DaVita Inc. (DVA) Earnings Call Transcript & Summary

Great. I want to thank everyone for joining us here as we wrap up day 1 of the conference. It's my pleasure to be introducing DaVita. DaVita is one of the largest providers of dialysis services in the world. Presenting today, we have Joel Ackerman, who's the CFO. We also have Logan Dunn and Nic Eliason in the audience. So why don't we just jump right in unless there's anything you want to start with.

No.

All right. Perfect.

Go ahead.

So I guess, one of the things that at least we've been focused on. I think the market has been broadly too, is just about volume growth, right? Because I think that the growth algorithm that you guys have outlined is a lot easier to understand when you're growing volumes 2%. So when we think about where you've been during COVID, entering COVID. For the first, I don't know, it was 12 or 13 years that I covered DaVita, the volume growth was consistently 4%. And then it kind of moved down to 2%, right, heading into COVID and that has been negative during COVID has started to come back up. Where do you think the right growth rate is for DaVita? And what -- when do you think we'll actually kind of get back to that normalized number?

Sure. So you're absolutely right, heading into COVID, the number was kind of 2-ish. And we think we can get back to that number. It had come down from the 4% number, which benefited from many years of the industry delivering better mortality, but mortality flattened out. And this had nothing to do with COVID. This was just pre-COVID. And then as you said, mortality was high during COVID, and that led to all the dynamics you mentioned. We're -- we guided for the year to 1% to 2%, which is a lot better than the negative 2% we were seeing during COVID and better than the 0% from last year. It -- the dynamic we're seeing now has been similar for a number of quarters now, which is our new to treatment dialysis growth is back to pre-COVID levels, and we feel good about that. We've seen it over a number of quarters, and we feel good about that trend. Mortality has improved significantly from the peak of COVID, but it is not back yet to the range we saw pre-COVID. And I think it's important for everyone to appreciate the fact that mortality pre-COVID varied from year to year due to flu and other fluctuations but we're not back to that range yet. And we think until mortality normalizes, it will be hard to get back to that 2-ish percent growth rate.

And I guess, is there a reason why you would think that mortality would still be elevated this far kind of post removed COVID. Is it something specific within your population? Or is it something more broad that you're seeing?

I think the data we see shows it being broader than just the dialysis impact. I don't think we have great analytics to really explain what's going on. And for that reason, it's harder to forecast it and harder to give a time line for when we think it can get back to normal.

So when you say that the new dialysis treatments are kind of back to pre-COVID levels, are you saying that on like an absolute basis? Because I guess in theory, like you would have thought that over 5 years, there should be a higher absolute number of back in 2024 than there would be in 2019. Is it back to 2019 levels? Or is it back to where 2019 trend line would have kind of pointed to by now?

No. I mean the year-over-year growth is back to pre-COVID levels. I'm trying to remember the graphs that I've had put in front of me so many times to answer that question. I'm not confident enough in the answer to give you an answer on that one.

I'll be happy if you presented those graphs to me at some point in the coming weeks, that will be good to see. Yes. So I guess -- so you're confident that because the beginning of the funnel is there, mortality just has to normalize at some point and therefore, that's -- because I guess, I think...

I wouldn't say mortality has to normalize, right? There is -- you hear people talk about COVID becoming endemic, right? It feels day-to-day like COVID is gone, but it's not gone. And if COVID becomes endemic, you'd effectively be in a scenario where the flu season would be worse than normal. It would remain variable, but it would be really the flu plus the COVID season, and that could persist for some period of time. And so I don't think we know enough to really know exactly how that's going to play out. And nor are we saying we have enough visibility to know exactly what's going to happen to mortality.

Is there anything about the age of your population? Like has that changed at all? Will you say, "Well, actually, pre-COVID the average age was 66 and today at 70 and then I would say...

We don't think there's any impact. If anything, COVID would have gone the other direction, the older patients would have died a little quicker, you'd have a younger population but we don't see that dynamic either. So we're -- look, we've spent a lot of time looking at it. There are a lot of people out there speculating whether it's fentanyl overdoses or people driving systematically faster than they used to. They're just -- it seems to be societal rather than something that to do with dialysis, and we don't -- we can't explain it.

Yes, because obviously, the market concern, at least for a period -- a short period of time was that GLP-1s were kind of the issue here. And that might have pushed up the average age of people who are slowing in and then coming in. Because I think that slowdown in volumes, although it seems like you've got better data but I think we often do from the outside about new starts versus mortality, certainly on a real-time basis. But the slowdown in volume from 4 to 2 kind of coincided with the rise of GLP-1s and SLGT2s and so like it's hard from the outside looking in, but there's nothing that you can see right now that says that, that would be really having any kind of impact on volumes?

No. We -- look, we laid out our analysis on GLP-1s in a lot of detail. I think we've got a lot of confidence that they are not playing into our volume number now nor do we expect them to play into them in the short term or the medium term or the long term for that matter. So we don't think it's that. I mean there are all sorts of theories. It was bad. It was changes in how kidney patients were being managed. We don't see any of that either. So -- and the fact that the top of the funnel remains robust, gives us a lot of confidence that it's really not that. And mortality is something that's relatively easy to measure. We can't necessarily measure it in real time. But with a few month lag, we can measure it. And so we can see that, that remains elevated.

Okay. And then, so I guess, kind of moving to the other part of the revenue build up rates. So what's the commercial environment like now? Again, another concern that was out there for a while, but it seems like it kind of died down was Marietta and commercial rates. Is there any updates on that?

I think rate increases continue to benefit from the inflationary environment. So they are better than they were a few years ago. There's really nothing new to say about Marietta. We continue to watch to see if there's any growth in discriminatory plan design, and we're just not seeing it. So Marietta is not impacting our rates. I think the real news on our rates over the last year or so is really what we've been able to accomplish in terms of our revenue operations and the revenue per treatment growth last year north of 3%. And this year, we're guiding to about 3% is really -- the biggest change there is what we've been able to do in improving our revenue operations, improving our collections, bringing down our bad debt and driving revenue per treatment there without needing higher prices or higher mix. And I think it's a great example of DaVita's operational excellence. We are very much an operator-driven culture. And many people were concerned that, that was all about price cutting. And I think our ability to deliver quality care with lower prices is certainly something that we do well but this has shown there are other ways to drive margin and drive profit growth without just cost cutting.

And can you talk a little bit about that rev cycle management pickup? It sounds like it's 100 basis points or so. Like is that -- should we be thinking about that as all margin? Like is that like...

Yes.

A big part of -- oh, that's a big part of your OI growth this year is that extra 100 basis points kind of...

It is an important piece of it. I mean it's -- there's a little bit of increased SG&A that goes against that, but it's basically all margin, yes.

Yes. Okay. But I guess one of the things I kind of struggle with, with you guys is that you guys have laid out a long-term growth trajectory where it's like, okay, it's 2% volume and then rate updates should be a little bit less than your cost growth and then it's kind of up to you to figure out how to make that all work.

That is a fair characterization there, business situation.

Yes. But you guys always seem to find something to make it work. And so this is just one more example, I guess, of that. Is there anything else on the revenue side like that we kind of say -- because a lot of the things that have happened in the past have been on the cost side. Anything else on the road check going forward?

No. I think this is really the big one, and we'll always be looking for more opportunities in the revenue cycle side. But we're not out of ideas. I think there continues to be a good list of opportunities to go after to continue to bridge that gap for many years to come.

I guess from an M&A perspective, that's been a nice tailwind over the last few years as that penetration has gone up. I mean are we at a normalization there? Or is there an opportunity for that to kind of keep going and adding to the rates?

I think we're at a normalization in terms of the growth rate. We saw accelerated growth through '21 and '22 really a little bit in '23. I think the MA penetration will continue to grow -- will continue to grow at the market rate, but I don't think it's going to grow at the accelerated rate we saw over the last few years.

Okay. And I guess there's been a lot of pressure within the MA side of things on the health plan side. Is there any flow-through or read through into you and the kind of rates that you'll be receiving from them or how they might try to negotiate with you or you get worried that when they see cost pressure, they just go after providers to offset it?

We haven't seen any yet. I'd say the negotiations with MA plans and the commercial plans has always been as their former CEO used to say, a full contact sport. So it wasn't easy before, and we're worried it's going to get hard. It was hard before. On the MA patients, there's been a lot of rate improvements for the ESRD patients in MA over the last few years. So if you turn the clock back a few years, you would have heard payers complaining that these were loss-making patients. They ran with MLRs in the 110%, 120% range. That period is over. I think these are profitable patients for them that have a very different dynamic than their -- the rest of their MA book. The coding is different. The rate increases are different and the cost trends are different. So our -- what we're seeing now is that they're treated a little bit differently and we're not feeling that push-through of rate pressure that the MA plans are feeling on their non-ESRD book.

Okay. And so I guess since it sounds like some of the better rate capture outside their RCM improvements is because the inflation backdrop is also higher. How do you solve that delta between where the rate growth is and where your cost growth is, which seems to be coming in a little bit higher. So no shortage of ideas, but what are some of those ideas to kind of...

So capacity utilization is certainly high on the list. We've closed a lot of clinics as a result of the mortality from COVID and we'll continue that this year. And then we see a path to growing capacity utilization by growing volume without opening net new clinics or opening net new clinics fewer than the volume. And there's a lot of flow through to margin of adding patients without adding clinics. About 2/3 of our clinic cost is variable, roughly 1/3 is fixed. So if you're not adding that 1/3, you get a lot of margin flow-through. So that would be one. We see opportunities on productivity, in particular, around training during COVID. Our turnover went up among our teammates, and it has remained elevated, and that leads to significantly higher training costs because as you're turning teammates, you need to train more teammates. We see an opportunity to bring that down as the labor market improves, so that would be another one. IKC will be another area of OI growth. International is growing faster. We just did an acquisition there that should accelerate that as well. And then there are all sorts of others. We still see opportunity in pharma. We've invested a lot in IT. We see that as an opportunity to continue to drive some of our other costs down. So no shortage of ideas.

Okay. So maybe go back to some of these things. The capacity utilization side of it, where is capacity utilization today? And where can that be?

Sure. So today, it's at about 58%. It peaked at roughly 65%, and we measure capacity, assuming a 6 shift per clinic. And it's hard to get too high because then you have patients dialyzing on unfavorable shifts, and the likely answer in those scenarios is someone will build a new clinic to accommodate them. We -- so the question is, can we get back to 65%. I think it will remain to be seen what volume growth is, what happens with competition in them closing clinics or building clinics, home penetration plays into that number a bit as well. So I think we can certainly get back into the 60s. I think it will take a little bit of time but as we talked before, there's a lot of margin flow-through from each point of that.

Okay. And then when you talk about that, is there also a home health dynamic of that approved or you're just really talking about the physical plant capacity because I guess capacity could be almost infinite if you do home health, right? Or...