Ron Birnbaum
Oct 27, 2018 · 11 min read

Proposition 8: Why to oppose it while still opposing the for-profit dialysis companies.

Before you vote for Prop 8, please

1) Read the proposition (or my summary below)

2) Put on your “sinister capitalist” hat and imagine what kind of games you would play if you were DaVita or Fresenius, the market dominating for-profit dialysis corporations, reacting to Prop 8’s stipulations if passed.

If your conclusion is that the companies will do what the Proposition 8 authors hope they will do, then vote for it. I think they will do other more nefarious stuff, so I oppose it.

I am not here to defend the for-profit oligopolists DaVita and Fresenius who make hefty profits providing a life-or-death service — dialysis — to 70% of Californians with kidney failure. When your kidneys fail, you have three options: 1) die 2) get a kidney transplant if you are medically and otherwise eligible and an organ is available 3) get hooked up to a machine that does the job of your kidneys, filtering toxins and the metabolic waste out of your blood, 3 times a week for several hours each time. That’s called dialysis. Currently in California, 66,000 human souls are absolutely, life-and-death, dependent on dialysis, and the dialysis companies profit handsomely from providing that care. If you are inclined to believe that DaVita and Fresenius are more beneficent than I give them, let me recommend John Oliver’s incredible segment on the dialysis industry if you like comedic video, or if you prefer the more sober medical literature, see this article which convincingly provides evidence that for-profit dialysis leads to excess hospitalization or this one which shows that for-profit dialysis clinics have lower staff to patient ratios (and relatively favor using dialysis technicians as opposed to nurses) or this classic study that demonstrates that for-profit dialysis leads to excess death. Correct that: everybody should also see the Oliver piece to get a clear picture of what kind of scam-artists the companies are. This is key, because Prop 8 depends on the good hearts of the dialysis companies to achieve its goals.

Nobody in their right minds would ever set up a system de novo in which people facing a life-or-death situation like kidney failure put their lives in the hands of a for-profit oligopoly with no bigger ethical mandate than to maximize shareholder returns. Sure, doing a shoddy job providing dialysis is “bad for business” with an occasional lawsuit as a cost, but I can assure you that a for-profit model for dialysis gives the firms that provide it strong incentives to cut corners on costs and that, of course, includes labor costs. Dialysis stands out dramatically in the health insurance world for how both our public and private insurers deal with it as a problem. Before the Affordable Care Act enacted a ban on exclusion of pre-existing conditions by commercial insurers, patients with chronic kidney failure were completely uninsurable in these markets. Congress in 1973 decided to take a single payer approach to the problem, adding patients with chronic kidney disease to those eligible for Medicare, otherwise limited to retirees and some people with disabilities. 90% of patients needing dialysis in California get their care paid for by Medicare or a combination of Medicare and Medi-Cal. Apparently, these payers — with prices set by the government — pay amounts that approximate costs.

So where do dialysis companies make their big money in California? They make it from commercial insurers. Ten percent of the dialysis population has commercial insurance, and the dialysis companies can charge them much higher prices. Those insurers are mandated to cover dialysis care for 30 months as those patients transition to Medicare. Proposition 8 is about what the for-profit dialysis industry can charge these payers. It is fascinating to me — a mystery that perhaps someone else can shed light on — that Big Health Insurance has not weighed in on this debate as far as I can tell. There is something fishy in that. The Service Employees International Union — United Healthcare Workers West (SEIU-UHW) placed this initiative on the ballot. It is an episode within their larger struggle to organize workers in the union-busting dialysis industry and to advocate for patients with kidney disease in California. I have tried to understand where this fits into their strategy. I would like to see those clinics adequately staffed with decently-paid and unionized persons providing care. I share SEIU-UHW’s critique of the dangers and fundamentally unethical structure of this industry. But alas, you can sometimes arrive at the right diagnosis and still give the wrong prescription. Prop 8 is in my opinion is the wrong prescription.

Let me summarize what Proposition 8 proposes to do:

1) It tries to define a “fair treatment payment amount” for dialysis

2) That amount is 115% of the sum of all “direct patient service costs and all health care quality improvement costs” that a single company makes across all its operations in California. It neither sets a profit margin nor an aggregate profit target. The law would regulate revenues.

3) It attempts to define what those allowable costs are:

a. Salaries, wages, and benefits of “non-managerial chronic dialysis staff” — listing nurses, technicians and trainees, social workers, registered dieticians, and non-managerial administrative staff. It allows for Department of Public Health to further regulate the definition of “non-managerial staff”

b. Medications and supplies and lab testing

c. Facilities costs including rent, maintenance, utilities, and depreciation on buildings and equipment

d. Health care quality improvement costs (like health information systems, training etc)

4) If a company makes more than those 115% of those costs, it has to rebate the excess to private insurance companies (but not Medicare, MediCal, Counties or any governmental entities). Sure, the proposition says that rebates would also go to patients, but basically next to no patients pay for their own dialysis, so there would be essentially no rebates to patients.

5) It tries to make itself constitution-proof by giving a court the flexibility to reset the revenue margin to any whole number larger than 115% to avoid an unconstitutional “taking.”

6) It forbids companies to deny care to a patient because of his/her payer source.

If this seems like a peculiar strategy, it’s because it is. The basic idea is to change the dynamics of business decision-making at DaVita and Fresenius so that their profits are dependent on the magnitude of their allowable costs and not the usual business thing: revenue (try to maximize it) minus costs (try to minimize them). It’s the cost-minimizing that SEIU-UHW rightly hates because it gives the dialysis corporations a strong incentive to hire as few dialysis technicians as possible, pay them as little as possible, and equip them and train them as cheaply as possible. The SEIU-UHW has been trying mightily to organize the dialysis technicians in the for-profit dialysis industry. They have also made a concerted effort to regulate the industry by going to the California legislature. However, by spending several hundred thousand dollars (chump change!) the dialysis corporations have bought off the legislature. That should make you angry; it’s worth a call to your legislators’ offices to tell them to stop taking this blood money.

So what’s the problem?

I have committed time and effort in the struggle to enact Medicare-for-All, also known as “single payer.” I am interested in payer reform first and foremost. Proposition 8, however, wades into the thorny waters of “payment” reform (not payer reform), ie how best to pay individuals and institutions that provide care so that they do a good, safe, and efficient job. I have steered somewhat clear of payment reform questions because they are in fact really tough policy questions that probably need better studies to clarify best approaches. But on November 6 we are all now being asked to weigh in on a life-or-death payment reform question. Prop 8’s methods of payment reform is not per se to limit dialysis industry profits in an absolute sense. It changes the game for the companies, and to see where we would go wrong here, you have to put on your “Sinister Capitalist” hat on and think about how they would respond to Prop 8’s conditions.

Novelist Tom Perrotta — after the 2016 election — poignantly posted on Facebook “We’re all students at Trump University now.” Let’s see what Professor Donald Trump and his public-minded family’s business practices have to teach DaVita and Fresenius in gaming payment systems. Faced with the chance that a large part of their aging dad’s real-estate fortune would be lost to inheritance taxes, the Trump siblings came up with the clever plan of creating a shell maintenance company in their names to service buildings owned by their Fred Trump. They could charge him exorbitant sums for “service contracts” and the inflated profits, kept within the family, became an effective way to circumvent estate taxes and gift taxes by transferring his money to them via this sham business. That’s bad enough, but they didn’t stop there. Fred Trump had made a lot of his money on affordable housing projects. After the Trumps set up their newly inflated costs (inflated by his family’s tax scam), they took this madness to housing regulators in New York to make the case that with maintenance costs up, they needed to raise rents on his rent-controlled tenants. Read this story (you might have missed it while the US Senate was gifting us Judge Kavanaugh on the Supreme Court for life). I think DaVita and Fresenius will pull a page out of the Trump 101 syllabus if Prop 8 passes.

Here’s what I predict the dialysis companies will do if Prop 8 passes:

1) Litigate. That’s a given. They will go to court to fight all of this.

2) Pull their big money strings to influence what regulators call “allowable costs.”

3) Develop new business models in which they inflate certain allowable costs (and I doubt they will pick ones that help SEIU-UHW whom they must perceive as bitter enemies.) I predict these will include taking over elements of their own supply chain, maybe spinning off real-estate holding companies so that they can rent themselves their clinic buildings, etc.

4) They will move clinics away from poor areas and underserved areas, hurting the most vulnerable populations. Why? Prop 8 forbids discrimination against patients by payer type, which I assume happens now. Commercially insured patients — though a small percentage of patients — are much more lucrative for the companies and are a big source of their profits. They still would be under Prop 8. If inflating costs in various ways becomes the go-to scheme for the companies under Prop 8, they will run into a worse version of the problem they already have: fixed revenues from public payers with the inability to shift substantial costs to them. The law forbids them to discriminate by turning away patients by payer type, so that would favor moving geographically away from areas with publicly insured patients. Indeed, higher rents in fancier neighborhoods help their cost picture. This strategy might be limited by the large number of patients on public programs, but anyone who argues that begins to advance the company’s argument that they would overall limit their operations in California.

In other words, if you support Prop 8, it’s because you have a more sanguine view than I do of how the companies will respond to Prop 8’s new conditions. How does my view square with the fact that the companies are pouring money into defeating it? I am not arguing that proposition 8 will actually help DaVita and Fresenius. It won’t. But I do think they will take steps to maximize profits under the new regime and that those steps won’t benefit either the non-managerial workers or patients. I believe proposition 8 is part of a chicken game with a malignant counter-party. I think a reasonable person can disagree with my speculations on how this will play out, but I don’t think it is reasonable to say it is clear how this will play out and that it will clearly work to patients’ benefit.

Dialysis is both technically complex and as a policy area is also quite complex. You got it: the worst kind of activity to try to regulate at the ballot box, even if regulations are a good idea (and they are in this case, just not in this way).

If not Prop 8, then what should we do:

-We need to reform our campaign finance laws in California. Fresenius and DaVita shouldn’t be able to buy off the legislature. I think it is the desperation of dealing with a bought-off legislature that in part led SEIU-UHW to “Take this to the voters.” In the meantime, call out every politician who take dialysis corporation money.

-Take the light that SEIU-UHW has justly shed on this corrupt industry and continue the longer conversation that ends for-profit dialysis in California. The transition has to happen in an orderly and systematic fashion though, because an enterprise as vital as supporting the lives of people whose kidneys have failed can’t have the plug pulled overnight or haphazardly.

-I think we can take a “Public Bank” or “Public Utility” approach to dialysis. Create a non-profit regulated corporation with facilities capitalized through the bond system as we have done with children’s hospital, included in our 2018 ballot initiative process.

-Have a commission of stakeholders make regulatory recommendations to the legislature, explaining CMS’s current regulatory framework and addressing deficiencies in quality and safety in the state. It was the failure of the Legislature to enact reasonable regulations (eg SB-349 in 2017) that upped the ante and led to Prop 8.

-Finally, we need to enact Medicare-for-All sooner and not later. As you can see, some of the oddity of the economics of dialysis involves the perversity of our current multi-payer market (oddly in this case, cost-shifting from the public to the private markets). Congress had the good sense to put patients with kidney disease into the Medicare program 45 years ago. The lion’s share of kidney failure is caused by diabetes and hypertension. We could in fact prevent the need for much of our pricey dialysis caseload (1% of the federal budget!) if we covered everybody with good primary care. Saving that money is important. Saving the lives and sparing Americans all that suffering is even more important. When I looked at this table and see that we have twice the rate of death from kidney disease of every industrialized country with a full universal healthcare system, I wanted to recommend everyone write-in “Enact Medicare-for-All” instead of voting on Prop 8 (it still rankles me to cast a vote that appears to side with DaVita and Fresenius). But, if a write-in vote on a proposition is not a “No” vote. I still think we need to vote no.

A comment on endorsements

In writing this, I have avoided telling you about who is for it and who is against it, other than that SEIU-UHW authored this and that the dialysis companies oppose it. I do not believe SEIU-UHW was cynical in putting this on the ballot. My opposition is my own argument from my thoughts and my heart. I would challenge those who disagree to argue from there own readings. However, without getting into specifics, I contend that no organization with a serious policy shop or serious health policy analysis operation has come out in support of this. I think a lot of supporters, including the California Democratic Party of which I am a central committee member, are supporting this because of their well-intended desire to stand with SEIU-UHW without really thinking through the ramifications of the proposal.

— The author is a physician in Los Angeles and a member of Physician’s for a National Health Program.

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