“God Help You. You're on Dialysis.”

Every year, more than 100,000 Americans start dialysis. One in four of them will die within 12 months—a fatality rate that is one of the worst in the industrialized world. Oh, and dialysis arguably costs more here than anywhere else. Although taxpayers cover most of the bill, the government has kept confidential clinic data that could help patients make better decisions. How did our first foray into near-universal coverage, begun four decades ago with such great hope, turn out this way? And what lessons does it hold for the future of health-care reform?
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Coke or Pepsi

Problems like those that regulators found in McMurry’s clinic are partly rooted in economics. The government’s payment policies for dialysis have created financial incentives that, in some ways, have worked against better patient care, while enabling for-profit corporations to dominate the business.

When the end-stage-renal-disease program began, hospitals provided most of the care on a nonprofit basis. But spurred by the guarantee of Medicare money, the marketplace met the growing demand for services through the expansion of for-profit companies. Today, more than 80 percent of the nation’s 5,000 clinics are for-profit. Almost two-thirds of all clinics are operated by two chains: Colorado-based DaVita and Fresenius, a subsidiary of a German corporation that is the leading maker of dialysis machines and supplies.

From the start, the government’s payment rules rewarded efficiency. Medicare set a rate for dialysis treatments, originally $138 per session, and covered a maximum of three treatments a week for most patients. Providers could keep whatever they didn’t spend on care. There were no penalties for poor results and no bonuses for good ones. Unlike other Medicare rates, the payment wasn’t adjusted upward for inflation.

Lawmakers cut the base rate to about $123 per treatment in 1983, after the program’s cost came in higher than expected and audits showed providers averaging profits of more than 20 percent. Dialysis companies responded like any other business facing a drop in prices, said Philip J. Held, a nationally recognized researcher on kidney disease and an economist by training. They chopped expenses by shortening treatments, thinning staff, and assigning tasks once done by nurses to unlicensed technicians. Some reused dialyzers, the filters that clean the patient’s blood. “It changed the nature of the service,” Held said of the rate cut. “You get what you pay for. The price was lower, but the product was dramatically different.”

The government created another perverse incentive by allowing clinics to bill Medicare separately for certain medications, reimbursing them at a markup over what they paid drug makers. Dialysis companies embraced the opportunity: doses of Epogen, prescribed to treat anemia, and similar medications tripled between 1989 and 2005, becoming Medicare’s single largest pharmaceutical expense. “Their core business became giving patients injectable drugs,” said Richard A. Hirth, a professor of health management and policy at the University of Michigan School of Public Health. “Dialysis was just the loss leader that got [patients] in the door.”

Though lucrative for clinics, the drug boom—much like the service cuts—may have undermined patient care. A 2006 study showed that patients treated with higher doses of Procrit, a medication similar to Epogen, were at greater risk for heart problems and death than those who got lower doses.

As a whole, the government’s payment rules have given big providers, with their economies of scale and purchasing power, a financial edge over smaller ones, spurring consolidation. DaVita and Fresenius each now have at least 1,500 clinics and more than 120,000 patients in the United States.

The chains say their deep pockets support quality initiatives that smaller providers can’t match. “One of the advantages of being large … is that you can invest in trying new things and being innovative,” said Dr. Allen Nissenson, DaVita’s chief medical officer. The Big Two are evolving into one-stop-shopping outlets for dialysis-related services: they run labs, pharmacies, and clinics that specialize in vascular access. They have moved into the home-dialysis market and make and sell drugs used by dialysis patients. In 2009, the dialysis giants booked combined North American operating profits of $2.2 billion, their most ever. DaVita said its margins are slimmer than those of the health-care sector overall.

Some smaller operators, meanwhile, are struggling. For the past several years, the Independent Dialysis Foundation, a nonprofit with nine clinics in Maryland, has run in the red. The founder, Dr. John Sadler, a pioneer in dialysis, said he has refused offers to sell, because he believes independent operators offer a crucial alternative to chains. But Sadler admitted to a growing sense of futility. “Perhaps people like me are dinosaurs,” he said. “I’ve always thought our focus on patients, not profits, was important.”

Many within the dialysis world share Sadler’s uneasiness with the dominance of for-profit providers overall and chains in particular. Over the past decade, stacks of competing studies have attempted to parse whether the quality of care at for-profit centers is equal to that at nonprofit centers, with no clear-cut answer.

The expanding grip of DaVita and Fresenius may make such debates moot. Though the U.S. has more dialysis clinics than ever, patients don’t necessarily have more choice. “It’s Coke and Pepsi,” said Joseph Atkins, who has been in the industry for 37 years as a technician, nurse, clinic owner, and consultant. “And in some places, it can be Coke or Pepsi.”

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