The Current Drama Over Dialysis in CA is Everything That's Wrong with U.S. Health Care

FOR A CASE STUDY on the extremely uphill battle of reining in health care costs in this country, look no further than what’s happening with the dialysis industry in California.

To start, a few background facts you should know:

Dialysis is expensive. Cost estimates for the thrice-weekly blood filtration procedure average around $90,000 annually; this does not account for other health care costs for end-stage renal disease (ESRD) patients, who tend to have multiple chronic medical issues. An act of Congress in 1973 entitled all patients with ESRD to coverage under Medicare, providing a public option for a population long shunned by private insurers.

Then in 2014 the Affordable Care Act came along and prohibited insurers from denying coverage based on pre-existing conditions (including ESRD), opening up the private insurance market to dialysis patients. Reimbursement rates by private insurers tend to be significantly higher than what Medicare pays.

Dialysis is also profitable. Very profitable. The two companies that dominate the industry, DaVita (American) and Fresenius (German), together account for 70% of the market and have operating margins of around 20%. It doesn’t take an MBA to know that 20% profit is high.

Here’s where it gets interesting: In between the dialysis providers and insurers, there’s a third player, a middleman called the American Kidney Fund (AKF). Ostensibly an independent non-profit, the fund takes donations from dialysis companies (primarily DaVita and Fresenius) and funnels them toward paying health insurance premiums for low-income dialysis recipients through its Health Insurance Premium Program. AKF has come under fire in recent years due to accusations that 1) it preferentially awards grants to patients who get their dialysis at DaVita and Fresenius, as opposed to smaller clinics, and 2) since the advent of Obamacare it has made an unofficial policy of “steering” patients toward private insurers over Medicare, presumably to reward its two major donors with the higher reimbursements those payers provide. These allegations remain in litigation; AKF, for its part, asserts no wrongdoing.

It's not in vogue to feel bad for

insurance companies, but this

is the definition of a racket.

So, to summarize:

Low-income patients pay (a little) money to insurance companies in the form of premiums—subsidized by AKF—in order to stay insured and keep getting dialysis. Medicare and private insurers pay DaVita and Fresenius (a lot of) money to provide dialysis. DaVita and Fresenius donate (a little) money to the AKF to help patients pay their premiums and keep as many people as possible on dialysis, most of whom will end up at DaVita and Fresenius facilities. And the cycle continues. Who suffers? Mostly the insurance companies.

I understand it’s not exactly in vogue to feel bad for insurance companies, but this is the definition of a racket. California, where DaVita and Fresenius do 20% of their business, has made two recent efforts to curb the worst excesses of this industry. The first, a ballot initiative called Proposition 8, which sought to cap dialysis profits at 15%, was defeated in 2018 after intense lobbying by dialysis companies to the tune of $111 million. The second, AB-290, aims to limit the reimbursements that private insurers pay to dialysis companies. It passed the state legislature and was signed by the governor last October, but its fate remains in limbo after a temporary injunction by a federal judge.

Prior to the passage of AB-290, AKF sent a letter to the 3,700 low-income Californians who benefit from its Health Insurance Premium Program. It informed them that if the measure passed, they would abruptly lose their premium assistance. The letter was widely perceived to be a warning shot directed at the state: “If you go through with this, these people will lose their insurance, they’ll show up in emergency rooms, and it will be your problem.” It essentially created a hostage situation with these vulnerable patients as pawns. The ransom the AKF demanded was for the bill to fail, for the money to keep flowing, and for the status quo to prevail.

The problem with the status quo is that it’s not sustainable. Inflated medical costs have to be paid for somehow, and the trend we’re seeing is that the burden is increasingly falling on individuals in the form of higher premiums and deductibles. It does not bode well for the financial health of our system if even modest efforts at reform are met with such fierce resistance. AKF’s tactics were shameful and manipulative. California, to its credit, didn’t cave. It is understandable that DaVita and Fresenius (and, by association, AKF) want to protect their interests. Corporations will always look out for the bottom line. It is the role of government to intervene when that bottom line is at odds with the public good. California legislators should be lauded for their courage to stand up to a powerful and influential industry. The question that remains now is where the real strength lies: with the government of our most populous state, or with the entrenched moneyed interests who have held sway over American health care for so long? The answer may serve as an indicator of how much success we should expect as our leaders work to prevent future insolvency in this massive and economically vital market.

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