ESRD Market Basket and How it Affects You

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AS WE WAIT for the issuance of the final rule on the new end-stage renal disease bundle I am busy preparing ESRD facility cost reports for those providers with a fiscal year that ends on Dec. 31, 2009.

Since cost reports are at times tedious and one could wonder why they have to be prepared at all, I thought this would be a good time to have a closer look at one of the key update factors for the composite rate payment itself that is impacted by cost report data, namely the ESRD bundle market basket, which goes by the acronym “ESRDB” market basket.

Without delving into the mathematical minutiae of how the SRDB market basket is calculated, here are some of the key points to keep in mind.

1. ESRDB Market Basket is an Ongoing Financial Reality

Firstly, the ESRDB market basket will be mandated and will impact your payment rate update, so it will be an ongoing reality and is worthy of your time and understanding. Per the Proposed Rule:

... 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.

2. The ESRDB Market Basket Applies to the Full Spectrum of Bundled Costs

Again, quoting from the Proposed Rule:

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. [Emphasis Added]

3. The Accuracy od Freestanding Facility Cost Reports Impact the ESRDB Market Basket Adjustment.

After reading the following excerpts from the proposed rule, you should have no doubt that the quality of cost reporting for freestanding facilities will impact the ESRDB market basket adjustment:

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).

...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.

...The resulting data set included information from approximately 3,572 independent ESRD facilities’ cost reports from an available pool of 3,970 cost reports.

4. Hospital ESRD Costs are Not Directly Factored into the ESRDB Market Basket

It is generally accepted that hospitals have, on the average, higher costs and often more acute patients than their freestanding counterparts. Nonetheless, CMS has not used any hospital cost reporting information to calculate the ESRDB market basket. Again, from the Proposed Rule:

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.

You may detect a somewhat defensive tone in the CMS rationale for why hospital data is not used to develop the ESRDB market basket.

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.

But, does it really make sense to omit cost data from hospital-based dialysis facilities when determining the composite rate payment which applies to hospital based facilities?

In closing, for those of us who prepare ESRD facility cost reports, lets keep in mind that the better information we prepare, the better accuracy we can expect in the new, but here to stay, ESRD bundle market basket.

So, what are your thoughts? As always, feel free to drop me a line at jahern@ahernconsulting.com and let me know what you think. RBT


With offices are located in Chicago and Washington, D.C., Jack Ahern provides cutting edge financial and management consulting services to major academic medical centers, large national dialysis organizations, independently owned dialysis facilities, nephrology groups, as well as to legislators, institutional investors, pharmaceutical companies and medical device manufactures. He has an MBA from the University of Chicago, and several undergraduate degrees in the physical sciences from Dalhousie University. He can be reached at (312) 997-2177, ext. 701.

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