The Hemodialysis Equipment and

Disposables Industry

December 1984

NTIS order #PB85-154953
HEALTH TECHNOLOGY CASE STUDY 32

The Hemodialysis Equipment

and Disposable Industry

This case study was

Federal Policies

DECEMBER 1984

performed as part of OTA’s Assessment of

and the Medical Devices Industry

Prepared for OTA by:

Anthony A. Romeo, Ph.D.

University of Connecticut

I
Recommended Citation:

Romeo, Anthony A., The Hemodialysis Equipment and Disposable Industry (Health

Technology Case Study 32), OTA-HCS-32, Washington, DC: U.S. Congress, Office of

Technology Assessment, December 1984. This case study was performed as part of OTA’s

assessment of Federal Policies and the Medical Devices Industry.

Library of Congress Catalog Card Number 84-601163

For sale by the Superintendent of Documents

U.S. Government Printing Office, Washington, DC 20402
Preface

The Hemodialysis Equipment and Disposable

Industry is Case Study 32 in OTA’s Health Technology Case Study Series. This case study has

been prepared in connection with OTA’s project

on Federal Policies and the Medical Devices Industry, which was requested by the Senate Committee on Labor and Human Resources and endorsed by the Senate Committee on Veterans’ Affairs. A listing of other case studies in the series

is included at the end of this preface.

OTA case studies are designed to fulfill two

functions. The primary purpose is to provide

OTA with specific information that can be used

in forming general conclusions regarding broader

policy issues. The first 19 cases in the Health Technology Case Study Series, for example, were conducted in conjunction with OTA’s overall project

on The Implications of Cost-Effectiveness Analysis of Medical Technology. By examining the 19

cases as a group and looking for common problems or strengths in the techniques of cost-effectiveness or cost-benefit analysis, OTA was able

to better analyze the potential contribution that

those techniques might make to the management

of medical technology and health care costs and

quality.

The second function of the case studies is to

provide useful information on the specific technologies covered. The design and the funding levels of most of the case studies are such that they

should be read primarily in the context of the associated overall OTA projects. Nevertheless, in

many instances, the case studies do represent extensive reviews of the literature on the efficacy,

safety, and costs of the specific technologies and

as such can stand on their own as a useful contribution to the field.

Case studies are prepared in some instances because they have been specifically requested by

congressional committees and in others because

they have been selected through an extensive review process involving OTA staff and consultations with the congressional staffs, advisory panel

to the associated overall project, the Health Program Advisory Committee, and other experts in

various fields. Selection criteria were developed

to ensure that case studies provide the following:

● examples of types of technologies by function (preventive, diagnostic, therapeutic, and

rehabilitative);

examples of types of technologies by physical

nature (drugs, devices, and procedures);

examples of technologies in different stages

of development and diffusion (new, emerging, and established);

examples from different areas of medicine

(e.g., general medical practice, pediatrics,

radiology, and surgery);

examples addressing medical problems that

are important because of their high frequency or significant impacts (e. g., cost);

examples of technologies with associated high

costs either because of high volume (for lowcost technologies) or high individual costs;

examples that could provide information material relating to the broader policy and methodological issues being examined in the

particular overall project; and

examples with sufficient scientific literature.

Case studies are either prepared by OTA staff,

commissioned by OTA and performed under contract by experts (generally in academia), or written by OTA staff on the basis of contractors’

papers.

OTA subjects each case study to an extensive

review process. Initial drafts of cases are reviewed

by OTA staff and by members of the advisory

panel to the associated project. For commissioned

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drafts are sent by OTA to numerous experts for

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30 reviewers, and sometimes by 80 or more outside reviewers. These individuals may be from

relevant Government agencies, professional societies, consumer and public interest groups, medical practice, and academic medicine. Academicians such as economists, sociologists, decision

analysts, biologists, and so forth, as appropriate,

also review the cases.

Although cases are not statements of official

OTA position, the review process is designed to

satisfy OTA’s concern with each case study’s

scientific quality and objectivity. During the various stages of the review and revision process,

therefore, OTA encourages, and to the extent

possible requires, authors to present balanced information and recognize divergent points of view.

111
Health Technology Case Study Seriesa

Case Study Case study title; author(s); Case Study Case study title; author(s);

Series No. OTA publication numberb

Series No. OTA publication numberb

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aAvallable [or sale by the Superintendent of [X)curnents, U S Government ctBac&c)und r>dper #3 to ~~e l~pllcdf)(,fl~ of C-ost-Effec( i\rent,s5 ,4nal~ws of

Prlntlng Otflce, Washington, DC, 20402, and b}, the Nat]onal Technical Lfe(ilcal Techrro]ogj

Information Serv]ce, 5285 Port Royal Rd , Sprlngf]elci VA, 22161 Call ‘Background Paper #5 to The Zmp]]c at]on~ of L’[)st-Efft>c tI ~wnt+~ ,4na/}ws (If

OTA’S Publ]shlng Off Ice (224-8996) for aval]abl]ity and orderlrrg lntor- ,! fed)ca) Techno]og},

matlon t~achgrc)un~ paper #1 IC) C)TA s May IQ82 rept)rt Technolw>” dncl Hanc~~-

borlglnat Pub]lcatlon numbers appear In parentheses capped Peoj)]e

~he f]r.t 17 cases In the series were 17 separately issued cases m BacLgr(mnd XBackground [’aper ~2 to TtY hn[ll(lg} and Ffanci~capped f’e(IP/e

Paper F.?. Case Stud]es ()/ Lfedlca)Techrrologles prepared ]n conjunction

wth OTA’s August IWO report The [mpl~caf](ms of C“()+Effet t~ Leness AnalVSJS of Medlca/ Technology},
OTA Project Staff for Case Study #32
Advisory Panel for Federal Policies and

the Medical Devices Industry

Richard R. Nelson, Chair

Institute for Social and Policy Studies, Yale University

New Haven, CT

William F. Ballhaus

International Numatics, Inc.

Beverly Hills, CA

Ruth Farrisey

Massachusetts General Hospital

Boston, MA

Peter Barton Hutt

Covington & Burling

Washington, DC

Alan R. Kahn

Consultant

Cincinnati, OH

Grace Kraft

Kidney Foundation of the Upper Midwest

Cannon Falls, MN

Joyce Lashof

School of Public Health

University of California

Berkeley, CA

Penn Lupovich

Group Health Association

Washington, DC

Victor McCoy

Paralyzed Veterans of America

Washington, DC

Robert M. Moliter

Medical Systems Division

General Electric Co.

Washington, DC

Louise B. Russell

The Brookings Institution

Washington, DC

Earl J. Saltzgiver

Foremost Contact Lens Service, Inc.

Salt Lake City, UT

Rosemary Stevens

Department of History and Sociology of Science

University of Pennsylvania

Philadelphia, PA

Allan R. Thieme

Amigo Sales, Inc.

Albuquerque, NM

Eric von Hippel

Sloan School

Massachusetts Institute of Technology

Cambridge, MA

Edwin C. Whitehead

Technicon Corp.

Tarrytown, NY

171
Contents

CHAPTER 1: INTRODUCTION AND SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Treatment Approaches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Major Policy Issues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ~ . . ~. ~. ~ ~ . .

CHAPTER 2: TREATMENT APPROACHES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Description of Alternatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ~ . .

Patterns of Choice Among Modalities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Costs of Treatment Modalities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

CHAPTER 3: EQUIPMENT REQUIREMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Market Overall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Dialyzers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ~ ~ The Dialyzer Market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Reuse of Dialyzes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

CHAPTER 4: MARKET STRUCTURE AND COMPETITION . . . . . . . . . . . . . . . . . . . .

The Sellers . . . . . . . . . . . . .

Market Concentration. .

Entry . . . . . . . . . . . . . . . .

The Buyers . . . . . . . . . . . . .

International Dimensions .

CHAPTER 5: INDUSTRY

Prices and Profits . . . . . . .

Prospects for the Industry

Prospects for Prices and

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ,.,

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..... . . . . . ...

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..... . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..... . . . . . ...

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PERFORMANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..... . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...

Profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

New Directions for the Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ~~

CHAPTER 6: POLICY ISSUES... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Reimbursement Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ~~• History of Reimbursement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ~ . ~ ~ ~ The New Reimbursement Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Effects of the Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ~~~~~~~~~ ~~~~

Research Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Dialyzer Reuse and The Federal Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

APPENDIX A.–CAPSULE DESCRIPTIONS OF MAJOR FIRMS

IN THE INDUSTRY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

APPENDIX B.–GLOSSARY OF TERMS AND ACRONYMS . . . . . . . . . . . . . . . . . . . .

APPENDIX C.–ACKNOWLEDGMENTS AND HEALTH PROGRAM

ADVISORY COMMITTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

REFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3

3

3

3

3

4

9

9

11

12

15

15

16

16

17

23

23

23

24

27

27

31

31

33

33

34

39

39

39

40

41

44

47

53

55

57

63
Contents—continued

Tables

Table No. Page

1. Estimated Number of End-Stage Renal Disease (ESRD) Patients in the

United States by Type of Treatment, 1983 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

2. Percent of Dialysis Patients Treated at Home by Year . . . . . . . . . . . . . . . . . . . . . . 11

3. Estimated Costs of Dialysis per Patient-Year by Modality . . . . . . . . . . . . . . . 12

4. Estimated U.S. Market for ESRD Equipment and Disposables by Year . . . . . . . . 15

5. Estimated Dialyzer Unit Sales by Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

6. Selected Estimates of Savings From Dialyzer Reuse . . . . . . . . . . . . . . . . . . . . . . 18

7. Suggested Medical Effects of Reuse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

8. Estimated Shares of U.S. Hospital Market for Dialysis Equipment

and Disposable by Year . . . . . . . . . . . . . . 23

9. Estimated Shares of Total U.S. Market for Dialysis Equipment and Disposable

by Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

10. Estimated Shares of U.S. Hospital Market for Dialyzers by Year. . . . . . . . . . 25

11. Estimated Shares of Total U.S. Market for Dialyzers by Year . . . . . . . . . . . . . . . . . 26

12. U.S. Involvement in the Renal Equipment Market in Various Countries. . . 28

13. Average Prices for Dialyzers Purchased by Hospitals From Major Producers

by Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

14. Innovations in Dialysis Treatment Attributed to the National Institute of

Arthritis, Diabetes, and Digestive and Kidney Diseases . . . . 45

15. Research Support for Chronic Renal Disease Program of National Institute of

Arthritis, Diabetes, and Digestive and Kidney Diseases, 1979-83 . . . . . . . . . . 46

,’111
OTA Note

These case studies are authored works commissioned by OTA. Each author

is responsible for the conclusions of specific case studies. These cases are not statements of official OTA position. OTA does not make recommendations or endorse

particular technologies. During the various stages of review and revision, therefore,

OTA encouraged the authors to present balanced information and to recognize

divergent points of view.
——

Introduction and Summary
1.

Introduction and Summary

INTRODUCTION

End-stage renal disease (ESRD) afflicts approximately 96,000 people in the United States (25,

102). In the course of treatment for this disease,

most patients and their providers use an array of

products produced by the hemodialysis equipment

and supplies industry. This case study offers an

analysis of this relatively new U.S. industry. Its

existence is a consequence of modern medical advances that have made hemodialysis a viable

treatment for ESRD. Moreover, it would be difficult to think of another industry that has been

so clearly and directly shaped by Federal policy.

SUMMARY

Treatment Approaches

The two major treatment options for ESRD are

transplantation and dialysis. At present transplantation is a solution for a small minority of patients, but with major advances of the recent past

in transplantation techniques and immunosuppressive drugs, 1

its use may grow in the future.

Nevertheless, at present the vast majority of patients undergo regular dialysis treatment, during

which the patient’s blood is cleansed of accumulated waste products.

in 1983, 86 percent of dialysis patients (61 ,722

people ) chose a form of dialysis known as hemodialysis (102). In this modality the patient’s blood

is pumped from the body by a machine, subjected

to dialysis, and then returned to the body in a continuous extracorporeal blood loop. Dialysis occurs as the blood passes through a dialyzer, or

artificial kidney. Patients must undergo this treatment about three times per week in sessions running about 31⁄2 to 5 hours each. This can be acFederal policy continues to be critical to the industry’s development. Recent Federal initiatives

have changed the rules under which treatment for

ESRD is reimbursed. Federal policy makers are

also being asked to evaluate certain current practices in treatment. The decisions made will influence, to a significant degree, the structure and economic performance of the industry. In light of

his, the case study is particularly timely.

complished in a hospital-based

standing facility, or at home.

center, in a freeA major alternative form of dialysis, chosen by

12 percent (8,688 people) of ESRD patients in

1983, is continuous ambulatory peritoneal dialysis

(CAPD) (102). In CAPD, dialysis occurs within

the patient’s body across the peritoneal membrane. CAPD requires a manual exchange of fluid

every 4 to 6 hours, but it can be done at home

and it frees the patient from dependency on a

dialysis machine. Although patients experience

some risk of developing peritonitis, the modality

has been growing in popularity.

The Market

The market for dialysis equipment and disposable has undergone rapid growth since 1972 when

Congress passed legislation extending Medicare

coverage to patients with ESRD, regardless of age.

Since its inception the number of beneficiaries of

this program has grown by more than 700 percent (from about 11,000 to 89,000 people2

). As
of 1983, program costs were estimated at more

than $1.7 billion annually (102).

The firms that produce dialysis equipment and

disposable now have total sales of roughly $500

million. They sell their products to hospitals, to

free-standing facilities (proprietary and nonproprietary), and to patients themselves. According

to traditional economic measures, the industry is

highly concentrated (i.e., only a few sellers have

a large market share). At the same time the number of separate buyers is large. However, although

profits in the industry were apparently quite attractive several years ago, they have been increasingly squeezed. Data presented in this case study

indicate that prices have fallen; for example, over

the past 5 years, the prices of dialyzers, which

have constituted about 40 percent of the industry’s sales, have fallen, after adjusting for inflation, by 34 percent.

The difficulties firms have experienced in the

dialyzer market in recent years are the result of

a combination of factors. It seems clear that there

has been overcapacity in the industry. Firms expanded production during the good times only to

find that overall demand for new dialyzers leveled

off and now is actually decreasing. The decrease

has resulted in part from buyers’ attempts to reduce costs, and those efforts, in turn, have been

stimulated by Federal efforts to control the costs

of the ESRD program.

Future prospects for the industry as a whole are

uncertain. The cost-control pressures are likely

to persist. The dialyzer market, in particular, is

likely to continue to decline as dialyzer reuse continues and patients move to modalities, such as

CAPD (continuous ambulatory peritoneal dialysis), that do not use dialyzers. Firms supplying

dialyzers are likely to respond, in part, with diversification within and outside the dialyzer area. In

addition, they will probably attempt to develop

equipment that can effectively reduce the costs of

treatment.

Major Policy Issues

Future prospects for the industry will largely

depend on the resolution of some major policy

issues. Three areas of policy in particular were

considered in the case study. They are: the reimbursement procedures for dialysis care, the Federal contribution to research on ESRD, and the

practice of “reuse” of dialyzers. The case study

draws some conclusions in each area.

Reimbursement

Perhaps the most notable and most controversial of these issues is the new Federal reimbursement rules for the ESRD program that were established in 1983. These rules are aimed at controlling

program costs, in particular by encouraging home

dialysis. The rules are likely to have a myriad of

direct and indirect effects on the nature of care

and thus on the hemodialysis equipment and disposables industry.

The rules have been hailed as the initiation of

prospectively set rates. Although the new rules

do involve prospective reimbursement—pre-set

payment “screens”or maximums known in advance to facilities and patients—so did the previous payment procedure, albeit perhaps to a lesser

extent. Under the previous rules, if costs differed

from the screen, the facility incurred a loss or surplus accordingly, but hospitals (although not independent facilities) were almost routinely granted

exceptions to the screen. Nevertheless, there is

some evidence that overall the screen did stimulate cost-control efforts.

It is likely that the new rules will have some

of the desired effect. Since exceptions will apparently be granted much less readily, facilities now

have a stronger financial incentive to control

costs. Moreover, because home dialysis is less

costly to the facility, but is reimbursed at the same

rate as dialysis performed in the facility, there is

a clear incentive to have patients treated at home.

Whether the present rates are the most appropriate way to achieve this goal is debatable. The rates

themselves seem to have been developed through

a less than rigorous statistical procedure, and they

offer no clear direct incentive to patients and only

limited incentives to physicians for home dialysis.

Thus, they could conceivably create conflicts between the facilities that wish to lower costs (and

generate surpluses) and physicians and patients.

Such conflicts are not apt to enhance the quality

of care or, indeed, to contribute to efficient care.
Patients have no direct financial incentive to

go home, because the patient's required payment

is independent of the setting. Although the Health

Care Financing Administration (HCFA) has noted

that facilities may want to share some of their

profits from home dialysis cases with the patients

themselves, it is unclear to what extent facilities

will take up this idea (93).

If the objective is to encourage home dialysis,

stronger incentives should be directed at patients,

who, after all, must make the ultimate choice of

setting. If patients were offered a financial incentive to dialyze at home—by being allowed to share

in the cost savings attributed to home dialysis—

they might be more inclined to choose this setting. Such an incentive, which allows patients

themselves to balance benefits and costs, does not

appear to have been seriously considered (20).

Congressional legislation in 1978 did try to eliminate one financial disincentive to home dialysis

by allowing for payment to home dialysis aides.

This payment was attractive because home dialysis generally requires the assistance of a trained

aide. Although a spouse or other close friend or

family member can provide such assistance, a notable time burden is imposed. Payment to an aide

is meant to reflect the time costs incurred. However, this congressional provision apparently was

not effectively implemented, On balance under

the new rules, home dialysis may contribute to

the facilities’ financial interests but not directly

to the patients’.

The impact of these rules on the equipment and

disposable industry depends on how effective the

rule changes are in achieving their stated objectives. If facilities feel the pressure to reduce costs,

they will in turn put pressure on their suppliers.

Suppliers will thus have an incentive to compete

more than previously on the basis of price and

less on the basis of other attributes of the product. At the same time, suppliers may be stimulated to develop cost-reducing innovations. If the

effect of the rules is to shift patients to newer

modalities such as CAPD, the industry will also

respond. Industry resources will be shifted toward

those products offering the greatest profit potential, which depends ultimately on the patient base

associated with the product.

On balance, the industry will certainly survive

the new rules, although its form and structure may

undergo some change. Profitability will depend

on how facilities and patients respond to the rules

and on how creative] y the industry can react.

Federal Research

The second major policy issue concerns research. The Federal Government has supported

considerable research on ESRD and has contributed to development of many of the products sold

by the equipment and disposable industry. However, this Government research contribution has

declined, particularly in the area of maintenance

dialysis, the area most likely to affect the industry. The long-term consequences are likely to be

a decline in innovation in the industry.

Federal-Government-supported research provides a base from which industry can build. As

the research base diminishes, private industry has

less on which to build. The profitability of its research and development (R&D) activities may diminish, and as a result less R&D will be done. In

the long run, the quality and cost efficiency of

care depend on such R&D. Private incentives may

not generate the socially optimal amount of R&D.

In assessing research, one must recognize that

there are competing uses of scarce funds. This case

study has no basis on which to conclude that the

ESRD program is more worthy of funds than

other programs. It is therefore appropriate that

some administrative decisions be made on the basis of available expert opinion and perceived social

goals. However, the activities of the various agencies responsible for research should be coordinated

to assure that whatever objectives are agreed upon

are pursued efficiently and effectively.

Dialyzer Reuse

The third major issue facing the industry involves dialyzer reuse. Increasingly, dialyzers,

which are labeled by manufacturers for single use

only, are being reprocessed and used again, often

multiple times. This reprocessing involves a rinsing of the used dialyzer, followed by cleaning and

disinfection or desterilization. Critics of the practice express concern about the possible adverse
consequences for patients. These may result from

the diminished performance features of a reused

dialyzer as well as from the introduction of chemicals used in reprocessing. However, at present,

medical opinion views reuse as an acceptable practice, as long as the reprocessing is done with appropriate care. From an economic perspective,

reuse appears attractive. Cost savings are undoubtedly present—but only if there are no substantial, negative, medical consequences to the

practice. If reuse is associated with increased morbidity or mortality, such costs would have to be

included in any cost analysis. Although projected

direct cost savings are large, they could be outweighed by the indirect costs of adverse medical

consequences.

Again, the current economic argument seems

to support reuse. It seems to follow as well that

Federal policy be directed toward seeing that reuse

be done appropriately. The Government through

the Food and Drug Administration could encourage the adoption of guidelines for reprocessing,

for the costs of inadequate reprocessing could be

severe. Since increases in reuse are likely, poor

reprocessing procedures may result. In essence,

care should be taken that reuse, one result of costcontrol measures, does not, on balance, increase

the full social costs of the ESRD program.

Note that these arguments are not contingent

on the possible negative effects increased reuse

may have on particular manufacturers. Clearly,

reuse will pressure firms, particularly weaker

firms, to lower prices, thus decreasing profits. In

the short run, the lower price seems attractive,

particularly to providers, On the other hand, these

price reductions could result in firms’ exiting from

the market, which might ultimately result in a less

competitive industry and higher monopoly-like

prices. However, such pricing would require at

least tacit coordination among remaining manufacturers and might be hampered by the international nature of competition and the possibility

for cost competition among treatment modalities.

Overall, such concerns seem remote.

The manufacturers of hemodialysis equipment

and disposable belong to an unusually dynamic

industry, which experienced rapid growth and attractive profits during one phase of its relatively

short existence and decreased profits and sales,

notably at least in dialyzers, in its current phase.

Clearly more changes are in store.

Federal policy has played a critical role throughout. The market grew with the onset of Medicare

coverage and has responded to ongoing Federal

efforts at controlling the costs of the coverage.

It is a market that in many respects is the creation of Federal policy. Its future shape remains

intimately tied to that policy.

The remainder of this case study presents evidence pertaining to the conclusions above. Chapters 2 and 3 describe the available treatment approaches to ESRD and their equipment requirements. Chapters 4 and 5 analyze the industry.

Finally, policy issues emanating from the industry are raised and discussed in chapter 6.

2 ■

Treatment Approaches

Hemodialysis is one of the three major treat- This section briefly describes each approach and

ment approaches for end-stage renal disease discusses the associated equipment. Table 1 shows

(ESRD). The others are peritoneal dialysis and the number of ESRD patients enrolled in the Meditransplantation. Each treatment involves a some- care program who utilized each treatment mowhat different array of equipment and supplies. dality during 1983.

Table 1. —Estimated Number of End-Stage Renal Disease (ESRD) Patients

in the United States by Type of Treatment, 1983

Estimated number of ESRD patients in the United States–.-:. . . . . . . . . . . . . . . . . . . . 95,687a

Estimated number of Medicare and nonMedicare ESRD patients receiving

treatment as of Dec. 31, 1983: Hemodialysis . . . . . . . . . . . . . . . . . . . . 61,722

Intermittent peritoneal dialysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,572

Continuous ambulatory peritoneal dialysis . . . . . . . . . . . . . . . . . . . . . . . . . 8.688

Kidney transplants . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,112

78,094a

— a

The difference between the estimated number of ESRD pat Ients in the Un Ited States (95,687) and the est{ mated number of

patients recelvlng treatments (78,094) may be attributable to the fact that patients who rece(ved transplants from 1980 to

1982 were still considered to be ESRD beneficiaries In the Medicare program in 1983

SOURCES P W Eggers Off Ice of Research, Health Care Flnanclng Admlnlstratlon. Baltlmore, MD personal communication,

February 1984 and U S Department of Health and Human Services, Health Care F!nanclng Adm{n!stratlon, ESRD

Data Branch ‘End Stage Renal Disease Program Quarterly Stat! stlcal Summary, ” Baltl more MD June 15, 1984

DESCRIPTION OF ALTERNATIVES

A healthy kidney performs a variety of functions within the body. It filters the blood, removing the waste products built up from dietary intake and physical activity; it regulates fluid and

chemical balance in the body; and it facilitates

hormone secretion, assisting in the regulation of

blood pressure and the prevention of anemia. In

a patient suffering from ESRD, the kidney has

ceased to adequately perform these life-sustaining

functions.

Treatments for ESRD seek to compensate in

various ways for the renal failure (52). Conceptually, the most direct correction is transplantation. A health kidney from a donor, living or

recently deceased, is transplanted into the patient.

If the transplant is successful, the new kidney will

take on the normal kidney functions and the patient, barring other complications, can lead a

nearly normal life.

Unfortunately, although transplantation appears an attractive solution in principle, its practical implementation is often quite difficult. Finding an appropriately matched donor kidney is not

easy since the body has a strong innate tendency

to reject the foreign organ. In addition, immunosuppressive therapy, which has many deleterious

side effects, is necessary to prevent kidney rejection. Although graft retention rates have apparently been improving, success is hardly assured

(48,49,89). During graft rejection, patients are

likely to suffer other complications and must either return to dialysis or undergo another transplantation.

At present, because of these difficulties, renal

transplantation remains a treatment for less than

7 percent of U.S. ESRD patients annually (6,112

patients in 1983) (102). The future is unclear.

Some observers feel transplantation may work for

only a small percentage of the patient population;

others believe that the new immunosuppressive

drugs, such as cyclosporine, hold promise for

more successful transplants in the future. The lat9
ter group see an inadequate supply of donor

organs as the major stumbling block to transplantation (81).

Dialysis, the major alternative to transplantation, offers an artificial mechanism for performing kidney functions. In hemodialysis, blood is

pumped from the patient’s body, subjected to a

process of dialysis, and then returned to the body

in a continuous extracorporeal blood loop. Dialysis occurs as the blood is passed through a

hemodialyzer, or artificial kidney. In the hemodialyzer (or, simply, dialyzer) the blood flows next

to but separate from another fluid, a dialysate.

The blood and the dialysate are separated from

each other by a semipermeable membrane. The

patient’s blood, because of the renal failure, contains accumulated waste products and abnormal

levels of electrolytes. The dialysate, on the other

hand, is free of waste products and contains

desirable concentrations of physiological chemicals. Via diffusion and osmosis, waste products

and other molecules pass through the semipermeable membrane so the blood can again take on

its appropriate properties. Furthermore, by regulating pressure on either side of the membrane,

buildup of excess body fluids can be effectively

removed through the blood to the dialysate.

Patients on hemodialysis typically are dialyzed

three times per week, for sessions ranging from

about 3% to 5 hours each. These patients can be

dialyzed at home or in hospital-based or freestanding dialysis facilities or centers. Hemodialysis was the treatment chosen by about 89 percent of the patients with ESRD in 1982 (25).

Another form of dialysis, peritoneal dialysis,

has been increasing in popularity in recent years.

The two forms of dialysis differ in the nature of

the semipermeable membrane separating the blood

and the dialysate. This difference leads to different

methods of dialysis therapy. In peritoneal dialysis,

the peritoneum, the membrane surrounding the

abdominal organs and lining the abdominal

cavity, is utilized in vivo; thus, dialysis occurs

within the patient’s body rather than via an extracorporeal blood loop. A permanent catheter

is inserted into the abdomen, and the dialysate

fluid is introduced through the catheter into the

peritoneal cavity. The fluid is allowed to remain

for varying periods of time, during which dialysis

occurs across the semipermeable peritoneal membrane, Later the dialysate fluid is drained out

through the catheter and discarded.

The various kinds of peritoneal dialysis reflect

variations in the timing of this process. In intermittent peritoneal dialysis (IPD) an automatic machine performs intermittent treatment three to

four times per week. Typically, the patient is

dialyzed for about 12 hours per treatment, during which the dialysate is automatically exchanged

from the peritoneal cavity every hour. Continuous cycling peritoneal dialysis (CCPD) is a variation of IPD involving the use of a machine to

warm and cycle the dialysate in and out of the

peritoneal cavity automatically about every 4

hours overnight as the patient sleeps. Normally,

some fluid is left in the abdomen during the day.

Continuous ambulatory peritoneal dialysis (CAPD)

involves a continuous, manual exchange of

dialysate, roughly every 4 to 6 hours. CAPD offers the advantage of freeing the patient from dependency on a machine. It was chosen by about

10 percent of the ESRD population in 1982 and

is, thus, the most popular form of peritoneal

dialysis (25).

The relative clinical effectiveness of the modalities remains a subject of study. For various

medical or psychological reasons some patients

may do better on certain modalities, but there are

no controlled, long-term, clinical trials on which

to make an overall judgment. Hemodialysis in a

dialysis center remains the general historical

standard for care. In this regard, a recent analysis done for the Office of Technology Assessment

(OTA) concludes that “CAPD appears to be an

acceptable alternative to hemodialysis for, at least,

selected persons with end-stage renal disease” (86).

The authors note that short-term survival rates

for the two modalities appear similar, but CAPD

patients may be slightly more likely to be hospitalized than either home or in-center hemodialysis patients. This hospitalization is usually because

of peritonitis, which many patients on CAPD develop (76).
—.— --

PATTERNS OF CHOICE AMONG MODALITIES

Choice of modality and treatment setting (home

or in-center) depends on a variety of factors reflecting not only the patient’s medical condition

but also the patient’s and physician’s personal

preferences. The decision to undergo dialysis at

home is complicated by concerns about the availability of an assistant to help in dialysis and the

cost and disruption the machinery can cause.

Also, a patient being dialyzed at home must psychologically balance the responsibilities and the

rewards associated with self-care.

The set of choices to be made has varied somewhat over time. With regard to setting, table 2

notes that in 1982 home dialysis was the choice

of about 18 percent of dialysis patients. Prior to

the enactment of the Federal Government’s ESRD

program in 1972, the percentage at home was as

high as 40 percent; it declined sharply after the

program was established but seems to be gradually creeping up. Of course, these percentage

changes are based on a patient population whose

size and characteristics have also changed.

The percentage of dialysis patients at home

varies considerably among States. Some have

more than half of their patients at home (e. g.,

Table 2.— Percent of Dialysis Patients Treated

at Home by Year

Year ‘ Percent at home

1972 ., ., . . 40

1973 . . . . ., ... ., . . . 33

1975 ., ... . . . . . . . 16

1976 ... ., ., . . . . 14

1977 . . . . . ... ., . . . . . 12

1978 ... ... ... ... ... . . 12

1979 . . . . . . . 13

1980 ., . . ., ... ., ... . . . 14

1981 . . . ... ... ... . . . ... 16

1982 ... ... . . . . . 18

SOURCES Sanford C Bernstein & Co Inc The K/dney D~a/ys/s /ndustry (New

York February 1981] C Davis Adm~nlstrator Health Care Flnanclng

Adm!n!stratlon testimony at hearing Proposed frospecf~ve Re/rn

bursement Rates for the End. S!age Renal Dtsease Program, before

the Subcommittee on Health of the Committee on F!nance U S

Senate, Mar 15 1982 (Washington DC U S Government Prlnt!ng Of

flee 1982) Kidder Peabody & Co Baxter Traver?o/ Laboratories /nc

CAPD Update, Company Follow up New York Aug 16, 1982 and P

W Eggers Office of Research, Health Care Flnanclng Admlmstra

tlon Balhm ore MD personal commun!catlon, February 1984

Washington) while others have less than 10 percent (e. g., Illinois). The nature of the facility with

which patients deal influences the choice. Hospitals send a greater proportion of patients home

than do free-standing facilities (20).

The percent of patients being dialyzed at home

also varies among countries. The U.S. rate is very

similar to the overall European rate of roughly

17 percent (50). However, there are variations

among countries. Great Britain, for example,

sends more than half of its patients home, whereas

other countries (e. g., The Netherlands and Spain)

tend to send less than 10 percent home (1). Such

differences may reflect differences among nations

in the institutional setting for medical care.

Among approaches, CAPD’s share of U.S. patients represents a growth in popularity over the

past few years (86), which many market analysts

predict will continue (46,79). Similar growth has

been evidenced in other countries, although as of

the end of 1981, only 6 percent of the European

dialysis patients were being treated with this approach (50). As with home dialysis in general,

there is considerable intercountry variation. In

Canada, about 30 percent of the patients are on

CAPD, but in Spain and West Germany, the figure is below 5 percent (46,50).

CAPD is a home-based modality, and thus its

use is linked closely with the decision to dialyze

at home. Most new patients choosing home dialysis are choosing CAPD, and roughly 68 percent

of home patients were on CAPD in 1983 (14,66).

At the same time, however, “procedure survival”

on CAPD, i.e., the percent of patients remaining

on the treatment for a given period, is somewhat

low. Recent U.S. figures show rates of 62 percent

after 1 year and 56 percent after 18 months (66).

The experience in Europe shows even lower procedure survival rates (50). Stason and Barnes note

that while there is a lack of systematic comparative data on hemodialysis, the CAPD figures do

give cause for concern about the modality’s longterm viability (86).
12 Ž Health Technology Case Study 32: The Hemodialysis Equipment and Disposable Industry

COSTS OF TREATMENT MODALITIES

From an economic perspective the choices made

could have important effects on costs. Various

studies suggest that there are important differences

in costs among modalities, but the estimates offered do not always agree (14,15,31,55,79,86).

Table 3 presents estimates from various sources.

On balance, in-center hemodialysis is the most

costly modality. Within this category, hospitals

incur greater costs than independent centers.

Home hemodialysis appears less costly than CAPD,

except in the Stason and Barnes (86) estimates

from Medicare data.

There are various problems with such estimates.

For one thing, data are limited in breadth of coverage and depth of detail. Moreover, the choice

of modality does vary with age, race, and sex (86).

These and other factors create case-mix differences

that affect the cost estimates. Cost estimates are

also hard to arrive at because assessing certain of

the costs is difficult. For example, the costs of

home hemodialysis are probably understated because the economic cost of unpaid aides who assist

in dialysis is usually not adequately accounted for.

Some estimates for CAPD have tried to account

for costs of hospitalization (such as would be associated with peritonitis), but other costs are more

difficult to incorporate into the estimates. For example, the costs of failure on CAPD, as measured by costs of the resulting change in modality,

are higher than for center hemodialysis (86).

On balance, evidence of the cost differences between hemodialysis in hospitals and free-standing

facilities is strong. However, a recent assessment

for OTA concludes that evidence of other cost differences remains rather uncertain and worthy of

further study (86).

Table 3.—Estimated Costs of Dialysis per Patient-Year by Modality (dollars)

Cost audits

(1 980-81) Medicare data Market study

Modality HCFA GAO 1979 1981-82 1981

Center hemodialysis:

Hospital center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,060 —

)

28,800

Independent center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,848 — 23,562 20,257 24,100

Home hemodialysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,572 16,068 18,629 14,485 14,850

Continuous ambulatory peritoneal dialysis . . . . . . . . . . . . . . . . . . 17,784 17,160 10,584 18.300

KEY” HCFA— Health Care Financing Administration, U S. Department of Health and Human Services, GAO—General Accounting Office

SOURCES Cost audit data are presented In W B Stason and B. A. Barnes, “Effectiveness and Costs of Continuous Ambulatory Peritoneal Dlalys!s (CAPD) in Corn.

parison With Home and Center Hemodialysis, ” contract report prepared for the Off Ice of Technology Assessment, U S. Congress, Washington, DC, in press,

estimates from Medicare data for 1979 are from P W. Eggers, End-Stage Renal Disease Program, 1983, unpublished, and for 1981-82 are from Stason and

Barnes; market study data are from Sanford C Bernstein & Co., Inc., The Kidrrey COa/ysIs Industry (New York February 1981)
Equipment Requirements
. .. . .

Equipment Requirements

THE MARKET OVERALL

Of the treatment approaches discussed above,

hemodialysis has perhaps the greatest requirements for equipment and supplies. Transplantation, of course, requires the various equipment

and supplies associated with the operating room,

but the equipment is employed once per transplant

and, for the most part, will be used in other surgical procedures as well. Peritoneal dialysis has

relatively modest equipment requirements overall. Machinery in the form of dialysate exchange

equipment is used in intermittent peritoneal dialysis (IPD) and continuous cycling peritoneal

dialysis (CCPD). In the more popular continuous

ambulatory peritoneal dialysis (CAPD), considerable use is made of the disposable dialysate

which, in this treatment, usually comes in a sterile, prepackaged container. Tubing and other

miscellaneous supplies are also employed.

The process of hemodialysis involves a range

of equipment and supplies. Machinery is required

to pump the blood, prepare and deliver the dialysate, and generally monitor the system for safe

operation. Water-treatment equipment may also

be used, or, alternatively, purified water may be

brought in. In addition, dialysate, dialyzers, blood

lines, needles, and assorted other items are needed.

The industry typically makes a distinction between “equipment, ” such as the blood pump and

delivery system, and “disposable,” such as the

dialyzers and blood lines, that in principle are

disposed of after each use. Those wishing a finer

distinction may also distinguish so-called “consumables” from other disposable. Consumables

are more specifically used up during hemodialysis and include the dialysate, heparin (drug used

to prevent blood clotting), and saline (solution

used to prime and rinse the dialyzer). For the most

part this case study will employ the former but

not the latter distinction.

Table 4 provides estimates of the dollar value

of the ESRD market over time. The total U.S.

market for equipment and disposable appeared

to have been about $500 million in 1983; and

based on 1982 estimates, the worldwide market

was roughly three times that size (46).

Equipment and disposable for hemodialysis account for the bulk of the market, but this share

Table

Hemodialysis:

Dialyzer s

Blood line s

Other supplies.

4.—Estimated U.S. Market for ESRD Equipment and Disposable by

1975 1976 1977 1978

. . . . . . . . . . $ 72.3 $ 94.4 $112.5 $131.8

.,. . . . . . . . . 18,0 25.4 32.9 40.2

40.0 556 71.2 837

Dialysate delivery systems and other equipment

b

14.0 17,0 20.4

Total hemodialysi s ,. $144,3 $1919 $2370

Peritoneal dialysis:

Continuous ambulatory peritoneal dialysis . . . $ — $ — $ —

Intermittent peritoneal dialysisr 

... 10.0 12.5 150

Continuous cycling peritoneal dialysis — — —

Total peritoneal dialysis d

$ 10.0 $ 12.5 $ 15.0

23,9

$299.6

$ 0.3

16,8 —

$ 17.1

$296.7

Year ($ million)

1979 1980

$1442 $153.7

45.5 49.8

98.8 1146

275 31.6

$316.0 $349.7

$ 3,2

18.5 —

$ 21,7

$3377

$ 16.6

16.5

0.2

$ 33.3

$383.0

1983a

$148.2

53.9

1139

395

$385.5

$ 99.8

9.1

175

$126.4

$511.9

SOURCE Sanford C Bernstein 8 C,) Inr The KIdnek DIa/ysfs /nduslr\ (New York February 1981 I
has been decreasing over time, primarily because

of the increasing popularity of CAPD. The single

most important item overall is the dialyzer. Its

1980 sales accounted for 40 percent of the market. For reasons discussed later in this case study,

this share is expected to decline.

Dialyzers are an important segment of the market in dollar terms and thus are worthy of some

attention. However, this segment of the market

DIALYZERS

The Dialyzer Market

Dialyzers consist essentially of three basic parts:

a compartment for the blood, a compartment for

the dialysate, and a semipermeable membrane

separating the two. The three principal types of

dialyzers—parallel plate, coil, and hollow fiber—

differ essentially in how these basic parts are arranged. All three types of dialyzers are generally

described by manufacturers as “single-use disposable,” but in fact are often reused. The Kiil

dialyzer, a type of plate dialyzer, is specifically

designed for reuse but its inconvenience has made

its popularity quite limited (117).

Although the specific features of the dialyzers

vary among manufacturers, each type of dialyzer

has certain basic characteristics. Parallel plate, or

simply, plate dialyzers consist of a stack of semipermeable membranes sandwiched between support “plates. ” Blood passes between the membranes while the dialysate passes in the opposite

direction through grooves or spaces in the support plate. In a coil dialyzer, blood passes through

semipermeable membrane tubing. The tubing is

wound around itself, or “coiled,” and a supportis also of special interest because it appears to be

especially sensitive to pressure to reduce the costs

of the ESRD programs and more generally sensitive to the resolution of some important policy

issues. Thus, it can help illuminate many policy

issues and effects. Since much of the analysis in

this case study will focus on dialyzers, the next

section describes this part of the market in more

detail.

ing screen separates the coils. The dialysate passes

at a 90° angle through the space created by the

screen. A hollow fiber dialyzer contains thousands

of hollow fibers bundled within a compact cylinder. Blood flows through the semipermeable

hollow fiber while the dialysate fluid passes outside the fibers (117).

The growth trend in unit sales, or numbers, of

dialyzers is illustrated in table 5. The figures show

a continuing decline in the rate of growth of

dialyzer sales and most recently an absolute decline in sales. The 1983 data were obtained from

a source different from that of the other years’

data, so comparisons should be made with caution. Nevertheless, the pattern observed is consistent with the view that the market is contracting (79). The principal explanation for this lies

in the increase in dialyzer reuse, a subject addressed later in this case study.

Note also the changing mix of dialyzers sold.

The hollow fiber dialyzer has clearly come to

dominate the market, while the coil dialyzer has

declined markedly in use. The plate dialyzer has

managed some increase in share, but market

Table 5.—Estimated Dialyzer Unit Sales by Year

1975 1976 1977 1978 1979 1980 1983

Total units sold (1,000s) . . . . . . . . . . . . . . . . ~ . . . . . . . . . . . . 3,585 4,555 5,410 6,130 6,800 7,445 4,400

Share by dialyzer type (o/o):

Hollow fiber . . . . . . . . . . . . . . . . . . . . . . . . . . ... . . . . . . . . . . . .

Coil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67.0 63.0 54.0 41.4 33.3 26.3 2

Parallel plate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.4 14.4 16.5 18.9 19.3 21.1 28

Other . . . . . . . . . . . . . . . . . . . . . . . . . . ... . . . . . . . . . . . . . . . . . . . . . 1.5 1.1 0.6 0.4 0.3 0.1 —

SOURCES For 197580 data, Sanford C Bernstein & Co , Inc , The Kidney Dalysfs /ndusfry (New York February 1981), for 1983 data, Information Resources international, Inc , B/orned/ca/ Business /nfernaf/ona/, Vl, Mar. 16, 1983
Ch. 3 --Equipment Requirements ● Ž 17 —

analysts expect this share

hollow fibers continue to

to drop somewhat as

gain (79).

There appear to be two principal reasons for

the hollow fiber dialyzer’s gain in market share.

First, hollow fiber dialyzers have excellent dialysis

performance characteristics. They are small, efficient, and relatively easy to use. Coils, on the

other hand, are more cumbersome and difficult

to work with and require relatively high blood

volumes. Plate dialyzers are generally regarded

as much superior to coils but are viewed by some

in the market as slightly less efficient than hollow

fibers (79).

The second reason for the hollow fiber gain in

market share is its relative suitability for reuse.

Although all three types can be reused, the hollow

fiber dialyzer has come to be regarded as especially suitable for reuse. The hollow fiber dialyzer’s advantages arise because, in practicing

reuse, it is important to monitor the changing performance characteristics of the dialyzer as it is reprocessed. This dialyzer’s characteristics allow for

a relatively straightforward determination of the

reused dialyzer’s efficiency. This is because the

dialyzer’s ability to perform its function is directly

related to the hollow-fiber cell volume, which can

be fairly easily and readily measured. In contrast,

the membrane used in plate dialyzers is compliant,

and simple volume measurements cannot provide

a reliable indicator of performance properties

(16,22). Furthermore, cleaning plates is difficult

to monitor because blood can get caught between

the plates. Finally, many simply regard the hollow

fiber dialyzer as more “rugged” and able to withstand the reprocessing treatments (120).

Reuse of Dialyzers

To understand the dialyzer’s position in the

market, it is important to understand the practice of reuse: it occurs when a dialyzer, after its

original use, is reprocessed, stored, and then used

again on the same patient, often multiple times.

The reprocessing generally begins with an initial

rinsing of the dialyzer after dialysis. The dialyzer

is subsequently cleaned and disinfected or resterilized (117). The actual reprocessing procedure and

the number of reuses tend to vary among facilities. However, various medical and industry

groups have been developing guidelines for the

reprocessing procedure (e. g., see (71) and (77)).

These guidelines include a test of the dialyzer’s

residual functional capabilities after each use.

When the dialyzer functions at an unacceptable

level, it is discarded. There are apparently no systematic data on the number of reuses actually

achieved nationwide. A recent Health Care Financing Administration (HCFA) analysis of the

cost savings from reuse assumes five reuses (103).

At a recent workshop, one program reported

some success in achieving a “target rate” of eight

reuses per dialyzer (84).

In any case, dialyzer reuse, although widely

practiced, is quite controversial. This section considers some of the major issues surrounding the

practice. As a beginning, some of the history of

the practice is recounted. Then its cost and medical consequences are discussed.

History of Reuse

Most dialyzers today are labeled by the manufacturer as intended for single use only. They are

“disposable.” However the practice of using a

dialyzer more than once goes back to the early

years of dialysis. In 1964, Shaldon and his associates reported a technique for reuse through

refrigerating coil dialyzers (83). A technique for

reuse of the Kiil dialyzer, aimed at eliminating the

need for disassembly and rebuilding, was described in 1967 (70).

In recent years there has been a renewed interest and indeed a growth in the reuse of “disposable” dialyzers. In a well-known study, Deane

found that in 1978 about 17 percent of patients

were involved with multiple use (23). A 1982

survey by the Centers for Disease Control indicates that 51 percent of patients were dialyzed

in centers that practiced reuse (27). In Europe the

practice is also followed but on a somewhat

smaller scale. Estimates actually show a decline

in the percentage of patients reusing disposable

dialyzers from about 14 percent in 1975 to 9 percent in 1981 (41). However, this decline is attributable, at least in part, to the marked expansion of the overall patient base. The actual number

of patients reusing dialyzers increased over this

period.
Whereas in the early years of dialysis the rationale for reuse was largely convenience (13,22),

the driving force behind reuse today is a desire

for cost savings. Of course, reuse may have medical effects, both positive and negative. An appropriate assessment of reuse must recognize the

various factors involved.

Cost Savings

Estimates of the cost savings associated with

reuse are illustrated in table 6. The estimates vary

from $1,600 to $6,000 per patient per year because

of differences in the assumptions underlying them

(e.g., with respect to dialyzer prices, labor, and

materials costs, etc. ) and because of differences

in the actual reuse and reprocessing procedures.

They also differ in the time periods on which the

estimates are based. As a result they may not fully

reflect experiences today.

If one assumes a savings of $2,000 per patient

per year with reuse and a patient population on

reuse of 40,000 (roughly 50 percent of the ESRD

population), then the yearly savings amount to

$80 million. As the industry has pointed out, savings of this magnitude represent a relatively small

portion of ESRD program costs (117). In this

hypothetical case the savings are less than 5 percent of program costs. Nevertheless, economies

of this magnitude are certainly attractive.

Table 6.— Selected Estimates of Savings

From Dialyzer Reuse

Savings per patient yeara

Source of estimate ($ current)

Fawcett and Mangles (1974) . $3,000

Foxen (1983)b . . . . . ... 1,900

Hoff stein, et al. (1976) . . 1,600-2,400

Scribner (1977) . . . . . . . . . . . . . 2,500-6,000

U.S. DHHS, HCFA (1981)b . 2,000 — .— aROUnded to neareSt $1 0 0

bEstlmates are for dlalyzer reuse without reuse of blood tubing

SOURCES. B Scrlbner, testimony at hearing before U S House of Represen.

tatlves, Subcommittee on Health of the Committee on Ways and

Means, Apr 251977, P A Hoffsteln, et al , “D!alysls Costs’ Results

of a Sample Study, ” Kid /nt. 9266.293, 1976, and K C Fawcett and

M D Mangles, “Reuse of the Gambro Lundia 17.Layer Dlalyzer, ”

D/a/ys/s and Trarrsp/antation 3(1) 38-40, 1974 Figures are derived from

the summary in G T Wlll!ngmyre, Reuse of Sirrg/eUse Hemodfa/yzers

(Washington, DC Health Industry Manufacturers Association, 1979)

Data from Fawcett and Mangles (above) and L G Foxen, “IS Reuse

Cost Effective? A Case Study, ” in Reuse of D/sposab/es, Assoclatlon for the Advancement of Medical Instrumentation, Technology

Assessment Report No 6-63 Arllngton, VA, 1963, were converted from

cost savings per treatment by assum!ng 156 treatments per year.

HCFA data are from U S Department of Health and Human Services,

Health Care Flnanctng Adm!nlstratton, Memorandum on Hemo.

dialysis Reuse from Edward L Kelly to Carolyne K Davis, July 31

1981

Of course, one might still challenge the validity

of such figures. Note that the more spent on

reprocessing, the less the cost savings of reuse.

Representatives of the dialyzer industry have suggested that with appropriately rigorous reprocessing, savings might be much less than are now

envisioned. Although manufacturers are subject

to Federal regulations concerning good manufacturing practices (GMP), clinics and hospitals reusing dialyzers generally are not. These regulations,

part of the Food, Drug, and Cosmetics Act, mandate minimum quality assurance requirements in

the manufacturing or processing of a medical device. If the GMP regulations were to be applied

to hospitals and clinics, it is argued that reprocessing might well become more costly (42,43,

44,117).

However, even if clinics and hospitals were to

perform reuse according to GMP regulations, the

cost of reprocessing, as estimated by one member of the industry, would still allow a saving

from reuse (44). As further evidence consider

market-generated estimates of reprocessing costs.

Multi-Use Systems, Inc., a new private company

that reprocesses dialyzers, charges $6.50 p e r

dialyzer for reprocessing, including pickup, delivery, and labeling. The firm uses automated reprocessing equipment and, according to the firm,

follows careful and rigorous procedures (24). With

the assumption of five reuses and a new dialyzer

price of $20, savings per patient year for the facility would come to roughly $1,800 and would

still presumably allow a profit for the reprocessing company.

Medical Consequences

Of course, any estimates of cost savings must

rest on a medical assessment of reuse. If reuse were

medically harmful to patients, then the costs of

increased morbidity or mortality would probably

dwarf the direct cost savings associated with it.

Thus, an appropriate assessment must be based

ultimately on considerations of the practice’s clinical safety and effectiveness.

Various concerns have been expressed about the

possible negative medical effects of reuse (e.g., see

(43)). However, others have suggested that reuse

may actually have some salutary effects. A. Peter

Lundin (54) has offered a summary of “presumed
—— .-

and proven” medical indications and contraindications for reuse. These are presented in table 7.

There are bits and pieces of evidence in support

of these items, but the consensus of a recent National Workshop on the Reuse of Consumables

in Hemodialysis concludes that overall there is

only “a small but finite risk of morbidity and

negligible or no risk of mortality with reuse in the

immediate treatment setting” (77).

In coming to such a conclusion, workshop participants also pointed out that the safety and effectiveness of reuse depends on appropriate reprocessing standards. They also recognized that

the long-term risks are unknown. Accordingly,

the consensus statement urges further study of the

potential medical effects of reuse.

In an assessment of reuse, there is often a

tendency to ignore the patient’s perspective. Patients face the issue from their own special perspectives (see, e.g., (54) and (62)). They recognize the desirability of cost savings in the ESRD

program and are even attracted by potential

benefits such as the prevention of new dialyzer

syndrome, a possible negative reaction to using

new dialyzers resulting in respiratory distress,

wheezing, back or chest pain, chills, or fever (67).

Yet they are concerned about the presently unknown long-term risks and emphasize the need

for more scientific study.

In considering the patient’s position, one should

note that the cost savings from reuse or the costs

of complications from reuse do not all accrue to

patients. Medicare, the dialysis facility, and patients can all be affected, and each group can have

its own perspective and incentives. Ethicist Arthur Caplan (18) notes that the dialysis patient,

by virtue of his or her illness, maybe particularly

“vulnerable. ” He argues strongly that the ethics

of therapy require that patients be informed fully

about reuse and allowed to consent or not consent to the practice.

Table 7.—Suggested Medical Effects of Reuse

Medical contraindications to reuse Medical Indications for reuse

1, Induction of hypercoagulability. 1 Prevention of new dialyzer syndrome,

2 Requirement of larger heparin doses 2 Less accumulation of manufactured residuals,

3. Format Ion of anti-N-llke antibodies. 3. No other way to avoid problems (1) and (2),

4, Format Ion of other auto-antibodies. 4, Equivalency or superiority to single dialyzer use.

5. Toxic effects of disinfectants

6. Lack of strict standards.

7. Inferiority to single dialyzer use,

SOURCE A P Lund!n Economy at Whose Expense The Elh Ics of Dlalyzer Reuse and Informed Consent n Reuse of Dwposab/es Assoc I at I on for the Advancement

of M ed c al I nst ru men tat o n Technology Assessme nt ReDort N o 683 A rl I n gton V A 1983

4.

Market Structure and Competition

A market consists of a group of buyers and

sellers coming together to exchange a product or

service. That interaction helps determine the product’s prices, quantities, and quality. To understand how these items are determined, and to

evaluate the economic performance of the hemodialysis equipment and disposable industry, it is

THE SELLERS

Market Concentration

A key feature of any market is its degree of

competitiveness. One factor that characterizes

competitiveness is market concentrate ion, the degree to which overall market activity is distributed among (or concentrated with in) the firms in

the market. Economic theory suggests that the degree of competition is related to market concentration and, in particular, that competition may

be stifled when a small number of firms controls

a large share of the market activity.

important to understand how buyers and sellers

are organized and how they compete. This section addresses the question of market structure

both from the seller’s side and the buyer’s side;

and since the U.S. market is not independent of

foreign markets, the international features of the

market are also examined.

Table 8.— Estimated Shares of U.S. Hospital Market for Dialysis Equipment and Disposable

1977 a

1978 1979 1980 1981

Baxter Travenol . . . . 32.7 0/0 23.4 0/0 29.4 0/0 28.4 0/0 26.6% 

CD Medical Inc. (Cordis Dow ) 19,2 19,0 20.1 15,5 22.5

Extracorporea l

c (Johnson & Johnson ) 165 20.0 14.4 22,8 18.6

Gambro AB . . . . . . . . . . . . 15,1 12,7 9.4 10.4 11,1

Cobe Labs . . . . . . 5.0 12.1 13,3 10,0 7.6

Organon-Teknika . . . . . . 1.7 1.8 1.9 2,6 2.0

Warner Lambert . . . . . . . . . . . . . . . . 1.7 1,7 (d) (d) (d)

Bentley (American Hospital Supply) ., . . . . 1.5 (d) (d) (d) (d)

Becton Dickinson . ., . (d) 4.6 3.2 (d) (d)

Erika . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (d) (d) 2,4 2.0 4,7

Vernitron Corp. . . . . (d) (d) (d) 2.0 2.0

Terumo-America, Inc. ... . . . . . . (d) (d) (d) (d) (d)

aaased on Ias[ 6 months Of 1977

b B as ed on first 5 months of 1983

Clncludes very small portion of sales attributable to Cntlkon D{vtslon of company

dNo

t among leadlng eight corporations In this year Figures not available separately

by Year (percent)

1982 1983b

30,0 0/0 29.4%

27,1 22.4

10.4 10.8

139 13.3

7 2 7 2

(d) (d)

(d) (d)

(d) 3.9

1.7 2.7

(d) (d)

17 3.1

SOURCE Comp! led from survey by IMS America, Lfd Hospital Supply Survey, contract report prepared for the Off Ice of Technology Assessment U S Congress

Washington, DC 1983
1975 1976 1977 1978 1979

Baxter Travenol . . . . . . . . . . . . . . . . . . . . . .

CD Medical Inc. . . . . . . . . . . . . . . . . . . . . .

Cobe Labs . . . . . . . . . . . . . . . . . . . . ... ...

Extracorporeal . . . . . . . . . . . . . . . . . . . . . . . .

Erika . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Gambro AB . . . . . . . . . . . . . . . . . . . . . . . . . . .

Becton Dickinson . . . . . . . . . . . . . . . . . . . . . .

Renal Systems . . . . . . . . . . . . . . . . . . . . . .

Terumo-America, Inc.... . . . . . . . . . . . . . . . .

Bentley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

McGaw . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Abbott . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

All others . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

32.70/o

11,0

8.4

9.8

2.6

6.5

2.6

0.6

—

1.0

1.9

.

22.9

22,70/o

12.4

7.8

9.7

4.0

6.5

2.5

1.0

0.7

1.5

2.0 —

29.3

22.10/0

14.1

8.9

9.1

5.4

6.3

2.5

1.5

1.2

1.9

1.8 —

25,1

1980 1983a

21.90/o

14.9

10.7

7.9

6.1

6.5

2.9

2.0

1,7

1.4

1.7

—

22.5

24.00/o

15.5

11.8

9.2

6.4

6.9

2.8

2.2

2.1

1.0

1.5

—

16.6

26.30/o

13.6

12.3

10.0

7.9

2.3

3.0

2.3

1.7

0.8

1.1

—

13.7

34.90/0

9.1

10.8

8.9

13.1

5.7

3.0

2,7

1.3 —

1.6

2.4

6.5

apro,ected by Bernstein in 1981

SOURCE Sanford C Bernstein &Co, Inc, The K/dr?ey Dla/ys/s /rrdusfry (New York February 1981)

ilarly, tables 10 and 11 present data on relative

shares for dialyzers alone, considering again, respectively, hospitals and the market overall.

The evidence in the tables presents a consistent picture, with Baxter Travenol emerging as the

U.S. leader. CD Medical, Inc., Gambro AB, and

Extracorporeal are also key firms. (For brief

descriptions of the major firms in the industry see

app. A.) In order to assess the competitive implications of this pattern, analysts often use a single

“summary” measure that can be used for comparative purposes. Two of the most commonly

used measures of market concentration are considered here: the four-firm concentration ratio and

the Herfindahl index.

The four-firm concentration ratio measures the

total market share of the largest four firms in the

industry. Where this ratio is high, competition is

likely to be less intense, since the largest firms may

have a greater opportunity to exercise market

power (80). In the hospital market for equipment

and disposable (table 8), the concentration ratio

was 76 in 1983. The ratio is slightly lower, 68,

in the market overall (table 9). In the hospital market for dialyzers (table 10), the ratio was over 90

in 1983. For dialyzers overall, the ratio was 79.

Although the concentration ratio is an imperfect

measure of competition, the figures for the industry put it at or in excess of the 60 to 70 percent

figure often viewed as the threshold for possibly

serious competitive problems (80). Furthermore,

this situation appears to have persisted over the

past several years.

An alternative measure of market concentration is the Herfindahl index. It is generally regarded as superior to the concentration ratio (80),

but it is less widely used because the data for its

calculations are often not available. It is calculated by summing the squared values of the market shares of the firms in the industry. Calculating shares in fractional or decimal terms, the index

can range in value from near zero, for an industry composed of many small firms, to one, for

a monopoly. Again, economic analysis indicates

that where this value is higher, the scope for anticompetitive behavior increases.

From the data in tables 8 through 11, Herfindahl indices can be calculated. In 1983, they

ranged from about 0.16 to 0.17 for all dialysis

equipment and supplies and from 0.17 to 0.28 for

the dialyzer market. Since data limitations have

restricted use of this index in economic studies,

there is little basis for comparison among industries, However, recently published guidelines from

the Department of Justice use the index in explaining their attitudes toward proposed mergers. Markets with index values in the range observed for

the dialyzer market (greater than 0.18) are characterized as “highly concentrated. ” In such markets, mergers that increased concentration to such

levels would be a “a matter of significant competitive concern” (104).

Entry

Another important characteristic of an industry’s structure, and its competitiveness, is the condition of entry. Is entry into the industry fairly
0

c

2
Table 11 .—Estimated Shares of Total U.S. Market for Dialyzers by Year (percent)

1975 1976 1977 1978 1979 1980 1983

Baxter Travenol . . . . . . . . . . . . . . . . . . . 47.40/0 41,10/0 34.10/o 33.10/0 30.9% 29.30/o 260/o

CD Medical Inc. . . . . . . . . . . . . . . . . . . . . . 18.7 18,6 21.3 24.5 27.9 23,5 20

Extracorporeal . . . . . . . . . . . . 18.8 16,9 14.9 11,0 10,8 12.5 NA

Gambro . 11.2 11.0 10,9 10,9 10.9 12.1 24

Cob. . . . . . . . . . . . . . . . . . . . . . . . 0.4 1.9 5.2 8.1 8.9 9.6 9

Erika . . . . . . . . . . . . . . . . . . . . . . . . . 0.4 4,2 6.9 7.7 7.7 9.4 7

Bentley ....,.... . . . . . . . . . . . . . . . 1.1 3.7 4.2 3.0 1.9 1.5 NA

Hospal . . . . . . . . . . . . . . . . . . . . . . — — 01 0.2 0.2 0.9 NA

Terumo-America, lnc . . . . . . . . . . . . . . . . . — — — — — 0.7 9

Organon-Teknika . . . . . . . . . . . . . — — — — 0.1 0.2 NA

Renal Systems . . . . . . . . . . . . . . . . . . . . . . . — — — — — 0.1 NA

Renal Devices . . . . . . . . . . . — — — — — 0.1 NA

All others .,, . . . . . . . . . . . . . . . . . . . 2,0 2.6 2.4 1.5 0.7 0.1 NA

f4A Indicates data not ava(lable

SOURCE For197580 data Sanford C Bernstein &Co Inc The K/dney D/a/ys/s/ndustry (New York February 1981), for1983 data, information Resources International,

Inc i3~omed(ca/ Business /nferr?af/ona/, VI Mar 16 1983, and A Kraus, Executive Vice President Gambro AB, personal communication Se~tember 1983

easy or are there substantial “barriers” to new

firms? Insubstantial barriers do exist, established

firms are insulated from an important source of

competition, the new entrant.

Barriers to entry arise from the advantages

established firms have over new entrants. These

could include cost advantages associated with access to technology or materials, or “product differentiation” advantages associated with the

strong image of established producers with customers. Certainly some of these advantages exist. Firms such as Baxter Travenol, for example,

have established a strong identity with buyers.

Cordis Dow for many years controlled patents in

hollow fiber dialyzer technology and, although

they have extensively licensed thereto other firms,

this may have generated some cost advantages for

the company.

An indirect test of the condition of entry can

be performed by observing actual patterns of entry. If entry can be accomplished relatively easily

and the market offers profit potential, then entry should occur. A review of tables 8 through

11 suggests the emergence over time (i. e., the

movement from unmeasured to significantly

measurable sales) of at least a few firms. Most

notable are Terumo America and Abbott Labs.

Each emerged from a solid base: Abbott moved

into dialysis from a strong foothold in related

health markets; Terumo America is part of a large

Japanese firm that produces dialysis products.

Upon entry to the U.S. market the company was

accused of infringing on Cordis Dow patents. The

suit was settled when Terumo agreed to royalty

payments (79).

In the dialyzer market, in particular, one sees

a number of new entrants. However, other than

Terumo, none has managed to achieve a major

market share. Another form of entry has occurred

among some of the existing dialyzer producers,

who are now making hollow fiber dialyzers. Extracorporeal, a producer of coil dialyzers, began

to produce hollow fiber dialyzers in 1977. Similarly, Erika moved into hollow fibers in 1980, and

Gambro entered in 1979 (61,79). These companies

already had a part of the overall market, so such

entry was easier than it would have been de novo.

Although the evidence suggests that some entry into the dialysis equipment and supplies market is possible, it is hardly wide open. Entry has

mainly consisted of established firms expanding

geographically (e.g., from Japan to the United

States) or into related products (e.g., into production of another type of dialyzer). Another indication of the difficulty of entry is the degree of

stability in the identities of the major firms. The

lack of opportunity to move within the market

is also a sign of some limits in competition (see,

e.g., (19)). Overall, therefore, the market may

best be characterized as having moderate barriers

to entry.
THE BUYERS

INTERNATIONAL DIMENSIONS

(01 ).

The greatest market power on the buyers’ side

probably rests with free-standing facilities. These

facilities account for a growing share of the market. As of 1981 approximately 42 percent of facilities were independent t. The comparable figure

was 11 percent in 1973. Such facilities are predominantly profit-making enterprises and are
Thus, it remains an attractive market for world

producers. Despite current competitive pressures

in the U.S. market, foreign firms with an established market base elsewhere may be able to compete effectively here.

At the same time, U.S.-based firms have ventured into foreign markets. Many foreign countries are experiencing greater increases than the

United States in the patient population, and these

foreign markets are quite attractive (46,50). Table

12 illustrates the U.S. role in a number of markets for renal equipment. The variations observed

seem attributable to numerous factors. Historical, geographic, political, and economic factors

probably all contribute. In any case, U.S. firms

clearly are playing an important role abroad. Although market shares in some countries may decline as the markets expand, the potential sales

remain a strong attraction.

The U.S. firms’ movements into foreign markets is consistent with a general pattern in U.S.

manufacturing, particularly in so-called “hightech” industries. Most observers have tended to

view this as an attempt to take advantage of the

technological superiority of the firms’ products.

(For example, see (32), (37), (111), and (112). )

Whether this superiority existed in this market is

unclear. Certainly today, leading foreign firms

seem to produce products of comparable quality.

Indeed, as noted above, foreign firms have made

inroads into the U.S. market.

If one judges from the dialyzer market, technological factors have been of some importance

domestically and internationally. Cordis Dow’s

power in the dialyzer market stemmed at least in

part from its control of patents related to the

hollow fiber dialyzer. Erika’s production of hollow

fiber dialyzers in Ireland is being done through

licensing technology from a foreign firm, Fresenius

(39). Many dialyzer manufacturers use a membrane, Cuprophan, which is made by Erika, a

West German company, although Japanese and

other foreign and U.S. firms are developing membranes as well (2).

International activity may also be prompted by

a production technology that may involve significant economies of scale in dialyzer production

(47,79). These economies may prompt firms to

broaden their market to achieve further sales and

to maintain or achieve potentially lower unit

costs. Economies of scale would allow Terumo,

for example, operating from a high-volume base

in Japan, to export to the U.S. market at a competitive price. Economies of scale may also lead

firms with declining domestic sales to seek markets abroad, thereby allowing high-volume production to be maintained.

Table 12.—U.S. Involvement in the Renal Equipment Market in Various Countries

Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Philippines ., . . . . ... ... ., ... . . . . . . . . . . . . . . . .

Spain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Switzerland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Taiwan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

United Kingdom. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

aEstlmated

Year

1979

1985a

1979

1985a

1980a

1979

1985a

1978

1983a

1979

1985a

1978

1983a

1979

1985a

Total

sales

($ millions)

$5.3

6.4

12

28

4.3

0.48

0.80

5.31

8.0

2.1

2.5

0.15

0.8

21.6

26.0

Imports from U.S. ($ thousands)

$583

750

2100

3000

3500

251

443

1850

1600

900

1200

150

200

2530

2500

U.S.

market

share (o/o)

1 1 %

12

17.5

11

81

52

56

35

20

43

48

100

25

12

9.6

SOURCE U S Department of Commerce, International Trade Admlnlstratlon, Country Market Survey, Medica/ Equ/prnenf, Be/giurn, CMS 82-517, February 1982, tdem,

Mecl~ca/ Equ/prnenf, Germany, CMS 82.516, February 1982, idem, Medlca/ Equipment, Mex/co, CMS 79-004, February 1979, Idem, Med/ca/ Equ/prnen(, Ph(/Ip.

pines, CMS MED 565/83, March 1983, !dem, Medical Equlprnenf, Spa/n, CMS 81-511. September 1981, Id@m, Medical Equfprr?er?t, Sw/fzer/artd, CMS 81.512

September 1981; Id@m, Medical Equ/prnen(, Tafwan, CMS 81.509, February 1981, !dem, Medfca/ Equfprnent, Un/fed K/ngdorn, CMS 81.515, September 1981

Renal equipment as defined appears to Include at least some dlsposables
ndustry Performance
5.

Industry Performance

Industrial economists generally expect an industry’s structure to have an important influence on

the industry’s behavior and its quality of economic

performance. This performance is generally gauged

in terms of the efficiency with which resources are

allocated and utilized. From a policy viewpoint,

PRICES AND PROFITS

As a guide to economic performance, economists often focus on prices and profits. Low

prices are attractive to consumers. Prices and costs

together determine a firm’s profits. Profits, although the logical reward to successful business

activity, can arise for a variety of reasons. For

example, successful innovation or unexpectedly

large increases in demand for an industry’s product could lead t o high profits, at least for some

period of time. However, when profits are much

higher than investors are earning in other parts

of the economy, it may signal monopoly power.

Such power imposes costs on consumers, via high

prices, and on the society at large, via inefficient

utilization of society’s resources (see (80)).

Analysis of market prices and profits is complicated by a variety of factors, including various

sorts of data limitations. For example, some price

data may be available, but these published prices

are list prices and do not necessarily reflect the

transact ion prices, which are often discounted

from list price. Even if transaction prices were

available, comparisons over time would require

adjusting for changes in the nature of the products being sold. Technological improvements and

various other modifications make the specific list

of products sold today different from those sold

several years ago.

Profit data are also not generally available

through published sources. Firms that are not publicly held are not subject to the disclosure rules

of publicly held corporations. Foreign-owned

companies also pose special difficulties. Even in

cases where there is public disclosure, profits on

good performance is the ultimate objective, and

policies that can improve that performance become attractive. This section discusses some of

the key features of the industry’s economic performance.

hemodialysis equipment and disposables may be

difficult to ascertain. As noted in appendix A,

many of the firms in the industry operate in a variety of markets. Although the Securities and Exchange Commission does require some product

line breakdowns of sales and profits, the breakdowns are generally too broad (e.g., “medical care

products”) to allow for assessment of this market in particular.

Surveys can overcome some but not all of the

above limitations. In its study of ESRD equipment

and supplies, Orkand Corp. (68) notes various difficulties in estimating prices, but seems to conclude that prices have, in general, shown little upward movement and, indeed — after adjusting for

inflation —have actually declined. For dialyzers,

it concludes that the decline has been especially

notable.

The discussion of prices here concentrates on

dialyzers since they have been a principal concern

of this case study and price data for this market

are relatively easy to interpret. The IMS America survey referred to earlier provides data that

allow for the calculation of the average price

paid for dialyzers by hospitals. These data are

presented in table 13.

The results are rather remarkable. Prices, even

in current dollar terms, have fallen over the past

5 years. After adjusting for inflation, the overall

decline is approximately 34 percent. Furthermore,

this decline in real prices seems to exist for all

kinds of dialyzers. For example, Baxter Travenol’s

hollow fiber dialyzers and the dialyzers of CD
Table 13.—Average Prices for Dialyzers Purchased by Hospitals From Major Producers by Yeara (current dollars)

Company and dialyzer 1978 1979 1980 – - 198 1 1982 1983b

Baxter Travenolc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25.4 $23.1 $24.3 $23.4 $21.7 $17.9

Hollow fiber . . . . . . . . . . . . . . . . . 27.7 25.0 26.2 24.6 22.0 17.9

Coil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.9 20.3 20.1 19.5 19.5 23.5

Parallel Plate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31.5 32.7 – — – –

CD Medical Inc. (Cordis Dow) . . . . . . . . . . . . . . . . . . . . . . 30.2 28,6 26.1 24.6 21.7 20.7

Gambro AB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (e) 20,4 24.4 24.0 24.7 22.3

Extracorporeal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (e) 18,9 21.1 18.7 17.6 16.3

Bentley. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (e) 16.6 16.4 16.2 NA NA

Cobe Labs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.5 22.7 23.3 23.2 22.5 24.8

Becton Dickinson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,6 27,6 18.8 NA NA NA

Erika . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.5 19.0 25.1 25.7 26.5 21.6

Hospal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43.0 37.6 38.0 37.6 34,3 34.0

Terumo-America, inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NA 27.0 19,1 25.4 NA 18,5

Organon-Teknika . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NA NA NA 10,9 NA NA

Grand averaged. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,1 23.3 23.7 22.9 21,8 19,2

Grand average (adjusted for inflation)df . . . . . . . . . . . . . . . . . 20.1 21.0 18.8 16.6 15.2 13.2

NA indicates data not avatlable

apr,ce~ are calculated as dollars sales dlwded by total units sold

bBased on first 5 monthsof 1983

CDa~a for Baxter Travenol allo,wed for computation overall and by dlalyzer type prices for other companies may Include a mlx Of types Of dlalyzers

dcomputed from total sales to sample hospitals of all types of dialyzers from all comPanles

eData dld not allow for meaningful calculations

fAdjustmentto Iglaprlceslsbasedon the producer prlcelndex fo~f,nlshedgoods Values of price index for 19831svalue forJune 1983(US Department of Commerce,

Bureau of Economic Analysts, L3usfness Stat/shcs f982.23d ed, November 1983, andUS Department of Commerce, Bureau of Economic Analyses, SurveyofCurrenf

Buslrress, November 1983)

SOURCE Computed from data !nlMSAmeflca, Ltd, tiospltal Supply Survey, contract reporfprepared forthe Ofhceof Technology Assessment US Congress, Washington,

DC, 1983

Medical (which focuses on the hollow fiber) show

an average decline of about 56 percent, after adjusting for inflation (and weighting by their relative sales). Prices of Baxter Travenol’s coil dialyzers also show a decline in real terms of 32

percent. And prices of plate dialyzers have probably also fallen. Data are not separately available,

but the two leading manufacturers of plate dialyzers, Gambro and Cobe (79), both experienced

price declines, once an adjustment is made for inflation. Although these figures are based on prices

paid by hospitals, the results are consistent with

general business assessments of price movements

(39,68,79).

For reasons alluded to earlier, the profit consequences of this price decline are not easily

assessable. Profits for dialyzers are rarely singled

out, although some assessments of profitability

do exist. A 1983 evaluation of Baxter Travenol

stock contends that the company is making good

profits on hollow fiber dialyzers (47). CD Medical (formerly Cordis Dow), on the other hand,

has been experiencing losses overall for the last

3 years; this appears at least partly due to its

hollow fiber dialyzers (17,59,114,115).

Overall, however, the major companies remain

viable. In part this is because they have been able

to lower production costs (47). Profit margins

have apparently declined, but as noted earlier,

over the past few years, some new entrants have

found the potential sufficient to entice them into

the market.

Given the description of market structure provided earlier, the downward movement in prices

and, apparently, in profits requires some further

explanation. The market as described has been

one of high seller concentration and generally low

buyer concentration. This may help explain the

attractive profits earned several years ago (79).

But the measured market concentration of sellers

has not evidenced a decline that might explain a

fall in prices. Clearly other factors must have been

at work.

One likely source of the price problem for manufacturers is the unduly optimistic past expectations about the growth in the market. When profit

prospects were good, capacity was expanded,

especially in the production of hollow fibers. Yet,

the rate of growth in unit sales of dialyzers has
been falling over the past several years, both overall and for hollow fiber dialyzers in particular (see

table 5 in ch. 3; also, (79)). Indeed, unit sales of

hollow fibers have actually shown a decline in the

past year. The result is extensive overcapacity in

the industry (47,79). The overcapacity led to price

cutting as manufacturers strove to maintain output and share in a decelerating and finally shrinking market.

The major factor that slowed the growth in

dialyzer demand was the growth in reuse. As reuse

increased, the number of new dialyzers required

per patient fell. With demand failing to keep up

with supply, it was inevitable that there would

be downward pressure on prices—even in this

concentrated market. A 1981 market survey notes

that “market share has lost much of its traditional

significance. . . . Dialyzers have become a pure,

price-sensitive commodity for which prices determine share” (79).

Buyers have contributed to reaching this outcome. Although they had little concentrated marPROSPECTS FOR THE INDUSTRY

Prospects for Prices and Profits

Market prospects depend to a great degree on

technological, medical, and policy developments.

Over the next few years the dialyzer market seems

likely to continue to contract (47,79). Two factors should contribute to this decline. One is a

continued growth in reuse of dialyzers. The other

is the likely growth in alternative treatment

modalities.

As noted earlier, reuse has been growing in the

United States. Given the cost savings associated

with reuse and the current consensus that reuse

is indeed safe when proper procedures are followed, this growth will probably continue. The

ultimate extent of the practice is difficult to assess.

Although statistics for Europe show some decline

over time in the percentage of patients reusing

dialyzers, these statistics are based on an expanding patient base and may reflect additional singleuse cases rather than any discontinuation of reuse

ket power, buyers were both prepared and motivated to take advantage of the manufacturers’

dilemma. Buyers, too, have been under pressure—

in this case from Federal Government insurers—to

control the costs of treatment, Reuse was one potential source of cost savings. More active bargaining with suppliers was another.

There is some support for the notion that buyer

pressures to reduce prices may matter. That lies

in the diversity of prices paid by various buyers.

GAO, for example, notes in its survey that Medicare paid $12.70 more per dialyzer session for supplies than did the Veterans Administration (105).

Informal discussions with users and various market surveys suggest that prices of new dialyzers

may vary considerably among customers (79).

The data in table 13, which show some variation

in actual prices, despite relative stability in official list prices, support such a view (68). Thus,

there appears to be some scope and potential for

bargaining by buyers.

(41). Certainly, there is room for further increase

in reuse in the United States.

The dialyzer market will also be affected by expected changes in the mix of treatment modalities

for patients with ESRD. Most projections show

a slowed rate of growth in the number of patients

on dialysis (46,79). If transplantation possibilities

improve, this growth will be further slowed. On

the other hand, any broadening of the criteria for

placing patients on dialysis would increase the patient population.

Within the dialysis population there is likely to

be continued movement toward continuous ambulatory peritoneal dialysis (CAPD). A recent investment study predicts that 19 percent of the

population will be on this modality within the

next 3 years (46). Other treatments such as hemofiltration may also gain in popularity. Hemofiltration involves separating a patient’s blood, by

filtration rather than dialysis, from fluids bear-
———-——

ing waste products. The fluids are then replaced

by other sterile liquids. The process is less timeconsuming and is apparently better tolerated by

some patients (61). As of 1982 about 1.6 percent

of European patients were on hemofiltration (50).

One study suggests that if technical problems

associated with cost efficient replacement of fluids

are solved, hemofiltration could account for as

much as 30 percent of the world market within

5 years (4).

This combination of factors points to continued

downward pressure on the demand for new dialyzers. This pressure maybe particularly acute for

coil dialyzers, which seem likely to continue their

marked decline. Sales of parallel plate dialyzers,

although generally superior in performance to

coils, will also likely decline, mainly because of

a continuing preference for hollow fibers. The

hollow fiber dialyzer, because of its performance

properties and its attractiveness for reuse, should

continue to dominate the market. One study

judges this the “only viable dialyzer market segment” (79). It probably will fare the best among

dialyzers but still suffer declines in absolute

volume.

These factors, along with continued buyers’

concern for cost control, should maintain prices

and profit margins at their present apparently low

level. Many observers expect this pressure to lead

to a “shakeout, ” with weaker firms forced from

the industry (46,79). To the extent that overcapacity and competition are reduced, a shakeout

could lend support to prices. Some suggest that

the result might be a return to higher, monopolylike prices (35). Although the high degree of market concentration suggests potential ability for

tacit price coordination, the probability of a move

to near-monopoly prices seems low. The adverse

demand conditions, the potential opportunities

(albeit perhaps only moderate) for entry, and the

diverse character of firms and their objectives, all

would work against such an occurrence (80). Continued reductions in production costs would further contribute to anti-monopoly pressures (79).

New Directions for the Companies

Although the dialyzer market shows reduced

profit potential, other segments of the market

seem to be attracting considerable interest among

manufacturers. Discussions with members of the

industry, as well as studies by investment firms,

suggest a number of areas where substantial potential exists, particularly in peritoneal dialysis,

and especially in CAPD.

Although there is still a great deal of clinical

uncertainty about CAPD, most observers, as

noted earlier, are expecting an increase in its use.

At present the market is dominated by Baxter

Travenol, which in 1982 had more than 90 percent of market sales (46). Profit from these sales

appears quite high. One report estimated the company’s profit in 1982 to be $80 million on $100

million of sales of CAPD solutions and supplies

(39). Evaluations of the company’s stock cite its

presence in the CAPD market as a key reason for

optimism about the company’s future prospects

(5,46,47). Such potential has not gone unnoticed

by other companies. For example, Abbott Labs

is making strong efforts, and firms such as Gambro, which are established in hemodialysis, are

entering the CAPD market as well (5,61).

Much of the success of the CAPD market may

depend on technological development. While research continues on the effectiveness of the modality, manufacturers are trying to develop sterile connection devices aimed at lessening the

incidence of peritonitis, a major concern with

CAPD (4,46). Although uncertainties about the

scope of the market abound, it is likely that this

sector will become increasingly competitive.

Just as one response to the threat posed by

CAPD is to enter that part of the market, companies may respond to reuse by entering the market for automated dialyzer reprocessing equipment. The success of such equipment will depend

not only on its efficiency but on the ultimate

course of dialyzer reuse. However, companies in
this field may also be attracted by potential in

other markets where “disposable,” such as catheters, are also reused. A recent business publication lists a number of companies in the field (39).

Only one, Renal Systems, actually showed up as

a seller in tables 8 to 11 in chapter 4, and its sales

are quite small. However, such a market would

constitute a natural extension for dialyzer manufacturers.

Another major area of interest is hemofiltration. As noted earlier, some analysts expect this

treatment to become increasingly popular. Gambro has shown particular interest here (4,61).

Various companies are also looking to apply

elsewhere the technological knowledge developed

in their ESRD activities. Expertise gained in dealing with dialyzer membranes and dialysis systems

may prove useful elsewhere. Gambro and other

companies, for example, are doing research on

plasmapheresis, a process in which blood is separated into its cellular and plasma components by

a process of filtration. The technique has potential applications in treating disorders of the autoimmune system, such as myasthenia gravis and

hypocholesterolemia (61).

Also related is work on hemoperfusion, which

involves the circulation of blood outside the body

through an activated charcoal cartridge. By a

process of adsorption, various toxic substances,

such as those associated with a drug overdose,

can be removed (61 ). While most of the dialyzer

companies have already diversified throughout

the health care field, the potential for developments and applications in other areas is significant.
—

6 .

Policy Issues
6 ■

Policy Issues

Developments in the industry have been greatly tients with equipment and disposable grew with

influenced by a number of Federal policy deci- this population.

sions. Most notably, the decision to extend Medicare coverage to end-stage renal disease (ESRD) At present, policy debates continue on a numpatients regardless of age set off a dramatic chain ber of issues of critical importance to the market

of events. The population of beneficiaries grew as well as to the patients. The following three secfrom roughly 11,000 at the onset of the program tions consider the three major policy areas: reimto 77,000 today. The industry supplying these pa- bursement, research, and dialyzer reuse.

REIMBURSEMENT POLICY

In May of 1983 the Department of Health and

Human Services issued final rules for new reimbursement rates for the ESRD program (93). These

new rules have caused a great deal of controversy

and are expected to have important effects on the

industry. This section considers these new rules,

discussing their historical antecedents, their form

and rationale, and their possible effects.

History of Reimbursement

As dialysis techniques for treating chronic

kidney failure were developed in the 1960s, effective treatment of the life-threatening disease became a possibility. Unfortunately, resources were

scarce and treatment choices, often involving life

or death decisions, had to be made. In response

to this dilemma, the U.S. Bureau of the Budget

in 1967 created a Committee on Chronic Renal

Disease. The committee, known as the Gottschalk

Committee, was charged with developing recommendations to deal with these problems. It issued

a recommendation that (94):

. . a national program be initiated for the treatment of end-stage renal disease with the aim of

providing, at the earliest possible date, treatment

in the form of chronic dialysis and/ or transplantation for all the American population for whom

it is medically indicated.

The committee suggested that the program be

financed by amending the Social Security Act “to

cover the permanently disabled regardless of age”

(94).

From the late 1960s until 1972, over 100 bills

were submitted in Congress to deal with the ESRD

problem (73). However, it was not until 1972 that

the issue was fully addressed. Section 199I of the

Social Security Amendments of 1972 extended

Medicare health insurance coverage to those people under age 65 suffering from chronic renal disease and requiring dialysis or transplantation. The

effective date for the coverage was July 1, 1973

(108). As of 1982, the program covered about 93

percent of the ESRD patient population (20).

In establishing the actual reimbursement levels

for dialysis under Medicare, the Social Security

Administration’s Bureau of Health Insurance had

little to go on. The non-Medicare medical market varied widely in reimbursement practices (72).

The decision was made to pay 80 percent of the

average cost to a hospital-based facility or 80 percent of the reasonable charges for a free-standing

facility, up to a “screen” or limit, of $133 per treatment. If routine laboratory services were included

in the facility’s costs, the screen was raised by $5;

if the supervisory services of a physician were included in the facility’s costs, the screen was increased by $12 more to $150. These rates were

in effect from 1974 until just recently when they

were supplanted by the new rates discussed below

(108).

In 1982, prior to the new rules, nearly all freestanding facilities were being paid at the rate of

$138 per treatment (the $133 plus $5 laboratory

charge) (20). Most hospital-based facilities re-

.34
quested and were granted exceptions to the screen,

on the grounds that their costs were higher; and

the average payment to hospitals had risen by

1980 to approximately $159 per treatment (110).

Under the previous system, physicians could

choose from one of two systems of payment, the

initial method and the alternative reimbursement

method. Under the initial method, reimbursement

for supervisory care was paid to a facility as part

of its reimbursement rate, as mentioned above.

The physician was then paid by the facility for

these supervisory services. Other nonsupervisory

services were paid on a fee-for-service basis.

Under the alternative reimbursement method,

physicians were paid a comprehensive monthly

fee per patient. For patients dialyzed in facilities,

the fee was based on a calculation of the customary or prevailing charges for a followup visit,

multiplied by 20. In 1982 the fee averaged roughly

$220 per month. For supervisory home patients,

the weighting factor was 14 rather than 20, to reflect the presumed lower physician service requirements of patients on home dialysis. This fee

came to an average of $154 per patient per month

in 1982 (20,110).

These payments to physicians and facilities reflect payments under the patients’ Medicare coverage. Patients have been enrolled under Parts A

and B of the Medicare program. Part A (Hospital Insurance) covers, with some benefit limits,

the reasonable and necessary services received in

a participating facility. These would include inpatient dialysis. ESRD patients generally receive

dialysis on an outpatient basis. This is covered

by Part B (Supplemental Medical Insurance).

ESRD beneficiaries pay a monthly premium and

are entitled to payment of 80 percent of reasonable charges or costs above a deductible. Physicians’ fees are paid on the same basis. Patients are

responsible for the remaining 20 percent of charges.

However, most patients are privately coinsured

for this 20 percent, and hospital facilities often

waive the 20 percent for those who are not (64).

Home dialysis has been covered under this same

basic arrangement. Medicare pays 80 percent of

acceptable costs for supplies and equipment and

physicians’ services, above the deductible. Some

inequities in defining supplies were corrected early

in the program so as not to penalize home dialysis

patients (72). Then, in 1978, passage of Public

Law 95-292 offered another incentive. If the patient obtained home dialysis and equipment from

an approved facility that reserved the equipment

for the exclusive use of patients on home dialysis,

the reimbursement rate would be 100 percent. At

the same time the law set a target rate for home

dialysis reimbursement to facilities of no more

than 70 percent of the national average payment

for in-facility dialysis. The target rate did not

apply to CAPD but notably did include payment

for home dialysis aides. (The 70 percent limit was

raised to 75 percent by the Omnibus Budget

Reconciliation Act of 1981 (108)).

Kidney transplantation is paid for by both parts

of Medicare. Hospital insurance (Part A) covers

various inpatient hospital services associated with

the transplant. This includes the cost of obtaining a suitable kidney, Coverage also extends to

the care of a patient who donates a kidney. The

surgeon’s services are covered by Part B. After

the deductible is met, Medicare medical insurance

pays 80 percent of the recognized charges for a

surgeon’s services (108).

The New Reimbursement Rates

The costs of the ESRD program have increased

dramatically. From $229 million in 1974, expenditures rose to about $1.8 billion in 1982 ($1.2 billion in constant 1974 dollars) (20). This continued

growth has generated considerable concern, even

though, as Rettig has pointed out, the increase was

due more to an increased patient population,

which more than tripled over this period, than

to an increase in costs per patient (72).

A major impetus for change was the passage

of the End Stage Renal Disease Amendment of

1978 (Public Law 95-292). As noted above, a major purpose of the law was to increase incentives

for home dialysis. In addition, section 1881 of the

law directed that a system be established for “prospectively set” reimbursement rates. Implementation of this provision proved rather time-consuming. In 1979 draft regulations were developed

proposing a single rate for outpatient dialysis covering both hospital and free-standing facilities.
However, in 1980 the Health Care Financing

Administration (HCFA) proposed a dual rate system, one for hospitals and a different one for freestanding facilities. This proposal was a recognition of the difference in payment rates that had

developed from Medicare’s practice of granting

to hospital facilities of numerous exceptions to the

payment screen (73). Although the Reagan Administration indicated in 1981 some preference for

a single rate, a final compromise, the Omnibus

Budget Reconciliation Act of 1981 (Public Law 97-

35) indicated preference for a dual composite rate:

one rate for hospitals and one for free-standing

facilities, but each would apply whether patients

were dialyzed in the institutional setting or at

home (73,108).

By early 1981, the Department of Health and

Human Services had developed specific proposed

rates. The reimbursement rate was to average

$132 for hospital-based facilities and $128 for freestanding facilities. Rates would be allowed to vary

to reflect local labor costs. As a result, payments

could vary from a low of $114 to a high of $148

for hospitals and from $109 to $143 for freestanding facilities (20,93).

The method by which these figures were generated is illuminating. In response to the 1978 legislation HCFA conducted audits of 38 free-standing facilities and 67 hospitals. Median cost per

in-facility dialysis treatment was estimated at $108

for free-standing facilities and $135 for hospitalbased facilities. In response to the 1981 legislation calling for composite rates, audits were then

conducted on 25 large home dialysis programs.

From this audit a median cost of $97 per treatment was estimated. These costs were then weighted

by the percentage of patients estimated to be

dialyzing in-facility and at home. The hospital rate

was then raised by $2.10 “to account for an apparent excess in hospital overhead costs resulting

from Medicare hospital accounting requirements. ”

Then 5 percent more was added to hospital costs

to account for “the possibility that the methodology used may have failed to recognize fully the

legitimate costs of hospitals or shortcomings in

the audited data” (20).

For physicians the proposed changes eliminated

the initial method of payment and modified the

alternative reimbursement method. The payment

would be the same for in-facility and home patients and was calculated as a weighted average.

For patients, one direct change was to eliminate

the 100 percent reimbursement option for home

dialysis equipment. However, as is suggested

below, indirect effects could be more substantial.

In congressional hearings in 1982, critics pointed

out various perceived problems with the proposals

(110). Opponents criticized the quality of the

audits, the sample size, the underlying assumptions, the philosophical rationale, and much else.

Overall, HCFA received 507 petitions and 4,265

comments on the rules, 3,675 of these from patients (93). The statistical procedures underlying

the calculations did seem suspect. Partly in response to that, HCFA pledged additional audits.

Nevertheless, the final rules, which were published

in the Federal Register on May 11, 1983, a nd

which became effective August 1, 1983, showed

very little change from the proposals. The average reimbursement rates of $131 for hospitals and

$127 for free-standing facilities were $1 lower than

those stated in the earlier proposal. However, this

difference simply reflected updated information

on the geographical wage differentials that were

used in rate calculations (93).

Effects of the Rates

The legislation mandating new rates spoke of

their “prospective” nature. Fixed rates are designed

to encourage facilities to control costs. Any excess of the rates over incurred costs can be kept

by the facility; any deficit in costs must be absorbed. In addition, the composite nature of the

rates is meant to create an incentive for movement toward increased home dialysis. HCFA

believes that as many as 40 percent of the ESRD

population could be on this presumably less expensive modality. Indeed, Carolyne Davis, the

Administrator of HCFA, stated that “the promotion of this incentive is the most important objective of the 1981 legislative provisions and of

our regulations” (20).

Thus, the regulations are aimed at providing

some overall cost-control incentives and at shifting treatment to the home setting. In neither case
is this motivation entirely new. A screen on Medical payments for dialysis treatment has been in

effect for a decade. For free-standing facilities the

$138 screen was, in effect, a prospectively set rate.

Indeed, if the HCFA audits are accurate, these facilities were enjoying an operating profit of about

$30 per treatment. Cost reductions could have

been translated into profits for these facilities,

precisely as called for in a prospective reimbursement system. For hospitals, of course, the screen

could be circumvented by the exceptions process.

Nevertheless, although Administrator Davis describes the previous system as cost-based (20), the

screen did at least impose some administrative

discouragement to increasing costs. Apparently,

it has made some contribution toward shifting patients toward the more cost-efficient proprietary

facilities. Rettig argues that the screen was “imaginative” and “the primary reason for steady perpatient costs” (72). HCFA’s plans to be stricter in

granting exceptions (93) should enhance the

screen’s effects.

The incentive for home dialysis is in some

respects ironic. In 1972 home dialysis was the

choice of approximately 40 percent of the patients,

but the initial Medicare regulations discouraged

it, contributing to the relative decline in this treatment choice (72). The 1978 legislation was a clear

move toward providing a home incentive. The

new regulations also encourage it but in a somewhat different fashion.

A rationale for discussing reimbursement in this

report is the expectation that reimbursement rates

will, by affecting patient and provider behavior,

affect the dialysis equipment and disposable market. This section considers effects by evaluating

the likely responses to the rules’ objectives of encouraging cost control overall and home dialysis

in particular.

Cost Control

A prospective reimbursement system provides

an incentive to reduce costs. One way to reduce

costs is by lowering the costs of materials and

equipment used in the dialysis process. Another

is to reduce labor costs, Providers can reduce their

costs by pressuring manufacturers to lower the

prices they charge, There may be some opportunities here, through strenuous bargaining or

forming cooperative buying ventures. GAO suggests that HCFA might negotiate with suppliers

(105). If such efforts did lower prices overall, then

costs to providers would, of course, decline accordingly.

Manufacturers naturally could suffer from such

developments. Profits, especially in areas such as

dialyzers, are apparently being squeezed. In fact,

those providers paying high prices may be in effect subsidizing other activity. Continued buyer

pressure on prices will undoubtedly contribute to

the predicted industry shakeout.

Such cost-reduction pressures may be viewed

perhaps more positively as providing an incentive for innovative advances. Rettig, for example, cites the development of large surface area

dialyzers, which increase the surface area exposed

to the blood, reducing required time on dialysis

and thus providers’ costs, as a technical change

that may have been prompted by Federal Government cost-control efforts (72). More generally,

a recent study notes that prospective reimbursement systems have provided hospitals with a

moderate incentive to adopt cost-saving innovations (75), Such concerns about costs offer a useful

signal to manufacturers (53).

Materials costs can also be reduced by increased

reuse of dialyzers. The key impetus behind reuse,

of course, has always been the effort to control

costs, Despite medical claims that reprocessing

may actually lead to salutary medical effects, cost

considerations are likely to remain the force

behind this practice. It appears that as long as current professional opinion remains generally supportive of carefully controlled reuse (e.g., Sadler,

1983 (77)), reimbursement pressures will make the

practice increasingly attractive to providers,

Note that this may be especially true since reuse

was not explicitly considered in the HCFA cost

calculations and no adjustments were made to reflect reuse. The HCFA did note that 25 percent

of the independent facilities examined reused

dialyzers while only 1 percent of the hospitalbased facilities did. It was further suggested that

dialyzer reuse does contribute to the cost differences observed (20). If a hospital’s costs are
otherwise comparable to the HCFA figures, reuse

offers a potential for generating a surplus.

The potential effects of reuse on the dialyzer

market were discussed earlier in this report. The

pressures generated from reuse could, however,

provide a special incentive to manufacturers.

Manufacturers insist that today’s dialyzers were

designed for single use only (117). Yet reuse is a

fact. Cost pressures may stimulate design changes

that enhance the efficiency or reduce the costs of

reprocessing.

Another potential source of cost savings is labor costs. Labor probably constitutes 50 percent

or more of the cost of dialysis treatment (91).

Thus, reductions in labor costs could generate

considerable savings. A potential reduction in labor has been the cause for some concern that care

will be shortchanged. The American Association

of Nurses and Technicians, for example, expresses

a fear that the useful services of social workers,

dietitians, and nurses will be reduced (3).

The effects on the dialysis equipment and supplies industry of such actions are not clear-cut,

but are probably not detrimental. Labor, equipment, and supplies are to some extent substitutable. As has occurred elsewhere, automation may

substitute for certain labor requirements. This, of

course, would have positive effects on the producers of the automated equipment. With reuse,

there is a complex interaction at work. Reuse does

seem to raise a facility’s labor costs (e. g., by requiring extra handling of dialyzers) while it reduces material costs. At the same time automated

dialysis machines could reduce some of these labor requirements.

Input costs could be reduced by a facility’s

focusing on “healthier” patients. “Sicker” patients,

with special medical problems, require more labor, more care in general. The possibility that hospitals’ higher costs are due to their “sicker” patients case mix has been debated. Only limited

data are available and they are subject to alternative interpretations. However, a recent study

by Plough, et al., does suggest that the case mix

in hospital-based facilities includes more severe

cases than those in free-standing facilities (69) (see

also, (53), (109), and (110)).

Incentives for Home Dialysis

As noted above, a major objective of the new

reimbursement plan is to encourage home dialysis.

Under the previous system, the expenses for home

dialysis were reimbursed according to the actual

costs incurred. This was the case whether patients

dealt with suppliers directly or through a facility. For facilities, the composite rate now provides

some incentive for encouraging this modality.

Cost data generally suggest that home dialysis is,

on the average, less costly per treatment than

dialysis in facilities. Recalling the figures presented

earlier in the case study, home hemodialysis is

clearly less costly in terms of direct outlays because of the time required for unpaid aides. Similarly, CAPD, a popular home modality, appears

less expensive if the costs of patient hospitalization are not included. Since hospitalization costs

of this sort are funded under Part A of Medicare,

they pose no rate-based disincentive to home

dialysis. Thus, on balance, if patients affiliated

with a facility are moved to home hemodialysis

or CAPD, the hospital has an opportunity to receive a surplus.

The objective of the changes proposed in physician reimbursement was essentially to eliminate

the disincentive to home dialysis in the preexisting

system, where physicians were reimbursed less

under the alternative reimbursement method for

home patients than for in-facility patients. This

payment differential was based on the view that

home patients required less of the physicians’ time.

Under the compositive alternative reimbursement

method, physicians’ fees are independent of location, and there is no longer any direct financial

reward for setting treatment in the facility.

For patients the situation becomes rather complex. Under the new rules patients may still choose

to buy their own supplies and be reimbursed

under the prior procedures. However, the new

plan eliminates the option to receive 100 percent

reimbursement for purchase of a home dialysis

machine, Furthermore if home patients now purchasing on their own do choose to operate through

the facility, they would risk being responsible for

20 percent of a fixed amount that is higher then

20 percent of the home dialysis costs they are now
incurring. Yet HCFA has suggested that one objective is to direct home patients into affiliating

with and receiving all equipment and supplies

from a facility (20,87). If there is indeed a profit

margin for facilities from home patients, facilities

would have an incentive to encourage patients to

buy through them. Moreover, greater volume

purchases may enable the facility to bargain for

lower prices from suppliers. One industry source

suggests that, as a result, the percent of patients

dealing directly with suppliers on an assignment

of benefits basis should fall from approximately

70 percent today (105) to less than 10 percent

within 1 year (91).

Under the new plan, the patient has no extra

financial incentive and perhaps even weaker incentive than previously for home dialysis. The potential profit incentive built into the composite

prospective rate is not for patients. This is quite

different from, say, a voucher type system, in

which the patients, rather than the facilities, are

allocated a fixed dollar amount and then given

the option of choosing a treatment from among

competing alternatives.

Overall, the strongest incentive for home dialysis belongs to the facilities. This is important,

RESEARCH POLICY

The research activities of the Federal Government have played an important part in the development of knowledge on the causes and treatment of ESRD. The National Institutes of Health

(NIH) funded early work on maintenance dialysis

and supported research on transplantation as well.

The Veterans Administration (VA) and the Public Health Service provided resources for the demonstration of maintenance dialysis therapy. The

research support continues today, but some difficult policy issues are evident.

The primary source of research on kidney

disease-related research is NIH. Within NIH, the

institute doing most of this research is the National

Institute of Arthritis, Diabetes, and Digestive and

Kidney Diseases (NIADDK), formerly the National Institute of Arthritis, Metabolism, and

Digestive Diseases. Other institutes also support

of course, and should create some movement

toward increased home dialysis. What effects

would this have on the industry? If the movement

were simply from in-center hemodialysis to home

hemodialysis, the effects would probably be to

increase sales. Equipment and disposable requirements would be technically similar. However, patients at home would not be able to share machines as would be the case in facilities. Without

this opportunity to economize on machines, more

machines would be demanded for any given patient population.

However, most new home patients are choosing CAPD (14), This has led many analysts to predict significant growth in this market. Firms such

as Baxter Travenol that have a firm foothold in

the market may gain at the expense of others that

do not. At the same time, many firms focusing

on hemodialysis will be encouraged to diversify

into CAPD products (47,79). Depending on the

relative success of the firms, changes in industry

structure are certainly possible. Much, of course,

will also depend on how present uncertainties

about CAPD’s cost and clinical efficacy are resolved.

kidney-related research as it relates to their special

responsibilities. These include the National Cancer Institute, the National Heart, Lung, and Blood

Institute, the National Institute of Allergy and Infectious Diseases, the National Institutes of Dental Research, the National Institute of Child

Health and Human Development, and the Division of Research Resources. Overall, the total

amount spent on kidney-related research was estimated at about $90 million in 1982 (78). This

might be compared with the approximately $73

million spent by NIH on kidney and urinary diseases in 1979 and the $47 million spent in the area

in 1976 (101).

This research would be expected to have some

long-term effects on the incidence and treatment

of ESRD. Perhaps a clearer idea could be obtained

by focusing attention on NIADDK, whose over-
all contributions to improving dialysis treatment

appear to be significant. According to testimony

before Congress by the institute’s Acting Director, Lester Salans, in 1982, NIADDK’s activities

“have produced, directly, or indirectly, most of

the innovations and developments which undergird today’s maintenance dialysis treatment . . .“

(78). The list of these innovations presented in

table 14 is impressive. Certainly, these developments have had an effect on the equipment market, particularly the dialyzer market, for NIADDK

contributed to the development of the hollow fiber dialyzer.

An examination of trends in funding, however,

suggests that NIADDK’s direct contributions to

the market are likely to decline. Table 15 shows

figures for 1979-83 for the Chronic Renal Disease

Program, a subdivision within NIADDK’s Kidney

and Urologic Diseases Program. After an adjustment for inflation, overall spending for the Chronic

Renal Disease Program fell by roughly 12 percent.

In the area of maintenance therapies, which includes applied research on hemodialysis, peritoneal

dialysis, hemofiltration, and other aspects of therapy, research fell by 83 percent from 1979 to 1983.

Furthermore, within NIH as a whole, maintenance

therapies took up only about 6 percent of the

ESRD-related research (119).

●

●

●

●

●

●

●

●

●

●

Table 14.— Innovations in Dialysis Treatment

Attributed to the National Institute of

Arthritis, Diabetes, and Digestive

and Kidney Diseases

Development of hollow fiber-dialyzers.

Enhancement of efficiency of flat-plate dialyzers.

Introduction of “single-needle” dialyzers.

Determination of protein levels for diets for dialysis patients.

Establishment of national registry of patients on dialysis

(responsibility later assumed by HCFA).

Development of specific absorbents for uremic wastes.

Development of wearable artificial kidney for self-treatment.

Improvement in prevention and treatment of chronic bone

pain and bone fractures in patients

Development of treatment measures for chronic anemia

i n patients.

Development of concept of hemofiltration.

SOURCE Adapted from L B Salans Acting Director, National Institute of Ar

thntls Diabetes, and Dlgestlve and Kidney Diseases Nahonal Institutes

of Health test Imony at hear! n g The Errol Sfage Renal Dseases Pro

gram (Parl 2— Treatment Standards and Methods) before the Subcom

mlttee on Government Operations U S House of Representatives Apr

28 1982 (Washington DC U S Government Prlntlng Off Ice, 1982)

This decline in dialysis research appears quite

conscious. Congressional testimony puts forward

the view within NIH that needs are changing. Particularly noteworthy is the “movement . . . of industry into this [dialysis] field. ” Given the research

base provided by NIH, the view holds, private

industry is now ready to take the major responsibility for research in dialysis. Thus, NIH becomes able to focus more heavily on alternatives,

such as the underlying causes of the disease and

on transplantation. Along with this shift comes

an emphasis on investigator-initiated research and

a reemphasis on contracts aimed at particular programs (78).

To many observers, such as Blagg, the result

is a “deficiency in dialysis research” (12). They

can point to various projects with worthwhile objectives that cannot be accomplished because of

a lack of funds. They can also point to successes

of the sort referred to in table 14 to indicate that

past federally funded research in dialysis has been

fruitful. For industry, the change in emphasis is

important. The NIH research has served as a

useful complement to the industry’s own research

and development (R&D) activities. As the Federal research contribution in this area diminishes,

industry will probably find its own research efforts in dialysis becoming more costly.

From an economic perspective, expenditures on

dialysis research have to be compared with alternative uses of these funds. A choice must be made

as to how much to spend on all research overall,

then which specific project should receive funding. Rarely is there adequate quantitative information on benefits and costs on which to make

these judgments. In the absence of such information it is appropriate to rely, as NIH has, on the

scientific community for judgments on which

projects have scientific merit and on Congress and

the executive branch for judgments as to which

projects have special social merit.

This is a complex but sensible method for

deciding research priorities. However, the situation in dialysis is complicated by assumptions

underlying the NIH decisions. NIH is suggesting

that research on dialysis may indeed be worthwhile but that industry can be expected to step

in to see that sufficient research is performed. Is
Table 15.— Research Support for Chronic Renal Disease Program of National Institute of Arthritis, Diabetes, and Digestive

Pathophysiolog y

Transplantatio n

Maintenance

therapies ., . ,

Total ...

and Kidney Diseases, 1979-83

-.

Fiscal year —— —.

1979 1980 1981 1982 1983 Percent change 1979-83

Current $ Percent Current $ Percent Current $ Percent Current $ Percent Current $ percent Current $ Constant $a

$2,986,058 32 ”/0 $2,745,229 35 % $3,050.031 370/o $3,698,842 4 2 % $6.221,596 + 108 + 4 6

1,933,590 21 2,652.601 3 4 3,488,265 4 2 3,915,709 4 4 4,428.662 3 8 + 129 + 6 1

%onverslon to constant prices was accomplished by uslnq tmpl!clt GNP deflator (a pr!ce Index) fo-r Federal Government Durchases of aoods and services (U S Department of Commerce Bureau of Economic

Analysls Survey of Current Bus/ness, March 1984)

SOURCE L B Salans Acting Director, National Institute of Arthrit!s Diabetes and Digestive and Kidney Diseases, National Institutes of Health, testimony at hearing The End-Stage Rena/ Dfseases Program

(Part 2–Treatment Standards and Methods) before the Subcommittee on Government Operations House of Representatives Apr 28 1982 (Washington DC U S Government Printing Off Ice 1982)

and G H Hlrschman, Chrorwc Renal D[sease Program, National Institutes of Health Bethesda MD, personal commun!catlon March 1984
this a reasonable expectation? In some respect s

it is. If, as NIH asserts, a strong technological base

has already been provided, then industry may be

expected to perform the development work required for commercializing worthwhile new technologies. Nevertheless, a diminishing NIH research base is apt to be viewed by firms as offering

diminishing attractive commercial opportunities.

A further difficulty is that an industrial firm will

make judgments on R&D based on the expected

return to the firm rather than on the overall value

of the innovation to society. As various authors

have suggested (e. g., (6) and (56)), there are numerous projects where the returns to society may

be high but where the returns to the private firm

may be so low as to make the project unattractive. This results because an innovator is generally unable to appropriate fully the gains of an

innovation. As the market reacts to these innovations, competitors and even customers manage to

secure for themselves part of these gains.

The end result is that private firms may, from

a social perspective, underspend on R&D and may

choose a socially suboptimal mix of R&D projects.

Policies to correct this problem need not, in general, include direct Government grants for R&D,

but they may involve various other incentives

such as tax breaks. However, for some studies,

particularly those of an evaluative nature, potential conflicts of interest may call for direct Government involvement. For example, clinical trials

of hemodialyzer reuse or of CAPD may be more

valuable and widely accepted if funded by impartial sources. And further, such purely evaluative

studies are apt to be especially characteristic of

projects where the benefits to society are well

beyond what the firm is likely to gain for itself.

A related difficulty here is the potential for differences of opinion among Government agencies

with respect to who should fund particular research. An example is the controversy, discussed

in congressional hearings in 1982 (107) as to which

agency, HCFA or NIH, should fund research on

reuse of hemodialyzers. NIADDK had funded a

study, completed in June 1981, on multiple use

(see (22)). However, in the testimony, the Institute’s view is expressed that, because the issue had

now emerged as primarily one of economic impact, HCFA would be best suited to fund additional clinical trials; HCFA, on the other hand,

viewed its research role as purely economic and

“appropriate only after clinical issues have been

resolved” (119).

An intradepartmental ESRD workgroup set up

to help resolve such differences subsequently recommended that the Food and Drug Administration be given the responsibility for the clinical

trials (20,40). Meanwhile, many questions about

reuse remain unanswered. This example suggests

that an appropriate Government research program in ESRD should clearly delineate not only

research objectives but also research responsibilities.

DIALYZER REUSE AND THE FEDERAL GOVERNMENT

Federal Government policies have had an important influence on the practice of reuse of

dialyzers. These policies include the reimbursement policies discussed earlier, which provide incentives for cost control and, thus, cost-saving

techniques such as reuse. However, other policies

have had a more direct influence. These include

funding of research on reuse and actions related

to the regulation of medical devices.

Various research efforts that deal with reuse

have been supported by Federal funds. For example, the Artificial Kidney-Chronic Uremia Program within NIH sponsored work on the reuse

of coil dialyzers (e. g., see (85)). This study concluded that reuse of coils did indeed appear safe

and cost effective. The National Institute of Arthritis, Metabolism, and Digestive Diseases also

partially supported research on reuse by Dr. Karl
48 • Health Technology Case Study 32: The Hemodialysis Equipment and Disposable industry

Nolph and his associates (9,65,118). This work

evaluated reuse of coil and hollow fiber dialyzers

under various conditions.

In 1978 Congress passed an amendment to the

Social Security Law (Public Law 95-292) requiring the Secretary of Health and Human Services

to conduct a “study of the medical appropriateness and safety of cleaning and reusing dialysis

filters by home dialysis patients. ” Subsequently,

NIADDK did sponsor a study evaluating dialyzer

reprocessing (see (22)). The Centers for Disease

Control also did work that indicated that reuse

was not associated with the increased incidence

of hepatitis B infections among dialysis patients

and staff (see (28)). Thus, the Federal Government

has contributed to the development of knowledge

on reuse. The Federal Government’s interest in

reuse remains high. However, as noted in the previous section, there are differences of opinion as

to which Federal agencies will support or conduct

the research.

A key role in the history and future of reuse

belongs to the Food and Drug Administration

(FDA). This role is associated with the FDA’s regulatory functions under the 1976 Medical Device

Amendments to the Food, Drug and Cosmetics

Act. These amendments give FDA authority to

regulate medical devices in order to assure that

they are safe and effective. The regulations apply

to all medical devices and in general appear to

pose no special or unusual problems for dialysis

equipment. Reuse is affected because regulatory

authority extends to dialyzers and to equipment

utilized in dialyzer reprocessing.

As noted earlier, most dialyzers are labeled by

the manufacturer as being for single use. Under

the regulations, any relabeling would require the

manufacturer to seek FDA approval. Given the

extensive clinical experience with reuse, the FDA

may eventually determine that specific dialyzers,

when reprocessed according to rigorous reprocessing procedures provided in the manufacturer’s

labeling, are as safe and effective as dialyzers not

previously used (113). Although FDA’s response

cannot be assured and seeking FDA approval

would involve some administrative expenses,

manufacturers’ reasons for not seeking to relabel

stem largely from considerations other than FDA.

One may simply be their belief that reuse is medically inappropriate. Another reason may be concern about the market’s reaction: Relabeling may

stimulate even further the practice of reuse and

contribute to declining demand for new dialyzers.

Finally, manufacturers may have concerns about

product liability, Labeling a dialyzer as suitable

for reuse could make manufacturers liable for any

damages to a patient from reuse. However, although the legal situation is potentially complex,

manufacturers do have reason to know that dialyzers are reused and, thus, maybe liable regardless of labeling (36).

Of course, regardless of the labeling, reuse has

become a common practice. The FDA is obviously

aware of this. Its position regarding reuse of

dialyzers (and other disposable) was stated in a

policy guide for field staff issued in 1977 and

revised in 1981 (99,100). The FDA indicates that

“the user should be able to demonstrate that a device considered for reprocessing can in fact be adequately cleaned and sterilized without affecting

the characteristics and qualities of the device and,

moreover, that the device will remain safe and

effective for its intended use. In addition the institution or practitioner who reuses the disposable

device must bear full responsibility for its subsequent safety and effectiveness” (116).

Although the FDA “neither condemns nor condones dialyzer reuse” (116), it has made some efforts to contribute to the evaluation of the practice. The FDA was one of the sponsors of a

National Workshop on Reuse of Consumables in

Hemodialysis in 1982. This workshop reached a

consensus for the development of guidelines for

hemodialyzer reuse.

The FDA has also authorized the marketing of

an automated dialyzer reprocessing device. Under

the Medical Device Amendments, entirely new devices may be subject to premarket approval by

the FDA. However, if a device is “substantially

equivalent” to a device marketed prior to the

enactment of the amendments, then a manufacturer can submit information required for premarket notification (106). In this latter case the

FDA will consider whether the device is similar

to and as safe and effective as the preexisting device. The reprocessing device was deemed sub-
———

stantially equivalent and allowed to be marketed.

Such permission does not constitute FDA approval of the device (116).

Overall, FDA response to reuse has been cautious. It recognizes that reuse is widespread and,

from available evidence, not a hazard to the public health. At the same time it is reluctant to endorse formally a practice which most experts agree

should be the subject of further clinical trials. The

FDA has chosen to monitor the activity and to

emphasize the responsibility of providers to ensure safety and effectiveness.

However, the literature on reuse suggests that

the practice’s safety depends critically on the

quality of the reprocessing. This suggests that in

the future FDA might want to step in to assure

that reprocessing is done appropriately. The manufacturing industry would be expected to be generally supportive, since it has argued, as noted

earlier, that clinics and hospitals reusing dialyzers

should be subject to good manufacturing practices

guidelines. This has not yet been done, but California has recently passed legislation requiring the

establishment of appropriate reprocessing methods (44). Furthermore, if independent reprocessing service companies do become important, they

may be viewed as falling under GMP guidelines.

As suggested earlier, however, this need not pose

a serious threat to the economic viability of such

reprocessing activities.
Appendixes
Appendix A.— Capsule Descriptions of

Major Firms in the Industry

Abbott Laboratories

Abbott Labs is a large producer of various healthcare products, including pharmaceuticals and nutritional products as well as laboratory and hospital instruments. Total company sales were about $3 billion

in 1983. As of 1980 its sales of dialysis products were

extremely small, but the company is moving into the

CAPD market (5,79).

Asahi Medical Co.

This Japanese company is a subsidiary of the $3.5

billion Asahi Chemical Co. It has been in the dialysis

equipment market since about 1975 and began fullscale marketing of its hollow fiber dialyzer in 1979.

Although still relatively unknown in the United States,

the company is a major force in Japan and the world.

Some observers expect a movement by Asahi into the

U.S. dialyzer market. The company’s licensing arrangement with Cordis Dow apparently prevented

U.S. sales until 1983 (7,8,57,79).

Baxter Travenol Laboratories

This company is involved in producing a wide range

of medical care products. Its renal and urological therapy product line represents about 20 percent of its total

sales of $1.7 billion (10). It is active in producing both

disposable and equipment for hemodialysis. The company has also made a strong effort in the CAPD market, where it has captured a 90-percent share (5).

BD Drake Willock

As of 1976, this company has been part of Becton

Dickinson, which now has over $1 billion in sales of

various medical, laboratory, and industrial equipment.

The company has focused its efforts on equipment

rather than disposable. However, Becton Dickinson

has expressed an interest in selling Drake Willock (11 ).

CD Medical, Inc.

CD Medical is the successor to Cordis Dow. The

company was created in 1983 when the Dow Chemical Corp. purchased Cordis Corp.’s 50 percent interest in their joint venture, Cordis Dow, for $4 million

in cash and real estate (114 ). The company has been

engaged primarily in the production of hollow fiber

dialyzers, and, indeed, the joint venture was established in part as a mechanism to utilize Dow’s patents

on hollow fiber technology. The company has experienced some difficulties, including some losses, in recent years (17,59,114,115).

Cobe Laboratories

Cobe entered the hemodialysis market in the late

1960s. The company offers a complete line of equipment and supplies, and, indeed, has emphasized a

complete system approach in its marketing activities.

It is focused in this market, with about three-quarters

of its approximately $100 million in sales coming from

hemodialysis products (5,60).

Erika

Erika is a subsidiary of National Medical Care, the

largest provider of outpatient dialysis care through its

approximately 180 centers treating more than 13,000

patients (88). Erika produces and distributes a variety

of dialysis products to both its parent and unaffiliated

customers. Sales of artificial kidney products accounted

for about 13 percent of National Medical Care’s $295.5

million in sales in 1982 (5,63).

Extracorporeal

Extracorporeal produces both disposables and

equipment for hemodialysis. It is also integrated

backwards into the manufacture of membranes for

dialyzers. Since 1978 it has been a subsidiary of

Johnson & Johnson, a large medical care products

company with almost $6 billion in sales in 1983. As

of 1980, Extracorporeal represented only about 2 percent of the parent company’s sales (5,45,68,79).

Gambro AB

Gambro is an international company incorporated

in Sweden. Shares of the company are publicly traded,

but close to 80 percent of the voting stock is controlled

by members of the family of Holger Crafoord, a

Swedish industrialist who founded the company in

1965. Gambro is the world’s largest producer of hemodialysis and hemofiltration products, but its sales are

widely dispersed, with no more than 20 percent coming from any one country. It has had manufacturing

facilities in the United States for several years (61,68).

53
Hospal

Hospal manufactures dialyzers as a joint venture of

Rhone-Poulenc and Sandoz Ltd. Rhone-Poulenc is a

multibillion-dollar French company, nationalized since

1982, that makes various chemical, pharmaceutical,

and textile products. Sandoz Ltd. is Swiss and also has

sales in the billions of dollars. Its activities range from

chemicals and pharmaceuticals to seed and food products. Its pharmaceutical products include cyclosporine,

which is used for transplant purposes (58,74).

Organon Teknika Corp.

This manufacturer of dialysis and other medical

products falls within a complex organizational structure. The company is 50 percent owned by Organon

Teknika N. V., a subsidiary of Akzo N. V., a Dutch

holding company, and Akzona, Inc., of the United

States. Within the Akzo empire is also Enka, a major

manufacturer of membranes for dialyzers (2,57).

Terumo Corp.

Terumo is a Japanese-based multinational corporation involved in the manufacture and sale of a variety

of medical products. Consolidated net sales of the company were 62 billion yen (approximately $265 million]

in 1981. U.S. operations include a sales office in

California and a production facility in Maryland (90).

The company is Japan’s second largest producer (behind

Asahi) of hollow fiber dialyzers (39).

Toray Industries, Inc.

This company is engaged in the production of fibers,

plastics, and chemicals and has annual sales in excess

of $3 billion. It is Japan’s third largest hollow fiber

dialyzer producer (behind Asahi and Terumo) and is

reported by Information Resources International as

planning to market in the United States in 1983 (39,

57,92).
Appendix B. —Glossary of Terms and Acronyms

—

Glossary of Terms

Artificial kidney: See dinlyz[~r.

Coil dialyzer: A dialyzer in which the blood passes

through semipermeable membrane tubing, The tubing is wound around itself, or “cc~iled, ” and a supporting screen separates the coils, The dial}’sate

passes at a ~0 angle throu~h the space created by

the screen,

Concentration ratio: The share of market (>utput acc(>unted for by the largest firms in an industry —

usual 1 y by the f~~ur largest. Higher values are indicative of greater c(]ncentrdtion of economic pclwer

and less competitiveness.

Continuous ambulatory peritoneal dialysis (CAI’D):

A form of peritoneal dialysis in which there is a continuous manual exchan~e of dialysate from the

peritoneal cavity.

Continuous cycling peritoneal dialysis (CCPD): A

[or-m of perit~~neal dialysis in which a machine

cycles the dialysate in and out of the peritoneal

cavity automat ically abc~ut every 4 hours overnight

as the patient sleeps.

Dialysate: A fluid that is used in the dialysis process,

which con tains desirable concentrations of ph>~-

sit}logical chemica]~. Elurin~ dialysis, the dial} rsate

is sepa ra ted from the pat ien t‘s b] ood by a wm iimpermeable membrane.

Dialyzer: A device used in hemodia]ysis. It consists

of a compartrnen t for the blood, a compartment t tor

the dialysatc, and a sem impermeable membrane

separating the two. The three principal types are

coil, holl(~n fiber, and parallel plate.

End-stage renal disease ( ESRD ): A condition of irreversible kidney fail ure. Without treatment, the disease results in the pdt ient’s death.

Hemodialysis: A prc]cess by which blood is pumped

from the patient’s body int[~ a dialyzer and then

returned to the body in a cent inuous extracorp(~rea]

blood loop. While in the clialyzer the blood flows

next to but separate from another fluid, a dia]ysate.

The blo(d and the dialysate are separated from each

other by a semipermeable membrane. Via diffusion

and osmosit, waste products and other molecules

pass throush the semipermeable membrane and the

blood can again take on its appropriate properties.

Hemodialyzer: See difzlyz~~r.

Herfindahl index: A measure of economic market concentration. It is calculated by summins the squares

of the market shares of the firms in the market,

Higher values of the index indicate a greater degree

of concentration and a less competitive market

structure,

Hollow fiber dialyzer: A dialyzer containing thousands

of hollow fibers bundled within a compact CJJI inder. Blood flows through the sernipertneable hollot<

fibers while the dialysate passes outside the fibers.

Intermittent peritoneal dialysis (IPD): A for-m of

peritoneal dialysis in~olving intermittent treatment

three t~~ four times per week. T~picall]rr the patient

is dialyzed for about 12 hours on each treatment.

Parallel plate dialyzer: A dialyzer cc}nsisting of a stack

of semipermeable membranes sandw’ iched between

support plates. Blood passe+ through the membranes while the dialysate passes in the opposite

direction through ~ro(~~es or spaces in the supp{lrt

plate.

Peritoneal dialysis: A process in ~ihich dial~’si~ (>ccur~

with in the pat ien t‘s b~>d}r rather than \’ia an ex -

tracorporeal blood loop, as is done in hcm(>dial}’-

sis. A permanent catheter i> inserted into the abdomen and then dial}sate is entered thri~ugh the

catheter int~~ the perit(>neal cav i t~’. The fluid is

allowed to remain tor vary ins peritxis {}f time, du ring which dialysis occurs across the semipermeable

peritoneal membrane, I.ater, the dial}satc is drained

out through thr catheter iind disc~rded.

Peritonitis: An inflammation of the pcritonc(]m, the

smooth transparent serous membrane that 1 ines the

cavity of the abdomen,

Prospective reimbursement: The setting of reimbursement rates prospectively, i c’., in adv~nce of the actual pro~’ision of care. This is t<) be contrasted with

cost-based or retr(wpective reimbursement, in which

rates reflect actual costs incurred,

Reuse: With respect to diall~sis, thi< ~~ccurs ti,hcn a

dialyzer, after its ori,qina] use, is reprocessec~r +tc}red,

and then used a~a i n on the same pat ien i, often

multiple times.

Transplantation: With respect t~> Lidne}r>, the transplant ing of a healthy kidney from a donor, ” li\’in8

or recently deceased, in t () a patient ~i’ i t h k i d ne}’

disease.

Glossary of Acronyms

CAPD

CCPD

ESRD

FDA

GAO

GMP

HCFA

IPD

—continuous ambulatory peritoneal dialysis

—continuous cycling peritoneal dialysis

—end-stage renal disease

—Food and Drug Administration, Department of Health and Human Services

—General Accounting Office

—good manufacturing practices

—Health Care Financing Administration,

Department of Health and Human Services

—intermittent peritoneal dialysis

.5.5
NIADIIK Nati(>nal Institute’ of Arthritis, Iliabet(’s, NNIC Nati(~nal Medical Care, Inc.

and Digest ive and Kidney Diseases, Na- OTA CXfice of Technology Assessment, U.S.

tional Institutes of Health, Department of Ct)ngress

Health and Human Services I<&I> research and development

NIH - National Institutes of Health, Department VA Veterans Administration

of Health and Human Set-vices
Appendix C.— Acknowledgments and

Health Program Advisory Committee ——— — —— . ——-

Robert J, Britain

Food and Drug Administration

Department of Health and Human Services

Silver Spring, MD

Dennis J. Cotter

Prospective Payment Assessment Commission

Washington, DC

J. Richard Crout

Boehringer-Mannheim Corp.

Rockville, MD

Nancy B. Cummings

National Institute of Arthritis, Diabetes, and

Digestive and Kidney Diseases

National Institutes of Health

Department of Health and Human Services

Bethesda, MD

Herbert DiMeola

Multi-Use Systems, Inc.

Rockville, CT

Richard M. DuBois

National Center for Health Services Research

Department of Health and Human Services

Rockville, MD

Paul W. Eggers

Health Care Financing Administration

Department of Health and Human Services

Baltimore, MD

Martin S. Favero

Centers for Disease Control

Department of Health and Human Services

Atlanta, GA

Gladys H. Hirschman

National Institutes of Health

Department of Health and Human Services

Bethesda, MD

Albert E. ]arvis

Cordis Dow Corp.

Miami, Fl.

Al Kraus

Gambro, Inc.

Barrington, IL

Kathleen Lloyd

Washington, DC

Neil Otchin

Veterans Administration

Washington, DC

Richard Rettig

Illinois Institute of Technology

Chicago, IL

John H. Sadler

School of Medicine

University of Maryland

Baltimore, MD

Robert Timmins

Cobe Laboratories

Lakewood, CO

Fernando Villarroel

Food and Drug Administration

Department of Health and Human Services

Silver Spring, MD

Irving Zola

Brandeis University

Waltham, MA

5 7
HEALTH PROGRAM ADVISORY COMMITTEE

Sidney S. Lee, Committee Chair

President, Milbank Memorial Fund

New York, NY

Stuart H. Altman*

Dean

Florence Heller School

Brandeis University

Waltham, MA

H. David Banta

Deputy Director

Pan American Health Organization

Washington, DC

Carroll L. Estes**

Chair

Department of Social and Behavioral Sciences

School of Nursing

University of California, San Francisco

San Francisco, CA

Rashi Fein

Professor

Department of Social Medicine and Health Policy

Harvard Medical School

Boston, MA

Harvey V. Fineberg

Dean

School of Public Health

Harvard University

Boston, MA

Melvin A. Glasser* * *

Director

Health Security Action Council

Committee for National Health Insurance

Washington, DC

Patricia King

Professor

Georgetown Law Center

Washington, DC

Joyce C. Lashof

Dean

School of Public Health

University of California, Berkeley

Berkeley, CA

Alexander Leaf

Professor of Medicine

Harvard Medical School

Massachusetts General Hospital

Boston, MA

Margaret Mahoney* * * *

President

The Commonwealth Fund

New York, NY

Frederick Mosteller

Professor and Chair

Department of Health Policy and Management

School of Public Health

Harvard University

Boston, MA

Norton Nelson

Professor

Department of Environmental Medicine

New York University Medical School

New York, NY

Robert Oseasohn

Associate Dean

University of Texas, San Antonio

San Antonio, TX

Nora Piore

Senior Advisor

The Commonwealth Fund

New York, NY

Mitchell Rabkin*

President

Beth Israel Hospital

Boston, MA

Dorothy P. Rice

Regents Lecturer

Department of Social and Behavioral Sciences

School of Nursing

University of California, San Francisco

San Francisco, CA

● ‘Llnt]l ~lar( h 1Q84

‘ ‘‘[lntll C)ct<)ber IQ~~

‘”‘‘Llnt]l August 1Q83
.q/J~J (“ ,4,”~tl,1111/[’ [/<:tll,’)lt~ till[~ ~(’liit}l [)t(~,~l(l?)l ,~l/:lf.[)f,U (-,ll?l~tllttl’[’ —

Richard K. Riegelman Frederick C. Robbins

Associate Professor President

George Washington University Institute of Medicine

School of Medicine Washington, DC

Washington, DC Rosemary Stevens

Walter L. Robb Professor

Vice President and Genera\ Manager Department of History and Sociology of Science

Medical Systems Operations University of Pennsylvania

General Electric CO. Philadelphia, PA

Milwaukee, WI
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