On June 21, 2022, the U.S. Supreme Court published its decision in Marietta Memorial Hospital, et al. v. DaVita, et al. In this decision, the Supreme Court ruled that self-funded health plans have the authority under the Medicare Secondary Payer Act to carve out dialysis benefits and set rates for such benefits at appropriate levels for plans and their members. The ruling has profound consequences for self-funded health plans faced with skyrocketing medical costs related to chronic kidney disease and end-stage renal disease. While this decision empowers health plans to deploy solutions to contain high-cost dialysis claims, health plans must nevertheless do so with care to stay within complex, often fraught legal and regulatory frameworks.
What follows is an analysis of the Marietta decision and, more importantly, practical guidance for implementing dialysis cost containment solutions in the case’s wake.
DaVita Takes Advantage of its Duopoly to Charge Commercial Health Plans Up to 800% of Medicare Rates
The kidney dialysis market is a duopoly. Two large, publicly-traded companies comprise almost 85% of the market: DaVita and Fresenius. Their complete dominance gives them pricing power. As DaVita and Fresenius have methodically consolidated the outpatient dialysis market, dialysis claims billed to commercial health plans have ballooned by roughly 400% since 2008.
DaVita (and Fresenius) overcharge commercial health plans to sustain and grow their profits. Of the approximately 500,000 Americans currently on dialysis, only about 60,000 (12%) are commercially insured. Yet DaVita reaps nearly 40% of its revenue and almost all of its profits from this 12% of commercially insured patients. Simply put, neither DaVita nor Fresenius can sustain Wall Street’s expectations on Medicare reimbursements. Rather, they make almost all of their profits on this narrow sliver of commercially insured dialysis patients. Indeed, the data suggests that DaVita charges commercial plans 400%-800% more than what it is reimbursed by Medicare for performing the same services for patients of equal acuity and complexity. That means that a member receiving dialysis at a DaVita clinic could cost a health plan between $720,000 and $2,160,000 per year.
DaVita’s history of untoward conduct goes beyond price gouging commercial plans. In 2014, DaVita agreed to pay more than $350 million to settle claims that it had given illegal kickbacks to doctors in exchange for patient referrals. The whistleblower, in that case, was actually a former DaVita senior executive. In 2015, DaVita agreed to pay $450 million to settle charges that it illegally billed the federal government for dialysis drugs. Over the past ten years, DaVita paid other fines and settlements, all totaling at least $1 billion.
This duopolistic pricing has forced health plans to seek solution partners for rationalizing exorbitant dialysis costs to appropriate levels. These solution partners—like Renalogic—help health plans contain dialysis costs by enabling plans to carve dialysis benefits out of the health plans and then pay the dialysis claims at appropriate levels for the plans and their members using proprietary methodologies. The direct effects of such solutions are dramatically lower costs for the health plans and their members, and lower revenues and profits for DaVita.
DaVita Sues Health Plans to Keep Profits Inflated
In an effort to block health plans from using dialysis cost containment strategies and prop up its revenues, DaVita filed five lawsuits against health plans in late 2018 and early 2019. These five cases were a coordinated effort to force health plans to pay DaVita’s dialysis claims at “most favored rates,” rates at least as high as the rates plans pay for other types of claims. One lawsuit was filed against non-profit Marietta Memorial Hospital’s health plan.
The Marietta Case
The Marietta Memorial Hospital health plan carved-out dialysis from its benefits for all health plan members and ultimately used a Multiple-of-Medicare repricing methodology to pay DaVita 87.5% of Medicare rates for dialysis claims. In response, DaVita filed suit, likely believing it would force the non-profit hospital to pay its demanded rates under threat of legal costs, a tactic which has worked for them before.”
At the trial court level, DaVita argued that Marietta Hospital’s health plan—and all commercial health plans, by extension—does not have the legal authority under the Medicare Secondary Payer Act (MSP) to carve out dialysis benefits and pay dialysis claims differently from other types of claims under the MSP. This would give dialysis claims “most favored nation” status—they would have to be paid at the highest rate the plan reimbursed any services. DaVita alleged that Marietta Hospital’s carve-out and reimbursements were discriminatory against members with end-stage renal disease (ESRD).
The MSP outlines the coordination of benefits with Medicare for plan members entitled to dual plan/Medicare coverage. DaVita and Fresenius have historically contended that Congress intended the MSP to prohibit commercial health plans from deciding how to manage dialysis costs. Under DaVita’s interpretation of the MSP, self-insured plans—which Congress deliberately gave considerable flexibility in determining healthcare coverage—would be required to sacrifice coverage of other medical services to pay for dialysis services at a rate as high as 2,500% of that of Medicare. These substantial cost increases would not benefit health plan members with ESRD. They who would continue to receive the same services. Nor would this “most favored nation” rate save Medicare money. Rather, the only party to benefit from this would be DaVita (and Fresenius).
In contrast, Marietta Hospital argued that the MSP was designed to coordinate benefits between insurance plans and Medicare for individuals covered by both, and not to provide preferential status to dialysis claims or individuals needing dialysis. Marietta Hospital won in the trial court, while the Sixth Circuit Court of Appeals reversed the trial court’s decision, holding for DaVita.
The Amy’s Kitchen Case
A second case filed by DaVita bears some consideration here: DaVita v. Amy’s Kitchen. Amy’s Kitchen is a frozen food manufacturer and Renalogic client. Amy’s Kitchen carved-out dialysis benefits from its health plan and utilized Renalogic’s ImpactProtect cost containment methodology (formerly known as the U&R Program) to reprice DaVita’s billed charges to appropriate levels. In response, DaVita sued Amy’s Kitchen, advancing similar arguments against it as in the Marietta case. Like Marietta Hospital, Amy’s Kitchen won at the trial court level. But unlike Marietta Hospital, Amy’s Kitchen also won a unanimous victory in the Ninth Circuit Court of Appeals.
In the Amy’s Kitchen decision, the Ninth Circuit categorically supported the health plan’s authority to carve out dialysis benefits and approved Renalogic’s claims repricing methodology. The Ninth Circuit held that not only did the plan have the authority to carve out dialysis benefits, but that the proprietary Renalogic language the plan used demonstrated that the plan did not discriminate. In doing so, it quoted the Renalogic language explaining that there was “evidence of ‘significant inflation’ of prices charged by dialysis providers; the use of inflated revenues [to providers due to this inflation] ‘to subsidize reduced prices to other types of payers as incentives’; and ‘the specific targeting of the [Amy’s Kitchen] Plan and other non-governmental and non-commercial plans by the dialysis providers as profit centers.’” The Ninth Circuit specifically noted that the plan had demonstrated that it adopted the program “because of its fiduciary obligation to preserve Plan assets[.]”
The Amy’s Kitchen decision actually came out after the Sixth Circuit’s Marietta decision but before the U.S. Supreme Court accepted the review of Marietta. The Ninth Circuit explicitly addressed and rejected the Sixth Circuit’s position that carving dialysis is discriminatory, and set the stage for Supreme Court review.
Marietta Appealed to the Supreme Court
The U.S. Supreme Court agreed to hear the Marietta case to resolve the split between the Sixth and the Ninth Circuits and because the importance of the issues at hand.
On June 21, 2022, the Supreme Court published its decision, reversing the Sixth Circuit’s decision and ruling that self-funded health plans unquestionably do have the authority under the MSP to carve out dialysis benefits and set rates for such benefits at appropriate levels for plans and their members.
In the Supreme Court, DaVita primarily argued that the MSP is really an anti-discrimination statute. DaVita contended that Marietta Hospital impermissibly discriminated against plan members with ESRD when it carved dialysis benefits out of the health plan and paid lower reimbursement rates to DaVita. It based this argument on the notion that because virtually all plan members on dialysis suffer from ESRD, carving dialysis benefits out of the plan and paying lower rates to DaVita has a disparate, negative impact on these members. Importantly, DaVita did not offer any support for the argument that the Marietta Hospital health plan ESRD members on dialysis received any inferior or inadequate care because of the carve-out or reduced dialysis claims payments. Indeed, the evidence in the case suggested that this plan affected all health plan members uniformly and that there was no negative impact on ESRD members.
For its part, Marietta Hospital argued that it did have the authority under the MSP to carve-out dialysis benefits and rationalize dialysis claims costs for members covered by both its plan and Medicare. As the MSP is properly understood as a coordination of benefits statute for members in need of dialysis and since the carve-out and recalibration of dialysis costs uniformly impacted all plan members, and did not preference one class of members over another, it was lawful. The U.S. Department of Justice, the National Labor Alliance, the Pacific Health Coalition, and the Self-Insurance Institute of America all joined in the case to support Marietta Hospital, bolstering its arguments.
In a 7-2 opinion, the Supreme Court ruled in Marietta Hospital’s favor and reversed the Sixth Circuit decision. The Court held that commercial health plans like Marietta Hospital’s can carve-out dialysis benefits and utilize cost containment methodologies under the MSP, so long as the plans offer the same terms of coverage for outpatient dialysis to all of its participants. In reaching its decision, the Supreme Court relied on the reasoning in the Amy’s Kitchen case, cementing Amy’s Kitchen as the leading MSP case and Renalogic’s ImpactProtect cost containment program as the market-leading, most legally sound methodology for dialysis cost containment.
This is a crucial decision, but at least as important is what the Supreme Court did not do. As a practical matter, the Supreme Court simply eliminated a decision that had drastically changed MSP law, but only in the four states of the Sixth Circuit (Kentucky, Michigan, Ohio and Tennessee) for the twenty months between the Sixth Circuit’s to the Supreme Court’s decisions. The Supreme Court did not use Marietta to otherwise change existing MSP law. This means that all the pre-existing MSP regulations and case law are still in effect, including the need to avoid violating the very real limitations the MSP still establishes. And Amy’s Kitchen is now the leading case on this issue.
What Marietta Means For Self-Funded Health Plans, Broker/Consultants, and TPAs
While the primary takeaway from Marietta is that health plans do have the legal authority to carve-out dialysis benefits under the MSP, this does not mean that plans have carte blanche. To enforce primary health plan coverage the MSP has “guardrails,” prohibitions against plan practices which might “take into account” the fact that a member with ESRD is qualified for Medicare, or “differentiate benefits” for dialysis for such members. These guardrails are mostly included in complex regulations and a few cases, and some must be inferred from particular situations using fact-specific analyses.
The Marietta decision did not change these guardrails—they’re all intact, even if their details and margins are not always clear. Violations of the MSP can be grounds for serious plan losses, including reversal of dialysis claims payments and double-damages to providers, so MSP guardrails should be respected.
When considering strategies and solutions to contain ballooning dialysis claims, self-insured plans, their broker/consultants, and TPAs would be well-served to consult with legal counsel and cost containment partners with expertise in working with such plans under the MSP and ERISA. Moreover, a plan ought to utilize a proven, legal repricing methodology, like Renalogic’s Impact Protect, which was validated unanimously by the Ninth Circuit in the Amy’s Kitchen case and relied upon by the Supreme Court in deciding Marietta.
Plans wanting to stay within the MSP guardrails should, at a minimum:
- Not create incentives for members who have ESRD or require dialysis to terminate plan coverage. This means making sure that premiums, deductibles, and benefit levels are the same for all plan members in similar employment situations.
- Avoid repricing Multiple-of-Medicare methodologies or which appear to “take into account” Medicare, such as a percentage or other multiple of the Medicare rate. This underlying issue was not ruled on in Marietta but the removal of a 125% of Medicare dialysis benefit methodology was a condition of settlement in the Virginia Mason case, another of the five cases DaVita filed that rose to the appellate court level. This issue has been raised in other cases and in appeals without a resolution. It could easily become a “new frontier” in dialysis litigation.
- Avoid any payment methodologies which result in payments at less than the Medicare rate, and especially those which result in payments at less than provider cost. This may have been a non-legal factor in Marietta that motivated the Sixth Circuit to break with precedent. The plan’s methodology resulted in payment at 87.5% of Medicare, well below the provider cost, and this may have motivated the judges to want to punish the health plan.
- Never create incentives for such members to switch to Medicare instead of plan coverage. This could include payment of Medicare premiums, for example.
- Avoid benefit structures that track Medicare coordination requirements. For example, changing dialysis payment rates at the start of the 30-month MSP “coordination period” was held to violate the MSP in one of the other five lawsuits DaVita filed, the Virginia Mason
To be clear, there are often other guardrail considerations when evaluating a dialysis cost containment strategy, but these are the major points.
The bottom line is that plans have a valuable cost containment tool in the dialysis carve-out, but this tool needs to be handled with due care. Benefit design and administration informed by an understanding of not only the MSP, but of other legal and practical risks is essential to prudent dialysis carve implementation.
One thing is immediately clear: some on both the plan side and the provider side are over-reacting. On the plan side, some seem to think that Marietta “got rid of” the MSP and its existing guardrails, and that anything is fair game. This is a mistake and some plans are likely to get into legal trouble as a result.
This is especially true for companies touting cost containment methodologies that are new to this space. An unintended consequence of Marietta is that what has been a niche issue for years has now received much broader attention. More plans may decide to explore carving out dialysis benefits. What is certainly true is that companies that have not previously worked on carving dialysis are likely to offer themselves as newly-minted experts in the field. The MSP is not the only legal risk is this space, which is full of traps for the unwary. Plans would be well-advised to partner with only those vendors with a proven track record and a depth of legal and practical know-how.
Following this defeat in Marietta, DaVita is likely to ramp up its public relations and lobbying campaigns. Fresenius is likely to follow suit. They are likely to try to demonize commercial health plans as profit-seekers themselves, discriminating against patients for no good reasons. DaVita has already been claiming that plans will use Marietta to force members on dialysis to drop plan coverage and switch to Medicare—which raises the question, “if this wasn’t happening before Marietta, why would it happen now?” But this is a complex legal and policy area, and this kind of campaign can help pressure Congress to pass laws requiring plans to pay DaVita and Fresenius their duopoly prices.
At Renalogic we will be watching these developments closely and doing our best to help plans—and the TPAs, brokers, and consultants which support them—defend against predatory dialysis provider initiatives. Renalogic is the leading dialysis cost containment company, with twenty years in the business and experience with the full range of issues. Renalogic has a 100% success rate in plan appeals, and our legal expertise helped the plans win Amy’s Kitchen and, ultimately, in Marietta.