If you want to understand what ails the U.S. health care system, look no farther than the dialysis industry. A recent New York Times article, “UnitedHealthcare Sues Dialysis Chain Over Billing,” provides a pre-made case study.

In brief, a chain of dialysis clinics, American Renal Associates, pushed poor people out of government coverage and into private insurance with UnitedHealthcare so that the clinics could bill $4,000 per treatment rather than $200. A patient advocacy group, American Kidney Fund, paid the patients’ insurance premiums using funds donated by American Renal. United is suing American Renal for overbilling.

So who are the good guys and who are the bad guys here?

From what I can see in the article (and there’s always more to the story) it looks like both American Renal and American Kidney are to blame. But to understand the motivation for their behavior, we have to look at the politics and economics of dialysis.

Dialysis is a life-saving treatment for people with impaired kidney function, but it’s expensive. Medicare is mainly a program for the elderly, but it also covers the disabled and people with end-stage renal disease (i.e., dialysis patients) regardless of age. That entitlement was added way back in 1972 to make sure patients didn’t drop dead for lack of funds for dialysis. Medicare coverage kicks in over time, so people with commercial insurance use their plans first before shifting over to Medicare. Once on Medicare, they are still responsible for a portion of their costs unless they are poor enough to qualify for Medicaid.

So officially the government pays for dialysis, but does it really do so in practice? In fact, what happens is that government reimbursements from Medicare and Medicaid are so low that clinics would go out of business if they had to rely solely on those payments. The clinics make up for the losses by charging high — or even extortionate — rates to private insurers, hence the 20x difference in reimbursement cited in the article. As a result, the clinics make more than 100 percent of their profits on their few commercial patients. From a financial standpoint, the commercial patients are the only patients the clinics cares about.

Meanwhile, the clinic business is essentially a duopoly between Fresenius and DaVita, which is why commercial rates can be so high. Interestingly, the few remaining independent players like American Renal are sometimes even more aggressive than the big boys. (There is an interesting analogy here with Martin Shkreli, who got into trouble for taking big pharma pricing tactics to their logical extreme.) Interestingly if you look at the American Renal website you can see that their real customer is the nephrologist; patient-centric they are not.

What about the American Kidney Fund? It seems like a good guy for paying the insurance premiums for ESRD patients. But its funding overwhelmingly comes from the two big dialysis companies who get a fantastic return on investment, since insurance premiums are much much lower than the reimbursement the companies get back for dialysis treatments. The two big boys basically split the market, so they are certain to benefit from their own contributions. More ESRD patients with commercial insurance means a lot more profit. In fact, if you want to understand just how closely American Kidney is tied to the dialysis business, it’s instructive to learn that patients who get kidney transplants and hence no longer need dialysis are not eligible for American Kidney subsidies!

For a small player like American Renal, it’s a different story. They can’t just donate to American Kidney and expect to get a benefit, since most of the value will flow to their big competitors. American Renal’s strategy appears to have been to target specific patients for insurance coverage who would then become American Renal patients. That’s an obvious no no. But hey, they probably figured their own intent wasn’t really any different from what their big competitors were doing, and they thought they could get away with it.

Incidentally, analogues to American Kidney operate in other disease areas, particularly for diseases where there are just one or two expensive drugs available. The drug companies pay the premiums and more than recoup their investments via reimbursed drug sales.

So I say good for United for taking on American Renal and American Kidney. But I also note that they — and the other health plans — are still too scared of retaliation to go after the industry heavyweights.

David E. Williams is president, Health Business Group and blogs at the Health Business Blog.

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