Investors Accuse Dialysis Provider DaVita of Ethics Breach

WILMINGTON, Del. (CN) – Saying an illegal profit-goosing scheme has already invited regulatory scrutiny and cost dialysis provider DaVita more than a billion dollars in market capitalization, shareholders brought a derivative class action to keep the company in line.

DaVita investor Charles Blackburn filed the federal complaint Friday in Delaware after what has been a tumultuous few months for the industry.

It all started, according to the complaint, in July 2016 when UnitedHealth Group leveled fraud charges against a competitor of DaVita’s called American Renal Associates Holdings.

Because DaVita had been engaged in a similar scheme, Blackburn says, the tide turned against it as well.

The scheme in question involves steering patients with end-stage renal disease, or ESRD, into private health insurance plans because plans that are subsidized by the government are less profitable for dialysis providers like DaVita.

While DaVita can bill a commercial insurer more than $4,000 for one session of dialysis, according to the complaint, Medicaid and Medicare would reimburse the company only $300 or less for the same service.

“DaVita’s profitability is heavily dependent on revenues derived from private insurance companies,” Blackburn says, noting that nearly all of the company’s profit derived from commercial payors in 2015, even though this group accounted for just a third of DaVita’s total dialysis services revenue that year.

To ensure that its patients traded government-subsidized insurance plans for private, commercial insurance, Blackburn says DaVita steered patients to a charity called the American Kidney Fund.

“DaVita and its competitors were only able to accomplish this feat by illegally and/or illicitly funneling money to the AKF,” the complaint states, abbreviating the charity’s name.

Blackburn says AKF used the proceeds of such funding to reimburse patients’ health care premiums.

“Notably, the AKF only funds insurance for dialysis (from which DaVita would benefit) and not insurance for alternative treatments for patients with ESRD, such as kidney transplants (from which DaVita would not benefit),” the complaint states (parentheses in original).

UnitedHealth’s lawsuit against American Renal put the writing on the wall for the industrywide scheme.

Blackburn says DaVita lost $625 million in market capitalization a month later when the Centers for Medicare & Medicaid Services announced an inquiry that could lead to rule changes and financial penalties for any dialysis providers who steered patients off Medicare.

DaVita lost another $565 million in market capitalization, according to the complaint, after the St. Louis Dispatch published an October article that implicated DaVita in the scheme outright.

“DaVita encouraged some low-income patients to enroll in commercial plans,” the headline read.

Blackburn says DaVita showed its hand a week later, “announcing that it was suspending support for applications to the AKF for charitable premium assistance by patients enrolled in minimum essential Medicaid coverage effective immediately.”

Such a move would cut about 12 percent of DaVita’s 2015 operating income, DaVita conceded, according to the complaint.

Blackburn says DaVita is not yet out of the woods. Just last month, the Justice Department announced an investigation into kidney-care industry. DaVita and the AKF were subpoenaed as part of this probe in Massachusetts.

Accusing DaVita of breaching its fiduciary duty, Blackburn says the company’s CEO, CFO and other directors must disgorge all illegally obtained profits.

Blackburn is represented by Brian Long of Rigrodsky & Long.

Neither Long nor DaVita representatives have returned requests seeking comment.

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