DaVita Inc. (DVA) Earnings Call Transcript & Summary

Hi, thanks -- thanks for joining us. Gary Taylor, I cover health care facilities and managed care here at TD Cowen. My pleasure to introduce DaVita, I think, maybe for the first time at this conference ever, maybe. So happy to have them here. Second largest operator of U.S. renal dialysis clinics, over -- almost 2,700 centers and nearly 400 in 11 other countries, over $12 billion of revenue guided for 2024. The company also takes global risk for dialysis patients in its IKC segment, managing over $4.5 billion of annual health care spending. So Joel Ackerman to my left here, Chief Financial Officer; Nic Eliason is Investor Relations. So gentlemen, thanks for joining us.

Thanks for having us.

First question that's moved up to the top of my list for almost everybody this week as this has lingered on, it's just been change. And could you just describe what DaVita's exposure is to change, what you use them for as any -- if you're using them for EDI, if you're unable to switch to other people, just level set us on, what do you think about it?

Yes. So changes are dominant exchange, and we use them for submitting claims and getting back from [indiscernible] advices for the vast majority of our claims. So it is a challenging moment in time. And so the good news is we are pretty confident that none of the cyber issues that they are dealing with have leaked into our system. I think there's a reasonable way to track that. So we feel good about that. And we are working hard to look for alternatives, and that can be direct billing for some payers like Medicare fee-for-service, for example. We're getting access to other exchanges as well. We've had conversation with other exchanges, which I think should facilitate that, but we're working hard on that issue right now.

So when you think about possible impact then just to the financials, I mean, in theory, this is just a cash flow to DSO issue, in theory. At some point, change comes back online, the pipes start working and just delayed claims come through. Is there any other way that this would impact DaVita financially?

Generally, no. I think you've said it right. The one thing that people are keeping a careful eye on is timely filing. So there are claims that could come due. And if technically, if you don't file them on time, it will impact your ability to collect that or if you choose other routes. So to deal with timely filing, you could, for example, submit paper claims. But the ability to collect on those things, the yields tend to go down. But as a general rule, our expectation is we will get paid for the services we're providing, and it's really a question of timing.

And the timely filing thing, is that like a 30-day thing with -- multiple players...

It varies -- I think 60 to 90 is a more typical time frame. And in general, it kicks in when -- we use filters before we submit claims to make sure we've got the right information on the claim. Sometimes, we will hold a claim until we get that right information, and that's the reason it would lead to some sort of delay like that.

Got you. And then on the -- does it have any impact at all on the IKC side of the business that's...

No. I mean the issue it could have on IKC and -- it would be just the timeliness of the information we're getting. If you can't submit claims, obviously, that would impact your ability to understand what your costs are.

Right. Okay. I want to go through -- really, I mean, the last year has been really amazing, quite frankly. It's been amazing for the stock. So congratulations on that. But fall of -- I mean pandemic was hard on DaVita.

Yes.

Fall of '22, your forward outlook was really negative, lowered the bar across treatment growth, labor costs, negative operating leverage, like a lot of a lot of stuff. And unfortunately, really, I feel like every quarter of '23, since you've been able to do better than you had thought. Temporary labor trends coming down, ESA savings, revenue cycle improvement, some of the excess mortality seems to be working through. So I guess, just sort of update us where you are in terms of your thinking now. It seems like there's still more operating leverage from utilization improving but also some center closures. So what's kind of your big-picture outlook for next couple of years?

So I'd really break the answer down into 2 components: the operating environment and then DaVita's performance. In terms of the operating environment, I think we tried to be as explicit as we could in Q3 of '22 about what our assumptions were for the operating environment in '23. And we basically said, we're not going to -- because we can't predict when it's going to improve, we're going to assume it's not going to improve until we see it. And the reality is the operating environment did improve. On the volume side, we saw our admissions growth ultimately get back to pre-COVID levels, and that was very encouraging. Mortality came down, although not back to pre-COVID levels, which is why our guidance for the year is 1% to 2% and not more in line with the historical 2% number. So that's on the volume side and the environment. The one other thing I'd call out about the environment is really on labor. And we're in a better labor environment than we were in mid-2022. You see that really in 2 ways. One is our contract labor is back down to pre-COVID levels. And our wage growth, while not back to pre-COVID levels, is much better than it was. Where we haven't gotten back yet is on productivity, in particular training productivity, and this is driven by turnover. Our turnover spiked as a result of COVID and the broader labor environment or the health care labor environment. And we're -- we've still got room to go there to bring our productivity back down to where it was in pre-COVID levels. In terms of other things I'd call out, you called out the fixed cost leverage, which has a real, I think, meaningful and long tailwind as we are able to continue to grow the census without adding new clinics. And given the high fixed cost within the clinic and then at corporate, we think there's a lot of margin growth in there. And the one I'd have to talk about is the revenue operations, where we have seen the investments we made starting in 2022 delivering twofold. One is on higher yields, which is driving our revenue per treatment up. And you can think about that as roughly a 1% tailwind in 2023 and then another 1% tailwind in 2024. Those of you like per treatment, you can think of $3.50 per treatment in each of those years. And that's been an amazing accomplishment by our revenue operations team. So I think those would be the big ones I'd call out. Obviously, the bottom line on IKC will continue to deliver. Depreciation and amortization is down and we think will stay down. So if you look at an OI or an EPS basis, that will be a tailwind. And -- but overall, look, I think it's just -- it's nice to be back in what I think we can reasonably categorize as a normal operating environment after the challenges of 2020, '21, '22 and the uncertainty going into 2023. So having a little bit more visibility and back to the model that we know and love is comforting.

Tell us a little bit more about the revenue cycle. And when you talk about 1% higher yield, so yield from whom? This is just on the commercial book or more...

On the commercial and the MA book, really very little having to do with Medicare fee-for-service and there. And those are more complicated payers to bill and collect from. Remember, Medicare fee-for-services is one payer with one set of information requirements and a very bundled rate. So you're not billing separately for lab or billing separately for pharma. On commercial and MA, they're more complicated payers with more complicated information requirements. So it's really about people, process and technology to optimize what we bill and ultimately what we collect. And then the third benefit is when we collect it, and you see that not in the rate but in the DSOs. And having seen the DSOs come down 12 days year-over-year is pretty exciting.

Yes. I mean to me, it's pretty impressive just because, I guess, maybe too simplistically think about a dialysis treatment as a bundled rate and thinking a lot of more commercials bundled today than it was 10 years ago, I'm sure, but that -- be able to create yield out of something that maybe is a -- a hospital chargemaster has 20,000 lines in it, but a dialysis center doesn't. So it wasn't obvious to me how to get that. So that's good.

Yes. And I think it's a lot of little things. It's not just about billing for pharmacy and lab. It's about making sure you've got the right information so you've got the right secondary payer. So you're billing the secondary rather than absorbing patient bad debt, for example. So there are a lot of things like that, making sure your claims are not getting rejected for all sorts of little things that may or may not wind up on the claim.

And where do you think you're at in terms of the center rationalization. So '24, close 50, open 20. This was a fairly new phenomenon just in the post-pandemic period to think about that you're actually closing net centers. Maybe one, give us a little like -- how do you identify a center that needs to close? Does it always just get consolidated into something else that's already in the market? And as -- and then two, just how much further could go?

Yes. So there are different reasons for closing a center. Some can be economics, some can be staffing or just patient safety. People forget that staffing isn't only a financial issue. There's a patient safety aspect to that, especially in rural clinics. If you can't find a nephrologist who's willing to round in a clinic because of where it's located, sometimes you've got to close it for reasons like that. So there are a lot of different reasons to close a clinic, for the same reason there are a lot of different reasons to open a clinic. In terms of where we are, I would say 2024 will likely be the end of the -- this kind of higher-than-normal clinic closure situation we've been in now that we've seen volumes starting to grow. I think you'd expect us to continue to close clinics. We've always closed clinics for a variety of reasons. I don't know that we'll be in a position of adding net clinics yet. But I think the clinic number is likely to begin to stabilize, and we'll see continued increases in our capacity utilization as the overall treatment volume grows in a more stable clinic number environment.

Is there anything else changing? Like in our model, we have a line, where do our best guess to sort of think about? How many machines you have? And how those are being utilized? But is there anything changing in terms of how many shifts you're running per day, how many centers are open on Saturday? How many -- fewer centers, but do you have more hemodialysis machines per center than you used to? Like is there any moving parts on that, that are material?

Yes. So I think where you're likely to see that more is on the shift side rather than adding chairs or adding machines to a center. So a typical center will run shifts Monday, Wednesday, Friday and then Tuesday, Thursday and Saturday. You see we have a decent number of clinics that run clinics -- that run shifts only Monday, Wednesday and Friday and then some that will only have like an early shift on Tuesday, Thursday and Saturday, driven largely by the fact that patients, teammates and physicians don't want to be in the clinic on Saturday afternoon or certainly Saturday evening. That said, there are clinics that run all 6 shifts. There are even clinics that run 7 or even 8 shifts just depending upon capacity. So the way we create capacity is by adding shifts. And that's basically how we think about our model as the variable cost is the cost for labor, supplies, drugs and everything to add a shift, which is typically about 2/3 of the clinic cost and about 1/3 of our $255 of patient care costs fixed.

So to the extent volume growth comes back or -- obviously, it is starting to a little bit, but normalizes even on this reduced center base, do you feel like you've got plenty of flexibility on the shift structure to add capacities you need to?

Exactly. And it's not true in every market. There can be a market where you'll have to add a clinic. But generally, the economics need work for that.

Just -- and just thinking about long-term patient volume growth, I think you're guiding 1% to 2% for '24.

Correct.

Lower than what we had seen prepandemic, but you still have a thought that maybe that can move higher as mortality normalizes. I'm maybe just looking longer term and thinking, if we look at the prevalent population growth of dialysis patients in the U.S., like it really, kind of law of large numbers, has hit that really since the 70s, since the '80s, since the '90s, into the 2000s. Like I felt like every decade, we've seen same-store growth -- or same-store treatment growth, how we want to describe that sort of stepping lower. But you think what you're doing now is still depressed by the excess mortality trend?

We do. And the reason we get comfort is by looking at the new admit numbers and the new admit growth, new-to-dialysis admits, which is if you want to think about -- use the funnel metaphor, it is what's coming into the top of the funnel. We now feel pretty comfortable having watched that for a few quarters that it's back to pre-COVID growth rates. So if mortality normalizes or -- and there's, I guess, the theoretical possibility that mortality becomes lower than it has historically because of some of the timing impacts associated with COVID mortality, we'd expect to get back to normal or better growth rates.

And the incidents data or new patients on dialysis, that's in your center. So you're saying like your visibility of who's a new star at a dialysis center so you have pretty real-time...

Yes, we have real time on that. The USRDS collects or lagged data, so that's a little harder to work with.

Well, big topic for a brief moment apparently was GLPs.

I heard about that.

It seemed to be, at least in the fall, but not so much anymore. You guys put out some very detailed assumptions around what you thought the impact of GLPs would be and specifically, I think, how sort of narrow the patient population for the FLOW trial is -- was constructed. I guess the question is, is there anything when we get the full readout from FLOW, if those results are significantly better or worse, does that change your thinking? Or is your view is that trial, which is too narrowly defined, to be useful? Because I mean, what we're generally seeing is, yes, there's a cardiovascular benefit that's going to keep patients alive longer, but there's also fewer patients going on dialysis. That seems to be what most of the SGLT2 trials have shown and SELECT kind of implied. And maybe FLOW is going to show that. But I think you've been -- critical isn't the right word, but you think FLOW is pretty narrowly defined or attractive?

Well, I think FLOW is narrowly defined to a pretty small segment of the CKD population. And whether people extrapolate the results from the FLOW trial to a broader set of the CKD population, that's up to clinicians to decide. That said, look, I think we expect the FLOW study to read out positively and that, as you said, fewer patients are going on to ESRD. But that's temporary. They're not avoiding ESRD. They're just delaying it. And our analytics show that the most likely scenario is that the negative impact on our volumes from the delay in patients getting into ESRD will be offset by the positive impact of lower mortality from cardiac issues. And we're as curious as everyone, may be a little bit more, to see what the FLOW study has to say. There's speculation about when that news will be released, but we don't know exactly or what exactly they will release. But I think your point is an important one, that it is a narrow set of the population.

And I would just clarify, we would actually expect a net increase in the number of CKD patients ultimately making it to ESRD. They may progress more slowly due to the impact of GLP-1s, but the cardiovascular mortality benefits should actually allow a greater percentage of CKD patients to survive from CKD Stage 3 through the onset of dialysis.

Right. And then when you walked through that last fall, did you talk about the time line or when you thought -- like how long -- if FLOW isn't going to show that, like how many years long would a trial like that need to be to show that more people ultimately are surviving cardiovascular making to ESRD? Was that part of what you had laid out?

Yes. So we -- if you think about the things we talked about, I think there were things we had more confidence in our ability to model and things we had less confidence. And the thing we were the most confident in our ability to model is the impact on commercial insurance, which we saw as minimal to none. I think the positive impact of cardiac -- of the cardiac implications is probably the thing we have the least visibility in our ability to quantify it. I think the reality of that dynamic feels quite tangible. How to quantify it was hard. The number that I think will probably get the most insight into that was in our analytics was the percentage delay of progression. We talked on the call about if a typical patient is in CKD for 10 years and there's a 25% delay in progression, that would extend the time they'd be on CKD and the delay to ESKD by 2.5 years. I think that number is the one that we might get the most insight on. But again, our assumptions around the delay and the uptake of these drugs were around the whole CKD population.

Got it. Moving to kind of -- this is more of a wildcard topic maybe. But just noticing your leverage ratio is now back down towards your long-term target. And even though you've been growing your margins very nicely in dialysis lately, overall, you've been shrinking the center footprint a little bit. Is there any reason to think DaVita might benefit from diversification? Or do you view -- what you're doing in IKC as the real -- it isn't heavily capital-intensive unless you want to ramp it up and lose money at the [ enrollment ] until it gets to profitability, but it is a CapEx-intensive business. But how are you thinking about just you have that core business, you're now building the risk-bearing business. Is there any other pieces you need? We've seen vertical integration across the entire sector. Are there any pieces you need to make IKC be able to do what it does better, more efficiently, et cetera?

Yes. So I don't think diversification for the sake of diversification is an important aspect of our strategy. I -- my sense in general is companies that make these big diversifying acquisitions, they more often than not don't go well. And what the shareholders in the room, I think, realizes, the shareholders can diversify, they don't need us to diversify. And companies that have even successfully diversified are often then challenged by activists to split up the company to capture the multiple on the one that's more valuable. So I don't see us going in that direction. There are things we see that could potentially add to our ability to deliver higher quality, higher value to our patients, either in fee-for-service or in IKC. And we're certainly willing to invest in innovation. That's why we did this deal -- this partnership with Medtronic that we call Mozarc. It's why we've invested in the IKC business. In terms of that as a meaningful source of capital deployment, it seems unlikely. Is it something -- is it a place where we could deploy a few hundred million dollars over time potentially? But if the question is, are we going to do a multibillion-dollar deal like DMG, I don't see that on the horizon right now.

In the IKC segment, I mean, you have, as I described in my preamble, I mean, $4.5 billion of medical spend that you're managing. So it's not like it's a small piece. But it does sort of -- maybe I'm wrong, you can correct me. It does still feel more like, highlighting probably isn't a fair word, but you're still like -- you're maybe figuring it out. Like -- or maybe it's just prudently not jumping in with both feet too deeply the way some other folks have in the value-based care environment. But if I'm [indiscernible] anything around it that makes sense, what I'm trying to get to is, what do you see the future for that segment? Do you think you can get to a pivot point where you say, we're now ready to grow this much faster than we had originally guided, we're confident in the outcomes that we're achieving, et cetera? Or is it still waiting to see that or demonstrate to yourselves how viable and profitable it could be?

Well, I think we're all in on IKC. We're not just toying around with it. [indiscernible] $100-plus million a year for a few years takes some resolve and some commitment. We've been disciplined in our growth because we were unwilling to -- look, we were in a capital markets environment for a number of years where there were a lot of smaller players in many aspects of value-based care that were growth at all cost. And they're not particularly focused on the bottom line. Certainly see that in some of the stock prices of a bunch of the nondialysis value-based care companies. You all know who I'm talking about. And it's not just one. There are numerous ones, some that are no longer with us, some that are there but trading in low to mid-single digits. And we were careful about that. We were not interested in playing that game. So I think that was a -- that prevented us from growing faster. And it was still relatively early. I think we're at a stage now where we feel good about our capabilities. We've gotten the profitability in 2 of the 3 IKC segments, and that's encouraging for us. And we're ready to grow as rapidly as we think is prudent given what the market opportunities are out there.

And you were asked this question on the fourth quarter call. I just want to revisit it briefly. But obviously, in Medicare broadly and MA specifically, we saw trend accelerating through most of '23 spike almost -- spiking might be the right word to describe the 4Q. And I think it makes a lot of sense that whether it's your SNP population or even just your ESRD MA population, not a population that's going to have the same level of volatility or having elective surgeries, if they'd even be healthy enough to have something like that, et cetera. But I do think that you have a lot of claims lag or some lag in terms of your claims visibility and certainly lag in settlement with the plans on that. So sitting here just a few weeks later, is there anything to amend to that? Any reason to think there could be negative development coming out of the fourth quarter? Or you still feel good about it?

Yes. Look, I think the foundation you paint here, the picture you paint here is quite accurate. That said, we still feel good that this is a different population with different health care needs, different spending patterns, reimbursement, different coding. And nothing we've seen so far would lead us to change any of our thoughts about prior period development relative to what we said on the Q4 call.

Last one for me while we're in sort of the value-based care realm, a lot of ex-DaVita and Fresenius [ alarms ] have gone and started these handful of CKD management companies that are either sort of disease management overlays all the way to actually acquiring nephrology practices to take risk. But the concept that CKD has just been a population that really hasn't had resources devoted to it because all the resources get devoted once people crash and hit in stage. So as you're kind of surveying the environment, do you think anything noteworthy is happening upstream of your clinics that would be impactful?

I'd say, in general, no. I think there are some companies there that are doing in good work, not all of them, though. But their ability to somehow steer patients from one dialysis provider to another, we really haven't seen any real evidence of that. And I think these patients are proving to be challenging to manage. The thing a lot of people don't recognize about CKD patients is we often think of them as chronic kidney disease patients, but they generally or oftentimes don't think of themselves as CKD patients. They think of themselves as diabetics or they think of themselves as a patient with congestive heart failure. And the fact that they have chronic kidney disease that their -- the functioning of their kidneys is declining, their EGFR score is going down, that is not the defining component of their health care. So it makes it a challenging population because they think of themselves in different ways. They've got a lot of comorbidities, and it just makes it a tough population to engage and a tough population to manage.

Yes. Certainly not as defined as your center population. But you're obviously -- are you -- in IKC, are you taking risk with MA plans for folks that are upstream ESRD or only at this point people that are on dialysis?

We do. Across our 3 businesses, we both -- do both CKD and ESKD. We tend to do more ESKD with the MA plans. And many or most of our CKD patients are through CKCC, the Medicare fee-for-service pilot.

Great. Okay. DaVita, thank you very much.

Thank you, Gary.

Thank you.