trending Market Intelligence /marketintelligence/en/news-insights/trending/lHxmQsho8jD7kytzIe3eOA2 content esgSubNav
In This List

Calif., Ohio initiatives seek to cap kidney dialysis charges

Blog

A Pharmaceutical Company Capitalizes on M&A Activity with Brokerage Research

Blog

2021 Year in Review: Highlighting Key Investment Banking Trends

Blog

Insight Weekly: US stock performance; banks' M&A risk; COVID-19 vaccine makers' earnings

Blog

Global M&A By the Numbers: Q3 2021


Calif., Ohio initiatives seek to cap kidney dialysis charges

In what promises to be an expensive and protracted battle that could affect dialysis companies such as DaVita Inc. and Fresenius Medical Care AG & Co. KGaA, a national healthcare union has already spent $3.5 million to push potential ballot initiatives in California and Ohio that would limit the amount centers can charge for treatment at 15% more than providers' costs.

In California, the initiative campaign on April 5 submitted 600,000 signatures to the state's election department, far more than the 365,880 needed to qualify for putting the Fair Pricing for Dialysis Act before state voters in November.

While supporters wait for California officials to verify the validity of the signatures, the campaign led by the Service Employees International Union-United Healthcare Workers West is trying to gather the 305,000 signatures needed by July 4 to put an identical measure before Ohio voters in November.

But DaVita Kidney Care CEO Javier Rodriguez is vowing a protracted fight.

"If the initiatives were to pass, we believe a legal or regulatory intervention will be needed to prevent negative impact on access to care for this vulnerable patient population," he said during a May 3 earnings call for the Denver-based company.

The measures would not take effect this year. If successful, the initiatives could ultimately mean an 18% EBIT hit for DaVita, which has 18% of its U.S. patients in California and 5% in Ohio, Sanford C. Bernstein & Co. analyst Lisa Bedell Clive wrote in an April 5 note. But the anticipated court fight could mean "the ultimate outcome would be several years away," she wrote.

Companies' profits

Supporters of the initiatives point to the companies' profits as evidence that caps are needed. DaVita made $3.29 billion in gross profits in the 12 months ended March 31, representing a 29.6% margin, according to S&P Capital IQ. Germany's Fresenius Medical Care reported 5.61 billion in gross profits for a 32.6% margin, according to S&P Capital IQ.

In California, the Service Employees International Union-United Healthcare Workers West, citing data from the Office of Statewide Health Planning and Development, said the average margin of dialysis clinics is 17%.

The union, which represents 130,000 healthcare workers in the two states, estimates that based on Centers for Medicare and Medicaid Services statistics, dialysis companies charge patients with private insurance an average of $156,000 for a year of dialysis treatment. That is 3.5x more than DaVita estimated as the cost of providing care in its 2015 annual report.

Opinion pieces by initiative supporters placed in California newspapers said the companies are not putting enough of their earnings into providing quality care.

"Throughout my 10 years as a dialysis patient, I've been forced a number of times to sit in a chair with dried blood on it or be connected to a machine that malfunctions," wrote an initiative supporter, Tangi Foster, in the Los Angeles Daily News on April 7.

Part of the problem is that two companies, DaVita and Fresenius Medical Care, treat about 70% of the state's dialysis patients, David Miller, a spokesman for the California campaign, said in an interview.

In addition, the Affordable Care Act's requirement that health insurance policies cover a minimum set of benefits such as dialysis treatment means that insurers have little leverage to negotiate for lower prices, according to a campaign fact sheet.

"We think middle-class folks need to have some relief from companies driving up reimbursements in an anti-competitive situation," Miller said.

Opponents: Caps would hurt care

To opponents — including dialysis companies and the California Medical Association, which represents 43,000 doctors — the proposed caps are unrealistic and would lead to dialysis centers closing.

"These initiatives attempt to cap reimbursement by ignoring the costs actually required to operate a clinic. They have already led us to cancel and postpone new clinics in California despite the need due to an already high capacity utilization in the state," Rodriguez said on the earnings call.

The initiatives would reduce the amount that can be charged in the two states to 115% of a "fair treatment payment amount," made up of the cost of providing direct care to patients or making improvements to their care.

Any payment above that would be considered an "unfair excess charged amount" and would have to be returned to private payers via a rebate.

In addition to limiting how much patients are charged, the initiatives would provide incentives to increase spending on patient care instead of executive salaries and administrative costs, supporters say.

Under both initiatives, companies are allowed to spend an unlimited amount on direct patient care, including "salaries, wages, and benefits of non-managerial chronic dialysis clinic staff, including all clinic personnel who furnish direct care to dialysis patients."

But other costs are not considered a part of the "fair treatment payment amount" and would come out of the 15% profit margin.

"If clinics can't cover their operating costs, they will be forced to make changes, including closure. If this happens, patients are the losers and will be in a very dangerous position because they will lose access to life-saving dialysis treatments," said Kathy Fairbanks, spokeswoman for Patients and Caregivers to Protect Dialysis Patients, in an email. Patients and Caregivers to Protect Dialysis Patients is a coalition of 75 groups, including the California Medical Association, opposing the measure.

S&P Capital IQ and S&P Global Market Intelligence are owned by S&P Global Inc.