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California Cracks Down on Dialysis Profiteering

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Rich Pedroncelli/AP Photo

A patient undergoes dialysis at a clinic in Sacramento, California 

For a state legislative session, California’s most recent cycle was unusually high-profile. A number of bills with national implications were passed this year in Sacramento, including landmark legislation on employee classification status for gig economy workers, a bill establishing statewide rent control, and a proposal that clears the way for NCAA athletes to be paid for use of their image and likeness. It’s not often that bills in state capitals win the support of a host of presidential candidates and, more notably still, LeBron James.

Less prominent, though critically important, was the passage of AB-290, a bill that will dramatically curtail some of the more flagrant profiteering of the outpatient kidney dialysis industry. That measure, authored by Assemblyman Jim Wood, passed both houses of the legislature, and is now awaiting the signature of Governor Gavin Newsom.

Wood’s bill targets a mechanism he described as a “scam,” wherein the country’s two largest outpatient kidney dialysis providers, DaVita and Fresenius, make use of one of the country’s largest charities, the American Kidney Fund, to goose their profits. The AKF offers financial assistance to low-income kidney dialysis patients, all of whom are covered by Medicare, thanks to a 1972 federal law that makes kidney patients of all ages eligible for Medicare payments that partially defray the high costs of dialysis. But the Fund doesn’t merely help mitigate costs that Medicare may not cover, it also encourages those patients to migrate to private insurance plans, which providers like DaVita and Fresenius can bill for four times the Medicare rate—for the exact same treatment. Seeking to take advantage of that glaring financial incentive, the two companies donate roughly a quarter of a billion tax-deductible dollars to the AKF. Those private insurance patients account for a massive percentage of the companies’ profits, which total roughly $4 billion a year combined.

AB-290 will curtail that arrangement significantly, capping the insurance reimbursement rate at the same level as the Medicare rate, and limiting the incentive for the American Kidney Fund to move its patients into the private insurance market. The bill would allow patients already on AKF-subsidized private plans to continue their treatment uninterrupted, but would bar dialysis companies from steering people to third-party payers in the future. It is slated to go into effect in 2022.

AB-290 isn’t the first attempt to rein in this arrangement. A similar bill, SB 1156, was vetoed by former Governor Jerry Brown in 2018 after he determined it to be overly broad. And an attempt to effectuate such regulation by ballot measure in 2018, Proposition 8, was downed by a vote margin of nearly 20 percent.

The ballot measure’s failure was largely due to massive funding from the industry, which spent over $100 million to help sink the proposition. Predictably, AB-290 was met with a similarly well-funded opposition campaign. The industry spent millions of dollars on media and lobbying, including television ads and an astroturf campaign called Dialysis is Life Support. The American Kidney Fund has threatened to withdraw from California, on the grounds that the bill would threaten its national charter, though two independent legal opinions disputed that assessment. AB-290 has extended AKF the option of requesting a third assessment, which should clarify the nature of that threat.

The industry’s efforts managed to win a handful of concessions, beyond the option of that third review. Initially, the bill stipulated it could take effect as soon as 2020—and if the AKF declines to request that third assessment, some preliminary aspects of it can go into effect on July 1 of next year. But the bill was amended to push the start date for revised reimbursement rates to January 1, 2022, and to grandfather in those already enrolled with third-party payers.

AB-290 falls short of being a cure-all for the dialysis industry. Because DaVita and Fresenius control 70 percent of the market, their duopoly position has allowed them to get away with understaffing and Medicare and Medicaid price gouging. That’s resulted in major settlements, including a $495 million penalty in 2015 after a suit was brought alleging DaVita had conspired to overcharge the government. The suit included reports from whistle-blowers who described doctors at DaVita clinics throwing out partially used medicine vials to increase the number of vials they could charge for. “What DaVita did, instead of charg[ing for] one vial, they’d give 50 milligrams of this vial [and] put the residual into the trash,” Dr. Alon Vainer, a medical director at dialysis clinics in Georgia, who was involved with the suit, told CNN. Then, they’d open up a new vial, use only part of it again, and throw the remainder in the trash. DaVita denied the allegation, but paid out the hefty settlement, on the heels of another $400 million settlement just one year prior.

Still, the bill comes as a major victory, and an important precedent-setter for some of the battles within the health care industry that are likely forthcoming with Medicare for All now a front-and-center concern for the Democratic presidential field. Kidney dialysis is just a small corner of the broader medical market, and similar legal battles to reel in prices could well be on the horizon. Even though the cost-saving effects of AB-290 won’t be realized until 2022, the success of the legislation itself could open the door for more aggressive legislation in the future.

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