DVA – DaVita HealthCare Partners

[MrB]

"Two California families awarded $253 million in lawsuit against dialysis corporation",

 

https://www.fresnobee.com/news/local/article214205774.html

 

This seems excessive.

Do punitive damages often get reduced or eliminated?

 

More background,

 

https://www.denverpost.com/2018/06/30/verdict-davita-testimony-wrongful-deaths/

 

The idea here is to try to discount the cost of doing business.

Punitive damage awards are hard to predict and can be substantial.

 

There are valid arguments in favor of punitive damages but a point can be made that amounts awarded sometimes seem excessive and have not been clearly shown to meet the underlying objectives. Especially true with the blockbuster punitive damages. Reform may be on the way. Something to consider is that, as I think that more dialysis and other comparable care will get covered by Medicare and "public" funds, capping damages "rules" may become more stringent. The large amounts are typically awarded by juries and one has to wonder if emotion plays over reason. What about the mindset of the typical jury starting his/her day reading the following article:

https://nypost.com/2018/06/29/hospital-charges-18000-to-treat-baby-with-a-bottle-and-a-nap/

I wonder if one's judgement is not clouded then when comparing the large corporatiion to the beloved guy who worked hard all his life and used to impersonate Santa Claus.

 

Concerning the merits of the cases, which may be irrelevant to this Board, the use of GranuFlo gives rises to potential questions. The defense side and expert witnesses used a shrewd strategy (and this is not pseudo-science or esoterics) and DaVita's "exposure" is significant as the ESRD population is at high risk of complications and mortality and dialysis is a high-risk procedure. The defense has to put together a reasonable thesis suggesting a link and reinforcing the potential bias described above. Don't get me wrong as I think that the business model has significant advantages and the results they report based on the CMS guidelines in terms of outcomes are relatively good but to reach financial target returns, DVA has to focus on costs and when drawing the line in some areas, this may be clearly be perceived as putting the safety of patients at risk. Historically, if you look at the regulatory legal profile (where most of the litigation risk lies IMO), DVA has been stretching the limits and the perception may be that the profit motive, at a certain point, may be detrimental to clinical results.

 

Having discussed the above, blockbuster awards at first instance courts are typically appealed. Then you get re-trials, punitive damages are reduced or eliminated on appeal or, very often, "settlements" are reached. Typically settlement amounts are not disclosed but, from inference, amounts are often immaterial or a small fraction of the initial amounts mentioned in initial press releases. Hope this helps if you try to discount these "operating" costs in your valuation.

Add to that the risk that Thiery is an aggressive operator that don't mind steering close to the line as shown by the Whistleblower Case and the substantial use of options.

Not the whole story, but worth bearing in mind.

[cubsfan]

Davita buys back another 8M shares in Q2 - what a cannibal.

 

And reloads with $1.5B for more buybacks.

 

Share repurchases: During the quarter ended June 30, 2018, we repurchased a total of 7,797,712 shares of our common stock for approximately $512 million at an average price of $65.60 per share. We have also repurchased 3,871,905 shares of our common stock for $273 million at an average price of $70.48 per share from July 1, 2018 through July 31, 2018. As of July 31, 2018, we have repurchased a total of 15,866,921 shares of our common stock for approximately $1,083 million at an average price of $68.24 during 2018.

 

On July 11, 2018, our Board of Directors approved an additional share repurchase authorization in the amount of approximately $1,390 million. This recently approved authorization was in addition to the approximately $110 million remaining at that time under our Board of Directors' prior share repurchase authorization approved in October 2017. As of July 31, 2018, we have a total of approximately $1,426 million in outstanding Board repurchase authorizations remaining under our stock repurchase program. These share repurchase authorizations have no expiration dates.

 

 

[DooDiligence]

What did they get from Walgreen for this?

More cash for buybacks?

 

http://www.orlandosentinel.com/business/consumer/os-bz-davita-layoffs-20180730-story.html

[DooDiligence]

https://www.gurufocus.com/news/724620/francis-chou-buys-buffetts-davita-spirit-and-allegiant-in-2nd-quarter

[ValueMaven]

Has there been any update on the deal with Optum yet??

[walkie518]

Has there been any update on the deal with Optum yet??

still on track to close this year...

[sleepydragon]

https://www.sec.gov/Archives/edgar/data/927066/000092706618000167/dva8-k8222018.htm

 

 

Amendment to Employment Agreement

 

DaVita Inc. (the “Company”) entered into an amendment (the “Amendment”) to the employment agreement with Kent J. Thiry, the Company’s Chairman and Chief Executive Officer and the Chief Executive Officer of DaVita Medical Group, effective as of August 20, 2018. The Amendment removes the additional payment that Mr. Thiry would be eligible to receive for excise taxes incurred under Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”), and replaces such provision with a provision that automatically reduces any payments or benefits related to a change in control of the Company to the extent necessary to avoid the imposition of excise taxes under Section 4999 of the Code, provided that such reduction would result in a better after-tax result for Mr. Thiry. The foregoing summary description of the Amendment does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Amendment, which is filed as Exhibit 10.1 hereto and incorporated by reference herein.

[Happy]

https://www.axios.com/california-passes-controversial-dialysis-bill-premium-assistance-6e3bd888-4696-4c5a-853b-efcb6f6692f9.html

 

The California Assembly late Wednesday passed dialysis legislation SB 1156 by a 44-19 tally after it originally didn't have the votes. California's Senate still has to vote it through again, but it's "pretty much pro forma at this point" and will head to Gov. Jerry Brown's desk, according to a lobbyist familiar with the bill.

 

The bottom line: This is a giant win for the SEIU, health insurers and employers and a huge blow to dialysis companies and the American Kidney Fund, but it's a coin flip on what Brown will do. The bill would cap payments at lower Medicare rates for providers that have financial ties to charities that subsidize patients' commercial insurance.

[DooDiligence]

https://www.axios.com/california-passes-controversial-dialysis-bill-premium-assistance-6e3bd888-4696-4c5a-853b-efcb6f6692f9.html

 

The California Assembly late Wednesday passed dialysis legislation SB 1156 by a 44-19 tally after it originally didn't have the votes. California's Senate still has to vote it through again, but it's "pretty much pro forma at this point" and will head to Gov. Jerry Brown's desk, according to a lobbyist familiar with the bill.

 

The bottom line: This is a giant win for the SEIU, health insurers and employers and a huge blow to dialysis companies and the American Kidney Fund, but it's a coin flip on what Brown will do. The bill would cap payments at lower Medicare rates for providers that have financial ties to charities that subsidize patients' commercial insurance.

 

Maybe the Fed should just nationalize dialysis treatment centers?

After all, they own these guys already...

 

(Tongue ==> Cheek)

 

:o

[Spekulatius]

No need to nationalize if you control the pricing. The current system where private insurance pays 3x what Medicare/ Medicaid pays makes no sense, but sane is true for many parts of the US health care system.

[dwy000]

This is not good for the California treasury.  If the rates are capped theres no reason for the assistance programs to exist and those patients will move into the government payroll (medicaid).  If the rates paid by Medicaid dont improve it could jeopardize clinics and send patients to emergency rooms - which will cost even more.

 

From a financial perspective you would think the government would be more inclined to set up their own insurance  assistance program to keep as many patients off Medicaid as possible.  Much cheaper for taxpayers (that was tongue in cheek as well) 

[mwtorock]

This is not good for the California treasury.  If the rates are capped theres no reason for the assistance programs to exist and those patients will move into the government payroll (medicaid).  If the rates paid by Medicaid dont improve it could jeopardize clinics and send patients to emergency rooms - which will cost even more.

 

From a financial perspective you would think the government would be more inclined to set up their own insurance  assistance program to keep as many patients off Medicaid as possible.  Much cheaper for taxpayers (that was tongue in cheek as well)

 

however we probably should not trust government/politicians to make right choices, should we?  :P

 

All that said,  should it put that much a dent into the valuation of DVA long term?

[walkie518]

This is not good for the California treasury.  If the rates are capped theres no reason for the assistance programs to exist and those patients will move into the government payroll (medicaid).  If the rates paid by Medicaid dont improve it could jeopardize clinics and send patients to emergency rooms - which will cost even more.

 

From a financial perspective you would think the government would be more inclined to set up their own insurance  assistance program to keep as many patients off Medicaid as possible.  Much cheaper for taxpayers (that was tongue in cheek as well)

I believe there must be senate approval followed by gubernatorial support for CA to enforce, but the stock appears to be moving as if this is a done deal

 

that said, that is one very possible outcome

 

another very possible outcome is that state assembly is the only approval the bill gets

 

for the time being, I think nothing is more likely than something...in the short-term, do politicians chose to alienate voters or donors?  considering the demographics of those impacted most, it might be a smarter move to kick the can down the road until the votes are collected?

 

closing clinics will be bad for patients, bad for the government, but good for the insurance companies

 

that said, if it doesn't go through, insurers will argue they should charge more

[flesh]

Is it true the standstill period with brk doesn't end unless DVA is m & a or ownership falls below 15%?

[DooDiligence]

I guess we'll see if high dollar hospital stays start jumping up.

 

Meanwhile, I hope Davita buys an assload of shares back.

[Spekulatius]

I guess we'll see if high dollar hospital stays start jumping up.

 

This would take years to work out. DVA can’t really dump existing patients. They can close down centers that are now unprofitable, but that would also hurt their LT earnings power.

[DooDiligence]

I guess we'll see if high dollar hospital stays start jumping up.

 

This would take years to work out. DVA can’t really dump existing patients. They can close down centers that are now unprofitable, but that would also hurt their LT earnings power.

 

Wasn't suggesting that (Thiry doesn't strike me as the kind of guy who would hurt people just to prove a point.)

 

But legally & contractually, are they obligated to continue serving patients who are not covered?

Insurance companies don't have to pay after (is it 32 months?)

Why would Davita HAVE to provide service (except out of a sense of moral obligation?)

 

What would be the difference between Davita providing free service or Davita contributing to premium assistance programs?

(Besides the obvious shifting of a liability from payers to Davita.)

 

What I am suggesting is that we should see an increase (over time) of newly diagnosed CA ESRD patients, who can't afford insurance, ending up in the hospital.

Then the liability get's shifted from payers to HOSPITALS & THEY start complaining to legislators (ad nauseam.)

 

Something has to give.

 

If not, then either the service degrades and/or, as you said, dialysis clinics start shutting down (which would exacerbate the problem.)

 

= edit =

 

and yes, it will take years to work out (which I'm OK with.)

 

"You pay a very high price in the market for a cheery consensus"

[Cigarbutt]

For dialysis care, I would say that, over time, the right balance between costs, outcomes and profits should eventually trickle down to a reasonable compromise. Bumps expected along the way.

 

When analyzing the California legislation recent announcement, it's hard to embrace market efficiency. The motivations pushing for change is more ideological than practical and DaVita and oligopolistic brothers have shown to be very adept at this political game.

 

 

Spent some time lately on DVA and wonder about the long-term challenges that may decrease its potential for profits:

1-the definition of "reasonable" profit which will be more and more influenced by government and quasi-government agencies

2-the accountability game

3-the captured nephrologist

4-the expected growing presence of "substitutes"

 

1-IMO long term trends will continue to bring equity returns along the lines of utilities but the complex nature of the industry is likely to make the returns less steady. Have to decide if this is simply for the long run or for opportunistic forays through the regulatory cycle.

 

2-I have no problems with the tight cost structure that DVA has put in place (fewer registered nurses per business volume, occasional cockroach on the wall story) but reasonable "regulatory" questions will keep coming when comparing key results (mortality, hospitalizations) because DVA may have some explaining to do (or penalties to pay) when relative poor results may be tied to factors under their control (shorter dialysis duration, less use of cardio-protective medications, infections (significant problem in this patient population) diagnosis, prevention and effective treatment).

 

3-The capture in place is associated with incentives that are poorly aligned (versus patient care) and IMO this issue will become more acute from within (profession) and from the regulators and policy makers. Main problems: a) patients are directed to dialysis too early b) with bundling, expected cost containment trends and accountability issues, "costly" patients who need dialysis treatments may be pushed out of the large dialysis organizations and c) certain patients for whom dialysis is not the best option may be kept on dialysis.

 

4-Combined with actions taken to deal with the issues in 3-, there are areas that can be improved as substitutes to dialysis: better primary and secondary prevention care. Also (opinion: end-of-life care will change a lot and, by definition, dialysis is often a component of the end coming soon), "improved" end-of-life care may result in a significantly decreased demand for dialysis services.

 

 

All in all, DVA has achieved a scale and market share based on an aggressive cost structure that makes sense in providing an essential "public" service and IMO the recent California legislation is more noise than anything but, from a cheery consensus long term point of view, return expectations perhaps should be moderated.

 

https://www.ajkd.org/article/S0272-6386(16)00113-X/pdf

http://www.medpac.gov/docs/default-source/reports/mar18_medpac_ch6_sec.pdf?sfvrsn=0

https://www.ajkd.org/article/S0272-6386(17)30732-1/pdf

https://www.ajkd.org/article/S0272-6386(18)30479-7/pdf

 

[Spekulatius]

I agree wholeheartedly with Cigarbutt here.

 

DooDilugence- DVA couldn’t dump the patients because they still would get paid the prevailing Medicaid rates. DVA accepts these rates( which barely cover costs) right now for the majority of patients, so they can’t refuse service on existing patients either, imo.

If DVA would refuse service to existing patients, and patients die because of this, the ensuring lawsuits would probably do the company in.

[DooDiligence]

I agree wholeheartedly with Cigarbutt here.

 

DooDilugence- DVA couldn’t dump the patients because they still would get paid the prevailing Medicaid rates. DVA accepts these rates( which barely cover costs) right now for the majority of patients, so they can’t refuse service on existing patients either, imo.

If DVA would refuse service to existing patients, and patients die because of this, the ensuring lawsuits would probably do the company in.

 

Davita's acceptance of Medicare's prevailing rates is a fine point which I didn't pay attention to until you pointed it out.

 

I also agree with Cigarbutt's insightful thoughts.

 

I believe the business will survive for a long time (while constantly being beaten & battered by those with opposing interests.)

A tight focus on operational excellence might minimize the ability of opponents to gain traction.

[walkie518]

I agree wholeheartedly with Cigarbutt here.

 

DooDilugence- DVA couldn’t dump the patients because they still would get paid the prevailing Medicaid rates. DVA accepts these rates( which barely cover costs) right now for the majority of patients, so they can’t refuse service on existing patients either, imo.

If DVA would refuse service to existing patients, and patients die because of this, the ensuring lawsuits would probably do the company in.

 

Davita's acceptance of Medicare's prevailing rates is a fine point which I didn't pay attention to until you pointed it out.

 

I also agree with Cigarbutt's insightful thoughts.

 

I believe the business will survive for a long time (while constantly being beaten & battered by those with opposing interests.)

A tight focus on operational excellence might minimize the ability of opponents to gain traction.

DaVita has reduced costs to the national healthcare; DaVita clinics are better than hospitals and smaller operations; and as long as people continue to eat and drink more than they need, dialysis will continue to grow with continued global population growth and/or GDP.

 

The largest risk to the business might be when kidneys can be printed?  I don't see other forms of dialysis sticking as in other countries?

[DooDiligence]

I agree wholeheartedly with Cigarbutt here.

 

DooDilugence- DVA couldn’t dump the patients because they still would get paid the prevailing Medicaid rates. DVA accepts these rates( which barely cover costs) right now for the majority of patients, so they can’t refuse service on existing patients either, imo.

If DVA would refuse service to existing patients, and patients die because of this, the ensuring lawsuits would probably do the company in.

 

Davita's acceptance of Medicare's prevailing rates is a fine point which I didn't pay attention to until you pointed it out.

 

I also agree with Cigarbutt's insightful thoughts.

 

I believe the business will survive for a long time (while constantly being beaten & battered by those with opposing interests.)

A tight focus on operational excellence might minimize the ability of opponents to gain traction.

DaVita has reduced costs to the national healthcare; DaVita clinics are better than hospitals and smaller operations; and as long as people continue to eat and drink more than they need, dialysis will continue to grow with continued global population growth and/or GDP.

 

This is the same reason I'm confident in NVO too.

Many people simply will not modify their behavior to avoid health problems.

 

The largest risk to the business might be when kidneys can be printed?  I don't see other forms of dialysis sticking as in other countries?

 

Agreed.

[Cigarbutt]

DaVita has reduced costs to the national healthcare; DaVita clinics are better than hospitals and smaller operations; and as long as people continue to eat and drink more than they need, dialysis will continue to grow with continued global population growth and/or GDP.

 

The largest risk to the business might be when kidneys can be printed?  I don't see other forms of dialysis sticking as in other countries?

 

In essence, I agree with your long-term assessment.

 

Reaching the long term trajectory however may be more rocky because of regulatory risk and social perception as DVA and other large dialysis providers can be depicted like the Frosted Mini-Wheats cereals ie they seem to have a dual personality. They are efficient providers and excellent at capital allocation but are often described as "predatory" entities racking up "obscene profits" through "greed". Standard Oil had such a dual personality and, with muckrackers such as Ida Tarbell and associated underlying political and social movements, the company eventually lost the public opinion battle, the Supreme Court (1911) called it "unreasonable" and was eventually broken up.

 

Even if you (and I) are convinced that DVA is bringing a huge net positive to society, in certain scenarios, the regulatory monster may look into the growing dialysis industrial complex and impose a way to "share" the efficiencies between the profit line and the end-consumers (patients). In the end, an argument could be made that Rockefeller was made richer by the anti-trust laws and the forced break-ups and DVA can certainly adapt but helpful to consider that regulatory challenges will continue to be on the horizon.

[sleepydragon]

I think if DVA reduce their debt, though their roe will be reduced, the stock will become much less volatile.

[Cigarbutt]

I think if DVA reduce their debt, though their roe will be reduced, the stock will become much less volatile.

1+

Also, it may be reasonable to expect that DVA will come to work in an environment where they will be bounded by an "authorized" capital structure.

 

Going forward, using leverage to maximize returns may become more difficult because of the ease of regulatory measurement.

 

IMO, the main competitive moat in the more stringent environment (I think this has been well explained by Mr.B using different words, earlier in this thread), will continue to be the capacity to be ahead of regulators by explaining the overall net gains brought to the system by running a large and efficient operation. What could be considered gaming of the system when returns are shared in order to make a "reasonable" profit can be reconciled using an intelligent dialogue with the agencies showing that gains from efficiencies are reasonably passed on to the immediate customers (dialysis patients) and customers at large (population) while maintaining satisfactory outcomes. There is room for relatively "aggressive" strategies on the operating side because, if costs happen to be lower than planned when negotiating reasonable returns, DVA can focus on efficiency gains for justification and not be looked upon as a firm cutting costs to the point of causing a negative impact on clinical outcomes.

 

This is a tough game to play but Kent Thiry and his team have been unusually good at this in the last few years overall and it is reasonable to expect more of the same going forward although regulatory volatility is to be expected.