Insurance Payers
DaVita (NYSE:DVA) is one of two large dialysis providers in the United States, and all of its profitability is propped up by its insurance payers. Insurance payers account for 33% of the company’s revenue but only make up 10.5% of its total patients. The problem is that since the federal government no longer mandates Americans buy health insurance, it is expected that roughly 13 million healthy Americans will opt out of having health insurance entirely. DaVita relies on its healthy patients’ insurance payments to support their kidney dialysis recipients - it takes 3,800 healthy patients to pay for 1 kidney dialysis patient ($150,000 annually). With those healthy patients no longer paying into health insurance, this means DaVita’s kidney dialysis patients could go unfunded. This means the company’s insurance paying kidney dialysis patients - its only profitable clients - are in danger. As a result, so is DaVita.
The American Kidney Fund
DaVita’s insurance payers rely heavily upon the American Kidney Fund (AKF) for financial support in its dialysis programs. The AKF helps by offering to pay health insurance premiums for its clients. This cushions the blow for patients and pads the bottom line for the company. Both DaVita and the AKF have come under fire in the past few years.
A lawsuit filed by United Healthcare alleged that DaVita steered Americans off of Medicare plans and onto commercial plans. The lawsuit went on to say that DaVita then encouraged those patients to receive aid from the AKF, which DaVita donates heavily to. As a result of all of this, health insurance companies have incorporated into their policies that they will no longer allow charitable donations to pay for patients’ premiums. DaVita acknowledge this in its latest 10-Q:
“A number of commercial payors have incorporated policies into their provider manuals limiting or refusing to accept charitable premium assistance from non-profit organizations, such as the American Kidney Fund, which may impact the number of patients who are able to afford commercial exchange plans.“
In the wake of the United Healthcare Lawsuit, DaVita released a statement about the AKF, citing that the latter directly influences the care for about 13% (25,000) of its patients. Of the 25,000 patients, 19,000 had their $1340 Medicare deductibles paid for. 4,000 commercial patients received aid who were on a COBRA or employer subsidized plain. 1,800 patients received assistance who did not have a subsidized plan. From this statement, DaVita stands to potentially lose 5,800-6,000 of its profitable patients if insurance companies no longer allow for premium assistance from the AKF, which is all of the company’s profitability. It will face a potentially heavy fall in stock price.
(Update 6/19/2018: We have corrected this article to reflect that, as an AKF spokesperson has told Seeking Alpha, the AKF board contains no current DaVita employees.)
DaVita has acknowledged giving money to the AKF. The fund’s board also has a former DaVita vice president on it.
Size and Impact of the American Kidney Fund
Skeptical of DaVita’s statement, I wanted to do some further research on the AKF. I did some back-of-the-envelope math to understand just how big of an impact it has on the company.
The Medicare deductible is $1,340, and since DaVita served 19,000 patients, that comes out to be $25.46 million.
I will also use the average individual health insurance premium of $321 per month (unreimbursed) according to CNBC. Dialysis patients get put in the high-risk pool, and most states have a premium cap for the high-risk pool between 150% and 200% above-average premium. So, if I annualize this, in the worst-case scenario $321 * 12 months = $3852 * 200% (premium cap) = $7704. AKF gave aid to roughly 6,000 patients, according to DaVita’s statement. So 6,000 * $7704 = $46.2 million, not counting the 4,000 that have a subsidized plan.
At the very most, the company should have given the AKF somewhere in the ballpark of $25.46 million + $46.2 million = $71.6 million for premium assistance.
According to the AKF’s audit report, two companies accounted for 78% of total donations, or $242,191,792. Almost all of the money that AKF received went out the door to Patient Assistance.
(Source: 2016 AKF Audit report)
I'll point out that DaVita and Fresenius (FMS) (DaVita’s largest competitor) have not disclosed how much they gave to the AKF. In order to try gain a better perspective, let’s say DaVita paid half of the $242 million, with Fresenius paying the other half. That means $121 million donated by each company for premium assistance.
If DaVita gave $121 million, and in the very worst-case scenario (not counting subsidized plans) it gave $71.6 million to pay for premium assistance, that leaves a $50 million hole - that is no chump change. DaVita being larger then Fresenius, something does not seem right, and I believe that more people are involved than what the two companies have let on. If the insurance companies pull back from accepting premium assistance, the impact will be much larger then what DaVita has indicated.
