Dialysis: A growth market

Dialysis -- the use of machinery to make up for malfunctioning kidneys -- is among medicine's least-loved treatments, both to endure and to administer.

Patients have to be hooked to machines for hours at a time every few days. Those providing care often find it difficult, too: as many as a fifth of their patients die each year, many of them after choosing to stop their treatment.

But it is also a fast-growing and lucrative market, and one that provides valuable lessons about making health care affordable.

Dialysis is dominated by an oligopoly. Fresenius Medical Care, the dialysis business of Germany's Fresenius, makes more than half of the dialysis machines sold in the world, followed by Gambro, a Swedish firm.

Ulf Mark Schneider, the chief executive of Fresenius, attributes his company's success to the fact that it plays to traditional German strengths. "A dialysis machine has the same number of parts as a car," he says. "Making one brings together electronics and mechanical engineering, which Germany is good at."

The real money, however, is in running dialysis clinics and administering drugs, which account for 80 percent of the cost of dialysis. The two biggest operators of dialysis clinics are Fresenius and DaVita, which bought Gambro's American clinics in 2004. Each of them runs almost a third of America's dialysis clinics.

About 2 million people receive regular dialysis to clean their blood of impurities that build up as a result of kidney failure. About a quarter of them are in America, which has one of the highest rates of dialysis in the world.

It is also the world's most lucrative dialysis market, with the government spending $24 billion a year, or $71,000 a year per patient, on dialysis, and private insurers paying yet more.

But the number of patients is growing fast all over the place, as is the cost of treatment. In Britain around 3 percent of health spending is devoted to treating kidney failure.

Globally, the number of patients on dialysis is likely to double over the coming decade. Most of them will be in developing countries, where numbers are growing by 10 percent or more a year. Worsening diets are playing a part but so are rising incomes, as a result of which health systems treat people who would previously have been left to die.

With spending rising rapidly, attention is now focused on to trying to control costs. Fresenius' experience offers two lessons.

First, combining the manufacture of machines with the running of clinics has helped it dominate both markets. "The thing that other people in the industry admire about Fresenius is this one-stop shopping model," said Stephan Danner of Roland Berger, a consulting firm. Gambro is the preferred supplier for DaVita's clinics.

Fresenius stands to become a big beneficiary as America's health care reforms take on some of the more bloated parts of the business. At present American dialysis clinics are paid on a "cost-plus" basis for the drugs they use. That, naturally, has encouraged them to use lots of expensive ones.

Analysts at Bernstein, a research firm, note that American clinics used to favor an injected drug costing $4,100 a year over an identical oral one which was introduced to the market at a cost of $450 a year.

After languishing unused, the oral drug now costs more than the injected one. "There is negative price elasticity here: the higher the price, the more competitive the product," Bernstein's analysts observe.