For-profit dialysis: an unethical industry / DaVita (DVA)

I’ve been researching the dialysis industry because Berkshire Hathaway owns DaVita (DVA), one of the largest dialysis providers in the US.  However, I’m not quite sure why Berkshire Hathaway owns this stock.  The for-profits are rarely rewarded for creating value while there are large financial rewards for unethical behaviour.  Buffett has been vocal about not owning Lorillard (a tobacco company) so I don’t see why he would be ok with owning DaVita.  It is possible that Buffett hasn’t researched the company much as Ted Weschler (probably) made the decision to buy it.

Historically, DaVita has been very rewarding for shareholders ever since Kent Thiry saved it from bankruptcy and turned it around.  However, his integrity strikes me as questionable and I’m of the opinion that entrusting your money with unethical people is not a good idea.

Industry overview

The American Medicare system pays for most dialysis patients’ costs.  There are a small number of patients whose costs are covered by private insurance.  Dialysis clinics are able to charge private insurers significantly more than Medicare (somewhere around three times) as the private insurers have little choice in the matter.  The industry generally loses a small amount of money (or breaks even) on its Medicare patients while it makes virtually all of its profits on privately-insured patients.

Currently, the private companies have little incentive to create value.  If they improve the lives of Medicare patients, they will not be rewarded for it unless Medicare rules specifically reward it.  Unfortunately, this rarely happens since Medicare has been burned by fraud so many times.  The largest two companies (Fresenius and DaVita) are constantly under government investigation and have paid out large settlements in the past.  It is difficult for Medicare to create rules that both (A) stops fraud that has happened in the past and (B) rewards good behaviour.  Another factor is that some of the people creating Medicare rules have financial ties to the for-profit companies.  They have incentives to create opportunities for private companies to make a profit.

The end result is that the for-profits primarily focus on a few areas to make money:

  1. Milking the private insurers.  The for-profits will find ways to retain and acquire patients that are privately insured (DaVita used to refer to them as “hippers”).  They may provide preferential service to hippers by giving them another patient’s chair if the hipper wants a particular time slot.  A positive side effect of this practice is that clinics with multiple hippers tend to offer better service.  As well, DaVita clinics tend to improve their quality if they face local competition over hippers.
  2. Cost cutting.  e.g. Pay staff less money and make them handle more patients.
  3. Kickbacks and conflicts of interest.  When DaVita sells a stake in their clinics to nephrologist groups, the kidney doctors will likely to refer their clients to a DaVita clinic (which is also their clinic).  By working with Amgen, DaVita overprescribed EPO to its patients and was able to generate more Medicare revenues while enjoying special discounts on EPO due to the higher volume.  This practice put its patients at risk as EPO is known to have serious side effects.

To be fair to DaVita, there are some areas where they may be creating value.

  1. Economies of scale.  DaVita tends to pay less money for its supplies due to its negotiating leverage and its scale.
  2. DaVita has a high percentage of patients with fistulas.  A surgically-created fistula leads to better patient outcomes and lowers costs slightly for DaVita (there are less complications and the patients can be setup for dialysis slightly faster).  Other countries have fistula rates over 90% while the US fistula rate is somewhere over 60%.  Nephrologists who own a stake in a dialysis clinic may have an incentive to encourage their patients to get a fistula.
  3. Lower staffing levels.  One could argue that this is an “efficiency”.
  4. Anticipating the future and trying to create a business model for Nxstage and home dialysis.  Home dialysis improves patients’ health and can save taxpayers money (less hospitalizations, lower costs than in-clinic as the patient or an unpaid helper acts as the lab technician, etc.).

On the other hand, DaVita has engaged in cost cutting that puts its patients at risk.  It has paid settlements regarding its over-prescription of EPO and for violating conflict of interest laws (relating to kickbacks to groups of kidney doctors).  In general, for-profit clinics often provide the bare minimum level of care (unless hippers are involved).  Posters on generally have an extremely strong preference for a not-for-profit clinic.  The academic article “The effect of dialysis chains on mortality among patients receiving hemodialysis” finds that for-profit dialysis chains have higher mortality rates than not-for-profits.

Hypocrisy in care

The default treatment for dialysis patients is in-clinic dialysis three times a week.  Most kidney doctors would not choose this method of treatment for themselves.  They would likely opt for:

  1. A higher frequency of treatment.  (This costs more money.)
  2. In-home treatment during the evening or while they are sleeping.  This allows them to work during the day, avoid commute times to the clinic, etc.
  3. Longer treatment time.  (This goes hand-in-hand with in-home treatment.)  More dialysis is better.   It improves patients’ health and quality of life dramatically.  It allows people to work and to enjoy their lives instead of being physically drained by dialysis.
  4. Doctors would insert their own needles (self-cannulation).  This saves time, arguably reduces complications (because the needle is less likely to miss), and patients who do this find it less painful.  In the US, very few dialysis patients have been trained to do this.
  5. They would not reuse dialysis filters.  (The academic article “Single-Use versus Reusable Dialyzers: The Known Unknowns” explains why.)  “Reuse” is often seen as a cost-cutting measure.  Not all clinics engage in reuse as the overall costs of single-use can be lower.

Overall, there is a big difference in the advice that kidney doctors give their patients and the choice of treatment they would choose for themselves.  This is a sign that the current system is delivering sub-par care.

Some of these treatment options are a win-win situation (home dialysis, inserting your own needles, etc.).  They save money and improve the lives of their patients.  The current medical system has done a poor job at enabling these efficiencies.

Why is this system flawed?

I’m sure that this is a political subject and that there are many varying viewpoints on it.  I’ll just give my brief opinion on it.  The people who make the rules and the politicians have conflicts of interest.  They often have financial ties to the medical industry (e.g. they receive money or other graft from the medical industry for consulting, business trips, employment, etc.).

Part of the reason may be cultural.  Americans tend to be litigation-happy.  This reduces the drive to innovate and to try anything other than the commonly-accepted standard.  There is also the societal expectation that doctors should take care of patients.  Many patients don’t want to take responsibility for their own health or medical treatment.  There are many patients who don’t try in-home dialysis even though they are aware that it can improve their health and quality of life.

Outlook on DaVita

I think that DaVita’s core dialysis business won’t have that much more room to grow.  Government regulators (rightfully so in my opinion) are beginning to limit DaVita’s ability to grow further as its larger size would cause concerns over competition.  Dialysis patients often have little choice about their clinic since they have to commute there three times a week.  DaVita understands this very well and takes many steps to create local monopolies (e.g. by buying groups of nephrologists and paying them to sign non-compete agreements).  Competition is vital for keeping the for-profits’ cost-cutting in check.  Because of the threat of competition (or actual competition), there are many DaVita clinics around that are run well and have satisfied patients.  I believe that the FTC will have grounds to limit DaVita’s growth in kidney care.

However, Kent Thiry is a very smart guy and may find ways to make more money in related fields.  The increase in DaVita’s share price has been phenomenal under his leadership.  He may be able to continue that trend.  (Some of this growth has been fueled by debt.)

Is DaVita’s CEO ethical?

  1. DaVita has been creatively putting its patients at risk and finding ways to bilk Medicare.  It is an innovator in overprescribing EPO and in billing Medicare for intentionally wasted drugs.
  2. Publicly, Kent Thiry talks a lot about how DaVita has some of the best patient outcomes.  This is a lie.  DaVita is just as bad as the other for-profits in terms of mortality rates.  He also talks about how DaVita is helping to save taxpayer dollars.  Yet DaVita has actively engaged in gaming Medicare.
  3. Skimming over DaVita’s DEF 14A, I see that Thiry’s salary has growth faster than DaVita’s share price.

DaVita’s metrics

DaVita has an internal metric (DaVita Quality Index) for the well-being of its patients.  The company uses this metric to claim that their patients are getting healthier thanks to DaVita’s care.

Unfortunately, DaVita employees often game these metrics.  They can repeat tests until they get a better number.  So, I don’t put much faith in their numbers.

The bottom line

The American medical system is often criticized for being extremely expensive for the level of care delivered.  DaVita is part of the problem, not part of the solution.

Great business, terrible ethics.

Please consider organ donation

Kidney disease is a terrible thing to live with.  Unfortunately, many people who would be happy to give away their organs don’t sign their organ donor cards!


The Strangest Show On Earth – An interesting magazine piece on Kent Thiry, his bizarre antics, and his critics.  His company comes across as somewhat cult-like.

HemoDoc / A Doctor’s Blog from a Patient’s Perspective

*Disclosure: No position in DaVita or Berkshire Hathaway.

11 thoughts on “For-profit dialysis: an unethical industry / DaVita (DVA)

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  3. Thanks for this detailed analysis. Are the links you posted the sole sources for this research? I’m working to improve my own research process so curious as to how you achieved this level of knowledge.

  4. I don’t think its fair to say DaVita is unethical because they make money keeping people alive due to a terrible medical condition. Sure, ESRD is absolutely hard to have to live with, but if I had it i’d sure be happy knowing there are companies like DaVita that specialize in a lifesaving treatment and work to continually produce better and better outcomes over time (which they have) although it isn’t perfect like most things. Having said that, you are right about the business being great. Whats so attractive about DaVita mainly, are four things. 1.) Free cash flow grows disproportionally to patient growth. This is because each patient with a commercial payor provides more in increased revenue than costs so each new patient’s attributable revenue flows right to the bottom line. 2.) It’s cash flow is ‘sticky’ and highly recurring. The companies monopoly like position in local markets (treating 3.5/10 patients nationally) and patients reliance on the companies services to not die means the cash comes in without having to be worked for (i.e. increased capex, advertising spending) or contribution of much additional capital and 3.) Kent Thiry is an excellent capital allocator. Thiry makes smart acquisitions, buys back and issues stock for acquisitions (like HCP) when appropriate and wisely takes advantage of long term fixed rate financing. Lastly, 4.) With a dialysis company, their greatest asset is their relationship with “referring physicians” which you spoke about. These physicians are on boards of local dialysis centers and for another dialysis center to come into a market and try to displace the incumbent DaVita, it would be nearly impossible to get these doctors to leave the centers they serve (the switch costs for patients would be large as well) and would be uneconomic because DaVita’s efficiency and scale would mean the competition would have a hard time subsidizing losses for very long.

  5. ugh–when will these american hustlers and opportunists go away. sickening–anything for buck. the american failed way. sicko country

  6. You know a Nephrologist was able to prevent Dialysis in most cases of kidney disease if caused by Diabetes and/or hypertension. An ACE inhibitor at a higher than normal dose can lower creatinine to a normal levels if the creatinine is below 2.0 and a GFR (kidney function) of more than 50 percent. If this treatment was known then companies like Davita would probably cease to exist. There would probably be enough cadaver kidneys to do a transplant as there would be a significantly reduced number of patients with rare forms of CKD that cannot be treated using this treatment. That same nephrologist also got fired for working in the VA for trying to get this treatment out there.

    Then again, America has outdated Dialysis treatments compared to Europe. Heck their machines are mostly based on 1980’s-1990’s era technology and probably feel if it ain’t broke don’t fix it. What is also weird is that one company (Fresenius) has a virtual monopoly on Dialysis machines supplying half of all worldwide machines. DaVita also uses Fresenius machines along with Gambro and B. Braun.

    • Not true re: ACEI/ARB. While can definitely slow progression of kidney disease (CKD), does not stop progression – CKD is a progressive disease, much like aging. Goal is proteinuria reduction, diabetes / cholesterol control, and avoidance of kidney toxins. ACEI/ARB are used for BP control and for benefits on how kidney remodels itself (ie, minimizing scar tissue). With all factors ideally optimized, it may be possible to greatly slow progression of CKD to that of normal age related loss of kidney function, but does not guarantee and largely depends upon how much ‘damage’ exists at a microscopic level (creatinine is the ‘tip of the ice burg’ so to speak, does a good job at providing marker of kidney function but may not always fully assess level of chronic injury at micro level). That being said, ACEI/ARBs are ‘standard of care’ in treating diabetic individuals for the above reasons. spoken from a nephrologist.s

  7. I am a foreign investor. I think the for-nonprofit dialysis center can provide better service than the for-profit dialysis center.I just wonder why most patient(about 80%) would go to the for-profit dialysis center for treatment, not go to the for-nonprofit dialysis center. If the for-nonprofit hospital can’t offer so much service to the patient, this hospital can build more dialysis center.

  8. Pingback: Healthcare inflation is driven by bad medicine – Glenn Chan's Random Notes on Investing

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