The recent passing of a new healthcare bill, Assembly Bill 290, in California has caused serious concern regarding its impact on delivery care to patients with end stage renal disease (“ESRD”). Governor Gavin Newsom’s signature serves to limit the reimbursements dialysis providers will receive for treating patients. Under the current structure, low income patients may cover the cost of care through a combination of payments from insurance and charitable support organizations.

Under the new law, payments from charitable organizations will be limited, putting those patients dependent on such programs in a challenging position: having to decide between their health and other obligations.

In addition, renal care providers are subject to pressure: their ESRD patients are dependent on consistent dialysis services, but can the providers accept lower total payment, jeopardizing their operational strength? This impacts local and national operators alike, with large organizations such as DaVita Kidney Care, Fresenius, and US Renal Care facing the most challenges.

Despite being vetoed by former Governor Jerry Brown, the bill was passed on October 13, 2019 capping nearly two decades of industry and legislative debate. Beginning in 2020, low income ESRD patients will need to look elsewhere for assistance in covering the cost of their treatments.

Chase Jarrett with ERE Healthcare Advisors states, “Sectors reliant on government reimbursements, such as providers to ESRD patients, have been pushing back on legislation like this for years, knowing that it will impact their revenue.  These companies (DaVita and Fresenius) have been collecting higher reimbursements by directing their patients to private insurance as opposed to Medicare or Medicaid.  Assembly Bill 290 looks to cap the reimbursement rate for dialysis companies to Medicare rates.  Patients will still be able to receive care, but this has a direct impact on the profits generated by providers.”, Mr. Jarrett has been closely monitoring the dialysis sector and working with nephrologists across the nation for several years.

How will dialysis operators fare? Given ESRD patients’ lives depend on multiple weekly treatments, providers may have no choice but to continue delivering care for lower reimbursement. While profitability is certain to suffer, the industry is expected to continue.

Earlier this year DaVita’s former-CEO, Kent Thiry, said that the law could reduce operating income by $24 million to $40 million.  In 2018 DaVita had a total revenue of $11.4 billion, while its operating income was $1.5 billion.

While there are challenges facing reimbursements for dialysis care operators, it is expected that the need for dialysis services will continue.  Even if the state of California doesn’t support sustainable delivery of dialysis care, those operators with a national footprint are positioned to continue serving patients in the state.

“Our outlook for landlords of properties leased to top dialysis operators (DaVita, Fresenius, US Renal) is strong, but this opens the door to speculation about the implementation of additional regulation in years to come,” says Jarrett.

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