Health Benefits Risk Management at the Intersection of Monopoly and Intensive Regulation
The dialysis sector is an intensified microcosm of the American health care system, and that’s bad for self-insured plans in particular. On the one hand, the dialysis marketplace is particularly dysfunctional, dominated by two giant multinationals with both incentives and the market power to drive up self-insured plan charges, and a willingness to litigate to maintain their rates. On the other, health benefits for dialysis are subject to intense federal regulations, some peculiar to dialysis, which severely limit plan’s options for managing dialysis costs.
A successful risk management strategy for dialysis cost containment therefore requires a careful understanding of not only the laws and regulations which apply, but of the players in the market and their various interests and strategies. At the end of the day it is a matter of informed risk identification and acceptance, and an understanding that risk can be reduced but will never be totally eliminated when the financial stakes are as high as they are in the dialysis sector.
Understanding dialysis claims risks calls for some background on dialysis itself. Dialysis is a process which filters a patient’s blood, when the patient’s kidneys have failed and can no longer perform that function. By far the most common reason for kidney failure is end-stage renal disease (“ESRD”) as the culmination of years of progressive chronic kidney disease (“CKD”). Diabetes and hypertension are by far the most common reasons for CKD, and with treatment CKD can be slowed or stopped before the patient reaches ESRD.
Dialysis technology was developed in the 1940s and began to enter mainstream treatment by the early 1970s. At first dialysis was principally delivered in hospitals, but free-standing dialysis centers soon became the predominant treatment facility. Home dialysis is an option for some patients.
Dialysis is a relatively simple process. Dialysis centers need to be supervised by licensed physicians, but the actual treatment can be and usually is provided by technicians. The necessary drugs are well-known and dosing is not usually complex, and dialysis devices need monitoring but are not hard to run. Patients who receive in-center dialysis typically do so three days a week. Dialysis is debilitating, and as a practical matter patients need a center no more than 30 miles from their home.
The need for dialysis due to ESRD is also one of three conditions which automatically qualify an individual for Medicare. (The other two are age and Lou Gehrig’s disease; the latter is quite rare.) In order to protect Medicare financially, the Medicare Secondary Payor act (“MSP”) requires self-insured plans which cover such individuals to pay primary to Medicare for a three month “waiting period” from the onset of dialysis, and a subsequent thirty month “coordination period.” Qualified individuals are not automatically enrolled or legally required to enroll in Medicare.
The Dysfunctional Dialysis Market
The fundamental driver of dialysis claims risk is the highly dysfunctional market, and the provider profits it generates. Self-insured plans in particular are caught between a rock and a hard place: The dialysis market supply side is strongly dominated by two giant firms, while most of the demand side is dominated by Medicare, which fixes the amounts it pays as a matter of law. Self-insured plans and commercial insurers are therefore the principal source of profits for dialysis providers.
Seventy-three percent of dialysis centers in the United States are owned by the two “large dialysis organizations” (“LDOs”), DaVita and Fresenius Medical Care (“FMC”). In many regional and local markets all dialysis centers are owned by one of the LDOs, and in some only one LDO is present. This is considered a “highly concentrated” market under U.S. Department of Justice standards, meaning that the dominant providers are considered able to exercise substantial control over pricing.
The demand side is also highly concentrated, but in ways which only exacerbate the problem. Medicare is the primary coverage for most dialysis patients (62%), and other government programs such as Medicaid bring total government program coverage up to almost 90%. Private commercial and self-insured plans therefore make up only a little over 10% of the demand side of the dialysis market, and have correspondingly little market power.
Further, Medicare rates in particular aren’t negotiated in the market. The Medicare dialysis payment rate is set annually by Congress based on recommendations by the Medicare Payment Advisory Commission (“MedPac”). MedPac recommendations are based on an analysis of the adequacy of care given as well as provider profitability and access to capital given current payment levels, and intended to provide for sufficient funding to support patient care plus a reasonable profit.
The LDOs sometimes complain that Medicare rates are insufficient, and there is a little something to that. In 2016 the average per-treatment Medicare payment was about $189, and the LDOs’ own figures for 2016 indicate their costs per treatment were $226 (DaVita) and $271 (FMC). However, their average revenues per treatment were $336 (DaVita) and $345 (FMC), with “rack rate” charges per treatment to self-insured and commercial plans in excess of $6,500. While many plans are able to access LDO facilities at a discount via preferred provider organization (“PPO”) and other provider networks, these are typically unable to negotiate discounts greater than twenty or thirty percent (reduction to $5,200 to $4,550).
Self-insured and commercial plans therefore subsidize Medicare rates to some extent, but mostly serve as the major LDO profit center. And annual charges for self-insured plans can therefore easily exceed a million dollars per case, even with a PPO discount.
Dialysis Claims: A Low Probability, High Impact Risk
The dysfunctional nature of the dialysis market and its financial implications are not necessarily clear to many plans and their advisors, simply because they have not experienced it. For smaller plans in particular there is a relatively low probability that any covered individual will enter ESRD and need dialysis in any given year.
The incidence of ESRD in the working age population is just over 100 cases per million for ages 22 – 44, and around 600 per million for ages 45 – 64. While there isn’t good data on point, clearly many of these individuals are covered by a government program or commercial insurance. A plan with a thousand covered lives would therefore have an incidence of fewer than .1 to .6 cases per year. Plans may therefore go years without any dialysis claims, especially if their covered population is relatively young. Even quite large plans will have few enough cases that they will have very limited experience with them.
At the same time, as noted above, charges for dialysis to self-insured claims are typically quite high and annual exposures easily exceed one million dollars. Dialysis cases may not exactly be “black swans,” but for many plans they may be unanticipated, and the plan may not be prepared for the financial impact of this relatively improbable event.
The Legal Environment of Dialysis Benefits
Even a plan which anticipates and wants to prepare for possible dialysis cases may have difficulty developing a sound strategy, because the unique legal environment limits and complicates strategic options. The first step is therefore the identification and interpretation of these various laws.
Health benefits in general are subject to a variety of laws which also apply to dialysis. The Employee Retirement Income Security Act (“ERISA”), along with various provisions of the Affordable Care Act (“ACA”) provides the overarching regulatory health benefits regime, particularly for requirements for notification of plan terms and adequacy of benefits. The Americans with Disabilities Act (“ADA”) and nondiscrimination provisions of the Health Insurance Portability and Accountability Act (“HIPAA”) limit the ways in which plans can try to control their risks by differentiating benefits for high-cost conditions.
There are well-established strategies for working with these laws and implementing plan benefit terms which allow plans to pay dialysis claims at less than provider billed charges, utilizing specifically designed plan language and consistent methodologies, such as defined “usual and customary” or “usual and reasonable” rate provisions. A number of such strategies are possible in principle, though they vary in legal defensibility. A few years ago there was a considerable litigation, including significant cases by the LDOs, alleging such strategies were unfair trade practices and other similar claims, and in fact some of them were found to be legally defective. Such challenges may still be made if a plan isn’t careful, but the parameters for defensible dialysis benefits terms and determinations are reasonably well-defined at this point. But there are two key areas where unanticipated and badly-defined legal issues can catch a plan by surprise: The MSP and PPO and other provider network contracts.
The Medicare Secondary Payor Act
As noted, the MSP requires self-insured plans to pay primary to Medicare for 33 months from the onset of dialysis. A lengthy and somewhat confusing set of regulations was promulgated to enforce this requirement and keep plans from “gaming” Medicare, including prohibitions on a variety of practices which might “take into account” that an individual is qualified for Medicare due to ESRD or the need for dialysis, or “differentiate benefits” for such individuals.
Some of the specific examples of prohibited practices are straightforward: A plan cannot terminate coverage for someone because she has ESRD. Others are less obvious; a plan cannot require someone to enroll in Medicare, though it can educate them about their rights and the benefits of doing so. Still other practices are not specifically prohibited and there is no guidance on point: Can a plan pay someone’s Medicare premiums? Can a plan pay one rate during the waiting period, and another during the coordination period? Is it “taking Medicare into account” if a plan pays dialysis claims based on the rate Medicare pays such claims? And so on.
Since a violation of the MSP can render a plan non-conforming and even be the basis for double damages, these are issues to be approached with care and an understanding of the risks. The LDOs are well aware of MSP vulnerabilities, and have sued plans for MSP violations; as of this writing DaVita is actively pursuing a number of cases targeting the MSP issues specifically.
The PPO Contract Problem
PPO and other network contracts pose a different set of issues and risks. PPO contracts are highly variable in content and structure, but are usually made up of a set of agreements in a “chain” of parties. At one end of the chain the participating provider has an agreement with the PPO entity. The PPO in turn will usually have an agreement with a third-party administrator (“TPA”) seeking PPO access for plans it administers (in some cases the same entity will administer both the PPO and plans). The TPA in turn will have an administrative services agreement with its plans, which allows them to obtain health care services for their members at PPO discount rates.
Some PPO arrangements allow plans and/or TPAs to choose to access the network or not, with no consequences if they don’t (other than loss of the discount). Some clearly prohibit plans from paying participating providers anything but PPO rates, frequently via a “joinder agreement” directly between the PPO and the plan. Most fall somewhere in the middle, and only case-by-case review can determine whether a plan is in fact obliged to pay participating providers at PPO rates.
This matters for dialysis purposes in particular because, as noted above, a PPO’s discount from LDO charges may leave a plan with an unacceptable claims exposure. The plan (or its TPA) may not have anticipated dialysis cases or their financial consequences when entering into the PPO arrangement. A plan may therefore need relief from this unanticipated and unacceptable exposure, but the plan (and/or TPA) may be subject to suit by the provider (and/or PPO) if it doesn’t pay the provider at PPO rates. Many PPOs recognize that they can’t provide acceptable discounts for dialysis services from the LDOs and may be willing to negotiate a dialysis carve-out, but such negotiations require careful analysis of the PPO documentation and an understanding of the PPO’s interests and obligations.
This is also an area which has seen active litigation by the LDOs over the years and there are a number of active cases as of this writing.
Self-insured health plans and their advisors need to anticipate dialysis cases; they may be relatively uncommon, but if they happen they can have severe financial impacts. Once they are anticipated a risk management strategy can be developed, with an appreciation and understanding of the legal requirements and standards which constrain alternatives. Some of these issues are in gray areas, and some of them are in active litigation. Part of prudent risk management is therefore making sure the strategy suits the plan’s willingness and ability to accept litigation risks, and balancing that against the exposure to dialysis claims risks which the strategy is intended to reduce.