DaVita Inc. (DVA) Earnings Call Transcript & Summary

Good afternoon, and welcome back to the Barclays Global Healthcare Conference. My name is Andrew Mok, and I'll be hosting today's session with DaVita. Joining me today is CFO, Joel Ackerman; and Vice President of Investor Relations, Jim Gustafson. Thank you both for joining. We're glad to have you here.

Thank you. It's nice to be here.

Thanks a lot.

Let's start with current trends on mortality and vaccinations. You put out an 8-K yesterday morning. So can you highlight some of the numbers and trends captured in that release?

Sure. So look, on the quarterly call -- in the quarterly call about a month ago, we highlighted some of the challenges that our patients are seeing in terms of COVID and the impact it's had on mortality. And I think we made it pretty clear that as we look at 2021, that's going to be the #1 headwind and the #1 impact from COVID. So we wanted to give folks a little bit of an update on what we're seeing as it relates to incidents and prevalence of COVID in our population, the impact on mortality and how we're doing on vaccine. So the highlights from my standpoint are, we've made good progress since the peak in January. The numbers have come down for us as they have for most of the country. In terms of how that relates to what we were thinking when we gave our guidance, our guidance incorporated a big range of outcomes in COVID. There's still -- there was a lot of uncertainty a month ago. There remains a lot of uncertainty. And what we've seen over the subsequent few weeks is well within what we were expecting, well within that range. And as a result, we haven't made any changes to guidance. In terms of vaccines, we've made good progress, although not as much as we would like. Fundamentally, we are dependent as we think about vaccinating our teammates, and most importantly, our patients, we are dependent on getting access to vaccines. We have not gotten a federal allocation for us or for the industry. So we're dependent on state-by-state and sometimes county-by-county getting vaccines. We do get allocations for very efficient users of vaccines. We can get those vaccines to the patients quickly with a minimum of wastage. But again, we are dependent on the local allocation, and that's been a challenge. So we're seeing progress, not as much as we would have hoped for, but we're hoping for more in the future. Jim, anything to add?

What's been the primary challenge to direct distribution? It seems like policymakers and health officials would both agree that dialysis patients are among the most vulnerable given the age and risk profile of that population.

Yes. My sense is there hasn't been a lot of people saying, "No, dialysis patients don't deserve vaccines." It's just -- it's a complicated dynamic. There are a lot of folks who are asking for vaccines. How these decisions are getting made is different by geography, not always clear and probably not always efficient. So I'd say it's more about politics and the complexity of the logistics and the shortage rather than anyone saying, "Yes, maybe dialysis patients aren't that worthy of them."

Got it. The commentary around excess mortality is certainly helpful, but you didn't go as far as quantifying the year-to-date impact in the release. Why is this so difficult to measure in real time? And how much variability is there in point estimates around excess mortality?

Yes. So it's hard to measure for a few reasons. First, it lags in so far as remember, these patients aren't passing away in a chair in our clinic. They're not passing away in the nephrologist's office. They're oftentimes admitted to a hospital, some other care setting, it could be a while from when they last treated with DaVita until when they pass away. And then it can be a while until that information filters back to us, that's both whether they passed away or not as well as what the reason for death was. So there's a lot of lag and complexity associated with that. And then there are really 2 ways of calculating this number. There's a bottoms-up approach that says, let's understand each patient who passed away, what their reason of death was and try and extrapolate from that how many patients are dying of COVID. Again, recognizing it's sometimes hard to know what the reason of death is on a death certificate. Sometimes they might have passed away from COVID even if they were not diagnosed. So that's a bottoms up approach. The top-down approach is just to say how many patients passed away in a given period? How does that compare to how many patients passed away in that same period, either in 2019 or over the average of some prior years? And those, you've got to triangulate through using both those sources. Even in the top-down, it depends on what year you compare it to. So it isn't a clean number. It's a hard number to get in real time, and that's why there's variability. In terms of the amount of variability, hard to quantify, depends over what time period you're looking and how recently you're looking. I think we feel reasonably good about our numbers in 2020, although there can be some variability in that number, it will take time until the 2021 data quality catches up.

Got it. That's helpful. When we think about the mortality impact on treatments over a longer period of time, there's the possibility that excess mortality experienced in 2020 and early 2021 will result in lower mortality in subsequent years. If that's the case, is it reasonable to expect an elevated period of treatment growth accompanied by modest pricing pressure as the Medicare patient mix is restored to historical levels?

Yes. So the quick answer is yes. Let me give a little bit more detail. The way I think about it is, today, we are experiencing higher mortality than normal as a result of patients passing away from COVID. Remember, dialysis patients live on average something like 6 years. Our average patient probably has a lifespan more in the 3-4 year range because remember, many of them have been on dialysis for a while. So the patients who are unfortunately passing away from COVID, they would have naturally passed away at some point over the next few years anyway. So the excess mortality we're seeing today is likely going to be followed by some period of lower-than-typical mortality. And in the same way that today, excess mortality is putting pressure -- downward pressure on NAG, going forward, if mortality were lower than expected, you'd expect that to see -- that to create upward pressure on NAG. So yes, when we come through COVID, I would expect there to be a higher than normal growth period. In terms of the impact on RPT, there is certainly a bit of the reverse. As we've talked about in the past, the patients who are passing away from COVID tend to be older, tend to be more likely to have Medicare rather than commercial insurance. The net impact of that is a net positive impact on our commercial mix as a result of COVID. You would anticipate that that's going to reverse itself once COVID goes away and the growth starts. The one thing I would point out, though, is the higher mix today is not a benefit. We're not seeing more commercial patients as a result of COVID. So it's not having a positive impact on OI. The negative impact is lower than you would expect. And you'd see a similar thing post-COVID that while mix might go down as a result of the COVID unwind, it won't have a negative impact on COVID. It's just that the positive impact from the excess NAG won't be as high as you would expect.

Got it. Throughout 2020, commercial membership proved more resilient than many investors anticipated. Did anything stand out to you in terms of your patient's behavioral response to coverage changes due to layoffs?

I think what stands out is that there are multiple paths to commercial insurance, some of which are about having a job, others are about post-employment, some of which are untethered to employment like access to the exchanges. So the correlation between employment and commercial insurance is probably a bit lower than you would expect. And because these patients do value having commercial insurance and even if they lose their job, they find other avenues to maintain that insurance.

Can you provide some color on the commercial incidence trends that you're seeing?

Yes. I don't think we've seen much change in the incident -- in the commercial rates in the incident population. So nothing really to call out there.

Okay. That's helpful. Let's talk about Medicare Advantage. 2021 was the first year MA eligibility for pre-existing Medicare patients under the CARES Act. The new rules seemed to bring about a more focused conversation around innovation and risk-sharing contracts with your MA partners. Can you give us a sense for how these newer risk contracts differ from some of the traditional constructs? And what kind of investments are you making in these new value-based programs?

Sure. So if you go back over the last 5 or 10 years, we've been doing a lot of integrated kidney care at a relatively small scale, but thousands and thousands of patients and it's come in all sorts of different forms. In its kind of most narrow form, it would be some form of pay-for-performance where we get an upside in our revenue per treatment for achieving certain clinical goals. It can go from there to something that's more like shared savings where we own some piece of the risk, but not all of the risk. And then it can go all the way to something that feels more like pure capitation where we own effectively all of the risk. And we've seen this in commercial relationships. We've seen this in MA, and we've certainly seen it in Medicare fee-for-service in ASCOs and SNP. So we've got experience with all sorts of different kinds of integrated kidney care relationships. I think MA is likely to prove to be similar. It will come in different flavors with different MA customers, depending on what their needs are, depending on what our capabilities are. So I don't think there's an emerging trend yet that would say MA risk contracts are likely to look in a certain way. That said, we do think MA is a natural place for risk contracts. So we're certainly leaning in on that.

Got it. That's helpful.

I think there was another [ point ] to your question. Was there another piece to your question?

No, I think we covered most of it. Just sticking on this topic, I think the base case expectation is that MA penetration rate in dialysis will catch up to the industry MA penetration rate. But I think 20% of the fee-for-service population did not have access to supplemental coverage before the CARES Act. Given the economic incentive for those patients to choose an MA plan, is it reasonable to think that your MA penetration in dialysis could surpass the industry-wide MA penetration rate?

Yes. So what you're pointing out is certainly true that the out-of-pocket component of insurance is a big driver of what our patients are looking at as they think about Medicare fee-for-service versus MA, and that's around a maximum out-of-pocket. And then, as you're pointing out, if they don't have a secondary coverage, it can be impactful for them and a driver of the MA. In terms of where this lands, we're not sure. It will depend a lot on patient inertia, whether they see MA as a benefit or whether they conclude they like what they have and they're less willing to change. So there certainly is a possibility it could go above the average rate. How long that will take remains to be seen. The average rate is -- it continues to grow as well. So I think if I look back over the last few years, the shift from Medicare fee-for-service to MA has been a nice tailwind for us, a nice driver of incremental improvements in overall Medicare rate and our overall revenue per treatment, which is helpful, given that our Medicare fee-for-service patients are underfunded, given the benefits we provide. So we like the trend. We think it will continue. Where it winds up and when it gets there, it's hard to tell.

Looking back at the annual enrollment period, did you sense that most of your fee-for-service Medicare patients were aware that they had the option to enroll in a private Medicare plan?

I don't know what they knew or what they didn't know. I don't think what they knew this year is probably significantly different than that what they might have known in a prior year. But I would say what we've known all along and was highlighted during COVID is patients who have commercial insurance work hard to maintain commercial insurance. And I don't know -- and I'd say what we probably learned over the course of the year is commercially-insured patients aren't moving quickly to say, "Hey, I'll take MA."

Right. Okay. Let's shift to home dialysis. I believe your home dialysis penetration rate stands at about 15%. I think you were targeting double-digit home treatment growth for 2020 before the pandemic. So curious to hear where that growth rate ultimately shook out for 2020?

Yes. So the growth rate came out a little bit below that. Not having to do with interest in home, but really having to do with the overall growth rate in the industry. And I think we've always thought of home growth as some multiple to the in-center growth and it could be 4x, it could be 5x. I think it's hard to use a multiple when the in-center growth becomes negative. But we're still -- I think what we saw during COVID is a continued relative growth of home relative to in-center. We saw that before COVID, we saw that during COVID. We think that will continue. And we have every reason to believe, as the growth rates return and the excess mortality plays through the system, that home growth rates will get back to the double digits.

Have you noticed an uptick in interest or leading indicators suggesting patients are more likely to dialyze at home over the next 12 to 18 months as it relates to COVID and more stay-at-home measures?

Not a lot. The decision to dialyze at home for a patient and their physician is a complicated decision, and there's a lot that goes into it, and there's a lot needed for a patient to thrive on home. And so we haven't seen a lot of impact from COVID on that decision making. Combined with the fact that our centers were not dangerous places. We and the rest of the industry did a great job on infection control. If you think about the challenges the nursing homes have had, that is not a challenge that the dialysis industry is faced with. So the concept of I don't want to go dialyze in the clinic because of COVID is a risk that really hasn't manifested itself.

One of the barriers to increasing home dialysis penetration is the high attrition rate, which is roughly 50%, I think. First, can you remind us why that attrition level is so high? And second, what progress has DaVita made to address that high dropout rate in recent years?

Yes. So you're right about the 50%. And I'd start by reminding people that home dialysis is not like home health care. It's not a nurse or a technician coming to your home and providing you care in the home that you otherwise would have gotten in the facility. It's more about self-care. It's about the individual patient and a family member or maybe a loved one somehow helping them to provide their own dialysis. So it's a clinically and logistically rigorous operation. You need access to water, to storage, you need room for all your equipment. There's obviously infection control. That's an important component of it, and it takes a lot of time. So ultimately, some patients or their caregivers experience burnout, either just as the accumulation of time moves on or because of some event. They might experience peritonitis, they might wind up in the hospital due to an infection. And for whatever reason they decide they've had enough of that, the self-care isn't working for them, they want to go in a clinic and have the care provided to them. So that's the reason for the high turnover, the high burnout rate. In terms of what we're doing, we are attacking this along multiple fronts, trying to get ahead of the issues that come up. We're using some predictive technology to try and predict which patients are reaching a point where they're at higher risk of reverting to in-clinic and looking for particular interventions to help them there whether it's some respite, whether it's helping them with infection control to keeping them out of the hospital, really doing anything we can to try and provide the patients and their caregivers, the support they need using our technology, using our information, using our footprint to make sure they can dialyze at home for as long as possible.

Great. As a result of COVID and home therapy, DaVita, like many providers is putting a greater emphasis on telehealth and virtual connectivity. Can you talk about some of the tools you've developed and made available to your patients? What have been the major accomplishments and challenges around telehealth?

Sure. So telehealth comes in many forms at DaVita. It's not purely a home-based technology, although it is used in the home, it's also used in the clinics to deliver, whether it's virtual visits with a nephrologist to a patient who's in a chair getting dialysis or deliver information or education to them. There are a whole bunch of different ways that we use to telehealth. Ultimately, we think it's a great tool for delivering information to the patients for minimizing some of the visits they otherwise might need. But it is challenging. This technology obviously costs a lot of money to develop and deploy. Our patients are not young. They're not the most Internet-savvy bunch. So getting them to utilize these tools is probably more challenging than you'd think with a typical slice of the population in the U.S. So we've made good progress. We're continuing to invest in it. I think it's something we're going to continue to invest in post-COVID.

Got it. That's helpful. And then last question here. We're now 1 year into the pandemic. Can you speak to the lessons you've learned in managing through this crisis and how your organization is better prepared to deal with the next health care crisis?

Yes. So look, I think we start off with a good foundation. We deal with a lot of crises. We're not in a business where shutting down a center for a week or 2 because there's a hurricane or an ice storm, it's something that we can tolerate. So we've always had an emergency response capability to deal with things like hurricanes, storms, what have you. And what we saw -- and that's historically been generally a localized effort for a relatively small period of time. What we've seen here is it required a national effort over a more sustained period of time, but the capabilities we've developed over many, many, many years came in very handy. I think we've learned that a national provider that has the scale of DaVita has some real advantages in responding to a pandemic like this relative to local providers. And as an industry, we and some of the other scale players, I think, did a really nice job kicking in and ensuring that some of the smaller folks had access to some of the capabilities we had. I think we certainly learned on the insurance side, what our patients will do to maintain insurance. And overall, look, I think it was a very, very, very proud year for DaVita. We did a lot of great stuff to keep our patients healthy, to keep our teammates healthy, to partner with our physicians, to support the system in giving back the $250 million of CARES money. And I think as we look over a long arc of continuing to build our reputation for clinical quality and being a responsible citizen in the health care community, I think it was a great year for DaVita.

I agree.

And we delivered really nice financial results for our shareholders. So [ I feel ] all right about that.

I agree. Fantastic. With that, we're just about out of time. So let's end it here. Thanks, again, to Joel and Jim for joining us, and thanks to everyone else for tuning in, and please enjoy the rest of the conference.

Great. Thank you, Andrew. Thanks, everyone.

Thanks a lot, Andrew.