DVA – DaVita HealthCare Partners

[Rasputin]

Private payor rate/treatment down 10% is a reasonable downside.  Assuming government rate/treatment remains the same, it will cause revenue/treatment to be down $11 from $347 to $336, 85 MLR.  EBIT will be down $300 million, which DVA will offset in 3 years. 

 

I have made mistake with Valeant, so I went through the lists.  One of them is: Can payors threaten to exclude DVA's service?  For VRX derm rx, the answer is yes.  For DVA the answer is no, since it's the lowest cost option. 

 

I think getting $347 for a service that costs $286 is reasonable.  And DVA's cost is similar to Fresenius's. 

 

In my view, it's time to extend the MSP period, since mortality rate has come down from 20% in 1997 to under 14% (people living longer on dialysis), then private rates can come down and the difference between private rate vs govt rate won't be so stark. 

[Rasputin]

https://www.davita.com/UploadedFiles/KidneyCareConnections/MSP_Timeline_10_06.pdf

[matts]

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.

 

and if DVA says, no, what will happen to their business? They would only be left with the money losing government business. Thiry would take a 90% pay cut and fire thousands of employees? Let's not make it sound like Davita has nothing to lose by playing a game of chicken with the insurers. My view is that their negotiating leverage is a lot smaller than what the bulls think. In a negotiation where both sides have massive downsides if a deal doesn't get done, typically both sides make significant concessions, not just one.

 

Also, I picked 10% arbitrarily, the dynamics might be the same at 15% or 20%. Hence why I asked at what price the marginal patient is no longer profitable, because it's only at that point we can all agree for sure that it makes sense for DVA to say no and walk away. Based on some of the comments it sounds like with a 10% cut the company would still be printing money. what about 15 or 20%?

 

 

 

 

[LC]

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.

 

and if DVA says, no, what will happen to their business? They would only be left with the money losing government business. Thiry would take a 90% pay cut and fire thousands of employees? Let's not make it sound like Davita has nothing to lose by playing a game of chicken with the insurers. My view is that their negotiating leverage is a lot smaller than what the bulls think. In a negotiation where both sides have massive downsides if a deal doesn't get done, typically both sides make significant concessions, not just one.

 

Also, I picked 10% arbitrarily, the dynamics might be the same at 15% or 20%. Hence why I asked at what price the marginal patient is no longer profitable, because it's only at that point we can all agree for sure that it makes sense for DVA to say no and walk away. Based on some of the comments it sounds like with a 10% cut the company would still be printing money. what about 15 or 20%?

 

Between the gov't, davita, and insurers, who has the worst leverage? the insurers. DVA provides a life saving service. The Gov't needs to pay for this service or people will start dying. The insurers want to save money.

 

I don't see how the gov't sides with the insurers who are doing not much of anything, as opposed to DVA who is providing a subsidized service to the gov't (saving them money) while keeping people alive.

[Rasputin]

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.

 

and if DVA says, no, what will happen to their business? They would only be left with the money losing government business. Thiry would take a 90% pay cut and fire thousands of employees? Let's not make it sound like Davita has nothing to lose by playing a game of chicken with the insurers. My view is that their negotiating leverage is a lot smaller than what the bulls think. In a negotiation where both sides have massive downsides if a deal doesn't get done, typically both sides make significant concessions, not just one.

 

Also, I picked 10% arbitrarily, the dynamics might be the same at 15% or 20%. Hence why I asked at what price the marginal patient is no longer profitable, because it's only at that point we can all agree for sure that it makes sense for DVA to say no and walk away. Based on some of the comments it sounds like with a 10% cut the company would still be printing money. what about 15 or 20%?

 

I think you can do the math yourself, the numbers are available, it's a very transparent industry.  I have taken the time to provide numbers for 1 downside scenario that I think is reasonably possible.

 

I'm saying if the payors have to operate with 80 to 85 MLR, forcing providers to operate with 90 plus MLR will be seen as unreasonable especially when it hurts dialysis patients.  DVA and Fresenius will just stop opening new centers, closing unprofitable centers, while # of ESRD needs grow almost 4% per year.  It costs roughly $3 million per new center. 

[flesh]

Medicare can grow it's budget through raising tax dollars or govt debt. Insurers can pass on costs to customers, they have more flexibility than dva.

 

I think probably the bear case already happened starting in 2013 when dva's medicare reimbursements were all but frozen and have been for the most part since. That's not to say it couldn't get worse. The gov has more power than insurers and medicare already decided to nearly freeze rates whereas most co's have been receiving market basket like inflation increases for their products/services. For the most part dva hasn't. As of now dva should receive only a marginal raise in 18' and closer to a market basket raise in 19'. Attrition through inflation is much more palatable for everyone. 

 

If any rates are to be cut, the most likely scenario is that rates are frozen, as they have been and dva doesn't receive rate increases going forward. Nobody wants to shock dva's system, however by freezing rates, dva could adjust it's cost structure to compensate slowly over time, to a point. I'm not sure where that point is but there's almost always something to cut, especially if it's 1-2% a year. The recent epo contract is evidence of this. Alternatively, value added services compensate or even add profitability in place of rate increases, such as http://www.davitahealthsolutions.com/.

 

With so much at risk, the govt allowing this duopoly for a reason, all parties reputation's are maintained by providing the best outcomes for patients. Anything to threaten the marginal facility threatens insurers and medicare/politicians in an instant news world.

 

Home dialysis is more expensive. Everyone's better off having remote facilities that are unprofitable and as the patient cohort grows these facilities become profitable and you do it all over again. Saving opposing parties money in the mean time.

 

Ideas like what's being floated in Cali are silly. As previously mentioned, if you hold rates to a 15% margin, facilities are closed down, people are upset and the politicians will hear about it. Plus, if you limit me to a 15% pre tax margin, like a utility at 10%, guess what I'll do? I'll raise my costs in turn increasing my profitability. I can give everyone a raise and keep 15% of it for myself to the point where my reimbursement limits me. If i'm receiving $1 dollar per patient limited by rates, at a 20% margin, and I'm now limited to a 15% margin, leaving .05 on the table, I raise my costs by .05 and capture 15% of it, netting zero savings to opposing parties. My future incentive, in place of cutting costs, is to raise costs as much as possible.

 

Come to think of it, I suppose if you limit my margin to 15% in cali and force me to hire new people, the above is exactly what will happen. This would mitigate the hit in a small way.

 

It would be interesting to find out what % of cali facilities are unprofitable at present. It's likely dva would be more profitable today, by closing under performing facilities and raising costs, capturing 15%. However, this may choke growth.

 

The 30% ish of the market dva and fresenius doesn't hold, can not afford to have any rates cut. This has been mentioned in this thread. See news circa 2013 from small operators. Their margins are significantly smaller than dva's. I don't see evidence of dva or fresenius working hard to gobble up market share at this point.

 

 

 

 

 

[matts]

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.

 

and if DVA says, no, what will happen to their business? They would only be left with the money losing government business. Thiry would take a 90% pay cut and fire thousands of employees? Let's not make it sound like Davita has nothing to lose by playing a game of chicken with the insurers. My view is that their negotiating leverage is a lot smaller than what the bulls think. In a negotiation where both sides have massive downsides if a deal doesn't get done, typically both sides make significant concessions, not just one.

 

Also, I picked 10% arbitrarily, the dynamics might be the same at 15% or 20%. Hence why I asked at what price the marginal patient is no longer profitable, because it's only at that point we can all agree for sure that it makes sense for DVA to say no and walk away. Based on some of the comments it sounds like with a 10% cut the company would still be printing money. what about 15 or 20%?

 

Between the gov't, davita, and insurers, who has the worst leverage? the insurers. DVA provides a life saving service. The Gov't needs to pay for this service or people will start dying. The insurers want to save money.

 

I don't see how the gov't sides with the insurers who are doing not much of anything, as opposed to DVA who is providing a subsidized service to the gov't (saving them money) while keeping people alive.

 

I guess I view leverage from a downside risk scenario. If davita decides to stand firm and the insurer also stand firm on a rate cut, what happens to each player?

 

Davita: Company is dead. There is no Davita without the private clients, it would just be a money losing pit. Thiry and thousands of others lose their jobs, he also loses his identity. Davita is his life. Never underestimate the power of ego.

 

Insurers: Costs go up because they have to send their clients to more expensive options (hospitals). Their profitability declines but their entire business is not threatened. OR they could pass on the costs to patients...

 

Patients: certainly inconvenienced, and also pissed if their premiums go up. But again, deaths would not skyrocket, c'mon guys

 

Government: Costs go up. If Davita is gone, some government plan patients would have to go to higher cost options.

 

See my point? Davita is the only actor under EXISTENTIAL threat if they play hardball with insurers. For all other players, it's a question of cost and convenience but their existence is not threatened. That's how I'm looking at it. 

[MrB]

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.

 

and if DVA says, no, what will happen to their business? They would only be left with the money losing government business. Thiry would take a 90% pay cut and fire thousands of employees? Let's not make it sound like Davita has nothing to lose by playing a game of chicken with the insurers. My view is that their negotiating leverage is a lot smaller than what the bulls think. In a negotiation where both sides have massive downsides if a deal doesn't get done, typically both sides make significant concessions, not just one.

 

Also, I picked 10% arbitrarily, the dynamics might be the same at 15% or 20%. Hence why I asked at what price the marginal patient is no longer profitable, because it's only at that point we can all agree for sure that it makes sense for DVA to say no and walk away. Based on some of the comments it sounds like with a 10% cut the company would still be printing money. what about 15 or 20%?

 

Between the gov't, davita, and insurers, who has the worst leverage? the insurers. DVA provides a life saving service. The Gov't needs to pay for this service or people will start dying. The insurers want to save money.

 

I don't see how the gov't sides with the insurers who are doing not much of anything, as opposed to DVA who is providing a subsidized service to the gov't (saving them money) while keeping people alive.

 

I guess I view leverage from a downside risk scenario. If davita decides to stand firm and the insurer also stand firm on a rate cut, what happens to each player?

 

Davita: Company is dead. There is no Davita without the private clients, it would just be a money losing pit. Thiry and thousands of others lose their jobs, he also loses his identity. Davita is his life. Never underestimate the power of ego.

 

Insurers: Costs go up because they have to send their clients to more expensive options (hospitals). Their profitability declines but their entire business is not threatened. OR they could pass on the costs to patients...

 

Patients: certainly inconvenienced, and also pissed if their premiums go up. But again, deaths would not skyrocket, c'mon guys

 

Government: Costs go up. If Davita is gone, some government plan patients would have to go to higher cost options.

 

See my point? Davita is the only actor under EXISTENTIAL threat if they play hardball with insurers. For all other players, it's a question of cost and convenience but their existence is not threatened. That's how I'm looking at it.

Does that line of thinking not fly in the face of how an oligopoly works? If you assume the pvt insurer can walk away from DVA then does it not assume a better price from FMS? If FMS does not break with DVA on pricing (probably safe to assume in an oligopoly) then you're left dealing with the 30% of the market that provides both inferior care (higher hospitalization rates, which at 40% of total patient cost and twice per annum on average per patient is a significant swing factor for the insurer) and you're also dealing with a footprint problem (your insured wants easy access to a clinic from home). I think it is a more complicated dance and the fact that an oligopoly was formed in the first place tells you a lot about who has the market power.  The government has the most, evidenced by the fact that they can "demand" the industry provides the service to government at a loss, then the oligopolists and then the insurers.

[gfp]

So Berkshire just filed a 13D on Davita showing 20.2% ownership, up from 18.69% at DVA's last proxy.  But as far as I can tell it's the same number of shares - 38,565,570.  So this is from share repurchases I gather.  It seems like Berkshire is unlikely to purchase additional shares in size if they are limited to 25% and the repurchases are increasing their ownership this quickly.  One might think Berkshire would consider a bid for the entire company but Buffett may not want the reputational risk of owning a healthcare company - he's pretty much stayed away from them and this one is not without headline risk, rational or otherwise.

 

Perhaps they will just negotiate an amendment to their standstill agreement forgoing some voting rights in exchange for permission to go above 25%.

[sleepydragon]

don't underestimate how much it will cost the insurers if a dialysis patient get sick.. Very expensive.  For dialysis, it's 800-900/dollar per treatment, or 12k/month. Just 1 day of hospital stay will be the same amount. Delayed dialysis treatments could easily send a patient to hospital and maybe stay there for 3-5 days, and then come back to the hospital a month later. If insurer mess this up, they will quickly lose their entire profits and even start posting losses. As of DVA, they will at least break-even without private insurers.

[sleepydragon]

So Berkshire just filed a 13D on Davita showing 20.2% ownership, up from 18.69% at DVA's last proxy.  But as far as I can tell it's the same number of shares - 38,565,570.  So this is from share repurchases I gather.  It seems like Berkshire is unlikely to purchase additional shares in size if they are limited to 25% and the repurchases are increasing their ownership this quickly.  One might think Berkshire would consider a bid for the entire company but Buffett may not want the reputational risk of owning a healthcare company - he's pretty much stayed away from them and this one is not without headline risk, rational or otherwise.

 

Perhaps they will just negotiate an amendment to their standstill agreement forgoing some voting rights in exchange for permission to go above 25%.

 

Yes, when I saw the 13D I was excited for a few minutes, till I pull the last filing.

Strange the Ted's personal holding in the 13D doesn't exactly match with the Form 4 filled in 2014, but total shares are exactly the same.

[sleepydragon]

They were 18% and now 20%, but they didn't make any purchase. So how did they know that there is a change and they need to file? Maybe management was buying stock during the past week and likely sent them a notice of the new shares outstanding?

[gfp]

It was just the recently filed 10Q for DaVita that gave the new share count at the top:

 

"All calculations of percentage ownership in this Schedule are based on 191,200,237 shares of Common Stock estimated to be issued and outstanding as of June 30, 2017, as reported in the Quarterly Report on Form 10-Q for the Quarterly Period ended June 30, 2017, which was filed by DVA with the SEC on August 1, 2017."

 

As for the difference in shares owned by Ted vs his last form 4, I think the difference is just shares owned by his daughter, certain other family members, and his perhaps changing interest in whatever pension fund / retirement vehicle Berkshire offered him.  Most of the discrepancy is the shares owned by Ted's family members.

 

They were 18% and now 20%, but they didn't make any purchase. So how did they know that there is a change and they need to file? Maybe management was buying stock during the past week and likely sent them a notice of the new shares outstanding?

[sleepydragon]

It was just the recently filed 10Q for DaVita that gave the new share count at the top:

 

"All calculations of percentage ownership in this Schedule are based on 191,200,237 shares of Common Stock estimated to be issued and outstanding as of June 30, 2017, as reported in the Quarterly Report on Form 10-Q for the Quarterly Period ended June 30, 2017, which was filed by DVA with the SEC on August 1, 2017."

 

As for the difference in shares owned by Ted vs his last form 4, I think the difference is just shares owned by his daughter, certain other family members, and his perhaps changing interest in whatever pension fund / retirement vehicle Berkshire offered him.  Most of the discrepancy is the shares owned by Ted's family members.

 

They were 18% and now 20%, but they didn't make any purchase. So how did they know that there is a change and they need to file? Maybe management was buying stock during the past week and likely sent them a notice of the new shares outstanding?

 

Thanks!!

[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.

 

The Valeant case is very different -  Valeant charged an enourmous markup for drugs with somewhat questionable value and in any case for the most part non -life threading diseases.

 

DVA comparatively speaking operates in a low margin business for a life saving treatment. The case is entirely different, except the fact that the pricing is not rational, which imo is a risk to profitability.

 

DVA is in a volume business, where each facility has a significant amount of fixed cost, somin order to make a profits, cost need to be held low and the facility need to run close to its capacity. I think the ability to reduce costs (both capes and variable cost as well as overhead) favors larger players and consolidation into hat now are two major players. Smaller companies and mom and pop business are at an disadvantage here and that is why they tend to sell out to the larger players. I think a business like this will more or less naturally evolve into few players owning large market shares.

 

Neither DVA nor the insurers  can afford to really take a hard line and deny treatment - people will do in very short order and just imagine the publicity and the lawsuits. It's not going to happen. What is going to happen is a fight behind the scenes and most likely government intervention.

 

I also think they home dialysis is a long term threat to some extend for the current business model. Yes treatment cost is higher, but clinical outcome is much better for home dialysis (due to more frequent but shorter treatment sessions) and the result is that home dialysis patients tend to remain in the workforce while those going to outpatient places like DVA won't too large extend. If the equipment for home dialysis becomes cheaper, it will become the preferred option, imo. This is not a short term issue, but could become one in ten years.

 

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.

[MrB]

Can anyone clarify the following for me please?

 

It seems accepted by the board and the analyst community and is being communicated by providers that they lose money on CMS business.

 

Why then do I frequently come across official data that mentions positive margins for dialysis centers and the data they use indicates that all costs are included (incl. costs like depreciation/capex, leases, interest exp and even bad debts)?

 

For example:

Reference to margins bottom of page 158 http://www.medpac.gov/docs/default-source/reports/mar17_medpac_ch6.pdf?sfvrsn=0

Taking into account the sequester, we estimate that the aggregate Medicare margin

was 0.4 percent in 2015, and the rate of marginal profit—that is, the rate at which

Medicare payments exceed providers’ marginal cost—was 16.6 percent. We project

a 2017 Medicare margin of –1.0 percent, which reflects a CMS accounting change

Slide 9 http://www.medpac.gov/docs/default-source/default-document-library/dialysis-1216-public.pdf?sfvrsn=0

 

Calculation of margin always seem to be based on Form CMS 265-94 and tab ws-A indicates the line items that go into the calculation.

https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwiLyraVn9LVAhUmDcAKHS7wCi8QFggoMAA&url=http%3A%2F%2Fwww.nber.org%2Fhcris%2F265-94%2Fworksheets%2FRENAL%2520WORKSHEET%2520FORMS%2520TRANSMITTAL%25209.xls&usg=AFQjCNEHseKC0W1gRm1M0yjowN2mTgY0eA

 

 

 

[Rasputin]

I think the cost number that CMS use is 4 wall facility costs (patient care costs + D&A costs).  It doesn't take into account headquarter costs, legal costs, provision for uncollectible costs (ppl not paying their copays). 

[Rasputin]

From Q2 2013 Earnings Call Transcript:

 

Gary P. Taylor - Citigroup Inc, Research Division

 

Just a couple of questions. The first, I was probably hoping to get Kent's perspective but I'm sure someone else can tackle it. I guess I was hoping you can maybe reconcile the thought that negative dialysis margins are an important part of the lobbying position of the industry with respect to the proposed rebasing cuts and I think this is an important part, so I just want to understand the reconciliation. If we go -- if we look at the MedPAC report based on the last analysis they did of 2010, they showed 2.3% positive margins for the whole industry. I'd presume, because of DaVita's scale, your margins might be a little better than that and then certainly, margins improved once the bundle was implemented in 2011. So how do we get back to negative overall Medicare margins? Is the MedPAC analysis just completely flawed in your opinion?

 

LeAnne M. Zumwalt

 

Yes, this is LeAnne. Yes, let me take that. Hey, no, the MedPAC analysis is based on the cost reports that we file. As Kent mentioned, one of the most significant drivers of our difference is the, let's call it, uncompensated care bucket, the unreimbursed coinsurance, which is therefore also not reimbursed through the bad debt policies. And so our biggest concern about any analysis that's done by the government, whether that be MedPAC or CMS itself, is that they're presumption is that primarily that the co-pay is 100% collected and it's not.

 

Gary P. Taylor - Citigroup Inc, Research Division

 

Okay. So even net of Medicaid contribution on dual eligible, that would net out to, overall negative, including that, that's the case?

 

LeAnne M. Zumwalt

 

Correct, that's a fair point. There's some other costs in the cost report, which are not recognized as we take exception for. But as a vehicle of how they do analysis, they strictly maintain the cost report filing data and don't consider these other factors.

[MrB]

Brilliant thanks Rasputin and then of course not the D&A as a result of acquisitions too.

Very helpful!

[MrB]

Good summary of the legal situation surrounding DVA.

 

Dialysis treatment companies like DaVita (and Fresenius) made contributions to the American Kidney Foundation (AKF)

AKF would then pay for premiums for patients in need of dialysis

Treatment facilities like DaVita would steer patients to coverage, paid for by AKF

..

Why is Davita anticipating lower operating income in 2017? The way in which they had been obtaining some profitable patients has been blocked — at least for a while — by the Department of Health and Human Services, is being investigated by the Department of Justice, and the subject of a potential class-action investor lawsuit.

 

That’s quite a trifecta, which we’ll continue to track.

 

http://stateofreform.com/featured/2017/03/davita-regulated-investigated-sued/

A bit dated and don't think I've seen it posted, but the AKF comment letter to CMS is interesting nonetheless.

http://www.kidneyfund.org/assets/pdf/advocacy/akf-comment-letter-to-cms.pdf

[MrB]

Another question please.

 

What are good sources to look at in order to understand the private payor landscape in ESRD in general and specifically how they ended up paying for 33 months. I understand it was 22 months originally. I'm still trying to frame the 33 months and the dynamics that influence the discussion in general from the private payor's point of view.

 

Any direction will be much appreciated.

[Green King]

@MrB With the uncertainty removed what is this thing worth? I looked a few times and I have no clue how to value this thing even without the uncertainty.

[MrB]

@MrB With the uncertainty removed what is this thing worth? I looked a few times and I have no clue how to value this thing even without the uncertainty.

GK kindly rephrase your question, so I can be sure I understand it correctly. 

[Green King]

@MrB With the uncertainty removed what is this thing worth? I looked a few times and I have no clue how to value this thing even without the uncertainty.

GK kindly rephrase your question, so I can be sure I understand it correctly.

 

Thanks for the reply. Simply put what is your price target and how can we get there? Are we looking at a double or a triple here?

 

I looked it a few times looks like it is trading at 10 Free cash flow and growing at 6% with blow-up risk. Once the blow-up risk is removed will it go to 15 times or 25 times due to its oligopolistic characteristics and supply side tail wind. They need a lot of leverage to get their return on equity so the capital market has to stay in place.

 

Also Is having free cash flow higher than earnings because they are under spending on CapEx or over depreciating?

[LC]

Perhaps using client satisfaction is a good proxy for capex spending? I.e. If the company is under-investing, you would think client satisfaction would drop.