Dialysis Industry to Face Regulatory Scrutiny in 2021, Driven by Kidney-care Models, Medicare Advantage

May 6, 2021 Capstone believes kidney care—namely DaVita Inc. (DVA) and Fresenius Medical Care AG & Co. (FMS)—will come under regulatory scrutiny in 2021 due to the launch of recent value-based care models, an aging population, Medicare Advantage coverage extending to end-stage renal disease (ESRD) patients, and continued attention on consolidation in the dialysis industry. Although less than 1% of Medicare beneficiaries have ESRD, the condition is responsible for around 7% of overall Medicare spending. In recent years, there has been bipartisan attention on the dialysis industry. In 2019, President Trump signed the Advancing American Kidney Health Executive Order, which presented five CMMI models for the kidney care space, starting in 2021 and 2022. In this note, we break down these models and the other top dialysis industry issues to watch in 2021.

Value-based CMMI Models Targeting Kidney Care Launch in 2021 and 2022: Pursuant to a Trump-administration executive order, five kidney-care models were introduced in 2019. The models—four voluntary and one mandatory—encourage at-home dialysis while coordinating providers for a more value-based approach to kidney care. The mandatory model, the End-Stage Renal Disease Treatment Choices (ETC) model, launched on January 1, 2021. The four remaining models, three of which involve direct contracting, are set to launch on January 1, 2022. Though the models are designed to reduce spending on dialysis, industry reaction has been positive. Capstone believes investors should watch how the industry responds to the models, especially since the Centers for Medicare & Medicaid Services (CMS) designed the models with cost savings in mind.

Medicare Advantage Plans Began Accepting ESRD Patients in 2021, Industry Watching to See Results: Pursuant to the 21st Century Cures Act, beginning in 2021, Medicare Advantage (MA) plans are required accept beneficiaries with ESRD. Prior to this change, beneficiaries who developed end-stage renal disease while in MA plans were grandfathered in, but traditional Medicare beneficiaries with ESRD could not enroll in MA. Medicare Advantage plans are anxiously watching to see what CMS will do about benchmarked payment rates, given that caring for ESRD patients, on average, is much more expensive than for non-ESRD patients. Estimates have found that the current out-of-pocket maximum creates a 9% underpayment for ESRD beneficiaries in MA. If the number of beneficiaries with ESRD in Medicare Advantage surges, then MA plans may need to increase premiums across the board to make up for underpayment for ESRD beneficiaries. The massive cost of ESRD patients and CMS’s failure to adequately risk adjust at least for the first year, combined with pandemic-related risk score pressures, could be an underappreciated headwind for MA plans in 2022.

Biden Administration Could Revisit Third-Party Payments Rule, but Is Unlikely to Finalize It: Recently confirmed Secretary of Health and Human Services Xavier Becerra was the target of the ongoing lawsuit against California Assembly Bill 290. The law, currently paused pending trial, would prohibit third-party organizations from making payments to patients to steer them toward commercial plans instead of government insurance. The Obama administration issued similar guidance in 2016, but it was met with litigation and eventually sent the rule back for review, where it remained until January 2021 when the Biden administration withdrew it. Although not our base case, should Secretary Becerra and the Biden administration reinstate the rule and successfully finalize it without litigation, it would push patients back onto public insurance, leading to reduced reimbursement rates for dialysis providers, namely DaVita and Fresenius.

State Dialysis Activity Likely to Continue, with California as a Harbinger: California is currently awaiting a court decision to see whether AB 290 can be implemented. The bill would limit third-party payments to dialysis patients that are passed through to dialysis companies. Additionally, during the November 2020 election, California was home to a ballot initiative that would have required a physician to be on-site at all dialysis clinics during patient treatment. The initiative failed with support from just 37% of voters. Given the size of the California kidney care market and the market consolidation toward the two major providers, Capstone expects California to continue to be a hub of dialysis-related regulatory activity.

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