DVA – DaVita HealthCare Partners

[DooDiligence]

So how does divination become more profitable over time if market share is purposefully kept steady? More patients? Raise prices on commercial only patients?

 

For that we'd need to hear from the divine master WEB (and/or his foil "the West Coast Philosopher")

 

Why do you keep referencing Buffett with respect to the DVA investment?  It is very well known that this is Weschler's investment.

 

Whatever (you don't think he was in on any discussions?)

[rb]

So how does divination become more profitable over time if market share is purposefully kept steady? More patients? Raise prices on commercial only patients?

 

For that we'd need to hear from the divine master WEB (and/or his foil "the West Coast Philosopher")

 

Why do you keep referencing Buffett with respect to the DVA investment?  It is very well known that this is Weschler's investment.

 

Whatever (you don't think he was in on any discussions?)

No I don't. DVA was ported over from Peninsula.

[DooDiligence]

So how does divination become more profitable over time if market share is purposefully kept steady? More patients? Raise prices on commercial only patients?

 

For that we'd need to hear from the divine master WEB (and/or his foil "the West Coast Philosopher")

 

Why do you keep referencing Buffett with respect to the DVA investment?  It is very well known that this is Weschler's investment.

 

Whatever (you don't think he was in on any discussions?)

No I don't. DVA was ported over from Peninsula.

 

Awesome; so that means a guy I greatly admire had nothing to do with buying into a company I never even put on a watchlist (yay!)

[flesh]

So how does divination become more profitable over time if market share is purposefully kept steady? More patients? Raise prices on commercial only patients?

 

Demographics.

 

Plus, Dialysis patients are living longer. Also, more older patients (baby boomers) are suffering from ESRD than before. The 70-75 category is growing fastest in % terms. If this trend continues, this could be meaningful combined with growing life expectancy's. 

 

 

 

 

 

 

 

 

[rb]

Awesome; so that means a guy I greatly admire had nothing to do with buying into a company I never even put on a watchlist (yay!)

And that would be your 8th irrelevant post on the DaVita. If you're not interested in DVA and don't have anything to add why are you on this thread?

 

You may be looking to boost your post count, but the rest of us are actually interested in the subject.

[flesh]

Found this interesting at the end of the press release.

 

[1] Individual market plans include both on-exchange and off-exchange plans (collectively "ACA Plans").  On-exchange plans, often referred to as "Marketplace plans," are purchased through the federal or state program and allow individuals to seek premium tax credits.  Off-exchange plans are purchased directly from the issuers.  Both impact the same risk pool and, as a result, the information provided here refers to both on-exchange and off-exchange plans.

[2] CMS's RFI and accompanying letter to dialysis facilities erroneously implied that it is unlawful to enroll a Medicaid beneficiary in an ACA Plan, citing to Social Security Act Section 1882(d)(3)(i)(II) in its letter to dialysis facilities. In fact, that statute prohibits someone from selling a Medicare beneficiary unnecessary Medicare supplemental insurance that merely duplicates their existing coverage, and is inapplicable to this situation.  Further, Medicaid benefits are often limited; an ACA Plan is not merely duplicative of Medicaid; and CMS itself has repeatedly recognized that Medicaid beneficiaries are eligible to enroll in an ACA Plan, just not eligible for federal premium tax credits or federal subsidies. https://www.cms.gov/CCIIO/Programs-and-Initiatives/Health-Insurance-Marketplaces/Downloads/Complex-Sits-Webinar-FINAL.pdf 3/20/2016, page 26; https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/Downloads/PDM-Round-3-FAQ-8-1-16.pdf.

[frankhkii]

Flesh,

 

How do you think about and price in future settlement charges and loss accruals? Might it be a cost of business going forward? If we model in the $230mm hit from the release and the 5 year avg settlement charge ~$200mm it starts to look a lot less attractive. Overly conservative?

 

Thank you.

[LC]

Awesome; so that means a guy I greatly admire had nothing to do with buying into a company I never even put on a watchlist (yay!)

And that would be your 8th irrelevant post on the DaVita. If you're not interested in DVA and don't have anything to add why are you on this thread?

 

You may be looking to boost your post count, but the rest of us are actually interested in the subject.

 

Actually I happen to agree with DooDiligence. I think it's perfectly reasonable to expect Buffett to have a view. I think you're being naive if you think Buffett has no input.

[flesh]

Flesh,

 

How do you think about and price in future settlement charges and loss accruals? Might it be a cost of business going forward? If we model in the $230mm hit from the release and the 5 year avg settlement charge ~$200mm it starts to look a lot less attractive. Overly conservative?

 

Thank you.

 

Certainly that's a good way to think about your downside, you'd still be well below a mid cycle market multiple. OTOH, if you believe they can meet their guidance through 2019, you have a nice slow grower selling at a low owner's earnings multiple eating itself. Often times mgmt's will offer neutrality when there's no hard catalyst's and they are looking to eat themselves as a result. At the last quarter mgmt stated no update on guidance for x, y, z until 4th qtr call = accelerated share repurchases for now imo. Also, you must decide whether or not to over weight reimbursement risk versus market/economic risks you'd see elsewhere in your portfolio.

 

I'm seeing a 4 to 1 upside to downside ratio end of year 17' with little market/economic risk myself.

 

Then there's perception and earnings. You've got to remember so much of the market follows gaap earnings, we can quickly forget how others think/react when we've learned to think beyond something so simple. Gaap earnings should improve substantially cy 17'. Remembering this has helped my performance. Cash flows will improve yoy as well. I'm not sure when the market will start pricing in rate changes for 2019 but if you're thinking years out I suppose that would happen in 2018. Paying 80 for this today is in Warren's wheelhouse as well. If this is in play we'll probably see Brk hitting the 25% threshold at these prices asap.

 

 

 

 

 

 

 

 

 

 

[rb]

Awesome; so that means a guy I greatly admire had nothing to do with buying into a company I never even put on a watchlist (yay!)

And that would be your 8th irrelevant post on the DaVita. If you're not interested in DVA and don't have anything to add why are you on this thread?

 

You may be looking to boost your post count, but the rest of us are actually interested in the subject.

 

Actually I happen to agree with DooDiligence. I think it's perfectly reasonable to expect Buffett to have a view. I think you're being naive if you think Buffett has no input.

Well Buffett had no input in buying DVA, Ted had ported it over from Peninsula. Could WB call ted and tell him to get rid of the position? Of course. Will he? I don't think so. He's said multiple times that he does not interfere with T&T and there's no reason to doubt that.

 

In addition, DVA is a stock holding not a subsidiary. BRK stock holdings have done lots of shady stuff and WB was mum on it. Hell, this isn't even the first time DVA is caught with shady stuff.

[rb]

If this is in play we'll probably see Brk hitting the 25% threshold at these prices asap.

Actually if BRK is contemplating a takeover you won't see them buying more shares. If they're buying it means there won't be a takeover.

[flesh]

At current prices Mr Market seems to be pricing in a large hit from the recent article about steering customers to AKF. Can someone who has followed or invested with DVA for a while explain the workings of these higher paying commercial plans and give a valid argument for why they won't go away? If the CMS is able to revise enrollment rules for Medicare and Medicade and/or make "regulatory changes that would allow individual market plans to limit their payment to healthcare providers to Medicare-based amounts" it seems this entire division would be unprofitable. Since this would put them out of business resulting in catastrophic consequences for their patients, it seems a long shot, but its hard to invest with the knowledge and comfort I currently have on why this couldn't or won't happen.

 

Any links or recommendations to help me understand this outside of DVA filings/calls would be helpful. So much of their profitability comes from these plans and it seems there is a lot of pressure on them while their leverage to fight back is hard to see.

 

Thanks for any help.

 

I am long.

 

Here's the short story to get you started.

Davita is the low cost provider.... 10-15% lower cost per patient vs fresenius by my unit economics estimates. Davita and Fresenius have around 1/3 of us market each. The other 1/3 Is mom in pops not benefiting from the economies of scale. Davita and Fresenius have slowed their acquisitions in the us at this point to keep the current market share balance. As a result, any change in pay would cause mom and pops to shut down. Also, patients may have to drive further to get their treatments.

Flesh, you seem to have done quite a bit of research on this so you you don't mind, can you provide a bit more detail regarding a couple more issues.

 

Firstly, DaVita seem to be very aggressive in sales/marketing. This is not their first scandal. In your view is this just stupid over zealousness at the top or is this kind of stuff what drives a good chunk of profits? If they ease up on the pressure will that be a small decrease in profits or will it be significant?

 

Secondly, what always bothered me about DaVita is that the bulk of the patients are Medicare. In those cases Medicare dictates the terms and they don't seem to make any money off these patients. They mostly service them to pay the rent and the power bill shall we say. The profits seem to be made off of the few patients with private insurance for whom they seem to charge a pretty penny. Give this do you think that their profits are sustainable? What prevents Medicare to cut the rate (i know there were some issues around this a couple of years ago) and push DaVita in a loss per medicare patient? Or otherwise what prevents private insurance to cut payments for dialysis? Or maybe a shift in the mix of private/public insurance? It seems to me like DVA is very exposed to these issues. If any of them would come to be it would evaporate a good chunk of DVA profits.

 

You seem very confident in the company so I assume you understand these issues better than me. I would appreciate it if you could share your thoughts around these issues.

 

I have a 15% position at 58 cost.

 

I've been thinking about your questions, I don't have any concrete way to answer them. If anyone knows how to quantify your questions, I'm all ears. If there is precedent in the healthcare industry for your concerns, I can't find them, I'm all ears. I don't often share my thoughts simply because I generally don't get any feedback and I usually invest scared, compounding it isn't helpful.

 

Instead of focusing on what I can't answer, which is how will the payor mix/reimbursement rates fluctuate, I've focused on what I can answer.

 

The bull thesis is fairly well outlined in this thread, so I'll put that aside. Mgmt has guided to 5.5 m fcf 2016-2019.

 

The question as I see it is, how would rates be cut and how quickly and when I compare that to 4-5% demographic plus acquisition growth and 4-5% buybacks at current multiple is it probable that dva could at least maintain it's current fcf/share in the face of cuts/payor mix? I'm assuming that if dva's fcf just held steady, the return would be positive.

 

Considering the mom and pops are crying and I've read repeatedly that they make zero profit on cms reimbursements, wouldn't they at least have to cut slowly? (didn't they already do this by freezing rates?)

 

If centers start closing down, how far will patients have to drive? How would this backlash from patients contribute cms's attitude about cuts? How many patient death's as a result of proximity issues would it take to turn things around? Who wants to be that guy?

 

If there is precedent for medicare/caid/private coming down hard on price is it apples to apples? Would people die? This isn't a patented drug with monopoly pricing. People will get hurt, companies will go out of business.

 

As the low cost producer, everyone else will be crying long before DVA. Excluding a near term, cost effective solution for ESRD aside from dialysis, I don't see a lot of downside. It would take a downside lollapalooza effect IMO to have a meaningful loss. Something like cuts/declining payor mix/HCP declining simultaneously. 

 

 

 

 

 

 

 

 

 

 

 

 

[bennycx]

 

I am long.

 

Here's the short story to get you started.

Davita is the low cost provider.... 10-15% lower cost per patient vs fresenius by my unit economics estimates. Davita and Fresenius have around 1/3 of us market each. The other 1/3 Is mom in pops not benefiting from the economies of scale. Davita and Fresenius have slowed their acquisitions in the us at this point to keep the current market share balance. As a result, any change in pay would cause mom and pops to shut down. Also, patients may have to drive further to get their treatments.

 

Hi flesh, how did you get this piece of information (bolded above)?

[flesh]

See attached or click http://seekingalpha.com/article/1769952-why-davita-is-undervalued-compared-to-fresenius-medical-care. Compare his cost analysis to the % of FMS's business being done here in the usa here:

 

http://seekingalpha.com/article/4016809-fresenius-medical-care-ag-and-co-kgaa-2016-q3-results-earnings-call-slides

 

It's difficult to be precise but it's pretty clear there's a difference.

ValuewalkValuation.docx.pdf

[flesh]

http://www.valuewalk.com/wp-content/uploads/2016/03/DaVita-HealthCare-Partners-DVA-3.2016.pdf

 

I just reread this.

 

Starting at page 48 some additional layers of protection on reimbursement/payor mix risks. Also some good upside points all happening in 2019.

 

1. CMS reimbursements go back to "normal" as a result of playing catch up from over payment. As this all flows to the bottom, could be in the hundreds of millions.

2. epo contract is up, lots of competition now versus when epo contract was struck... prices will come down. 20-30% of costs per patient currently.

3. International should hit breakeven (from 100m/year loss current)

4. Debt comes due, If rates are up and with more than enough cash flow, might pay off.

 

Aside from making money, I find what HCP/Davita medical group is doing quite fascinating. Absent bringing a true free market with price discovery to healthcare I think this pay per performance is the best model I"ve seen in terms of bringing us closer to health  care vs our current disease care. Without the proper incentives, nothing will change.

 

 

[no_free_lunch]

So I have been following this one for years due to the Buffet link.  I can see how it will likely do well in a 2-5 year time horizon.  I just wonder if people would be comfortable with it over a longer time horizon, like 20 years.  I read earlier in the thread how there is a chance of a technological disruption.  Lab grown kidney's or something along those lines.  How do you handle that risk?

[cubsfan]

Regarding the kidney transplant issue, this is not a simple procedure. And success is not just due to availability of kidneys.

It's dangerous depending on the patient's health and age. I had discussions earlier this year with Director of U of Chicago Kidney Transplant Center.

 

The problem for many of these "candidates" is that they are unhealthy and many times overweight. U of Chicago will not do a transplant on individuals above a certain body mass index - those candidates have to lose a significant amount of weight.

The side effects of  infection, drugs, etc can be fatal.  Risk of infections goes up significantly with overweight patients.

Powerful drugs to fight these infections can damage the heart, etc.

 

Her opinion: those on dialysis can live very long and healthy lives without a transplant.

Transplants should not be viewed as a silver bullet. I am not a doctor - but this is how I understand the issue.

[flesh]

Regarding the kidney transplant issue, this is not a simple procedure. And success is not just due to availability of kidneys.

It's dangerous depending on the patient's health and age. I had discussions earlier this year with Director of U of Chicago Kidney Transplant Center.

 

The problem for many of these "candidates" is that they are unhealthy and many times overweight. U of Chicago will not do a transplant on individuals above a certain body mass index - those candidates have to lose a significant amount of weight.

The side effects of  infection, drugs, etc can be fatal.  Risk of infections goes up significantly with overweight patients.

Powerful drugs to fight these infections can damage the heart, etc.

 

Her opinion: those on dialysis can live very long and healthy lives without a transplant.

Transplants should not be viewed as a silver bullet. I am not a doctor - but this is how I understand the issue.

 

Now we are getting somewhere. I forwarded this to my bro in law to discuss with his doctor buddies. I'll try to find some statistics on what portion of esrd patients are eligible for any sort of transplant.

 

 

[cubsfan]

If you want to check this presentation from the U of Chicago Transplant Center - it reviews some of the issues

for families of transplant candidates. There are many factors (ex. see slide 11 for body mass index) - they won't

attempt a transplant if your body fat is 40%+. There are rejection issues, long term medication side effects, infections, etc .

You get a team of doctors to evaluate you as a candidate - it's not simply an issue of availability of a kidney.

Families often misunderstand and think if they give a kidney to their sibling - everything is a "go".

It's not at all like that.

 

With dialysis you do not have these complications or trauma.

 

 

 

Ed_SessionTransplant.key

[rogermunibond]

http://www.nejm.org/doi/full/10.1056/NEJMoa1508380

 

I think I posted on this before non-compatible kidney donation (from live donor) got a major study write up in the NEJM.  Over 1000 transplants and very good results.  Still up in the air if the results are good enough for more widespread adoption.

[bennycx]

I'm comfortable with this investment other than seeing some reports saying that Davita provides worse quality of care than non-profits? Can anyone quantify this?

[rogermunibond]

https://data.medicare.gov/data/dialysis-facility-compare

 

CMS has made dialysis center data available, and they have consumer comparison site.

 

From my perusing Davita and Fresenius did about avg, mostly 3 stars.  Some nonprofits did much better, but the thing is a lot of nonprofits that had their own dialysis have gotten out of the biz.

[fareastwarriors]

Kidney Fund Seen Insisting on Donations, Contrary to Government Deal

http://www.nytimes.com/2016/12/25/business/kidney-fund-seen-insisting-on-donations-contrary-to-government-deal.html?ref=business&_r=0

[flesh]

http://pressreleases.davita.com/2017-01-25-DaVita-Responds-to-US-District-Court-Eastern-District-of-Texas-Ruling-Protecting-Dialysis-Patients-from-Discrimination-by-Insurance-Companies

[flesh]

http://pressreleases.davita.com/2017-02-01-DaVita-Finalizes-Acquisition-of-Mountain-View-Medical-Group

 

This acquisition took forever to close. Not sure why.

 

http://www.denverpost.com/2017/02/01/federal-government-pay-davita-millions-underpayment-claims/

 

Over 500 million coming in from the govt.

 

Good things happening along with the new epo contract which is accretive.