J. Service Science & Management, 2010, 3 : 45 -50
doi:10.4236/jssm.2010.31005 Published Online March 2010 (http://www.SciRP.org/journal/jssm)
Copyright © 2010 SciRes JSSM
End Stage Renal Disease Economics and the
Balance of Treatment Modalities
John D. Sullivan
Boston University, Boston, USA.
Email: jsulliva@bu.edu
Received June 25th, 2009; revised August 19th, 2009; accepted October 1st, 2009.
Periodically, research articles emerge arguing the economic b enefits of peritoneal dialysis, or PD, over the traditional
in-center hemo dialysis for patients su ffering from End Stage Renal Disease. Resulting conclusion s indentify PD as the
ideal therapy to reduce Medicare expenditures for this expensive treatment. However, despite this possible economic
benefit to the United States taxpayer, the number of PD patients remains relatively flat with an increasing amount of
patients being prescribed in-center hemo dialysis. A simplistic view of controlling the rising costs, on a per treatment
basis, associated with the treatment of this disease would be to increase the number of patients from in-center hemo
dialysis to peritoneal dialysis. This pap er will ar gue why this shift is both unlikely and unrealistic, an d why the resulting
potential cost savings to this segment of the Medicare program is a myth.
Keywords: End Stage Renal Disease , Di alysis, Medicare, Reimb urse ment, Economics, Mergers , Acq u i sit i ons
1. Introduction
The primary function for our kidneys is to remove excess
fluids and toxins from the body through urine. The pro-
duction of urine is a complex process of excretion and
reabsorption. Because of this process, kidneys are also
known as the body’s chemists, balancing and stabilizing
salt, potassium, and acid content. Kidneys also produce a
potent Vitamin D and hormones that impact the function
of other organs. Erythropoietin, one of these significant
hormones, acts as stimulation for the production of red
blood cells.
Chronic kidney disease, or CKD, impacts the lives of
more than 26 million patients in the United States with
millions of others at an increased risk of developing the
disease [1]. There are five stages of kidney disease
tracking renal function with stage 5 representing near or
complete renal failure. Progression of the disease is
measured through several tests such as the Glomerular
filtration rate, urine protein tests, and blood pressure.
As of today, there is no cure for end stage renal dis-
ease. Patients with stage 5 renal CKD require either a
kidney transplantation or dialysis for continued survival.
Without immediate treatment, patients will suffer from
uremia, a build up of toxins and fluid in the blood. This
condition will lead to death in a matter of days or weeks
depending on existing renal function as each kidney de-
teriorates. Symptoms of uremia include, but are not lim-
ited to, nausea, vomiting, loss of appetite, weight loss
and ultimately changes in mental status, confusion, re-
duced awareness, psychosis, seizures, agitation, and
The most common cause of kidney disease is diabetes
and hypertension. Incidence of renal failure is increasing
as a result of these disorders as well as the aging popula-
tion. Race can also be a factor in the incidence of ESRD.
African Americans, American Indians, Hispanics, Asians,
and Pacific Islanders have a higher incidence of renal
failure due to higher rates of diabetes and high blood
pressure [2 ,3].
The most ideal treatment for patients with End Stage
Renal Disease is transplantation. Transplantation is
purely a treatment and not a cure. Patients, even with
ideal tissue matches, must take immunosuppressive drugs
to ensure that the organ is not rejected by the body's
natural immune system. The number of transplants in the
United States has increased significantly from the late
1980’s as technology and drugs have improved. But
since 2003, the total number of transplantations have
leveled off at approximately 16,500 per year with the
waiting list for a kidney growing to 85,000 [4]. (Figure
1). The transplant rate remains flat due to the lack of
available organs. Studies have concluded that transplan-
tation is not only the be st option for a patient’s quality of
life, but also is the most cost effective therapy [5,6].
End Stage Renal Disease Economics and the Balance of Treatment Modalities
Copyright © 2010 SciRes JSSM
2. Dialysis Treatment Options
For patients not fortunate enough to receive a kidney
transplant, there are two other treatment options: hemo-
dialysis and peritoneal dialysis. Hemodialysis is primar-
ily performed in a dialysis outpatient center although
some hospital based programs continue to operate. Pa-
tients that utilize this therapy visit the dialysis center
three times each week for treatments that will last be-
tween 3 1/2 and 4 1/2 hours. Due to the time commit-
ment for hemodialysis and many of the other medical
problems that are associated with patients that require
this treatment, most patients cannot maintain full-time
employment and drop out of the workforce. By far,
hemodialysis is the majority of the treatment modality
chosen by nephr olo gi st s. (Fi g ure 2)
In the past few years, some research has suggested that
the treatment time for hemodialysis should be longer if
the three treatments per week model are followed [7].
Current literature has moved from this theory to one that
prescribes shorter dialysis times, but on a daily basis. But
since the present reimbursement structure is based on a
thrice a week structure, it is unlikely that this change in
treatment time and frequency will occur on a national
wide-scale despite the probable benefits to the patient.
Figure 1. Source: United network for organ sharing
Figure 2. Source: USRDS 2008 annual report
Not all hemodialysis is performed in outpatient or hos-
pital based clinics. A small portion of dialysis patients do
receive treatment in their home. Many of these patients
utilize machines built by NxStage and undergo extensive
training in their treatment. Despite the logical reasoning
behind this treatment modality, home hemodialysis
doesn’t seem to be getting any traction and the number of
patients undergoing this treatment is insign ifican t [8].
No matter in a clinic or in the home setting, hemodi-
alysis requires pumping the blood from the patient to the
dialysis machine. The machine pushes the blood along
through arterial lines to an artificial kidney where the
blood flows against dialysate, a fluid that removes toxins
through osmosis. The blood then returns to the body by
way of venus lines. To accommodate the flow of blood,
patients must undergo surgery to improve vascular access.
For all hemodialysis patients, vascular access is both
required and presents an ongoing challenge for both
nephrologists as well as vascular surgeons. The site often
clots and requires hospitalizations and repeated medical
procedures to ensure p ro per bl oo d fl o w fo r dialysis.
One of the positive aspects of hemodialysis therapy is
the social interaction between patients and the center’s
staff. Patients in this setting tend to bond and exchange
information about their illness and treatment progress.
Many patients also prefer the clinic over treatment at
home due to the stress and potential medical problems
that can occur outside a qualified medical facility.
Peritoneal dialysis, as a therapy, is very different than
its hemodialysis counterpart. PD dialyzes a patient
through the u se of the peritoneal cavity. Each patient has
a catheter implanted in their lower abdomen and infuses
dialysis fluid into the peritoneal cavity. As the fluid is
removed from the abdomen, toxins flow out along with
the dialysate. The peritoneal membrane essentially acts
as the filter for the dialysis process. There are two types
of PD available for patients: Continuous Ambulatory
Peritoneal Dialysis (CAPD) and Continuous Cycling
Peritoneal Dialysis (CCPD). Not all patients are suited
for peritoneal dialysis [9]. Patients must be compliant
and careful in their treatment. Both therap ies require that
patients undergo extensive training, usually at an ap-
proved dialysis center. Patients must visit that center fre-
quently to pick up th eir supplies and to receive any infu -
sion drugs that may be prescr ibed.
CAPD requires multiple exchanges of dialysate during
the day and has no equipment. CCPD is performed at
night while the patient sleeps and requires the use of a
“cycling” machine. In the past, most patients that were
suitable for PD were prescribed CAPD . Presen tly, mostl y
as a result of technologically advanced cyclers, the
amount of patients on PD has flipped with CCPD being
the preferred prescription [10]. Each PD treatment,
unlike hemodialysis’ thrice a week regime, is performed
each day. Reimbursement for this therapy is identical to
End Stage Renal Disease Economics and the Balance of Treatment Modalities
Copyright © 2010 SciRes JSSM
hemodialysis whereby the same amount is paid for a
three treatment week as the PD seven day a week ther-
A major advantage for patients that choose PD as their
treatment modality is flexibility since trice a week travel
is not required for treatment. This would also enforce the
shift from CAPD to CCPD given that the therapy is done
while the patient sleeps. However, use of the peritoneal
membrane as a filter does have its drawbacks for p atients.
Most patients, at one time or another, can develop peri-
tonitis. This inflammation and infection of the peritoneal
cavity is painful and requires patients to convert to
hemodialysis while being treated for their infection and
many patients cannot convert back to PD.
For both therapies, reimbursement is currently based
on a basic treatment with additional payments for an-
cillary drugs and testing. PD does appear less expen-
sive than hemodialysis. From the payment perspective,
PD prescriptions for the basic treatment are identical to
hemodialysis treatment although individual non-gov-
ernment payers may have separate payment structures
for each therapy. Although the payment structures for
hemodialysis and PD are the same for the basic treat-
ment, the difference in cost seems to be ancillary drugs.
Patients that are prescribed PD are typically healthier
than their hemodialysis counterparts and often don’t
require additional drugs to maintain a better quality of
life [11]. Peritoneal dialysis patients also tend to pos-
sess a greater kidney function that would require less
external treatments for such disorders as anemia. Re-
search studies conclude that only 20% of PD patients
are using EPO for anemia as compared with 80% of
hemodialysis patients [12].
2.1 The End Stage Renal Disease Program
In July of 1973, under the direction of the Federal Gov-
ernment, health care in the United States changed dra-
matically for patients with renal failure. Through Medi-
care Part B, virtually every citizen, after an initial wait-
ing period, would be entitled to coverage, paid by tax
dollars, for this disease regardless of age. The ESRD
program has, at times, been hailed as a success story
and at other moments in its history, been criticized for
the programs growing economic burden and high mor-
tality rates.
Initial results were difficult to assess because of the
slow build up of physicians and clinics to meet the needs
of ESRD patients across the country. Initially, the argu-
ment behind the program was that treatment options,
such as transplan t, would keep the cost of providin g care
low. The first year of the life saving treatment cost the
government $229 million for approximately 16,000 pa-
tients. The current Med icare payment is $20.3 billion for
437, 334 patients [13]. (Figure 3)
Figure 3. Source: USRDS 2008 annual report
The idea behind dialysis was that it would serve as a
model for a universal health care system in the United
States. The problem with this theory is that the renal pa-
tient community is not an accurate reflection of the
mainstream health care needs of the general population.
As reflected by the very nature of the constant therapy
combined with the numerous hospitalizations, the ESRD
program cannot be an example of how universal health
care may work. The exploding costs have placed more
and more of an economic burden on Medicare consum-
ing 6% of the budget for less than 1% of the Medicare
population [14].
2.2 The Dialysis Business Model
The dialysis market, from the providers’ side, is basically
controlled by two entities: Fresenius Medical Care and
DaVita. The combination of these two companies control
82.1% of the top ten providers in the dialysis market [15].
(Figure 4). Other smaller either niche or “mom and pop”
clinics control the remaining share along with hospital
dialysis based units. For profit clinics dominate the mar-
ket and have significantly increased their size over the
last fifteen years. (Figure 5)
Fresenius and DaVita, by their very business model,
are two very distinct companies. Fresenius, or FMC, is a
fully integrated co mpany that both provides dialysis care
to patients and manufactures the equipment and supplies
for that care. FMC is a global health care company with
the largest patient base of any provider.
By increasing the production of artificial kidneys, or
dialyzers, FMC has virtually ended the process of re-
processing dialyzers to reduce costs through economies
of scale production. Reprocessing dialyzers was a com-
mon practice in the 1970’s throug h the 1990’sat first due
to the lower ability to manufacture enough dialyzers. As
production increased, reuse was purely a means to reduce
medical supply costs. Studies are inconclusive as to
whether or not reuse impacts the quality of treatment or
effects mortality rates.
DaVita on the other hand, is a pure dialysis provider
End Stage Renal Disease Economics and the Balance of Treatment Modalities
Copyright © 2010 SciRes JSSM
Figure 4. Source: Nephrology news and issues july 2009
Figure 5. Source: USRDS 2008 annual report
only treating patients in the United States. While not at
all of their clinics, many of DaVita’s clinics still reuse
patient dialyzers. For patients worried about this practice,
DaVita maintains information regarding reuse on their
website [16] .
Consolidation over the past thirty years has been
driven by the in cen tive to cu t costs rather than to increase
market share and expand. Dialysis, by its very nature, is a
business that requires an infrastructure to support multi-
ple clinics with minimum administrative or corporate
staff. Mergers and acquisitions add the patient volume
and base revenue while administration costs from the
target company can be eliminated.
The driving force behind this strategy has been Medi-
care’s inability or unwillingness to raise the composite
rate. With a level reimbursement rate from the majority
of the patient population combined with inflationary
pressures from the medical labor market, providers were
forced to look to this “roll up” strategy to maintain prof-
itability. Larger dialysis companies operate at a signifi-
cant advantage to their smaller competitors. Expenses
can be leveraged through economies of scale, but with
stagnant reimbursement from government sources, this
advantage can be limited. Thus, leverage in revenue is
also critical to their advantage over smaller providers. By
controlling larger shares of the market, dialysis chains
can leverage payments from commercial insurance pro-
viders making up more than the difference from the
Medicare and Medicaid shortfall.
Outpatient dialysis hemodialysis units are expensive
investments with leasehold improvements and equipment
ranging from $1.5 to $2.5 million depending on size and
location. From a finance perspective, these are large
fixed cost businesses [17]. To minimize or leverage these
fixed costs, volume of patients is critical to maximize
profitability. For profit dialysis centers tend to have
higher numbers of patients per unit than non-profit and
hospital based units. (Figure 6)
Because of the increase in fixed asset investment by
dialysis companies, there may be an incentive to push
towards flowing the volume of patients from a PD ther-
apy to hemodialysis. Adding to this pressure of sending
renal patients to clinics is the emerging structure within
the small to medium size dialysis companies. To motivate
younger nephrologists or perhaps to give older physi-
cians the ability to div est a portion of their investment in
a dialysis business, these smaller dialysis companies,
many supported by private equity investment dollars, is
to offer a joint venture arrangement with the nephrologist.
Whether a de novo unit or an existing clinic, the physi-
cian will have an incentive to prescribe hemodialysis
over PD to drive volume and fully leverage their large
fixed asset investment.
PD, by its very nature, is a variable cost treatment
without the overhead required in a sophisticated outpa-
tient clinic. Labor costs do exist, but are far less utilized
as patients usually only visit the clinic once a month to
pick up supplies and drop off blood samples. Variable
costs for PD patients are a different story. Because PD
patients dialyze seven days a week, medical supply costs
are significantly higher than in-center hemodialysis pa-
tients. The difference in cost experienced by the payer is
attributable to the lower amount of prescription drugs.
If PD is indeed a lower cost with similar revenue
streams as in-center hemodialysis patients, why is the
industry so reluctant to embrace this therapy? The
overwhelming majority of the market is controlled by
Figure 6. Source: USRDS 2008 annual report
End Stage Renal Disease Economics and the Balance of Treatment Modalities
Copyright © 2010 SciRes JSSM
for-profit entities with the top two being publicly traded.
Small to mid size other players are backed by private
equity firms responsible to their investors. Peritoneal
dialysis may be the lowest cost from the payers’ perspec-
tive, but is it the most profitable to the providers? With
the immense pressure from Wall Street and Private Eq-
uity Firms for high returns, it at least appears that the
significant factor to profitability for dialysis co mpanies is
ancillary drugs and not the basic dialysis treatment. Oth-
erwise, capital resources would be directed to invest in
areas with the highest potential return. This theory may
be complimented by the number of nephrologists that
believe in the effectiveness of peritoneal dialysis [18].
Regardless of motive, the simple fact is that the level of
PD patients continues to be flat while the in-center
hemodialysis patient population is growing [19].
3. Current and Future Reimbursement
Structure for Dialysis
The renal community is on the edge of a monumental
change in reimbursement by the federal government. The
present system is based on a fee for service with addi-
tional charges for drugs and medical tests. The new
payment structure would entail a “bundled” rate. This
rate would be inclusive of both the dialysis treatment and
any additional drugs the patient may require. The Medi-
care Improvements for Patients and Providers Act of
2008, passed on July 15 and survived a veto from Presi-
dent Bush, requires this new bundled system to be in
place for ESRD by 2011.
Bundled rate systems are not new to renal providers.
Prior to the invention of Amgen’s anemia drug, Epogen
in 1989, the Medicare composite rate was essentially a
“bundled payment” covering nearly all the costs of pro-
viding care to patients. Some commercial insurance
companies have already moved to a bundled reimburse-
ment as a means to control costs and simplify the billing
The reasoning behind this change is likely to control
costs associated with additional necessary drugs while
creating a high quality environment thorough quality
measures in outcomes to ensure that care isn’t being re-
duced under bundling to secure higher profitability [20].
The problem with this approach is that it does not take
into account adverse consequences such as providers
pushing patients that are non-compliant into competing
clinics. Nor does the plan specify how small and medium
providers will afford to invest in the systems necessary to
gather and analyze this da ta.
Implementation for this program will start regionally
and as it is tested, be rolled out on a nationwide basis.
Obviously, geographical areas will play a key role in the
reimbursement rate based on the cost of living. It may be
likely that adjustments to th e bundle would occur as data
is collected similar to Medicare’s first implementation of
the ESRD program in 1973. A report will be issued dur-
ing the summer of 2009 with more details alth ough much
hasn’t been disclosed by way of bundled reimbursement
by modality.
The question that remains regarding this new structure
is what the goals of Med icare will be b eyond maintainin g
a quality program? If it is to ensure profitability for pro-
viders, even slightly beyond break-even, Medicare will
be forced to increase what they’re currently paying for
these services [21]. Thus, the bundled rate will likely be
very similar to the current reimbursement.
4. Conclusions
The majority of dialysis that is performed in the United
States is conducted under the high fixed-cost outpatient
dialysis units. Despite significant improvements in the
delivery of PD therapy, the numbers of patients utilizing
either CAPD or CCPD remains flat as the total renal
failure population experiences consistent growth. This is
primarily due to the high fixed cost infrastructu re already
in place, which many physicians don’t believe that their
patients are suitable for PD, and many nephrologists un-
willingness to prescribe PD for treatment. If profitability
is the goal of most providers, it would appear that
in-center patients, as long as the center is at a high utili-
zation, are more profitable than at home hemodialysis or
PD patients. Otherwise peritoneal dialysis would be em-
phasized as an alternative therapy and the rate of utiliza-
tion would at least grow at the rate of the incidence of
renal failure.
From the payers’ perspective, peritoneal dialysis
treatment is more cost effective th an traditional in-center
and home hemodialysis. However, in the current clinical
and economic environment, any shift in treatment modal-
ity seems unlikely. The pressure from investors, includ-
ing physicians, emphasizes a volume in-center treatment
model that maximizes financial returns. With the aging
population combined with higher incidence rates of dia-
betes and hypertension, the overall cost of the ESRD
program will continue to consume a greater portion of
the Medicare budget.
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