The U.S. dialysis industry includes more than 4,000 outpatient dialysis facilities (in addition to a large number of home dialysis programs) that service more than 350,000 patients suffering from end stage renal disease (ESRD). The industry self-classifies dialysis companies as either large dialysis organizations (LDOs) or small dialysis organizations (SDOs). The LDOs are few in number and include DaVita and Fresenius Medical Care, both publicly traded companies, as well as DSI Renal and Renal Advantage, both of which are backed by private equity funding.  In mid-2008, Congress passed the first major Medicare payment overhaul for dialysis providers in 25 years. Two years later, in anticipation of the January 1, 2011 implementation date, LDOs and SDOs alike are taking a close look at the potential impact on their businesses.   

As part of a more comprehensive ESRD program reform bill, the payment formula for dialysis treatments was reconfigured into a bundled payment for all dialysis services (including pharmaceuticals such as the common anemia management erythropoietin-based drugs). Pricing for those services will be influenced by a market update mechanism starting in 2012. Providers can elect to fully participate in the bundles approach in 2011 or may instead elect to have the approach phased in over four years beginning in 2011. Physicians will also get a 2% increase in the Medicare payment if they submit prescriptions electronically. Those who don’t use the so-called e-prescriptions by 2011 would have their fees cut by 1% the following year, rising to 2% in 2014. 

It is likely that the new bundling system will impact SDOs and LDOs differentially for a variety of reasons. For instance, LDOs enjoy impressive purchasing and contracting power and other economies. Further, some LDOs are vertically integrated such that their key equipment and fungible products suppliers are affiliates, which can result in a significant cost savings to the LDO.  

On the other hand, some industry analysts believe the impact of bundling will be felt differently by providers not necessarily along SDO versus LDO lines but rather based on other factors, such as a provider’s historical drug dosage orders or based on geographic factors. For example, Shari Levanthal of the American Society of Nephrology published an interesting article last year describing the findings of Columbia University/Harlem Hospital researchers who believe that dialysis providers in the east and southeast are particularly likely to feel an adverse financial impact due to historical variances in Medicare reimbursement.

In any event, the January 1^st implementation date for the new methodology is quickly approaching and dialysis providers of all size, modality focus and patient population would be wise to assess now the potential impact on their businesses and strategies for keeping costs low and quality high.