DaVita Inc. (DVA) Earnings Call Transcript & Summary

Okay. Okay. I think we're ready to go with our next session. We're very pleased to have DaVita with us today, Joel Ackerman, Chief Financial Officer; and Nic Eliason, Group Vice President of Capital Markets, Investor Relations.

So I think we'll just start off. We're 11 months into the year, what would you tell us have been the positive surprises so far? And if there's any areas of challenge you'd point to?

Sure. So thank you, A.J. Thanks for having us, and thank you all for joining us today. So if I were to reflect back on 2024, I'll start with the positives. Revenue per treatment would probably be at the top of the list. It's not a surprising outcome that it's been strong. I think we signaled that at the beginning of the year. And what has been surprising is the efforts we have made around collections and our revenue operations team, which was very deliberate, have delivered even more than we expected. So revenue per treatment has certainly been a highlight so far for the year. The other one I'd point out is probably on the labor side. Last year was a very tough year. We knew or we expected it would improve, and it has improved, probably a bit more than we expected. So I'd call those 2 things out as the positives. And the negative, which should come as no surprise to anyone who follows DaVita, has to be volume. The story coming after COVID has been hard to predict. The good news is we have recovered from the depths of COVID, where we're seeing our volume shrink, call it, 2% a year. We're back in positive territory, but we have not gotten back to the pre-COVID levels. And so I'd say the negatives there are one, that we're not back to where we wanted to be or as far back as we expected, I don't think we ever expected to get fully back to pre-COVID levels this year. And the future outlook is not clear. I wish we could give more confidence in how we think mortality will play out over the next quarter or next year or so. But without an analytic framework to really pressure test that and without any leading indicators, I think we'll know it's improved when it's improved, and we're not going to predict that.

And just -- I've got a variety of things I want to ask about, but just to dwell on that since it is a question we get constantly, and I'm sure you do too. Anything you can say to try to -- why is it happening the way it is? And what -- I mean, we had the discussion about people die and coming out of the pandemic and maybe they're just not here anymore. I don't know if that's it. What would you say?

I don't think it's a problem that -- I don't think the major part of the problem is that people died and they're not here anymore. The major part of the problem is that people continue to pass away at an elevated rate. And I think what we've discovered as we continue to look at this carefully, one is this is not a dialysis issue. This is a U.S. total population issue. And if you were to overlay the mortality curve of our patients on top of the total U.S. mortality curve, while the magnitudes are different, the patterns are the exact same. You'll see it with a little bit of variability, but relatively steady, heading into COVID, a dramatic increase during COVID, and then it has come back down and settled at a level now that is the exact same for our population as it is for the U.S. So I think that takes off the table a lot of questions about, is this somehow related to dialysis or kidney? So that's, I think, relatively clear to us. And what's left really is COVID. And this isn't our speculation alone. We're looking at what other actuarial firms have said and what other insurance firms have said. And the -- I think the #1 hypothesis is there are really 3 components of COVID. One is patients continue to pass away of COVID. We don't hear about it as much, but that -- it remains a source of mortality. Second is that long COVID -- patients who have long COVID are at high risk of mortality than they would have been had they not had long COVID. And third, there was care that was delayed during COVID. And as you would expect, preventive care is there for a reason. And the lack of -- or the lessening of preventive care has led to higher mortality. What we can't do is quantify those things. This data is generally not available. It's not collected in the same way it was collected during COVID. So they're hard to quantify, but that's our hypothesis of what is going on.

And you're back to seeing new to dialysis growing again. And when you drill down on that, are people younger going on dialysis? Is there any other dynamic around that? Or is that pretty much as it's always been?

No, there haven't been any major changes in that. So some of the speculation or questions about what's happening in the CKD population, either as a result of mortality during COVID or more recent speculation about the impact of GLP-1 or SGLT2 inhibitors are having. We're not seeing that. We -- that admit population and the growth there looks like it's very similar to pre-COVID levels. So we feel some of those callouts, we just don't see it in the data.

Okay. Okay. On the revenue per treatment, that's been a bright spot. Obviously, there's some -- well, I should ask you more broadly. What do you think is driving that? And then I'm going to drill down a little bit on the election for that. But can you give us the lay of the land first?

Yes. So I'd call out 3 factors. One is rate increases, which are better than they were pre-COVID, which you would expect given the inflationary environment, the labor environment, our costs are growing quicker. Second is mix. Both our commercial mix and our Medicare Advantage mix have continued to grow, although I would expect the tailwinds from those are likely to moderate considerably. And then the third is just our revenue operations performance. And there are different ways to talk about it and think about it. I think the simplest way is to think of it like bad debt. There are just certain things we build for that we don't collect for, and we've done a better job with our processes and our technologies, gathering the information we need, doing it timely, following up on everything. So we're just collecting more of that revenue.

Okay. You're saying you think it will taper off. What specifically are you thinking about there? Just a law of large numbers and you've had success? There's no other low-hanging fruit or what?

Yes. So on the commercial mix front, we've seen a lot of growth from the exchanges. What happens there remains a question that obviously we and I know many others are looking at carefully. On the MA side, you have to look at the history. Pre-2021, our patients could not enroll in MA. If they had MA, when they were incident to ESRD, they could keep their coverage, but they couldn't enroll. That changed in early 2021, and the result of that has been a huge growth in MA in our population, to the point now we're right on top of the overall MA penetration rate for all of Medicare. And we think those 2 things will move in line going forward. And whether there's some stagnation of that given some of the challenges in the MA market, remains to be seen.

Got you. So on the election, there's definitely a discussion about the exchanges you already alluded to. Given the strength in your revenue per treatment, and one thing you've highlighted is benefit of some growth there. What happens if we lose these enhanced subsidies? Have you been able to do any analysis on that?

Yes. We've done some analytics. There are obviously questions that will lead to the right answer that are out of our hands. I'd say we have -- we learned a lot at the beginning of the COVID pandemic that has strengthened our view that our patients, all else being equal, would like to maintain commercial insurance, and they will do things to maintain that. And using that, we would expect our commercial penetration to go down. We think it would take a little bit of time, wouldn't all happen in year 1. And we -- as we model it out, we think a reasonable scenario would be that we would lose $25 million to $40 million of operating income in each of 2026, 2027 and 2028 before we stabilize into a new normal. So a cumulative OI hit of $75 million to $120 million of OI, if the premium tax credits are completely eliminated. Obviously, it's not a binary situation. There are middle grounds where they could change the cutoff points in some, but not all patients would lose it. But that's our best thinking right now on what could happen.

Okay. There used to be a lot of programs available to help people to sort of when the subsidies go away for premium support and so forth. What are the status of those? And is that a mitigating factor in any way?

Yes. So you're referring to chartable premium assistance, what some people call the AKF, the American Kidney Fund, which is a not-for-profit that supports this. That got a lot of attention going back 2017 for a few years. Ultimately, nothing really has changed about how that works, and charitable premium assistance is still available for patients. And yes, that certainly could be one way they could mitigate the loss of their commercial coverage.

So when you give those figures, are you assuming some benefit from that or some mitigation from that or not really?

There are a lot of different ways patients could mitigate it, but that would certainly be one way that would be part of our calculus.

Okay. The other thing that we hear, and I mean, since you've done the analysis, I mean, I'm not assuming you guys are experts on the exchanges, but I'll ask the question. One of the things that people have hypothesized on the Washington policy front is people will trade down to bronze from silver. Today, most people are buying silver with the enhanced subsidies. If they trade down to bronze, I mean, are you thinking about that? In your reimbursement, my understanding is, yes, you might have a narrow network if you go to bronze, but the reimbursement for the provider sort of stays the same. I want to confirm that to you if that's true, too?

Yes. That's a level of things we haven't gotten into yet. The other question in my mind would be what would happen to max out of pocket? Would that drive more bad debt?

Okay. Okay. Any other questions as we try to wrestle with this exchange that are sort of the open issues in your mind? Obviously, if they do something halfway, where they don't fully eliminate the enhanced subsidies, that could be a mitigating factor. But is there anything else?

That would be the biggest mitigant that I'd think about or just some deal that keeps this in place.

Right, right. Okay. The other thing that we've had is obviously the final rule has come out, and there was an adjustment to the update, but then there's also the phosphate binders are now included. We've been speculating all year about that. Now we actually have something tangible. What's your reaction to it?

Yes. So let's not get ahead of ourselves. We have the final rule, but there is still the potential for legislation at year-end, which would delay the inclusion of orals in the bundle. So I don't think we can yet definitively say this is going to happen in 2025. So that's certainly if you're thinking about the different scenarios that could play out, that's -- you have to include one where this doesn't happen for next year. In terms of the final rule, I'd say the good news is that the ASP plus 0 scenario that some people were speculating about, did not happen. CMS took a slightly more complicated approach than just adding a percentage to ASP. Actually I think what they did was thoughtful. There's no reason that extra cost to the industry should necessarily be completely aligned with ASP. And we were pleased to see that there will be an add-on payment for the costs associated with implementing this. In terms of our overall view, this puts us a little better than where we probably were a couple of weeks ago, but still in the same general vicinity of there's a lot we need to figure out, besides just does this happen? There are a lot of things that will play out as this gets implemented, that will really determine what the overall economics are. But net-net, we think it is a tailwind for the year.

And talk about how to how long it takes to go through the process of understanding what the implications are. So let's assume there is no legislation that puts it on hold. How quick will you realize your full potential benefit from this?

I think it will happen relatively quickly. I don't think there's a huge ramp-up in it. We'll have to see certain things, how are physicians prescribing some things about our cost structure, what percentage of patients actually utilize these drugs. And I would imagine we'll know that relatively quickly next year.

Okay. Okay. It was definitely discussed on the call, the whole issue of what's happening with the supply chain. Access to, I mean, the issues with the Baxter supply and all. What -- any update there? And maybe for someone that missed that, what are you seeing there?

Yes. So there are really 2 issues. They're saline and PD supply, peritoneal dialysis supply. On the saline side, I think we've got that reasonably figured out. It could lead to a little bit of a higher saline expense in the near term, but saline is not a huge component of our cost structure. So I think it's safe to put that off on the side as some small cost impact over the near term. In terms of peritoneal dialysis, the challenge there is really around supply and our ability to start new patients on PD. Our existing PD patients are not going to be impacted by this in any material way. In terms of starting new patients, Baxter, I think their confidence in our ability to start new patients and for that to ramp through the end of the year to get back to, call it, normal by the end of the year, their confidence seems to be growing on that, and they've done a nice job, and I think generally have underpromised and overdelivered on that. So that's kind of the update. In terms of the impact we think it's about a $10 million to $20 million impact for Q4, driven a little bit by supply costs for saline, but more about losing patients on PD and then having lower productive PD nurses, and that could flow through to next year as well. If you've lost these patients, you probably lost them for good, and it will take a little bit of time to build that back up.

Okay. If it hasn't underlying referral sources and things like that, just because you couldn't take that patient and they went and they're being now cared by somebody else, you don't think that's a permanent shift that you got to...

No. I think this is more about individual patients who are really -- who needed to start dialysis now, and were really focused only on PD. Remember, many PD patients have residual renal function, so they can actually push off the start of dialysis a little bit. They have the option of starting in center, which is what -- about half our home patients actually start in center during normal times anyway. So those are 2 options besides going to another provider, another company that has PD supply.

I want to just make sure I dotted the I and crossed the T on the new ESRD rule. So they raised it 50 basis points, the rule, forget the binder stuff, from the original proposal. Is that enough to move the needle for you guys in a meaningful way when you think about headwinds and tailwinds for '25?

More is better, no doubt. Medicare fee-for-service is becoming a smaller and smaller part of our business, right? With the shift to MA, it's now less than half of our Medicare lives. So look, we'll take it, and we remain concerned that Medicare fee-for-service rates are not enough to cover the costs. But no, I don't think -- in the broader picture of our view of 2025, I don't think it swings things much.

It doesn't move the needle much. Just begs the question to me, covering the managed care. As when we started out, there was an assumption that we were going to see the managed care guys, I mean, you're saying your share of the dialysis market is equivalent -- in MA is equivalent to the overall market at this point. That's sort of surprising to me. Are you surprised by that? And why do you think it's played out like that?

Well, I'm not surprised. I think it's played out that way because Medicare patients have spoken. And for all the reasons you know, and you probably know better than I do, they prefer MA than they do Medicare fee-for-service. The other, I think, important dynamic is that given the way reimbursement for ESRD patients, and remember, ESRD patients are paid differently in MA than fee-for-service patients, those are now -- we understand profitable patients for MA insurance companies. So while there was a time where it felt like those were negative -- or MLR greater than 100%, patients, because of how reimbursement has caught up, we think those are now profitable patients.

Interesting. Interesting. So do you think in that regard, we might actually see it accelerated? I mean because I guess, if you've got a population that tends to be below average in income levels, you've got some extra benefits that you get in MA and you've got a maximum amount of pocket I assume that still applies? So I could see that you'd see it significantly higher percentage ultimately end up in MA.

Look, it is certainly possible. And look, these are -- the rates on these patients are very high, right? They're -- these are $100,000 a year patients. So I don't know where typical MA is running, but these are 10x higher. So even if the percent margin is lower, the dollar margin on these patients could be considerably higher. And the patients like the product. I think, some of the challenges that MA players are seeing more broadly are probably playing out differently in our population, right? The new coding, V28, whatever it's called, doesn't apply to our populations, they have different coding scheme, it's obviously a different reimbursement rates and everything else. So it will be interesting to see how plays out.

Are you seeing as they set benefits, I mean there are things you can do to make it more attractive, less attractive to? Are you seeing any movement on the part of MA plans to say where they may be reluctant a few years ago. Now they're saying hey, we are [indiscernible] these patients?

I do not know of any of that.

Okay. Okay. I want to -- obviously, one focus has been the IKC segment. You've said you're on track to deliver the $50 million net loss. It bounces around a lot. So it makes me think I should ask you every time I see you, like you're on track for that. And then maybe give us a sense about how it steps down in the future and your confidence level on that?

Yes. So I'd say you're absolutely right. It has bounced around a lot. It is one number that's actually this year been quite steady. We said negative [ 50 ] going into the year, and that has not changed. As you would imagine, under the covers, things go up and things go down, but they've offset each other, and we feel really good about where we are. So -- and I think that's probably a sign of the business is maturing a little bit and all that. Looking forward, we've talked about 2026 as the breakeven year, and that number hasn't changed in the last 3 or 4 years either. And we continue to feel good about that. The question is what is the margin potential in this business after we've gotten to that point in time and we've hit a level of scale. And that remains to be seen. I think the best indicator for what margins could be in this business would be health plan margins and -- not using our revenue, but our dollars of cost under management because we account for revenue a little bit differently than they do. So low mid-single digits on that, call it, $5 billion today that could grow over time.

And as you get to the point where you're breakeven in that business to move in towards making money, do you have the ability to ramp up the number of patients you're serving? Or are you sort of mitigating that a little bit given that you're running losses at this point?

I don't -- No, we're not mitigating it. When we decided to go all in on IKC, we made the decision, which I think was the right decision with 2020 hindsight was to call out the losses and just deal with it, right? There were certainly alternatives to go a lot slower, to use some sort of black box off-balance sheet financing, and that's really not the way we typically do things. So we thought it was the right decision for the long term. We called it out. In terms of volume growth, sure, we think there are opportunities. It will depend on what happens with the CKCC program. It could happen, what happens with MA. There's certainly a competitive dynamic that will drive it as well. But I wouldn't say we've been going slow because we didn't want to absorb losses.

Okay. Okay. And I think there's also been some discussion about -- we've had some discussion recently about HDF. And obviously, there's a Fresenius study out there showing quite a bit of movement. It's not available in the U.S., but could be. What would something like that mean?

Yes. So there's a lot of interesting stuff about HDF. There's the CONVINCE trial that you mentioned. And this is not a new technology to us. We use it in a number of countries across the world, somewhere it's largely standard of care. And we're excited about the potential opportunity, but we've got a lot of questions. The most exciting part is the potential for lowering mortality and the positive impact that would have on our patients, and ultimately, our volumes. And then the questions would be about the impact on reimbursement and on cost. So a lot to learn. This isn't a 2025 event. I think Fresenius has said, it will become commercially available towards the end of the year, but not more broadly available till 2026. And we're excited to learn more.

Okay. And so it gets approved, what would be -- I mean, you need clarity from the payers about and the government about how you get reimbursed or what is...

First, we need clarity from physicians. Because ultimately, it's the physicians who will refer this. They write the script for dialysis, and they'll be the ones who decide whether it's traditional hemodialysis or HDF. And then along with that, and that's -- the physicians don't vote as a body, right? It's one by one. And then along with that, there will be questions about reimbursement cost, there are operational questions about how do you implement this? So there's a lot to be done. That said, I feel really good about DaVita's capabilities around all these dimensions. And if you think about changes that have happened in the industries, drugs is probably the best example. First calcimimetics and now orals in the bundle. DaVita does an amazing job of doing what's right for the patients, working with our physicians, operationalizing things and figuring out how to make the economics work.

No, that makes sense. You've seen some deals announced this year, including an international one that I guess you're still -- I guess, I should ask it for an update on the closing?

Yes. No, we're still -- we've closed 2 markets, we're working on 2 others.

Right, how about just some comments on the pipeline and what do you see out there?

Yes. So look, I like this deal a lot. And I'm excited about our opportunity to deploy capital for growth with high returns on capital. And I spend a lot of time talking about capital-efficient growth. Everyone I interact with at DaVita knows, that's kind of -- it's going to come out of my mouth sometime soon unless they say it first. And we hold international to the same standards that we hold the U.S. So I'm excited about this transaction in terms of delivering on capital-efficient growth. There are -- we continue to look across the world. We're pretty disciplined about what markets we're going to go into. We have to be able to deliver clinical excellence. We're looking for low risk from fraud and abuse and those issues. It has to hit a level of scale that it's worth our time, and we need a good entry point in terms of the price we're paying. So I would not call this out as the start of a new trend. I wouldn't have anyone expect that we're going to start deploying $300 million of capital internationally every year. That said, if I found another one tomorrow, I'd do it in a heartbeat.

Does the -- I don't think it necessarily does, but I'm going to ask the question anyway. With the Trump administration coming in, there's an opening up of M&A opportunities, presumably out there, at least relative to the FTC that we've been operating under. Does that mean anything for you guys, do you think?

On the margin, yes, I mean, there are FTC issues around noncompetes and on the labor side that I think would benefit us relative to the trajectory the FTC was probably on. On the M&A side, probably less so. We would love to do small tuck-in acquisitions and maybe those get marginally easier, but it's not a big driver of our economics. And anything big that we would want to do, I would probably not have gotten to a scale even in the current administration, that where they would somehow have gotten concerned.

Right. And just I should double back on your comments about labor. It's been a positive and you said even maybe a little bit of an upside. When you look ahead in the next year, are we at equilibrium at this point in your mind? Or is there any more opportunities there?

I don't think we're at equilibrium if you define equilibrium as pre-COVID level. I think there's a fair question of are we ever getting back to pre-COVID levels. We have a lot of debate internally on every metric, whether we should stop talking about pre-COVID levels. It's like, enough already. We're in a new world. It's like talking about high school basketball, right? I'm 59 years old, it's time to move on. So that said, labor rates are still elevated, although we would anticipate them coming down again next year, and turnover remains elevated. And that impacts us on higher training costs. So those would be the 2 opportunities I would call out if the labor market continues to improve for us to see some mitigation on some of the higher cost increases that we're seeing.

Why do you think the turnover rate is still elevated, that sort of strikes me.

I think the labor market within health care is stronger than it is across the U.S. So that's probably the #1 thing I'd point to.

So it's not they are leaving the profession or something, they're just having other opportunities there?

Yes. This is more -- this is less about nurses, and more about patient care technicians.

I got you. I got you. You reinstituted the share repurchase program last fall a year ago at this point, and you've been very active. Give us an update on your thinking about that, how we should think about that as we look ahead?

So look, I'm happy to say there is no update. Our philosophy has not changed. It's been quite durable for whatever it's been 6 years now, where we focus on deploying capital for growth in a risk-adjusted high return on capital way, and we're quite disciplined about that. And when we can't find ways to deploy capital for that, we return it to the shareholders through share buybacks. Our leverage level of 3x to 3.5x has not changed as a target. We do go above and below that at times, but that remains our target. And we -- I think we'll just continue to use those principles, keeping an eye on intrinsic value, keeping an eye on liquidity. But from a liquidity standpoint, we're in a good spot. From a leverage level, we're at a good spot. So no change in our philosophy.

And I know you approached us a little bit on the Q3 call, but I'll ask it again and if there's any expansion you want to give? When you think about puts and takes for '25 and how -- what we should be focused on, give us a little bit of that here.

So we called out a few headwinds and tailwinds. And on the headwind side, we -- volume is certainly a headwind and Baxter is a headwind. On the tailwind side, we called out orals in the bundle, the clinic closure costs are coming down and I'm looking to Logan to remind me of the third -- and international, the Latin American acquisition. And while it's too early to quantify each of those individually, we think as a group, those -- based on our current thinking today, those should net out to about 0. So a stalemate between the headwinds and the tailwinds. And then leaving all that aside, we would expect next year to get back to a more normal growth level. If you step back, we've been through 3 unusual years. 2022 was a very tough year for us, with volume way down and the labor pressure really peaking. And then '23 and '24 have been very strong recovery years, with OI growth of 20-ish percent in both years. And we're not going to -- we do not expect to drive OI growth of 20-ish percent again in this year, adjusted OI growth, I should say. And so for that reason, we think kind of back to normal levels. And -- so that's kind of how we're thinking about it.

No, that's great. That's great. Well, again, I really appreciate you guys participating in the conference this year. Next up in this room will be Standard BioTools. And thanks, everybody, for...

Thank you, A.J., and thanks, everyone.