DaVita Inc. (DVA) Earnings Call Transcript & Summary

I want to thank everyone for joining us today. It's my pleasure to be introducing DaVita. DaVita is one of the largest providers of dialysis services across the globe. Presenting today, we have Joel Ackerman who's the CFO; as well as Nic Eliason, who's from Investor Relations. So with that, I think we'll just jump into Q&A.

Right.

Right. So I guess one of the things that we've been struggling with from a modeling perspective for you guys has just been the volume trajectory. Obviously, COVID has created mortality headwind for you. You started to see some improvement in Q1. But can you tell us how you think about volume and treatment growth through the rest of the year? And then where do you see the normal number? It was 4% for a long time and you started to be 2% to COVID. Where do we get back to?

Sure. So I'd highlight 3 dynamics as we think about volume. One is what you mentioned, excess mortality. Obviously, that's been a huge headwind for the whole industry as well as us. It has gotten better since the beginning of COVID. If you think of our excess mortality number being in the 6,000 range in 2021. That was down to a little above 4,000 in 2022. We wholly expect that number to continue to improve during 2023. And we've seen that. The winter surge was significantly lower in 2023 than what we experienced in 2022. And mortality -- excess mortality rates have continued to come down. So Q1 was a good sign there. We are still cautious about making any very clear predictions about what the rest of the year has install for -- in store for us and the rest of the industry. We have continued to assume there will be elevated mortality throughout the year, somewhere in the 2,500 to 3,000 range. We saw a little bit less than 1,000 in Q1. So that would mean you'd likely -- to hit those numbers, you'd have to see some sort of increase in the summer the way we've seen before. And while some may have a more optimistic view than what we've built into our guidance because it's been so hard to predict, we wanted to just be crystal clear with what we've built into our guidance. And I wouldn't say we have any better information on this than others do. So that's excess mortality. Mistreatment rate was a dynamic we first really started calling out last year. It's a -- mistreatment is nothing new to dialysis. It's historically run at about a 6% level for many, many years. Think of half of that roughly the result of patients going into the hospital, the other half being missing treatments for a variety of other reasons. And that number ticked up. And last year, it was running at about 7%. You can think of that as about 100 basis point headwind on volume. We have not seen that number begin to improve significantly this year. And for our guidance, we've assumed that remains elevated for the year. Therefore, it's not a year-over-year headwind, but it's certainly -- we're not assuming any benefit. The third component is the net patient growth, excluding excess mortality. And I'll address your second part of your question as well. So that number leading into COVID was running at about 2%, as you mentioned. And you can think of that as roughly 4,000 patients a year. We have no reason to believe that once all of the dynamics associated with COVID play through that, that number will be any lower. So I think 2%, to the best of our knowledge, is the right assumption once we're through all of the current dynamics. In terms of where we are now, that 4,000 number came down significantly last year. It was running at about half that level. And in Q1, we saw that bounce back, and we saw significant improvement in that net patient growth, excluding excess mortality. And the big question on our mind, and we tried to be very careful in calling this out on the earnings call is, is this just one good data point? Or is this the beginning of a trend? Given how this number has moved around historically from quarter-to-quarter, we are being cautious about declaring this a trend. Presumably, we'll know more next quarter, whether Q1 was a bit of an anomaly, and we're still running at a lower net patient growth number or whether that has somehow turned around, and we're now back on a better trend.

So when we think about that net patient growth number, is there a way to think about -- I think one of the biggest concerns is that just from excess mortality kind of normalizes, we're going to normalize back to a growth rate that's less than 2% because we hear all about the weight loss of -- the diabetes drugs being more efficacious. We hear managed care companies constantly talking about diabetes management. So like is that not having an impact so far? And if not, won't it have an impact at some point in the future just when things start to get better?

Right. So we get a lot of questions about what's happening in the CKD market and what impact that should have today or in the future about our new to dialysis submissions, the incidence rate, you can call it a bunch of different things. And let me take the 2 pieces separately. From a clinical standpoint, in terms of the impact of SGLT2 inhibitors and the GLP-1 drugs, we are not baking in any impact of that. Our clinical team is saying they don't believe there's any impact from that today in terms of what will happen in the future. I think the GLP-1, those are new and people are skeptical about whether those will ever have any impact. On the SGLT2 inhibitors, you can see it happening both ways. It could take a patient who otherwise would have been incident to dialysis and allow them to remain in earlier stages of CKD longer and that would be a headwind. On the flip side, it could take patients who otherwise might have died before they were ever incident to ESRD, allow them to live longer and that would be a tailwind. So I think time will tell what's happening there. In terms of the CKD management companies and things that managed care companies are trying to do, we believe in CKD management. We are in that business as well. We think, ultimately, that is about managing these patients' health better, giving them better access to care and creating a smoother entry into dialysis, rather than what is often called crash into dialysis, ensuring that they're under the care of a nephrologist, they're being well looked after and they have a smooth start. Nothing we have seen would lead us to conclude that there's been any sort of ability to hold off the onset of ESRD. So it absolutely changes the care, but it hasn't changed the incident rate.

Okay. I think all that makes sense. When we think about -- one of the pressures that everybody has been seeing, labor, how are you guys thinking about that? I think, initially, you've kind of indicated that maybe some of the mistreatment dynamic was actually labor-driven. So what are you seeing as far as temp labor, wage growth and ability to accommodate the volumes coming through?

Yes. So again, I'll break the wage or the labor cost issue into 3 buckets. On the contract labor side, we've seen a lot of progress on that. It peaked for us in Q3 at about $120 million a year run rate. So that was $100 million above what we had seen historically. It came down in Q4. We were expecting continued progress and called out relative to a total contract labor number in '22 of $100 million. We called out that coming down to $50 million in the year. That's what we said when we gave initial guidance in February. This quarter, we've updated that further and we're calling out another $15 million of progress. So we see that number for the year now somewhere in the range of $35 million for the year relative to what it was pre-COVID of about $20 million. So we made a lot of progress. A little bit more to come, but I would say that issue will be largely in the rearview mirror relatively soon. On the wage growth side, we're seeing progress this year. Last year, that number was running 7%, 8%. This year, we're forecasting somewhere more in the 5% to 6% range. So progress against last year, but still well above the historical norms of, call it, 2.5% to 3%. And again, updating that from what we said in February to what we said on the call a couple of days ago, a little bit of progress there, and we'd probably call out another $10 million of benefit for the year relative to what we were seeing in February. On the...

Actually, just to clarify that because I'm writing and listening. So you said 4% to 6% is what you're seeing now versus 2% to 3%? Or 4% to 5%?

No, 5% to 6%.

5% to 6%. Okay.

Yes. In the base wage and we're probably running a little bit better in that range than we thought.

Okay.

And then the third topic for us is really productivity, and this is largely about training productivity. We saw that number spike up over the course of last year, largely driven by higher turnover, lower retention rates. And we haven't made a lot of progress on that, and we expect the path to progress on that is really going to be progress in the broader labor markets. What we have seen historically is our retention rates are highly correlated to what's happening in terms of unemployment numbers and wage growth and open positions relative to job seekers in the broader markets, and we expect our numbers to improve when those numbers do improve, perhaps with a little bit of a lag.

Okay. And I guess to go back to that point about contract labor because thinking about the Q1 results and the beat in Q1 and then the guidance raise, part of that outperformance in Q1, I guess, is achieving savings faster rather than necessarily changing the run rate is kind of the way to think about the labor component, the...

Well, I think there's both in there. Part of it is we achieved the results quicker than we thought and part of it is we've upped our guidance around improvement in contract labor. We just think we'll get to a better point by year-end than what we had thought of.

Okay. So it's both.

So there's a component of both.

Okay. And when we think about cost growth this high, historically, the rate growth hasn't been anywhere near this high, but the company has been able to manage it. Volumes are better in the past than they are right now. So how do you think about your ability to manage cost growth? Or do you get the appropriate pricing and keep cost growth versus pricing growth in line?

Yes. So you're pointing out the reality of our 10- to 15-year history, which is we have always managed a gap between the rate increases we're getting and the cost pressure on labor and other things that we've seen. We've never gotten RPT increases that match those costs, and we've been able to make up that gap. Looking forward, I think we will continue to see that gap. I expect rate increases to go up a bit associated with the labor pressure and the inflation, but that gap to remain. And I think we will continue to look for and I expect we will find opportunities to bridge that gap with a variety of things associated with cost savings in other areas like pharmaceuticals, like capacity utilization or other ways to get our revenue up even if our rates aren't increasing through mix or other opportunities.

So what does that mean from a rate perspective? What do you normally get versus what you think you'll get now?

I think if you went back a couple of years, numbers were averaging about 1% for this year. We think we're going to be north of 2%, so 2% to 2.5%, largely the result of just these higher cost pressures and payers recognizing that. That needs to flow through to rates. Where that goes going forward, I think it can't -- you can't look at one without the other. You have to look at what rate increases we're going to get hand-in-hand with what the pressure -- cost pressures in the market are. And I think those things are not independent variables.

So the spread hasn't changed in your view?

The spread has changed. Last year was a much tougher spread, and that's why you saw the margin contraction. I think the question is, will we see more margin contraction or more margin stability or an increase of margin going forward? And we haven't updated long-term guidance. So I'm hesitant to go there, but I think we certainly see opportunities to bridge that gap going forward.

Okay. And then this...

By the way, including in this year.

This year, there are some specific cost tailwinds, MIRCERA being kind of like is the biggest one that you pulled.

Right.

So can you help quantify that and help us think about how much of that -- is that fully realized this year? Or is there a tailwind into next year?

Yes. So it's not fully realized this year. I'll just remind you what we said. We called out $125 million to $175 million of cost savings this year, driven by MIRCERA, by operating leverage from closing clinics and from some G&A savings. And the MIRCERA number, we're getting most of it this year, but not all of it. It is the biggest component of that $125 million to $175 million. But if you look to 2024, we'll get some more of the MIRCERA. We'll continue to get then operating leverage from the clinics we've closed. We'll continue to look for G&A opportunities. And I think -- if you look back at DaVita over many, many years, including well before I joined, I think one thing DaVita has always done well is in the face of these continuing cost pressures and revenue pressure, we found ways to bridge that gap while continuing to deliver high-quality care to our patients.

And what's the driver to those 2 ranges, the $125 million versus the $175 million?

MIRCERA is a big swing factor in that, and I'd call out 2 things. One is how quickly the uptake is. Remember, DaVita doesn't prescribe drugs, nephrologists prescribe drugs, and how quickly nephrologists choose to make that switch from EPO to MIRCERA. So that's one. And the second one, which is probably the bigger one is, how physicians choose to use MIRCERA, at what levels they are prescribing, and that will drive a component of the cost side of it.

And -- but I guess from that perspective, does that mean the $175 million is a good number? It's just whether you get it this year or whether you get it next year?

Not necessarily because the prescribing patterns in terms of the amount they prescribe, you get x mgs per kg or x plus 10, and that will drive a difference in the cost.

Okay. So you may never get to where you think you could be at this point?

Right. It's not just a matter of time.

Okay. And then on the rate side of the equation, one of the overhangs from the industry perspective has just been the Marietta case. I mean can you talk a little bit about if you're seeing any indication that that's actually pressuring pricing?

Yes. So stepping back just to give the context, I'd say what we know in Washington is that we've got bipartisan support for a fix. What we don't know is if and when that fix will come. It is a complicated political environment, as I think everyone knows. From an employer standpoint, we are concerned that employers are out there thinking about how to use this Marietta ruling to fundamentally change the benefit design and the network availability for their employees. And from our standpoint, we believe that they are doing this in a deceptive way, not being clear with their patients of how their benefits are changing and how their network availability is changing and we are not going to accommodate that. We believe employers have a choice. They can offer a robust in-network benefit or not. And if they choose not to, they cannot expect and they should not expect that they will get the same access to our clinics as they would if they chose a network benefit. And that one -- that we know. What we don't know is how many employers are thinking about that. They don't call us up and say, "Hey, just we wanted to talk this over with you," certainly not. They don't even call us to tell us they did this. We have to figure this out through our understanding and our analysis of claim patterns and claim activity. So that's where we are today. I can tell you, from a claim activity standpoint, we have not seen an uptick so far in the number of patients who are being discriminated against by their employers. As you know, this is something that has been happening for a while. That's why the Marietta case happened. We track it and we haven't seen an uptick so far. In terms of how this is playing through with employer conversations, Nic, do you want to take that?

Yes, sure. It's not a topic of -- that's influencing our payer discussions or negotiations in any way. Right now, obviously, both parties are aware of it, but we negotiate with the health plans, and the employer group activity happens behind the scenes on how each employer decides to design their benefits. So it's not something right now that's showing up as an influence in our payer negotiations in any way.