A federal appeals court has struck down a California law aimed at curbing dialysis-driven distortion of insurance risk pools.
On April 7, the Ninth Circuit found that three of five challenged provisions of California Assembly Bill 290 violate the First Amendment. The ruling effectively dismantles the state's attempt to regulate the financial relationship between dialysis providers, a major kidney disease charity, and the private insurance market.
At the heart of the case is a peculiar dynamic in the health insurance ecosystem. End-stage renal disease affects roughly 800,000 Americans, most of whom cannot work because of the extensive time dialysis demands and the difficulties of living with chronic illness. Dialysis requires up to five hours in a treatment center, three to four times a week. More than 80% of ESRD patients are unemployed, which means most lack employer-sponsored coverage and cannot afford private health insurance on their own. Congress extended Medicare to all ESRD patients in 1972 and, through the Affordable Care Act in 2010, barred private insurers from denying them coverage based on preexisting conditions.
That opened the door to a complicated arrangement. Private insurers negotiate their own reimbursement rates with dialysis providers like Fresenius Medical Care and DaVita. Those rates are often higher than what Medicare pays, which typically sits at or below providers' actual costs. The result is a set of competing incentives: insurers want ESRD patients on public plans, while providers benefit when patients carry private coverage.
Enter the American Kidney Fund, a nonprofit with more than 80,000 donors that runs a Health Insurance Premium Program to help ESRD patients pay their insurance premiums. In 2021, the organization assisted more than 70,000 patients nationwide, including 3,174 in California. AKF says it maintains strict neutrality on which type of coverage patients choose, and roughly 60% of its California recipients stay on public insurance.
The wrinkle is that DaVita and Fresenius reportedly account for about 80% of AKF's funding. Their contributions have been described as fair share payments calibrated to cover what patients would need for commercial insurance premiums. When patients use that assistance to get or keep private insurance, the donating providers receive higher reimbursement rates than they would under Medicare.
California legislators saw a problem. In 2019, they passed AB 290, which among other things capped the reimbursement rate for providers who donate to organizations like AKF, limiting payment to the Medicare rate or a rate set by an independent state body rather than whatever the provider had negotiated with the insurer. The law also required AKF to disclose the names of patients receiving premium assistance to insurers, so those insurers would know which patients triggered the lower reimbursement cap. California acknowledged that without this disclosure mechanism, the reimbursement cap would be effectively unenforceable.
Additional provisions prohibited AKF from conditioning financial assistance on whether a patient was eligible for or receiving any surgery, transplant, procedure, drug, or device, and required the organization to inform patients of all available health coverage options including Medicare and Medicaid.
AKF warned the legislature it would cease its charitable operations in California, including its premium assistance program, if the law took effect. Along with the dialysis providers and individual patients, it sued to block enforcement. A district court entered a preliminary injunction and later struck down some provisions while upholding others.
On appeal, the Ninth Circuit took a harder line against the law. The panel held that the reimbursement cap burdens the providers' right to donate to an expressive association, since AKF engages in lobbying, education, and charitable work protected by the First Amendment. The court applied what is known as exacting scrutiny, which requires a law to serve a sufficiently important government interest and be narrowly tailored to achieve it.
The court accepted that California has a legitimate interest in preventing distortion to insurance risk pools. The state's own expert had found that individual-market plans in California would likely see premium increases from an influx of ESRD patients. But the court concluded the reimbursement cap was not narrowly tailored to address that problem. California could have capped reimbursement rates for ESRD patients directly without tying the cap to whether a provider had donated to a charity, the court reasoned, achieving the same result without restricting associational rights.
The court also pointed to overbreadth issues. AB 290 does not define what counts as a financial relationship and defines providers so broadly that even a nephrologist making a $10 donation to AKF's education and advocacy program would face a reimbursement penalty for any patients receiving premium assistance through the fund.
With the reimbursement cap gone, the patient disclosure requirement fell too. California's only justification for requiring AKF to hand over patient names to insurers was to make the cap enforceable, and a provision cannot survive constitutional review when its sole purpose is to implement another provision that has already been struck down.
The financial assistance restriction met the same fate. The court found that while California has a real interest in protecting vulnerable patients from abusive practices, the provision went too far by effectively eliminating AKF's ability to decide which patients to support, burdening its associational rights more than necessary.
The one provision the court found constitutional on its own merits was the coverage disclosure requirement, which simply asked AKF to inform patients of all available insurance options. The court viewed this as compelling factual and uncontroversial information reasonably related to the state's interest in preventing consumer deception.
But even that provision did not survive. Under California's severability framework, a remaining provision must be grammatically, functionally, and volitionally separable from the struck-down portions of a statute. The court focused on the volitional prong, which asks whether the legislature would have passed the provision on its own, and concluded it would not have. About 90% of the affected patients are already on public insurance. Telling them about all their options, including private coverage and the availability of premium assistance, might actually push some toward private plans, the opposite of what the legislature intended. That problem was made worse by the fact that the law's anti-steering provision, which would have prohibited dialysis clinics from steering, directing, or advising patients regarding any specific coverage program option or health care service plan contract, had already been struck down at the district court level and was not challenged on appeal.
The challenge to the law's safe harbor provision, which would have given AKF a window to seek an updated federal advisory opinion before July 1, 2020, was declared moot. AKF never acted before the deadline, and because the legislature chose a fixed date rather than a flexible trigger, the court found there was nothing left to remedy.
The net effect of the ruling is that the status quo holds. Dialysis providers can continue donating to AKF, which can continue helping ESRD patients pay insurance premiums, and insurers continue paying negotiated reimbursement rates for those patients. The underlying concern the legislature tried to address, that provider-funded charitable premium assistance may be distorting private insurance risk pools and pushing premiums higher, remains without a regulatory answer in California.
