DaVita Inc. (DVA) Earnings Call Transcript & Summary

Good morning. My name is Elan, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the DaVita Investor Conference Call. All lines have been placed on mute to prevent any background noise. And after the speakers' remarks, there will be a question-and-answer period. [Operator Instructions] And thank you, Mr. Ackerman, you may begin your conference.

Thank you, and welcome, everyone, to this investor conference call. We appreciate your continued interest in our company. I am Joel Ackerman, CFO and Treasurer. And joining me today is Javier Rodriguez, our CEO; and Kathleen Waters, our Chief Legal and Public Policy Officer. Today's call is focused on answering some questions we know you have about the Supreme Court ruling on Tuesday, and we're going to limit our remarks to issues related to that decision. Please note that during this call, we will make forward-looking statements within the meaning of the federal securities laws, including, for example, statements about the potential impact of the recent U.S. Supreme Court decision on us and statements about potential responses to the decision by third parties such as plans, regulators and legislators. All of these statements are subject to known and unknown risks and uncertainties that could cause the actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties could include, among other things, actions that may be taken by plans in response to this court decision, including any redesign of benefit plans, how and whether regulators and legislators will respond to this decision, including whether they will issue regulatory guidance or adopt new legislation. Other potential negative impacts of this court decision and result in planned behavior on our commercial mix or the number of our patients covered by commercial insurance plans and the timing of these items. For further details concerning these risks and uncertainties, please refer to our SEC filings, including our most recent annual report on Form 10-K subsequent quarterly reports on Form 10-Q and other information we may subsequently furnish or file with the SEC. Our forward-looking statements are based on information currently available to us and we do not intend and undertake no duty to update these statements except as may be required by law. We plan to conclude the call before the market opens, but hopefully, we can answer everyone's questions by that time. Now let me turn it over to Javier.

Thank you, Joel. Good morning, and thank you for joining today's call. Let me begin by stating our purpose and passion is to serve and care. As part of that responsibility, we are fierce advocates for our patients, and we'll work hard to protect their rights. And we see activity that negatively impacts kidney care patients, it does not sit well with us and serves as an impetus for action. In the case of Marietta, we built a strong coalition and advocated all the way to the Supreme Court. However, deeply disappointed with the outcome, it has not depleted our resolve to continue advocating for what's right for our patients. We believe that the ruling ignores the long history of protecting of protection offered under the Medicare Secondary Payer Act to dialysis patient population. I'm assuming that all of you have read the opinion and understand that the majority opinion was based on a narrow interpretation of the language in the MSPA. The majority determined that because this planned design applied equally to all beneficiaries who need dialysis and not just to those diagnosed with ESRD, it did not violate the MSPA. Importantly, the majority opinion specifically acknowledges that the purpose and the intent of the MSPA was to prevent plans from pushing beneficiaries onto Medicare prematurely by cutting off or offering lesser benefits to those people entitled to Medicare. This decision does not undercut or disagree with that purpose but rather the majority felt that this specific language of the MSPA required this decision. Majority also suggests, if not request, the Congress intervenes have been intended to more broadly protect ESRD patients. In the dissent, Justice Kagan explained, the discriminating against people who need outpatient dialysis is the same, or in her words, a perfect proxy discriminating against ESRD patients, which the statute specifically prohibits. The dissent is less reserved on the call for Congress to act and set specifically, and I quote, "Now Congress will have to fix the statute that this court has broken." As you can see, both the majority and dissenting opinions agree there's a need to clarify the language of the MSPA. With that background, there's a few questions we want to address today. Question number one, plan react to this ruling. And if so, what economic impact might that have on DaVita? Question number two, around timing, when could we start to see shifts in plan designs? Question number 3. What will the industry do to prevent discriminatory plan design? Let me take those in that order. Regarding whether and how we think plans may react to the ruling, as we stated in the past, we are not in a position to predict if plans might try to take advantage of this ruling to limit outpatient dialysis benefits to their members. We believe the MSPA was just one of several barriers to prevent the majority of health insurance plans and self-insured employers from pursuing discriminatory plan design. The Supreme Court ruling Tuesday weakened our protection. However, we believe there remains a number of other reasons why plan would not attempt to change or benefit designs to push ESRD patients to the Medicare or severely limit the scope of outpatient dialysis services covered. Let me provide additional support. First, there's a brand and reputation risk if a plan starts to redesign their benefits to push this vulnerable patient population who needs dialysis on to Medicare. Like the current administration, many plans are focused on health equity and benefit plan designed to discriminate against dialysis patients would fly in the face of any health equity efforts. Second, we believe that market forces in a highly competitive environment will incentivize plan to maintain comprehensive and competitive benefits. Plans generally want to provide the services beneficiaries need and would not want to be seen discriminated against this patient population. And finally, we believe other potential legal challenges, for example, under the antidiscrimination provisions of the ACA, may be utilized to seek to prevent mainstream health insurers in large employer groups from taking such actions. We think that these barriers may be less likely to deter Marietta like discriminatory plan design in certain plan segments. Segments we think present the most risk is comprised of small self-insured plans, some of which are administered by TPAs or small regional payers. We are not in a position to predict if and when these plans may change their behavior in light of the Marietta decision. That said, to help you get a feel for the dollars at stake, every shift of 10% of this segment to Medicare fee-for-service is approximately $20 million in operating income. Again, we cannot predict how any of these plans may choose to implement discriminatory plan designs, and there is a possibility that the plans outside the small self-insured segment could try to create benefit design that push the envelope, although we believe those segments are at a lower risk given some of the barriers we referred earlier. This leads to the next question of how quickly could plan start to take action relying on the Supreme Court case. Positive news is that for the vast majority of plans, we believe the answer is not very quickly, and here's why. Each year, employers review the way their plans are designed prior to open enrollment. This process is already well underway. So any changes to incorporate the Supreme Court's decision most likely would take effect in 2024 and beyond, unless a plan attempted to be very aggressive. It is, of course, possible that we could see exceptions to this, but still overall, we believe that the 2023 impact to be limited. Now moving on to mitigation efforts. The kidney care community, including dialysis providers, nephrologists and patient advocates is actively pursuing 2 paths simultaneously to potentially close the gap created by this ruling. Regulatory path and a legislative path. This dispute resulted from a conflict in regulatory guidance. CMS could issue a new regulatory guidance to clarify the intent and meaning of the language and how it should be interpreted. We do not think that CMS will want the ecosystem disrupted because of the potential for patient harm as well as the negative financial impact to Medicare if commercial patients were prematurely forced on to Medicare. We believe CMS is interested in protecting this patient population's choice of insurance and preventing disruption in the dialysis ecosystem. Another path, a legislative fix, could be accomplished with small changes to the MSPA that addresses the statutory language relied upon by the Supreme Court. We have already started to work with some of the Kidney Care champions to introduce such legislation. While finding the vehicle for this is always challenging, we think there are a few things working in our favor. First, we believe that Congress will want to fix the loophole that SCOTUS decision created in the MSPA and that could be accomplished with addition of just a few words. Second, achieving the fix is now a top priority for the kidney care industry policy initiative list. And third, we expect to have bipartisan support for a legislative fix and believe that the fix -- sorry, the [ fix score ] would be a saver. Putting all of this together, we believe that there is a reasonable chance of getting this fix in Washington. The timing on mitigation is harder to comment on as it depends on many dynamics of the administration in the Hill. While we cannot predict the outcome or the timing, we will continue our approach of transparency with all of you. With that, Elan, if you could please open up the line for questions.

Certainly. [Operator Instructions] Our first question today is from Pito Chickering from Deutsche Bank.

I guess the first one is that 10% shift to be $20 million of operating income. Just curious, is it the 10% of the small employer self-insured plans or the 10% of the total commercial mix?

Go ahead, Joel. Sorry, we're not together, but go ahead, Joel.

Yes. Pito, it's 10% of that small segment that Javier referenced. There's a bit of judgment required in how you define the segment in terms of plan size and self-insured versus fully insured, et cetera, but it's 10% of that, not 10% of the total commercial.

Got it. And then just to sort of you said it back into what percent of the sort of total commercial mix, of 10.5% you talked about last quarter, is this the small segment of self-insured plans?

Yes. So I get back to this comment about the judgment. We have to triangulate on this, and there are different ways to size the segment when we think about it. So I think we're going to avoid putting a patient count on it and really focus on the OI impact, I think it is an easier way to really understand what the financial parameters are associated with the risk of the movement of this segment. So I'd use the $20 million of OI rather than focus on a patient number.

Yes. So I mean, just I mean, is it -- as I sort of do the math and sort of what is the treatment growth versus the -- [indiscernible] for treatment on government, sort of does that imply that the small groups is around 10% or 15% of the total mix? Is that a fair ballpark?

Again, I'd rather not get into specifics, but I think you're in the right general range, yes. I'd say, on the lower end of that range.

Okay. Okay. And then next question is just as we are sort of talking about renegotiating rates for now, I guess, what prevents the payers from using this sort of big bat about the -- that Supreme Court gave them in order to get more aggressive on rates for the 2023 time period.

Let me grab that one, Joel. I think it's a reasonable question and a couple of things that I would say is right now, we're focused on one thing, which is MSPA, but there's a lot of things that surround anti-discriminatory behavior. And so we got a ruling on one narrow thing. There's still protections under ACA in [ Arista. ] Number two, as we discussed, there's just market forces. Right now is one of the most competitive time in the marketplace. And so employer groups have to have competitive benefits. Three is society is acutely aware and very passionate to work on health equity. And this would be obviously going against that and then three is contracts. Our contracts, as you know, were comprehensively contracted and most of them are multiyear. And so we have protections against anti-discriminatory in most of our contracts. And so what the hope is, of course, and we put all the proper disclosures on it, is that the fix can come before any of these renewals?

Let me ask 2 more quick questions here, sort of both of them on the same camp. Is there a possible besides the legislative fix, is there a regulatory fix that CMS can do to offset this? Or is this going to be legislative only?

Yes. As discussed in my opening remarks, we are pursuing both paths. CMS could clear up the language.

It's great. I'll stop there. [indiscernible]

Thank you. Our next question is from Sarah James from Barclays.

Could you give us a little insight on to the cadence of your commercial payer contract renewal? Is it ratable through the year? Or are they weighted towards any particular time of year?

There is no pattern thereof in -- and in general, what we've said is we're comprehensively contracted. Our contracts tend to be multiyear and so think of an average contract in -- depending on the -- I guess, I shouldn't say average. But the range goes from probably 2 to 4 years, and so you can start to get a sense of on any given year, roughly fourth or so of our contracts would be renewed. And again, it's not perfect, but that gives you a sense for it.

And does that ruling impact your strategy on capital deployment at all either for share repurchase or standing up new facilities?

No. It does not.

Our next question is from Kevin Fischbeck from Bank of America.

Actually, this is Joanna Gajuk filling in for Kevin today. So 2 questions. So first one, I guess, on the portion of the commercial business that you expected to be the highly likely impacted here potentially, right, if these plans would start to make these changes to understand that it's hard to predict, but if they do, but just stepping back and thinking about those headlines, I would think that the small group [ ISO ] rates are probably above average of commercial rates because just the -- given the size of these entities or the members should they bring in. So could you help us understand if that's true and then kind of the magnitude of things in terms of how much higher this commercial rates on average could be versus the rest of the business?

Yes. Thanks for the question, Joanna. And just to clarify because I think you said highly likely and I'm not sure we can speculate whether it's highly likely or not. We're just saying that this is probably the segment that's most likely to try things as opposed to highly likely. Point number two, we're not going to get into details of breaking down the rates per segment. But I think if you just grab the average rate of contracted patients, commercial patients, I think, you are going to be in the right ZIP code.

Okay. And my second question, so you mentioned that obviously, and the Supreme Court that was understanding that Congress should step in and fix this language, which essentially, and as this imply like there's already work being done. So can you give us a sense of what response you're getting from Q4 in Congress in terms of just the magnitude of the interest or the number of people that have kind of said, hey, are we on board and are we going to help? And also with that, are you also pulling it or is the pharma industry also trying to kind of help here because obviously not directly, but indirectly, I guess, it flows through, if there's any issues around utilization or just rates, of course the dialysis then could have some implications. So just broadly speaking kind of any other support that might come their way?

Thank you, Joanna. We have been very encouraged by the reception that we have had. Again, the Supreme Court was very clear that they agreed with the intent. They just said that the language needed clarification. So that was very helpful for both the legislative and the regulatory fix and that there was, let's call it, a footprint or a framework or a direction that says we agree with the intent, we just needed to be more specific. So the reception has been positive, the momentum is good. And of course, we're early in, into this process. As it relates to your second part of your question as to who will be supportive? There's been a lot of people that will join the coalition, and there's a lot of energy. So we are at this juncture, quite positive. And of course, there's a journey here that we got to go through.

Great. I guess we will just be on the look at -- we'll see what's coming up from Congress.

Thank you, Joanna.

And our next question is from Justin Lake from Wolfe Research.

Good morning. The first thing is, Javier, you talked about these contracts' protection. Most contracts I've heard of between a provider and an MCO have kind of mutual 90-day outs, for either kind of step away from the contract that they give that 90-day notice. Does that not exist here? Do you have -- do these things kind of have that -- don't have that protection.

Most of our contracts are longer term with -- there's reasons for exiting the contract, but it's not usually just an opinion-based when this has to be a violation of a cause or something like that, which wouldn't happen in this case, Justin.

Okay. And then just to be clear, you talked about the small employers, and I'd agree that makes -- that's probably where the most risk is, but the small plan. But just to make sure I understand, like there's -- I've heard of cases where like a regional health plan has gone and actually tried to send letters to ESRD patients and asked them to move to Medicare or even offer to pay the Medicare Part B premium for them. Is that right? Has that been happening out there? I mean I don't think they've been too successful, but has that been happening? And do you think that, that adds to the risk that some larger regionals might try to get up?

Yes. if that's happened, it has not come to my attention, so it's not been sizable. And so I can't comment on the detail, but it would be obviously something that we would fight and again, introduce it into some of this framework because there is there are other vehicles and anti-discriminatory vehicles that we could use. Again, there are market forces that they would be going against. So I just would think that, that would not be something that would get a lot of traction. And then lastly, to the point where you started out in your other question, it's just important to remember that the bulk of our OI is protected contractually. And so we're just trying to share as much as we can here so that we all have the same information.

Got it. Two other questions, Javier. One, the -- I think a lot of people found the fact that the Solicitor General was arguing for Marietta in the case kind of disturbing -- did you ever get -- did you ever talk to anybody in D.C. or get an idea of why that was the case given it does seem logically like the government should have been on your side for a lot of reasons.

Yes. Justin, I felt the same sentiment and we did reach out to some folks. And as you know, during the oral arguments Justice has asked the same question. I'll paraphrase, but I think the answer was in the direction of a narrow or strict reading as well and so again, this was interpretation of law and all are seeking understanding of the spirit needs to be clarified. But it was the same thinking that the Justice is used that the solicitor general applied.

Okay. And then just lastly, I know commercial contracting and commentary on commercial contracts, I think it's almost been like a third rail for you guys in terms of talking on the earnings calls and for a lot of reasons, you've kept the commentary pretty opaque. How are you -- how do we think about you sharing the -- what's going on between you and health plans and what health plans are doing as we go forward? I'm sure you're going to get this call on this question on every conference call going forward. Is this something that you will share kind of what's going on incrementally put some -- it's been really helpful that 10% number, for instance, is helpful that you gave us. Will you give us some color on that going forward in terms of what you're seeing out there? Or is this just something that you'll put earnings numbers around and just say, [ therefore ] treatment is getting pushed because of commercial and will just be kind of bulked up within pricing and everything else.

Yes. A couple of things. Number one, I hate to hear the word opaque. We want to be as transparent as possible. In the context of contracts, there are a couple of reasons why it doesn't make sense to go into it. Number one is just truly every contract is different. Number two, it can impact, of course, negatively the actual situation as it's playing out from a leverage or other matters. So we will give you as much information as we can, so you can understand the situation as well as we can up until if we think it's going to have an impact on the outcome. And that's when we stop short of that.

And our next question is from Gary Taylor from Cowen.

A couple of questions. One, I think I understand and agree with kind of how you're sizing the self-funded small group market. But I just want to make sure I understand why you think fully funded small group wouldn't also perhaps be some risk here? And is that just back to your points on tight labor market, health equity kind of commentary?

Yes. And again, we're not saying it's just about one segment. There's a risk on all of these, but what we're highlighting is that it's less likely both because of the timing of where we are in the cycle because of the reputation, because there are other things that we would pursue both in court in another ways and that people want to run their business and provide health coverage, most people want to provide their employees' health coverage. And of course, they want to keep the expenses down, but there's a limit to that when you feel that you're crossing over. And I think that we can all agree that the Supreme Court read this narrowly, but that in the face of just sort of common sense in the marketplace, if your kidneys fail, you expect that the premium that you have paid for years and years will kick in and that you will have the choice of health insurance and regardless of some technical interpretation of the law. And so I think that most people understand that.

Got it. It's been a number of years since you guys have disclosed out-of-network revenue exposure, but it occurs to me that could be a place where you'd see some changes in terms of how you're being reimbursed. Is out-of-network a material piece? Or could you care to size it for us?

Yes. We're not going to go into that little detail. I think what we've tried to tell you is comprehensively contracted. And what that means to me is we're into and you can correct me if I'm wrong, Joel, into the 90-plus of our patients are contracted that are commercial. And so it's a smaller piece. And of course, any commercial patient the economics are still relevant, but it's a small piece.

Last one for me, Javier, I didn't -- I do understand for sure the statutory relief you'd be seeking from Congress. I didn't understand what you're saying about CMS and how they could clarify language? And could you just review that, so I understand it maybe.

Kathleen, you've been in the conversations, you want to chime in here?

Yes, sure. So the actual -- this actual dispute started because of the conflict between regulatory guidance that CMS issued concerning the rule and interpretation of the rule. And so we would be seeking CMS to clarify that guidance and kind of explain that they intended when they use the words ESRD that it also included just people who needed outpatient dialysis or who needed dialysis. So that's what we are working on the administration to do.

Okay. I'll ponder that. Obviously, it wouldn't change what SCOTUS has done, but you think a change in the CMS guidance could impact how plans might look at making any change.

That's right. That was right. And that is, and just going back to one of the questions about the Solicitor General, it was as the Solicitor General explained that oral argument, they felt like they had to come out in that position based on the regulatory guidance. And so if the guidance can change and be clarified, that would change the landscape a little.

[Operator Instructions] Our next question is from Jane Orringer from Alliance Bernstein.

So just to go back to the Solicitor General issue. It seems to be a very elongated process for the Solicitor General to bring an amicus. And I'm just wondering, if you've seen this in other health care reg situations where the Solicitor General brings an amicus seeking clarification and the position where the Solicit General seeking clarification is really contrary to what you're indicating CMS's intent is. So I'm just still kind of confused by the PSG's participation.

I'm not sure it's a good idea for us to speculate on the solicitor general reason for participating. I would agree with you. I was somewhat perplexed as to why that happened and why it occurred. But then again, the Justice has asked about it. They were in oral arguments and the answer was that they interpreted narrowly. So I think that we shouldn't speculate as to exactly what happened because the reality is we don't know.

Okay. And then secondarily, to the extent that you can't get the fix, what is the potential for closure of centers in certain regions?

Well, I mean, you're asking me to go well into the future. The short answer is, of course, it depends the prolification and spread of all this, and we've given you a whole bunch of reasons why we don't think it will happen. And so I think it's a bit premature to think about that.

Okay. But will those in terms of some of the smaller regional plans, do they tend to be in geographies that are possibly more isolated where you could close centers? Or is there just kind of a breadth both urban, suburban, rural of those employers?

Yes. I haven't looked at the geographic spread of those, but if I had to speculate, I would say that they're dispersed all over the country, what you're putting your finger on is something that there was an amicus curiae filed on, which is, of course, what we know is that the economics of a center are sustained because of a small number of commercial patients. And of course, that is something that we talk about as, let's call it, the economic ecosystem and CMS is acutely aware of that. and that gives us more hope that they will be energized to clarify this. But again, too premature to answer your specific question on geography and plan, I think it's too early to predict that.

And I am showing no further questions at this time.

Okay. Well, let me finish where I started. We will continue our journey. This was clearly a setback, but we will continue to advocate for our patients in what we believe to be right. Thank you so much for your interest, and we'll talk again. Be well.

Thank you. This does conclude today's conference. You may disconnect at this time.