Proposals to cut Medicare payments to kidney dialysis centres by a vastly greater amount than even the most pessimistic forecasts have horrified investors in this sector. Shares of dialysis providers dropped, led by Fresenius Medical Care (FMC) which plunged 10% – the biggest drop in over four years – while Fresenius, which owns 30% of FMC, lost 4%.
The Centers for Medicare and Medicaid Services (CMS) have proposed a net cut of 9.4% in the bundled per-treatment payment – far more drastic than the cut of around 3% most analysts had been expecting. It seems likely that the reduction will be moderated when the final ruling is made in the autumn, which is just as well: analysts from Bernstein have suggested that the proposed claw-back could put swathes of US dialysis clinics out of business.
Deeper than expected
In 2013 dialysis providers were paid $240.36 to cover the drugs, devices, personnel and other costs incurred by each bout of treatment for patients with end-stage renal disease, one of the few conditions for which Medicare funds may be spent on non-seniors. The CMS is now proposing to slash this by $23 to $216.95.
A cut in the rate was mandated by the US fiscal cliff bill, passed in January, on the grounds that use of erythropoietin-stimulating agents had declined by around 35% since bundled pricing was introduced in 2011 (Medicare dialysis rules to re-shape ESA market, July 28, 2010).
Most industry-watchers had anticipated this cut to be between $5 and $10 per treatment. A discount of more than double this would have severe repercussions, with Bernstein’s Lisa Bedell Clive writing in a note that, if enacted, it would “almost certainly put up to a third of the US dialysis industry (the independent clinics) out of business.”
FMC and the other big dialysis providers, Baxter International and DaVita, would be better placed to weather the convulsions, but they would suffer too. Some clinics have a patient base where upwards of 95% of cases are funded by Medicare, and it could be difficult for them to break even, even when owned by the larger dialysis organisations.
Mathieu Chabert of Bryan Garnier said that profit margins for the dialysis industry for Medicare patients are around 3%, with the independent dialysis chains that make up around a third of the market "more
in the flat margin zone".
This is the main reason why implementation of this proposal is unlikely. The measure will be open for discussion until the end of August, and plenty of objections will be made before the final ruling is made in the autumn.
The most plausible outcome is, as so often in politics, a compromise. A cut of around $10 per treatment – just over 4% – seems realistic.
But even if the proposed $23 slash stands, there is another chance for dialysis providers. The CMS has indicated that it is considering a transition period, permitting the cut to be phased in gradually. Mr Chabert said that if the alteration were spread over three or four years it would provide significant relief to dialysis companies.
The proposed changes have disconcerted the dialysis industry somewhat. Come autumn it is likely to become clear that it has been starting at shadows.
|Dialysis providers' share price changes, July 1-2 2013|
|Company||Exchange||Share price at close July 1||Share price at close July 2||Change|
|Fresenius Medical Care||Frankfurt||€54.48||€49.70||-8.8%|