Supreme Court Rules Against DaVita

In a 7-2 ruling, the court decides in favor of Marietta Memorial Hospital in a case involving coordination of benefits with Medicare

This brief note is a follow-up to DaVita: An Essential Provider of Dialysis Services, a business profile published on May 20 for premium subscribers of Rational Reflections.

DaVita shares have declined by more than 15 percent today on news of the Supreme Court’s 7-2 opinion in Marietta Memorial Hospital Employee Health Benefit Plan v. DaVita. The opinion, written by Justice Kavanaugh, has important implications for the coordination of benefits between private insurers and Medicare that has formed the basis for the economics of the dialysis industry for decades.

As discussed in last month’s DaVita profile, when a patient who is covered by private insurance is diagnosed with end-stage renal disease (ESRD), there is a thirty month “coordination period” during which the private insurer continues to cover the patient. Following the thirty month period, Medicare coverage begins.

ESRD is the only condition that entitles patients to Medicare coverage before the standard age of 65. The thirty-month coordination period was put in place in 1981 in order to prevent private insurers from immediately discontinuing coverage for ESRD patients who are very expensive to treat.

As the data presented in the DaVita profile demonstrates, the business model of dialysis providers depends on receiving much higher reimbursement rates from private insurers compared to the rates paid by Medicare. If patients switch from private insurance to Medicare too quickly, or if private insurers reimburse dialysis providers at lower rates, the profitability of the industry would be at risk.

DaVita claimed that Marietta was in violation of the statutory language that an insurer “may not differentiate in the benefits it provides between individuals having end stage renal disease and other individuals covered by such plan on the basis of the existence of end stage renal disease, the need for renal dialysis, or in any other manner” and that insurers “may not take into account that an individual is entitled to or eligible for Medicare due to end-stage renal disease.”

In the majority opinion, Justice Kavanaugh states that the Marietta plan is not in violation of the first requirement that it not differentiate in the benefits provided between individuals who have end stage renal disease and others. The plan offers the same reimbursement rate for outpatient dialysis regardless of whether the patient has ESRD or not. Having arrived at the conclusion that the Marietta plan does not differentiate in benefits provided based on the presence of ESRD, Justice Kavanaugh considers the second requirement to be moot.

As I read the majority opinion, it occurred to me that the logic makes very little sense. How many patients receiving outpatient dialysis do not have end-stage renal disease? If nearly all patients requiring outpatient dialysis have end-stage renal disease, then it follows that benefits related to dialysis, by their very nature, are intended to affect patients with ESRD. It is true that dialysis is sometimes required for individuals who have been injured and have temporary kidney failure, but such cases are normally handled in a hospital, not on a recurring outpatient basis.

In the dissenting opinion, Justice Kagan made precisely this point:

“One fact is key to understanding this case: Outpatient dialysis is an almost perfect proxy for end stage renal disease. Virtually everyone with end stage renal disease—and hardly anyone else—undergoes outpatient dialysis. Ninety-seven percent of people diagnosed with end stage renal disease—all those who do not obtain a preemptive kidney transplant—undergo dialysis.”

She continues by noting that whether a plan differentiates between patients with ESRD or not, by targeting the use of outpatient dialysis — a treatment almost exclusively used by people with ESRD — the plan is effectively targeting ESRD:

“Because that is so, common sense suggests that we should not care whether a health plan differentiates in benefits by targeting people with end stage renal disease, or instead by targeting the use of dialysis. When “status and conduct” are proxies for each other, our decisions have declined to distinguish between them.”

I am not an attorney and rarely try to interpret Supreme Court opinions, but I found this one quite easy to follow and recommend that those interested in learning more read it in full. The document is only twelve pages long.

Mr. Market has decided that this decision is a serious event for DaVita because it could portend tougher negotiations with private insurers in the future. Given that private insurers are paying rates far in excess of Medicare, this seems like a valid concern, but only time will tell how rate trends develop.

As Justice Kavanaugh notes, Congress now has the opportunity to clarify the statute that the Court interpreted and pass new legislation. The focus of this debate will turn from the Supreme Court across the street to Congress, or perhaps a couple of miles away to the lobbyists on K Street.

As of 3 pm, I do not see any press releases from DaVita commenting on the decision.

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No position in DaVita.