Hypothetical Mean

Commentary from an Actuarial and Economic Perspective

ESRD: A Case Study in Single Payer Health Insurance

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Medicare’s struggles with End-Stage Renal Disease (ESRD) provide insight into government provided healthcare.  In 1972, President Nixon signed a bill that provided universal coverage for all Americans who have ESRD.  At the time, there were 7,000 people with ESRD on dialysis.  It seemed a managable socialization.

Now, we have more than 300,000.  In 2002, ESRD represented more than 6.7% of all Medicare expenditures.  We have discovered new drug treatments like Epogen which help fights anemia for those on dialysis.  Government payment structures have lagged technology. From 1983 to 2003, when the infamous Medicare Modernization Act was passed, government paid providers for a bundle of services via something known as a composite fee. Now, we are trying to do something about it.

There is a war on for how to pay for ESRD treatments. This WSJ article ($$) details the complex political issues involved. One way to trim costs is to eliminate “overprescription” of Epogen, which may ultimately be harmful for those receiving the higher doses. But what is overprescription? It turns out that African Americans receive more Epogen, perhaps because of a higher incidence of related complications. So far, Congressional Democrats have been undeterred in their attempt to save money by limiting Epogen prescriptions. However, the racial overtones of these decisions are now being looked at, and the Congressional Black Caucus may be break with Democrats, stalling funding reform. We’ll see.

The politicization of medicine is just one of the problems we are facing with ESRD. The government’s virtual monopoly on ESRD treatments plays havoc with traditional government methods for determining fair levels of remuneration. This is especially true for valuing a drug like Epogen. Bruce Steinwald’s GAO congressional testimony described the impact of the current method, which takes the Average Sales Price (ASP) from the manufacturer and arbitrarily adds 6%:

… certain unknowns about the composition of ASP and the ASP-based payment formula make it difficult for CMS to determine whether the ASP-based payment rates are no greater than necessary to achieve appropriate beneficiary access. For one thing, CMS has no procedures for validating the accuracy of a manufacturer’s ASP, which is computed by the manufacturer. For another, CMS has no empirical justification for the 6 percent add-on to ASP. Regardless of how payment for these drugs is calculated, as long as facilities receive a separate payment for each administration of each drug and the payment exceeds the cost of acquiring the drug, an incentive remains to use more of these drugs than necessary.

Epogen is the only product available in the domestic ESRD market for anemia management. However, the ASP method relies on market forces to achieve a favorable rate for Medicare. When a product is available through only one manufacturer, Medicare’s ASP rate lacks the moderating influence of competition. The lack of price competition may be financially insignificant for noncompetitive products that are rarely used, but for Epogen, which is pervasively and frequently used, the lack of price competition could be having a considerable adverse effect on Medicare spending.

The result: two billion dollars spent on Epogen per year, and a lot of chaos.


Written by Victor

September 12, 2007 at 1:43 pm

One Response

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  1. Greetings…

    Wasn’t what I was looking for, but neat site. Take care….

    Tami L

    November 30, 2008 at 6:22 am

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