The Hemodialysis Equipment andDisposables Industry

December 1984

NTIS order #PB85-154953

HEALTH TECHNOLOGY CASE STUDY 32

The Hemodialysis Equipmentand 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 (HealthTechnology Case Study 32), OTA-HCS-32, Washington, DC: U.S. Congress, Office ofTechnology Assessment, December 1984. This case study was performed as part of OTA’sassessment of Federal Policies and the Medical Devices Industry.

Library of Congress Catalog Card Number 84-601163

For sale by the Superintendent of DocumentsU.S. Government Printing Office, Washington, DC 20402

Preface

The Hemodialysis Equipment and DisposableIndustry is Case Study 32 in OTA’s Health Tech-nology Case Study Series. This case study hasbeen prepared in connection with OTA’s projecton Federal Policies and the Medical Devices In-dustry, which was requested by the Senate Com-mittee on Labor and Human Resources and en-dorsed by the Senate Committee on Veterans’ Af-fairs. A listing of other case studies in the seriesis included at the end of this preface.

OTA case studies are designed to fulfill twofunctions. The primary purpose is to provideOTA with specific information that can be usedin forming general conclusions regarding broaderpolicy issues. The first 19 cases in the Health Tech-nology Case Study Series, for example, were con-ducted in conjunction with OTA’s overall projecton The Implications of Cost-Effectiveness Anal-ysis of Medical Technology. By examining the 19cases as a group and looking for common prob-lems or strengths in the techniques of cost-effec-tiveness or cost-benefit analysis, OTA was ableto better analyze the potential contribution thatthose techniques might make to the managementof medical technology and health care costs andquality.

The second function of the case studies is toprovide useful information on the specific tech-nologies covered. The design and the funding lev-els of most of the case studies are such that theyshould be read primarily in the context of the as-sociated overall OTA projects. Nevertheless, inmany instances, the case studies do represent ex-tensive reviews of the literature on the efficacy,safety, and costs of the specific technologies andas such can stand on their own as a useful contri-bution to the field.

Case studies are prepared in some instances be-cause they have been specifically requested bycongressional committees and in others becausethey have been selected through an extensive re-view process involving OTA staff and consulta-tions with the congressional staffs, advisory panelto the associated overall project, the Health Pro-gram Advisory Committee, and other experts invarious fields. Selection criteria were developedto ensure that case studies provide the following:

● examples of types of technologies by func-

tion (preventive, diagnostic, therapeutic, andrehabilitative);examples of types of technologies by physicalnature (drugs, devices, and procedures);examples of technologies in different stagesof development and diffusion (new, emerg-ing, and established);examples from different areas of medicine(e.g., general medical practice, pediatrics,radiology, and surgery);examples addressing medical problems thatare important because of their high frequen-cy or significant impacts (e. g., cost);examples of technologies with associated highcosts either because of high volume (for low-cost technologies) or high individual costs;examples that could provide information ma-terial relating to the broader policy and meth-odological issues being examined in theparticular overall project; andexamples with sufficient scientific literature.

Case studies are either prepared by OTA staff,commissioned by OTA and performed under con-tract by experts (generally in academia), or writ-ten by OTA staff on the basis of contractors’papers.

OTA subjects each case study to an extensivereview process. Initial drafts of cases are reviewedby OTA staff and by members of the advisorypanel to the associated project. For commissionedcases, comments are provided to authors, alongwith OTA’s suggestions for revisions, Subsequentdrafts are sent by OTA to numerous experts forreview and comment. Each case is seen by at least30 reviewers, and sometimes by 80 or more out-side reviewers. These individuals may be fromrelevant Government agencies, professional so-cieties, consumer and public interest groups, med-ical practice, and academic medicine. Academi-cians such as economists, sociologists, decisionanalysts, biologists, and so forth, as appropriate,also review the cases.

Although cases are not statements of officialOTA position, the review process is designed tosatisfy OTA’s concern with each case study’sscientific quality and objectivity. During the vari-ous stages of the review and revision process,therefore, OTA encourages, and to the extentpossible requires, authors to present balanced in-formation 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]ogjInformation 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 (IfOTA’S Publ]shlng Off Ice (224-8996) for aval]abl]ity and orderlrrg lntor- ,! fed)ca) Techno]og},

t~achgrc)un~ paper #1 IC) C)TA s May IQ82 rept)rt Technolw>” dncl Hanc~~-matlonborlglnat 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/ePaper F.?. Case Stud]es ()/ Lfedlca) Techrrologles prepared ]n conjunctionwth OTA’s August IWO report The [mpl~caf](ms of C“()+Effet t~ Leness Anal-VSJS of Medlca/ Technology},

OTA Project Staff for Case Study #32

I\ngn I ferdman, Assistmlt Director, OTA HeN I tIl mlii L de Sciences Di7.1 is i() 1I

Clyde J. Behney, Heilith Prognml /\111110/<('1

Jane E. Si"k, ['roicct Director

fudith L \\lagner, Sellior AlIal,t/st

Katherine E. L()CKe, RC5cllrcli Assistl1l1t

H. Christy Bergemann, Editor

\lirginia C\valina, Adlllillstrati7.'c Assistallt

I\ehecca I. EricKson, S('(-retary LVord Processor Spccil7lic,t

Brenda 0-/1iller, l\lor/i Proccssor P. C. SpC(~i£lli5t

Advisory Panel for Federal Policies andthe Medical Devices Industry

Richard R. Nelson, ChairInstitute for Social and Policy Studies, Yale University

New Haven, CT

William F. BallhausInternational Numatics, Inc.Beverly Hills, CA

Ruth FarriseyMassachusetts General HospitalBoston, MA

Peter Barton HuttCovington & BurlingWashington, DC

Alan R. KahnConsultantCincinnati, OH

Grace KraftKidney Foundation of the Upper MidwestCannon Falls, MN

Joyce LashofSchool of Public HealthUniversity of CaliforniaBerkeley, CA

Penn LupovichGroup Health AssociationWashington, DC

Victor McCoyParalyzed Veterans of AmericaWashington, DC

Robert M. MoliterMedical Systems DivisionGeneral Electric Co.Washington, DC

Louise B. RussellThe Brookings InstitutionWashington, DC

Earl J. SaltzgiverForemost Contact Lens Service, Inc.Salt Lake City, UT

Rosemary StevensDepartment of History and Sociology of ScienceUniversity of PennsylvaniaPhiladelphia, PA

Allan R. ThiemeAmigo Sales, Inc.Albuquerque, NM

Eric von HippelSloan SchoolMassachusetts Institute of TechnologyCambridge, MA

Edwin C. WhiteheadTechnicon 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: INDUSTRYPrices 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 FIRMSIN THE INDUSTRY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

APPENDIX C.–ACKNOWLEDGMENTS AND HEALTH PROGRAMADVISORY COMMITTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

333334

99

1112

1515161617

232323242727

3131333334

39393940414447

53

55

57

63

Contents—continued

Tables

Table No. Page1. Estimated Number of End-Stage Renal Disease (ESRD) Patients in the

United States by Type of Treatment, 1983 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92. Percent of Dialysis Patients Treated at Home by Year . . . . . . . . . . . . . . . . . . . . . . 113. Estimated Costs of Dialysis per Patient-Year by Modality . . . . . . . . . . . . . . . 124. Estimated U.S. Market for ESRD Equipment and Disposables by Year . . . . . . . . 155. Estimated Dialyzer Unit Sales by Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166. Selected Estimates of Savings From Dialyzer Reuse . . . . . . . . . . . . . . . . . . . . . . 187. Suggested Medical Effects of Reuse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198. Estimated Shares of U.S. Hospital Market for Dialysis Equipment

and Disposable by Year . . . . . . . . . . . . . . 239. Estimated Shares of Total U.S. Market for Dialysis Equipment and Disposable

by Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2410. Estimated Shares of U.S. Hospital Market for Dialyzers by Year. . . . . . . . . . 2511. Estimated Shares of Total U.S. Market for Dialyzers by Year . . . . . . . . . . . . . . . . . 2612. U.S. Involvement in the Renal Equipment Market in Various Countries. . . 2813. Average Prices for Dialyzers Purchased by Hospitals From Major Producers

by Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3214. Innovations in Dialysis Treatment Attributed to the National Institute of

Arthritis, Diabetes, and Digestive and Kidney Diseases . . . . 4515. 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 authoris responsible for the conclusions of specific case studies. These cases are not state-ments of official OTA position. OTA does not make recommendations or endorseparticular technologies. During the various stages of review and revision, therefore,OTA encouraged the authors to present balanced information and to recognizedivergent points of view.

——

Introduction and Summary1.

1.

Introduction and Summary

INTRODUCTION

End-stage renal disease (ESRD) afflicts approx-imately 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 ofproducts produced by the hemodialysis equipmentand supplies industry. This case study offers ananalysis of this relatively new U.S. industry. Itsexistence is a consequence of modern medical ad-vances that have made hemodialysis a viabletreatment for ESRD. Moreover, it would be dif-ficult to think of another industry that has beenso clearly and directly shaped by Federal policy.

SUMMARY

Treatment Approaches

The two major treatment options for ESRD aretransplantation and dialysis. At present transplan-tation is a solution for a small minority of pa-tients, but with major advances of the recent pastin transplantation techniques and immunosup-pressive drugs, 1 its use may grow in the future.Nevertheless, at present the vast majority of pa-tients undergo regular dialysis treatment, duringwhich the patient’s blood is cleansed of accumu-lated waste products.

in 1983, 86 percent of dialysis patients (61 ,722people ) chose a form of dialysis known as hemo-dialysis (102). In this modality the patient’s bloodis pumped from the body by a machine, subjectedto dialysis, and then returned to the body in a con-tinuous extracorporeal blood loop. Dialysis oc-curs as the blood passes through a dialyzer, orartificial kidney. Patients must undergo this treat-ment about three times per week in sessions run-ning about 3½ to 5 hours each. This can be ac-

Federal policy continues to be critical to the in-dustry’s development. Recent Federal initiativeshave changed the rules under which treatment forESRD is reimbursed. Federal policy makers arealso being asked to evaluate certain current prac-tices in treatment. The decisions made will influ-ence, to a significant degree, the structure and eco-nomic performance of the industry. In light ofhis, the case study is particularly timely.

complished in a hospital-basedstanding facility, or at home.

center, in a free-

A major alternative form of dialysis, chosen by12 percent (8,688 people) of ESRD patients in1983, is continuous ambulatory peritoneal dialysis(CAPD) (102). In CAPD, dialysis occurs withinthe patient’s body across the peritoneal mem-brane. CAPD requires a manual exchange of fluidevery 4 to 6 hours, but it can be done at homeand it frees the patient from dependency on adialysis machine. Although patients experiencesome risk of developing peritonitis, the modalityhas been growing in popularity.

The Market

The market for dialysis equipment and dispos-able has undergone rapid growth since 1972 whenCongress passed legislation extending Medicarecoverage to patients with ESRD, regardless of age.Since its inception the number of beneficiaries ofthis program has grown by more than 700 per-cent (from about 11,000 to 89,000 people2). As

of 1983, program costs were estimated at morethan $1.7 billion annually (102).

The firms that produce dialysis equipment anddisposable now have total sales of roughly $500million. They sell their products to hospitals, tofree-standing facilities (proprietary and nonpro-prietary), and to patients themselves. Accordingto traditional economic measures, the industry ishighly concentrated (i.e., only a few sellers havea large market share). At the same time the num-ber of separate buyers is large. However, althoughprofits in the industry were apparently quite at-tractive several years ago, they have been increas-ingly squeezed. Data presented in this case studyindicate that prices have fallen; for example, overthe past 5 years, the prices of dialyzers, whichhave constituted about 40 percent of the indus-try’s sales, have fallen, after adjusting for infla-tion, by 34 percent.

The difficulties firms have experienced in thedialyzer market in recent years are the result ofa combination of factors. It seems clear that therehas been overcapacity in the industry. Firms ex-panded production during the good times only tofind that overall demand for new dialyzers leveledoff and now is actually decreasing. The decreasehas resulted in part from buyers’ attempts to re-duce costs, and those efforts, in turn, have beenstimulated by Federal efforts to control the costsof the ESRD program.

Future prospects for the industry as a whole areuncertain. The cost-control pressures are likelyto persist. The dialyzer market, in particular, islikely to continue to decline as dialyzer reuse con-tinues and patients move to modalities, such asCAPD (continuous ambulatory peritoneal dial-ysis), that do not use dialyzers. Firms supplyingdialyzers are likely to respond, in part, with diver-sification within and outside the dialyzer area. Inaddition, they will probably attempt to developequipment that can effectively reduce the costs oftreatment.

Major Policy Issues

Future prospects for the industry will largelydepend on the resolution of some major policyissues. Three areas of policy in particular were

considered in the case study. They are: the reim-bursement procedures for dialysis care, the Fed-eral contribution to research on ESRD, and thepractice of “reuse” of dialyzers. The case studydraws some conclusions in each area.

Reimbursement

Perhaps the most notable and most controver-sial of these issues is the new Federal reimburse-ment rules for the ESRD program that were estab-lished in 1983. These rules are aimed at controllingprogram costs, in particular by encouraging homedialysis. The rules are likely to have a myriad ofdirect and indirect effects on the nature of careand thus on the hemodialysis equipment and dis-posables industry.

The rules have been hailed as the initiation ofprospectively set rates. Although the new rulesdo involve prospective reimbursement—pre-setpayment “screens”or maximums known in ad-vance to facilities and patients—so did the previ-ous payment procedure, albeit perhaps to a lesserextent. Under the previous rules, if costs differedfrom the screen, the facility incurred a loss or sur-plus accordingly, but hospitals (although not in-dependent facilities) were almost routinely grantedexceptions to the screen. Nevertheless, there issome evidence that overall the screen did stimu-late cost-control efforts.

It is likely that the new rules will have someof the desired effect. Since exceptions will appar-ently be granted much less readily, facilities nowhave a stronger financial incentive to controlcosts. Moreover, because home dialysis is lesscostly to the facility, but is reimbursed at the samerate as dialysis performed in the facility, there isa clear incentive to have patients treated at home.Whether the present rates are the most appropri-ate way to achieve this goal is debatable. The ratesthemselves seem to have been developed througha less than rigorous statistical procedure, and theyoffer no clear direct incentive to patients and onlylimited incentives to physicians for home dialysis.Thus, they could conceivably create conflicts be-tween the facilities that wish to lower costs (andgenerate surpluses) and physicians and patients.Such conflicts are not apt to enhance the qualityof care or, indeed, to contribute to efficient care.

Patients have no direct financial incentive togo home, because the patient's required payment

is independent of the setting. Although the HealthCare Financing Administration (HCFA) has notedthat facilities may want to share some of theirprofits from home dialysis cases with the patientsthemselves, it is unclear to what extent facilitieswill 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 ofsetting. If patients were offered a financial incen-tive to dialyze at home—by being allowed to sharein the cost savings attributed to home dialysis—they might be more inclined to choose this set-ting. Such an incentive, which allows patientsthemselves to balance benefits and costs, does notappear to have been seriously considered (20).Congressional legislation in 1978 did try to elim-inate one financial disincentive to home dialysisby allowing for payment to home dialysis aides.This payment was attractive because home dial-ysis generally requires the assistance of a trainedaide. Although a spouse or other close friend orfamily member can provide such assistance, a no-table time burden is imposed. Payment to an aideis meant to reflect the time costs incurred. How-ever, this congressional provision apparently wasnot effectively implemented, On balance underthe new rules, home dialysis may contribute tothe facilities’ financial interests but not directlyto the patients’.

The impact of these rules on the equipment anddisposable industry depends on how effective therule changes are in achieving their stated objec-tives. If facilities feel the pressure to reduce costs,they will in turn put pressure on their suppliers.Suppliers will thus have an incentive to competemore than previously on the basis of price andless on the basis of other attributes of the prod-uct. At the same time, suppliers may be stimu-lated to develop cost-reducing innovations. If theeffect of the rules is to shift patients to newermodalities such as CAPD, the industry will alsorespond. Industry resources will be shifted towardthose products offering the greatest profit poten-tial, which depends ultimately on the patient baseassociated with the product.

On balance, the industry will certainly survivethe new rules, although its form and structure mayundergo some change. Profitability will dependon how facilities and patients respond to the rulesand on how creative] y the industry can react.

Federal Research

The second major policy issue concerns re-search. The Federal Government has supportedconsiderable research on ESRD and has contrib-uted to development of many of the products soldby the equipment and disposable industry. How-ever, this Government research contribution hasdeclined, particularly in the area of maintenancedialysis, the area most likely to affect the indus-try. The long-term consequences are likely to bea decline in innovation in the industry.

Federal-Government-supported research pro-vides a base from which industry can build. Asthe research base diminishes, private industry hasless on which to build. The profitability of its re-search and development (R&D) activities may di-minish, and as a result less R&D will be done. Inthe long run, the quality and cost efficiency ofcare depend on such R&D. Private incentives maynot generate the socially optimal amount of R&D.

In assessing research, one must recognize thatthere are competing uses of scarce funds. This casestudy has no basis on which to conclude that theESRD program is more worthy of funds thanother programs. It is therefore appropriate thatsome administrative decisions be made on the ba-sis of available expert opinion and perceived socialgoals. However, the activities of the various agen-cies responsible for research should be coordinatedto assure that whatever objectives are agreed uponare pursued efficiently and effectively.

Dialyzer Reuse

The third major issue facing the industry in-volves dialyzer reuse. Increasingly, dialyzers,which are labeled by manufacturers for single useonly, are being reprocessed and used again, oftenmultiple times. This reprocessing involves a rins-ing of the used dialyzer, followed by cleaning anddisinfection or desterilization. Critics of the prac-tice express concern about the possible adverse

consequences for patients. These may result fromthe diminished performance features of a reuseddialyzer as well as from the introduction of chem-icals used in reprocessing. However, at present,medical opinion views reuse as an acceptable prac-tice, as long as the reprocessing is done with ap-propriate care. From an economic perspective,reuse appears attractive. Cost savings are un-doubtedly present—but only if there are no sub-stantial, negative, medical consequences to thepractice. If reuse is associated with increased mor-bidity or mortality, such costs would have to beincluded in any cost analysis. Although projecteddirect cost savings are large, they could be out-weighed by the indirect costs of adverse medicalconsequences.

Again, the current economic argument seemsto support reuse. It seems to follow as well thatFederal policy be directed toward seeing that reusebe done appropriately. The Government throughthe Food and Drug Administration could encour-age the adoption of guidelines for reprocessing,for the costs of inadequate reprocessing could besevere. Since increases in reuse are likely, poorreprocessing procedures may result. In essence,care should be taken that reuse, one result of cost-control measures, does not, on balance, increasethe full social costs of the ESRD program.

Note that these arguments are not contingenton the possible negative effects increased reusemay have on particular manufacturers. Clearly,reuse will pressure firms, particularly weakerfirms, to lower prices, thus decreasing profits. In

the short run, the lower price seems attractive,particularly to providers, On the other hand, theseprice reductions could result in firms’ exiting fromthe market, which might ultimately result in a lesscompetitive industry and higher monopoly-likeprices. However, such pricing would require atleast tacit coordination among remaining manu-facturers and might be hampered by the interna-tional nature of competition and the possibilityfor cost competition among treatment modalities.Overall, such concerns seem remote.

The manufacturers of hemodialysis equipmentand disposable belong to an unusually dynamicindustry, which experienced rapid growth and at-tractive profits during one phase of its relativelyshort 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 through-out. The market grew with the onset of Medicarecoverage and has responded to ongoing Federalefforts at controlling the costs of the coverage.It is a market that in many respects is the crea-tion of Federal policy. Its future shape remainsintimately tied to that policy.

The remainder of this case study presents evi-dence pertaining to the conclusions above. Chap-ters 2 and 3 describe the available treatment ap-proaches to ESRD and their equipment require-ments. Chapters 4 and 5 analyze the industry.Finally, policy issues emanating from the indus-try are raised and discussed in chapter 6.

2. Treatment Approaches

2 ■

Treatment Approaches

Hemodialysis is one of the three major treat- This section briefly describes each approach andment 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 Medi-transplantation. Each treatment involves a some- care program who utilized each treatment mo-what different array of equipment and supplies. dality during 1983.

Table 1. —Estimated Number of End-Stage Renal Disease (ESRD) Patientsin 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 receivingtreatment as of Dec. 31, 1983: Hemodialysis . . . . . . . . . . . . . . . . . . . . 61,722Intermittent peritoneal dialysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,572Continuous ambulatory peritoneal dialysis . . . . . . . . . . . . . . . . . . . . . . . . . 8.688Kidney transplants . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,112

78,094 a

—aThe 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 to1982 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, ESRDData 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 func-tions within the body. It filters the blood, remov-ing the waste products built up from dietary in-take and physical activity; it regulates fluid andchemical balance in the body; and it facilitateshormone secretion, assisting in the regulation ofblood pressure and the prevention of anemia. Ina patient suffering from ESRD, the kidney hasceased to adequately perform these life-sustainingfunctions.

Treatments for ESRD seek to compensate invarious ways for the renal failure (52). Concep-tually, the most direct correction is transplanta-tion. A health kidney from a donor, living orrecently deceased, is transplanted into the patient.If the transplant is successful, the new kidney willtake on the normal kidney functions and the pa-tient, barring other complications, can lead anearly normal life.

Unfortunately, although transplantation ap-pears an attractive solution in principle, its prac-

tical implementation is often quite difficult. Find-ing an appropriately matched donor kidney is noteasy since the body has a strong innate tendencyto reject the foreign organ. In addition, immuno-suppressive therapy, which has many deleteriousside effects, is necessary to prevent kidney rejec-tion. Although graft retention rates have ap-parently been improving, success is hardly assured(48,49,89). During graft rejection, patients arelikely to suffer other complications and must ei-ther return to dialysis or undergo another trans-plantation.

At present, because of these difficulties, renaltransplantation remains a treatment for less than7 percent of U.S. ESRD patients annually (6,112patients in 1983) (102). The future is unclear.Some observers feel transplantation may work foronly a small percentage of the patient population;others believe that the new immunosuppressivedrugs, such as cyclosporine, hold promise formore successful transplants in the future. The lat-

9

ter group see an inadequate supply of donororgans as the major stumbling block to transplan-tation (81).

Dialysis, the major alternative to transplanta-tion, offers an artificial mechanism for perform-ing kidney functions. In hemodialysis, blood ispumped from the patient’s body, subjected to aprocess of dialysis, and then returned to the bodyin a continuous extracorporeal blood loop. Dia-lysis occurs as the blood is passed through ahemodialyzer, or artificial kidney. In the hemo-dialyzer (or, simply, dialyzer) the blood flows nextto but separate from another fluid, a dialysate.The blood and the dialysate are separated fromeach other by a semipermeable membrane. Thepatient’s blood, because of the renal failure, con-tains accumulated waste products and abnormallevels of electrolytes. The dialysate, on the otherhand, is free of waste products and containsdesirable concentrations of physiological chemi-cals. Via diffusion and osmosis, waste productsand other molecules pass through the semiperme-able membrane so the blood can again take onits appropriate properties. Furthermore, by reg-ulating pressure on either side of the membrane,buildup of excess body fluids can be effectivelyremoved through the blood to the dialysate.

Patients on hemodialysis typically are dialyzedthree times per week, for sessions ranging fromabout 3% to 5 hours each. These patients can bedialyzed at home or in hospital-based or free-standing dialysis facilities or centers. Hemodial-ysis was the treatment chosen by about 89 per-cent 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 ofthe semipermeable membrane separating the bloodand the dialysate. This difference leads to differentmethods of dialysis therapy. In peritoneal dialysis,the peritoneum, the membrane surrounding theabdominal organs and lining the abdominalcavity, is utilized in vivo; thus, dialysis occurswithin the patient’s body rather than via an ex-tracorporeal blood loop. A permanent catheteris inserted into the abdomen, and the dialysatefluid is introduced through the catheter into the

peritoneal cavity. The fluid is allowed to remainfor varying periods of time, during which dialysisoccurs across the semipermeable peritoneal mem-brane, Later the dialysate fluid is drained outthrough the catheter and discarded.

The various kinds of peritoneal dialysis reflectvariations in the timing of this process. In inter-mittent peritoneal dialysis (IPD) an automatic ma-chine performs intermittent treatment three tofour times per week. Typically, the patient isdialyzed for about 12 hours per treatment, dur-ing which the dialysate is automatically exchangedfrom the peritoneal cavity every hour. Continu-ous cycling peritoneal dialysis (CCPD) is a varia-tion of IPD involving the use of a machine towarm and cycle the dialysate in and out of theperitoneal cavity automatically about every 4hours 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 ofdialysate, roughly every 4 to 6 hours. CAPD of-fers the advantage of freeing the patient from de-pendency on a machine. It was chosen by about10 percent of the ESRD population in 1982 andis, thus, the most popular form of peritonealdialysis (25).

The relative clinical effectiveness of the mo-dalities remains a subject of study. For variousmedical or psychological reasons some patientsmay do better on certain modalities, but there areno controlled, long-term, clinical trials on whichto make an overall judgment. Hemodialysis in adialysis center remains the general historicalstandard for care. In this regard, a recent analy-sis done for the Office of Technology Assessment(OTA) concludes that “CAPD appears to be anacceptable alternative to hemodialysis for, at least,selected persons with end-stage renal disease” (86).The authors note that short-term survival ratesfor the two modalities appear similar, but CAPDpatients may be slightly more likely to be hospi-talized than either home or in-center hemodialy-sis patients. This hospitalization is usually becauseof peritonitis, which many patients on CAPD de-velop (76).

—.— --

PATTERNS OF CHOICE AMONG MODALITIES

Choice of modality and treatment setting (homeor in-center) depends on a variety of factors re-flecting not only the patient’s medical conditionbut also the patient’s and physician’s personalpreferences. The decision to undergo dialysis athome is complicated by concerns about the avail-ability of an assistant to help in dialysis and thecost and disruption the machinery can cause.Also, a patient being dialyzed at home must psy-chologically balance the responsibilities and therewards associated with self-care.

The set of choices to be made has varied some-what over time. With regard to setting, table 2notes that in 1982 home dialysis was the choiceof about 18 percent of dialysis patients. Prior tothe enactment of the Federal Government’s ESRDprogram in 1972, the percentage at home was ashigh as 40 percent; it declined sharply after theprogram was established but seems to be gradu-ally creeping up. Of course, these percentagechanges are based on a patient population whosesize and characteristics have also changed.

The percentage of dialysis patients at homevaries considerably among States. Some havemore than half of their patients at home (e. g.,

Table 2.— Percent of Dialysis Patients Treatedat Home by Year

Year ‘ Percent at home

1972 ., ., . . 401973 . . . . ., ... ., . . . 331975 ., ... . . . . . . . 161976 ... ., ., . . . . 141977 . . . . . ... ., . . . . . 121978 ... ... ... ... ... . . 121979 . . . . . . . 131980 ., . . ., ... ., ... . . . 141981 . . . ... ... ... . . . ... 161982 ... ... . . . . . 18SOURCES Sanford C Bernstein & Co Inc The K/dney D~a/ys/s /ndustry (New

York February 1981] C Davis Adm~nlstrator Health Care FlnanclngAdm!n!stratlon testimony at hearing Proposed frospecf~ve Re/rnbursement Rates for the End. S!age Renal Dtsease Program, beforethe Subcommittee on Health of the Committee on F!nance U SSenate, Mar 15 1982 (Washington DC U S Government Prlnt!ng Offlee 1982) Kidder Peabody & Co Baxter Traver?o/ Laboratories /ncCAPD Update, Company Follow up New York Aug 16, 1982 and PW Eggers Office of Research, Health Care Flnanclng Admlmstratlon Balhm ore MD personal commun!catlon, February 1984

Washington) while others have less than 10 per-cent (e. g., Illinois). The nature of the facility withwhich patients deal influences the choice. Hospi-tals send a greater proportion of patients homethan do free-standing facilities (20).

The percent of patients being dialyzed at homealso varies among countries. The U.S. rate is verysimilar to the overall European rate of roughly17 percent (50). However, there are variationsamong countries. Great Britain, for example,sends more than half of its patients home, whereasother countries (e. g., The Netherlands and Spain)tend to send less than 10 percent home (1). Suchdifferences may reflect differences among nationsin the institutional setting for medical care.

Among approaches, CAPD’s share of U.S. pa-tients represents a growth in popularity over thepast few years (86), which many market analystspredict will continue (46,79). Similar growth hasbeen evidenced in other countries, although as ofthe end of 1981, only 6 percent of the Europeandialysis patients were being treated with this ap-proach (50). As with home dialysis in general,there is considerable intercountry variation. InCanada, about 30 percent of the patients are onCAPD, but in Spain and West Germany, the fig-ure is below 5 percent (46,50).

CAPD is a home-based modality, and thus itsuse is linked closely with the decision to dialyzeat home. Most new patients choosing home dia-lysis are choosing CAPD, and roughly 68 percentof home patients were on CAPD in 1983 (14,66).At the same time, however, “procedure survival”on CAPD, i.e., the percent of patients remainingon the treatment for a given period, is somewhatlow. Recent U.S. figures show rates of 62 percentafter 1 year and 56 percent after 18 months (66).The experience in Europe shows even lower pro-cedure survival rates (50). Stason and Barnes notethat while there is a lack of systematic compara-tive data on hemodialysis, the CAPD figures dogive cause for concern about the modality’s long-term 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 madecould have important effects on costs. Variousstudies suggest that there are important differencesin costs among modalities, but the estimates of-fered do not always agree (14,15,31,55,79,86).Table 3 presents estimates from various sources.On balance, in-center hemodialysis is the mostcostly modality. Within this category, hospitalsincur greater costs than independent centers.Home hemodialysis appears less costly than CAPD,except in the Stason and Barnes (86) estimatesfrom Medicare data.

There are various problems with such estimates.For one thing, data are limited in breadth of cov-erage and depth of detail. Moreover, the choiceof modality does vary with age, race, and sex (86).These and other factors create case-mix differencesthat affect the cost estimates. Cost estimates are

also hard to arrive at because assessing certain ofthe costs is difficult. For example, the costs ofhome hemodialysis are probably understated be-cause the economic cost of unpaid aides who assistin dialysis is usually not adequately accounted for.Some estimates for CAPD have tried to accountfor costs of hospitalization (such as would be asso-ciated with peritonitis), but other costs are moredifficult to incorporate into the estimates. For ex-ample, the costs of failure on CAPD, as meas-ured by costs of the resulting change in modality,are higher than for center hemodialysis (86).

On balance, evidence of the cost differences be-tween hemodialysis in hospitals and free-standingfacilities is strong. However, a recent assessmentfor OTA concludes that evidence of other cost dif-ferences remains rather uncertain and worthy offurther 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 24,100Home hemodialysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,572 16,068 18,629 14,485 14,850Continuous ambulatory peritoneal dialysis . . . . . . . . . . . . . . . . . . 17,784 17,160 10,584 18.300KEY” 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 andBarnes; market study data are from Sanford C Bernstein & Co., Inc., The Kidrrey COa/ysIs Industry (New York February 1981)

Equipment Requirements3.

. . . . .

Equipment Requirements

THE MARKET OVERALL

Of the treatment approaches discussed above,hemodialysis has perhaps the greatest require-ments for equipment and supplies. Transplanta-tion, of course, requires the various equipmentand supplies associated with the operating room,but the equipment is employed once per transplantand, for the most part, will be used in other sur-gical procedures as well. Peritoneal dialysis hasrelatively modest equipment requirements over-all. Machinery in the form of dialysate exchangeequipment is used in intermittent peritoneal dia-lysis (IPD) and continuous cycling peritonealdialysis (CCPD). In the more popular continuousambulatory peritoneal dialysis (CAPD), consid-erable use is made of the disposable dialysatewhich, in this treatment, usually comes in a ster-ile, prepackaged container. Tubing and othermiscellaneous supplies are also employed.

The process of hemodialysis involves a rangeof equipment and supplies. Machinery is requiredto pump the blood, prepare and deliver the dialy-sate, and generally monitor the system for safeoperation. Water-treatment equipment may alsobe used, or, alternatively, purified water may be

brought in. In addition, dialysate, dialyzers, bloodlines, needles, and assorted other items are needed.The industry typically makes a distinction be-tween “equipment, ” such as the blood pump anddelivery system, and “disposable,” such as thedialyzers and blood lines, that in principle aredisposed of after each use. Those wishing a finerdistinction may also distinguish so-called “con-sumables” from other disposable. Consumablesare more specifically used up during hemodialy-sis and include the dialysate, heparin (drug usedto prevent blood clotting), and saline (solutionused to prime and rinse the dialyzer). For the mostpart this case study will employ the former butnot the latter distinction.

Table 4 provides estimates of the dollar valueof the ESRD market over time. The total U.S.market for equipment and disposable appearedto have been about $500 million in 1983; andbased on 1982 estimates, the worldwide marketwas roughly three times that size (46).

Equipment and disposable for hemodialysis ac-count for the bulk of the market, but this share

Table

Hemodialysis:D i a l y z e r sB l o o d l i n e sOther 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 40.240.0 556 71.2 837

Dia lysate de l ivery sys tems and o ther equ ipmentb 14.0 17,0 20.4

T o t a l h e m o d i a l y s i s ,. $144,3 $1919 $2370

Peritoneal dialysis:Continuous ambulatory peritoneal dialysis . . . $ — $ — $ —Intermittent peritoneal dialysisr ... 10.0 12.5 150Continuous cycling peritoneal dialysis — — —

Tota l per i toneal d ia lys is d $ 10.0 $ 12.5 $ 15.0

23,9

$299.6

$ 0.316,8—

$ 17.1

$296.7

Year ($ million)

1979 1980

$1442 $153.745.5 49.898.8 1146275 31.6

$316.0 $349.7

$ 3,218.5—

$ 21,7

$3377

$ 16.616.50.2

$ 33.3

$383.0

1983a

$148.253.9

1139395

$385.5

$ 99.89.1

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 becauseof the increasing popularity of CAPD. The singlemost important item overall is the dialyzer. Its1980 sales accounted for 40 percent of the mar-ket. For reasons discussed later in this case study,this share is expected to decline.

Dialyzers are an important segment of the mar-ket in dollar terms and thus are worthy of someattention. However, this segment of the market

DIALYZERS

The Dialyzer Market

Dialyzers consist essentially of three basic parts:a compartment for the blood, a compartment forthe dialysate, and a semipermeable membraneseparating the two. The three principal types ofdialyzers—parallel plate, coil, and hollow fiber—differ essentially in how these basic parts are ar-ranged. All three types of dialyzers are generallydescribed by manufacturers as “single-use dis-posable,” but in fact are often reused. The Kiildialyzer, a type of plate dialyzer, is specificallydesigned for reuse but its inconvenience has madeits popularity quite limited (117).

Although the specific features of the dialyzersvary among manufacturers, each type of dialyzerhas certain basic characteristics. Parallel plate, orsimply, plate dialyzers consist of a stack of semi-permeable membranes sandwiched between sup-port “plates. ” Blood passes between the mem-branes while the dialysate passes in the oppositedirection through grooves or spaces in the sup-port plate. In a coil dialyzer, blood passes throughsemipermeable membrane tubing. The tubing iswound around itself, or “coiled,” and a support-

is also of special interest because it appears to beespecially sensitive to pressure to reduce the costsof the ESRD programs and more generally sen-sitive to the resolution of some important policyissues. Thus, it can help illuminate many policyissues and effects. Since much of the analysis inthis case study will focus on dialyzers, the nextsection describes this part of the market in moredetail.

ing screen separates the coils. The dialysate passesat a 90° angle through the space created by thescreen. A hollow fiber dialyzer contains thousandsof hollow fibers bundled within a compact cylin-der. Blood flows through the semipermeablehollow fiber while the dialysate fluid passes out-side the fibers (117).

The growth trend in unit sales, or numbers, ofdialyzers is illustrated in table 5. The figures showa continuing decline in the rate of growth ofdialyzer sales and most recently an absolute de-cline in sales. The 1983 data were obtained froma source different from that of the other years’data, so comparisons should be made with cau-tion. Nevertheless, the pattern observed is con-sistent with the view that the market is contrac-ting (79). The principal explanation for this liesin the increase in dialyzer reuse, a subject ad-dressed later in this case study.

Note also the changing mix of dialyzers sold.The hollow fiber dialyzer has clearly come todominate the market, while the coil dialyzer hasdeclined markedly in use. The plate dialyzer hasmanaged 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 4,400Share by dialyzer type (o/o):

Hollow fiber . . . . . . . . . . . . . . . . . . . . . . . . . . ... . . . . . . . . . . . .Coil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67.0 63.0 54.0 41.4 33.3 26.3 2Parallel plate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.4 14.4 16.5 18.9 19.3 21.1 28Other . . . . . . . . . . . . . . . . . . . . . . . . . . ... . . . . . . . . . . . . . . . . . . . . . 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 interna-tional, Inc , B/orned/ca/ Business /nfernaf/ona/, Vl, Mar. 16, 1983

Ch. 3 --Equipment Requirements ●� Ž 17—

analysts expect this sharehollow fibers continue to

to drop somewhat asgain (79).

There appear to be two principal reasons forthe hollow fiber dialyzer’s gain in market share.First, hollow fiber dialyzers have excellent dialysisperformance characteristics. They are small, ef-ficient, and relatively easy to use. Coils, on theother hand, are more cumbersome and difficultto work with and require relatively high bloodvolumes. Plate dialyzers are generally regardedas much superior to coils but are viewed by somein the market as slightly less efficient than hollowfibers (79).

The second reason for the hollow fiber gain inmarket share is its relative suitability for reuse.Although all three types can be reused, the hollowfiber dialyzer has come to be regarded as espe-cially suitable for reuse. The hollow fiber dia-lyzer’s advantages arise because, in practicingreuse, it is important to monitor the changing per-formance characteristics of the dialyzer as it is re-processed. This dialyzer’s characteristics allow fora relatively straightforward determination of thereused dialyzer’s efficiency. This is because thedialyzer’s ability to perform its function is directlyrelated to the hollow-fiber cell volume, which canbe fairly easily and readily measured. In contrast,the membrane used in plate dialyzers is compliant,and simple volume measurements cannot providea reliable indicator of performance properties(16,22). Furthermore, cleaning plates is difficultto monitor because blood can get caught betweenthe plates. Finally, many simply regard the hollowfiber dialyzer as more “rugged” and able to with-stand the reprocessing treatments (120).

Reuse of Dialyzers

To understand the dialyzer’s position in themarket, it is important to understand the prac-tice of reuse: it occurs when a dialyzer, after itsoriginal use, is reprocessed, stored, and then usedagain on the same patient, often multiple times.The reprocessing generally begins with an initialrinsing of the dialyzer after dialysis. The dialyzeris subsequently cleaned and disinfected or resteri-lized (117). The actual reprocessing procedure andthe number of reuses tend to vary among facil-ities. However, various medical and industry

groups have been developing guidelines for thereprocessing procedure (e. g., see (71) and (77)).These guidelines include a test of the dialyzer’sresidual functional capabilities after each use.When the dialyzer functions at an unacceptablelevel, it is discarded. There are apparently no sys-tematic data on the number of reuses actuallyachieved nationwide. A recent Health Care Fi-nancing Administration (HCFA) analysis of thecost savings from reuse assumes five reuses (103).At a recent workshop, one program reportedsome success in achieving a “target rate” of eightreuses per dialyzer (84).

In any case, dialyzer reuse, although widelypracticed, is quite controversial. This section con-siders some of the major issues surrounding thepractice. As a beginning, some of the history ofthe practice is recounted. Then its cost and med-ical consequences are discussed.

History of Reuse

Most dialyzers today are labeled by the manu-facturer as intended for single use only. They are“disposable.” However the practice of using adialyzer more than once goes back to the earlyyears of dialysis. In 1964, Shaldon and his asso-ciates reported a technique for reuse throughrefrigerating coil dialyzers (83). A technique forreuse of the Kiil dialyzer, aimed at eliminating theneed for disassembly and rebuilding, was de-scribed in 1967 (70).

In recent years there has been a renewed inter-est and indeed a growth in the reuse of “dispos-able” dialyzers. In a well-known study, Deanefound that in 1978 about 17 percent of patientswere involved with multiple use (23). A 1982survey by the Centers for Disease Control in-dicates that 51 percent of patients were dialyzedin centers that practiced reuse (27). In Europe thepractice is also followed but on a somewhatsmaller scale. Estimates actually show a declinein the percentage of patients reusing disposabledialyzers from about 14 percent in 1975 to 9 per-cent in 1981 (41). However, this decline is at-tributable, at least in part, to the marked expan-sion of the overall patient base. The actual numberof patients reusing dialyzers increased over thisperiod.

Whereas in the early years of dialysis the ra-tionale for reuse was largely convenience (13,22),the driving force behind reuse today is a desirefor cost savings. Of course, reuse may have med-ical effects, both positive and negative. An appro-priate assessment of reuse must recognize thevarious factors involved.

Cost Savings

Estimates of the cost savings associated withreuse are illustrated in table 6. The estimates varyfrom $1,600 to $6,000 per patient per year becauseof differences in the assumptions underlying them(e.g., with respect to dialyzer prices, labor, andmaterials costs, etc. ) and because of differencesin the actual reuse and reprocessing procedures.They also differ in the time periods on which theestimates are based. As a result they may not fullyreflect experiences today.

If one assumes a savings of $2,000 per patientper year with reuse and a patient population onreuse of 40,000 (roughly 50 percent of the ESRDpopulation), then the yearly savings amount to$80 million. As the industry has pointed out, sav-ings of this magnitude represent a relatively smallportion of ESRD program costs (117). In thishypothetical case the savings are less than 5 per-cent of program costs. Nevertheless, economiesof this magnitude are certainly attractive.

Table 6.— Selected Estimates of SavingsFrom Dialyzer Reuse

Savings per patient yeara

Source of estimate ($ current)Fawcett and Mangles (1974) . $3,000Foxen (1983)b . . . . . ... 1,900Hoff stein, et al. (1976) . . 1,600-2,400Scribner (1977) . . . . . . . . . . . . . 2,500-6,000U.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 andMeans, Apr 251977, P A Hoffsteln, et al , “D!alysls Costs’ Resultsof a Sample Study, ” Kid /nt. 9266.293, 1976, and K C Fawcett andM 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 fromthe 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 ReuseCost Effective? A Case Study, ” in Reuse of D/sposab/es, Assocla-tlon for the Advancement of Medical Instrumentation, TechnologyAssessment Report No 6-63 Arllngton, VA, 1963, were converted fromcost 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 311981

Of course, one might still challenge the validityof such figures. Note that the more spent onreprocessing, the less the cost savings of reuse.Representatives of the dialyzer industry have sug-gested that with appropriately rigorous reproc-essing, savings might be much less than are nowenvisioned. Although manufacturers are subjectto Federal regulations concerning good manufac-turing practices (GMP), clinics and hospitals reus-ing dialyzers generally are not. These regulations,part of the Food, Drug, and Cosmetics Act, man-date minimum quality assurance requirements inthe manufacturing or processing of a medical de-vice. If the GMP regulations were to be appliedto hospitals and clinics, it is argued that reproc-essing might well become more costly (42,43,44,117).

However, even if clinics and hospitals were toperform reuse according to GMP regulations, thecost of reprocessing, as estimated by one mem-ber of the industry, would still allow a savingfrom reuse (44). As further evidence considermarket-generated estimates of reprocessing costs.Multi-Use Systems, Inc., a new private companythat reprocesses dialyzers, charges $6.50 p e rdialyzer for reprocessing, including pickup, de-livery, and labeling. The firm uses automated re-processing equipment and, according to the firm,follows careful and rigorous procedures (24). Withthe assumption of five reuses and a new dialyzerprice of $20, savings per patient year for the fa-cility would come to roughly $1,800 and wouldstill presumably allow a profit for the reprocess-ing company.

Medical Consequences

Of course, any estimates of cost savings mustrest on a medical assessment of reuse. If reuse weremedically harmful to patients, then the costs ofincreased morbidity or mortality would probablydwarf the direct cost savings associated with it.Thus, an appropriate assessment must be basedultimately on considerations of the practice’s clin-ical safety and effectiveness.

Various concerns have been expressed about thepossible negative medical effects of reuse (e.g., see(43)). However, others have suggested that reusemay actually have some salutary effects. A. PeterLundin (54) has offered a summary of “presumed

—— .-

and proven” medical indications and contraindica-tions for reuse. These are presented in table 7.There are bits and pieces of evidence in supportof these items, but the consensus of a recent Na-tional Workshop on the Reuse of Consumablesin Hemodialysis concludes that overall there isonly “a small but finite risk of morbidity andnegligible or no risk of mortality with reuse in theimmediate treatment setting” (77).

In coming to such a conclusion, workshop par-ticipants also pointed out that the safety and ef-fectiveness of reuse depends on appropriate re-processing standards. They also recognized thatthe long-term risks are unknown. Accordingly,the consensus statement urges further study of thepotential medical effects of reuse.

In an assessment of reuse, there is often atendency to ignore the patient’s perspective. Pa-tients face the issue from their own special per-spectives (see, e.g., (54) and (62)). They recog-nize the desirability of cost savings in the ESRD

program and are even attracted by potentialbenefits such as the prevention of new dialyzersyndrome, a possible negative reaction to usingnew dialyzers resulting in respiratory distress,wheezing, back or chest pain, chills, or fever (67).Yet they are concerned about the presently un-known long-term risks and emphasize the needfor more scientific study.

In considering the patient’s position, one shouldnote that the cost savings from reuse or the costsof complications from reuse do not all accrue topatients. Medicare, the dialysis facility, and pa-tients can all be affected, and each group can haveits own perspective and incentives. Ethicist Ar-thur Caplan (18) notes that the dialysis patient,by virtue of his or her illness, maybe particularly“vulnerable. ” He argues strongly that the ethicsof therapy require that patients be informed fullyabout reuse and allowed to consent or not con-sent to the practice.

Table 7.—Suggested Medical Effects of Reuse

Medical contraindications to reuse Medical Indications for reuse1, 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 disinfectants6. 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

4.Market Structure and Competition

A market consists of a group of buyers andsellers coming together to exchange a product orservice. That interaction helps determine the prod-uct’s prices, quantities, and quality. To under-stand how these items are determined, and toevaluate the economic performance of the hemo-dialysis equipment and disposable industry, it is

THE SELLERS

Market Concentration

A key feature of any market is its degree ofcompetitiveness. One factor that characterizescompetitiveness is market concentrate ion, the de-gree to which overall market activity is distrib-uted among (or concentrated with in) the firms inthe market. Economic theory suggests that the de-gree of competition is related to market concen-tration and, in particular, that competition maybe stifled when a small number of firms controlsa large share of the market activity.

important to understand how buyers and sellersare organized and how they compete. This sec-tion addresses the question of market structureboth from the seller’s side and the buyer’s side;and since the U.S. market is not independent offoreign markets, the international features of themarket 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% C D M e d i c a l I n c . ( C o r d i s D o w ) 19,2 19,0 20.1 15,5 22.5E x t r a c o r p o r e a lc ( J o h n s o n & J o h n s o n ) 165 20.0 14.4 22,8 18.6Gambro AB . . . . . . . . . . . . 15,1 12,7 9.4 10.4 11,1Cobe Labs . . . . . . 5.0 12.1 13,3 10,0 7.6Organon-Teknika . . . . . . 1.7 1.8 1.9 2,6 2.0Warner 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 4,7Vernitron Corp. . . . . (d) (d) (d) 2.0 2.0Terumo-America, Inc. ... . . . . . . (d) (d) (d) (d) (d)aaased on Ias[ 6 months Of 1977b B as e d on first 5 months of 1983

Clncludes very small portion of sales attributable to Cntlkon D{vtslon of companydNot among leadlng eight corporations In this year Figures not available separately

by Year (percent)

1982 1983b

30,0 0/0 29.4%27,1 22.410.4 10.8139 13.37 2 7 2

(d) (d)(d) (d)(d) 3.91.7 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 CongressWashington, DC 1983

1975 1976 1977 1978 1979Baxter Travenol . . . . . . . . . . . . . . . . . . . . . .CD Medical Inc. . . . . . . . . . . . . . . . . . . . . .Cobe Labs . . . . . . . . . . . . . . . . . . . . ... ...Extracorporeal . . . . . . . . . . . . . . . . . . . . . . . .Erika . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Gambro AB . . . . . . . . . . . . . . . . . . . . . . . . . . .Becton Dickinson . . . . . . . . . . . . . . . . . . . . . .Renal Systems . . . . . . . . . . . . . . . . . . . . . .Terumo-America, Inc.... . . . . . . . . . . . . . . . .Bentley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .McGaw . . . . . . . . . . . . . . . . . . . . . . . . . . . .Abbott . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .All others . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

32.70/o11,08.49.82.66.52.60.6—1.01.9.

22.9

22,70/o12.47.89.74.06.52.51.00.71.52.0—

29.3

22.10/014.18.99.15.46.32.51.51.21.91.8—

25,1

1980 1983a

21.90/o14.910.7

7.96.16.52.92.01,71.41.7—

22.5

24.00/o15.511.89.26.46.92.82.22.11.01.5—

16.6

26.30/o13.612.310.0

7.92.33.02.31.70.81.1—

13.7

34.90/09.1

10.88.9

13.15.73.02,71.3—1.62.46.5

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 relativeshares for dialyzers alone, considering again, re-spectively, hospitals and the market overall.

The evidence in the tables presents a consist-ent picture, with Baxter Travenol emerging as theU.S. leader. CD Medical, Inc., Gambro AB, andExtracorporeal are also key firms. (For briefdescriptions of the major firms in the industry seeapp. A.) In order to assess the competitive impli-cations of this pattern, analysts often use a single“summary” measure that can be used for com-parative purposes. Two of the most commonlyused measures of market concentration are con-sidered here: the four-firm concentration ratio andthe Herfindahl index.

The four-firm concentration ratio measures thetotal market share of the largest four firms in theindustry. Where this ratio is high, competition islikely to be less intense, since the largest firms mayhave a greater opportunity to exercise marketpower (80). In the hospital market for equipmentand disposable (table 8), the concentration ratiowas 76 in 1983. The ratio is slightly lower, 68,in the market overall (table 9). In the hospital mar-ket for dialyzers (table 10), the ratio was over 90in 1983. For dialyzers overall, the ratio was 79.Although the concentration ratio is an imperfectmeasure of competition, the figures for the indus-try put it at or in excess of the 60 to 70 percentfigure often viewed as the threshold for possiblyserious competitive problems (80). Furthermore,this situation appears to have persisted over thepast several years.

An alternative measure of market concentra-tion is the Herfindahl index. It is generally re-garded as superior to the concentration ratio (80),but it is less widely used because the data for itscalculations are often not available. It is calcu-lated by summing the squared values of the mar-ket shares of the firms in the industry. Calculat-ing shares in fractional or decimal terms, the indexcan range in value from near zero, for an indus-try composed of many small firms, to one, fora monopoly. Again, economic analysis indicatesthat where this value is higher, the scope for an-ticompetitive behavior increases.

From the data in tables 8 through 11, Herfin-dahl indices can be calculated. In 1983, theyranged from about 0.16 to 0.17 for all dialysisequipment and supplies and from 0.17 to 0.28 forthe dialyzer market. Since data limitations haverestricted use of this index in economic studies,there is little basis for comparison among indus-tries, However, recently published guidelines fromthe Department of Justice use the index in explain-ing their attitudes toward proposed mergers. Mar-kets with index values in the range observed forthe dialyzer market (greater than 0.18) are char-acterized as “highly concentrated. ” In such mar-kets, mergers that increased concentration to suchlevels would be a “a matter of significant com-petitive concern” (104).

Entry

Another important characteristic of an indus-try’s structure, and its competitiveness, is the con-dition of entry. Is entry into the industry fairly

0c

2

Table - Estimated Shares of U.S. Hospital Market for Dialyzers by Year (percent)

1 'd/ /0 1'd/~ 1'd/'d l'd~U 1 'd~1 l'd~L l'd~JU

Dollars Units Dollars Units Dollars Units Dollars Units Dollars Units Dollars Units Dollars Units

Baxter Travenol ................. 33.0% 23.9% 24.2% 19.1 % 33.7% 34.1 % 32.4% 31.6% 31.3% 30.6% 37.9% 38.1% 40.1% 43.0% CD Medical Inc .................. 25.5 22.0 25.1 16.7 25.6 20.8 19.5 17.7 26.2 24.3 31.1 31.2 26.0 24.2 Gambro AS ..................... 20.9 33.9 17.3 25.3 11.5 13.1 12.9 12.5 13.4 12.7 15.8 14.0 15.8 13.8 Extraeorporeal .................. 14.4 16.0 18.9 25.3 11.2 13.8 23.0 25.8 18.4 22.5 8.6 10.6 10.6 12.5 Bentley ........................ 2.2 2.6 0.6 0.8 0.2 0.3 0.2 0.3 0.1 0.1 (c) (c) (d) (d) Cobe ........................... 1.5 0.2 9.6 9.0 11.8 12.1 8.5 8.7 4.6 4.6 4.3 4.1 3.1 2.4 Becton-Dickinson .......... 1.1 0.8 3.7 3.5 2.0 1.7 (d) (d) (d) (d) (d) (d) (d) (d) Erika ........................... 1.1 0.6 0.4 0.4 2.7 3.3 2.2 2.1 5.6 5.0 1.6 1.3 1.6 1.4 Hospal ......................... (d) (d) 0.1 0.1 1.3 0.8 0.4 0.2 0.2 0.1 0.1 (c) (c) (c) Terumo-Ameriea, Inc ............. (d) (d) (d) (d) (c) (c) 0.9 1.1 0.1 0.1 0.6 0.6 2.5 2.6 Organon-Teknika ................ (d) (d) (d) (d) (d) (d) (d) (d) (c) (c) (d) (d) 0.2 0.2 All others ...................... 0.3 0.0 0.1 0.0 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

- -----..... ,~--

on last 6 months of 1977 on first 5 months of 1983

small sales (less than 0.10'0) indicated n survey sales indicated in survey

SOURCE: Compiled from survey by IMS America. Ltd .. Hospital Supply Survey, contract report prepared for he Office of Technology Assessment. US Congress. Washington. DC, 1983

9 oL.

::: :;:;

;... ~

~ ~ ...,

n

~ 3-

t,-, 'Jl

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/oCD Medical Inc. . . . . . . . . . . . . . . . . . . . . . 18.7 18,6 21.3 24.5 27.9 23,5 20Extracorporeal . . . . . . . . . . . . 18.8 16,9 14.9 11,0 10,8 12.5 NAGambro . 11.2 11.0 10,9 10,9 10.9 12.1 24Cob. . . . . . . . . . . . . . . . . . . . . . . . 0.4 1.9 5.2 8.1 8.9 9.6 9Erika . . . . . . . . . . . . . . . . . . . . . . . . . 0.4 4,2 6.9 7.7 7.7 9.4 7Bentley ....,.... . . . . . . . . . . . . . . . 1.1 3.7 4.2 3.0 1.9 1.5 NAHospal . . . . . . . . . . . . . . . . . . . . . . — — 01 0.2 0.2 0.9 NATerumo-America, lnc . . . . . . . . . . . . . . . . . — — — — — 0.7 9Organon-Teknika . . . . . . . . . . . . . — — — — 0.1 0.2 NARenal Systems . . . . . . . . . . . . . . . . . . . . . . . — — — — — 0.1 NARenal Devices . . . . . . . . . . . — — — — — 0.1 NAAll others .,, . . . . . . . . . . . . . . . . . . . 2,0 2.6 2.4 1.5 0.7 0.1 NAf4A 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 newfirms? Insubstantial barriers do exist, establishedfirms are insulated from an important source ofcompetition, the new entrant.

Barriers to entry arise from the advantagesestablished firms have over new entrants. Thesecould include cost advantages associated with ac-cess to technology or materials, or “product dif-ferentiation” advantages associated with thestrong image of established producers with cus-tomers. Certainly some of these advantages ex-ist. Firms such as Baxter Travenol, for example,have established a strong identity with buyers.Cordis Dow for many years controlled patents inhollow fiber dialyzer technology and, althoughthey have extensively licensed thereto other firms,this may have generated some cost advantages forthe company.

An indirect test of the condition of entry canbe performed by observing actual patterns of en-try. If entry can be accomplished relatively easilyand the market offers profit potential, then en-try should occur. A review of tables 8 through11 suggests the emergence over time (i. e., themovement from unmeasured to significantlymeasurable sales) of at least a few firms. Mostnotable are Terumo America and Abbott Labs.Each emerged from a solid base: Abbott movedinto dialysis from a strong foothold in relatedhealth markets; Terumo America is part of a largeJapanese firm that produces dialysis products.

Upon entry to the U.S. market the company wasaccused of infringing on Cordis Dow patents. Thesuit was settled when Terumo agreed to royaltypayments (79).

In the dialyzer market, in particular, one seesa number of new entrants. However, other thanTerumo, none has managed to achieve a majormarket share. Another form of entry has occurredamong some of the existing dialyzer producers,who are now making hollow fiber dialyzers. Ex-tracorporeal, a producer of coil dialyzers, beganto produce hollow fiber dialyzers in 1977. Simi-larly, Erika moved into hollow fibers in 1980, andGambro entered in 1979 (61,79). These companiesalready had a part of the overall market, so suchentry was easier than it would have been de novo.

Although the evidence suggests that some en-try into the dialysis equipment and supplies mar-ket is possible, it is hardly wide open. Entry hasmainly consisted of established firms expandinggeographically (e.g., from Japan to the UnitedStates) or into related products (e.g., into produc-tion of another type of dialyzer). Another indica-tion of the difficulty of entry is the degree ofstability in the identities of the major firms. Thelack of opportunity to move within the marketis also a sign of some limits in competition (see,e.g., (19)). Overall, therefore, the market maybest be characterized as having moderate barriersto entry.

THE BUYERS

INTERNATIONAL DIMENSIONS

(01 ).

The greatest market power on the buyers’ sideprobably rests with free-standing facilities. Thesefacilities account for a growing share of the mar-ket. As of 1981 approximately 42 percent of fa-cilities were independent t. The comparable figurewas 11 percent in 1973. Such facilities are pre-dominantly profit-making enterprises and are

Thus, it remains an attractive market for worldproducers. Despite current competitive pressuresin the U.S. market, foreign firms with an estab-lished market base elsewhere may be able to com-pete effectively here.

At the same time, U.S.-based firms have ven-tured into foreign markets. Many foreign coun-tries are experiencing greater increases than theUnited States in the patient population, and theseforeign markets are quite attractive (46,50). Table12 illustrates the U.S. role in a number of mar-kets for renal equipment. The variations observedseem attributable to numerous factors. Histori-cal, geographic, political, and economic factorsprobably all contribute. In any case, U.S. firmsclearly are playing an important role abroad. Al-though market shares in some countries may de-cline as the markets expand, the potential salesremain a strong attraction.

The U.S. firms’ movements into foreign mar-kets is consistent with a general pattern in U.S.manufacturing, particularly in so-called “high-tech” industries. Most observers have tended toview this as an attempt to take advantage of thetechnological superiority of the firms’ products.(For example, see (32), (37), (111), and (112). )Whether this superiority existed in this market isunclear. Certainly today, leading foreign firmsseem to produce products of comparable quality.

Indeed, as noted above, foreign firms have madeinroads into the U.S. market.

If one judges from the dialyzer market, tech-nological factors have been of some importancedomestically and internationally. Cordis Dow’spower in the dialyzer market stemmed at least inpart from its control of patents related to thehollow fiber dialyzer. Erika’s production of hollowfiber dialyzers in Ireland is being done throughlicensing technology from a foreign firm, Fresenius(39). Many dialyzer manufacturers use a mem-brane, Cuprophan, which is made by Erika, aWest German company, although Japanese andother foreign and U.S. firms are developing mem-branes as well (2).

International activity may also be prompted bya production technology that may involve signif-icant economies of scale in dialyzer production(47,79). These economies may prompt firms tobroaden their market to achieve further sales andto maintain or achieve potentially lower unitcosts. Economies of scale would allow Terumo,for example, operating from a high-volume basein Japan, to export to the U.S. market at a com-petitive price. Economies of scale may also leadfirms with declining domestic sales to seek mar-kets abroad, thereby allowing high-volume pro-duction 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

19791985a19791985a1980a19791985a19781983a19791985a19781983a19791985a

Totalsales

($ millions)

$5.36.4

1228

4.30.480.805.318.02.12.50.150.8

21.626.0

Imports fromU.S.

($ thousands)

$583750

210030003500

251443

18501600900

1200150200

25302500

U.S.market

share (o/o)

1 1 %

1217.51181525635204348

10025129.6

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 81.512September 1981; Id@m, Medical Equ/prnen(, Tafwan, CMS 81.509, February 1981, !dem, Medfca/ Equfprnent, Un/fed K/ngdorn, CMS 81.515, September 1981Renal equipment as defined appears to Include at least some dlsposables

ndustry Performance

5.Industry Performance

Industrial economists generally expect an indus-try’s structure to have an important influence onthe industry’s behavior and its quality of economicperformance. This performance is generally gaugedin terms of the efficiency with which resources areallocated and utilized. From a policy viewpoint,

PRICES AND PROFITS

As a guide to economic performance, econ-omists often focus on prices and profits. Lowprices are attractive to consumers. Prices and coststogether determine a firm’s profits. Profits, al-though the logical reward to successful businessactivity, can arise for a variety of reasons. Forexample, successful innovation or unexpectedlylarge increases in demand for an industry’s prod-uct could lead t o high profits, at least for someperiod of time. However, when profits are muchhigher than investors are earning in other partsof the economy, it may signal monopoly power.Such power imposes costs on consumers, via highprices, and on the society at large, via inefficientutilization of society’s resources (see (80)).

Analysis of market prices and profits is com-plicated by a variety of factors, including varioussorts of data limitations. For example, some pricedata may be available, but these published pricesare list prices and do not necessarily reflect thetransact ion prices, which are often discountedfrom list price. Even if transaction prices wereavailable, comparisons over time would requireadjusting for changes in the nature of the prod-ucts being sold. Technological improvements andvarious other modifications make the specific listof products sold today different from those soldseveral years ago.

Profit data are also not generally availablethrough published sources. Firms that are not pub-licly held are not subject to the disclosure rulesof publicly held corporations. Foreign-ownedcompanies also pose special difficulties. Even incases where there is public disclosure, profits on

good performance is the ultimate objective, andpolicies that can improve that performance be-come attractive. This section discusses some ofthe key features of the industry’s economic per-formance.

hemodialysis equipment and disposables may bedifficult to ascertain. As noted in appendix A,many of the firms in the industry operate in a va-riety of markets. Although the Securities and Ex-change Commission does require some productline breakdowns of sales and profits, the break-downs are generally too broad (e.g., “medical careproducts”) to allow for assessment of this mar-ket in particular.

Surveys can overcome some but not all of theabove limitations. In its study of ESRD equipmentand supplies, Orkand Corp. (68) notes various dif-ficulties in estimating prices, but seems to con-clude that prices have, in general, shown little up-ward movement and, indeed — after adjusting forinflation —have actually declined. For dialyzers,it concludes that the decline has been especiallynotable.

The discussion of prices here concentrates ondialyzers since they have been a principal concernof this case study and price data for this marketare relatively easy to interpret. The IMS Amer-ica survey referred to earlier provides data thatallow for the calculation of the average pricepaid for dialyzers by hospitals. These data arepresented in table 13.

The results are rather remarkable. Prices, evenin current dollar terms, have fallen over the past5 years. After adjusting for inflation, the overalldecline is approximately 34 percent. Furthermore,this decline in real prices seems to exist for allkinds of dialyzers. For example, Baxter Travenol’shollow 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 – - 1 9 8 1 1982 1983b

Baxter Travenolc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25.4 $23.1 $24.3 $23.4 $21.7 $17.9Hollow fiber . . . . . . . . . . . . . . . . . 27.7 25.0 26.2 24.6 22.0 17.9Coil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.9 20.3 20.1 19.5 19.5 23.5Parallel Plate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31.5 32.7 – — – –

CD Medical Inc. (Cordis Dow) . . . . . . . . . . . . . . . . . . . . . . 30.2 28,6 26.1 24.6 21.7 20.7Gambro AB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (e) 20,4 24.4 24.0 24.7 22.3Extracorporeal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (e) 18,9 21.1 18.7 17.6 16.3Bentley. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (e) 16.6 16.4 16.2 NA NACobe Labs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.5 22.7 23.3 23.2 22.5 24.8Becton Dickinson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,6 27,6 18.8 NA NA NAErika . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.5 19.0 25.1 25.7 26.5 21.6Hospal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43.0 37.6 38.0 37.6 34,3 34.0Terumo-America, inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NA 27.0 19,1 25.4 NA 18,5Organon-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 13.2NA indicates data not avatlableapr,ce~ are calculated as dollars sales dlwded by total units soldbBased on first 5 monthsof 1983CDa~a for Baxter Travenol allo,wed for computation overall and by dlalyzer type prices for other companies may Include a mlx Of types Of dlalyzersdcomputed from total sales to sample hospitals of all types of dialyzers from all comPanleseData dld not allow for meaningful calculationsfAdjustmentto Iglaprlceslsbasedon the prod ucer 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, SurveyofCurrenfBuslrress, 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) showan average decline of about 56 percent, after ad-justing for inflation (and weighting by their rela-tive sales). Prices of Baxter Travenol’s coil dia-lyzers also show a decline in real terms of 32percent. And prices of plate dialyzers have prob-ably also fallen. Data are not separately available,but the two leading manufacturers of plate dia-lyzers, Gambro and Cobe (79), both experiencedprice declines, once an adjustment is made for in-flation. Although these figures are based on pricespaid by hospitals, the results are consistent withgeneral business assessments of price movements(39,68,79).

For reasons alluded to earlier, the profit con-sequences of this price decline are not easilyassessable. Profits for dialyzers are rarely singledout, although some assessments of profitabilitydo exist. A 1983 evaluation of Baxter Travenolstock contends that the company is making goodprofits on hollow fiber dialyzers (47). CD Medi-cal (formerly Cordis Dow), on the other hand,has been experiencing losses overall for the last3 years; this appears at least partly due to itshollow fiber dialyzers (17,59,114,115).

Overall, however, the major companies remainviable. In part this is because they have been ableto lower production costs (47). Profit marginshave apparently declined, but as noted earlier,over the past few years, some new entrants havefound the potential sufficient to entice them intothe market.

Given the description of market structure pro-vided earlier, the downward movement in pricesand, apparently, in profits requires some furtherexplanation. The market as described has beenone of high seller concentration and generally lowbuyer concentration. This may help explain theattractive profits earned several years ago (79).But the measured market concentration of sellershas not evidenced a decline that might explain afall in prices. Clearly other factors must have beenat work.

One likely source of the price problem for man-ufacturers is the unduly optimistic past expecta-tions about the growth in the market. When profitprospects 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 over-all and for hollow fiber dialyzers in particular (seetable 5 in ch. 3; also, (79)). Indeed, unit sales ofhollow fibers have actually shown a decline in thepast year. The result is extensive overcapacity inthe industry (47,79). The overcapacity led to pricecutting as manufacturers strove to maintain out-put and share in a decelerating and finally shrink-ing market.

The major factor that slowed the growth indialyzer demand was the growth in reuse. As reuseincreased, the number of new dialyzers requiredper patient fell. With demand failing to keep upwith supply, it was inevitable that there wouldbe downward pressure on prices—even in thisconcentrated market. A 1981 market survey notesthat “market share has lost much of its traditionalsignificance. . . . Dialyzers have become a pure,price-sensitive commodity for which prices deter-mine share” (79).

Buyers have contributed to reaching this out-come. Although they had little concentrated mar-

PROSPECTS FOR THE INDUSTRY

Prospects for Prices and Profits

Market prospects depend to a great degree ontechnological, medical, and policy developments.Over the next few years the dialyzer market seemslikely to continue to contract (47,79). Two fac-tors should contribute to this decline. One is acontinued growth in reuse of dialyzers. The otheris the likely growth in alternative treatmentmodalities.

As noted earlier, reuse has been growing in theUnited States. Given the cost savings associatedwith reuse and the current consensus that reuseis indeed safe when proper procedures are fol-lowed, this growth will probably continue. Theultimate extent of the practice is difficult to assess.Although statistics for Europe show some declineover time in the percentage of patients reusingdialyzers, these statistics are based on an expand-ing patient base and may reflect additional single-use cases rather than any discontinuation of reuse

ket power, buyers were both prepared and moti-vated to take advantage of the manufacturers’dilemma. Buyers, too, have been under pressure—in this case from Federal Government insurers—tocontrol the costs of treatment, Reuse was one po-tential source of cost savings. More active bar-gaining with suppliers was another.

There is some support for the notion that buyerpressures to reduce prices may matter. That liesin the diversity of prices paid by various buyers.GAO, for example, notes in its survey that Medi-care paid $12.70 more per dialyzer session for sup-plies than did the Veterans Administration (105).Informal discussions with users and various mar-ket surveys suggest that prices of new dialyzersmay vary considerably among customers (79).The data in table 13, which show some variationin actual prices, despite relative stability in offi-cial list prices, support such a view (68). Thus,there appears to be some scope and potential forbargaining by buyers.

(41). Certainly, there is room for further increasein reuse in the United States.

The dialyzer market will also be affected by ex-pected changes in the mix of treatment modalitiesfor patients with ESRD. Most projections showa slowed rate of growth in the number of patientson dialysis (46,79). If transplantation possibilitiesimprove, this growth will be further slowed. Onthe other hand, any broadening of the criteria forplacing patients on dialysis would increase the pa-tient population.

Within the dialysis population there is likely tobe continued movement toward continuous am-bulatory peritoneal dialysis (CAPD). A recent in-vestment study predicts that 19 percent of thepopulation will be on this modality within thenext 3 years (46). Other treatments such as hemo-filtration may also gain in popularity. Hemofiltra-tion involves separating a patient’s blood, byfiltration rather than dialysis, from fluids bear-

———-——

ing waste products. The fluids are then replacedby other sterile liquids. The process is less time-consuming and is apparently better tolerated bysome patients (61). As of 1982 about 1.6 percentof European patients were on hemofiltration (50).One study suggests that if technical problemsassociated with cost efficient replacement of fluidsare solved, hemofiltration could account for asmuch as 30 percent of the world market within5 years (4).

This combination of factors points to continueddownward pressure on the demand for new dia-lyzers. This pressure maybe particularly acute forcoil dialyzers, which seem likely to continue theirmarked decline. Sales of parallel plate dialyzers,although generally superior in performance tocoils, will also likely decline, mainly because ofa continuing preference for hollow fibers. Thehollow fiber dialyzer, because of its performanceproperties and its attractiveness for reuse, shouldcontinue to dominate the market. One studyjudges this the “only viable dialyzer market seg-ment” (79). It probably will fare the best amongdialyzers but still suffer declines in absolutevolume.

These factors, along with continued buyers’concern for cost control, should maintain pricesand profit margins at their present apparently lowlevel. Many observers expect this pressure to leadto a “shakeout, ” with weaker firms forced fromthe industry (46,79). To the extent that over-capacity and competition are reduced, a shakeoutcould lend support to prices. Some suggest thatthe result might be a return to higher, monopoly-like prices (35). Although the high degree of mar-ket concentration suggests potential ability fortacit price coordination, the probability of a moveto near-monopoly prices seems low. The adversedemand conditions, the potential opportunities(albeit perhaps only moderate) for entry, and thediverse character of firms and their objectives, allwould work against such an occurrence (80). Con-tinued reductions in production costs would fur-ther contribute to anti-monopoly pressures (79).

New Directions for the Companies

Although the dialyzer market shows reducedprofit potential, other segments of the marketseem to be attracting considerable interest amongmanufacturers. Discussions with members of theindustry, as well as studies by investment firms,suggest a number of areas where substantial po-tential exists, particularly in peritoneal dialysis,and especially in CAPD.

Although there is still a great deal of clinicaluncertainty about CAPD, most observers, asnoted earlier, are expecting an increase in its use.At present the market is dominated by BaxterTravenol, which in 1982 had more than 90 per-cent of market sales (46). Profit from these salesappears quite high. One report estimated the com-pany’s profit in 1982 to be $80 million on $100million of sales of CAPD solutions and supplies(39). Evaluations of the company’s stock cite itspresence in the CAPD market as a key reason foroptimism about the company’s future prospects(5,46,47). Such potential has not gone unnoticedby other companies. For example, Abbott Labsis making strong efforts, and firms such as Gam-bro, which are established in hemodialysis, areentering the CAPD market as well (5,61).

Much of the success of the CAPD market maydepend on technological development. While re-search continues on the effectiveness of the mo-dality, manufacturers are trying to develop ster-ile connection devices aimed at lessening theincidence of peritonitis, a major concern withCAPD (4,46). Although uncertainties about thescope of the market abound, it is likely that thissector will become increasingly competitive.

Just as one response to the threat posed byCAPD is to enter that part of the market, com-panies may respond to reuse by entering the mar-ket for automated dialyzer reprocessing equip-ment. The success of such equipment will dependnot only on its efficiency but on the ultimatecourse of dialyzer reuse. However, companies in

this field may also be attracted by potential inother markets where “disposable,” such as cath-eters, are also reused. A recent business publica-tion lists a number of companies in the field (39).Only one, Renal Systems, actually showed up asa seller in tables 8 to 11 in chapter 4, and its salesare quite small. However, such a market wouldconstitute a natural extension for dialyzer manu-facturers.

Another major area of interest is hemofiltra-tion. As noted earlier, some analysts expect thistreatment to become increasingly popular. Gam-bro has shown particular interest here (4,61).Various companies are also looking to applyelsewhere the technological knowledge developedin their ESRD activities. Expertise gained in deal-ing with dialyzer membranes and dialysis systemsmay prove useful elsewhere. Gambro and other

companies, for example, are doing research onplasmapheresis, a process in which blood is sepa-rated into its cellular and plasma components bya process of filtration. The technique has poten-tial applications in treating disorders of the auto-immune system, such as myasthenia gravis andhypocholesterolemia (61).

Also related is work on hemoperfusion, whichinvolves the circulation of blood outside the bodythrough an activated charcoal cartridge. By aprocess of adsorption, various toxic substances,such as those associated with a drug overdose,can be removed (61 ). While most of the dialyzercompanies have already diversified throughoutthe health care field, the potential for develop-ments and applications in other areas is sig-nificant.

—

6 .

Policy Issues

6 ■

Policy Issues

Developments in the industry have been greatly tients with equipment and disposable grew withinfluenced by a number of Federal policy deci- this population.sions. Most notably, the decision to extend Medi-care coverage to end-stage renal disease (ESRD) At present, policy debates continue on a num-patients regardless of age set off a dramatic chain ber of issues of critical importance to the marketof events. The population of beneficiaries grew as well as to the patients. The following three sec-from roughly 11,000 at the onset of the program tions consider the three major policy areas: reim-to 77,000 today. The industry supplying these pa- bursement, research, and dialyzer reuse.

REIMBURSEMENT POLICY

In May of 1983 the Department of Health andHuman Services issued final rules for new reim-bursement rates for the ESRD program (93). Thesenew rules have caused a great deal of controversyand are expected to have important effects on theindustry. This section considers these new rules,discussing their historical antecedents, their formand rationale, and their possible effects.

History of Reimbursement

As dialysis techniques for treating chronickidney failure were developed in the 1960s, ef-fective treatment of the life-threatening disease be-came a possibility. Unfortunately, resources werescarce and treatment choices, often involving lifeor death decisions, had to be made. In responseto this dilemma, the U.S. Bureau of the Budgetin 1967 created a Committee on Chronic RenalDisease. The committee, known as the GottschalkCommittee, was charged with developing recom-mendations to deal with these problems. It issueda recommendation that (94):

. . a national program be initiated for the treat-ment of end-stage renal disease with the aim ofproviding, at the earliest possible date, treatmentin the form of chronic dialysis and/ or transplan-tation for all the American population for whomit is medically indicated.

The committee suggested that the program befinanced by amending the Social Security Act “tocover the permanently disabled regardless of age”(94).

From the late 1960s until 1972, over 100 billswere submitted in Congress to deal with the ESRDproblem (73). However, it was not until 1972 thatthe issue was fully addressed. Section 199I of theSocial Security Amendments of 1972 extendedMedicare health insurance coverage to those peo-ple under age 65 suffering from chronic renal dis-ease and requiring dialysis or transplantation. Theeffective date for the coverage was July 1, 1973(108). As of 1982, the program covered about 93percent of the ESRD patient population (20).

In establishing the actual reimbursement levelsfor dialysis under Medicare, the Social SecurityAdministration’s Bureau of Health Insurance hadlittle to go on. The non-Medicare medical mar-ket varied widely in reimbursement practices (72).The decision was made to pay 80 percent of theaverage cost to a hospital-based facility or 80 per-cent of the reasonable charges for a free-standingfacility, up to a “screen” or limit, of $133 per treat-ment. If routine laboratory services were includedin the facility’s costs, the screen was raised by $5;if the supervisory services of a physician were in-cluded in the facility’s costs, the screen was in-creased by $12 more to $150. These rates werein effect from 1974 until just recently when theywere supplanted by the new rates discussed below(108).

In 1982, prior to the new rules, nearly all free-standing facilities were being paid at the rate of$138 per treatment (the $133 plus $5 laboratorycharge) (20). Most hospital-based facilities re-

.34

quested and were granted exceptions to the screen,on the grounds that their costs were higher; andthe average payment to hospitals had risen by1980 to approximately $159 per treatment (110).

Under the previous system, physicians couldchoose from one of two systems of payment, theinitial method and the alternative reimbursementmethod. Under the initial method, reimbursementfor supervisory care was paid to a facility as partof its reimbursement rate, as mentioned above.The physician was then paid by the facility forthese supervisory services. Other nonsupervisoryservices were paid on a fee-for-service basis.Under the alternative reimbursement method,physicians were paid a comprehensive monthlyfee per patient. For patients dialyzed in facilities,the fee was based on a calculation of the custom-ary 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 re-flect the presumed lower physician service re-quirements of patients on home dialysis. This feecame to an average of $154 per patient per monthin 1982 (20,110).

These payments to physicians and facilities re-flect payments under the patients’ Medicare cov-erage. Patients have been enrolled under Parts Aand B of the Medicare program. Part A (Hospi-tal Insurance) covers, with some benefit limits,the reasonable and necessary services received ina participating facility. These would include in-patient dialysis. ESRD patients generally receivedialysis on an outpatient basis. This is coveredby Part B (Supplemental Medical Insurance).ESRD beneficiaries pay a monthly premium andare entitled to payment of 80 percent of reason-able charges or costs above a deductible. Physi-cians’ fees are paid on the same basis. Patients areresponsible for the remaining 20 percent of charges.However, most patients are privately coinsuredfor this 20 percent, and hospital facilities oftenwaive the 20 percent for those who are not (64).

Home dialysis has been covered under this samebasic arrangement. Medicare pays 80 percent ofacceptable costs for supplies and equipment andphysicians’ services, above the deductible. Someinequities in defining supplies were corrected early

in the program so as not to penalize home dialysispatients (72). Then, in 1978, passage of PublicLaw 95-292 offered another incentive. If the pa-tient obtained home dialysis and equipment froman approved facility that reserved the equipmentfor the exclusive use of patients on home dialysis,the reimbursement rate would be 100 percent. Atthe same time the law set a target rate for homedialysis reimbursement to facilities of no morethan 70 percent of the national average paymentfor in-facility dialysis. The target rate did notapply to CAPD but notably did include paymentfor home dialysis aides. (The 70 percent limit wasraised to 75 percent by the Omnibus BudgetReconciliation Act of 1981 (108)).

Kidney transplantation is paid for by both partsof Medicare. Hospital insurance (Part A) coversvarious inpatient hospital services associated withthe transplant. This includes the cost of obtain-ing a suitable kidney, Coverage also extends tothe care of a patient who donates a kidney. Thesurgeon’s services are covered by Part B. Afterthe deductible is met, Medicare medical insurancepays 80 percent of the recognized charges for asurgeon’s services (108).

The New Reimbursement Rates

The costs of the ESRD program have increaseddramatically. From $229 million in 1974, expend-itures rose to about $1.8 billion in 1982 ($1.2 bil-lion in constant 1974 dollars) (20). This continuedgrowth has generated considerable concern, eventhough, as Rettig has pointed out, the increase wasdue more to an increased patient population,which more than tripled over this period, thanto an increase in costs per patient (72).

A major impetus for change was the passageof the End Stage Renal Disease Amendment of1978 (Public Law 95-292). As noted above, a ma-jor purpose of the law was to increase incentivesfor home dialysis. In addition, section 1881 of thelaw directed that a system be established for “pro-spectively set” reimbursement rates. Implemen-tation of this provision proved rather time-con-suming. In 1979 draft regulations were developedproposing a single rate for outpatient dialysis cov-ering both hospital and free-standing facilities.

However, in 1980 the Health Care FinancingAdministration (HCFA) proposed a dual rate sys-tem, one for hospitals and a different one for free-standing facilities. This proposal was a recogni-tion of the difference in payment rates that haddeveloped from Medicare’s practice of grantingto hospital facilities of numerous exceptions to thepayment screen (73). Although the Reagan Ad-ministration indicated in 1981 some preference fora single rate, a final compromise, the OmnibusBudget Reconciliation Act of 1981 (Public Law 97-35) indicated preference for a dual composite rate:one rate for hospitals and one for free-standingfacilities, but each would apply whether patientswere dialyzed in the institutional setting or athome (73,108).

By early 1981, the Department of Health andHuman Services had developed specific proposedrates. The reimbursement rate was to average$132 for hospital-based facilities and $128 for free-standing facilities. Rates would be allowed to varyto reflect local labor costs. As a result, paymentscould vary from a low of $114 to a high of $148for hospitals and from $109 to $143 for free-standing facilities (20,93).

The method by which these figures were gen-erated is illuminating. In response to the 1978 leg-islation HCFA conducted audits of 38 free-stand-ing facilities and 67 hospitals. Median cost perin-facility dialysis treatment was estimated at $108for free-standing facilities and $135 for hospital-based facilities. In response to the 1981 legisla-tion calling for composite rates, audits were thenconducted on 25 large home dialysis programs.From this audit a median cost of $97 per treat-ment was estimated. These costs were then weightedby the percentage of patients estimated to bedialyzing in-facility and at home. The hospital ratewas then raised by $2.10 “to account for an appar-ent excess in hospital overhead costs resultingfrom Medicare hospital accounting requirements. ”Then 5 percent more was added to hospital coststo account for “the possibility that the method-ology used may have failed to recognize fully thelegitimate costs of hospitals or shortcomings inthe audited data” (20).

For physicians the proposed changes eliminatedthe initial method of payment and modified the

alternative reimbursement method. The paymentwould be the same for in-facility and home pa-tients and was calculated as a weighted average.For patients, one direct change was to eliminatethe 100 percent reimbursement option for homedialysis equipment. However, as is suggestedbelow, indirect effects could be more substantial.

In congressional hearings in 1982, critics pointedout various perceived problems with the proposals(110). Opponents criticized the quality of theaudits, the sample size, the underlying assump-tions, the philosophical rationale, and much else.Overall, HCFA received 507 petitions and 4,265comments on the rules, 3,675 of these from pa-tients (93). The statistical procedures underlyingthe calculations did seem suspect. Partly in re-sponse to that, HCFA pledged additional audits.Nevertheless, the final rules, which were publishedin the Federal Register on May 11, 1983, a n dwhich became effective August 1, 1983, showedvery little change from the proposals. The aver-age reimbursement rates of $131 for hospitals and$127 for free-standing facilities were $1 lower thanthose stated in the earlier proposal. However, thisdifference simply reflected updated informationon the geographical wage differentials that wereused in rate calculations (93).

Effects of the Rates

The legislation mandating new rates spoke oftheir “prospective” nature. Fixed rates are designedto encourage facilities to control costs. Any ex-cess of the rates over incurred costs can be keptby the facility; any deficit in costs must be ab-sorbed. In addition, the composite nature of therates is meant to create an incentive for move-ment toward increased home dialysis. HCFAbelieves that as many as 40 percent of the ESRDpopulation could be on this presumably less ex-pensive modality. Indeed, Carolyne Davis, theAdministrator of HCFA, stated that “the promo-tion of this incentive is the most important ob-jective of the 1981 legislative provisions and ofour regulations” (20).

Thus, the regulations are aimed at providingsome overall cost-control incentives and at shift-ing treatment to the home setting. In neither case

is this motivation entirely new. A screen on Med-ical payments for dialysis treatment has been ineffect 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 fa-cilities were enjoying an operating profit of about$30 per treatment. Cost reductions could havebeen translated into profits for these facilities,precisely as called for in a prospective reimburse-ment system. For hospitals, of course, the screencould be circumvented by the exceptions process.Nevertheless, although Administrator Davis de-scribes the previous system as cost-based (20), thescreen did at least impose some administrativediscouragement to increasing costs. Apparently,it has made some contribution toward shifting pa-tients toward the more cost-efficient proprietaryfacilities. Rettig argues that the screen was “im-aginative” and “the primary reason for steady per-patient costs” (72). HCFA’s plans to be stricter ingranting exceptions (93) should enhance thescreen’s effects.

The incentive for home dialysis is in somerespects ironic. In 1972 home dialysis was thechoice of approximately 40 percent of the patients,but the initial Medicare regulations discouragedit, contributing to the relative decline in this treat-ment choice (72). The 1978 legislation was a clearmove toward providing a home incentive. Thenew regulations also encourage it but in a some-what different fashion.

A rationale for discussing reimbursement in thisreport is the expectation that reimbursement rateswill, by affecting patient and provider behavior,affect the dialysis equipment and disposable mar-ket. This section considers effects by evaluatingthe likely responses to the rules’ objectives of en-couraging cost control overall and home dialysisin particular.

Cost Control

A prospective reimbursement system providesan incentive to reduce costs. One way to reducecosts is by lowering the costs of materials andequipment used in the dialysis process. Anotheris to reduce labor costs, Providers can reduce theircosts by pressuring manufacturers to lower theprices they charge, There may be some oppor-

tunities here, through strenuous bargaining orforming cooperative buying ventures. GAO sug-gests that HCFA might negotiate with suppliers(105). If such efforts did lower prices overall, thencosts to providers would, of course, decline ac-cordingly.

Manufacturers naturally could suffer from suchdevelopments. Profits, especially in areas such asdialyzers, are apparently being squeezed. In fact,those providers paying high prices may be in ef-fect subsidizing other activity. Continued buyerpressure on prices will undoubtedly contribute tothe predicted industry shakeout.

Such cost-reduction pressures may be viewedperhaps more positively as providing an incen-tive for innovative advances. Rettig, for exam-ple, cites the development of large surface areadialyzers, which increase the surface area exposedto the blood, reducing required time on dialysisand thus providers’ costs, as a technical changethat may have been prompted by Federal Gov-ernment cost-control efforts (72). More generally,a recent study notes that prospective reimburse-ment systems have provided hospitals with amoderate incentive to adopt cost-saving innova-tions (75), Such concerns about costs offer a usefulsignal to manufacturers (53).

Materials costs can also be reduced by increasedreuse of dialyzers. The key impetus behind reuse,of course, has always been the effort to controlcosts, Despite medical claims that reprocessingmay actually lead to salutary medical effects, costconsiderations are likely to remain the forcebehind this practice. It appears that as long as cur-rent professional opinion remains generally sup-portive of carefully controlled reuse (e.g., Sadler,1983 (77)), reimbursement pressures will make thepractice increasingly attractive to providers,

Note that this may be especially true since reusewas not explicitly considered in the HCFA costcalculations and no adjustments were made to re-flect reuse. The HCFA did note that 25 percentof the independent facilities examined reuseddialyzers while only 1 percent of the hospital-based facilities did. It was further suggested thatdialyzer reuse does contribute to the cost dif-ferences 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 dialyzermarket were discussed earlier in this report. Thepressures generated from reuse could, however,provide a special incentive to manufacturers.Manufacturers insist that today’s dialyzers weredesigned for single use only (117). Yet reuse is afact. Cost pressures may stimulate design changesthat enhance the efficiency or reduce the costs ofreprocessing.

Another potential source of cost savings is la-bor costs. Labor probably constitutes 50 percentor more of the cost of dialysis treatment (91).Thus, reductions in labor costs could generateconsiderable savings. A potential reduction in la-bor has been the cause for some concern that carewill be shortchanged. The American Associationof Nurses and Technicians, for example, expressesa fear that the useful services of social workers,dietitians, and nurses will be reduced (3).

The effects on the dialysis equipment and sup-plies industry of such actions are not clear-cut,but are probably not detrimental. Labor, equip-ment, and supplies are to some extent substitut-able. As has occurred elsewhere, automation maysubstitute for certain labor requirements. This, ofcourse, would have positive effects on the pro-ducers of the automated equipment. With reuse,there is a complex interaction at work. Reuse doesseem to raise a facility’s labor costs (e. g., by re-quiring extra handling of dialyzers) while it re-duces material costs. At the same time automateddialysis machines could reduce some of these la-bor requirements.

Input costs could be reduced by a facility’sfocusing on “healthier” patients. “Sicker” patients,with special medical problems, require more la-bor, more care in general. The possibility that hos-pitals’ higher costs are due to their “sicker” pa-tients case mix has been debated. Only limiteddata are available and they are subject to alter-native interpretations. However, a recent studyby Plough, et al., does suggest that the case mixin hospital-based facilities includes more severecases than those in free-standing facilities (69) (seealso, (53), (109), and (110)).

Incentives for Home Dialysis

As noted above, a major objective of the newreimbursement plan is to encourage home dialysis.Under the previous system, the expenses for homedialysis were reimbursed according to the actualcosts incurred. This was the case whether patientsdealt with suppliers directly or through a facil-ity. For facilities, the composite rate now providessome incentive for encouraging this modality.Cost data generally suggest that home dialysis is,on the average, less costly per treatment thandialysis in facilities. Recalling the figures presentedearlier in the case study, home hemodialysis isclearly less costly in terms of direct outlays be-cause of the time required for unpaid aides. Sim-ilarly, CAPD, a popular home modality, appearsless expensive if the costs of patient hospitaliza-tion are not included. Since hospitalization costsof this sort are funded under Part A of Medicare,they pose no rate-based disincentive to homedialysis. Thus, on balance, if patients affiliatedwith a facility are moved to home hemodialysisor CAPD, the hospital has an opportunity to re-ceive a surplus.

The objective of the changes proposed in phy-sician reimbursement was essentially to eliminatethe disincentive to home dialysis in the preexistingsystem, where physicians were reimbursed lessunder the alternative reimbursement method forhome patients than for in-facility patients. Thispayment differential was based on the view thathome patients required less of the physicians’ time.Under the compositive alternative reimbursementmethod, physicians’ fees are independent of loca-tion, and there is no longer any direct financialreward for setting treatment in the facility.

For patients the situation becomes rather com-plex. Under the new rules patients may still chooseto buy their own supplies and be reimbursedunder the prior procedures. However, the newplan eliminates the option to receive 100 percentreimbursement for purchase of a home dialysismachine, Furthermore if home patients now pur-chasing on their own do choose to operate throughthe facility, they would risk being responsible for20 percent of a fixed amount that is higher then20 percent of the home dialysis costs they are now

incurring. Yet HCFA has suggested that one ob-jective is to direct home patients into affiliatingwith and receiving all equipment and suppliesfrom a facility (20,87). If there is indeed a profitmargin for facilities from home patients, facilitieswould have an incentive to encourage patients tobuy through them. Moreover, greater volumepurchases may enable the facility to bargain forlower prices from suppliers. One industry sourcesuggests that, as a result, the percent of patientsdealing directly with suppliers on an assignmentof benefits basis should fall from approximately70 percent today (105) to less than 10 percentwithin 1 year (91).

Under the new plan, the patient has no extrafinancial incentive and perhaps even weaker in-centive than previously for home dialysis. The po-tential profit incentive built into the compositeprospective rate is not for patients. This is quitedifferent from, say, a voucher type system, inwhich the patients, rather than the facilities, areallocated a fixed dollar amount and then giventhe option of choosing a treatment from amongcompeting alternatives.

Overall, the strongest incentive for home dia-lysis belongs to the facilities. This is important,

RESEARCH POLICY

The research activities of the Federal Govern-ment have played an important part in the de-velopment of knowledge on the causes and treat-ment of ESRD. The National Institutes of Health(NIH) funded early work on maintenance dialysisand supported research on transplantation as well.The Veterans Administration (VA) and the Pub-lic Health Service provided resources for the dem-onstration of maintenance dialysis therapy. Theresearch support continues today, but some dif-ficult policy issues are evident.

The primary source of research on kidneydisease-related research is NIH. Within NIH, theinstitute doing most of this research is the NationalInstitute of Arthritis, Diabetes, and Digestive andKidney Diseases (NIADDK), formerly the Na-tional Institute of Arthritis, Metabolism, andDigestive Diseases. Other institutes also support

of course, and should create some movementtoward increased home dialysis. What effectswould this have on the industry? If the movementwere simply from in-center hemodialysis to homehemodialysis, the effects would probably be toincrease sales. Equipment and disposable require-ments would be technically similar. However, pa-tients at home would not be able to share ma-chines as would be the case in facilities. Withoutthis opportunity to economize on machines, moremachines would be demanded for any given pa-tient population.

However, most new home patients are choos-ing CAPD (14), This has led many analysts to pre-dict significant growth in this market. Firms suchas Baxter Travenol that have a firm foothold inthe market may gain at the expense of others thatdo not. At the same time, many firms focusingon hemodialysis will be encouraged to diversifyinto CAPD products (47,79). Depending on therelative success of the firms, changes in industrystructure are certainly possible. Much, of course,will also depend on how present uncertaintiesabout CAPD’s cost and clinical efficacy are re-solved.

kidney-related research as it relates to their specialresponsibilities. These include the National Can-cer Institute, the National Heart, Lung, and BloodInstitute, the National Institute of Allergy and In-fectious Diseases, the National Institutes of Den-tal Research, the National Institute of ChildHealth and Human Development, and the Divi-sion of Research Resources. Overall, the totalamount spent on kidney-related research was esti-mated at about $90 million in 1982 (78). Thismight be compared with the approximately $73million spent by NIH on kidney and urinary dis-eases in 1979 and the $47 million spent in the areain 1976 (101).

This research would be expected to have somelong-term effects on the incidence and treatmentof ESRD. Perhaps a clearer idea could be obtainedby focusing attention on NIADDK, whose over-

all contributions to improving dialysis treatmentappear to be significant. According to testimonybefore Congress by the institute’s Acting Direc-tor, Lester Salans, in 1982, NIADDK’s activities“have produced, directly, or indirectly, most ofthe innovations and developments which under-gird today’s maintenance dialysis treatment . . .“(78). The list of these innovations presented intable 14 is impressive. Certainly, these develop-ments have had an effect on the equipment mar-ket, particularly the dialyzer market, for NIADDKcontributed to the development of the hollow fi-ber dialyzer.

An examination of trends in funding, however,suggests that NIADDK’s direct contributions tothe market are likely to decline. Table 15 showsfigures for 1979-83 for the Chronic Renal DiseaseProgram, a subdivision within NIADDK’s Kidneyand Urologic Diseases Program. After an adjust-ment for inflation, overall spending for the ChronicRenal Disease Program fell by roughly 12 percent.In the area of maintenance therapies, which in-cludes applied research on hemodialysis, peritonealdialysis, hemofiltration, and other aspects of ther-apy, research fell by 83 percent from 1979 to 1983.Furthermore, within NIH as a whole, maintenancetherapies took up only about 6 percent of theESRD-related research (119).

●

●

●

●

●

●

●

●

●

●

Table 14.— Innovations in Dialysis TreatmentAttributed to the National Institute of

Arthritis, Diabetes, and Digestiveand 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 pa-tients.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 bonepain and bone fractures in patientsDevelopment of treatment measures for chronic anemiai n patients.Development of concept of hemofiltration.

SOURCE Adapted from L B Salans Acting Director, National Institute of Arthntls Diabetes, and Dlgestlve and Kidney Diseases Nahonal Institutesof Health test Imony at hear! n g The Errol Sfage Renal Dseases Program (Parl 2— Treatment Standards and Methods) before the Subcommlttee on Government Operations U S House of Representatives Apr28 1982 (Washington DC U S Government Prlntlng Off Ice, 1982)

This decline in dialysis research appears quiteconscious. Congressional testimony puts forwardthe view within NIH that needs are changing. Par-ticularly noteworthy is the “movement . . . of in-dustry into this [dialysis] field. ” Given the researchbase provided by NIH, the view holds, privateindustry is now ready to take the major respon-sibility for research in dialysis. Thus, NIH be-comes able to focus more heavily on alternatives,such as the underlying causes of the disease andon transplantation. Along with this shift comesan emphasis on investigator-initiated research anda reemphasis on contracts aimed at particular pro-grams (78).

To many observers, such as Blagg, the resultis a “deficiency in dialysis research” (12). Theycan point to various projects with worthwhile ob-jectives that cannot be accomplished because ofa lack of funds. They can also point to successesof the sort referred to in table 14 to indicate thatpast federally funded research in dialysis has beenfruitful. For industry, the change in emphasis isimportant. The NIH research has served as auseful complement to the industry’s own researchand development (R&D) activities. As the Fed-eral research contribution in this area diminishes,industry will probably find its own research ef-forts in dialysis becoming more costly.

From an economic perspective, expenditures ondialysis research have to be compared with alter-native uses of these funds. A choice must be madeas to how much to spend on all research overall,then which specific project should receive fund-ing. Rarely is there adequate quantitative infor-mation on benefits and costs on which to makethese judgments. In the absence of such informa-tion it is appropriate to rely, as NIH has, on thescientific community for judgments on whichprojects have scientific merit and on Congress andthe executive branch for judgments as to whichprojects have special social merit.

This is a complex but sensible method fordeciding research priorities. However, the situa-tion in dialysis is complicated by assumptionsunderlying the NIH decisions. NIH is suggestingthat research on dialysis may indeed be worth-while but that industry can be expected to stepin 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

P a t h o p h y s i o l o g y

T r a n s p l a n t a t i o n

Maintenance

t h e r a p i e s . , . ,

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 . 2 2 1 , 5 9 6 + 1 0 8 + 4 6

1 , 9 3 3 , 5 9 0 21 2 , 6 5 2 . 6 0 1 3 4 3 , 4 8 8 , 2 6 5 4 2 3 , 9 1 5 , 7 0 9 4 4 4 , 4 2 8 . 6 6 2 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 EconomicAnalysls 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 expectat ion? In some respec tsit is. If, as NIH asserts, a strong technological basehas already been provided, then industry may beexpected to perform the development work re-quired for commercializing worthwhile new tech-nologies. Nevertheless, a diminishing NIH re-search base is apt to be viewed by firms as offeringdiminishing attractive commercial opportunities.A further difficulty is that an industrial firm willmake judgments on R&D based on the expectedreturn to the firm rather than on the overall valueof the innovation to society. As various authorshave suggested (e. g., (6) and (56)), there are nu-merous projects where the returns to society maybe high but where the returns to the private firmmay be so low as to make the project unattrac-tive. This results because an innovator is gener-ally unable to appropriate fully the gains of aninnovation. As the market reacts to these innova-tions, competitors and even customers manage tosecure for themselves part of these gains.

The end result is that private firms may, froma social perspective, underspend on R&D and maychoose a socially suboptimal mix of R&D projects.Policies to correct this problem need not, in gen-eral, include direct Government grants for R&D,but they may involve various other incentivessuch as tax breaks. However, for some studies,particularly those of an evaluative nature, poten-tial conflicts of interest may call for direct Gov-ernment involvement. For example, clinical trialsof hemodialyzer reuse or of CAPD may be more

valuable and widely accepted if funded by impar-tial sources. And further, such purely evaluativestudies are apt to be especially characteristic ofprojects where the benefits to society are wellbeyond what the firm is likely to gain for itself.

A related difficulty here is the potential for dif-ferences of opinion among Government agencieswith respect to who should fund particular re-search. An example is the controversy, discussedin congressional hearings in 1982 (107) as to whichagency, HCFA or NIH, should fund research onreuse of hemodialyzers. NIADDK had funded astudy, completed in June 1981, on multiple use(see (22)). However, in the testimony, the Insti-tute’s view is expressed that, because the issue hadnow emerged as primarily one of economic im-pact, HCFA would be best suited to fund addi-tional clinical trials; HCFA, on the other hand,viewed its research role as purely economic and“appropriate only after clinical issues have beenresolved” (119).

An intradepartmental ESRD workgroup set upto help resolve such differences subsequently rec-ommended that the Food and Drug Administra-tion be given the responsibility for the clinicaltrials (20,40). Meanwhile, many questions aboutreuse remain unanswered. This example suggeststhat an appropriate Government research pro-gram in ESRD should clearly delineate not onlyresearch objectives but also research responsi-bilities.

DIALYZER REUSE AND THE FEDERAL GOVERNMENT

Federal Government policies have had an im-portant influence on the practice of reuse ofdialyzers. These policies include the reimburse-ment policies discussed earlier, which provide in-centives for cost control and, thus, cost-savingtechniques such as reuse. However, other policieshave had a more direct influence. These includefunding of research on reuse and actions relatedto the regulation of medical devices.

Various research efforts that deal with reusehave been supported by Federal funds. For exam-ple, the Artificial Kidney-Chronic Uremia Pro-gram within NIH sponsored work on the reuseof coil dialyzers (e. g., see (85)). This study con-cluded that reuse of coils did indeed appear safeand cost effective. The National Institute of Ar-thritis, Metabolism, and Digestive Diseases alsopartially 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 workevaluated reuse of coil and hollow fiber dialyzersunder various conditions.

In 1978 Congress passed an amendment to theSocial Security Law (Public Law 95-292) requir-ing the Secretary of Health and Human Servicesto conduct a “study of the medical appropriate-ness and safety of cleaning and reusing dialysisfilters by home dialysis patients. ” Subsequently,NIADDK did sponsor a study evaluating dialyzerreprocessing (see (22)). The Centers for DiseaseControl also did work that indicated that reusewas not associated with the increased incidenceof hepatitis B infections among dialysis patientsand staff (see (28)). Thus, the Federal Governmenthas contributed to the development of knowledgeon reuse. The Federal Government’s interest inreuse remains high. However, as noted in the pre-vious section, there are differences of opinion asto which Federal agencies will support or conductthe research.

A key role in the history and future of reusebelongs to the Food and Drug Administration(FDA). This role is associated with the FDA’s reg-ulatory functions under the 1976 Medical DeviceAmendments to the Food, Drug and CosmeticsAct. These amendments give FDA authority toregulate medical devices in order to assure thatthey are safe and effective. The regulations applyto all medical devices and in general appear topose no special or unusual problems for dialysisequipment. Reuse is affected because regulatoryauthority extends to dialyzers and to equipmentutilized in dialyzer reprocessing.

As noted earlier, most dialyzers are labeled bythe manufacturer as being for single use. Underthe regulations, any relabeling would require themanufacturer to seek FDA approval. Given theextensive clinical experience with reuse, the FDAmay eventually determine that specific dialyzers,when reprocessed according to rigorous reproc-essing procedures provided in the manufacturer’slabeling, are as safe and effective as dialyzers notpreviously used (113). Although FDA’s responsecannot be assured and seeking FDA approvalwould involve some administrative expenses,manufacturers’ reasons for not seeking to relabelstem largely from considerations other than FDA.

One may simply be their belief that reuse is med-ically inappropriate. Another reason may be con-cern about the market’s reaction: Relabeling maystimulate even further the practice of reuse andcontribute to declining demand for new dialyzers.Finally, manufacturers may have concerns aboutproduct liability, Labeling a dialyzer as suitablefor reuse could make manufacturers liable for anydamages to a patient from reuse. However, al-though the legal situation is potentially complex,manufacturers do have reason to know that dia-lyzers are reused and, thus, maybe liable regard-less of labeling (36).

Of course, regardless of the labeling, reuse hasbecome a common practice. The FDA is obviouslyaware of this. Its position regarding reuse ofdialyzers (and other disposable) was stated in apolicy guide for field staff issued in 1977 andrevised in 1981 (99,100). The FDA indicates that“the user should be able to demonstrate that a de-vice considered for reprocessing can in fact be ade-quately cleaned and sterilized without affectingthe characteristics and qualities of the device and,moreover, that the device will remain safe andeffective for its intended use. In addition the in-stitution or practitioner who reuses the disposabledevice must bear full responsibility for its subse-quent safety and effectiveness” (116).

Although the FDA “neither condemns nor con-dones dialyzer reuse” (116), it has made some ef-forts to contribute to the evaluation of the prac-tice. The FDA was one of the sponsors of aNational Workshop on Reuse of Consumables inHemodialysis in 1982. This workshop reached aconsensus for the development of guidelines forhemodialyzer reuse.

The FDA has also authorized the marketing ofan automated dialyzer reprocessing device. Underthe Medical Device Amendments, entirely new de-vices may be subject to premarket approval bythe FDA. However, if a device is “substantiallyequivalent” to a device marketed prior to theenactment of the amendments, then a manufac-turer can submit information required for pre-market notification (106). In this latter case theFDA will consider whether the device is similarto and as safe and effective as the preexisting de-vice. The reprocessing device was deemed sub-

———

stantially equivalent and allowed to be marketed.Such permission does not constitute FDA ap-proval of the device (116).

Overall, FDA response to reuse has been cau-tious. It recognizes that reuse is widespread and,from available evidence, not a hazard to the pub-lic health. At the same time it is reluctant to en-dorse formally a practice which most experts agreeshould be the subject of further clinical trials. TheFDA has chosen to monitor the activity and toemphasize the responsibility of providers to en-sure safety and effectiveness.

However, the literature on reuse suggests thatthe practice’s safety depends critically on thequality of the reprocessing. This suggests that in

the future FDA might want to step in to assurethat reprocessing is done appropriately. The man-ufacturing industry would be expected to be gen-erally supportive, since it has argued, as notedearlier, that clinics and hospitals reusing dialyzersshould be subject to good manufacturing practicesguidelines. This has not yet been done, but Cali-fornia has recently passed legislation requiring theestablishment of appropriate reprocessing meth-ods (44). Furthermore, if independent reprocess-ing service companies do become important, theymay be viewed as falling under GMP guidelines.As suggested earlier, however, this need not posea serious threat to the economic viability of suchreprocessing activities.

Appendixes

Appendix A.— Capsule Descriptions ofMajor Firms in the Industry

Abbott Laboratories

Abbott Labs is a large producer of various health-care products, including pharmaceuticals and nutri-tional products as well as laboratory and hospital in-struments. Total company sales were about $3 billionin 1983. As of 1980 its sales of dialysis products wereextremely small, but the company is moving into theCAPD market (5,79).

Asahi Medical Co.

This Japanese company is a subsidiary of the $3.5billion Asahi Chemical Co. It has been in the dialysisequipment market since about 1975 and began full-scale 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 theU.S. dialyzer market. The company’s licensing ar-rangement with Cordis Dow apparently preventedU.S. sales until 1983 (7,8,57,79).

Baxter Travenol Laboratories

This company is involved in producing a wide rangeof medical care products. Its renal and urological ther-apy product line represents about 20 percent of its totalsales of $1.7 billion (10). It is active in producing bothdisposable and equipment for hemodialysis. The com-pany has also made a strong effort in the CAPD mar-ket, where it has captured a 90-percent share (5).

BD Drake Willock

As of 1976, this company has been part of BectonDickinson, which now has over $1 billion in sales ofvarious medical, laboratory, and industrial equipment.The company has focused its efforts on equipmentrather than disposable. However, Becton Dickinsonhas expressed an interest in selling Drake Willock (11 ).

CD Medical, Inc.

CD Medical is the successor to Cordis Dow. Thecompany was created in 1983 when the Dow Chemi-cal Corp. purchased Cordis Corp.’s 50 percent inter-est in their joint venture, Cordis Dow, for $4 millionin cash and real estate (114 ). The company has beenengaged primarily in the production of hollow fiber

dialyzers, and, indeed, the joint venture was estab-lished in part as a mechanism to utilize Dow’s patentson hollow fiber technology. The company has experi-enced some difficulties, including some losses, in re-cent years (17,59,114,115).

Cobe Laboratories

Cobe entered the hemodialysis market in the late1960s. The company offers a complete line of equip-ment and supplies, and, indeed, has emphasized acomplete system approach in its marketing activities.It is focused in this market, with about three-quartersof its approximately $100 million in sales coming fromhemodialysis products (5,60).

Erika

Erika is a subsidiary of National Medical Care, thelargest provider of outpatient dialysis care through itsapproximately 180 centers treating more than 13,000patients (88). Erika produces and distributes a varietyof dialysis products to both its parent and unaffiliatedcustomers. Sales of artificial kidney products accountedfor about 13 percent of National Medical Care’s $295.5million in sales in 1982 (5,63).

Extracorporeal

Extracorporeal produces both disposables andequipment for hemodialysis. It is also integratedbackwards into the manufacture of membranes fordialyzers. Since 1978 it has been a subsidiary ofJohnson & Johnson, a large medical care productscompany with almost $6 billion in sales in 1983. Asof 1980, Extracorporeal represented only about 2 per-cent of the parent company’s sales (5,45,68,79).

Gambro AB

Gambro is an international company incorporatedin Sweden. Shares of the company are publicly traded,but close to 80 percent of the voting stock is controlledby members of the family of Holger Crafoord, aSwedish industrialist who founded the company in1965. Gambro is the world’s largest producer of hemo-dialysis and hemofiltration products, but its sales arewidely dispersed, with no more than 20 percent com-ing from any one country. It has had manufacturingfacilities in the United States for several years (61,68).

53

Hospal

Hospal manufactures dialyzers as a joint venture ofRhone-Poulenc and Sandoz Ltd. Rhone-Poulenc is amultibillion-dollar French company, nationalized since1982, that makes various chemical, pharmaceutical,and textile products. Sandoz Ltd. is Swiss and also hassales in the billions of dollars. Its activities range fromchemicals and pharmaceuticals to seed and food prod-ucts. Its pharmaceutical products include cyclosporine,which is used for transplant purposes (58,74).

Organon Teknika Corp.

This manufacturer of dialysis and other medicalproducts falls within a complex organizational struc-ture. The company is 50 percent owned by OrganonTeknika N. V., a subsidiary of Akzo N. V., a Dutchholding company, and Akzona, Inc., of the UnitedStates. Within the Akzo empire is also Enka, a majormanufacturer of membranes for dialyzers (2,57).

Terumo Corp.

Terumo is a Japanese-based multinational corpora-tion involved in the manufacture and sale of a varietyof medical products. Consolidated net sales of the com-pany were 62 billion yen (approximately $265 million]in 1981. U.S. operations include a sales office inCalifornia and a production facility in Maryland (90).The company is Japan’s second largest producer (behindAsahi) 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 excessof $3 billion. It is Japan’s third largest hollow fiberdialyzer producer (behind Asahi and Terumo) and isreported by Information Resources International asplanning 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 tub-ing is wound around itself, or “cc~iled, ” and a sup-porting screen separates the coils, The dial}’satepasses at a ~0 angle throu~h the space created bythe screen,

Concentration ratio: The share of market (>utput ac-c(>unted for by the largest firms in an industry —usual 1 y by the f~~ur largest. Higher values are in-dicative of greater c(]ncentrdtion of economic pclwerand less competitiveness.

Continuous ambulatory peritoneal dialysis (CAI’D):A form of peritoneal dialysis in which there is a con-tinuous manual exchan~e of dialysate from theperitoneal cavity.

Continuous cycling peritoneal dialysis (CCPD): A[or-m of perit~~neal dialysis in which a machinecycles the dialysate in and out of the peritonealcavity automat ically abc~ut every 4 hours overnightas 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} rsateis sepa ra ted from the pat ien t‘s b] ood by a wm i-impermeable membrane.

Dialyzer: A device used in hemodia]ysis. It consistsof a compartrnen t for the blood, a compartment t torthe dialysatc, and a sem impermeable membraneseparating the two. The three principal types arecoil, holl(~n fiber, and parallel plate.

End-stage renal disease ( ESRD ): A condition of irre-versible kidney fail ure. Without treatment, the dis-ease results in the pdt ient’s death.

Hemodialysis: A prc]cess by which blood is pumpedfrom the patient’s body int[~ a dialyzer and thenreturned to the body in a cent inuous extracorp(~rea]blood loop. While in the clialyzer the blood flowsnext to but separate from another fluid, a dia]ysate.The blo(d and the dialysate are separated from eachother by a semipermeable membrane. Via diffusionand osmosit, waste products and other moleculespass throush the semipermeable membrane and theblood can again take on its appropriate properties.

Hemodialyzer: See difzlyz~~r.Herfindahl index: A measure of economic market con-

centration. It is calculated by summins the squaresof the market shares of the firms in the market,Higher values of the index indicate a greater degreeof concentration and a less competitive marketstructure,

Hollow fiber dialyzer: A dialyzer containing thousandsof hollow fibers bundled within a compact CJJI in-der. Blood flows through the sernipertneable hollot<fibers while the dialysate passes outside the fibers.

Intermittent peritoneal dialysis (IPD): A for-m ofperitoneal dialysis in~olving intermittent treatmentthree t~~ four times per week. T~picall]rr the patientis dialyzed for about 12 hours on each treatment.

Parallel plate dialyzer: A dialyzer cc}nsisting of a stackof semipermeable membranes sandw’ iched betweensupport plates. Blood passe+ through the mem-branes while the dialysate passes in the oppositedirection through ~ro(~~es or spaces in the supp{lrtplate.

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 ab-domen and then dial}sate is entered thri~ugh thecatheter int~~ the perit(>neal cav i t~’. The fluid isallowed to remain tor vary ins peritxis {}f time, du r-ing which dialysis occurs across the semipermeableperitoneal membrane, I.ater, the dial}satc is drainedout through thr catheter iind disc~rded.

Peritonitis: An inflammation of the pcritonc(]m, thesmooth transparent serous membrane that 1 ines thecavity of the abdomen,

Prospective reimbursement: The setting of reimburse-ment rates prospectively, i c’., in adv~nce of the ac-tual pro~’ision of care. This is t<) be contrasted withcost-based or retr(wpective reimbursement, in whichrates reflect actual costs incurred,

Reuse : With respect to diall~sis, thi< ~~ccurs ti,hcn adialyzer, after its ori,qina] use, is reprocessec~r +tc}red,

and then used a~a i n on the same pat ien i, oftenmultiple times.

Transplantation: With respect t~> Lidne}r>, the trans-plant ing of a healthy kidney from a donor, ” li\’in8or recently deceased, in t () a patient ~i’ i t h k i d ne}’disease.

Glossary of Acronyms

CAPDCCPDESRDFDA

GAOGMPHCFA

IPD

—continuous ambulatory peritoneal dialysis—continuous cycling peritoneal dialysis—end-stage renal disease—Food and Drug Administration, Depart-

ment 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)ngressHealth and Human Services I<&I> research and development

NIH - National Institutes of Health, Department VA Veterans Administrationof Health and Human Set-vices

:\1:\1)1)1( "at ;"na l Digest ive anJ

tiona! ot HCJ lth and f-iurn,ln

,.1

Didbeks. Na-

of

:--J"lC Ol:\

I~& I)

National OHiu.:o/ Congress

Cart:' ,

Admin istration

Appendix C.— Acknowledgments andHealth Program Advisory Committee

——— — —— . ——-

Robert J, BritainFood and Drug AdministrationDepartment of Health and Human ServicesSilver Spring, MD

Dennis J. CotterProspective Payment Assessment CommissionWashington, DC

J. Richard CroutBoehringer-Mannheim Corp.Rockville, MD

Nancy B. CummingsNational Institute of Arthritis, Diabetes, and

Digestive and Kidney DiseasesNational Institutes of HealthDepartment of Health and Human ServicesBethesda, MD

Herbert DiMeolaMulti-Use Systems, Inc.Rockville, CT

Richard M. DuBoisNational Center for Health Services ResearchDepartment of Health and Human ServicesRockville, MD

Paul W. EggersHealth Care Financing AdministrationDepartment of Health and Human ServicesBaltimore, MD

Martin S. FaveroCenters for Disease ControlDepartment of Health and Human ServicesAtlanta, GA

Gladys H. HirschmanNational Institutes of HealthDepartment of Health and Human ServicesBethesda, MD

Albert E. ]arvisCordis Dow Corp.Miami, Fl.

Al KrausGambro, Inc.Barrington, IL

Kathleen LloydWashington, DC

Neil OtchinVeterans AdministrationWashington, DC

Richard RettigIllinois Institute of TechnologyChicago, IL

John H. SadlerSchool of MedicineUniversity of MarylandBaltimore, MD

Robert TimminsCobe LaboratoriesLakewood, CO

Fernando VillarroelFood and Drug AdministrationDepartment of Health and Human ServicesSilver Spring, MD

Irving ZolaBrandeis UniversityWaltham, MA

5 7

HEALTH PROGRAM ADVISORY COMMITTEE

Sidney S. Lee, Committee ChairPresident, Milbank Memorial Fund

New York, NY

Stuart H. Altman*DeanFlorence Heller SchoolBrandeis UniversityWaltham, MA

H. David BantaDeputy DirectorPan American Health OrganizationWashington, DC

Carroll L. Estes**ChairDepartment of Social and Behavioral SciencesSchool of NursingUniversity of California, San FranciscoSan Francisco, CA

Rashi FeinProfessorDepartment of Social Medicine and Health PolicyHarvard Medical SchoolBoston, MA

Harvey V. FinebergDeanSchool of Public HealthHarvard UniversityBoston, MA

Melvin A. Glasser* * *DirectorHealth Security Action CouncilCommittee for National Health InsuranceWashington, DCPatricia KingProfessorGeorgetown Law CenterWashington, DC

Joyce C. LashofDeanSchool of Public HealthUniversity of California, BerkeleyBerkeley, CA

Alexander LeafProfessor of MedicineHarvard Medical SchoolMassachusetts General HospitalBoston, MA

Margaret Mahoney* * * *PresidentThe Commonwealth FundNew York, NY

Frederick MostellerProfessor and ChairDepartment of Health Policy and ManagementSchool of Public HealthHarvard UniversityBoston, MA

Norton NelsonProfessorDepartment of Environmental MedicineNew York University Medical SchoolNew York, NY

Robert OseasohnAssociate DeanUniversity of Texas, San AntonioSan Antonio, TX

Nora PioreSenior AdvisorThe Commonwealth FundNew York, NY

Mitchell Rabkin*PresidentBeth Israel HospitalBoston, MA

Dorothy P. RiceRegents LecturerDepartment of Social and Behavioral SciencesSchool of NursingUniversity of California, San FranciscoSan Francisco, CA

● ‘Llnt]l ~lar( h 1Q84‘ ‘‘[lntll C)ct<)ber IQ~~‘”‘‘Llnt]l August 1Q83

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Richard K. Riegelman Frederick C. RobbinsAssociate Professor PresidentGeorge Washington University Institute of MedicineSchool of Medicine Washington, DC

Rosemary StevensWashington, DC

Walter L. Robb ProfessorVice President and Genera\ Manager Department of History and Sociology of ScienceMedical Systems Operations University of PennsylvaniaGeneral Electric CO. Philadelphia, PAMilwaukee, WI

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