Estimating increases in outpatient dialysis costs resulting from scientific and technological advancement

The Medicare program's base payment rate for outpatient dialysis services has never been adjusted for the effects of inflation, productivity changes, or scientific and technological advancement on the costs of treating patients with end-stage renal disease. In recognition of this, Congress asked the Prospective Payment Assessment Commission to annually recommend an adjustment to Medicare's base payment rate to dialysis facilities. One component of this adjustment addresses the cost-increasing effects of technological change--the scientific and technological advances (S&TA) component. The S&TA component is intended to encourage dialysis facilities to adopt technologies that, when applied appropriately, enhance the quality of patient care, even though they may also increase costs. We found the appropriate increase to the composite payment rate for Medicare outpatient dialysis services in fiscal year 1995 to vary from 0.18% to 2.18%. These estimates depend on whether one accounts for the lack of previous adjustments to the composite rate. Mathematically, the S&TA adjustment also depends on whether one considers the likelihood of missing some dialysis sessions because of illness or hospitalization. The S&TA estimates also allow for differences in the incremental costs of technological change that are based on the varying advice of experts in the dialysis industry. The major contributors to the cost of technological change in dialysis services are the use of twin-bag disconnect peritoneal dialysis systems, automated peritoneal dialysis cyclers, and the new generation of hemodialysis machines currently on the market. Factors beyond the control of dialysis facility personnel that influence the cost of patient care should be considered when payment rates are set, and those rates should be updated as market conditions change. The S&TA adjustment is one example of how the composite rate payment system for outpatient dialysis services can be modified to provide appropriate incentives for producing high-quality care efficiently.