OBJECTIVES:  The increasing number of patients developing end-stage renal disease (ESRD) is driving up the costs of care dramatically.  Effective January 1, 2011, Medicare implemented a bundled prospective payment system (PPS). This study investigates the five-year budget impact on Medicare under the new PPS of changing the distribution of patients undergoing peritoneal dialysis (PD) and in-center hemodialysis (ICHD). METHODS: We constructed an Excel®-based budget impact model to assess dialysis-associated Medicare costs when shifting patients between PD and ICHD.  The model incorporates the current modality distribution and accounts for Medicare dialysis payments (including start-up costs), oral drug costs, and the costs and probabilities of adverse events including access failure, access infection, pneumonia, and cardiovascular events.  Data from the United States Renal Data System (USRDS) were used to estimate the US Medicare dialysis patient population for the next five years. The baseline scenario assumed a stable distribution of PD (8.0%) and ICHD (90.5%) over five years; the remaining 1.5% is assumed to practice home hemodialysis.  Alternative scenarios assumed the prevalence of PD decreased by 0.5% or increased by 0.5% or 1% each year for five years, with commensurate changes in ICHD.  Differences among scenarios were evaluated in terms of costs to Medicare and numbers of adverse events. RESULTS: Under the bundled PPS, an increase in the prevalent PD population from 8.0% in 2012 to 10% or 12% in 2016 is predicted to result in five-year cumulative savings for Medicare of $37 million and $74 million, respectively. If the prevalent PD population were to decrease from 8.0% in 2012 to 6.0% by 2016, the total Medicare payment for dialysis patients would increase by $37 million over 5 years CONCLUSIONS: Under Medicare bundled PPS, shifting patients from ICHD to PD could help Medicare reduce dialysis-associated costs.