OVERVIEW
We spoke to a former executive of a dialysis operator who managed 50+ dialysis facilities and a home dialysis program as recently as 2018. Our objective was to understand better the impact of the new ESRD regulations, the potential for disruption from third party premium support reforms, and labor costs. With the two major pillars of the bull case we have heard in the rearview - the sale of DMG to Optum, the recapitalization and share buy back - the ongoing mix shift to Medicare patients and likely third party premium support reforms, we feel even more comfortable with the short here. Our view on labor costs may be too aggressive in the short term, but as it constitutes 2/3 of treatment costs and with extreme readings on Health Care labor tightness, it should remain a substantial headwind.
OIG Referral
The debate raging in the California Legislature over third party payment support by the American Kidney Fund, spread to Washington, DC this week when Rep. Katie Porter (CA-45) asked the HHS Office of the Inspector General to undertake an investigation into the application of the 1997 Advisory Opinion by that office that blessed the arangement between AKF and dialysis providers. The request goes further and asks the OIG to revoke the Advisory Opinion while it reviews certain practices we have highlighted in the past; are the subject of a lawsuit in Florida; and were featured on a John Oliver piece a few years ago. Meanwhile, the Office of Management and Budget are reviewing a proposed rule that addresses third party payments to dialysis providers.
The pace of investigations in Washington are slow but count Rep. Porter's request as another brick on the regulatory load.
field notes
- Referral to home dialysis has structural impediments
- 9 out of 10 nephrologists would agree Home PD is better than facility HD
- Why is penetration still only 12%? Because there are structural problems for adoption
- 40-50% of patients "crash" into dialysis from an ER visit; they have a heart attack, or fluid retention, high blood pressure, other co-morbidity
- The ER is only trying to stabilize the patient
- The patient was not being cared for and seen by a nephrologist before episode/ER visit
- Hospital discharge with a catheter
- No time to educate patients about options including home dialysis
- No vested interest to train
- Nephrologist in ER chooses a clinic close to patient's home, economic ownership of clinic by nephrologist
- Once the patient is in the clinic, social bonds form, comfort with routine, only 1-2% of patients will convert from facility to home
- If the patient is educated they would say "of course I want home dialysis"
- To prepare for home dialysis one needs a catheter inserted surgically
- Surgically inserted catheter takes 30 days to heal
- Sometimes catheter is put in too soon, a huge fear for physician
- There is no payment system, no incentives for physician, to encourage home dialysis
- The internal medicine or primary care doc does not refer patient to nephrologist for fear of losing a patient
- Most markets have physician ownership of dialysis clinics
- Nephrologist receives quarterly dividends
- A center costs $2M to stand up
- 85% of centers have some physician interest
- New models may change paradigm
- Cricket or Somatus starting with just home https://www.crickethealth.com/, https://somatus.com/ these companies will likely be very successful
- Patients don't get educated early on about home
- 1st year PD mortality is better than facility HD, but by year 5 it evens out
- Peritoneum wears out over time
- CVS- HHD quite the laggard, more patient care is needed, many managed care companies call it "experimental"
- Training cycle for patient is much more intense, patient complications at home are common and require nurse time
- Margins for PD highest at 50%, 1 FTE per 25 patients, monthly doc visits in physician office
- HD margins are 30% with 1 tech per 4 patients, 1 nurse per 12 patients, 1 RN oversees facility
- HD physician can send physician assistant to do rounds weekly and only required to show up 1/month
- For home, not allowed to use physician extenders
- Significantly less profitable for the physician, home versus facility
- Economic interest in facility would be a share of profits paid, dividend check
- May also be made medical director and receive a $50K-$100K year salary
- Fee per visit in-center
- Overship JV can range for 5% to 50%, from single doc to large group
- Ownership leads to better outcomes, skin in the game for physician
- Integrated care won't work though with physician ownership of clinic
- No capitated risk model
- Need to see an integrated model like Inter-mountain or Kaiser
- Medicare is -5% to breakeven to 5%-10% depending on patient and location
- Direct labor costs is 2/3 of the cost per treatment; 1/3 capital, maintenance, consumables, lab, pharma, etc
- Davita chronically underpaid people following 2008-2010 recession, never caught up and became a problem in 2017-2018
- A very real threat a year ago, escalating labor costs
- Nurses work at multiple locations
- You start losing people if you underpay
- DVA started recruiting at nursing schools; offered training to extend career retain more, lower costs
- Its all about the first year, burn out is high
- Turnover is 20-25% per year, you are doing great at 20%, above 25% its a real problem
- Traveler and agency cost is a huge problem, once it starts hard to get out of
- Agency/Traveler not accustomed to practice patterns
- At this point any acquisition is tied to significant divestiture
- Leaves the market to US Renal and ARA
- Eventually Optum or CVS will buy them, not DVA or FMS
- Charitable premium assistance
- ACA- we advocated for patients, bankrupted a few payors
- I don't think patient assistance will go away
- DVA won't track it
- Arms length needed
- The pushback is it is a cost to the American people without patient assistance.
- Davita is really good at mobilizing lobbying efforts
Thomas Tobin
Managing Director
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Emily Evans
Managing Director – Health Policy
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