For-Profit Status & Industry Evolution in Health Care Markets: Evidence from the Dialysis Industry

The U.S. renal dialysis industry makes for an interesting setting in which to consider industry evolution due to differences in management practice. Whereas the majority of dialysis treatment facilities initially were atomistic non-profit organizations, for-profit chains now predominate. Understanding how ownership differences have impacted the dialysis industry's evolution matters due to the size of its human and economic impact: around half a million Americans now regularly need dialyzation, and the bulk of the expense is borne by Medicare, which offers coverage to all sufferers of end-stage renal disease (ESRD).

To explore why for-profit facilities have become so dominant in the dialysis service industry, I exploit 20 years of annual censuses of all facilities providing treatment to ESRD sufferers. The paper's chief findings are as follows. First, I uncover robust evidence that for-profit facilities have an advantage in static competition. While the econometric models' results do not preclude the possibility that for-profit facilities also have lower average entry costs, the data are inconsistent with what would be observed if this were the only difference across ownership types. These findings contrast with past studies of other health-care industries, which found that the rise of for-profit hospitals during roughly the same period stemmed from lower entry costs, and occurred despite their having higher marginal costs than non-profit facilities. The distinctly different nature of hemodialysis treatment, which requires relatively little capital investment and is highly routinized, may explain these differences.

Second, the data provide some -- though not conclusive -- insight into the character of for-profits' static advantage. In particular, I find weak to no evidence that for-profits perform more treatments than otherwise observationally equivalent non-profit facilities. This is opposite to what would be expected if for-profits possessed an advantage in attracting patients, such as observably higher quality. Moreover, it would be contrary to conventional wisdom and much of the existing literature. Thus, consistent with past work on the dialysis industry, as well as a broader economic literature, the results imply that for-profit facilities achieve higher margins than comparable non-profits. My analyses suggest that this stems from something other than greater capital efficiency, but cannot distinguish between the possibility of more efficient labor force utilization or the possibility that reimbursements are higher, perhaps because of differences in the prescription of pharmaceuticals.

Third, analyses that consider whether the most important organizational cleavage is based on for-profit status versus membership in a large chain indicate that for-profit status matters in its own right. However, I do find evidence that large chains' are more effective at squeezing production out of installed capacity. Though the precise mechanism cannot be identified in the data, this observation may be rationalized by focusing on the incentives of patients' referring physicians. Many nephrologists have formed affiliations with the largest dialysis providers. Such partnerships would naturally be expected to increase referrals as research has shown that physicians respond sharply to financial incentives.