The Medicare cost of renal dialysis. Evidence from a statistical cost function

Medicare's End Stage Renal Dialysis Program currently costs more than $6 billion per year, which covers renal dialysis, kidney transplants and other life-saving medical care for 190,000 patients of all ages suffering from chronic renal failures. Medicare reimburses dialysis units for dialysis treatments using a formula based on accounting costs reported by a small sample of facilities. However, accounting methods may obscure the true economic costs of providing the different type of dialysis treatments such as hemodialysis, continuous ambulatory peritoneal dialysis, and continuous cycling peritoneal dialysis. In this study, a multiproduct, statistical cost function approach to obtain cost estimates was used. Results obtained in this study show that the average cost and marginal cost of hemodialysis treatments are generally in line with current reimbursement rates, whereas the average and marginal costs of continuous ambulatory peritoneal dialysis treatments may be below this rate. For in-center hemodialysis, which is the mainstay of all dialysis units, the authors found evidence of decreasing economies of scale at the mean facility size, but found constant returns to scale for other modalities. Some evidence of economies of scale from chain ownership of dialysis centers was discovered. Finally, the analysis indicates that the Medicare reimbursement formula may be outdated, and further research that could lead to the design of more "rational" payment rules is suggested.