The (duopolistic, Federally funded) market for dialysis

Robin Fields in The Atlantic discusses dialysis: “God Help You. You're on Dialysis.”

It begins:
"In October 1972, after a month of deliberation, Congress launched the nation’s most ambitious experiment in universal health care: a change to the Social Security Act that granted comprehensive coverage under Medicare to virtually anyone diagnosed with kidney failure, regardless of age or income..."

But most of the story focuses on the dire situation of those in dialysis.
"Dialysis entered the American consciousness in the early 1960s as the country’s signature example of medical rationing. In those days, kidney disease killed about 100,000 people a year. Chronic dialysis was possible, thanks to two inventions: the artificial-kidney machine developed by the Dutch doctor Willem Kolff during World War II and a vascular-access device designed by Belding Scribner, a pioneering Seattle physician who opened the first outpatient dialysis center in the United States. But treatments were expensive, and most private insurers would not pay for them. At Scribner’s medical center, the Life or Death Committee parceled out the few slots, weighing not only the health of patients and their income, but also their perceived social worth.

"News reports about the committee’s work sparked one of the earliest national debates over the right to care and put pressure on the government to step in. A turning point came when Shep Glazer, vice president of the largest patient group, made an emotional appeal to the House Ways and Means Committee, as he underwent dialysis on the hearing-room floor. “If your kidneys failed tomorrow, wouldn’t you want the opportunity to live?” asked the 43-year-old father of two. “Wouldn’t you want to see your children grow up?”

"The measure establishing taxpayer funding for treatment of end-stage renal disease, signed into law by President Nixon, was expansive, and its lopsided, bipartisan approval reflected the times. Many lawmakers—even conservatives—thought the United States would adopt a European-style national health-care system. Also, the program that took effect in July 1973 was expected to have about 35,000 patients and cost about $1 billion in its 10th year.

"Those estimates came to seem almost laughable. The number of dialysis patients surpassed 35,000 by 1977 and has gone up from there. The growth reflected not only lower-than-expected transplant rates and the spread of diabetes, but also positive trends, like better cardiac care. With Americans living long enough for their kidneys to fail and no disqualifying conditions for the program, even the oldest and sickest patients increasingly were prescribed dialysis. Upwards of 100,000 now start treatment each year. “It’s been a perfect example of that line, ‘Build it and they will come,’” said Dr. Jay Wish, director of dialysis services for University Hospitals Case Medical Center in Cleveland.

"Because the kidney program absorbed that unforeseen wave—and thus, prolonged so many lives—some call it one of the great success stories of modern medicine. Still, the annual bill for the program quickly outpaced early projections, surging past $1 billion within six years. Per-patient expenditures were expected to drop as technology advanced. Instead they have risen steadily, as drug and hospitalization costs grew for the program’s increasingly frail clientele."
...
"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.”