Considering the Effects of a Recent U.S. Supreme Court Ruling on Dialysis Care Costs

Abstract

Dialysis care in the United States is expensive and is mostly paid for by Medicare. To reduce the cost of providing dialysis services the federal government has relied on a law that designates Medicare as a Secondary Payer in the first 30 months of dialysis. During this period, private health insurers are the Primary Payer and pay for the majority of dialysis costs. Private health insurers often pay substantially higher prices for dialysis care than Medicare, possibly due to highly concentrated dialysis provider markets. A perspective by Boumil and Curfmin in this journal discusses how a recent ruling by the U.S. Supreme Court may limit Medicare’s role as a Secondary Payer, potentially altering the economic relationship between dialysis providers and private insurers. Boumil and Curfmin discuss how these changes may ultimately promote competition in dialysis provider markets and lower dialysis costs paid by private health insurers. We compare this viewpoint to responses and concerns voiced by other stakeholders in the kidney care community and outline additional ways in which the Supreme Court ruling may affect competition in dialysis markets and prices paid for dialysis by private insurers.

808,000 patients in the United States (U.S.) have end-stage kidney disease (ESKD) and require either dialysis or a kidney transplant to survive. Approximately 70% of patients with ESKD undergo dialysis, which involves multiple treatments per week either at home or at a dialysis center.¹ Regular dialysis treatments, combined with frequent hospitalizations for complications of ESKD and a high burden of associated comorbidities (such as diabetes and cardiovascular disease) contribute to high healthcare costs for patients with ESKD.

Due to federal law, nearly every U.S. patient with ESKD becomes eligible for Medicare once their kidneys fail, regardless of age or disability status. This policy makes Medicare the primary payer for dialysis and other healthcare services among patients with ESKD. Medicare spends an average of $95,000 per year on each patient receiving dialysis, including $30,000 per year on dialysis services. ESKD care comprises 6–7% of all Medicare fee-for-service expenditures.¹

One way that policymakers have tried to control federal spending on ESKD care has been to establish Medicare as a Secondary Payer for dialysis services when patients have private health insurance at the onset of ESKD. Instead of automatically switching to Medicare upon the development of ESKD, these patients can retain their private health insurance coverage for up to 30 months. During this 30 month “coordination period,” the private insurer remains the Primary Payer and continues to cover most healthcare costs. As a Secondary Payer during this period, Medicare’s expenses are limited to a subset of costs that are not covered by private insurance, such as assistance with co-insurance. After 30 months, Medicare becomes the Primary Payer and private health insurance switches to the Secondary Payer. For the many patients who stop working after initiating dialysis, the coordination period is less than 30 months.

The Centers for Medicare and Medicaid Services has also sought to restrain Medicare’s ESKD expenditures by bundling reimbursement for dialysis through a prospective payment system. For many years, payment under the End-Stage Renal Disease Prospective Payment System (ESRD PPS) did not increase with inflation, leading to steady declines in inflation-adjusted reimbursement for dialysis services.² Despite several updates to the ESRD PPS since 2011, limited Medicare reimbursement means that many facilities that are less efficient at delivering dialysis – such as rural facilities and smaller dialysis facilities – incur costs that exceed Medicare reimbursement levels.³

Patients with private health insurance comprise a relatively small proportion of all dialysis recipients because most patients with ESKD eventually switch to Medicare as their primary payer. Yet, many dialysis facilities have become reliant on payments from private health insurance as a major source of revenues. An analysis of financial filings from a large dialysis provider found that commercial payers contributed to 33% of the providers’ revenues, despite comprising only 11% of the payer population.⁴

One reason for this reliance on privately insured patients is that private insurers often pay higher prices for dialysis services than Medicare. Dialysis markets are highly concentrated, with the average market only having the equivalent of two competing dialysis providers.⁵ In these highly concentrated provider markets, private insurers commonly pay high prices for dialysis services. One study found that private insurers pay up to six times the amount that Medicare reimburses.⁶ High dialysis costs incurred by health insurers ultimately translate into higher private health insurance premiums, making health insurance less affordable.

A US Supreme Court ruling issued on June 21, 2022 -- Marietta Memorial Hospital Employee Health Benefit Plan v. DaVita Inc – has the potential to transform the relationship between private health insurers and dialysis providers in the United States. In a 7–2 opinion, the court ruled in favor of a private health insurer – Marietta Memorial Hospital Employee Health Benefit Plan (Marietta health plan) – that pursued a strategy of making all outpatient dialysis facilities out-of-network. The Marietta health plan only agreed to pay 87.5% of Medicare’s allowable rate when patients received care at these out-of-network dialysis facilities. A large dialysis provider – Davita Inc. – lost their argument that this strategy violated the Medicare Secondary Payer statute by illegally discriminating against patients with ESKD.

If other private health insurers pursue an “out-of-network” strategy similar to the Marietta health plan, then dialysis facility revenues from private insurers could decline sharply. One possibility is that dialysis providers choose to continue caring for affected patients, despite being designated as out-of-network, and accept payments that are lower than the typical price charged to private insurers today. Alternatively, if dialysis providers refuse to accept patients whose insurers pursue this strategy, then affected patients would be forced to switch to Medicare to continue receiving dialysis. Since Medicare typically pays a fraction of the price paid by private insurers, dialysis facility revenues would also decrease.

Dialysis providers, healthcare advocacy groups, and patient organizations have expressed strong concerns that the ruling could limit patients’ access to dialysis care.⁷ They point out that some patients may be left with exorbitant out-of-pocket expenses if dialysis facilities seek to reclaim costs not covered by the primary insurance provider or Medicare. If patients are forced to discontinue their private insurance and switch to Medicare, they would be left responsible for Medicare’s 20% co-insurance and without secondary payer assistance from the private insurer. The need to switch to Medicare could also leave dependent family members without insurance if they are beneficiaries of the patient’s private insurance plan. This is similar to what currently happens after patients discontinue private health insurance due to employment loss. Stakeholders have also expressed concern that the ruling could lead to worsening quality of dialysis care. Quality of care will decrease if the loss of additional revenue from private insurance leads facilities to cut back on services that benefit patients. These negative outcomes are likely to be disproportionately felt by underserved patient populations.⁸

In their perspective, Boumil and Curfman provide a different appraisal of the Supreme Court ruling. Rather than focus on how the ruling might affect patients with ESKD and dialysis providers, the authors focus on its potential to resolve longstanding issues around dialysis costs to private health insurers.⁹ They describe unique features of the US dialysis industry that contribute to high costs for private health insurers, including highly concentrated provider markets and the presence of provider-funded charitable assistance that “game the system” by helping patients to acquire and maintain more costly private health insurance. They then discuss both successful and failed efforts by state and federal policymakers to rein in private insurance dialysis costs by curbing these and other questionable practices. Finally, they posit that the added flexibility given to private insurers by the Supreme Court’s ruling will help to moderate dialysis prices for private insurers.

Boumil and Curfman outline a mechanism by which decreases in the amount paid by private insurers for dialysis might foster competition in dialysis provider markets and limit schemes related to charitable giving in dialysis. They discuss how, if large dialysis organizations refuse to accept lower private insurance prices, then other dialysis providers may step in to fill this need and increase competition in these markets. Similarly, if prices paid by private insurance decline, there may be less enthusiasm to invest in charitable organizations that help patients to maintain private insurance.

Although the authors are optimistic that the Supreme Court ruling will have a positive influence on the price of US dialysis care, they also recognize that, “no change is inevitable.” They outline several hurdles that must be overcome for dialysis markets to change for the better following the Supreme Court ruling. Recognizing the important role of regulatory policy, the authors propose a multipronged effort by government organizations to help foster more competition in dialysis markets and curb perceived fraud and abuse in the wake of the Supreme Court ruling.

Changes to the bargaining process for in-network providers represents another important mechanism, not discussed in the perspective by Boumil and Curfman, by which the Supreme Court ruling could influence prices and market competition in dialysis markets. The ruling is likely to give private health insurers additional bargaining leverage when negotiating in-network prices with dialysis providers. Following the Court ruling, it is now clearer that private insurers have the option to pursue the Marietta health plan’s strategy of making all dialysis providers out-of-network. Even if adopting this strategy is reserved as a last resort option for failed negotiations, the threat that an insurer might exercise this option may lead providers in highly concentrated dialysis markets to accept lower in-network prices from private insurers.

From the viewpoint of bargaining leverage, the threat of pursuing Marietta health plan’s out-of-network strategy resembles what occurs when private insurers threaten to construct narrower networks by excluding other healthcare providers. For example, a study of private healthcare plans in California found that allowing plans to exclude hospitals from their networks would lead to substantially lower negotiated rates, even for hospitals that remained in-network.¹⁰ In the case of dialysis, this suggests that the insurers’ new ability to exclude dialysis facilities from the network could decrease prices even for facilities that remain in-network.

If increased bargaining leverage among insurers, combined with reduced reimbursement when providers are designated as out-of-network, cause prices paid by private insurers to decrease by more in highly concentrated markets when compared to less concentrated markets, then efforts to maintain highly concentrated dialysis markets could become less profitable. Large dialysis organizations may choose not to acquire smaller providers if the benefits of maintaining highly concentrated markets are not worth the cost. New competitors may begin entering dialysis markets. Yet, it is also possible that dialysis market concentrations will remain unchanged or increase following Court’s ruling. In addition to price markups, cost considerations can drive industry consolidation. Benefits from economies of scale and increased bargaining leverage with suppliers are two ways in which larger organizations may face lower average costs. To the extent that cost considerations – rather than price markups – maintain consolidated dialysis markets, lower prices paid by private insrers may not end up fostering more competition.

The effects of the ruling on dialysis markets will also depend on how many insurers follow Marietta health plan’s lead and pursue a similar out-of-network strategy. The case in question involved a self-insured employer-provided health plan. In self-insured plans, employers bear the financial risk of insurance and are subject to relatively few network adequacy protections including state and federal oversight.^11,12 In contrast, many patients with private health insurance are enrolled in fully-insured group health plans, where a third party insurer assumes financial risk. These fully-insured plans are subject to more stringent network adequacy protections and may not have the option of designating all dialysis facilities as out-of-network. It is also possible that insurers will choose not to adopt an out-of-network strategy for fear of public backlash and the loss of customers. For example, in response to the Supreme Court ruling, Fresenius, a large dialysis provider, referred to a general interest in patient wellbeing when stating that they did not expect a major change in the relationship between dialysis providers and health insurers.¹³

In summary, a recent U.S. Supreme Court ruling has the potential to transform the economics of dialysis care in the U.S. For the many patients with ESKD who rely on life-sustaining dialysis therapy, there are concerns about how the ruling might increase the burden of kidney disease. In contrast to the many stakeholders in the kidney community who have been highly critical of the ruling, the perspective by Boumil and Curfman highlights ways in which the ruling could also have a positive influence on the cost of kidney dialysis care. However, key questions remain about how many private health insurers will adopt the new out-of-network strategy permitted by the Supreme Court when negotiating prices with dialysis providers and how the ruling will ultimately affect competition in dialysis markets.