Reimbursement rates and quality of care in the dialysis industry: a policy discussion.

Under the end stage renal disease (ESRD) program, begun in 1972, the Health Care Financing Administration (HCFA) of the federal government covers 80% of the costs of dialysis for all citizens suffering from kidney failure, regardless of age. The purpose of this program is to ease the financial strain on patients caused by the high cost of treating this catastrophic illness through dialysis. These costs currently run on the order of $30,000 to $37,000 per patient per year. The budget allocated to the ESRD program has grown from $229 million in its initial year of operation to approximately $3.7 billion in 1988 as the number of patients on dialysis has increased from 11,000 to approximately 110,000.(1) As the principal payor of dialysis costs, HCFA sets reimbursement rates for dialysis clinics.(2) These rates were originally set in 1973 at approximately $138 per patient per treatment.(3) Since that time, reimbursement rates have been altered from time to time. Most recently, dialysis reimbursement rates were lowered twice during the decade of the 1980s, from an average of $138 to $129 in 1983, and from $129 to $125 in 1986.(4) In addition to these reductions in nominal rates, general inflation accounted for an additional reduction of approximately 55% over this period.(5) As a result, real reimbursement levels have fallen approximately 64% over the past decade.(6) At present, there is considerable debate concerning the impact that these reductions in reimbursement rates are having on the quality of dialysis treatments received by kidney patients. Recent evidence strongly suggests that dialysis clinics may be responding to the lower rates by cutting back on average treatment duration (i.e., the length of time the patients spend on the dialysis machine during treatments). Shorter treatment duration, in turn, is believed to be possibly one of several factors contributing to observed increases in patient mortality over this same period.(7) Thus, there is strong evidence to suggest that the cost savings attributable to reduced reimbursement rates are being gained at the expense of patients' lives. Of course, the same may be said of virtually any cost containment measures adopted in the field of medicine. Indeed, such trade-offs are inescapable in a world of limited resources. Rational public policy should, nonetheless, make such trade-offs in an informed and intelligent manner; which is to say that neither unnecessary expenditures nor unnecessary deaths should be tolerated. Theoretically, there is an efficiency frontier or lower boundary that, given current technology, traces out a locus of minimum expenditures for a given number of deaths or a minimum number of deaths for a given expenditure. Rational public policy, then, will select some socially preferred point on the efficiency frontier. To locate above it would imply a higher expenditure than is necessary to attain a given number of deaths or, conversely, a higher number of deaths than is necessary for a given level of expenditures. And to locate below it is technologically infeasible. The relevant question, then, is whether our current policy concerning reimbursement rates for dialysis clinics is (1) on the efficiency frontier, and, if so, (2) at a socially desirable point on that frontier. In this article, I apply the tools of economics to attempt to answer or, at least, shed light on that question. The article is organized as follows. The first section presents the fundamental problem created by the profitability/quality trade-off faced by dialysis clinics. The second section evaluates the potential for competitive market forces to ensure quality in this industry. The third section considers several alternative regulatory approaches to quality assurance, some of which have been employed in other price-regulated industries. The fourth section considers our current policy in light of the problem and its potential solutions. The final section draws policy implications and suggests some potential changes that might improve on the present approach. …