DaVita's SEC filings illustrate the cost of profit

By Bill Peckham

In Jennifer Nix's article for Salon, I love my socialist kidney, she writes that:

... contrary to the notion that private companies can more efficiently and cheaply insure healthcare, consider these facts: Total public and private spending on the ESRD population, according to the USRDS 2008 report, was $34 billion. So, if we revisit the percentages above, Medicare covers 75 percent of the ESRD population for $23 billion, while $11 billion is spent to cover the remaining 25 percent of ESRD patients, including the 10 percent covered by private insurance. In other words, private insurance pays $4.4 billion to cover 10 percent of ESRD patients, which suggests that it would cost private insurance $33 billion to cover 75 percent of the ESRD population -- $10 billion more than Medicare now pays. So, who's more cost-effective?

Nix's point is correct, it would cost the system more if private insurers had to cover people currently covered under Medicare. However, I think Nix is over stating the efficiency of commercial payers and commercial providers. It's even more lopsided.

Rather than include total medical spending for someone using dialysis, look at just the dialysis piece. In 2007, Medicare Part B spending for dialysis composite rate services and separately billable Part B drugs was about $8.6 billion total, including the 20% beneficiary copay amount (this apparently can be gleaned from the USRDS but I received this figure via email from MedPAC's principal policy analyst). $8,600,000,000 is the total revenue US dialysis providers received in return for taking care of Medicare primary beneficiaries.

With a little math the per beneficiary, per year cost/revenue can be determined. There were about 360,000 people on dialysis in 2007. Of the 360,000 about 75% were Medicare primary. So putting that together, in 2007 about 270,000 Medicare beneficiaries were on dialysis. Therefor, in 2007 the average dialysis provider revenue per Medicare beneficiary, per year was about $31,850 ($8.6B / 270,000). The difference between my number and Nix's is that Nix is using total medical costs which includes payments to dialysis providers but also physicians, hospitalizations, skilled nursing, etc.. Looking at just the dialysis piece is illustrative. The cost of profit in the provision of dialysis is clear.

I can't find any report of total dialysis provider revenue from commercially insured patients but we do have access to numbers from one of the two large dialysis organizations (LDOs), DaVita's 2008 10-K SEC filings which reports their revenue and provider mix.

DaVita reports they had $5.7B in revenue in 2007; of which 36% of was due to 13% of their patients - the ones with commercial insurance primary. DaVita also reports that in 2007 they had about 107,000 patients. Math to get this in terms of per patient:

36% of $5.7B = $2,052,000,000 revenue due to commercially insured patients
13% of 107,000 = 13,910 patients with commercial insurance
$2,052,000,000 / 13,910 = $147,520 per patient revenue when patient has commercial insurance

From the same 10-K SEC filing DaVita reports that Medicare and Medicare-assigned HMO plans covered 80% of their patients; these Medicare primary patients provided 58% of their 2007 revenue. More math:

58% of $5.7B = $3,306,000,000 revenue due to Medicare primary patients
80% of 107,000 = 85,600 patients with Medicare primary
$3,306,000,000 / 85,600 = $38,600 per patient revenue when Medicare is primary

Back to Nix's point. If all Medicare primary patients were generating as much income as DaVita's commercially insured patients then they would have generated $39,830,400,000 in revenue (or total cost) instead of $8,600,000,000. Even more interesting is comparing the DaVita Medicare patient revenue to the national average: $38,600 vs. $31,850. A 20% difference.

It's not clear from DaVita's SEC filings why their per patient, per year Medicare beneficiary revenue was 20% over the national average. This letter (PDF link) NephrOnline posted last December concerning CROWNweb included cost data collected for the National Renal Administrators Association by Avalera Health. Avalera Health reported that the data indicated higher epo usage at the LDOs but a 20% variation is a lot of epo. 

Nix asked "So, who's more cost-effective?". Using her numbers or mine I think the answer is clear.

Comments

[Idalia]

Does that really answer the question of cost-effectiveness?
I can see that privately insured patients "cost" more then Medicare patients - from the payer perspective. But this only indicates how much revenue they generate and simply shows that Medicare payment are lower then what private pays for patient. To understand and compare cost efficiency one would have to look at cost structure of dialysis delivery by different providers. Would you agree with that?

[Bill Peckham]

You can see the per treatment cost structure of Large Dialysis Organizations vs. Small Dialysis Organizations at the PDF link in the second to last paragraph. What it shows is that LDOs have greater purchasing power and there by low costs.

Dialysis treats a chronic condition. The medical cost of treating someone who needs dialysis is predictable. Given this, why would private insurance do a better job paying for the healthcare of people who need dialysis? What is the role of profit in treating a chronic condition? On the insurance side and on the provider side?

When you consider the overhead in administering private insurance, add in the profit margin you're talking about a nearly 30%. What value is given for the 30%?

On the provider side their cost per treatment is less but despite this Medicare is paying DaVita 20% more per beneficiary. What value is being given for that 20%?

[Zach]

Excellent point, Bill.

[Wormwood]

You numbers are wrong. try $254,904 a year just for hemo.
$21,242 for 13 treatments per month
$313.50 for drug/epolt1000 units 22 units per month
$601.25 for heparin 1000 ut 65 units per month
$695.00 for venofer 100 units per month
$3,634.80 for zemplar 52 units per month
$1,683.05 for Administration.

These are real numbers.
no charges went to medicare as secondary

now I believe I lost my job because of insurance premiums, because of high cost of hemo-dialysis at Davita to my private insurance.

What is the real cost per treatment in center at Davita? this I would really like to know.

[Peter Laird, MD]

Some insurers do better than that. The treatment cost for each treatment including all costs at my center was $240.00 which included all aspects of care. It was a capitation payment between Kaiser and FMC as an exclusive arrangement where only Kaiser patients were treated at this FMC unit. The manager of the unit said he was able to make enough to keep his supervisors happy and the care for the patients was excellent. Unfortunately, not all insurers get have that type of arrangement between the dialysis provider and the insurance company. With high numbers of patients, it always puzzled me why they didn't have better contracts with dialysis providers.

[Bill Peckham]

My numbers come from SEC filings, they're the best I have access to. That said the revenue numbers are averages. I too have heard about the sort of excessive charges Wormwood describes and I would suspect that his job loss may well have been because of the insurance implications of his continued employment.

The other public data point we have on charges is the lawsuit http://www.billpeckham.com/from_the_sharp_end_of_the/2008/01/law-suit-reveal.html. Those rates are about what Wormwood describes.

I think it would be a good project for DSEN to have dialyzors send in their Explanation of Benefits. You'd strip off, black out, redact any personal info e.g. name, SS #, but leave the amount charged, the amount paid, and service location.

I'd then republish the info - if a couple hundred dialyzors participated it would be a pretty interesting data base.

[Zach]

Excellent idea, Bill.