On last week’s episode, we asked whether the U.S. healthcare system is really as messed up as people think.
Zack COOPER: Oh, I think absolutely the U.S. health system is as messed up as people think it is, probably more so.
In the U.S., we spend 17 percent of our G.D.P. on healthcare — around $3.5 trillion a year.
Marty MAKARY: The big players are doing extremely well. The stakeholders are making a ton of money except for one stakeholder, which is the patient.
As we were interviewing doctors and healthcare economists and policymakers, there was one story that kept coming up as a cautionary tale. Here’s Zack Cooper; he’s a healthcare economist at Yale.
COOPER: You want to know why the U.S. healthcare system is messed up? Look at how we treat folks with end-stage renal disease.
End-stage renal disease, or E.S.R.D., is “the final permanent stage of chronic kidney disease.” It’s also known as kidney failure. By this point, the kidneys are no longer able to perform the vital function of filtering your blood. Left untreated, the condition is fatal. What are the treatment options? Here’s Ryan McDevitt, an economist at Duke.
Ryan McDEVITT: Transplant is the most preferred option, it’s the only way to cure this condition long-term. But kidneys are very scarce. Not all patients are suitable for one.
And what happens when a kidney transplant is not an option?
McDEVITT: So really, almost all cases you have to go on dialysis after kidney failure.
Dialysis is the process by which a patient is hooked up to a machine that helps do the job their kidneys can no longer do. In the U.S., this typically happens in a dialysis clinic, where a patient might go three or four times a week for about four hours each session.
McDEVITT: It’s really a big part of your life, and it really makes it hard to do anything else.
In the 1970’s, there were only around 10,000 Americans on dialysis. Today, that number is nearly 500,000; another 200,000 people live with a transplanted kidney. Why has there been such a spike? As a population, we’ve gotten sicker. That’s one thing. The leading cause of kidney disease is diabetes, which has also spiked. About one of three adults with diabetes has some form of kidney disease, and about 30 percent of people worldwide with end-stage renal disease are diabetics. But also, the management of kidney disease has improved, so more patients stay alive long enough to be receiving dialysis. That said, it is called “end-stage” renal disease for a reason: one in five patients who start dialysis die within a year; the average survival rate is three years, with 100,000 new patients each year requiring dialysis. And what does it cost to treat a patient with end-stage renal disease?
McDEVITT: Each patient, it’s costing us about $100,000 a year to treat. We’re talking over $30 billion a year in Medicare spending. It’s 6 to 7 percent of Medicare’s overall budget, and it’s almost 1 percent of the entire federal budget, which to me is just a staggering statistic. Every $100 I send in taxes, one of it’s going to pay for dialysis.
And what about the dialysis industry? How would a healthcare economist like Zack Cooper describe it?
COOPER: The dialysis industry is just a hot mess.
A “hot mess” because, why?
COOPER: There’s not sort of one thing wrong.
How about just one, for starters?
COOPER: I don’t know what the legal definition is of fraud, but I think you’re going to see some of those firms get pretty close to the limit.
Yeah, that does sound like a pretty hot mess. So today on the show we’ll get the economists’ take on the dialysis industry.
McDEVITT: Just a case of duopoly and the bad things that can happen when there’s no competition.
Also, the politicians:
Jim WOOD: It feels like they care more about their business model than they do their patients.
And the dialysis industry itself:
Jeff GIULLIAN: From the outside, that’s exactly what I might think if I didn’t have more information.
* * *
The economist Zack Cooper is co-director of a research project called One Percent Steps for Healthcare Reform. He came to the conclusion that the U.S. healthcare system is so complex, so full of opaque practices and perverse incentives, that it’s hard to make any one big change that will radically cut costs. Instead, he enlisted a bunch of other healthcare economists to come up with evidence-based solutions that would each trim maybe 1 percent from overall spending — his thinking being that if you have enough 1-percent solutions, you’d make real progress.
One research topic that Cooper himself has explored is what’s called surprise billing. That’s when, for instance, a patient with insurance goes to a hospital that’s in their insurance network but winds up seeing an out-of-network doctor, and gets stuck with a huge bill. This is one of countless examples of healthcare spending where the dollars don’t flow in the magnitude or direction you might think they should.
COOPER: It’s easier to make money taking advantage of the rules of the healthcare system than it is to improve patient outcomes. And there are a lot of firms who have business models that basically exploit broken rules or nooks and crevices that lead to inefficiencies.
Cooper discovered that the dialysis industry is a prime example. Within the U.S. healthcare system, the dialysis industry is an outlier for a few reasons — the biggest one being its relationship with Medicare, the federal health-insurance program for older Americans.
COOPER: In the 1970s, Medicare expanded and legislators basically codified that if you had end-stage renal disease, you could get Medicare coverage.
This is very unusual. For all ailments except one other — A.L.S., or Lou Gehrig’s disease — Medicare doesn’t kick in until you turn 65. Why is dialysis an exception? It goes back to the invention of dialysis technology, in the 1960s.
COOPER: For folks who had end-stage renal disease, it was dialysis or death. And it was really, really expensive. The question was, how do you allocate it across individuals?
Committees were set up to assess each patient’s so-called “social worth.” These committees came to be known as “God panels”; they were essentially choosing which patients would live and which would die. For seven years, the federal government debated what to do about this new technology that saved lives but cost so much. And then in 1972, under President Nixon:
COOPER: They actually did a dialysis of a patient on the floor of the House of Representatives. It was this powerful moment that captivated legislators.
The chair of the Senate Finance Committee at the time was Russell B. Long, a Democrat from Louisiana. “I sat there and thought to myself: We are the greatest nation on earth,” he later recalled, “the wealthiest per capita. Are we so hard-pressed that we cannot pay for this?”
COOPER: And the thing got inserted at the 11th hour into a Medicare reform bill, and changed the shape of the Medicare program.
So, while Medicare-for-All is not yet a thing in the United States, Medicare-for-all-dialysis-patients is. With one key stipulation:
McDEVITT: Private insurance picks up the first 30 months if you are on private insurance when you begin dialysis.
That, again, is the Duke economist Ryan McDevitt. Why 30 months?
McDEVITT: Someone in D.C. decided 30 months is the right number, and we’ve been sticking with it.
So for some people with kidney failure — especially younger ones who are still working — their private or commercial insurance picks up the dialysis bill for the first two-and-a-half years, at which point Medicare coverage takes over. Although the disease is so exhausting that many of these patients have to stop working. Then they lose their private insurance and move on to Medicare. And here is a key fact: the rates paid by Medicare to the big dialysis chains are much lower than the rates paid by private insurance companies.
McDEVITT: Medicare just sets a rate. You have to take it or leave it. But the big chains can negotiate very high reimbursements from private insurers three or four times as generous as Medicare reimbursements.
Medicare rates do vary a bit, but typically, one dialysis session is priced at around $250. So for a patient getting dialysis four times a week, the clinic gets $1,000 a week from Medicare. But if the patient has commercial insurance, the same clinic might get up to $4,000 a week.
COOPER: And so, these big companies basically make all of their profits from a very, very narrow sliver of commercially-insured patients.
Cooper says around 12 percent of people who need dialysis are funded by commercial insurers.
COOPER: And the guesstimate is, for some of these big firms, that’s about 40 percent of their revenue and all of their profit.
The U.S. dialysis market is dominated by two large firms: DaVita, which is based in Denver, and Fresenius, with headquarters in Germany. DaVita and Fresenius are rivals when it comes to running dialysis clinics but, because Fresenius also manufactures dialysis machines, DaVita is also one of their biggest customers. McDevitt again:
McDEVITT: These are for-profit, publicly traded companies. So their mandate, their whole reason for existence, is to make as much money as possible. And that’s what they do.
In the most recent years for which they reported earnings, DaVita had about $1 billion in profits, Fresenius nearly $1.4 billion. So: nowhere near Facebook profits and not even as much as Netflix but still, a very healthy business. And think about the nature of the dialysis business, and its clientele. If you are the kind of businessperson who envies a subscription model, like Netflix’s, because it guarantees a steady flow of revenue — well, it sounds terrible to say so, but dialysis patients are about as loyal as any subscriber can be. Which makes dialysis clinics an attractive investment target.
Over 30 percent of DaVita’s stock is owned by Berkshire Hathaway, the investment conglomerate run by Warren Buffett. As we discussed in last week’s episode, medicine has become very much a profit-driven industry, with even non-profit hospitals making a lot of money thanks to their tax-exempt status. In order to profit-maximize, healthcare firms often scale up and consolidate, just like you see in other industries. That’s what’s happened in the dialysis market: of the 7,500 dialysis clinics in the U.S., more than 5,000 are owned by either DaVita or Fresenius.
McDEVITT: We went from about 80 percent independently-run dialysis clinics to now two-thirds in these two big chains, really just a case of duopoly and some of the bad things that can happen when there’s no competition.
Is McDevitt saying DaVita and Fresenius are somehow colluding?
McDEVITT: I would say not quite collusive. I don’t have any evidence they’ve gotten in a back room somewhere and try to hash out deals. But in economics, you don’t really need that. Our theory is they can learn to stay away from each other, not invade each other’s turf.
In a previous Freakonomics Radio episode called “America’s Hidden Duopoly,” we described a much more famous duo — the Democratic and Republican parties — and how they rely on each other to collectively dominate the market for votes. Ryan McDevitt argues that DaVita and Fresenius have become nearly as dominant in their market, having spent the past 30 years buying up independent dialysis clinics. These were often owned by nephrologists — kidney doctors — or a hospital. You might think a consolidation like this would trigger antitrust concerns. But any one dialysis clinic just isn’t that valuable.
McDEVITT: Maybe $4 million in revenue per year. So that’s way under any threshold for antitrust scrutiny. No one’s really going to look at this.
The University of Chicago economist Thomas Wollman calls this “stealth consolidation.” And we should probably expect more of it. Twenty years ago, the threshold for reporting a merger to the Federal Trade Commission was $10 million; now it’s $90 million. In the case of DaVita and Fresenius, their acquisition of so many dialysis centers gives them market power, which in turn gives them bargaining power with commercial insurance companies. That’s how they’re able to set an insurance price that can be four times higher than the Medicare price.
In a case like this, where denying care would mean death, insurers just don’t have much leverage. Now, again: consolidation is common throughout the healthcare industry — hospital chains, doctors’ practices, equipment manufacturers, you see it everywhere. One reason is that administrative costs now make up roughly one-third of all healthcare spending in the U.S. That’s partly because of regulations that have made practicing medicine so much more complicated — and this certainly includes the regulations for a dialysis clinic.
McDEVITT: There are quite burdensome data requirements, they had to report a lot, and the chains are good at that. They have a good I.T. system, there are kinds of scale when it comes all of the other record-keeping they have to do, so for an independent nephrologist, it’s really hard to keep up with the data side of it.
Size also allows a big chain to approach profit-maximizing the way that maybe a fast-food chain might.
McDEVITT: DaVita, they had a very charismatic C.E.O., Kent Thiry. He said he wants to run all his clinics like a Taco Bell.
Kent THIRY: If I had 1,400 Taco Bells and 32,000 people who worked in them, I would be doing all the same stuff.
McDEVITT: And that was intriguing to us because maybe this idea, that if we standardize care, if we cut out a lot of the waste, maybe we can have better outcomes at a lower cost and we’re going to solve a lot of our healthcare problems across the U.S. It turns out, though, you probably don’t want to run your healthcare system like a Taco Bell.
DUBNER: Because why?
McDEVITT: Well, because the stakes are a lot different. If you cut back on the quality of your meat, or you don’t clean your Taco Bell quite as frequently, maybe that results in a poor dining experience. But no one’s life is really at stake.
To be fair, people have suffered severe illness from eating contaminated food at Taco Bells. But you get the point. Kent Thiry was C.E.O. of DaVita for 20 years; he stepped down in 2019. His emphasis on growth and scale inspired Ryan McDevitt and a few other economists to study DaVita, Fresenius, and the rest of the dialysis industry. They analyzed about 12 years’ worth of Medicare claims and clinical data that included everything from drug dosing to staffing information to patient outcomes. Last year, they published their findings in The Quarterly Journal of Economics, one of the leading journals in the field. The economists identified three major changes after a for-profit chain like DaVita or Fresenius would acquire a dialysis clinic from an independent operator, many of which had been run as non-profits.
McDEVITT: One would be the drug doses. We see for each patient what kind of doses they’re getting, from which drugs each session. We saw, for instance, that EPO doses nearly doubled right after acquisition for the same patients, the same facility, as soon as the ownership changed.
EPO, or erythropoietin, is a hormone that in a healthy person is made by the kidneys; it helps produce red blood cells. As McDevitt notes, you wouldn’t expect a given patient to suddenly need double the amount of EPO simply because their dialysis clinic had a new owner. And how did new ownership affect clinic staffing?
McDEVITT: You have two main people working at a clinic. You have the nurses and the dialysis techs. Nurses have more extensive training, tend to be higher quality. At least they’re viewed as higher-quality labor.
“Higher-quality labor” meaning higher-paid labor.
McDEVITT: So the for-profit chains emphasize more techs than nurses. We also saw the facilities have more patients per employee. We also saw more patients per machine — which again, in a for-profit setting, you like to see that they’re running a lean operation, they’re being more efficient. But on dialysis, there’s a big tradeoff. If you can’t thoroughly clean and disinfect each station between treatments, you put your patients at risk. And then we see in the data, one of the outcomes that deteriorated after acquisition were the blood-infection rates. Patients got more infections after an acquisition.
So those all sound like potential downsides of consolidation. And somewhat more serious downsides than you’d worry about if you owned a few thousand Taco Bells. There was one more big difference McDevitt saw after an independent dialysis clinic was acquired by a chain:
McDEVITT: We saw, on the first year of dialysis, the rate of being on the transplant waitlist or actually getting one fell about 9.5 percent.
Remember, the best possible outcome for a patient with kidney failure is to get a transplant; that obviates the need for dialysis.
McDEVITT: I think that’s really, for me, that would be the biggest statistic is whether you get a successful transplant.
Not every patient with kidney failure is medically qualified to get on a transplant waitlist. It’s also possible that as the patient population becomes sicker, the share of qualified patients may fall. Still, a 9-percent drop in patients getting on a waitlist after a clinic was acquired concerned McDevitt, and he found it fit a larger pattern.
McDEVITT: I have seen a number of interviews where representatives of DaVita and Fresenius, they actively tell patients not to seek out a transplant. “You’re not going to like it. It’s going to be a burden for you. You’re going to lose your family, your community. You’re coming here three times a week. We’re family now.”
Would a firm like DaVita really do what McDevitt is suggesting? We went to the source:
GIULLIAN: My name is Jeff Giullian. I’m a kidney doctor from Denver, and I serve as the chief medical officer for DaVita.
DUBNER: So, some of the people we’ve been talking to have made the argument that DaVita and others may actively discourage some dialysis patients from entering the transplant protocol, from getting on a donor waitlist, even if they might be a good candidate. Now, that’s a big charge. A cynic would say that a firm like yours would rather keep that patient as a customer forever rather than have them receive a new kidney and no longer need your dialysis.
GIULLIAN: Absolutely, unequivocally false. I think that from the outside, it would make perfect sense. “Gosh, if a patient gets a kidney transplant, they no longer require your dialysis services. And hence, you’ve lost a patient.” That is not the way we think. While there are always financial incentives that drive decisions in all sorts of industries, within dialysis, I think it is significantly, significantly more nuanced than that. The easy answer is always a financial one. And I’m here to tell you both as a physician and now as somebody who does population health management at an administrative role, it’s not the financial issues that occur. Quite frankly, as a physician, I wouldn’t work for a company that was using financial incentives to make those types of decisions.
It wasn’t so long ago that medicine was considered a higher calling. It was different from auto manufacturing or agriculture, even law. But one consequence of medicine having become an industry — remember, it constitutes 17 percent of our G.D.P. — is that ethics and dollars don’t always line up just right. Jeff Giullian makes it sound as though medicine still is a higher calling for him, and for DaVita. I asked Ryan McDevitt, the Duke economist who’s studied the firm, if he agreed.
McDEVITT: I haven’t been inside the organization, so it’s really hard for me to say. I know they present themselves that way. At Duke, we send a lot of graduates there. A former DaVita executive just made an eight-figure donation to Duke. I know a lot of my former students work there and they’re great people. I think they really do care. They want to make a difference. But when you look at these stats from Medicare data, they just jump out of the page at us.
DUBNER: Considering that eight-figure donation, did anyone at Duke ask you to reconsider any details in the paper that you published on them?
McDEVITT: My business school dean, of course, would be much happier if I had found that DaVita was saving the world. But we have independent research. No one’s at Duke telling me what I can and cannot publish.
* * *
It’s well-known that the U.S. spends more money on healthcare than any other country and yet has far from the healthiest population. Medicine has become — at least to a significant degree — a market-driven industry with massive spending on pills and procedures, but not much spending at all on prevention or health maintenance. One example: end-stage renal disease, in which nearly half-a-million Americans receive treatment covered by Medicare that costs about $100,000 a year per patient, with roughly half of that money going to dialysis clinics and the rest to in-patient facilities. The dialysis industry has come to be dominated by two firms, DaVita and Fresenius. As we’ve heard so far, a peer-reviewed economic analysis shows these firms behave in a variety of ways that seem closer to profiteering than just profit-maximizing.
GIULLIAN: From the outside, I think that’s exactly what I might think myself if I didn’t have more information.
Jeff Giullian used to be a kidney doctor in private practice in Denver. Now he’s the chief medical officer at DaVita. He says that yes, much more could and should be done to promote kidney health, but DaVita’s mission is to care for patients who reach E.S.R.D., or end-stage renal disease.
GIULLIAN: I think about it a little bit like a trauma center. So, a trauma center at a local hospital does not want there to be a massive pileup on the highway. A trauma center doesn’t want there to be a mass shooting. But a trauma center exists because unfortunately, those things occur. And the truth of the matter is in dialysis, we feel the same way. I would love it if there was no more need for dialysis, if there was no more kidney failure. I would go out and find another job in a heartbeat. But unfortunately, that’s not the world we live in. And we do have people that need dialysis. And so, we are here, just like that trauma center is there, to take care of those patients that need it.
And what does Giullian say to the research showing that consolidation in the dialysis industry has led to higher profits but worse outcomes for patients?
GIULLIAN: Mortality has decreased by a third over the past two decades. So, I think that these ideas that somehow profits come at the expense of taking great care of patients, I think it’s nonsense, quite frankly.
Jeff HYMES: I understand the attractiveness of trying to paint this as nefarious. But I do think that it’s a natural outgrowth of the payment system.
That’s Jeff Hymes, also a kidney doctor, and the chief medical officer of the North American division at Fresenius Kidney Care, the other big dialysis firm.
HYMES: I don’t think this is a phenomenon that’s limited to dialysis. It’s happened with healthcare systems all over. It’s happened with all kinds of businesses. Medicare reimbursement for dialysis has been very slow to keep pace with expense. And it becomes increasingly difficult to operate a dialysis company at small scale.
Jeff Giullian of DaVita recalls these financial pressures from when he ran his own nephrology practice.
GIULLIAN: As a physician, I always felt like I wanted Medicare to reimburse me more for the care that I gave, because our costs as a physician group were always rising. Our nurses cost more from year to year. Our electricity and our rent cost more from year to year. But that increase in dialysis payments really has not gone up significantly on a year-to-year basis.
Economists who have studied the dialysis industry agree that these fixed and relatively small Medicare payments do not enable dialysis firms to make much money. At least not without some creativity. Remember, here’s what the Duke economist Ryan McDevitt found when he analyzed data from dialysis clinics after they’d been acquired by one of the big chains.
McDEVITT: They nearly double the drug doses for patients. And again, we’re looking at the very same patient before and after this acquisition, so it’s not that characteristics change, it’s not like they got sicker, everything else was held constant. It was just that change in owner that was driving all this difference.
How does McDevitt explain the increased doses?
McDEVITT: Medicare was giving fee-for-service reimbursements for these drug doses, which means that each dose the clinic gave their patients was a marginal profit, and it was quite lucrative. It was up to 25 percent of DaVita’s revenue and 40 percent of their profits during this time period. So really a key financial incentive to give excessive doses to patients.
But that incentive was done away with when Medicare caught onto this practice. In 2011, they changed their payment system from per-dose to per-session. And what happened after this change?
McDEVITT: We saw doses fall about 50 percent right after the payment reform.
As McDevitt and others describe it, the dialysis industry and DaVita in particular have a history of shady practices in the pursuit of higher profits. In 2014, the firm agreed to pay more than $350 million to settle claims that it had given illegal kickbacks to doctors in exchange for patient referrals. The whistleblower was a former senior financial executive at DaVita. The following year, in a case brought by two whistleblowers, DaVita agreed to pay $450 million against charges of illegally billing the federal government for dialysis drugs. There have been other fines and settlements, adding up to at least $1 billion over the past 10 years.
Jim CHANOS: This is just a cost of doing business. Okay, that’s fine.
That’s Jim Chanos, who runs a hedge fund called Kynikos Associates. His specialty is short-selling — betting that a given stock or other asset will lose value. You’ve probably heard about the recent short-selling drama over GameStop stock. Anyway: Chanos made his name years ago shorting Enron stock.
CHANOS: We’ve seen that corporate wrongdoing increasingly is penalized economically by fines and penalties. But that’s it. No one ever goes to jail. And I think that’s the problem. You actually have people deciding to do this, but the corporations themselves end up just paying for it if they get caught.
Short-sellers are often depicted as exploitive, taking advantage of a good company’s bad fortunes. Chanos doesn’t see it that way.
CHANOS: The real role that short-sellers play in the market that nobody else plays is that they’re the real-time financial detectives. And regulators are the financial archeologists in the system. The regulators will tell you what happened years and years later after you’ve lost all your money. And short-sellers have an economic incentive to ferret out fraud. We live in what I call right now the golden age of fraud. And so, companies with very questionable business models have actually done better than companies playing by the rules for the most part.
So Chanos is always looking for companies that make their money with a questionable business model. In 2014, he came across DaVita and Fresenius. By this point, the drug-dosing Medicare loophole had been closed. But as he dug into their business, he discovered what looked like a suspicious relationship between the two dialysis chains and a charity called the American Kidney Fund, whose mission is to provide financial support to needy patients.
CHANOS: So, the American Kidney Fund will help various patients pay for private policies.
Private insurance policies, that is, instead of Medicare.
CHANOS: The patient is strongly urged because of quality of care, convenience, whatever the case might be, that they will be treated better as a commercial-policy patient rather than a government-policy patient and that the American Kidney Fund could help them pay those premiums.
On its surface, that does not sound like a terrible thing for a kidney charity to do. But Chanos looked at it from the perspective of the dialysis industry.
CHANOS: If the dialysis companies could push people that would normally be eligible for Medicare into commercial policies, private policies, they could charge those companies often two to four times what the going Medicare reimbursement rate was.
And Chanos believed that pushing people onto commercial insurance is exactly what the American Kidney Fund was doing. It’s helpful here to follow the money.
CHANOS: It will come as probably no shock that the two largest donors to the American Kidney Fund are the two largest dialysis companies, Fresenius and DaVita.
CHANOS: So, they are basically putting money into the charity. The charity is turning around and using that money to help pay premiums to enroll patients in commercial insurance. And then, the commercial insurers are charged a huge premium to what the dialysis companies are charging the government.
It’s estimated that for every dollar that DaVita or Fresenius send to the American Kidney Fund, they receive $3.50 in return from private-insurance payments.
CHANOS: And that’s the problem.
One especially interesting part of this arrangement is who’s losing money: the insurance companies! It’s not often you hear about insurance companies on the losing end — and maybe you don’t have much sympathy.
CHANOS: “Well, it’s the private sector, right? So, why should we care if the insurers make less profits?” Well, the fact of the matter is it’s raising premiums for everybody in the exchanges.
That is, the insurance exchanges, the marketplaces created by the Affordable Care Act, also known as Obamacare.
CHANOS: And the head of California Blue Cross Blue Shield was on the record saying that the dialysis in California was driving up private policy rates dramatically.
Some insurers have fought back, without much success yet. As for Jim Chanos: he gave up his fight. He was short DaVita stock for a few years, but he exited his position in 2020. At the start of 2019, DaVita’s stock price was in the fifties; today, it’s above $100 per share.
A short-selling investor like Jim Chanos may not be a disinterested source on the relationship between the big dialysis firms and the American Kidney Fund. But there’s been plenty of other reporting on this scheme, and the Yale healthcare economist Zack Cooper is convinced it is as unsettling as it appears. He’s also convinced that it couldn’t have happened without the Affordable Care Act.
COOPER: Before, because you could price insurance plans as a function of an individual’s health risks, you could charge huge amounts of money for premiums for folks with end-stage renal disease.
But the Affordable Care Act stipulated that insurers could no longer use pre-existing conditions to charge higher premiums. The only acceptable inputs were a patient’s age, ZIP code, and whether they smoked.
COOPER: So, for somebody with end-stage renal disease, pre-Affordable Care Act, if you were to try to get health insurance on the private markets, you would have basically been priced out. The insurer would have known that you were 100 percent going to need dialysis and then basically would have charged you the price of dialysis for your premiums.
And the high cost of dialysis was the whole reason that Medicare universally covers it in the first place. But now a patient with end-stage renal disease could buy private insurance much cheaper than they would have been able to otherwise, and those private insurers were compelled to pay the dialysis firms up to four times as much as the Medicare rate for every dialysis session.
DUBNER: So Zack, how would you assess the — skill, I guess — with which Fresenius and DaVita took advantage of this Obamacare loophole to funnel money through the American Kidney Fund in order to grow their profits?
COOPER: I think Dr. Evil was looking at them going, “That was some pretty slick work.” I think it’s a really good example of finding a loophole and then driving a truck into that loophole as quickly as humanly possible. Capitalism, baby.
GIULLIAN: I don’t see it the same way that they see it. Clearly, they’re looking at it one way and I look at it another way.
That, again, is Jeff Giullian, DaVita’s chief medical officer. He says private insurance gives a dialysis patient significant advantages over Medicare coverage.
GIULLIAN: Medicare only pays 80 percent of a patient’s costs. So, if a patient ends up in the hospital, they are on the hook for some percentage, 20 percent of those costs.
Indeed, a patient with end-stage renal disease has a 20 percent co-pay, not just for dialysis sessions but for other issues that may go along with kidney failure.
GIULLIAN: Patients on dialysis have on average about five other medical conditions. So, they need to see their cardiologist. They might need to see their endocrinologist. They are hospitalized intermittently. And so, the American Kidney Fund makes it possible for them to have supplemental insurance and to pay those bills, ultimately.
DUBNER: Why fund the insurance, however, through these non-profits where it can give the appearance of some kind of profiteering or profit-laundering? Why not directly subsidize the patients, either through their insurers or some other channel, including perhaps the Affordable Care Act, so that the money can be more directly used by those patients?
GIULLIAN: We’re not in the business of subsidizing anybody. We’re in the business of taking care of patients. And so, when we donate to any of these organizations, they then can distribute in a way that makes the most sense for them and for patients. And that may be patients that dialyze with somebody other than us. So, our job here is not to pick and choose who gets help. Our job is to make sure we’re supporting patients.
Is it true that a patient who gets American Kidney Fund money for private insurance is free to go to any dialysis clinic? In 2019, a lawsuit from 2015 was unsealed, based on information from a whistleblower at the American Kidney Fund — alleging that the A.K.F. would only buy private insurance plans for patients going to a clinic owned by one of the two major A.K.F. funders, DaVita or Fresenius.
The U.S. Justice Department, however, declined to join the whistleblower suit. And the American Kidney Fund declined our request for an interview. They did send us a statement, from C.E.O. LaVarne Burton, saying that the lawsuit was filed by a “disgruntled former employee who was terminated for cause” and that the American Kidney Fund “fills a gaping hole in the safety net for the neediest dialysis and transplant patients.” Meanwhile, there is a legislator in California who fully believes the accusations against the American Kidney Fund and the dialysis chains.
WOOD: We decided to introduce a bill that would essentially end this practice, and say that if you are getting private insurance paid for by a third party, that you would get the Medicare rate, not the private-insurance rate.
Jim Wood, a Democrat, is chair of the Health Committee in California’s state assembly. The legislation he introduced, in 2019, was Assembly Bill 290. His argument, like the short-selling investor Jim Chanos’s argument, is that the dialysis industry’s self-funded private-insurance scheme is driving up costs for everyone who buys health insurance.
WOOD: We got complaints from the industry that, “Well, you’re a shill for the insurance companies and they’re going to save this money, and what do we get out of it?”
DUBNER: I’ve read that the American Kidney Fund said that if the bill passed, they would leave the state. So, what does that mean exactly?
WOOD: What it means to me is that they really — it feels like they care more about their business model than they do their patients, because I think there are other things they could do. We didn’t say you couldn’t provide the policies. We just said you couldn’t have the industry expect the same level of remuneration. So, if they’re truly a nonprofit that really cares about patients, they’d be looking for solutions take care of those patients. You wouldn’t just pull up your tent stakes and go home.
DUBNER: And what is the status then of A.B. 290?
WOOD: Well, the bill was very contentious. And the industry lobbied really, really hard. But ultimately, we got it across the line. It was signed by the governor. And then, as no good deed goes unpunished, we were sued.
DUBNER: Sued by whom?
WOOD: The American Kidney Fund.
In part because of the lawsuit and in part because of Covid, Wood’s bill is stalled in court. In the last few years, there have also been two ballot propositions put to California voters about the dialysis industry. These would have addressed many of the issues we’ve been hearing about today — requiring more highly-trained staff and better reporting of patient data; also, potentially capping profits, especially profits derived from private insurance. Both ballot proposals failed.
WOOD: The industry was willing to spend whatever it took to defeat these, and they did.
We asked Jeff Giullian from DaVita about the most recent California ballot measure, Prop 23, and why exactly DaVita fought it.
GIULLIAN: As a clinician, one of the things that made no sense to me about that proposition was that it would require a physician to be in the dialysis center the entire time that patients are getting dialysis. Now, as somebody who’s maybe not familiar with this, you might say, “Well, gosh, that sounds like a great idea.” Except that that’s not the way that dialysis works. And there are, quite frankly, not enough kidney doctors to go around. There’s already a shortage in this country.
And so, what this proposition would have done is led to the closure of somewhere between 80 and 90 percent of dialysis facilities in California. So, what that would mean for patients is one of two things. Either they would not get dialysis and they would die, which is not a good option, or they would not get dialysis, and every two or three days, they would have to be rushed to the emergency room to get dialysis in a hospital, which is equally not a good option because that would lead to suboptimal care and unfortunately, excess patient death.
DUBNER: Now, that sounds horrible and scary. I know that DaVita spent more than $65 million out of a total of around $105 million to defeat that California proposition last year. The cynic in me, or the skeptic at least, wants to say, “Well, this is what firms do when they’re defending their turf. They throw out scare tactics. They say, ‘All these providers will have to close inevitably because you’re overregulating and people will die as a result.’” I’m sure that was not the intention of those who wrote the proposition, which is that kidney patients will die. They are charging you of excess profiteering. So, what do you really think would be the worst thing had that proposition passed?
GIULLIAN: Well, I think exactly what I said in terms of that fear that a lot of dialysis facilities would have closed. And this wasn’t actually just our analysis. When outside medical organizations looked at this objectively, they came to that same conclusion. And that’s a very scary conclusion.
DUBNER: So, here’s the thing. Your firm — including from before you were there, so I’m not assigning this blame to you — but your firm has a pretty spotty track record when it comes to compliance and ethics. In 2014, DaVita agreed to pay $350 million to settle claims that it had provided illegal kickbacks to doctors. In 2015, the company agreed to pay $450 million to settle allegations that it unnecessarily disposed of drugs and then billed the federal government for that waste. So, from the outside, what are we supposed to think? When we read about the American Kidney Fund and what sounds like profit-laundering, are we supposed to think that your firm has gotten religion and turned a new leaf?
GIULLIAN: It’s hard for me to answer that as a member of the organization because those occurred when I was a physician in practice. What I recall as a physician in practice when those occurred — and my practice had patients in DaVita dialysis facilities as well as other dialysis facilities — was initially a re-evaluation on my part of whether the care that my patients were receiving at DaVita was different and somehow suboptimal compared to the care that my patients were getting when they were in other dialysis facilities. And so, I actually went back and looked at this and I could find no concern in terms of the clinical quality or the patient safety. And in fact, in many cases, I felt that the care they were getting was even better. And so, I made a decision at that point as an independent physician that I wanted my patients to continue to stay where they were dialyzing.
DUBNER: As a nephrologist in private practice before joining DaVita, were you ever offered any sort of kickback or incentive from DaVita or any other larger firm that we might consider illegal or unethical?
GIULLIAN: Absolutely not. If I was, I might be sitting on a yacht right now, but no, I was not offered anything like that.
Based on the evidence we’ve heard today, the big dialysis chains are better at maximizing profits than patient outcomes, and they appear to exploit whatever loopholes the federal government opens up.
McDEVITT: They respond to the incentives put in place by Medicare.
The Duke economist Ryan McDevitt again.
McDEVITT: They’re gaming the system, but they’re playing the game that’s in front of them. But really, I think it’s incumbent on Medicare to set incentives in a way that aren’t gamed like they’re doing right now.
In other words: an economist doesn’t blame the dialysis industry for exploiting the incentives they’re given; he blames the system for creating incentives that are so tempting to exploit. So what happens next? Does anything change?
McDEVITT: Trump did have some good ideas for dialysis care.
Before the pandemic, President Trump signed an executive order addressing not just the dialysis industry, but kidney care generally.
Alex AZAR: Why do you tackle kidney care? Well, it’s where the money is.
That is Alex Azar, the Secretary of Health and Human Services under Trump. You remember what Ryan McDevitt said about the cost of treating end-stage renal disease?
McDEVITT: It’s 6 to 7 percent of Medicare’s overall budget, and it’s almost one percent of the entire federal budget.
Alex Azar helped launch a series of kidney-care initiatives well beyond dialysis: financial incentives to providers to encourage prevention and early detection of kidney disease; also, trying to encourage kidney donation by rolling back the prohibitions against donor compensation.
AZAR: You can actually get compensated for lost wages, for travel expenses, and for child care and for elder care. So try to create not an incentive, but make it easier for those who want to give this gift of life, of being a living donor, make that easier.
Another big change Azar tried to work on: letting more end-stage renal disease patients get dialysis at home rather than trekking to a dialysis clinic three or four days a week.
AZAR: The United States, of our people on dialysis, 12 percent are doing home-based dialysis. In Guatemala, it’s 58 percent are getting home dialysis. In Hong Kong, it’s over 80 percent. We lag behind the world in this.
Ryan McDevitt has looked at how kidney patients do in home care versus dialysis-center care.
McDEVITT: Outcomes are better. Quality of life is better. That’s where we should be moving as a country, trying to get more care at home.
Alex Azar’s own father had kidney failure. He died last year, at 80, his life extended by a kidney transplant as well as home dialysis treatment.
AZAR: The way that works is, while you’re sleeping at night, you basically plug into a machine and it uses just notions of osmosis and water filtration to clean your blood while you sleep during the eight hours that you’re sleeping. And you do that every single night. You may be able to keep working, keep engaged with family and everything, and you’re in your own home.
Given all these benefits of home dialysis, and given that many other countries do much more of it, why doesn’t the U.S.? Prior to the Trump kidney-care reforms, the Medicare reimbursements were identical for dialysis at home or in the clinic. For DaVita and Fresenius, there wasn’t much incentive to encourage home dialysis.
AZAR: It’s cheaper for them to have a bunch of dialysis machines in a common center with a common employee base. Their cost basis is going to be lower, their profit higher than if they’re having to support people out in the home doing that. And so the financial incentives are just against it. Not that they would intentionally steer people away from it, but it’s just business.
As H.H.S. secretary, Azar worked with DaVita and Fresenius on how best to incentivize at-home dialysis. He told us that both firms have committed to increase at-home dialysis, hoping to reach 25 percent in the short term. To get there, Azar introduced a new payment model that takes two forms:
AZAR: The first is what’s called a voluntary model. So that’s where those who provide dialysis and those who treat and care for people suffering from chronic kidney disease can voluntarily sign up to assume various risk. So at the lowest end of risk, providers can opt in and say, “If we’re able to get more people on home dialysis, if we’re able to get more people to arrest their chronic kidney-disease progression, if we are able to get more people to get into transplant, we’ll make more money.” That’s a pure upside. So there’s no downside risk, but simply an incentive to get better.
In other words, a direct financial incentive. And Medicare will pay more when providers use what is called “qualifying innovative equipment and supplies” — including home dialysis machines. The second program goes a step further.
AZAR: Big dialysis centers, big primary-care groups, big groups of nephrologists, they can actually assume higher degrees of risk where they actually manage the total cost of care. And so that takes your patient with chronic kidney disease and says if you can help manage this individual to get them into transplant, which was the best outcome and lowest cost overall, you make money.
This would mark a shift away from the fee-for-service model that dominates the U.S. healthcare system toward what’s called value-based care, where providers are paid according to their patients’ outcomes. This idea goes back to the practice of medicine before it was such a complex industry: the goal is to get or keep people healthy, not simply to perform more procedures. We asked Jeff Giullian and Jeffery Hymes, the chief medical officers of DaVita and Fresenius, what they thought of shifting more resources upstream.
GIULLIAN: There are a lot more people out there living with early stages of kidney disease.
GIULLIAN: In fact, one in seven of us have some form of kidney dysfunction. Now, for most of us, we will live our whole lives and that won’t bother us. So, if you think about this, taking off our clinical hat, and just said, “Well, gosh, where is it that there are the most number of patients?” There are the most number of patients upstream living with some amount of kidney dysfunction.
In other words, a company specializing in kidney care should theoretically be able to prosper with a patient base that hasn’t reached end-stage renal disease. And here’s Jeff Hymes from Fresenius:
HYMES: I just don’t think that it’s credible to say that either the physicians treating the patients or the company are so money-blind as to say that we don’t want to prevent progression to E.S.R.D.
The Trump executive order on this new kidney-care payment model has been frozen by the Biden administration, not a surprising development as the new administration evaluates which Trump healthcare reforms to keep. In the meantime: lessons have been learned.
COOPER: I think that the story of end-stage renal disease is a window about why we spend a lot on health care in this country.
That again is the healthcare economist Zack Cooper.
COOPER: Incentives matter. If you pay firms on a fee-for-service basis, they’re going to do everything they can to squeeze as many patients through in as short an amount of time as possible. And if you don’t measure quality, you’re probably going to see quality go down. If there’s the opportunity for those firms to get higher reimbursements if an individual has commercial insurance, you’re going to see those firms buy those people commercial insurance. And if you see that there’s a nook or cranny or crevice that can be exploited to generate large returns, you ought to expect the firm to enter that crevice.
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Freakonomics Radio is produced by Stitcher and Renbud Radio. This episode was produced by Zack Lapinski, with research help from Jacob Clemente. Our staff also includes Alison Craiglow, Greg Rippin, Mark McClusky, Matt Hickey, Mary Diduch, and Emma Tyrrell; we had help this week from Jasmin Klinger. Our theme song is “Mr. Fortune,” by the Hitchhikers; the rest of the music was composed by Luis Guerra. You can subscribe to Freakonomics Radio on Apple Podcasts, Stitcher, or wherever you get your podcasts.
- Zack Cooper, healthcare economist at Yale.
- Marty Makary, surgeon at Johns Hopkins and author of The Price We Pay: What Broke American Healthcare — and How to Fix It.
- Ryan McDevitt, economist at Duke.
- Jim Wood, chair of the Health Committee in California’s state assembly.
- Jeff Giullian, chief medical officer of DaVita Kidney Care.
- Jeff Hymes, chief medical officer of Fresenius Kidney Care.
- Jim Chanos, founder and managing partner of Kynikos Associates.
- Alex Azar, former secretary of Health and Human Services.
- “Shifting Dialysis Away From Employer-Based Coverage Cost Medicare $3 Billion, Study Finds,” by Allison Inserro (American Journal of Managed Care, 2021).
- “The Cost of Transferring Dialysis Care From the Employer-Based Market to Medicare,” by Eugene Lin (JAMA Network Open, 2021).
- “Biden Administration Pauses Key Value-Based Reimbursement Models,” by Jacqueline LaPointe (Xtelligent Healthcare Media, 2021).
- “Kidney Dialysis Is a Booming Business—Is It Also a Rigged One?” by Carrie Arnold and Larry C. Price (Scientific American, 2020).
- “Worldwide Epidemiology of Diabetes-Related End-Stage Renal Disease, 2000–2015,” by Hui-Teng Cheng, Xiaoqi Xu, Paik Seong Lim, and Kuan-Yu Hung (Diabetes Care, 2020).
- “California Voters Will Again Consider New Dialysis Center Regulations with Prop. 23,” by Melody Gutierrez (Los Angelos Times, 2020).
- “Mandatory Medicare ESRD Model to Launch in January 2021,” by Rich Daly (Healthcare Financial Management Association, 2020).
- “How to Get Away with Merger: Stealth and Consolidation and Its Real Effects on U.S. Healthcare,” by Thomas G. Wollmann (National Bureau of Economic Research, 2020).
- “How Acquisitions Affect Firm Behavior and Performance: Evidence from the Dialysis Industry,” by Paul J. Eliason, Benjamin Heebsh, Ryan C. McDevitt, and James W. Roberts (The Quarterly Journal of Economics, 2020).
- “FMC Sees U.S. Government Easing Home Dialysis Goals,” by Ludwig Burger and Patricia Weiss (Reuters, 2020).
- “More Than a Third of U.S. Healthcare Costs Go To Bureaucracy,” by Linda Carroll (Reuters, 2020).
- “Berkshire Hathaway Bet Big on Dialysis Giant DaVita. Jim Chanos Thinks It’s a Scam.” by Christine Idzelis (Institutional Investor, 2019).
- “Out-Of-Network Billing And Negotiated Payments For Hospital-Based Physicians,” by Zack Cooper, Hao Nguyen, Nathan Shekita, and Fiona Scott Morton (Health Affairs, 2019).
- “Top Kidney Charity Directed Aid to Patients at DaVita and Fresenius Clinics, Lawsuit Claims,” by Reed Abelson and Katie Thomas (The New York Times, 2019).
- “Trump Orders Overhaul of Organ Transplant and Kidney Dialysis Systems,” by Lenny Bernstein and Kimberly Kindy (The Washington Post, 2019).
- “DaVita Talks Plans for Home Dialysis Growth in Wake of Federal Order,” by Jensen Werley (Denver Business Journal, 2019).
- “Florida Blue Sues DaVita, Says Company Conspired to Cost it ‘Tens of Millions of Dollars’,” by Max Marbut (Jacksonville Daily Record, 2019).
- “A Comparison of Payments to a For-profit Dialysis Firm From Government and Commercial Insurers,” by Christopher P. Childers, Jill Q. Dworsky, Gerald Kominski, and Melinda Maggard-Gibbons (JAMA Internal Medicine, 2019).
- “U.S. Seeks to Cut Dialysis Costs with More Home Care Versus Clinics,” by Caroline Copley and Caroline Humer (Reuters, 2019).
- “Cost savings, disruption threat pushing more providers into home dialysis,” by Tara Bannow (Modern Healthcare, 2019).
- “Comparing Treatment Modalities for End-Stage Renal Disease: A Meta-Analysis,” by Gilbert L. Queeley and Ellen S. Campbell (American Health and Drug Benefits, 2018).
- “DaVita Inc.: United States Securities and Exchange Commission,” by the United States Securities and Exchange Commission (2018).
- “Productivity and Quality in Health Care: Evidence from the Dialysis Industry,” by Paul L. E. Grieco and Ryan C. McDevitt (The Review of Economic Studies, 2017).
- “DaVita to Pay $389 Million to Settle Federal Charges of Illegal Kickbacks,” by Katie Thomas (The New York Times, 2014).
- “DaVita to Pay $350 Million to Resolve Allegations of Illegal Kickbacks,” by the U.S. Department of Justice (2014).
- “The Medicare Conversion Factor,” by D.J. Seidenwurm and J.H. Burleson (American Journal of Neuroradiology, 2014).
- “God Panels and the History of Hemodialysis in America: A Cautionary Tale,” by Will Ross (AMA Journal of Ethics, 2012).
- “Consequences of Frequent Hemodialysis: Comparison to Conventional Hemodialysis and Transplantation,” by John B. Stokes (Transactions of the American Clinical and Climatological Association, 2011).
- “Incidence, Management, and Outcomes of End-Stage Renal Disease in the Elderly,” by Manjula Kurella Tamura (Current Opinion in Nephrology and Hypertension, 2009).
- “The Catastrophe Capitalist,” by Gabriel Sherman (New York, 2008).
- “The Early History of Dialysis for Chronic Renal Failure in the United States: A View from Seattle,” by Christopher R Blagg (The American Journal of Kidney Diseases, 2007).
- “Enron Short Seller Detected Red Flags in Regulatory Filings,” by Cassell Bryan-Low and Suzanne McGee (The Wall Street Journal, 2001).
- “Origins of the Medicare Kidney Disease Entitlement: The Social Security Amendments of 1972,” by Richard A. Rettig (Biomedical Politics, 1991).
- “America’s Hidden Duopoly (Ep. 356),” by Freakonomics Radio (2018).