The Dialysis Business: Fair Treatment?

September 16, 2007

The Dialysis Business: Fair Treatment?

By ANDREW POLLACK
New York Times

El Segundo, Calif.

KENT J. THIRY, the chief executive of DaVita, a leading provider of dialysis services, regularly dons a Three Musketeers costume at company meetings, brandishes a sword and leads employees in chants of “All for One” and “One for All.” At a meeting last year in Dallas, he rode a longhorn bull around the hotel, surrounded by parade floats made by employees.

Amid all this boosterism is a combative streak. In a skit presented at a DaVita employee meeting two years ago, a DaVita musketeer killed a federal bureaucrat — dressed in black hat and bandit’s mask — who threatened to cut the reimbursement for dialysis. Another musketeer killed a federal prosecutor.

For his part, Mr. Thiry favors a warmer, homier approach at the company’s headquarters here. He insists that DaVita is a “village” and that he, as the sign on his office door says, is “KT, Mayor.” Office aisles even sport street signs like “Be Our Guest Ln.” and “Acquisition Ave.”

With the help of such slogans, skits and shtick, Mr. Thiry has rescued DaVita from near collapse and turned it into an enterprise that, he asserts, is becoming “the best dialysis company the world has ever seen.” And that, he says, using another expression that his DaVita employees faithfully repeat, is “no brag, just fact.”

But the mayor and his profitable little community (2006 sales, $4.9 billion; earnings, $290 million) are threatened. Federal officials are cracking down on how DaVita makes much of its money: by administering the drug Epogen to treat anemia in dialysis patients. DaVita receives more from Medicare and private insurers for providing Epogen than it pays to buy the drug from its manufacturer, Amgen.

Concerns are mounting that such financial incentives are contributing to an overuse of Epogen that may lead to heart problems, blood clots or even premature deaths. “The payment system leads to perverse incentives,” said Representative Pete Stark, Democrat of California, during a Congressional hearing in June at which DaVita was singled out for criticism.

The Food and Drug Administration, which has already forced Amgen to provide stricter warnings about Epogen and similar products, convened a panel of experts last week to consider further restrictions on the drug’s use. While the panel advised against such a move, use of the drug is still expected to drop from last year’s levels, industry analysts say.

Medicare and Congress are moving to stop separate Medicare reimbursement for Epogen to end the incentives to overuse the drug. Law enforcement authorities, including those at the Justice Department and at the Health and Human Services Office of Inspector General, are conducting criminal and civil investigations into how DaVita and some other dialysis providers bill for Epogen.

All of this casts an unfavorable spotlight on the dialysis business, which might be the closest thing the United States has to nationalized health care. Medicare pays for almost all dialysis, even for patients younger than 65.

Dialysis is a dreary experience, one in which people with failed kidneys sit for hours hooked to machines that cleanse their blood, assisted by technicians who often have to work a second job to make ends meet. More than one in five of the nation’s dialysis patients die each year — a rate as much as double that in Europe and Japan — for reasons that aren’t clear.

Some 350,000 or so Americans currently need dialysis; that population is growing about 3 percent a year, fueled by a rise in diabetes. DaVita treats about 106,000 patients in more than 1,300 clinics and appears to be the most aggressive Epogen user among major dialysis chains, according to the United States Renal Data System, a government-funded registry of dialysis data. Epogen accounts for 25 percent of DaVita’s revenue and up to 40 percent of its earnings, according to the Stanford Group Company, a research firm.

As he sorties forth to defend DaVita, Mr. Thiry has become the most visible dialysis executive in Washington, taking issue with what he describes as unfair accusations that his company’s profits are built on a product that causes harm to patients.

“The suspension of logic in this discussion has been remarkable,” he said. He said he was confident that DaVita would emerge unscathed from the government investigations.

Mr. Thiry added that he would welcome a well-designed change in the reimbursement system to eliminate perceived incentives to overuse Epogen, which is commonly referred to as Epo. “Do that tomorrow so we get rid of the taint,” he said. “We’re still going to use the same amount of Epo.”

THE controversy comes just as Mr. Thiry, 51, has started to attract favorable attention in business schools and the media for DaVita’s management practices, like an extensive emphasis on employee training.

After graduating from Harvard Business School, Mr. Thiry was a consultant at Bain & Company and then ran Vivra, a dialysis chain in Northern California. After Vivra was acquired in the late 1990s, Mr. Thiry was recruited by Total Renal Care, a dialysis chain in Southern California that was in disarray.

Mr. Thiry had just seen the movie “The Man in the Iron Mask,” in which the Three Musketeers come out of retirement. Inspired, he called some of his former aides from Vivra and asked, “Will you ride again?”

He and his team took over in October 1999, though Mr. Thiry continued to live in Northern California, working mostly out of his home or a nearby company office. As they addressed bookkeeping problems and other woes, they also overhauled the corporate culture.

Many chief executives stress teamwork and values, but Mr. Thiry took those concepts to extremes. He changed the company’s name from Total Renal Care to DaVita (which he describes as Italian for “he/she gives life”). He also painted inspirational slogans in huge letters on the walls of his office — including “Begin with the end in mind,” and “Speak with your life, not just your words.”

DaVita employees are known as teammates. Those who do well can win company-paid vacations. Dialysis clinics have “walls of fame” with a picture of each patient and staff member.

Mr. Thiry and his wife, Denise O’Leary, a former venture capitalist, bankroll the KT Family Fund, which provides $100,000 a year in scholarships for the children of employees, as well as the KT Community Fund, which helps pay for community service projects undertaken by employees. Another fund, backed by the company and employee contributions, helps staff members during setbacks like illnesses.

DaVita uses annual company meetings and many smaller regional gatherings so people can bond and learn the “DaVita way.” Mr. Thiry, often wearing his musketeer outfit, speaks at many of them, afterward posing for pictures with employees.

Some skeptics say Mr. Thiry is merely a salesman who has created a cult of personality around him.

“You see 2,500 in a huge conference room in Dallas, and KT running through the hall with his arms up slapping hands, with his Three Musketeers costume, and these women crooning,” said a former employee who said Mr. Thiry’s showmanship was self-aggrandizing. This person requested anonymity because a relative still works for DaVita.

But others say Mr. Thiry’s motivations are genuine. “Kent cries at movies. He’s one of those guys,” said Douglas Vlchek, who was called Yoda at DaVita, where he was chief wisdom officer, in charge of employee education. He left in 2005 and is now a deacon in the Catholic Church. “I preach at Mass and I talk about this company sometimes,” Mr. Vlchek said. “It does what human beings are supposed to do.”

Another defender is Jeffrey Pfeffer, a professor at Stanford business school who wrote a case study in 2006 of DaVita’s revival. He said the corporate culture, while being too “Kent-centric,” reduced employee turnover and made the company “extremely successful and effective.” He also said that DaVita is a leader among companies in using data to make decisions.

Certainly, the financial results have been stellar. Revenue climbed from $1.4 billion in 1999, the year Mr. Thiry took over, to $4.9 billion last year. And the stock, which dipped below $2 in early 2000, is now about $62.

Mr. Thiry has profited from this growth, in large part from gains on stock options. He made $8.4 million in 2006 and more than $25 million in 2005. He owns DaVita shares worth about $90 million, according to the last proxy statement.

DaVita and its main competitor, Fresenius Medical Care, control about two-thirds of the dialysis business. The rest of the industry is composed of smaller chains and independent clinics, some of which are nonprofit operations. Since 2002, DaVita has grown faster in the markets it serves than Fresenius, said an analyst at Deutsche Bank Securities.

Mr. Thiry points to company data showing that DaVita provides better care than the national average, although the United States Renal Data System statistics do not show this clearly. He argues that DaVita’s efforts to improve overall dialysis treatment, even when it makes no extra money, show that the company is not overusing Epogen just to cash in.

Dialysis clinics lose money on the fee paid by Medicare for a dialysis treatment because the payments haven’t kept pace with inflation. Yet industry executives say the clinics can typically recoup those losses by getting reimbursed for Epogen and other drugs.

Government officials “understood they were subsidizing the cost of dialysis by allowing us to make a profit on the drugs,” said Dr. J. Michael Lazarus, chief medical officer of Fresenius. He added that he did not particularly like the arrangement. “I don’t want to be in the drug business,” he said. “I want to be in the dialysis business.”

Amgen offers discounts and rebates to dialysis companies based, in part, on how much Epogen they use and how much that use increases year to year. DaVita says in regulatory filings that failure to qualify for such discounts could have a “material adverse effect” on the company’s earnings.

While Amgen and DaVita are financially tethered through Epogen, there have been tensions in the relationship. Protected by patents, Amgen is the only supplier of a drug that dialysis centers cannot do without, giving it strong leverage over the dialysis companies.

Mr. Thiry declined to comment about Amgen. But in previous comments to reporters and analysts, he has accused Amgen of “abuse of monopoly power” and has said that Washington would not care as much about Epogen if the price were lower.

In a letter to Amgen in February 2006, DaVita protested terms of a new contract, saying it would face huge financial penalties if it didn’t increase usage of Epogen by 4 percent.

In a statement, Amgen said the incentives in its contracts with DaVita were based on past patterns of growth and did not cause Epogen usage to increase unduly. Amgen said it “partners with customers in service to patients,” and that DaVita was a “valued Amgen customer.” It also said the cost per unit of Epogen to Medicare had dropped over the years.

Despite such pressures, Mr. Thiry says DaVita did not overuse Epogen. He said decisions on how much to use are made by patients’ physicians. While a small number of physicians own a stake in their local DaVita clinic, the vast majority do not profit personally from prescribing Epogen, according to Mr. Thiry.

Still, corporate ownership does seem to influence Epogen use. According to a study published in April in The Journal of the American Medical Association, for-profit clinics use $1,700 more of Epogen on each patient every year than nonprofit centers do.

Moreover, DaVita does have a central protocol to advise doctors on dosage.

“The truth is, there’s a partnership between the facilities and the doctors,” said Dr. Peter W. Crooks, head of nephrology for Kaiser Permanente in Southern California, which sends patients to Fresenius and DaVita clinics.

When Epogen came on the market in 1989 it was a godsend for dialysis patients. The drug is a synthetic version of a hormone, made by the kidneys, that stimulates the body to produce oxygen-carrying red blood cells. Patients with failed kidneys make little or none of the hormone and can have fatigue-inducing anemia or require blood transfusions.

But some studies have shown that if the drug is used too aggressively and red blood cell levels are raised too high, it can cause cardiovascular problems or kill people. And Renal Data System figures show that more than 60 percent of DaVita patients have red blood cell levels that the F.D.A. considers risky. A Renal Data System study from 2006 found that DaVita was the company most likely to overshoot recommended red cell levels and was the slowest to reduce doses once this occurred.

Yet the evidence is complicated and incomplete, as testimony at last week’s F.D.A. meeting showed. Low red blood cell levels are also unhealthy, and Medicare has a minimum recommended level for dialysis patients. Mr. Thiry said that DaVita tries to get as many patients as possible above that level, but that each patient responds differently and that some overshoot.

Still, other chains manage to keep more patients in the desired range, according to a Renal Data System study. DaVita said it didn’t cut Epogen dosages sharply after an overshoot because that causes big fluctuations in red blood cell levels. At last week’s meeting, some panel members said such fluctuations could, in themselves, be risky.

The F.D.A. doesn’t have to listen to its advisory panels and has yet to decide on a proper target range for levels of red blood cells — but when it does, analysts say, it will almost certainly be lower than what DaVita was aiming for before the safety concerns intensified. Still, last week’s proceedings reduced the chance that there would be severe new restrictions, and DaVita’s stock surged to $63 on Thursday, the highest level since Mr. Thiry took over.

MR. THIRY said that last week’s proceedings provided some vindication. “As people step back and consider the actual evidence that exists, all the old fun and dramatic criticisms are evaporating,” he said.

Other challenges loom, however. Congress and Medicare are moving to eliminate the separate payments for Epogen and other drugs in favor of one “bundled” payment that would cover all aspects of dialysis treatment. That would eliminate the financial incentive to overuse Epogen — but could end up replacing it with an incentive to skimp on the drug to lower treatment costs and increase profits. After long opposing bundling, Mr. Thiry now says he would accept it providing the total payment per treatment does not drop.

To help press their case in the nation’s capital, Mr. Thiry and DaVita’s government relations office — what it calls its G-Force — have plunged into the various Washington battles in DaVita’s usual rah-rah way. DaVita’s political action committee contributed $530,000 to lawmakers last year and is aiming for $1 million this year, according to the company’s in-house magazine. DaVita even organized its patients into an advocacy group, the DaVita Patient Citizens. DaVita employees and patients sent 27,000 letters and e-mail messages to lawmakers in 2006.

Mr. Thiry’s frequent trips to Washington have added to rumors that DaVita’s “mayor” is planning to run for a real public office. Mr. Thiry says he would like to pursue a public service job when he leaves DaVita, but he wouldn’t say when that might be. DaVita has begun to spread his cheerleading duties to other executives.

But for now, Mr. Thiry seems intent on saving DaVita, and his own reputation, from attacks in Washington and the media attention that has followed. “We were on our way to becoming a role model for American health care,” he said, “until this spate of articles on anemia has tainted our community.”

http://www.nytimes.com/2007/09/16/business/16dial.html

PHOTO: Kent J. Thiry, chief executive of DaVita, at a dialysis center in Daly City, Calif., with Pearl Ulukoo,
who was visiting her husband, Richard. Mr. Thiry has turned around DaVita, but the company has attracted criticism.