DaVita Inc. (DVA) Earnings Call Transcript & Summary

Good morning. Welcome back to day 2 of the Barclays Global Healthcare Conference. My name is Andrew Mok. I'm the managed care and facilities analyst here at Barclays. And running me on stage is Joel Ackerman, CFO; and Nic Eliason, Group Vice President.

Morning Andrew, thanks for having us.

Thanks for joining. Maybe just start -- we'll start with [ 2022 ] operating performance, which was pretty remarkable following a challenging 2022. Can you speak to the underlying performance drivers that led to your impressive [ turn ] around with respect to admissions growth, mortality, labor, things of that nature? And which areas do you expect [ just to ] continue improvement [ this year?]

Sure. Yes so '23 was , as you said, it was a great year, but coming off a very tough 2022. And from our standpoint, we think it demonstrates the resilience of the business. In terms of performance, I really bifurcated into 2 pieces. One is environmental things that happened outside of DaVita that impacted the results and [ sniffing is ] what we did. So environmentally, nearly the volume was helped by continued decline in mortality, and we expect that to continue in 2024, and then the labor environment improved. We saw that mostly in the reduction of contract label, you called out some other challenges in 2022, especially related to turnover has it's impact on productivity, primarily through training [ and think ] that could be improved in 2023. And we're not really relying on that 2023 [indiscernible]. So the productivity challenges continue. So that's what I'd point to environmentally. In terms of what we did, really 3 things. One was on revenue operations. We invested a lot in people, the process and technology continue to drive better revenue operation that leads to better billing and better collection in terms of our yield, which impacts revenue per treatment as well as the timeliness of collections, which ultimately impacts our days sales [ and ] outstandings. So drawing improvement on both of those in 2023. For 2024, I'd say we're expecting continued improvement on that on the RPT line, and a lot of that is really just the annualization of what we saw come through over the course of 2023. On the DSO side, I don't expect a huge improvement the way we saw in 2023. So that's revenue operation. Second would be on pharmaceutical costs. We switched from [indiscernible]. I think we've called this out in advance. And to me, this is kind of part of a broader pattern of what DaVita can do as a scale provider with national footprint, and our ability to manage pharmaceutical in a way that really both help our patients, help our physicians and can help our shareholders, frankly. And we've seen that in numerous cases. We've seen that with [indiscernible] and over the better part of a decade. We [indiscernible] were introduced to the bundle and we saw it here with MIRCERA. And the final 1 would be in terms of our center footprint. We lost roughly 10% of our patients as a result of COVID. There's nothing unique to DaVita, it is an industry phenomenon. But as you would imagine, that resulted in our capacity utilization going down, we thought it was important to address that. So we closed a couple of hundred centers and, ultimately, that shows up an improvement in fixed cost leverage. So those are the things I would highlight that really drove the 23 performance and how we play through it in '24.

Great. And I want to go further on each 1 of those points a little bit. Maybe to start on revenue, what specifically prompted those revenue and it's just to begin with. Can you help us understand what drove that and it seems like this [ now year 2 ] of a multiyear potential tailwind here? How much room is there to grow?

Yes. So I'd say rooted in a strong culture of continuous improvement and the recognition that -- I think one of the things that has made DaVita great over 20 years, is our [ outbring ] excellent. And A lot of people see that's all the cost cutting. And I think the reality is that it played through in other areas, and this is a great [ example ] to that. In terms of what specifically drove it, the biggest factor was the growth of Medicare Advantage. When a patient moves for Medicare fee-for-service to Medicare Advantage, they're effectively moving from the easiest payer to collect, which is Medicare fee-for-service, that's a huge bolus of patients with really 1 set of rules to Medicare Advantage, which I think you could say is our hardest payer class. They look a lot like commercial in terms of the complexity of the [ increment ] needed and the diversity and they tend to move around more in commercial patients. So that growth, and if you think about it using very rough numbers a few years ago, less than 1/4 of our Medicare patients were [ at ] Medicare Advantage and now it's more than half. So recognizing that growth we decided we needed to invest in that area.

Great. And I think on the fixed cost leverage, I think [ of that's ] a point that maybe a lot of investors underappreciated throughout [ 2022 ], particularly as you optimize the clinic footprint. When you do close clinics, what's your typical patient retention look like? Can you walk us through some of those dynamics?

Sure. So I think you have to look at 2 different types of situations. One is an urban environment where closing a center is really largely about consolidating a center into 1 or 2 year by clinics. And in those instances, contain virtually all of the patients and the providers and the teammates. So that's 1 area. And in terms of patient retention, it's pretty close to 100% there. The other situation is a more rural environment where we do not have a clinic nearby and those oftentimes are closed, not because of financial reasons, but really for clinical [indiscernible] issues of clinical safety. People forget that staffing both at the nurse and the patient care technician and from a medical [ director ] coverage standpoint is not only a cost issue, but it's a patient safety issue. And if we're in a rural environment where we [ can't staff a ] clinic, sometimes we just closed it. And in those instances, our patient retention numbers are pretty low.

And if we translate this into a financial perspective and [ that helps ] understand the fixed and variable costs of this.

Sure. We are at the center level -- so this ignores anything at corporate, but at the center level, it's about 2/3 variable and 1/3 fixed. The variable is dominated by labor and drugs and supplies. And then the fixed costs or everything you'd imagine, rent, insurance, medical director fees, things like that.

Great. And going back to the switch from EcoGen to MIRCERA, can you help us understand how that transition unfolded versus your expectations throughout 2023 from both a timing and clinical perspective?

Sure. So it was well planned. [ The field ] does an amazing job of working with physicians because ultimately, DaVita doesn't prescribe drugs, it's nephrologists -- the patient's nephrologist who are not employed by us who prescribe the drug. And I'd say it went out pretty much as planned, both financially and clinically, we do it region by region [ with ] not all done at once, and it's just, I'd say, a good practice around change management is what's so much of the challenges here. But from a clinical standpoint, there were really no problems that I've heard of. And financially, it rolled out kind of through the year as expected.

And was it complete by the end of the year?

Was largely complete. There's a little bit of anniversarying that we'll see in 2024, maybe [ $20 million ] of benefit from that. But but that's really just caused laid out over the course of the year.

And in addition to that dollar cost benefit, is there also a productivity benefit that comes from switching to a long-acting ESA?

I would not expect to see that. There's a -- there're a fixed number of people in the clinic, and you really have to make a step function change in productivity in order to really eliminate teammates as a result of that. So I wouldn't build any of that into a model.

Understood. Last week, I think you announced [ 4 ] recent acquisitions in Latin America. Can you give us a quick overview of those transactions?

Sure. So stepping back, our International business have not gotten a lot of [ attention ] I'd say, over the last 5 years since we hit breakeven which I think was 5 years ago, maybe 6 years ago. And it's been a nice steady contributor for us. [ It drives, ] both organic and inorganic growth, and it's been relatively steady, $10 million to $15 million OI growth every year. Those numbers vary a little bit. And it's an area we like. It's what we continue to invest in. We've been reasonably selective about which markets we want to be in. We're -- before this announcement we were in 11 countries outside the U.S. with a lot of diversity in terms of the nature of each of those markets. And we like the team. We like our performance. We like the opportunity to invest capital there at good rates of return. And everything that I've ever said about capital [ efficient ] growth and all of our guardrails around capital discipline apply outside the U.S. just as much as they do in the U.S. So with that as a foundation, we've been in Latin America for a while. Brazil was 1 of our larger growth markets. We've also got a strong presence in Colombia. We saw an opportunity to get into 2 new countries as well as build our capabilities in both Brazil and Colombia, and we liked the deal. These were quality clinics, well run, and so our expectation is we will see synergy, but that's largely at the G&A level rather than some sort of view that we can necessarily grow -- run these better than the seller did.

Right. And to your point, it's been somewhat quiet from your end on the international market. Why the investment now? And is this an area which would see continued investment?

Yes. We've been investing in it all along. We haven't done a single transaction of this scale. So we've been deploying capital there. This one happened [ from ] about at a good time for us. So I don't view it as somehow we're changing our posture on international. Just as I've learned from my career, when you're disciplined on M&A, there can be long dry spells and then something interesting can come along, and that's really what happened here. I think we will continue to invest in international, but I wouldn't view this as some sort of a turning point where all of a sudden we're going to start deploying significantly more capital internationally year after year after year. We'll continue to -- like international, we'll continue to invest there. I continue to perform organic growth to inorganic growth because of the capital efficiency. And if we see attractive assets come up [indiscernible], we'll certainly go after them.

Great. The other big piece of news that came out last week was NOVOS headline results from the FLOW trial. My initial take is that the demonstrated reduction in CKD progression with at or below the base case assumptions you laid out a few months ago. What was your reaction to take away from these headlines results?

Yes. So I think headline is the right way to. characterize the results. That's really all we got was a headline. There's a lot of detail behind this [ 24% ] number that we're curious to see. That said, the results were -- did not contradict our views, and I use those words carefully I didn't say they support our views because they were so high level. And just to be clear, when we talked on our Q3 earnings call about a 25% delay in progression, that was a number we plugged into our analytics to make sure investors understood how the math works and how we think about it. And that 25% number is different than this 24% number. The 24% number that they announced is not a percent delay in CKD progression. It was the percentage of the patients in the trial who met 1 of the 5 endpoints. And 1 of those or some of those endpoints are good surrogates for delay in [ the CKD ] progression, others are very different, in particular, the 1 that shows lower mortality. And so if you think about how this 24% number plays into a model, if you're trying to build up the impact of FLOW and the GLP-1s on volume, some of these endpoints likely the delay in CKD progression would be great for patients and lower ESKD utilization. Others like delay in mortality would also be great for patients, but they would actually drive utilization up because there are many more patients with CKD who are passing away with cardiac issues and those would ultimately progress with ESKD if [ it lived ] longer than there are those who are actually progressed [ ESKD ]. So the 24% number is [indiscernible] line. It's Frankly hard to figure out how to use that [indiscernible] model. None of our views have changed, and we continue to view the data as we'll learn more about, but also doesn't appear [ in a vacuum ]. These drugs are well studied, and we continue to believe these drugs are great for patients and the ultimate impact on our volume is likely to be small.

Great. Maybe going back to your 2024 guidance for a minute. I just want to understand the key variables of treatment growth in the 1% to 2% [ treatment ] growth embedded in the guide. How are things [ trended with ] mortality mistreatments variation. [ Do you expect to see like -- what's going to drive upside to treatment growth?]

Yes. So these treatments could drive upside, although that would be a onetime thing. We don't expect [ mistreatment ] to continue to decline below where they were at the pre-COVID level. In terms of mortality, it's -- there's a lot we still need to learn about what's driving excess mortality today. It is -- it's a phenomenon that I think is being seen across the population not exclusively to DaVita or exclusively to dialysis patients. I think there's a lot more data to really understand what that is. Is it endemic COVID that likely to feel like a bad flu season for many more years? Are there other factors like mistreatments that were related to COVID, but were likely [ to work through ]? Are there other changes in how people's behavior that need to [ more ] is or overdoses or something else. So I think we're waiting to understand that. I think mortality could be a driver of where we fall in that range or if we fall outside that range. So we are keeping a very, very careful eye on how [ more ] mortality progresses.

Can you share on where mortality is today, and maybe how it's trended?

Yes. It's -- I don't think we have a lot of updates since the Q4 call. It has trended down since the peak. It is slightly above where it was pre-COVID. But I think it's important to realize the range pre-COVID, you can see a pretty good correlation between good flu years and bad flu years associated with the mortality in our population. So I think you have to really have to think about this as a range rather than comparing it to a point estimate, and it's slightly above the high end of the range.

Understood. I think last we spoke, you were still waiting on 2022 performance data from CMS on the CKCC program. Has that data come in? And if so, do you have any initial impressions to share?

Yes. The data has not come in. [indiscernible] has been a bit late in getting that to us. It has nothing to do with DaVita [indiscernible] let everyone know at the same period of time. So we're still waiting on that. That said, we continue to be excited about [ IKC. ] We're making a lot of progress in there, along the 3 dimensions that we're focused on, which is; one, is growing the program, adding patient medical cost dollars under management. We still have have growth well in 2023, and we're expecting continued growth in 2024. [indiscernible] is the net savings rate. Ultimately, we need to drive hot value, which is higher quality care to patients at lower cost. I mean that's something that we deliver in partnership with nephrologists, and we share some of those savings with our nephrology partners as well as with the payers, and that's why we refer to it as net savings. The savings that comes to DaVita after achieving [ your ] reductions and then sharing with our partners. And finally is the cost of delivering care. And we see that continuing to scale. When we talked about a 15% reduction in our cost is really that line item on a [ PMPM ] basis that we're expecting in 2024. So overall, IKC as a business is maturing, but it's still early. We're seeing good progress, and there's a lot to learn. And as you pointed out, [ CKCD ] is probably the area where we have most to learn. It represents the biggest [ poll ] of our patients. So we are anxiously awaiting the results from CMS.

Great. And last topic I don't want to -- make sure we've got time to cover [ is patient health care ]. It's been on a lot of people's minds this week. How is DaVita affected by the disruption here? And what are your impressions of some of the plans to address this?

Yes. So we are absolutely affected. We use change for the vast majority of our claims. I'd say -- I spoke about this last week. There's not a lot to update on. We are focused, as you would expect, on ensuring we can file a claim. We have -- we are as I think the rest of the provider community is watching carefully what change in United announces about this. And there's certainly been a good news about the timing of that over the last week. So that's been positive. We have lined up alternative ways to submit claims, and some of that is direct. So Medicare fee-for-service is the best example of that, and we've [indiscernible] all our clients directly through them and then other exchanges available to us. So overall, it is a challenging situation for us. We feel like we've got good alternatives, and we can manage the -- what really is the big question to the timing of how all this plays out.

Right. Can you share what's your completion rate on claims submissions?

I'm not sure what you mean by that.

The percentage of claims that you're able to submit those that you're incurring.

I would say, right now, we are -- I will put it as a percentage of revenue. About half our revenue is covered today the other half would be dependent on either change or the alternative [ vendor that we've got ].

Understood. And after an event like this, how does that [ shape ] your way of thinking about vendor concentration risk, things like that? Do you reevaluate [ your? ]

So the answer is absolutely. And it's not just in the claims submission area, you just have to learn from an area like this and think about enterprise risk across every area and anywhere we have vendor concentration. It also, as you would expect, makes us think about liquidity, ensuring that we've got sufficient liquidity to cover areas like this and contingency plans around liquidity to make sure we're being prudent as [ elective ] top-up?

Great. With that, we're just about out of time. So why don't we wrap it there. Joel, Nic, thank you so much for joining, and please enjoy the rest of the conference.

Great. thank you, Andrew. Thanks, everyone.