As we have learned from bitter experience over the years, in California’s ballot initiative process, money talks. On Proposition 8, which aims to rein in profits of the kidney dialysis industry, it’s been screaming at top volume. The for-profit dialysis industry just set an all-time record in spending, bringing its total war chest to defeat the measure to more than $111 million.
That spending has bested the record set in 2016 by the pharmaceutical industry, which spent $109 million to kill a California ballot measure aimed at capping drug prices.
If you want to know why U.S. healthcare costs are so ruinous, there’s one explanation: Private companies are permitted to charge what the market will bear to build up their profits, and then to spend unlimited amounts in election campaigns to protect those profits.
You might wonder where a couple of healthcare firms whose campaign is based on their pleading poverty could find so much money for TV ads. The answer is that even at this record level, their spending is a tiny fraction of the profits they’re trying to protect.
The two big companies in this field are Denver-based DaVita Inc. and the German health conglomerate Fresenius Medical Care. Together they account for about 70% of the U.S. dialysis market. In California, their 421 clinics account for 72% of the total number, according to the Legislative Analyst’s Office. The analyst’s office placed their California revenue at $3 billion a year.
The companies’ spending went over the top on Oct. 24, when Fresenius added $5.4 million to the roughly $28.5 million it already had invested in killing Proposition 8. Still, it’s a piker compared to DaVita, which has invested nearly $67 million, according to campaign finance reports. If you’re a California resident watching TV even in a stupor, you’ve been inundated with No on 8 ads, some featuring dialysis patients convinced they’ll be left to die because DaVita and Fresenius clinics will have to shut down. (More on that claim in a moment.)
We’ve outlined in prior columns, here and here, the unconstrained financial rent-seeking that has allowed these firms to accumulate the resources needed to safeguard their income. They’re easily outspending the Yes on Proposition 8 backers, chiefly the Service Employees International Union, which has a war chest of about $23 million.
As we’ve reported, the core of DaVita’s and Fresenius’ wealth comes from their gaming of the U.S. healthcare system, particularly the Affordable Care Act. Until the ACA’s protections for people with preexisting conditions became effective in 2014, dialysis patients were virtually uninsurable in the individual market. So Congress in 1973 allowed renal patients to enroll in Medicare at any age. The act effectively made end-stage renal disease the only condition subject to a single-payer program.
This turned dialysis into a profitable business. About 10,000 patients were covered in 1973; today, more than 650,000 are. Federal spending has soared to more than $34 billion a year from $1.1 billion (in current dollars) in 1973.
But Medicare reimbursements left the dialysis firms with slender profit margins. Enter Obamacare: By remaining outside insurance companies’ networks, the dialysis firms were able to extract much higher reimbursements from them. Dialysis profits grew fat, and the expense of covering dialysis patients—some of whom allegedly had been counseled by Fresenius and DaVita employees to give up their Medicare coverage and sign up for private insurance—drove some insurers out of the Obamacare system.
The spending on Proposition 8 pales not only in comparison to previous corporate spending on ballot campaigns, but to the money the dialysis companies, particularly DaVita, have laid out to settle accusations of wrongdoing brought by patients, whistle-blowers and government regulators.
In 2016, Fresenius settled patients’ lawsuits alleging dangerous practices at its clinics for $250 million without admitting guilt or negligence. DaVita agreed in October to pay $270 million to settle a federal accusation that it inflated claims to Medicare (it did not admit liability). In June, a federal jury in Denver awarded three patient families a total of $383.5 million on their assertions that DaVita clinics misused dialysis drugs (the company says it will appeal); two of the patients were treated in California. In 2015, the company paid a total of $895 million to settle whistle-blower allegations of fraud, including a lawsuit alleging that it was deliberately throwing out unused dialysis drugs in order to inflate claims to the government, and another that alleged it was paying hidden kickbacks to doctors in exchange for patient referrals to its clinics. In those cases the company did not admit to the accusations.
Proposition 8 would cap the firms’ revenue from California operations at 115% of their spending on “direct patient care” and “healthcare quality improvement.” The more they spend on those categories, in other words, the more they can collect in revenue and remain within the cap.
The companies claim that the initiative would exclude lots of costs they contend are germane to providing services, such as the wages of supervisors, but they’re almost certainly overstating the case.
They claim that Proposition 8 would make dialysis so unprofitable that most of the state’s 580 outpatient clinics, including some nonprofit facilities, would have to close. Their source is a study by a consultancy called the Berkeley Research Group. The dialysis industry calls this “an independent study.” Campaign finance documents reveal, however, that the No on 8 campaign has paid the Berkeley Research Group about $200,000 this year, so you’re free to question just how independent it really is.