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Erythropoietin (EPO) is a glycoprotein hormone that is a growth factor for erythrocyte (red blood cell) precursors in the bone marrow. It increases the number of red blood cells in the blood. Synthetic erythropoietin is available as a therapeutic agent produced by recombinant DNA technology. It is used in treating anemia resulting from chronic renal failure or from chemotherapy for the treatment of cancer. Its use is also believed to be common as a blood doping agent in endurance sports such as bicycle racing, triathlons and marathon running. more...

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Discovery and Biological Role

The existence of a humoral factor regulating red blood cell production was first postulated in 1906 based on transfusion experiments in rabbits. In 1950, the still unidentified erythropoietic factor was found to be stimulated in rats breathing a low-oxygen atmosphere, thus establishing the elements of its biological regulation. In the 1960s its source was identified as the kidneys. The human hormone was first purified in 1977 from human urine and a small amount was used experimentally to treat patients with anemia.

EPO has now been identified as a glycoprotein with a molecular mass of about 30,000 Daltons. It has a 165 amino acid chain with four oligosaccharide side chains and circulates in the blood plasma at a very low concentration (about 5 pmol/L).

In adult humans, EPO is produced primarily by peritubular cells in the kidneys, where its production is stimulated by low oxygen levels in the blood. Some EPO is also produced by the liver, which is the primary source in the fetus.

EPO acts by binding to a specific erythropoietin receptor (EpoR) on the surface of red cell precursors in the bone marrow, stimulating them to transform into mature red blood cells. As a result the oxygen level in blood reaching the kidney rises and the amount of EPO produced decreases.

Because the kidneys are the primary source of erythropoietin, chronic kidney disease often results in a systemic deficiency of EPO and consequent anemia. Anemia can also occur in cancer patients, sometimes as a direct result of the malignancy but usually as a side effect of chemotherapy.

Also, in patients who may require a blood transfusion or undergo surgery where blood loss is expected, EPO is given in advance as a precaution. The bone marrow produces more red blood cells, and if blood is lost during the operation, there is still enough to sustain the patient.

EPO as a Therapeutic Agent

A portion of the human EPO isolated from urine in 1977 was acquired by Amgen, Inc., an American biotechnology company. In 1983, the gene coding for it was identified at Amgen just weeks ahead of a corporate rival, allowing the company to establish a dominant patent position in the field after an epic legal battle. Recombinant DNA technology was used to express the protein in Chinese hamster ovary cells, which allowed a synthetic form of EPO (rEPO) to be produced in commercial quantities for the first time.

Recombinant EPO was launched as a pharmaceutical product by Amgen for treatment of anemia resulting from chronic kidney disease in 1989 under the brand name Epogen. In 1991 it was also approved for treating anemia resulting from cancer chemotherapy. Johnson & Johnson (J&J), an American pharmaceutical company, markets EPO under license from Amgen for cancer chemotherapy under the brand name Procrit. Amgen’s patents have so far prevented other companies from entering the US market. Even though the patents are all based on work done in the early 1980s, the last of them will not expire until 2015, thirty-two years after the date of the original application.


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Hospital-based dialysis centers perspectives from the for-profit sector
From Healthcare Financial Management, 6/1/05 by Peter W. Ketchum

Running a financially viable outpatient dialysis program has become an enormous challenge. Many hospital-based outpatient dialysis programs incur losses from treating Medicare patients and may be unprofitable, according to data published by the Centers for Medicare and Medicaid Services. Even an unprofitable program, however, may have substantial value on the open market.

Medicare insures approximately 85 percent of end-stage renal disease patients in the United States. Before 1983, Medicare payment for dialysis treatments was based on reasonable costs, with an upper limit of $138 per treatment. In 1983, a prospective payment system, referred to as the composite rate, was established. Under this new payment system, the average composite rate for freestanding dialysis centers was approximately $127. From 1983 through 1990, the Medicare composite payment rate was changed twice, yielding an average composite rate of about $126 that prevailed through the 1990s. Since 2000, the Medicare composite rate has been increased by about 3.6 percent. Several changes in the Medicare payment rate became effective on Jan. 1, including a composite rate increase of 1.6 percent, a reduction in payment for the 10 most frequently used ESRD drugs to the average acquisition costs (AAC), and a drug add-on adjustment of 8.7 percent to compensate for the decrease in drug payment. Several of the leading dialysis companies have stated that they expect these changes to have a minimal impact on profitability. Because of this flat payment environment and the inexorable effects of inflation on operating costs, successful facility operators responded by becoming more efficient.


In addition, the industry is concentrated. Almost two-thirds of U.S. outpatient dialysis centers are owned by four large investor-owned chains, including Renal Care Group, Inc., and DaVita Inc. Because of their size, these chains have certain advantages over their smaller rivals, particularly when it comes to purchasing equipment and supplies.

Traditionally, the large dialysis companies, together with some of their smaller rivals, have competed with each other for acquisitions, although the activity levels of each have waxed and waned from time to time for various reasons. When considering a potential acquisition candidate, these companies tend to evaluate the target based not on its actual financial performance but on its pro forma financial performance, taking into account the seller's patient volume and payer mix and the buyer's payment rates, estimated labor costs based on standard staffing ratios, and costs for supplies and ancillaries based on typical consumption patterns and pricing. Pro forma revenues and expenses are extrapolated to develop a long-term earnings projection. These projected earnings then provide the basis for calculating an internal rate of return. Normally, the buyer can be expected to price an acquisition such that the IRR equals or exceeds a certain targeted threshold, although strategic considerations may cause a specific bidder to make an offer that is higher or lower than that indicated by the IRR analysis.

Using Industry Benchmarks

Knowing how your dialysis center stacks up against industry benchmarks can be useful not only if you are considering a sale, but also if you are reviewing the operation to see if it is making an adequate contribution to the financial position of the hospital or if it is creating an unnecessary drag on cash flow, thus diverting valuable resources away from other programs. Following are selected benchmarking data, derived from a variety of publicly available sources, to assist you in making such a determination. (a)

Revenues. Currently, Medicare payment for outpatient dialysis includes a composite rate for each treatment session that covers the dialysis treatment, supplies used for the treatment, a standard panel of laboratory tests, and certain medications. Additional payment is provided for ancillary services, such as additional lab tests and the administration of injectable drugs, e.g., Epogen[R] (EPO), iron supplements, and vitamin D analogues. In 2004, the average Medicare composite payment rate was approximately $131 per treatment. The Medicare payment rate for EPO is $10 per 1,000 units. Roughly 90 percent of dialysis patients receive EPO, and the average dosage is 5,500 to 6,000 units per treatment. Other drugs are generally paid at 95 percent of the average wholesale price. Adding in revenue for miscellaneous drugs and other services yields a total Medicare payment of approximately $210 to $225 per treatment.

A review of data concerning Renal Care Group and DaVita shows that these companies have average payment rates, including ancillaries, of about $315 per treatment, which implies commercial payment rates in the neighborhood of $700 per treatment. Because the net payment rates from commercial payers are usually subject to contractual allowances, the implied charge per treatment is higher. Anecdotal evidence suggests that a charge of $600 per treatment, excluding ancillaries, is not unusual. Commercial payment rates for EPO average about $4.5 per 1,000 units, according to Morgan Stanley research published in 2004. Given the disparity in payment rates provided by commercial payers versus those provided by government payers, payer mix will have a significant impact on a dialysis center's average payment rate. According to the Morgan Stanley research, the payer mix for Renal Care Group and DaVita is about 80 percent Medicare and Medicaid, and 20 percent commercial, including acute care treatments provided at hospitals.


Patient care expenses. These expenses are typically defined as cash operating expenses that are incurred within the four walls of the dialysis center. The primary categories are labor, pharmaceuticals (including EPO), other medical supplies, rent, utilities, and medical director fees. The most significant of these will be labor and pharmaceuticals, and pharmaceutical costs will be influenced by the center's case mix and the medical necessity of providing certain treatments, as determined by the medical director. Data for Renal Care Group and DaVita indicate average direct patient care costs of approximately $215 per treatment.

Labor. Generally, labor includes nurses and patient care technicians, nurse administrator, facility receptionist/clerk, dietitian, social worker, re-use technician, and maintenance technician. The last four positions are often part-time, depending on the number of patients being treated at the facility. Common staffing ratios are four patients per employee, and one nurse per three patient care technicians. (Allowable staffing ratios may be affected by state regulations.) Naturally, the higher the facility's capacity utilization, the easier it is to achieve these ratios. Labor costs for large providers average approximately $85 per treatment.

Pharmaceutical costs. These costs are composed primarily of EPO, but also include other injectables, such as iron and vitamin D analogues. Although usage varies depending on the nature of the patient population and the resulting medical necessity as concluded by the medical director, average pharmaceutical costs for large providers are roughly $60 to $65 per treatment. Smaller providers should expect their costs to be somewhat higher due to the volume purchase discounts available to the large chains. Some centers use overfill recapture to help contain EPO costs, although indications are that Amgen (the sole provider of EPO) has reduced the overfill amount, which eliminated some of the benefit of this technique.

Other medical supplies. These supplies include dialyzers, tubing, and related items. Assuming that the center has a re-use program, a target cost of about $30 per treatment is indicated. If the center uses only disposable dialyzers, this cost will be somewhat higher. This higher cost can be offset to some extent by lower costs for the labor, rent, and equipment associated with a re-use program.

Medical director fees. These fees are generally negotiated as a function of the number of hours the medical director needs to spend to effectively execute his/her responsibilities under the medical director agreement.

Medical director fees can vary considerably from market to market, depending in part on how difficult it is to recruit nephrologists to a particular locale. Various market data indicate average medical director fees of about $7 per treatment.


Other operating costs. These costs are generally fixed and difficult to control. Other operating costs include items such as rent, utilities, and taxes. All of these factors are influenced to an extent by local market conditions. However, other operating expenses for the large chains average about $30 to $35 per treatment.

Profit margins. Based on the above characteristics, the large for-profit dialysis facility operators generate an average cash contribution margin of $90 to $100 per treatment. To arrive at earnings before interest, taxes, depreciation, and amortization, further allowances must be made for selling, general, and administrative expenses and for bad debt.

Selling, general, and administrative expenses include functions that are more or less directly related to the business operations (such as billing and collections and accounting) and indirect expenses (such as senior management, finance, and human resources functions). The large publicly held chains also incur certain expenses that are not related to the operations of any existing center, such as those pertaining to investor relations, Securities and Exchange Commission compliance, and business development (e.g., acquisitions and the development of new, or de novo, centers). Average selling, general, and administrative expenses for Renal Care Group and DaVita were $25 to $26 per treatment in 2002 and 2003. In 2002 and 2003, DaVita and Renal Care Group had allowances for bad debt of 1.8 percent and 2.6 percent of net revenues, respectively, or roughly $6 and $8 per treatment.

The above data indicate that the large chains, as represented by DaVita and Renal Care Group, generate EBITDA of about $65 to $70 per treatment. Assuming 144 treatments per patient per year, the average EBITDA per patient would be roughly $9,000 to $10,000 annually.

CMS has instituted certain changes to the payment methodology for dialysis services provided to Medicare patients. These changes will go into effect in 2005. Essentially, the changes will reduce payment for ancillary drugs to the average sales price less 3 percent and will increase the composite rate by about 11 percent to offset the reduction in drug payment. These changes are intended to be budget neutral. Renal Care Group and DaVita both stated in their third quarter 2004 earnings conference calls that these changes are expected to result in small reductions in their earnings. However, the general consensus is that the changes will have a greater impact on small providers due to their higher drug acquisition costs. The implications are that smaller providers will experience further pressure on their earnings, but their acquisition values probably will not be significantly affected.

The information presented in this article is intended to help healthcare financial executives assess the financial performance and potential value of their hospital-based dialysis programs. With no relief on Medicare payment rates in sight, the keys to operating a financially viable dialysis program will continue to be maximizing all available revenue opportunities and closely scrutinizing expenses. If the sale of the dialysis program is a consideration, it is important to recognize that the potential buyers competing to acquire the program will be focused more on its income-generating potential than on its historical financial performance.


* Make your hospital-based dialysis program financially viable, not a drain on cash flow.

* Assess the program's financial performance and potential value by comparing its data with industry benchmarks.

* Maximize all available revenue opportunities, and closely scrutinize expenses.

(a.) Primary sources of data regarding patient care expenses, labor, pharmaceutical costs, other medical supplies, and other operating costs were Renal Care Group, Inc., Form 10-K for FY03 and Form 10-Q for the quarter ended Sept. 30, 2004; DaVita Inc. Form 10-K for FY03 and Form 10-Q for the quarter ended Sept. 30, 2004; and Morgan Stanley research.


In the United States, 2.6 million adults, or 1.3 percent of the adult population, has been diagnosed with kidney trouble. Slightly over a million of them are age 65 or older. Of those age 65 and over who have been diagnosed with kidney disease, 259,000 are covered by Medicare only, 144,000 are covered by Medicare and Medicaid, 518,000 carry private health insurance, and about 15,000 are uninsured, according to the National Center for Health Statistics. Medicare assumes coverage for ESRD patients after about 30 months of dialysis treatments, regardless of the patient's age.


To view an online list of HFMA's resources related to the business of health care, visit businessofhc1.htm.

Peter W. Ketchum is a director, Health Care Services Practice, Willamette Management Associates, Chicago, and a member of HFMA's Georgia Chapter. Questions or comments about this article may be sent to him at

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