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Why Dialysis Remains an Attractive Business

The dialysis industry is in a state of flux, but business models remain intact.

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With regulatory changes afoot in the dialysis space, it's critical that investors understand the dimensions around the new bundled payment system, and what it means for industry stalwarts  Fresenius (FMS) and  DaVita (DVA). We've touted both of these firms as intriguing investment opportunities at various times in the past, and would recommend them again--Fresenius more so, given its vertically integrated business model and non-U.S. exposure--if either one were to return to 4- or 5-star territory. Before we talk about the two companies individually, let's quickly recap the current reimbursement structure, as well as the Centers for Medicare & Medicaid Services' (CMS) final proposed changes to the payment system.

Regulatory Changes to the Current Reimbursement Structure
Dialysis is somewhat unique in that Medicare is the primary payer for all patients with End-Stage Renal Disease after a period of 33 months, regardless of age. Once Medicare becomes the primary payer, it pays for 80% of the cost of treatment, with the patient, Medicaid, or supplementary third-party insurance responsible for the remaining 20%. Medicare payment rates are considerably lower than commercial rates, which mean two things: Dialysis centers depend on higher commercial rates to subsidize Medicare rates, and centers actually lose money on Medicare-reimbursed treatments, as payments are lower than a typical center's average cost per treatment.

Bill Buhr does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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