Column: Dialysis firms’ profits are obscene. What will happen if California tries to cap them?

The worst maladies of the American healthcare system are related to corporate profits: The competition among insurance companies to avoid the sickest customers and extract the most money from the rest, and the rise of for-profit healthcare providers.

In few fields do those factors come together as neatly as they do in the dialysis business. And a business it is — a terrifically profitable one. The two dominant for-profit dialysis firms, Denver-based DaVita and German-owned Fresenius, report pretax operating profits in the billions and margins of 18% to 19%.

Proposition 8, an initiative appearing on California’s November ballot, would cap those profits at 15% over their direct spending on health services.

You can expect this measure to be among the hardest-fought of the election. Already, DaVita and Fresenius have contributed more than $8 million to the opposition campaign, and it’s still early. The Service Employees International Union, which sponsored the measure, has amassed a war chest of just under $6 million so far.

The dialysis industry’s “No on 8” campaign ties the initiative to SEIU’s effort to unionize dialysis workers. For years, the union has campaigned for higher pay at the clinics and laws mandating higher staffing, citing complaints from workers that they’re overloaded and from patients that they sometimes feel rushed through a procedure that has to unfold at its own pace. A bill setting minimum staffing levels and transition times between patients passed the state Senate last year but has stalled in the Assembly.

The opposition’s pitch, based on an economic study it commissioned, is that Proposition 8 would make dialysis so unprofitable that most of the state’s 580 outpatient clinics, including some nonprofit facilities, would have to close. Wall Street securities analysts say DaVita and Fresenius might well pull entirely out of California, where they do about 20% of their business and collect $3 billion a year. A large number of the 68,000 state residents undergoing treatment would have to find treatment at centers far from their homes, while the state’s remaining capacity would be strained beyond the breaking point. DaVita and Fresenius referred our questions to the No on Prop 8 campaign.

Yet the opposition study may well have exaggerated the financial impacts of Proposition 8. Among other things, it made assumptions about allowable spending that the initiative’s sponsors say are overly conservative. It assumed, for example, that the salaries of facility administrators, medical directors and security staff would be excluded from allowable “direct medical spending.” The union disputes that.

“There’s more flexibility on costs than the opposition lets on,” SEIU spokesman Sean Wherley told me. If Proposition 8 passes, moreover, the roster of allowable direct costs would be set by state regulators and the Legislature. State courts also would have a say on whether the profit cap should stay at 15% or be raised.

More generally, the Proposition 8 campaign is a reflection of the dialysis industry’s reputation for profiteering from a life-preserving procedure.

Short of a kidney transplant, dialysis is the only life-preserving option for people with end-stage renal disease, in which the kidneys have shut down, often because of diabetes or chronic high blood pressure. Patients must undergo the procedure of cycling their blood supply through a filter to remove waste products three times a week for several hours each time.

Dialysis is so expensive — it runs about $90,000 a year — that in the days before the Affordable Care Act, patients couldn’t get insurance. As a result, Congress in 1973 allowed renal patients to enroll in Medicare at any age. The act effectively made end-stage renal disease the only condition subject to a single-payer program.

Combined with the rapid increase in diabetes, hypertension and other underlying conditions, the federal program turned dialysis into a hugely profitable business. About 10,000 patients were covered in 1973; today, more than 650,000 are. Federal spending has soared to more than $34 billion a year from $1.1 billion (in current dollars) in 1973.

DaVita and Fresenius have been big beneficiaries of these trends. Their 4,900 outpatient clinics serve about 400,000 patients and account for roughly 70% of the market. In 2017, DaVita earned about $1.8 billion in pretax operating profit on $10.1 billion in dialysis revenue. Fresenius reported pretax operating profit of $2.3 billion on dialysis revenue of $11.7 billion for North America.

Once the Affordable Care Act came into play in 2014, and made it illegal for private insurers in the individual market to reject dialysis patients, the firms thirsted for the private insurers’ higher reimbursements.

Federal prosecutors subpoenaed DaVita and Fresenius last year in connection with an investigation into whether they’ve been steering patients away from Medicare and Medicaid, where reimbursements average a few hundred dollars per visit, and toward commercial insurers, which pay as much as ten times the government rate. The companies have said they’re cooperating with the investigation.

According to accusations in lawsuits and the companies’ public disclosures of the federal investigation, suspicion has focused on the American Kidney Fund, which presents itself as a charity helping kidney patients pay for private insurance premiums and co-pays.

The fund, however, looks like a front for DaVita and Fresenius, which have provided 78% of its revenue in recent years — a combined subsidy of more than $200 million a year — according to the fund’s annual report. A lawsuit filed last year by Aetna cites allegations that DaVita parlayed its contributions to the fund into the higher reimbursements received from private insurers by “steering” dialysis patients away from Medicare despite their eligibility. DaVita denies the accusation.

The Centers for Medicare and Medicaid Services had similar concerns. CMS proposed a rule allowing insurers to reject premium payments from the fund, which would funnel those patients into Medicare, producing “a material and adverse impact” on profits at the dialysis firm, as Fresenius acknowledged in a securities filing last year.

Teri Browne, a professor at the University of South Carolina and former dialysis social worker at Fresenius, told CMS that the firm expected its social workers to encourage patients to keep on or seek commercial insurance, using the American Kidney Fund to pay their premiums, and discourage their enrollment in Medicare. This disadvantaged the patients, she said, because it reduced their chances of obtaining a kidney transplant and subjected them to higher costs and possibly Medicare surcharges once the fund stopped paying their fees.

Browne said patients were not given all the information they needed to make a choice, including how commercial insurance compares to Medicare in access to doctors, copayments, and “how much more their dialysis companies can bill” private insurers.

“Patients are steered into insurance decisions … that are only best for dialysis companies’ profits,” Browne said. The CMS rule was blocked last year by a federal judge and has been placed on hold by the Trump administration.

The for-profit companies generally have skimpier professional staffing than nonprofit or hospital-based dialysis clinics and have had worse patient outcomes, according to some studies. A 2013 survey by the University of Virginia found 35% fewer registered nurses and 42% fewer practical nurses on their premises compared with nonprofit clinics, with unlicensed technicians taking up the slack. The researchers conjectured that replacing nurses with technicians might “jeopardize long-term patient outcomes,” but didn’t come to a conclusion that it did so. And a 2016 report by the government-financed U.S. Renal Data System documented that DaVita and Fresenius patients had higher mortality rates and hospitalization rates than those at nonprofit and hospital-based dialysis clinics from 2011 to 2014.

Wall Street analysts who follow DaVita are confident the industry will be able to beat Proposition 8, because the dialysis companies are rich. “The industry has robust lobbying capabilities in Sacramento and … a much larger war chest for fighting a state-wide initiative” than the union, observed analysts at Robert W. Baird & Co. in March.

That’s a good example of why American healthcare is mired in a spiral of higher costs, far outstripping what residents of other developed countries pay, without producing better health. Profit-making providers dominate our healthcare industry, and collect so much in profits they can’t easily be dislodged. For DaVita and Fresenius, the cost of fighting Proposition 8 is pennies compared with how much they’ll continue to profit if it goes down. In November, California voters should call their bluff.

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