Proposition 8

ANALYSIS BY THE LEGISLATIVE ANALYST

BACKGROUND

DIALYSIS TREATMENT

Kidney Failure. Healthy kidneys filter a person's blood to remove waste and extra fluid. Kidney disease refers to when a person's kidneys do not function properly. Over time, a person may develop kidney failure, also known as "end-stage renal disease." This means that the kidneys no longer function well enough for the person to survive without a kidney transplant or ongoing treatment referred to as dialysis.

Dialysis Mimics Normal Kidney Functions. Dialysis artificially mimics what healthy kidneys do. Most people on dialysis undergo hemodialysis, a form of dialysis in which blood is removed from the body, filtered through a machine to remove waste and extra fluid, and then returned to the body. A hemodialysis treatment lasts about four hours and typically occurs three times per week.

Most Dialysis Patients Receive Treatment in Clinics. Individuals with kidney failure may receive dialysis treatment at hospitals or in their own homes, but most receive treatment at chronic dialysis clinics (CDCs). As of May 2018, 588 licensed CDCs in California provided treatment to roughly 80,000 patients each month. Each CDC operates an average of 22 dialysis stations, with each station providing treatment to one patient at a time. The California Department of Public Health (CDPH) is responsible for licensing and inspecting CDCs. Various entities own and operate CDCs. As shown in Figure 1, two private for-profit entities operate and have at least partial ownership of the majority of CDCs in California.

PAYING FOR DIALYSIS TREATMENT

Payment for Dialysis Treatment Comes From a Few Main Sources. We estimate that CDCs have total revenues of roughly $3 billion annually from their operations in California. These revenues consist of payments for dialysis treatment from a few main sources, or "payers":

- Medicare. This federally funded program provides health coverage to most people age 65 and older and certain younger people who have disabilities. Federal law generally makes people with kidney failure eligible for Medicare coverage regardless of age or disability status. Medicare pays for dialysis treatment for the majority of people on dialysis in California.

- Medi-Cal. The federal-state Medicaid program, known as Medi-Cal in California, provides health coverage to low-income people. The state and the federal government share the costs of Medi-Cal. Some people qualify for both Medicare and Medi-Cal. For these people, Medicare covers most of the payment for dialysis treatment as the primary payer and Medi-Cal covers the rest. For people enrolled only in Medi-Cal, the Medi-Cal program is solely responsible to pay for dialysis treatment.

- Group and Individual Health Insurance. Many people in the state have group health insurance coverage through an employer or another organization (such as a union). The California state government, the state’s two public university systems, and many local governments in California provide group health insurance coverage for their current workers, eligible retired workers, and their families. Some people without group health insurance purchase health insurance individually. Group and individual health insurance coverage is often provided by a private insurer that receives a premium payment in exchange for covering the costs of an agreed-upon set of health care services. When an insured person develops kidney failure, that person can usually transition to Medicare coverage. Federal law requires that a group insurer remain the primary payer for dialysis treatment for a "coordination period" that lasts 30 months.

Group and Individual Health Insurers Typically Pay Higher Rates for Dialysis Than Government Programs. The rates that Medicare and Medi-Cal pay for dialysis treatment are relatively close to the average cost for CDCs to provide a dialysis treatment and are largely determined by regulation. In contrast, group and individual health insurers establish their rates by negotiating with CDCs. The rates paid by these insurers depend on the relative bargaining power of insurers and the CDCs. On average, group and individual health insurers pay multiple times what government programs pay for dialysis treatment.

PROPOSAL

Requires Clinics to Pay Rebates When Total Revenues Exceed a Specified Cap. Beginning in 2019, the measure requires CDCs each year to calculate the amount by which their revenues exceed a specified cap. The measure then requires CDCs to pay rebates (that is, give money back) to payers, excluding Medicare and other government payers, in the amount that revenues exceed the cap. The more a payer paid for treatment, the larger the rebate the payer would receive.

Revenue Cap Based on Specified CDC Costs. The revenue cap established by the measure is equal to 115 percent of specified “direct patient care services costs” and “health care quality improvement costs.” These include the cost of such things as staff wages and benefits, staff training and development, drugs and medical supplies, facilities, and electronic health information systems. Hereafter, we refer to these costs as “allowable,” meaning they can be counted toward determining the revenue cap. Other costs, such as administrative overhead, would not be counted toward determining the revenue cap.

Interest and Penalties on Rebated Amounts. In addition to paying any rebates, CDCs would be required to pay interest on the rebate amounts, calculated from the date of payment for treatment. CDCs would also be required to pay a penalty to CDPH of 5 percent of the amount of any required rebates, up to a maximum penalty of $100,000.

Rebates Calculated at Owner/Operator Level. The measure specifies that rebates would be calculated at the level of a CDC's "governing entity," which refers to the entity that owns or operates the CDC (hereafter "owner/operator"). Some owner/operators have many CDCs in California, while others may own or operate a single CDC. For owner/operators with many CDCs, the measure requires them to add up their revenues and allowable costs across all of their CDCs in California. If the total revenues exceed 115 percent of total allowable costs across all of an owner/operator's clinics, they would be required to pay rebates equal to the difference.

Legal Process to Raise Revenue Cap in Certain Situations. Both the California Constitution and the United States Constitution prohibit the government from taking private property (which includes the value of a business) without fair legal proceedings or fair compensation. A CDC owner/operator might try to prove in court that, in their particular situation, the required rebates would amount to taking the value of the business and therefore violate the state or federal constitution. If a CDC owner/operator is able to prove this, the measure outlines a process where the court would reduce the required rebates by just enough to no longer violate the constitution. The measure places on the CDC owner/operator the burden of identifying the largest amount of rebates that would be legal. The measure specifies that any adjustment in the rebate amount would apply for only one year.

Other Requirements. The measure requires that CDC owner/operators submit annual reports to CDPH. These reports would list the number of dialysis treatments provided, the amount of allowable costs, the amount of the owner/ operator's revenue cap, the amount by which revenues exceed the cap, and the amount of rebates paid. The measure also prohibits CDCs from refusing to provide treatment to a person based on who is paying for the treatment.

CDPH Required to Issue Regulations. The measure requires CDPH to develop and issue regulations to implement the measure's provisions within 180 days of the measure's effective date. In particular, the measure allows CDPH to identify through regulation additional CDC costs that would count as allowable costs, which could serve to reduce the amount of any rebates otherwise owed by CDCs.

FISCAL EFFECTS

MEASURE WOULD REDUCE CDC PROFITABILITY

Currently, it appears that CDCs operating in California have revenues in excess of the revenue cap specified in the measure. Paying rebates in the amount of the excess would significantly reduce the revenues of CDC owner/operators. In the case of CDCs operated by for-profit entities (the majority of CDCs), this means the CDCs would be less profitable or could even be unprofitable. This could lead to changes in how dialysis treatment is provided in the state. These changes could have various effects on state and local government finances. As described below, the impact of the measure on CDCs and on state and local government finances is uncertain. This is because the impact would depend on future actions of (1) state regulators and courts in interpreting the measure and (2) CDCs in response to the measure. These future actions are difficult to predict.

MAJOR SOURCES OF UNCERTAINTY

Uncertain Which Costs Are Allowable. The impact of the measure would depend on how allowable costs are defined. Including more costs as allowable would make revenue caps higher and allow CDCs to keep more of their revenues (by requiring smaller rebates). Including fewer costs as allowable would make revenue caps lower and allow clinics to keep less of their revenues (by requiring larger rebates). It is uncertain how CDPH (as the state regulator involved in implementing and enforcing the measure) and courts would interpret the measure's provisions defining allowable costs. For example, the measure specifies that the costs of staff wages and benefits are only allowable for "nonmanagerial" staff that provide direct care to dialysis patients. Federal law requires CDCs to maintain certain staff positions as a condition of receiving Medicare reimbursement. Some of these required positions—including the medical director and nurse manager—perform managerial functions but are also involved in direct patient care. The costs of these positions might not be considered allowable because the positions have managerial functions. On the other hand, the costs of these positions might be considered allowable because the positions relate to direct patient care.

Uncertain How CDCs Would Respond to the Measure. CDC owner/operators would likely respond to the measure by adjusting their operations in ways that limit, to the extent possible, the effect of the rebate requirement. They could do any of the following:

- Increase Allowable Costs. CDC owner/ operators might increase allowable costs, such as wages and benefits for non-managerial staff providing direct patient care. Increasing allowable costs would raise the revenue cap, reduce the amount of rebates owed, and potentially leave CDC owner/operators better off than if they were to leave allowable costs at current levels. This is because the amount of revenues that CDC owner/operators could retain would grow by more than the additional costs (the revenue cap would increase by 115 percent of additional allowable costs).

- Reduce Other Costs. CDC owner/operators might also reduce, where possible, other costs that do not count toward determining the revenue cap (such as administrative overhead). This would not change the amount of rebates owed, but it would improve the CDCs' profitability.

- Seek Adjustments to Revenue Cap. If CDC owner/operators believe they cannot achieve a reasonable return on their operations even after making adjustments as described above, they might try to challenge the rebate provision in court to get a higher revenue cap as outlined in the measure. If such a challenge were successful, some CDC owner/operators might have a higher revenue cap and owe less in rebates in some years.

- Scale Back Operations. In some cases, owner/operators might decide to open fewer new CDCs or close some CDCs if the amount of required rebates is large and reduced revenues do not provide sufficient return on investment to expand or remain in the market. If this takes place, other providers would eventually need to step in to meet the demand for dialysis. These other providers might operate less efficiently (have higher costs). Some other providers could potentially be exempt from the provisions of the measure if they do not operate under a CDC license (for example, hospitals). Such broader changes in the dialysis industry are difficult to predict.

IMPACT OF REBATE PROVISIONS ON STATE AND LOCAL FINANCES

We estimate that, without actions taken by CDCs in response to the measure, potential rebates owed could reach several hundred million dollars. Depending on the factors discussed above, the measure’s rebate provisions could have several types of effects on state and local finances.

Measure Could Generate State and Local Government Employee Health Care Savings . . . To the extent that CDCs pay rebates, state and local government costs for employee health care could be reduced. As noted previously, the measure excludes government payers from receiving rebates. However, state and local governments often contract with private health insurers to provide coverage for their employees. As private entities, these insurers might be eligible for rebates under the measure. Even if they are not eligible for rebates, they would likely still be in a position to negotiate lower rates with CDC owner/operators. These insurers might pass some or all of these savings on to government employers in the form of reduced health insurance premiums.

. . . Or Costs. On the other hand, as described above, CDCs might respond to the measure by increasing allowable costs. If CDCs increase allowable costs enough, rates that health insurers pay for dialysis treatment might increase above what they would have been in the absence of the measure. If this occurs, insurers might pass some or all of these higher costs on to government employers in the form of increased health insurance premiums.

State Medi-Cal Cost Pressures. The Medi-Cal program also contracts with private insurers to provide dialysis coverage for some of its enrollees. Similar to health insurers that provide coverage for government employees, private insurers that contract with Medi-Cal might also receive rebates (if they are determined to be eligible) or might be able to negotiate lower rates with CDC owner/ operators. Some or all of these savings might be passed on to the state. However, because rates paid to CDCs by these insurers are relatively low, such savings would likely be limited. On the other hand, if CDCs respond to the measure by increasing allowable costs, the average cost of a dialysis treatment would increase. This would put upward pressure on Medi-Cal rates and could result in increased state costs.

Changes to State Tax Revenues. To the extent the measure's rebate provisions operate to reduce the net income of CDC owner/operators, the measure would likely reduce the amount of income taxes that for-profit owner/operators are required to pay to the state. This reduced revenue could be offset, to an unknown extent, by various other changes to state revenues. For example, additional income tax revenue could be generated if CDCs respond to the measure by increasing spending on allowable staff wages.

In Light of Significant Uncertainty, Overall Effect on State and Local Finances Is Unclear. Different interpretations of the measure’s provisions and different CDC responses to the measure would lead to different impacts for state and local governments. In light of significant uncertainty about how the measure may be interpreted and how CDCs may respond, a range of possible net impacts on state and local government finances is possible.

Overall Effect Could Range From Net Positive Impact in the Low Tens of Millions of Dollars . . . If the measure is ultimately interpreted to have a broader, more inclusive definition of allowable costs, such as by including costs for nurse managers and medical directors, the amount of rebates CDC owner/operators are required to pay would be smaller. Under this interpretation, it is more likely that CDC owner/operators would respond with relatively modest changes to their cost structures. In this scenario, state and local government costs for employee health benefits could be reduced. These savings would likely be partially offset by a net reduction in state tax revenues. Overall, we estimate the measure could have a net positive impact on state and local government finances reaching the low tens of millions of dollars annually in this scenario.

. . . To Net Negative Impact in the Tens of Millions of Dollars. If the measure is ultimately interpreted to have a narrower, more restrictive definition of allowable costs, the amount of rebates CDC owner/operators are required to pay would be greater. Under this interpretation, it is more likely that CDC owner/ operators would respond with more significant changes to their cost structures, particularly by increasing allowable costs. CDC owner/ operators would also be more likely to seek adjustments to the revenue cap or scale back operations in the state. In this scenario, state and local government costs for employee health benefits and state Medi-Cal costs could increase. State tax revenues could also be reduced. Overall, we estimate the measure could have a net negative impact reaching the tens of millions of dollars annually in this scenario.

Other Potential Fiscal Impacts. The scenarios described above represent our best estimate of the range of the measure's likely fiscal impacts. However, other fiscal impacts are possible. As an example, if CDCs respond to the measure by scaling back operations in the state, some dialysis patients' access to dialysis treatment could be disrupted in the short run. This could lead to health complications that result in admission to a hospital. To the extent that dialysis patients are hospitalized more frequently because of the measure, state costs—particularly in Medi-Cal—could increase significantly in the short run.

ADMINISTRATIVE IMPACT

This measure imposes new responsibilities on CDPH. We estimate that the annual cost to fulfill these new responsibilities likely would not exceed the low millions of dollars annually. The measure requires CDPH to adjust the annual licensing fee paid by CDCs (currently set at about $3,400 per facility) to cover these costs. Some of these administrative costs may also be offset by penalties paid by CDCs related to rebates or failure to comply with the measure’s reporting requirements. The amount of any offset is unknown.

Visit https://www.sos.ca.gov/campaign-lobbying/cal-access-resources/measure-contributions/2018-ballot-measure-contribution-totals/ for a list of committees primarily formed to support or oppose this measure. Visit http://www.fppc.ca.gov/transparency/top-contributors/nov-18-gen.html to access the committee's top 10 contributors.

If you desire a copy of the full text of the state measure, please call the Secretary of State at (800) 345-VOTE (8683) or you can email vigfeedback@sos.ca.gov and a copy will be mailed at no cost to you.

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VOTE YES ON PROPOSITION 8—THE FAIR PRICING FOR DIALYSIS ACT

Dialysis is a life-saving treatment for patients with kidney failure in which their blood is taken out, cleaned, and then put back in their body. Dialysis patients should have a clean, sterile environment during their treatments, but big, corporate dialysis providers, which make billions by charging these critically ill patients as much as $150,000 a year, won't invest enough in basic sanitation. Bloodstains, cockroaches, and dirty bathrooms have all been reported at dialysis clinics, and patients' lives have been put at risk from exposure to dangerous infections and diseases. These high prices drive up healthcare costs for all Californians. PROP. 8 will require the corporations to refund excessive profits that aren't spent on improving dialysis patient care.

STOP OVERCHARGING PATIENTS

California's largest dialysis company marks up its charges for some patients as much as 350% above the actual costs of providing care, or as much as $150,000 per year. PROP. 8 will provide strong incentives for dialysis companies to lower costs and improve their quality of care, making patients the priority everywhere, which is especially important in low income and minority communities.

LOWER HEALTHCARE COSTS FOR EVERYONE

Because dialysis patients are often charged such huge sums of money for their life-saving treatment, insurance companies are forced to pass those costs on to policyholders, driving up healthcare costs for all Californians. One insurance provider, Blue Shield of California, reported that it takes 3,800 other policyholders to offset the cost of one dialysis patient. PROP. 8 will help lower the cost of healthcare for all Californians.

SUPPORTED BY A BROAD COALITION

Dialysis Advocates, LLC • Californians for Disability Rights • CalPERS • Congress of California Seniors • Service Employees International Union California • Minority Veterans Coalition of California • and many more . . . MAKE PATIENTS THE HIGHEST PRIORITY We should vote “YES” on Prop. 8 and tell dialysis companies to prioritize lifesaving treatment for patients over corporate profits.

VOTE YES ON PROPOSITION 8

Learn more about how PROP. 8 will help improve healthcare for Californians at www.YESonProp8.com

TANGI FOSTER, Dialysis Patient

GARY PASSMORE, President

Congress of California Seniors

NANCY BRASMER, President

California Alliance for Retired Americans

Proponents are trying to mislead voters. Their measure is flawed and dangerous. Here are the facts.

Proposition 8 is opposed by thousands of health care professionals and dialysis patients across California including the American Nurses Association\California, California Medical Association, and the American College of Emergency Physicians, California Chapter because it jeopardizes access to care for 66,000 patients who need dialysis to stay alive.

"Missing even one appointment can be fatal for dialysis patients. By limiting access to dialysis care, Proposition 8 jeopardizes patient lives." —Theodore M. Mazer, M.D., President, California Medical Association, representing 43,000 doctors

CALIFORNIA DIALYSIS CLINICS RANK AMONG THE HIGHEST IN THE NATION FOR QUALITY CARE

California dialysis clinics are highly regulated at both the state and federal level. According to federal regulators, California clinics outperform other states in clinical quality and patient satisfaction.

PROP. 8 WOULD FORCE COMMUNITY DIALYSIS CLINICS TO CUT SERVICES AND CLOSE—ENDANGERING PATIENTS

An independent analysis by California's former Legislative Analyst found that under Prop. 8, 83% of dialysis clinics would operate at a loss. That reality would force hundreds of clinics to reduce operations or close.

PROPOSITION 8 WOULD COST CONSUMERS AND TAXPAYERS HUNDREDS OF MILLIONS ANNUALLY

Prop. 8 limits what insurance companies pay for dialysis care. But NOTHING in Prop. 8 requires insurance companies to pass ANY savings to consumers. In fact, Prop. 8 would INCREASE COSTS for taxpayers by hundreds of millions annually by forcing dialysis patients into more costly hospitals and emergency rooms, further straining already overcrowded ERs.

Please join doctors, nurses and patients.

VOTE NO ON PROPOSITION 8. IT'S DANGEROUS.

www.NoProp8.com

PHILLIP BAUTISTA, RN, President

American Nurses Association\California

TERRY RICO, Dialysis Patient

THEODORE M. MAZER, MD, President

California Medical Association

PROP. 8 PUTS VULNERABLE DIALYSIS PATIENT LIVES AT RISK

The American Nurses Association\California, California Medical Association, American College of Emergency Physicians, California Chapter and patient advocates all OPPOSE Prop. 8 because it jeopardizes access to care for 66,000 patients in California who need frequent dialysis treatments to stay alive.

"Patients on dialysis have kidney failure and are very sick. They require dialysis three days a week, four hours at a time to do the job of their kidneys to remove toxins from the body. These patients cannot survive without regular treatments. Prop. 8 dangerously reduces access to care and places vulnerable patients at serious risk." —Phillip Bautista, BSN, RN, PHN, President, American Nurses Association\California

PROP. 8 WILL FORCE COMMUNITY DIALYSIS CLINICS TO CUT SERVICES AND CLOSE

Proposition 8 severely limits what insurance companies are required to pay for dialysis care. These arbitrary limits will not cover the actual cost of providing care. In fact, an independent analysis conducted by California's former Legislative Analyst concluded Prop. 8 will result in 83% of dialysis clinics operating at a loss. That will force hundreds of clinics to reduce operations or close, endangering patients.

Without access to community clinics, patients will have to travel long distances, miss treatments or end up in the emergency room.

DOCTORS, NURSES, AND PATIENT ADVOCATES ALL OPPOSE PROP. 8

"Missing even one appointment can be fatal for dialysis patients. By limiting access to dialysis care, this proposition jeopardizes patient lives." —Dr. Theodore M. Mazer, President, California Medical Association, representing 43,000 doctors

"As emergency physicians, we regularly treat dialysis patients who end up in the ER due to missed appointments or complications from kidney failure. This proposition will increase the risk of life-threatening complications for these very vulnerable patients." — Dr. Aimee Moulin, President, American College of Emergency Physicians, California Chapter

PROP. 8 DISPROPORTIONATELY HURTS DISADVANTAGED COMMUNITIES

Prop. 8 is opposed by California NAACP and National Hispanic Medical Association because it will disproportionately impact patients in disadvantaged communities with higher risk of kidney failure.

PROP. 8 INCREASES COSTS FOR ALL CALIFORNIANS BY HUNDREDS OF MILLIONS ANNUALLY

When clinics close, dialysis patients end up in the ER where care is more expensive. According to the former Legislative Analyst, this measure will increase taxpayer costs by nearly $300 million annually.

CALIFORNIA DIALYSIS QUALITY RANKS AMONG THE HIGHEST IN THE NATION

California dialysis clinics are highly regulated by federal and state regulators that provide quality reports on every facility. According to the federal Centers for Medicare & Medicaid Services, California clinics outperform other states in clinical quality and patient satisfaction. This measure makes no sense when California dialysis care is highly regulated and saving lives.

PROP. 8 COMES BETWEEN DOCTORS AND PATIENTS

Vote NO on Prop. 8 and leave complicated medical decisions about dialysis in the hands of doctors and patients.

PROP. 8 IS DANGEROUS. VOTE NO.

Please join doctors, nurses and patient advocates and reject this dangerous proposition that puts vulnerable dialysis patients at risk. www.NoProp8.com

PHILLIP BAUTISTA, RN, President

American Nurses Association\California

THEODORE M. MAZER, MD, President

California Medical Association

AIMEE MOULIN, MD, President

American College of Emergency Physicians, California Chapter

VOTE YES ON PROPOSITION 8 TO IMPROVE HEALTH CARE IN CALIFORNIA.

DIALYSIS CORPORATIONS CUT CORNERS AND ENDANGER PATIENTS

Patients with kidney failure generally undergo dialysis three times a week, where their blood is removed, cleaned and put back in their bodies. Patients and caregivers report unsafe conditions at dialysis clinics, including short-staffing and poor sanitation and hygiene, which puts them at risk of life-threatening infections.

"When I started dialysis, I didn't expect I'd have to worry about the clinic that's supposed to keep me healthy. I've seen bugs crawling in between the plastic that covers the light fixtures in the ceiling. I've had to call the health department many times to report roaches, bloodstains, and lack of adequate cleaning."— Tangi Foster, Dialysis Patient

Visit www.YesOn8.com to read firsthand accounts from Dialysis patients.

DIALYSIS CORPORATIONS MAKE HUGE PROFITS AT PATIENTS’ EXPENSE

For-profit dialysis corporations make billions in profits while clinics in vulnerable communities are run-down, with no doctor on site at times.

PROP. 8 pushes dialysis corporations to invest some of those profits to improve patient care, which is especially needed in low-income communities.

OVERCHARGING DRIVES UP THE COST FOR ALL OF US

Dialysis corporations mark up the cost of care for some patients by 350%, an expense absorbed by insurance companies and passed on to policyholders throughout California.

Their high prices make healthcare more expensive for all of us.

The California Democratic Party, veterans, healthcare advocates and religious leaders all support YES ON PROP. 8.

It's time Dialysis corporations prioritize patient care, not their profits.

GUADALUPE TELLEZ, Dialysis Registered Nurse

PASTOR WILLIAM D. SMART, JR.

Southern Christian Leadership Conference of Southern California

TANGI FOSTER, Dialysis Patient

Arguments printed on this page are the opinions of the authors, and have not been checked for accuracy by any official agency.

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