DVA – DaVita HealthCare Partners

[Rasputin]

DVA sold its NxStage shares within the same purchase year

 

From 2008 10-K

 

NxStage agreement

 

In February 2007 we entered into a National Provider Agreement with NxStage, Inc. As a part of the agreement, we purchased outright all of our NxStage System One equipment then in use for $5.1 million, and have been purchasing a majority of our home-based hemodialysis equipment and supplies from NxStage. In connection with the provider agreement, we purchased two million shares of NxStage common stock in a private placement offering for $20 million, representing an ownership position of approximately 7%. We subsequently sold our NxStage Inc. shares in the second and third quarters of 2007 for approximately $25.9 million and recognized a pre-tax gain of $5.9 million or $3.6 million after tax. This pre-tax gain is included in other income.

[sleepydragon]

It's a little amusing to me that Goldman sachs USA team has a Sell rating on DVA (for a year or so now), but their Europe team (different analysts) have a Conviction Buy rating on Fresenius

[sleepydragon]

It's a little amusing to me that Goldman sachs USA team has a Sell rating on DVA (for a year or so now), but their Europe team (different analysts) have a Conviction Buy rating on Fresenius

 

On Fresenius, GS Europe analyst:

"what we see as highly compelling fundamentals, given 1) improving revenue /

treatment dynamics in the US, 2) ongoing opportunities for efficiencies,

and 3) earnings upside from care coordination. We reiterate Buy (on CL). "

 

On DVA, GS USA analyst:

"Aside from pricing and regulatory uncertainty, we remain concerned with lack of operating leverage in the business model and runway for growth" ..." We remain Sell on risks to the earnings growth story"

 

One of them has to be wrong.

[Rasputin]

I agree with both GS teams with regards to their take on the business and environment. 

 

Management seems incompetent if we just look at results between 2013 and today.

From beginning 2014 through end of 2016, management has spent $2 B beyond what they categorize as maintenance capex while EBITDA remains stagnant. 

 

I am a buyer though.  In a scenario where all capex = maintenance capex and they stop acquisition, I get fcf (cash by op activities minus all capex) of around $3.4 per share for 2018.

[flesh]

Thought this was worth mentioning.

 

"Whit Mayo - Robert W. Baird & Co., Inc.

 

Thanks. Good afternoon. Looking at the cost per treatment in the quarter, if I isolate all of the EPO purchases just within the June quarter, was it all under the new contract or did you have any purchases or any old inventory that you were working through rather I should say? And I'm just trying to think through the run rate going forward.

 

Kent J. Thiry - DaVita, Inc.

 

Yeah. All of the purchases were under the new contract for this quarter.

 

Whit Mayo - Robert W. Baird & Co., Inc.

 

So, does the second quarter have the full benefit of the new contract or is there a tail on this that we should consider as the year plays out?

 

Kent J. Thiry - DaVita, Inc.

 

It's got the benefit that's intended to have for this year."

 

And then at the end of the call......

 

"John W. Ransom - Raymond James & Associates, Inc.

 

Hey, sorry if you have addressed this. I'm just old and forgetful. But the cadence of the EPO purchasing benefit. I mean, we've taken some statements from the manufacturer to interpret that to mean, it's sort of equally weighted between this year and next year. Is that a fair way to think about it?

 

Kent J. Thiry - DaVita, Inc.

 

I don't know if we can comment on that. We have big restrictions on what we can say on the contract. So I think, we're going to have to pass on that one.

 

John W. Ransom - Raymond James & Associates, Inc.

 

Well. I thought I would try anyway. All right. Thank you.

 

Javier J. Rodriguez - DaVita, Inc.

 

Thank you.

 

Kent J. Thiry - DaVita, Inc.

 

Thanks, John. Good try.

 

John W. Ransom - Raymond James & Associates, Inc.

 

Yeah. Thanks."

[crastogi]

I agree with both GS teams with regards to their take on the business and environment. 

 

Management seems incompetent if we just look at results between 2013 and today.

From beginning 2014 through end of 2016, management has spent $2 B beyond what they categorize as maintenance capex while EBITDA remains stagnant. 

 

I am a buyer though.  In a scenario where all capex = maintenance capex and they stop acquisition, I get fcf (cash by op activities minus all capex) of around $3.4 per share for 2018.

 

So, I am new, trying to understanding this business.  I got interested as the prices have come down.  Can someone please summarize the bull case? 

[cubsfan]

I'll just give you my view. Valuation-wise, if we are selling below 10X FCF and DVA continues to buy back 10% of their stock each year with their FCF - then 5 yrs from now, we are at 112M shares outstanding, doing maybe $1600M+ in operating income without

trying to grow, which DVA still does. So I get $14/share at that point. Does the stock still remain at $60?

 

DVA is still growing around 5% organically and rolling up other clinics too.  Growth is not even factored in.

 

You have to be fearful of re-imbursement rates - since this stuff is expensive. But we don't let people die in this country, and unless

we want many thousands more dying every year or flooding the emergency rooms - someone needs to perform this service.

I see no alternative to DaVita or Fresenius, who now control 70% of the business. The demand is predictable, the uncertainty of the future pricing keeps lots away.  DVA gets high marks for quality of care - and that is crucial to their success.

 

If someone can come up with reasonable alternatives about how this ESRD is going away - I might see it differently.

 

I guess my biggest concern is the HCP acquisition - and if this turns sharply positive, which Thiry says it does next year.

Then things look even better.

[matts]

I'll just give you my view. Valuation-wise, if we are selling below 10X FCF and DVA continues to buy back 10% of their stock each year with their FCF - then 5 yrs from now, we are at 112M shares outstanding, doing maybe $1600M+ in operating income without

trying to grow, which DVA still does. So I get $14/share at that point. Does the stock still remain at $60?

 

DVA is still growing around 5% organically and rolling up other clinics too.  Growth is not even factored in.

 

You have to be fearful of re-imbursement rates - since this stuff is expensive. But we don't let people die in this country, and unless

we want many thousands more dying every year or flooding the emergency rooms - someone needs to perform this service.

I see no alternative to DaVita or Fresenius, who now control 70% of the business. The demand is predictable, the uncertainty of the future pricing keeps lots away.  DVA gets high marks for quality of care - and that is crucial to their success.

 

If someone can come up with reasonable alternatives about how this ESRD is going away - I might see it differently.

 

I guess my biggest concern is the HCP acquisition - and if this turns sharply positive, which Thiry says it does next year.

Then things look even better.

 

I don't understand this logic. If government programs and the major insurers decide to reimburse 10% less than the current rate will people just stop coming and die?! Of course not, Davita would adjust to the new market dynamics and eat the lower profit margins because it still makes good profits, just less than before. and THAT'S the bear case.

 

 

[cmlber]

I'll just give you my view. Valuation-wise, if we are selling below 10X FCF and DVA continues to buy back 10% of their stock each year with their FCF - then 5 yrs from now, we are at 112M shares outstanding, doing maybe $1600M+ in operating income without

trying to grow, which DVA still does. So I get $14/share at that point. Does the stock still remain at $60?

 

DVA is still growing around 5% organically and rolling up other clinics too.  Growth is not even factored in.

 

You have to be fearful of re-imbursement rates - since this stuff is expensive. But we don't let people die in this country, and unless

we want many thousands more dying every year or flooding the emergency rooms - someone needs to perform this service.

I see no alternative to DaVita or Fresenius, who now control 70% of the business. The demand is predictable, the uncertainty of the future pricing keeps lots away.  DVA gets high marks for quality of care - and that is crucial to their success.

 

If someone can come up with reasonable alternatives about how this ESRD is going away - I might see it differently.

 

I guess my biggest concern is the HCP acquisition - and if this turns sharply positive, which Thiry says it does next year.

Then things look even better.

 

Is there an explanation, besides stupidly conservative guidance, as to why at the investor day DVA projected 4-9% net income growth, but EPS growth (net income growth boosted by share repurchases) is only projected to be 5-12%?  I.e., projecting that they reduce the share count by 1-3% per year. 

 

But they say they'll have $3.35Bn available for share repurchases over that time frame, which would mean a pace of 10%/year share repurchases.  Is there something I'm missing?

[cubsfan]

I'll just give you my view. Valuation-wise, if we are selling below 10X FCF and DVA continues to buy back 10% of their stock each year with their FCF - then 5 yrs from now, we are at 112M shares outstanding, doing maybe $1600M+ in operating income without

trying to grow, which DVA still does. So I get $14/share at that point. Does the stock still remain at $60?

 

DVA is still growing around 5% organically and rolling up other clinics too.  Growth is not even factored in.

 

You have to be fearful of re-imbursement rates - since this stuff is expensive. But we don't let people die in this country, and unless

we want many thousands more dying every year or flooding the emergency rooms - someone needs to perform this service.

I see no alternative to DaVita or Fresenius, who now control 70% of the business. The demand is predictable, the uncertainty of the future pricing keeps lots away.  DVA gets high marks for quality of care - and that is crucial to their success.

 

If someone can come up with reasonable alternatives about how this ESRD is going away - I might see it differently.

 

I guess my biggest concern is the HCP acquisition - and if this turns sharply positive, which Thiry says it does next year.

Then things look even better.

 

I don't understand this logic. If government programs and the major insurers decide to reimburse 10% less than the current rate will people just stop coming and die?! Of course not, Davita would adjust to the new market dynamics and eat the lower profit margins because it still makes good profits, just less than before. and THAT'S the bear case.

 

I said the risk is in the re-imbursement rates. No kidding that's the bear case.

But of course, you likely see many clinics close and that creates chaos until the market adjustments are made.

 

[crastogi]

I'll just give you my view. Valuation-wise, if we are selling below 10X FCF and DVA continues to buy back 10% of their stock each year with their FCF - then 5 yrs from now, we are at 112M shares outstanding, doing maybe $1600M+ in operating income without

trying to grow, which DVA still does. So I get $14/share at that point. Does the stock still remain at $60?

 

DVA is still growing around 5% organically and rolling up other clinics too.  Growth is not even factored in.

 

You have to be fearful of re-imbursement rates - since this stuff is expensive. But we don't let people die in this country, and unless

we want many thousands more dying every year or flooding the emergency rooms - someone needs to perform this service.

I see no alternative to DaVita or Fresenius, who now control 70% of the business. The demand is predictable, the uncertainty of the future pricing keeps lots away.  DVA gets high marks for quality of care - and that is crucial to their success.

 

If someone can come up with reasonable alternatives about how this ESRD is going away - I might see it differently.

 

I guess my biggest concern is the HCP acquisition - and if this turns sharply positive, which Thiry says it does next year.

Then things look even better.

 

I don't understand this logic. If government programs and the major insurers decide to reimburse 10% less than the current rate will people just stop coming and die?! Of course not, Davita would adjust to the new market dynamics and eat the lower profit margins because it still makes good profits, just less than before. and THAT'S the bear case.

 

I said the risk is in the re-imbursement rates. No kidding that's the bear case.

But of course, you likely see many clinics close and that creates chaos until the market adjustments are made.

 

Thanks everyone for your inputs.  I am concerned about reimbursement rates too.  Looks like they break even/loose little on medicare reimbursements and make money on private insurance. 

 

However, if things get really bad they have the option to close/ turn away/meter medicaid/medicare patients. 

Does anyone know who has a lower cost structure, Fresenius or DVA? 

 

 

[Rasputin]

I'll just give you my view. Valuation-wise, if we are selling below 10X FCF and DVA continues to buy back 10% of their stock each year with their FCF - then 5 yrs from now, we are at 112M shares outstanding, doing maybe $1600M+ in operating income without

trying to grow, which DVA still does. So I get $14/share at that point. Does the stock still remain at $60?

 

DVA is still growing around 5% organically and rolling up other clinics too.  Growth is not even factored in.

 

You have to be fearful of re-imbursement rates - since this stuff is expensive. But we don't let people die in this country, and unless

we want many thousands more dying every year or flooding the emergency rooms - someone needs to perform this service.

I see no alternative to DaVita or Fresenius, who now control 70% of the business. The demand is predictable, the uncertainty of the future pricing keeps lots away.  DVA gets high marks for quality of care - and that is crucial to their success.

 

If someone can come up with reasonable alternatives about how this ESRD is going away - I might see it differently.

 

I guess my biggest concern is the HCP acquisition - and if this turns sharply positive, which Thiry says it does next year.

Then things look even better.

 

I don't understand this logic. If government programs and the major insurers decide to reimburse 10% less than the current rate will people just stop coming and die?! Of course not, Davita would adjust to the new market dynamics and eat the lower profit margins because it still makes good profits, just less than before. and THAT'S the bear case.

 

For me, 10% drop in rev/treatment (from $347 to $312) is so disruptive that average OI/center will be so low that nobody will open new centers, with possibility of significant # of dialysis center closures.  It will cause MLR to be around 92 for both Davita and Fresenius.

 

MLR of 85 (similar to California AB 251), though, is a reasonable downside.  That will cause roughly 2.7% drop in DVA Kidney Care OI margin or around $300 million in annual EBIT.  I think DVA will make up this $300 million over the next 3 years from improvement in DMG (roughly $100 million), International (roughly $50 million), and continuing opening de novo (3.5% growth in # of treatments, EBIT improvement of $150 million).  By 2020, DVA EBIT will be equal to 2017.  It wil also have 20% less shares outstanding (assuming it can buy back 7% of its shares outstanding annually for $900 million) with roughly $900 million more net debt.  If everybody is happy with 85% MLR and 10 yr treasury remains around 2.5%, I think 12 times EBIT valuation is pretty reasonable (8.5% pretax return for stable, slightly growing business).  That's EV of $20.4 Billion.  Subtract $9.4 Billion of net debt, equity valuation should be roughly $11 Billion.  Divide that by 155 million shares outstanding = $70 per share in 2020.  Not a great return, but not a permanent loss. 

 

[sleepydragon]

- A couple years ago,  the govt wanted to lower the payment rate by something like 10%. They proposed it and asked public for opinions. DVA stock tanked. About 3 months later, government withdrew their proposal. It's very hard to cut the payment. Whenever they do that, DVA's customers call congressman. Their life depend on it. DVA is already losing money on each medicare treatment.

- In fact, the government is on the same team with DVA. In the past, the government pay for all the treatments. Now, the government require private insurers pay for 30 months. I will not be surprised that in a few years private insurers will have to pay for 40, 60 months instead of currently 30 months. The portion that private insurers pay will only get higher in the future. The government encouraged/turned a blind eye on the consolidations in this industry because they want DVA to have negotiation power to extract more money from private insurers.

- Recession will actually hurt DVA, because less people employed means less private insurance payment. But as economy getting better, DVA shall benefit.

- 90% of the profits are from a small number of payers. But, that means this small number could grow to a big number in certain cases (i.e. when everyone has private insurance) , and that means a lot of profits.

- HCP is at least break even for now.

- The only worry is private insurer want to lower the rate. But I don't think they have much say. DVA/FMS will just say no, and Government is behind them.

 

 

[sleepydragon]

I'll just give you my view. Valuation-wise, if we are selling below 10X FCF and DVA continues to buy back 10% of their stock each year with their FCF - then 5 yrs from now, we are at 112M shares outstanding, doing maybe $1600M+ in operating income without

trying to grow, which DVA still does. So I get $14/share at that point. Does the stock still remain at $60?

 

DVA is still growing around 5% organically and rolling up other clinics too.  Growth is not even factored in.

 

You have to be fearful of re-imbursement rates - since this stuff is expensive. But we don't let people die in this country, and unless

we want many thousands more dying every year or flooding the emergency rooms - someone needs to perform this service.

I see no alternative to DaVita or Fresenius, who now control 70% of the business. The demand is predictable, the uncertainty of the future pricing keeps lots away.  DVA gets high marks for quality of care - and that is crucial to their success.

 

If someone can come up with reasonable alternatives about how this ESRD is going away - I might see it differently.

 

I guess my biggest concern is the HCP acquisition - and if this turns sharply positive, which Thiry says it does next year.

Then things look even better.

 

I don't understand this logic. If government programs and the major insurers decide to reimburse 10% less than the current rate will people just stop coming and die?! Of course not, Davita would adjust to the new market dynamics and eat the lower profit margins because it still makes good profits, just less than before. and THAT'S the bear case.

 

I said the risk is in the re-imbursement rates. No kidding that's the bear case.

But of course, you likely see many clinics close and that creates chaos until the market adjustments are made.

 

Thanks everyone for your inputs.  I am concerned about reimbursement rates too.  Looks like they break even/loose little on medicare reimbursements and make money on private insurance. 

 

However, if things get really bad they have the option to close/ turn away/meter medicaid/medicare patients. 

Does anyone know who has a lower cost structure, Fresenius or DVA?

 

This happened before. Govt have tried to lower the rate a couple years ago. Didn't work. Too many phone calls from congressman and patients i guess.

A lot of none-profit and smaller places will have to close if they lower the rate.

if people can't get the service from DVA, even just for a few days, they likely will end up going to ERs.. A hospital stay can run up to $5000-15000/night.  Neither medicare nor private insurer want that.

 

[DooDiligence]

I'll just give you my view. Valuation-wise, if we are selling below 10X FCF and DVA continues to buy back 10% of their stock each year with their FCF - then 5 yrs from now, we are at 112M shares outstanding, doing maybe $1600M+ in operating income without

trying to grow, which DVA still does. So I get $14/share at that point. Does the stock still remain at $60?

 

DVA is still growing around 5% organically and rolling up other clinics too.  Growth is not even factored in.

 

You have to be fearful of re-imbursement rates - since this stuff is expensive. But we don't let people die in this country, and unless

we want many thousands more dying every year or flooding the emergency rooms - someone needs to perform this service.

I see no alternative to DaVita or Fresenius, who now control 70% of the business. The demand is predictable, the uncertainty of the future pricing keeps lots away.  DVA gets high marks for quality of care - and that is crucial to their success.

 

If someone can come up with reasonable alternatives about how this ESRD is going away - I might see it differently.

 

I guess my biggest concern is the HCP acquisition - and if this turns sharply positive, which Thiry says it does next year.

Then things look even better.

 

I don't understand this logic. If government programs and the major insurers decide to reimburse 10% less than the current rate will people just stop coming and die?! Of course not, Davita would adjust to the new market dynamics and eat the lower profit margins because it still makes good profits, just less than before. and THAT'S the bear case.

 

I said the risk is in the re-imbursement rates. No kidding that's the bear case.

But of course, you likely see many clinics close and that creates chaos until the market adjustments are made.

 

Thanks everyone for your inputs.  I am concerned about reimbursement rates too.  Looks like they break even/loose little on medicare reimbursements and make money on private insurance. 

 

However, if things get really bad they have the option to close/ turn away/meter medicaid/medicare patients. 

Does anyone know who has a lower cost structure, Fresenius or DVA?

 

This happened before. Govt have tried to lower the rate a couple years ago. Didn't work. Too many phone calls from congressman and patients i guess.

A lot of none-profit and smaller places will have to close if they lower the rate.

if people can't get the service from DVA, even just for a few days, they likely will end up going to ERs.. A hospital stay can run up to $5000-15000/night.  Neither medicare nor private insurer want that.

 

Yep...

 

http://www.uglymule.com/images/DVA-Improvements-in-Care.png

[skanjete]

I guess it tells something that everyone is talking about the bear case these days...

 

Government could indeed lower reimbursements.

But government could likewise also lower corporate taxes, of which DVA pays roughly 35%.

 

Actually, I thing in the long term DVA performs a service that's essential to the community and will be appropriately rewarded for it, the one way or the other. That is, as long there won't be any competing (better) treatment for dialysis.

[Spekulatius]

The biggest risk are not the Medicaid or Medicare reimbursement rates, but that the private insurers wake up and start to negotiate rates down closer to Medicare levels, which are roughly 1/3 of what they pay now.

The Government business fills the rooms, but the private insurance business fills the coffers. I also think that LT, the trend will go to home dialysis, since 3 treatments a week does not cut it for the medical outcome. That said, DVA does look very cheap and a lot if not all of the above is already somewhat discounted in the stock price.

 

Also, DVA will Not be able to buy back 10% of their stock every year, unless they are willing to lever up their balance sheet significantly.

[Rasputin]

The biggest risk are not the Medicaid or Medicare reimbursement rates, but that the private insurers wake up and start to negotiate rates down closer to Medicare levels, which are roughly 1/3 of what they pay now.

The Government business fills the rooms, but the private insurance business fills the coffers. I also think that LT, the trend will go to home dialysis, since 3 treatments a week does not cut it for the medical outcome. That said, DVA does look very cheap and a lot if not all of the above is already somewhat discounted in the stock price.

 

Also, DVA will Not be able to buy back 10% of their stock every year, unless they are willing to lever up their balance sheet significantly.

 

Private insurers were never asleep.  They are not stupid. 

 

CMS ESRD PPS (government rate) is published annually.  Dialysis is very transparent, CMS gets all the data.  The reason why private rates are around 4 to 5 times CMS rate is because private insurers only pay for 33 months.  Medicare becomes the primary payor for all dialysis patients the day after 33 month ends.  It's called MSP period (Medicare as Secondary Payor) period.  John Oliver show, Chanos don't mention this.  The MSP period is also the reason why dialysis companies are being punished for lowering mortality rate.  The longer a person live on dialysis beyond 33 months, the more losses that patient inflict on the dialysis center. 

 

The MSP period started at 21 months in 1981, extended to current 33 months in 1997.  It maybe time to extend this MSP period if private payor started to try to avoid this costly group of patients. 

[sleepydragon]

I think this stock is undervalued and mispriced because most investors think of the govt and private insurers as two separate groups of clients of dva.

They failed to evaluate them as a group, and the dynamic and interplay of the two groups.

It's also wrong to say govt clients are not profitable. DVA's profit model is like a pyramid, similar to amazon's model, where most customers are not profitable (but cash flow helped building up infacstructure) and a small group of customers are very profitable.

 

[DooDiligence]

The biggest risk are not the Medicaid or Medicare reimbursement rates, but that the private insurers wake up and start to negotiate rates down closer to Medicare levels, which are roughly 1/3 of what they pay now.

The Government business fills the rooms, but the private insurance business fills the coffers. I also think that LT, the trend will go to home dialysis, since 3 treatments a week does not cut it for the medical outcome. That said, DVA does look very cheap and a lot if not all of the above is already somewhat discounted in the stock price.

 

Also, DVA will Not be able to buy back 10% of their stock every year, unless they are willing to lever up their balance sheet significantly.

 

Private insurers were never asleep.  They are not stupid. 

 

CMS ESRD PPS (government rate) is published annually.  Dialysis is very transparent, CMS gets all the data.  The reason why private rates are around 4 to 5 times CMS rate is because private insurers only pay for 33 months.  Medicare becomes the primary payor for all dialysis patients the day after 33 month ends.  It's called MSP period (Medicare as Secondary Payor) period.  John Oliver show, Chanos don't mention this.  The MSP period is also the reason why dialysis companies are being punished for lowering mortality rate.  The longer a person live on dialysis beyond 33 months, the more losses that patient inflict on the dialysis center. 

 

The MSP period started at 21 months in 1981, extended to current 33 months in 1997.  It maybe time to extend this MSP period if private payor started to try to avoid this costly group of patients.

 

Thanks for pointing this out.

 

I was thinking that the improved mortality meant that DVA was truly aligned with patient values & benefited from this alliance but it turns out they'd be better off if the figures weren't so good.

 

Tough way to look at churn but...

 

http://www.uglymule.com/images/DVA-till-Death-do-Us-Part.png

 

John Oliver's bear case seems valid & Thiry might be a bit of a loon but ultimately, Davita seems to do a pretty fair job of keeping people alive.

 

As an aside, shouldn't CMS rates improve from 2018 forward due to this?

 

http://www.uglymule.com/images/DVA-CMS-Overpayment-Bundling.png

dva_-_03-2016_-_wiseowl_capital.pdf

[MrB]

Don't think I've seen this posted here. Long term history of Davita from 1979 and background to the industry; good read.

Favorite quote "We are very much a new company," Thiry explained in an October 23, 2000 interview with the Los Angeles Business Journal. "The previous company was almost exclusively focused on shareholders, and our new mission is to be the provider, partner, and employer of choice. We realize that we have to satisfy our shareholders with a reasonable return, but that is not our primary mission." He did not do that bad considering returns were not his primary focus.

 

http://www.referenceforbusiness.com/history2/15/DaVita-Inc.html

 

This one is good study too:

https://www.usrds.org/2015/download/vol2_USRDS_ESRD_15.pdf

 

2016 report

https://www.usrds.org/2016/view/Default.aspx

[Spekulatius]

I think this stock is undervalued and mispriced because most investors think of the govt and private insurers as two separate groups of clients of dva.

They failed to evaluate them as a group, and the dynamic and interplay of the two groups.

It's also wrong to say govt clients are not profitable. DVA's profit model is like a pyramid, similar to amazon's model, where most customers are not profitable (but cash flow helped building up infacstructure) and a small group of customers are very profitable.

 

I fail to see why this prevents the private insurers to demand lower rates  for dialysis. The current structure that private insurance pays 3-5x more for the same service than the government  is certainly not rational. I understand that the government underplays and private insurance overpays to compensate, but this still does not make sense.

 

And how can DVA say no to a private insurance  that demand the price to go from 5x to 2x, when they take Medicare patients for a much lower treatment term at the same price. It sounds like an Implicit agreement that is just meant to be broken.

[matts]

I think this stock is undervalued and mispriced because most investors think of the govt and private insurers as two separate groups of clients of dva.

They failed to evaluate them as a group, and the dynamic and interplay of the two groups.

It's also wrong to say govt clients are not profitable. DVA's profit model is like a pyramid, similar to amazon's model, where most customers are not profitable (but cash flow helped building up infacstructure) and a small group of customers are very profitable.

 

I fail to see why this prevents the private insurers to demand lower rates  for dialysis. The current structure that private insurance pays 3-5x more for the same service than the government  is certainly not rational. I understand that the government underplays and private insurance overpays to compensate, but this still does not make sense.

 

And how can DVA say no to a private insurance  that demand the price to go from 5x to 2x, when they take Medicare patients for a much lower treatment term at the same price. It sounds like an Implicit agreement that is just meant to be broken.

 

Agreed. I think some are just refusing the see the larger picture. It reminds me of people trying to rationalize Valeant charging thousands for a tube of foot cream. "That's how the system works, and if insurance companies demand a lower price then Valeant will just say no"

 

Can someone provide evidence that the MARGINAL client will unprofitable for davita if the private rates go lower by 10%?

Seems to me like DVA is making too much money for that to be the case. And if the marginal client is profitable, then I believe Thiry will whine and complain but in the end eat it, not close any centers, and everyone who gets care now will continue to get care. He's trying to get paid, and knows that the larger the company is, the more he can shovel his way.

 

 

[cubsfan]

It seems the market agrees with both of you guys, that DaVita will have to take these lower re-imbursement prices forever.

Could be. There is no certainty.  Maybe the best solution is for the government to take over the clinics and run them like the VA Hospitals. That should be good for the quality of care.

[sleepydragon]

If private insurer want lower payment from dva, and dva say no, where else the patience can get the treatment? They will go to hospitals, and the hospitals will bill much higher amount (plus maybe other tests). So the reality is DVA is already the low cost solution for private insurers.