Dialysis Duopoly Set for Growth, but Regulation Looms

Note: A version of this article originally appeared on LibertyFinancialNews.com in April 2023.

Big Business, Concentrated Market

Dialysis is a medical process in which machines detoxify a patient’s blood, in place of functioning kidneys. For most patients with end-stage renal disease, the most severe stage of kidney failure, long transplant waitlists make dialysis a necessity.

Based on figures from the National Institutes of Health (NIH), a government agency, more than half a million Americans currently require dialysis. The treatment is vital, but expensive. Firms charge private insurance carriers up to $1,000 for in-clinic treatments which patients must attend three times a week.

For investors, these figures add up to big business. In the US, the $25 billion market is overwhelmingly controlled by the duopoly of DaVita and Fresenius, which treat more than 85% of patients.

While the market has been in a slump due to the lasting effects of the Covid pandemic, long-term trends point to secular growth for the industry. Regulatory pressure continues to threaten such a concentrated and controversial market, though, which could weigh down growth prospects.

Covid Excess Mortality and Price Pressures

Covid negatively affected the dialysis industry primarily through the increased mortality rates associated with kidney failure. While Covid will remain an endemic virus, the aberration in death rates associated with the first several waves will soon be overshadowed by secular trends.

Kidney failure mainly affects people with diabetes, high blood pressure, or old age. Since these populations (that is, the obese and the elderly) are disproportionately likely to die from Covid, excess deaths meaningfully reduced the customer base of dialysis firms. According to the NIH, the number of Americans on dialysis fell from 2019 to 2020, the first decline on record.

Correspondingly, the number of dialysis treatments DaVita performed grew by just 0.5% during 2020 and fell by 2.3% during 2021. Similarly, the number of dialysis treatments Fresenius performed declined by about 4% from 2020 to 2022.

High prices of medical equipment and high wages paid to medical professionals during the pandemic further contributed to the industry’s Covid-related slump. From 2020 to 2022, for instance, DaVita’s operating income fell by about 20%, even as overall revenue grew slightly during the same period.

With the worst of the pandemic equipment shortages long past, and general inflation pressure easing, costs should stabilize for the dialysis industry. Moreover, long-term demographic trends and obesity rates point to a growing customer base over the next several decades.

Growing Obesity Rates and an Aging Population

Among the many difficulties of old age is the loss of organ function, particularly of the kidneys. For this reason, the continually increasing median age of developed economies is bullish for the dialysis sector.

From 2000 to 2021, the portion of the American population aged 65 and older has grown from 12% to over 16%, representing an increase of more than 20 million people. According to the Census Bureau, a government agency, low birth rates among younger generations indicate the median age of the population will increase for years to come. 

Obesity, which can lead to kidney failure through diabetes and high blood pressure, follows a similar historical trend. Rates of American obesity have grown from about 35% of the population in 2000 to about 51% in 2018.5

As expected, given these figures, the number of patients with end-stage renal disease more than doubled in the United States between 2000 and 2020. While new weight loss drugs like Ozempic could play a role in reducing obesity rates, demographic trends all but guarantee an aging population. As the developed world gets older and fatter, the dialysis customer bias will grow.

Regulatory Pressures

The concentrated nature of the dialysis industry makes it a particular target for regulators, especially given the sensitive nature of treating life-saving healthcare as a business. Earlier this year, both DaVita and Fresenius disclosed that the District of Columbia’s attorney general is investigating their relationship with the American Kidney Fund, a nonprofit that provides financial assistance to dialysis patients.

This investigation, rooted in antitrust concerns, reflects growing regulatory pressure on the dialysis duopoly. Last year, the Supreme Court ruled against DaVita in a landmark case that permits employee health plans to steer patients toward using Medicare for kidney treatments. Considering government programs pay less than a third of the rates that private insurers do, this ruling had immediate implications for DaVita’s top-line revenue.

As of 2022, government programs paid for dialysis treatments for about 90% of DaVita’s US patients, compromising 67% of revenue. Fresenius, being more internationally diversified, saw 26% of dialysis-related revenues come from American government programs.

For both firms, even small changes to government reimbursement standards could substantially impact revenue. This gives regulators and policymakers a powerful tool to rein in firms that many see as having unjust pricing power.

Competitive Treatments Possible, but Uncertain

While competition from new entrants seems unlikely to disrupt the dialysis industry in the near term, there are several projects in development with the potential to provide alternative treatments for kidney failure.

Wearable artificial kidneys, or WAKs, have been the subject of research since at least the 1980s. As the name suggests, WAKs would mimic the function of a kidney while allowing the patient to go about their daily lives. Major improvements in home dialysis over the past decade and incremental progress in WAK designs have sparked hope that artificial kidneys could replace dialysis, but a fully functioning model has yet to be commercialized.

A more exotic solution for the current lack of suitable kidney transplants is xenotransplantation, or the transplantation of modified animal organs into people. In 2022, a heart from a gene-edited pig developed by United Therapeutics was successfully transplanted into a patient suffering from heart failure. While the patient died two months after the transplant, the experiment indicated the feasibility of the procedure. Considering the risk of infectious diseases, however, and the fact that patients still routinely reject human kidney transplants, xenotransplantation as a full-scale solution to kidney failures appears to be a long way off.

Company Comparison

DaVita (DVA)

P/E (TTM): 14.92   D/E: 9.92   Net Profit Margin: 4.8%   Dialysis revenues, percent of total: 97%

Fresenius (FMS)

P/E (TTM): 19.11   D/E: 0.76   Net Profit Margin: 3.5%   Dialysis revenues, percent of total: 47%