Out of their comfort zone

When DaVita, the country's second-largest provider of kidney dialysis services, acquired multispecialty medical group HealthCare Partners in May 2012, the deal surprised observers because it seemed to take DaVita far outside its core kidney-care business.

Denver-based DaVita HealthCare Partners is best known for its network of 1,954 outpatient dialysis centers in 44 states. While it operates a number of ancillary businesses, the publicly traded company, with $8.2 billion in net revenue in 2012, has stayed close to its nephrology expertise—from its Lifeline Vascular Access division, which trains interventional nephrologists to perform vascular procedures, to Falcon EHR, which offers electronic health records for nephrology.

Now it's ventured beyond the realm of kidneys toward serving the whole patient. HealthCare Partners' network of more than 2,000 doctors in California, Florida, Nevada and New Mexico provides primary care and hospitalist services, runs wellness programs, makes house calls and operates outpatient surgery centers. It also runs three Medicare accountable care organizations and contracts with Medicare Advantage and commercial insurers on a capitated basis.

DaVita's acquisition of the multispecialty medical group is part of the company's effort to move from care provider of nephrology services to an integrated delivery network that contracts for the full spectrum of care and receives the entire capitated dollar. Not only did DaVita buy the medical group's expertise in coordinating care, but also the deal positions DaVita to participate in ACOs and patient-centered medical home arrangements, and to manage the care of kidney patients before they reach end-stage disease. This is consistent with a broader trend for niche providers to manage the health of their enrolled populations as public and private payers move from fee-for-service payment to alternative payment models that reward providers for outcomes rather than volume.

But moving toward an accountable care model comes with growing pains. “We have a lot of scars from our own learning in the process,” DaVita's co-chairman and long-time CEO Kent Thiry said in an interview.

The acquisition comes as outpatient kidney dialysis providers face the prospect of sharp reductions in Medicare bundled payments, which Congress mandated earlier this year but which DaVita and its chief rival, Germany-based Fresenius Medical Care, are lobbying strongly against. At the same time, the growth in the number of patients on dialysis has slowed. And the CMS has proposed a Medicare ACO program focused on ESRD patients to improve their care and reduce costs.

DaVita and other dialysis providers understand that ACOs, Medicare Advantage plans and other alternative payment models are likely to shift the financial incentives from providing outpatient dialysis care—which currently represents two-thirds of DaVita's revenue—to offering home-based dialysis and other less- expensive options. In an ACO model, “we would go from being a revenue center to a cost center,” said Jeff Lehman, president of Seattle-based Dialysis Consulting Group, which works with independent dialysis providers. “And you'd be pretty low on the food chain.”

Still, providing care for end-stage renal disease patients remains big business. Nearly all ESRD patients in the U.S. regardless of age qualify for full Medicare coverage. According to the CMS, there were 441,690 beneficiaries with ESRD in 2012, making up 0.9% of all Medicare beneficiaries. Yet the program spent about $30 billion on their care, more than 7% of total Medicare expenditures. The program spends about $10 billion a year on dialysis alone.

ESRD typically affects patients over 65, and the incidence has been rapidly increasing in this age group, according to the National Institutes of Health. African-Americans are three times as likely to be affected as Caucasians. Studies have shown that 86% of patients have at least one comorbidity, typically diabetes, congestive heart failure and depression. The condition is also associated with risk factors including obesity, hypertension, alcoholism and substance abuse, and up to 25% suffer from depression.

Nearly 20 million adults in the U.S. have some degree of chronic kidney disease, with fewer than 7,000 nephrologists to care for them, said Dr. Jonathan Himmelfarb, director of the Kidney Research Institute at the University of Washington, who also serves on the council of American Society of Nephrology. That means many patients are being managed in a primary-care setting, leaving a big opening for providers such as DaVita to expand their role.

Thiry, who has served as DaVita's CEO since 1999, said the company plans to expand the number of services and markets for HealthCare Partners, which ended 2011 as a $2.4 billion business. DaVita also plans to draw on its newly acquired population health capabilities to better serve pre-dialysis patients.

Last year, about 86% of DaVita's net revenue came from dialysis and related laboratory services, according to its annual report. While DaVita didn't close its HealthCare Partners acquisition until November, the company estimated that over the full year, its core dialysis business would have accounted for just 68% of revenue for the combined firm.

But DaVita's initial integration of HealthCare Partners hasn't been without bumps. For the past two quarters, HealthCare Partners has underperformed analyst expectations, owing to factors including federal budget sequestration, lower-than-expected payment rates to Medicare Advantage plans and slow growth in its newest market Albuquerque, where it acquired multispecialty medical group ABQ Health Partners last September.

DaVita and other dialysis providers also are facing reimbursement pressure on outpatient dialysis. Medicare pays a bundled per-visit fee for dialysis and related services for ESRD patients, which includes laboratory fees, medical supplies and related drugs and biologics.

But the bundled rate came under fire last year from the Government Accountability Office for relying on 2007 data on the use of anti-anemia drugs. Nephrologists have been using less of the expensive agents because of patient safety concerns. As a result, the GAO estimated that the CMS would have saved at least $650 million in 2011 if the bundled-payment rate had accurately reflected the sharply reduced use of drugs like Epogen.

The CMS is now working to rebase the payments, and the agency in July proposed a 9.4% cut to 2014 rates. The rebased rate would mean a cut of nearly $30 from the previously planned $246 payment per visit for next year. HHS is supposed to issue a final rule by Nov. 1.

But lobbyists for DaVita and Fresenius have mounted an intense lobbying campaign to block the rate cut, and more than 200 House members signed a letter last month asking the CMS to reconsider the cut. They argue that the cut would strain margins, hurt providers in rural and low-income communities, and put some providers out of business.

Fresenius did not respond to a request for comment for this article.

The integration issues with HealthCare Partners and the proposed reimbursement cut have taken some of the steam out of DaVita's stock price. But the company announced good news in May when it revealed that it had entered into an agreement with Berkshire Hathaway that could pave the way for the Warren Buffett-lead holding company to increase its 14.2% stake to 25%. Analysts saw the move as a vote of confidence.

Thiry said that while the acquisition of HealthCare Partners might drive more referrals to DaVita's dialysis centers, that isn't the point of the merger. The goal is more strategic—preparing for a time when DaVita will be expected not only to provide dialysis but help keep nephrology patients out of the hospital and manage their other chronic conditions.

DaVita has been on the frontlines of pushing to extend the Medicare ACO program to end-stage renal disease. That would expand the current Medicare bundled-payment model for ESRD to cover a wider spectrum of their care, with the aim of improving quality of care and reducing costs.

In February, the CMS Innovation Center introduced the Comprehensive ESRD Care Initiative, a Medicare shared-savings program for end-stage renal disease, built around ESRD Seamless Care Organizations, or ESCOs. The program would be similar to current Medicare ACOs, allowing providers to receive a percentage of Medicare's savings if they meet budget and quality-of care-targets, or else face a financial loss if they fail to meet the targets.

But Thiry said DaVita hasn't yet decided whether to participate partly because of concerns about the payment methodology.

Among his concerns is that participating in a shared-savings program requires major investment on the front end, both financially and in terms of deploying company talent. Moreover, the ESCO guidelines state that the CMS plans to “rebase” payments in the fourth and fifth years, using data from the first three program years. In other words, he argued, the CMS is moving the goalposts, potentially making it harder for program participants to achieve savings.

“It becomes impossible to make the kind of investment to add value,” Thiry said.

Dr. Amy Williams, a nephrologist at the Mayo Clinic, said the ESCO program should start working with kidney disease patients upstream from ESRD, when patients first develop kidney disease.

Thiry said DaVita already is doing some “exciting work” in the pre-dialysis population, and it is prepared to collaborate more closely with upstream providers. Among its current business units is VillageHealth, which works with private and public payers to deliver an integrated-care model for chronic kidney disease patients. The program focuses on coordinating care hand-offs, preventing readmissions, promoting vaccination against conditions such as influenza and pneumonia, and managing infection, diabetes and hypertension risks.

DaVita is not the only dialysis provider looking for better ways of delivering care to kidney disease patients. Williams leads a project at Mayo to design an accountable care model for patients with chronic kidney disease. The model, which starts well before patients need dialysis, is being used across all three of Mayo's sites. She said Mayo has seen a significant decrease in both 30-day readmissions and the number of patients receiving dialysis.

The financial incentives for dialysis operators currently favor center-based care, where operators see the largest profit margins. Dr. Sanjay Saxena, co-leader of the North American hospital and health systems practice at consulting firm Booz & Co., predicted payment models using financial incentives to deliver more cost-effective care, such as Medicare ESCOs, will drive providers toward peritoneal dialysis, which is cheaper and can be delivered at patients' homes.

Until DaVita decides whether to jump into in the ESCO program, it will continue operating in the current world of bundled—and potentially declining—per-episode payment. Over the short term, it needs to squeeze higher margins out of its new HealthCare Partners unit to please investors focused on quarterly earnings.

But Thiry said his company is upbeat about the merger and its vision of more coordinated care for patients. “One knows that when you get married, not every day will be perfect, but you don't revisit the marriage,” he said. “We are absolutely passionate about this.”

Follow Beth Kutscher on Twitter: @MHbkutscher