We believe DaVita to be a corrupt healthcare organization whose historical success has relied largely on gouging the healthcare system. The company has paid over $1.1 billion in the past 5 years to settle four DoJ False Claims Act allegations. (1,2,3,4) The result of these settlements has been to mitigate several profitable (and allegedly illegal) lines of business.
Now, DaVita’s most lucrative scheme is finally becoming obvious to insurers, patients and legislators following multiple media exposés. As a result, legislation is starting to specifically target the company’s primary remaining profit center. We intend to highlight the legislative challenges currently facing DaVita at both the state and national level that we believe will persist until the loophole driving this scheme has been closed.
As DaVita works against one of its main legislative challenges of the moment, California Assembly Bill 290, we sought to understand the company’s lobbying effort. We found that DaVita is, in characteristic fashion, engaging in what looks to be underhanded lobbying tactics in order to defend its charity scheme.
We at Hindenburg are typically known for taking short positions alongside our research, but the truth is that we just like to call out scams when we see them. We have no position long or short in DaVita (for reasons we will explain) but, nonetheless, we thought it would be important to shed light on the ridiculous abuse of the medical system that continues under a cloak of legitimate lobbying efforts.
DaVita is the second largest operator of dialysis clinics nationwide. According to its latest annual report, it derives 79% of its revenue from these clinics.
The company acknowledges that it loses money on patients that use government insurance (Medicare/Medicaid/Medi-Cal) and makes all its profit from patients using commercial insurance, who are charged substantially higher rates for their dialysis services.
Former DaVita CEO Kent Thiry said at the 2017 J.P. Morgan Healthcare conference:
The private payors dramatically subsidize the government. Most of our patients are Medicare. In fact, about 85%, 90% of our patients are from the government sector. On average we lose money on each one, which leads to a grotesquely large cross-subsidy from the private sector to the government.
Thus, the company’s profitability largely relies on its mix of commercial versus government payors across its dialysis clinics.
In late 2016, the New York Times highlighted DaVita as being party to a scheme whereby it donates to a ‘non-profit’ entity called the American Kidney Fund (AKF), which then helps convert patients from low-cost government payors (such as Medicare and Medicaid) toward high-cost private commercial insurers.
In September 2017, the Southern Investigative Reporting Foundation highlighted exactly how the scheme works and how it results in billions of dollars dropping to DaVita’s bottom line at the expense of the medical system.
The AKF targets low income and minority individuals who believe they will be getting better care (when, in reality, many are being set up to pay higher costs or lose services later). The AKF then pays for the patient’s co-pays, allowing dialysis operators to burden the commercial insurers with extraordinarily high costs despite no apparent difference in treatment.
It is estimated that a year of commercial dialysis treatments for one patient can cost $160,000, compared with $40,000 when Medicare pays for them.
Last year, DaVita and Fresenius (the two largest dialysis providers) donated $247 million to the AKF. As of 2017, the AKF paid premiums for over 74,000 patients, representing almost 20% of the nation’s dialysis recipients.
In California, a bill called AB 290 just passed the State Assembly. It is directly focused on closing DaVita’s charity loophole. The bill was introduced by Assemblyman Jim Wood, who, in his press release for the bill called the actions of dialysis companies “a scheme to bankroll patients’ health care premiums.”
Commenting on the intention of the bill, Wood said:
Runaway costs in health care affect everyone, and I’m committed to protecting patients but I’m not interested in protecting dialysis companies from scamming the system for their own benefit…
…When unscrupulous dialysis companies, through a third party, steer patients away from Medicare or Medi-Cal by indirectly paying a patient’s premiums, for the company’s own financial benefit, these companies are price gouging and it’s a scam. It doesn’t improve care for patients and increases the cost of health care premiums for everyone.
The bill goes on to note the effect that the scheme has on taxpayers:
Nationally, this problem has added billions of dollars of costs to the individual and group health insurance markets.
Rather than attacking the bill on its merits, DaVita instead quietly spent $95 million on “advocacy costs” to fuel lobbying efforts to wage a propaganda war against the bill and others like it.
Keep in mind that net income attributable to DaVita Inc. for 2018 was only $159.3 million, so the amounts spent are clearly material.
In California alone, DaVita has quietly directed $67 million in the past two years to a single group in order to combat legislation aimed at closing its charity loophole.
The lead lobbying group working against AB 290 in California, “Patients and Caregivers to Protect Dialysis Patients”, has set up a website called “Dialysis Life Support”. The group claims to be “fighting to protect dialysis patient access to quality care.”
On its site, it argues that AB 290 is discriminatory and puts low-income patients at a disadvantage. Specifically, the group states:
AB 290 attacks vulnerable, low-income dialysis patients by eliminating charitable premium assistance (CPA) in California.
It sounds like a virtuous fight. So, where does the money come from?
At the bottom of the lobbying group’s website, it notes that it is paid for by “Patients and Caregivers to Protect Dialysis Patients, sponsored by the California Dialysis Council”.
Despite its public claims to be advocating for the poor and disadvantaged, the California Dialysis Council’s organizational documents say that it was formed to act in the interest of dialysis providers:
The specific purpose of this corporation is to provide state-wide representation for end stage renal dialysis providers.
As we will show, “Patients and Caregivers to Protect Dialysis Patients” seems to be nothing more than a cleverly disguised support arm for DaVita’s business, appearing to act in the interests of protecting the company rather than patients.
FollowtheMoney.org shows that about $100 million, or 90% of the budget for “Patients and Caregivers to Protect Dialysis Patients” has come from just two entities: DaVita ($67 million) and Fresenius ($33 million), providers that collectively control 70% of the California dialysis market.
Usually when you direct tens of millions to a non-profit cause they feature your sponsorship and highlight how critical your donation is to the organization. They might even throw you a dinner or name a building in your honor!
Contrary to that expectation, we see that DaVita and other for-profit dialysis operators are instead buried near the very bottom of the list of coalition members on the lobbying group’s website.
DaVita’s name falls well below relatively unknown organizations such as the “Scottish American Military Society”, “Sacramento Valley Section-National Council of Negro Women, Inc.”, and the “American Legion, Department of California”.
Since many of these obscure organizations were listed above DaVita and Fresenius on the list of those who oppose AB 290, we figured perhaps they were vital to the efforts against the bill.
After calling numerous organizations on the list, a couple things became clear:
Here’s what some of the groups that oppose the bill told us, in their own words:
Commander of the State of California American GI Forum:
As far as I’m concerned, I haven’t been informed about anything that’s out there or stance that we take, etc., so I can’t really say why are we opposed to it.
CEO of the Oxnard Chamber of Commerce:
Um, I’m trying to remember off the top of my head which one this is. We’ve followed some that have to do with dialysis for 2 or 3 years now, so I’m trying to wrap my head around which one this is.
When asked if she knew they were part of the coalition: “Yes, but we’re probably in 50 or 60 coalitions.”
When asked if she knew DaVita and Fresenius funded the coalition: “That wouldn’t surprise me. They’re trying to protect their interest obviously.”
Legislative Affairs Manager at Valley Industry and Commerce Association: We asked if he knew that most of the funding for the coalition came from DaVita and Fresenius. His response: “Uh, no.”
Press Contact for the Desert AIDS Project seemed completely surprised that the organization was involved in anything to do with dialysis:
This being Desert AIDS project…we have 6500 clients who are getting medical care from us. Only half of them actually have HIV, the other half are just getting primary care – a lot of those folks are getting treatment for Hepatitis C. So, when you’re talking about kidney care, I’m like ‘wow, that’s interesting’
President of the National Veterans Foundation:
I really listen to those veteran lobbyists that advise the group…I just wait and look at everybody and then once they say ‘hey, this is really good’ and they do a little paragraph, I go ‘OK, NVF supports’.
Associate Director of Alameda-Contra Costa Medical Association:
Normally we are in alignment with CMA’s view. If the CMA opposes something, most likely we’ll be opposing it…Our main leader is the California Medical Association when it comes to this opposition.
(Despite the California Medical Association seemingly guiding its local chapters, roughly a dozen chapters were individually listed as opponents, in addition to the CMA itself. This gives the appearance of a broad coalition of medical organizations opposing the bill despite the direction coming from only one group.)
In other instances, we called organizations opposed to the bill and found that they either went straight to voicemail or didn’t seem to have much of an organization at all.
For instance, the website address we found for the Chambers of Commerce Alliance of Ventura & Santa Barbara Counties, www.chamberalliance.biz, came up with a message that said “This Website is Disabled”.
Our calls went straight to voicemails when we called the ROA Department of the Golden West and the Black Women Organized for Political Action.
All told, despite dozens of calls to numerous organizations, we couldn’t find one well-informed member of the coalition who read the bill or who could articulate clear reasons for their opposition.
The ultimate impact of this charade is significant. Along with burdening the medical system with billions in excess costs, the AKF has also impacted patients and their families.
The daughter of one victim recently wrote an op-ed for the California Capital Weekly, highlighting DaVita’s scheme and how it led to her mother missing the opportunity for a possibly lifesaving kidney transplant:
…It didn’t take long for us to realize what a mistake we’d made. Patient care was never the priority of the American Kidney Fund. It was making a profit for its funders, DaVita and Fresenius. Patients like my mom were encouraged to switch to private health insurance because it lets the large, for-profit dialysis corporations make more profit than they would from patients covered by Medi-Cal or Medicare.
After signing up with the American Kidney Fund, my mom started having to pay high out-of-pocket costs for her medications – something she never had to do with Medi-Cal. When she tried to schedule a normal appointment with her doctor, the clinic said they couldn’t see my mom because they didn’t accept her new health insurance.
With all the money we were spending, we were getting so stressed. That’s when we began trying to get my mom back into Medi-Cal, a process that took eight months. By that time though, she was 68 and considered too old to be eligible for a kidney transplant.
We were devastated. My mom’s dialysis clinic told us we were doing the right thing by switching to commercial insurance paid for by the American Kidney Fund, and yet she ended up with inferior coverage that cost my mom her chance of getting a new kidney.
When California Assemblyman Wood introduced AB 290 he specifically called out this problem:
…patients caught up in these schemes may face higher out-of-pocket costs and mid-year disruptions in coverage, and may have a more difficult time obtaining critical care such as kidney transplants.
We’d like to provide a quick note on the dynamics of DaVita’s stock. As investors, we look for sustainable business models and therefore view DaVita as a terrible long-term business model. That being said, we have no position today because the company has a liquid balance sheet after the recent sale of a division, and has signaled an aggressive intent to buy back its shares.
While now we are primarily concerned with shining light on the company’s lobbying scheme, we may reevaluate DaVita as a potential short down the road.
Organizations that provide great service at reasonable prices don’t need to use underhanded lobbying efforts to save their charity scams.
While the proposed California bill has made some headlines, much of the work against it (and against similar legislation in other states) is being done behind closed doors. The purpose of our article today is to provide an update on the DaVita story and to shine sunlight into a lobbying effort that appears, at least to us, to be yet another scheme born out of an already existing scheme to further strain an already inefficient healthcare system.
Disclosure: We have no position in any of the stocks mentioned
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