Healthcare M&A update: Q1 2019
Sector spotlight: Dialysis service providers
The dialysis services industry is displaying continued growth, with an aging population and an increase in chronic conditions such as hypertension and diabetes, which lead to end-stage renal disease (ESRD). ESRD is the final stage of kidney failure where patients require dialysis or a transplant. Dialysis treatment is primarily administered in two forms:
- Hemodialysis, where an artificial kidney is used to filter out toxins, fluids and salt from patients’ blood. This treatment can be performed at an outpatient center, or at home with the correct equipment.
- Peritoneal dialysis, where a cleaning solution is used to filter out waste and fluids from blood through the patient’s abdominal lining. This treatment is generally performed at home, but is less time-efficient and has a higher risk of complication than hemodialysis, making it a less commonly administered modality.
The prevalence of ESRD continues to rise by about 20,000 cases per year, reaching 726,000 cases in the U.S. in 2016.
While the majority of dialysis treatment have been undertaken in outpatient centers, providers in the U.S. are increasing their focus on home dialysis. This trend is being driven by increasing operating costs for outpatient centers and lower Federal reimbursement rates.
The dialysis services landscape has been historically dominated by a few large players. However, the industry has been adapting to combat financial challenges, which leads to potential drivers and opportunities for investment, including:
- Increased demand for ESRD treatment: The prevalence of ESRD has continued to increase in the U.S., with a rise in the median age of the population and co-occurring diseases such as diabetes. In addition, mortality rates for dialysis patients are no longer decreasing, which is a factor that should lead to higher focus on treatment.
- Falling reimbursement rates: With increased adoption of Medicare and Medicaid due to increased Federal funding
for these programs, dialysis providers could see reductions in revenue-per-customer moving forward. Medicare payment plans are typically responsible for payment of ESRD patients’ treatment from initialization, unless they are covered by commercial insurance, in which case Medicare becomes the primary payor after 33 months. Medicare plans tend to have lower reimbursement rates than private health plans, resulting in lower revenues as patients’ reliance on Medicare rises. - Increasing costs for outpatient treatment centers: Profitability of outpatient dialysis centers is expected to decline from 14.8 percent of revenue currently to 13.9 percent by 2023, due to a) the effect of falling reimbursement, and b) increasing industry wage levels as the demand for technically trained and skilled workers rises due to government mandates on staffing levels and quality control. Dialysis providers are increasingly looking for revenue-boosting and cost-cutting measures, including integrating drug therapies, increasing utilization of healthcare information technology and increasing home dialysis offerings.
- Growth in adoption of home dialysis services: With decreasing margins for outpatient hemodialysis centers, home dialysis is becoming an increasingly attractive method of treatment. According to Medicare cost report data for 2017, providers paid an average of $256 for a single in-center hemodialysis treatment versus $217 for a home dialysis treatment. Technological advancement in home-based treatment methods and equipment will accelerate the migration from outpatient to home-based treatment.
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