Amgen Still Owns the Power

IS THE ESRD PROVIDER community trapped in a flawed delivery system that benefits a few large organizations at the expense of the small dialysis provider? Given that Amgen has the power to unilaterally set pricing for Epogen (EPO), the question is, will Amgen ever level the playing field for these independent dialysis facilities? I speak with a lot of independent dialysis facility operators that were privately hoping Roche would be allowed to enter the erythropoetic stimulant agent (ESA) marketplace to compete with Amgen. The reality of the courts decision to uphold Amgen’s patents means there will be no competition for ESAs in ESRD until 2013, five years from now.

What does this mean for the independent dialysis facilities, which are collectively referred to as MDOs, SDOs, freestanding or hospital-based dialysis facilities? The reality is the independent dialysis facility will continue to pay more for Epogen than the two largest dialysis organizations (LDOs) in the United States, under the auspices of purchasing power. This means the independent dialysis facilities indirectly subsidize these two national chain providers under the Centers for Medicare & Medicaid Services’ current ESA reimbursement policy. Medicare sets the reimbursement amount per 100 units for Epogen quarterly at a rate of 6 percent above the average sales price (ASP), currently $0.896. Accordingly, since the LDOs pay less for the drug, they generate more profit on Medicare Epogen reimbursement rates than independent dialysis facilities, without any discernable difference in the cost of administration.

We can use simple business mathematics to determine the actual purchase price paid for Epogen by the LDOs along with calculating their Medicare profit margin. We know that there are approximately 4,750 certified dialysis facilities in the United States. If we look at the ESRD provider marketplace demographics, one LDO owns approximately 1,600 dialysis facilities and the other LDO owns approximately 1,350 dialysis facilities. This means that the there are approximately 1,800, or 38 percent, remaining independent dialysis facilities in the United States. We also know that the Renal Purchasing Group (RPG) organization boasts participation of the vast majority of the independent dialysis facility market segment. Given RPG’s published contracted Epogen purpose price of $0.⁸⁹⁶ per 100 units, net of 6.¹ percent discounts, we can determine the LDO’s contracted Epogen purchase price and Medicare EPO profit margin as follows. (Fig. 1)

In analyzing the difference in purchasing power between the LDOs and the independent dialysis facilities, we will use a basic set of assumptions based on Amgen’s representations for utilization to determine the disparity in purchasing power between these two segments over the next five years. Assuming that the average EPO dose per patient is 7,200 units (according to Amgen) and that the average facility size is 70 patients (333,000 patients/4,750 facilities = 70 patients) with an estimated 90 percent EPO utilization rate, we can calculate how much more the independent dialysis facilities will pay Amgen for EPO over and above the LDOs over the next five years as follows:

Independent Dialysis Facilities’ Additional EPO Cost Paid to Amgen Over the Next Five Years

•7,200 units x $0.⁰⁸² per tx = $5.⁹⁰ x 156 tx’s per yr = $920.⁴⁰ per yr x 70 pts x 90% utilization = $57,985.²⁰ annual cost per facility x 1,800 facilities = $104,373,360 x 5 yrs = $521,866,800 (This represents Amgen’s excess profits generated off the independent dialysis facilities)

In applying the same factual situation, we can determine the collective independent dialysis facility profit margins for EPO for Medicare patients over the next five years as follows:

Independent Dialysis Facilities’ Collective Medicare Profit Margins on EPO Over the Next Five Years

•7,200 units x $0.⁰⁰⁰ per tx = $0.⁰⁰ x 156 tx’s per yr = $000.⁰⁰ per yr x 70 pts x 90% utilization = $00,000.⁰⁰ annual cost per facility x 1,800 facilities = $00,000,000 x 5 yrs = $000,000,000 (This represents the collective profit margin of independent dialysis facilities.)

In applying the same factual situation we can determine the LDOs average profit margins for Medicare patients over the next five years is as follows.

LDO’s Collective Medicare Profit Margins on EPO Over the Next Five Years

•7,200 units x $0.⁰⁸² per tx = $5.⁹⁰ x 156 tx’s per yr = $920.⁴⁰ per yr x 70 pts x 90% utilization = $57,985.²⁰ annual cost per facility x 2,950 facilities = $171,056,340 x 5 yrs = $855,281,700 (This represents the LDOs’ total Medicare profit generated off EPO, which includes a 4.93% built-in profit margin percentage subsidy from independent dialysis facilities)

The simple observation of the aforementioned data indicates Amgen will receive $521,866,800 more in revenue over the next five years from the independent dialysis facility segment than it will get from its LDO counterparts. In addition, the independent dialysis facilities will not generate any profit margins on EPO for Medicare patients (which are approximately 90 percent of their payer mix) over the next five years while the LDOs will earn $855,281,700 split two ways netting approximately $427,640,850 each. Given this factual situation, it appears that the independent dialysis facilities are the sacrificial lambs for “The Big Three,” Amgen and the two LDOs, by subsidizing EPO administrations through current CMS ESA reimbursement policies, without any discernable difference in the cost of administering the drug.

I would also like to point out two other observations in defense of the independent dialysis providers. First, the independent dialysis facilities have no profit motive for higher utilization of EPO under current CMS ESA reimbursement policy, contrary to what is being insinuated by certain lawmakers regarding built-in incentives for “greedy” dialysis facility providers and physicians to overprescribe the drug. Secondly, when you consider an estimated average rate of 4 percent bad debt for independent dialysis facilities, they actually lose money on every Medicare EPO unit prescribed and there is no possibility to recover these bad debt losses from CMS under current reimbursement policy.

Given all of this negative data surrounding the financial inequities of the current CMS ESA reimbursement policy, when facing challenges like this, my experience has taught me to identify and raise possible solutions to improve the outcome. Therefore, I offer four possible solutions that relate to the current delivery system for ESAs. These four solutions address each phase of the delivery system from Amgen (the manufacturer) to RPG, (the GPO/distributor) to the independent dialysis provider and finally to CMS ESA current reimbursement policy itself. In this regard, each one of these four participants in the ESA delivery system can single-handedly lead the effort to achieve financial balance while maintaining their equanimity.

For instance, Amgen could proactively reduce the purchase price for EPO to independent dialysis facilities based on fundamental principles and situational ethics. Amgen could respond to CMS ESA reimbursement policy by being a responsive corporate member of the dialysis provider community. My viewpoint for raising this possible solution is from the dialysis caregiver’s perspective, with compassion and humility, as they truly want better outcomes for their patients. It is becoming a sad day for the ESRD program when the collective good of a single drug is diminished solely to monetary considerations.

My second solution for consideration is relative to RPG and its role as the independent dialysis facility group purchasing organization (GPO), with the estimated combined purchasing of 1,800 independent facilities totaling 38 percent of the marketplace, RPG would appear to have enough purchasing power to negotiate a purchase agreement with Amgen for EPO at or around the levels of the two LDOs. The difference between 38 percent and 31 percent (62 percent / 2 LDOs) should effectively negate any competitive advantage by the LDOs. Since RPG is run by people, I am directing this consideration to the executive director. Has the GPO lost focus on the EPO contracted sales price in favor of the consideration of commissions? For example, a 10.⁹³ percent variance in the contracted purchase price for EPO may have little effect on the amount of commissions received by the GPO, whereas, as we identified above, there is a material effect on the total amount that will be paid for the drug by the independent dialysis provider over the life of a contract period. In this case, serving two masters (commissions versus sales price) may create an inherent conflict of interest that could cloud objectivity. The primary goal of the GPO should be to negotiate the best possible purchase price for EPO given the leverage of a 38 percent market share.

My third proposed solution: Since independence dialysis facilities are mandated to administer EPO under their CMS ESRD dialysis facility certification requirements they could go on strike. This in no way implies that servicing ESRD patients comes to a halt but rather, as they do in Japan, wear red arm bands to signify that they are on strike. In doing so, providers can express their frustrations with CMS’s current ESA reimbursement policy while still continuing to perform their stated mission, providing quality care for ESRD patients. Accordingly, if Medicare patients ask about the meaning of the red arm bands the caregivers could educate the dialysis patients on the challenges facing the independent dialysis facility relating to CMS’s ESA reimbursement policies. This would also bring awareness to ESRD patients about financial issues that may eventually affect their quality and access to dialysis care. Staying on course sometimes means that we may have to speak uncomfortable truths.

Lastly, we could ask CMS to create an exception in the reimbursement methodology to counterbalance the disparity in the cost of EPO similar to what is in place for labor rates and case-mix rate adjustments that are already built in to the composite reimbursement rate structure. My concern here is that CMS may or may not have the authority or the desire to take on this issue without congressional support. In this regard, I would hope that CMS sees the imbalance of the current ESA reimbursement policy and has the courage to champion change for the benefit of their beneficiaries, the Medicare patient.

In conclusion, this ESA pricing/reimbursement issue begs us to ask the question of where our priorities are in government. In a much larger viewpoint; relatively speaking, one could (and should) ask how many defense contractors are being forced to sell their arms to our government at cost? If we can fund war based on principle, we should be able to fund and manage our healthcare system by leadership and merit to guide the ESRD program in the right direction. As I was once taught, “In God we trust; everyone else bring data.” I will let you be the judge on whether we are an industry in crisis or not.

Finally, EPO is only one flaw in current ESRD reimbursement policies and now there is proposed legislation to bundle everything into one ESRD composite rate, whereby we will lose the ability of tracking issues like this separately. My concern is for a Congress that wants to fundamentally change the ESRD reimbursement incentives from overtreating patients to undertreating patients under the auspices of a bundled rate, without a demonstration project. Simply stated, this is, at a minimum, reckless. Stay tuned for my analysis of the bundled rate proposal. RBT

Bruce Thompson is the founder and CEO of Gaia Software.

The opinions in this article, express or implied, are the author’s individual opinions and do not reflect the opinions of any organizations, groups or associations.

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