U.S. Markets closed
  • S&P 500

    +8.70 (+0.24%)
  • Dow 30

    +37.90 (+0.13%)
  • Nasdaq

    +111.44 (+0.92%)
  • Russell 2000

    +10.25 (+0.56%)
  • Crude Oil

    -0.18 (-0.39%)
  • Gold

    -23.10 (-1.28%)
  • Silver

    -0.81 (-3.44%)

    +0.0057 (+0.4788%)
  • 10-Yr Bond

    -0.0360 (-4.10%)
  • Vix

    -0.41 (-1.93%)

    -0.0042 (-0.3169%)

    -0.1650 (-0.1583%)

    +353.56 (+1.99%)
  • CMC Crypto 200

    -4.23 (-1.25%)
  • FTSE 100

    +4.65 (+0.07%)
  • Nikkei 225

    +107.40 (+0.40%)

Jim Chanos: This Berkshire Hathaway-Backed Health Care Company Is an Insurance Fraud


Jim Chanos (Trades, Portfolio) specializes in sniffing out fraud. In the early 2000s, he was one of the few people betting on the collapse of Enron. More recently, he has made headlines with his well-publicized short position on Tesla (NASDAQ:TSLA) and his criticism of Elon Musk. In a Sept. 19 interview with CNBC, Chanos discussed another one of his shorts - dialysis provider DaVita Inc. (NYSE:DVA).

Insurance fraud?

DaVita is notable for the fact its biggest shareholder is Warren Buffett (Trades, Portfolio)'s Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B). We will discuss why this seems strange in a little while; for now, let's talk about Chanos' short thesis.

"It's always ominous in my world when one of your biggest customers sues you for fraud. And this spring, Blue Cross of Florida sued Davita for a scheme."

The suit alleges (and Chanos agrees with these allegations) that DaVita has been targeting Medicare and Medicaid patients and pushing them into signing up for expensive commercial insurance through the Obamacare exchanges. DaVita promises better service and shorter waiting times to those on the more expensive insurance. Many of these patients cannot afford commercial insurance; however, the company points out that The American Kidney Fund, a charity, will cover some of the premium payments.

"They then turn around, using the VSO numbers, and charge the commercial payers, three to four times what they get for Medicare and Medicaid. Now, this is bad enough, but what really is interesting is that the two largest donors, at slightly less than 90% of the donations to the American Kidney Fund, are DaVita and Fresenius [another big player in the dialysis business]. And so they are donating to the charity, the charity is paying the premium into the Obamacare exchange and they're then charging the insurers three to four times X."

DaVita has always said it does not direct the fund's spending. However, a whistleblower from the fund recently came forward and said this was not the case, and that DaVita plays a direct role in determining where the money goes.

Where does Berkshire come in?

"Berkshire Hathaway, as you mentioned, owns over 25%. Whatever you might think, this I think is a very bad look for an insurance company like Berkshire Hathaway, to be promoting a company that I think is certainly running an insurance scam, and if the whistleblower is correct, it's actually insurance fraud. And I just can't understand why Berkshire Hathaway would be promoting a company that's gaming the insurance business is as much as DaVita is."

It's definitely odd to see a company like DaVita listed in Berkshire's holdings. For one thing, as Chanos points out, it has a history of paying large fines to the federal government, which it seems to accept as a cost of doing business. It's own 10-K filing lists many risk factors and its extreme reliance on this Medicare-sponsored model makes it vulnerable to possible legislative and regulatory challenges. With that being said, DaVita does have a strong hold on the market for dialysis, which I suppose affords it a fairly wide moat. But all the same, it seems decidedly unlike Berkshire.

Disclosure: The author owns no stocks mentioned.

Read more here:

  • Jack Bogle: Keep Your Serious Indexed Money Separate From Your Fun Money

  • Howard Marks: There Are No Opportunities in Distressed Debt Today

  • How Joel Greenblatt Came Up With His Magic Formula

Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.

This article first appeared on GuruFocus.