DaVita Inc. (DVA) Earnings Call Transcript & Summary

I'm Steven Valiquette, the health care services analyst here at Barclays. Yes. So the next company here is DaVita. With us from the company, we have the company's CFO, Joel Ackerman; and also Nic Eliason, VP is in the audience as well. This will be a fireside chat. So I think with that, we'll just -- we'll dive right in.

Great.

All right. Sure. So first question here, it seems like for all the provider companies, the topic of labor is still at the forefront of investors' minds. So I guess we'll just dive right into that before we start talking about some of the other parts of the business and some of the growth drivers. But I think labor expense, you guys have talked about that getting better. You quantified some amounts on the temp staffing portion, but also just another source of savings and quantify that around reducing some of the training costs as well. Maybe just walk through some of the details around this and that there's any color you can talk about and how that's progressing so far this year, that would be great as well. But let's just frame that first as far as the opportunity to improve that year-over-year in '23 versus '22.

Sure. So '22 was clearly a tough year. We were not insulated from it in any way, shape or form. We saw the challenges on base wage rate, we saw it on contract labor and we saw it on productivity. The main driver of productivity being turnover, which leads to higher training costs. As we think about 2023, what we're anticipating is a continued challenging year relative to what our labor rates or our labor increases felt like pre-COVID, but we think it should be an easier year than 2022. We expect continued wage rate pressure well north of 5%, the overall labor pressure at the middle of our range, probably around 5%. And that's wage rate higher than 5% offset by improving contract labor and improving training productivity.

Okay. Great. And across all of our health care provider coverage a lot of the investor focus and a lot of the discussion really is more around nursing staff, more than anything else. But I think with you guys, I think more of the nursing staff isn't really the true epicenter of some of the challenges, but instead, it's maybe just as much of that more some of the non-licensed patient care technicians. So I guess I'm just curious to hear a little bit more color around that variable and how that's going to be a different set of challenges versus just trying to recruit some of the same nurses everybody is trying to recruit and how there's different ways to tackle that and try to improve that?

Sure. So you're spot on, we saw the challenges both on the nursing side as well as on some of the lower skilled labor we call -- excuse me, patient care technicians and the challenges were there, although the challenges were different in the different sectors. Contract labor is not as big an issue on the non-nursing side, but the turnover was even bigger challenge. So a lot of our focus this year will be on making sure we're hiring the right patient care technicians, figuring out as quickly as possible, whether we think ultimately, they'll make it through what is a 3-month training program. And if we see opportunities to get them out a little bit quicker, recognizing they're not going to make it through training, that there isn't the right fit between them and working in a dialysis clinic. If we can make those decisions quick, we think we can save on some of the training productivity challenges.

Okay. All right. Now every health care provider industry to some degree is lobbying, hoping to maybe get some rate relief from CMS to offset some of the labor pressure, is whether it's related to skilled labor, whether there's true licensure and in this case, maybe some of the non-license patient care technicians, I don't know how much that plays a role in trying to get some rate relief. But maybe just -- where do we stand right now? And what's your view on how much dialysis industry may be is poised to get some rate relief at least through CMS? And also as part of that same discussion, maybe talk about the commercial and maybe pricing environment, which I know is usually not that amenable to raising rates and everything period, but just any line of sight to some relief on that side as well?

Yes. So we feel good about our revenue per treatment, which is the way we quantify our rate relief being better than it has been in the past. We quantified 2% to 2.5% for 2023, and that's a combination of price increases as well as the benefit of mix shift from Medicare Fee-For-Service to MA as well as from government to commercial. So we feel good about better rates than we've seen in the past. I think the big question on our mind is ultimately will they be enough to overcome the pressure we're seeing on wage rate pressure as well as other inflation. And from our standpoint, that remains to be seen. It is hard to know what's going to happen on the Medicare Fee-For-Service side. We get our preliminary rates in June or early July. Our understanding of how they do it is it's more on a projection of inflation rather than looking at the path. So ultimately, you need to see where is the outside contractor they use lined up on their projection of inflation for 2024. More broadly on MA and commercial, we've got all the same dynamics that I think other providers see in terms of challenging conversations with commercial payers and MA payers about getting appropriate wage growth to offset the cost increases.

Okay. Great. Okay. So just jumping around here a little bit to some different topics. This next topic is something that's certainly not new. It's been talked about, I think, ad nauseam over the past couple of years, but the good news is we're getting maybe closer to the end of this overhang that -- this kind of just comes back to the subject around just the negative impact on your business and the patient base from COVID mortality. So you guys can give us some numbers around this. 2022, you saw some improvement versus 2021. But perhaps you can just touch on the 2022 dynamics, but how that bridges into 2023, when thinking about still some impact on overall volume growth and how that's kind of baked into the guidance as well. Just to frame that vendor for everybody.

Yes, sure. So volume has undoubtedly been a big challenge for us and an accumulating challenge because every year where we see negative growth, it compounds year after year. So just to set the stage on what we call excess mortality, which is largely driven by mortality associated with COVID, but rather than try and pick out COVID, we just talked about the total excess. The number was running at, call it, 6,500 at the beginning of COVID on an annualized basis. As you pointed out, 2022 was better. It was in the low 4,000s. And our expectation for 2023 is it will continue to come down. Built into our guidance is a range, but at the middle of the range is excess mortality of about 3,000 patients. And the way we got to that number was, one, to look at what happened during the winter, and there clearly was no winter surge. And if you adjust last year's numbers without a winter surge, you'd get to about 3,000 excess mortality. So we basically said no excess -- no surge, and that's clearly good news. The question was, how do we build out our assumptions for the rest of the year. And we decided to leave the assumptions for the rest of the year similar to what they've been last year. Predicting the path of COVID for us has been challenging, and we decided rather than try predict the end of COVID, let's just give a lot of transparency about what's built into our numbers. And if investors think the result are too aggressive or too conservative they can build that in. So we're basically saying we expect mortality or we forecast mortality for the rest of the year to be similar to what we saw last year.

Okay. I'm doing this from memory, so I apologize if I butcher this, but the -- I think the rule of thumb, I think for every thousand patients on that algorithm, it's roughly a $50 million revenue impact in either direction. Is that the right way to think about that is just to frame of reference?

That is a good -- hold on, I'm just doing quick math in my head. I think your -- I think 2,000 patients would be about $50 million, 1% would be $50 million.

Okay. For the record then on the transcript, that's the right answer. Not what I said. Okay. Great. So shifting gears here a little bit again. The -- from our keynote session earlier today, most of the discussion was really around value-based care initiatives that's being driven out of the CMS Innovation Center. Tried to get them to dive in a little bit deeper into certain therapeutic areas like kidney care and the -- we never really had time in today's session to really dive into that, but certainly for you guys that's going to be the focal point. And you're already heavily involved in that, obviously, you've talked about that over the past couple of years. And aside with what you're doing with the government, even just with managed care payers, the VBC is evolving at a pretty rapid pace. So a couple of questions to ask around this overall topic. First, maybe just to frame it for everybody, just take a few minutes to remind everybody again, just the annual amounts. I mean the way you're looking at this is the risk dollars under management. You've given some clear numbers on that for 2021, 2022 and your expectations for '23. And if there's any further color on how much of that is coming from just commercial versus an MA versus the government side that would help as well.

Sure. So value-based care is absolutely here. It's absolutely real. I remember a few years ago, we've come here and investors were a little tired of hearing us talking about value-based care. It's kind of enough already. This doesn't feel real. And we've certainly gotten past that. It went from -- in 2021, about $1.7 billion of cost under management to north of $3 billion, almost $3.5 billion last year. And for 2023, we're expecting that number to be about $5 billion. You can think about that as roughly 2/3 government and 1/3 MA and commercial. The MA and commercial side is dominated by MA. So the biggest piece of the business is with Medicare Fee-For-Service patients through, the CKCC program. The other big chunk is Medicare Advantage.

Yes. Okay. One of the other things that we talked about at the keynote session earlier today as well is just a focus on just profitability and just the opportunities. There's been some areas of value-based care tied into CMS that look at it on paper, but then the reality ended up being not that profitable for some of the participating companies. So I think for you guys, just diving a little bit deeper on the profitability of the VBC initiatives, so the same thing there. I think you guys have been pretty good about giving specific numbers as far as some of the start-up losses or early-stage losses that you've had to build this up. And also, you got to put some [ unfed ] capital in place and then you kind of get the fruits of that the following year, et cetera. You mentioned about $125 million of losses you absorbed in '22 around all this, might be a similar number in '23. I think you're just trying to breakeven on a reported basis at '25 or '26 somewhere in there. Maybe just talk about that profitability, where the ideal margins kind of play out within the contracts, how close you are to those target margins, at least on a gross margin basis, if you can leverage how all that kind of flows over the next couple of years from here?

Yes. So we think of the business around 3 metrics. So one is this dollars under management. And as I mentioned, that's $5 billion this year. The second is what the net savings percentage is? How much cost savings can we drive through our model of care. And then how much of that we then ultimately need to share, either with payers through a percentage of premium contract or some sort of baseline. And then how much we ultimately share with other partners typically nephrologists. And once you put that all in the mix, you wind up with a net savings percentage. We feel good about the net savings percentage. We're driving now on our population. We feel good about the total dollar growth. And then the third metric is really the cost, the call it, the G&A associated with delivering the model of care as well as any overhead associated with that. And we need to see progress on that. We see that cost continuing to rise on a dollar basis, but we see it coming down on a per member per month basis. So as the dollars under management grow, we maintain this net savings percentage on a bigger higher scale number, and we see the PMPM cost to deliver this come down, we think we can get to a profit range that's low single-digit percent of the dollars under management.

Okay. Got it. Okay. Another topic that is somewhat intertwined into this discussion is really just your mix of Medicare Advantage business versus Medicare Fee-For-Service and how this impacts the profit growth for the overall company. And again, across all the health care provider companies entries that we track, I think everybody has seen a greater mix of MA volume versus Medicare Fee-For-Service for pretty obvious regions. And some business models, that's a good thing. Other ones is a bad thing depending on the relative payments. I think for dialysis, that's more of a good guy as far as greater growth in MA versus Fee-For-Service. I guess one of the questions around that, though, is are you still maintaining that same favorable spread on MA versus Fee-For-Service under the value-based care contracts? Or will that may be working against you a little bit over time despite the greater opportunity for more volume? Just overall, though, again, how focused are you on that delta in reimbursement versus the non-DVT MA contracts and rates versus Fee-For-Service and how that's trending over time?

Yes. So you've got the facts all spot on. It is undeniably a positive for us in terms of our revenue per treatment under Medicare Advantage relative to Medicare Fee-For-Service and that number has remained relatively stable. We have not seen some sort of deterioration in our Medicare Advantage rate relative to Medicare Fee-For-Service. And as a reminder, people were concerned going into 2021. Remember, before 2021, dialysis patients who are on Medicare Fee-For-Service could not move to Medicare Advantage. That constraint was removed as a result of the 21st Century Cures Act that went into place in early 2021, and that's what drove the big growth in MA penetration in dialysis in both 2021 and 2022. So we started off -- we ended 2020 at less than 30% penetration of Medicare Advantage. We've now basically caught up by and large to where the broader industry is somewhere in the 50-ish percent plus or minus range. And through that, we have not seen deterioration in our MA rates. So it's been a -- both on the volume side and on the rate side, it's been a real positive dynamic for us over the last couple of years.

Okay. Great. All right. bouncing around here on a few more topics. We talked about some the volume challenges over the past couple of years. [indiscernible] you guys to maybe put the foot on the gas a little bit more on some of the rationalization of the facility footprint close roughly 130 facilities last year may be close at 50 to 70 this year. Just curious if you're able to provide any update on the progression so far this year? And how about do you think you're retaining the patient on the closed facilities in kind of one of the most important variables around this whole [indiscernible].

Sure. So we continue to make good progress. I think we'll be done with the lion's share of that in the first half of the year. We don't do it all on one day because there are just local dynamics we need to work through and nothing more important than patient safety and making sure all these patients find a home. We don't have the luxury of closing a dialysis center and finding a patient who ultimately can't find dialysis anywhere. So we do it at a measured pace because of that. From a patient retention standpoint, it is going well. We are finding homes within DaVita clinics for the vast majority of the patients who are in convenience by this, and that's something we are very deliberate about them. Again, it's important from a patient safety. It's important for our relationship with our nephrologists and it's important to the economics of the center closure process as well.

Okay. Another topic I want to make sure we hit on. This kind of has to do with some of the home dialysis initiatives and kind of what's going on in the industry. So without officially covering the company right now and not covering it for the last couple of years or so, I left off on the coverage. This was, I think, pretty topical a couple of years ago. Some threats around disruption, et cetera. You guys have a couple of years now that your mix of home dialysis is around, call it, 15%, give or take. Your goal is to get that to 25%. Really what I want to hone in on though is just the -- what's going on in the competitive front around all that because it -- I think a while ago, a couple of years ago, and there was a wave of competitors that were focused on home-only dialysis making a lot of noise about what they might be able to do there. But I think kind of reexploring that more recently, I think it hasn't really panned out for most of those companies, whether they were large or small players. Maybe just give more color for the audience just on how the competitive landscape has evolved around that? And what have been the tripwires for the companies that are focused on home-only versus you guys with a more comprehensive offering?

Sure. So I divide those -- that group of companies you're talking about really into 2 buckets. There's players who are getting into the dialysis management business, and got part of their dialysis management plan would be to encourage patients to dialyze at home, but weren't actually providing home dialysis. So they were more in the management business rather than the direct patient care business. Some of those are still out there. I don't know that they're having a ton of impact on actually driving patients home, but they're still out there. The second bucket, which I think is probably the more worrisome one from where you left off 2 or 3 years ago were companies who said we're going to change the model, and we're actually going to be direct providers of dialysis, but we're going to do it in some form of an alternative setting, whether it's home or their capacity in our drug store or something like that. To the best of my knowledge, if you added up all of the patients in America who are getting dialysis from one of those providers, I don't think it would at least signal to be the clinic. Those things have proven to be unsuccessful. I don't think they appreciated the dynamic of home dialysis, whereby at any moment in time, home dialysis can be a great modality for an individual patient or an individual doc or even an individual payer. But if you look at depletion over their life or a physician managing a whole set of patients or a payer who's got a whole bunch of dialysis patients, home is part of the answer, part of the time, but ultimately, you need a much broader solution. So we have not seen anyone make home-only work.

Okay. That helpful. So kind of running low on time here. Maybe one other question on -- one final question here, just to touch on a little bit. I guess the other thing that happened over the past couple of years as I last covered the company officially was -- you guys had your last Analyst Day about -- calendar 2021. And I think you laid out some pretty strong growth outlook back then for over like a 3- to 5-year time horizon, 3 to 7 percent operating income growth and getting into double digit on EPS with some of the capital deployment. Obviously, the timing of that wasn't great. Nobody could have known back then just how roughly this labor market would become over the ensuing 18 months or so. So nobody's fault at that time, obviously. But the question is, once we get past some of the labor pressure and some of the other volume challenges tied to that excess mortality that we talked about. I mean, do you think you're in a position -- in 2023 still has some of that you get into '24 and beyond, do you think some of it will be back on track to kind of resume what you laid out that last couple of days as far as the growth on an annualized business?

So look, we don't want to call the end of COVID, whether it happens this year or next year, whatever. But post-COVID, we believe we can get back to that earnings growth that nothing we've seen either on the volume side or the RPT side or the cost side, I would say somehow the earning power and the growth model has changed permanently. So we feel good about that. Timing remains a question. But we don't see any reason we can't get back to that 3% to 7% operating growth.

Okay. Great. With that, we're a couple of minutes over. So I think we'll end it there. So I want to thank you for your time today. And hopefully, everyone will enjoy the rest of the conference. Thank you.

Thank you, Steve. Thanks to everyone for joining us.