its place new
introductory text in paragraph (c).

Sec. 414.330 Payment for home dialysis equipment, supplies, and
support services.

(a) * * *
(2) Exception for equipment and supplies furnished prior to January
1, 2011. * * *
* * * * *

[[Page 50026]]

(b) * * *
(2) Exception for home support services furnished prior to January
1, 2011. * * *
* * * * *
(c) Payment limits for support services, equipment and supplies,
and notification of changes to the payment limits apply prior to
January 1, 2011 as follows:
* * * * *
27. Section 414.335 is amended by revising paragraph (a) to read as
follows:

Sec. 414.335 Payment for EPO furnished to a home dialysis patient for
use in the home.

(a) Prior to January 1, 2011, payment for EPO used at home by a
home dialysis patient is made only to either a Medicare approved ESRD
facility or a supplier of home dialysis equipment and supplies.
Effective January 1, 2011, payment for EPO used at home by a home
dialysis patient is made only to a Medicare approved ESRD facility.
* * * * *
(Catalog of Federal Domestic Assistance Program No. 93.773,
Medicare--Hospital Insurance; and Program No. 93.774, Medicare--
Supplementary Medical Insurance Program)

Dated: May 28, 2009.
Charlene Frizzera,
Acting Administrator, Centers for Medicare & Medicaid Services.
Approved: July 23, 2009.
Kathleen Sebelius,
Secretary.

Note: The following Appendices will not appear in the Code of
Federal Regulations.

BILLING CODE 4120-01-P

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[FR Doc. E9-22486 Filed 9-15-09; 4:15 pm]
BILLING CODE 4120-01-C