DVA – DaVita HealthCare Partners

[sleepydragon]

From the point of view of patients, staying in private insurance dramatically increase their chance of receiving a kidney transplant. So AKF provide real value to patients.

Insurance companies are bunch of greedy a**holes who never want to pay anything! Two out of three times, my insurance company reject my doctor's prescription drugs, saying it's too expensive and i can get less effective genetic versions. . Look at their stock prices, they are so profitable nowaday but still reject claims. They are the greedy guys that shall be regulated heavily.

[flesh]

Roddy left out that Thiry has already quantified, about a year ago, what impact losing all akf patients would have. Two, read akf's rebuttal, also from about a year ago.

 

I appreciate Roddy taking the time to allow dva to buyback shares cheaper.

 

I liked the example of a hospital with a 1% operating margin.

[cubsfan]

 

I appreciate Roddy taking the time to allow dva to buyback shares cheaper.

 

 

 

 

Exactly!

[DooDiligence]

I can't understand why someone would spend time attacking a service that loses money on nearly 80% of their business (someone correct me if I'm wrong on this figure.)

 

Seems like they'd be going after egregious margins elsewhere?

 

Agree with Flesh tho (buy, buy, buy backs!)

[dwy000]

I can't understand why someone would spend time attacking a service that loses money on nearly 80% of their business (someone correct me if I'm wrong on this figure.)

 

Seems like they'd be going after egregious margins elsewhere?

 

Agree with Flesh tho (buy, buy, buy backs!)

Seems like they are attacking the other 20% of the business which provides all the income (25% operating margins across the entire business) at the expense of insurance provider - which then drives up prices for everyone else.  Not claiming right or wrong but the attention in itself is going to be a weight on the stock for the foreseeable future.  Count the number of comparisons to Valeant that come up.

[koshigoe]

unfortunately they are entering the share repurchase blackout period (5 weeks before Nov earnings). hopefully today they're buying!

[Spekulatius]

I can't understand why someone would spend time attacking a service that loses money on nearly 80% of their business (someone correct me if I'm wrong on this figure.)

 

Seems like they'd be going after egregious margins elsewhere?

 

Agree with Flesh tho (buy, buy, buy backs!)

 

Comparisons with VRX are misguided - DVA does not sell pills that cost $5 to make and are quasi generic for $500. the margins in this busines are much lower than with Pharma. Dialysis is a tough business where it is important to keep cost low and utilization high while at the same time delivering quality work. I think there is an issue with the business model where a relatively small percentage of their patient generate all the prints, but this is by no means that same story than VRX.

 

[sleepydragon]

unfortunately they are entering the share repurchase blackout period (5 weeks before Nov earnings). hopefully today they're buying!

 

Likely not a coincident this report is published at this time.

[DooDiligence]

unfortunately they are entering the share repurchase blackout period (5 weeks before Nov earnings). hopefully today they're buying!

 

Likely not a coincident this report is published at this time.

 

No blackout for COBF members.

 

I hope it gets shorted down another 20% (I know, careful what you wish 4)

[oddballstocks]

I have no dog in this fight.  But the responses here are interesting.  I read the report, have no opinion.

 

BUT since WEB owns this it's 'good'.  What if WEB sells out, will the psychology change and suddenly the allegations are true, or it becomes 'bad'?

 

The same thing happened with ZINC.  Everyone was rah-rah ZINC when Pabrai loved it.  Then he dumped the stock, and the stock tanked and suddenly it's terrible.  Yet nothing changed in the meantime, just the perception.

 

I don't know if half of your profit coming from 4% is good or bad, but I do know it's risky.  Maybe this is a larger comment about following guru's whomever they are.  Their halo can cloud your thinking.

[sleepydragon]

I have no dog in this fight.  But the responses here are interesting.  I read the report, have no opinion.

 

BUT since WEB owns this it's 'good'.  What if WEB sells out, will the psychology change and suddenly the allegations are true, or it becomes 'bad'?

 

The same thing happened with ZINC.  Everyone was rah-rah ZINC when Pabrai loved it.  Then he dumped the stock, and the stock tanked and suddenly it's terrible.  Yet nothing changed in the meantime, just the perception.

 

I don't know if half of your profit coming from 4% is good or bad, but I do know it's risky.  Maybe this is a larger comment about following guru's whomever they are.  Their halo can cloud your thinking.

 

Well, Pabrai is not Web. I would follow Web but not Pabrai. But it's not even a Web position.

If most revenue are from 4% clients, then that's risky. Here the situation is special: the 96% client (gov) getting the service at negative cost and the 4% subsidies the 96% client. The 4% doesnt have to use dva, but other alternatives, including set up their own shops at CVS, would cost more. 

[rb]

I have no dog in this fight.  But the responses here are interesting.  I read the report, have no opinion.

 

BUT since WEB owns this it's 'good'.  What if WEB sells out, will the psychology change and suddenly the allegations are true, or it becomes 'bad'?

 

The same thing happened with ZINC.  Everyone was rah-rah ZINC when Pabrai loved it.  Then he dumped the stock, and the stock tanked and suddenly it's terrible.  Yet nothing changed in the meantime, just the perception.

 

I don't know if half of your profit coming from 4% is good or bad, but I do know it's risky.  Maybe this is a larger comment about following guru's whomever they are.  Their halo can cloud your thinking.

 

Well, Pabrai is not Web. I would follow Web but not Pabrai. But it's not even a Web position.

If most revenue are from 4% clients, then that's risky. Here the situation is special: the 96% client (gov) getting the service at negative cost and the 4% subsidies the 96% client. The 4% doesnt have to use dva, but other alternatives, including set up their own shops at CVS, would cost more.

Ok, just did a quick calculation. The cost per treatment for DVA is about $271. 88% of their patients are gov. This implies that they charge the commercial side an average of $1,097 per treatment or about 4x cost. You can see why the insurance cos may be a little pissed off.

 

I agree with oddball, this reliance on charging a lot per treatment on the commercial side is a great risk. Add in DVAs leverage and it gets even less appealing.

 

Btw, if they were to get some pushback from insurance to lower their rates to 3x cost that would lower their operating profit by $815 million. This is not an out of this world scenario. 3x cost is not a low price.

[Rasputin]

Insurance companies shouldn't be pissed about it since they only have to pay the 4x for 33 months. This 33 month period is unique only for ESRD.

[rb]

Try explaining that to an insurance co.

[Spekulatius]

I have no dog in this fight.  But the responses here are interesting.  I read the report, have no opinion.

 

BUT since WEB owns this it's 'good'.  What if WEB sells out, will the psychology change and suddenly the allegations are true, or it becomes 'bad'?

 

The same thing happened with ZINC.  Everyone was rah-rah ZINC when Pabrai loved it.  Then he dumped the stock, and the stock tanked and suddenly it's terrible.  Yet nothing changed in the meantime, just the perception.

 

I don't know if half of your profit coming from 4% is good or bad, but I do know it's risky.  Maybe this is a larger comment about following guru's whomever they are.  Their halo can cloud your thinking.

 

I can’t speak for others, but I don’t own my (small) position because of WEB. I own this knowing because the stock is cheap and I believe they do have a narrow moat, due to being the low cost competitor and have a hug market share, together with Fresenius. I also own this because I have some ground level exposure through family (which I don’t want to evaluate further) and it does not feel like a fraudulent operation, it feels like a very lean operation. so, I think the statement from the article above, that their connection to AKF is their only competitive advantage is incorrect.

 

Now, I acknowledge the risk from somewhat broken revenue model, where some customers pay 4x what others do, for the same service, but again discrepancies in pricing are allover the healthcare system, albeit at probably a smaller extent.

 

Also, hurting these cost providers of a very essential service does not really help reduce the overall cost in the healthcare system. If Fresenius and DVA get into trouble and need to close down centers, those patients would need to go a a hospital, where costs are many times higher, due to much higher overhead.

 

I would not own a large position in DVA,  because I really cannot estimat the risk that something will change in the pricing that could drastically reduce DVA’s profits, but oeverall, it seem that the stocks valuation reflect this risk and makes it a fair bet at current prices.

[cubsfan]

Spekulatius - I'm pretty much with you on this. My brother, who had spina-bifida, just passed away 2 weeks ago from kidney failure. He was on dialysis for 20 months, and I spent time with him in the clinic a couple of times this year (Fresenius, not DVA). These people offer a life saving service.

They kept him out of the hospital, unless there were complications, of which there were many during the 20 months. These clinics are very busy, and most of the patients are unhealthy - keeping them out of the hospital is what they do - and if these clinics close, they will overload the hospitals.

[Gregmal]

I have a small position in this. My thoughts are as follows.

 

The company is cheap. There is a moat. They're doing buybacks and are generally shareholder friendly.

 

I wanted to add today but did not simply because of my larger concern, one that the company has no control over. The government, and more specifically, shithead mouthpieces like Warren and McCaskill have and will continue to use public companies to boost their political status. Its easy for them. Who is going to stand up to Warren for railing the big banks? Or the greedy corporations doing inversions? No one. No politician has the nuts to take the other side so what you have is now widespread abuse of controversial companies whenever someone needs a status boost. Hillary did this non-stop. And it won't end. It's the same reason I haven't pulled the trigger on AGN. And FWIW I think Tepper owning AGN is more a reason to buy it than Buffett owning DVA. Buffett may be the Oracle, but Tepper since '92 has been God.

[walkie518]

The report is based on old news.

 

What do you think would happen if the AKF disappeared?  Certainly Medicare/aid would no longer be subsidized.  It may be possible that commercial plans become more expensive on the whole as well since the patients who are subsidized make no money for the company.

 

I would think the following questions are most important to investors or those considering an investment?  Can anyone add or subtract?

 

(1) Is kidney care cheaper to the health system because of DaVita?  Cheaper than a hospital but also of lesser cost to the patient depending on coverage/assistance.

(2) Is kidney care better at DaVita?  Yes, according to the ratings, and according to changes in the ratings after DaVita has acquired new kidney care centers.

(3) Is this a growing business?  Yes.

(4) Does management have the shareholder in mind?  Yes, buybacks have been substantial. 

(5) Does DaVita provide an essential service that would be political suicide to attempt to dismantle?  Yes.

(6) Are there high barriers to entry?  Yes and there are only two companies with scale. 

(7) Does DaVita have a strong corporate culture?  Some would call DaVita's corporate culture a cult.

 

I'm not sure I see a logical reason to sell based on the SIRF report...

 

[flesh]

(8) To what extent are commercial pay reductions mitigated by mom and pops without scale? Will a politician put them out of business and concentrate the duopoly further?

 

I wouldn't call this a slam dunk to the commercial pay question but it certainly mitigates it. In this slowly dying modern economy, I can't say I'd be totally surprised if this pricing mechanism became less a part of the free market. Especially in certain states. However, absent political interference on commercial... I don't think there's anything commercial insurers can do about it and there's nothing left for CMS to squeeze.

 

Anyone who was following this in 13' when there was some CMS freezes probably saw a bunch of articles about mom and pops crying about going out of business....

 

Nothing Roddy wrote was new. It was simply a stacking of all the previous bad news hoping for a lollapalooza effect.

 

It's probably not a good idea to have huge position here but I'm comfortable with a medium sized position.

 

 

 

 

[Foreign Tuffett]

IMO the more that DVA is a good, cash generating business the more it's at risk from the status quo unraveling in an unfavorable way.

 

Here's a counterfactual to try and explain what I mean. What if, instead of charging private insurers ~$1050 per dialysis treatment, DVA and its ilk charged them $3150 per treatment? In this scenario DVA would look like a great business, but it would be unsustainable. It probably wouldn't happen overnight, but regulations and/or laws would be changed so that, one way or the other, the cost to private insurers for dialysis treatment would come down significantly.

 

It's this "what is the proper cost to society for the provision of dialysis services?" dynamic that has kept me from investing in DVA. Sure, right now it looks like a pretty good business. However, it's definitely possible that various governmental entities decide that dialysis is bleeding the insurers dry and make it their mission to ensure that the dialysis providers are only profitable enough to incentivized them to open new clinics. 

 

There's another, much more concise, way of looking at this issue: the dialysis industry doesn't have much pricing power. The circular song-and-dance with the AKF was the dialysis industry's attempt to game a system that it has relatively little control over.

 

 

 

[Rasputin]

To me, any analysis that only talks about cost/treatment (4x or 3x) is missing the other variable that determine the total cost to private payors.  The missing variable is Number of treatments.

 

Number of treatments have been significantly reduced because private payors only have to cover for 33 months (even as the patient and his/her employer continue to pay monthly premium to their insurance company). 

 

If ESRD is treated like any other disease, and dialysis is treated like any other expensive-must have-treatment, yes the cost/treatment to private payors will be significantly reduced, but the number of treatments will explode upward and will go higher over time as more patients live longer on dialysis.  Total cost to the insurance industry will be much higher. 

 

Any article that only mention 4x or 3x commercial rate without mentioning the 30 month MSP period is biased. 

[MrB]

As pointed out the 30 (33) month payment period for commercial is an important variable that is often not mentioned.

Also, the 20%-30% odd percentage of the market provide higher cost treatment and probably needs to go out of business first before DVA's economics falls flat.

Lastly if it is not sustainable/unfair that 10% carries the industry then it is probably also unsustainable/unfair that 90% don't cover costs.

 

I think it is critical that one views DVA/industry from the point of the patient, bearing in mind how sensitive their situation is. As long as DVA delivers for the patient, all should be well.

[mrholty]

No position here but considering.

 

I have looked at the books of a small physical therapy clinic.  Its not uncommon for regular insurance reimbursement rates to be 3x the medicare rate.  This is the fallacy of single payor in the US.  If we go to that and we use those rates as the price it will be interesting to see what happens.

[MrB]

National Kidney Foundation letter - good read

https://www.kidney.org/sites/default/files/20160922-NKF_response_CMS_RFI_allegations_steering.pdf

 

Experpt:

Insurer Practices

Insurers have been increasingly denying third party premium assistance payments for dialysis patients

provided by the American Kidney Fund, going even as far to explicitly ask patients to attest that they are

not directly receiving contributions from AKF to help pay their premiums. In addition, some plans also

permit third-party premium assistance from other non-profit organizations, while singling out dialysis

patients and excluding premium assistance provided by the American Kidney Fund. Over the past few

years NKF has worked to end this and other discriminatory practices against ESRD patients by private

insurers, particularly as it relates to Marketplace coverage.

 

For example:

• In 2013 and 2014 insurance companies in Oregon and Washington required waiting periods for

coverage of organ transplants if patients did not have prior insurance coverage. NKF contacted

the state insurance commissioners and thankfully, Washington and Oregon passed regulations

that prohibited this practice.

• We have seen and continue to see insurers in the Marketplace listing all immunosuppressive

drugs, including generics, on the highest cost sharing tiers.

In 2015 and 2016 we have seen plans across several states that disclose if a person is eligible for

Medicare due to ESRD they must enroll or the plan will only pay for services otherwise not

covered by Medicare and will only pay secondary to Medicare three months after the patient

begins dialysis or at the time they receive a transplant.

 

o We have seen policies that disclose if a patient does not enroll in Medicare that the plan

will only pay a certain percentage above the Medicare payment rate for dialysis services

and that the patient may be balanced billed by the provider for charges above that rate,

which will not be counted towards their out-of-pocket maximums.

 

o We have even seen plans in which insurers state they will pay the Medicare premium for

patients if they enroll in Medicare while also maintaining their private coverage with the

carrier.

 

o We have heard from patients and their social workers about instances where patients

have been called by their insurance company and told they must enroll in Medicare.

 

A qualitative analysis of the open ended responses we received to our survey identified Medicare

beneficiaries with Part A and B that had no supplemental coverage and indicated difficulty paying the 20%

coinsurance. In some cases these beneficiaries indicated their coinsurance was waived by the dialysis

company, but not by other providers. For some, this led to not seeking medical care beyond their dialysis

facility. In addition, many respondents, including some respondents who have Medicare Part D, stated

that they have high out-of-pocket costs for their prescription medications and were struggling to afford

them. Additionally, some patients claimed they cannot afford to get a transplant. These respondents

tended to be dually enrolled in Medicare and Medicaid or enrolled in Medicare without a supplemental

policy. A few transplant recipients also indicated concerns about paying for private coverage when their

Medicare ends 36 months after transplant or continuing to pay for their private insurance premiums when

AKF HIPP assistances ends.

[JRM]

This looks worse and worse the more I look at it.  This may not be the next Valeant, but it sure looks like there is some hard core rationalization going on here similar to the VRX thread.  What will happen if the loophole is closed where Fresenius and DaVita tax deductible donations to AKF are not allowed to be spent on claims from the two companies?  What happens if these companies are turned into regulated utilities which result in increased O&M costs and decreased margins?  Why is DaVita constantly settling major lawsuits? And why is the CEO running around dressed like a musketeer?  He looks like a brilliant outsider when things are going well.  When the barbarians are at the gates he just looks like a crazy person.

 

Their business model is to gouge private insurance.  Period.  They will have a viable business if they aren't allowed to gouge private insurance.  However, the business won't be worth as much.

 

At the end of the day they provide a value added service, but how is this not a commodity service?  They offer a lower cost than a hospital because of lower overhead and operational efficiencies.  Such as, they are not required to have a doctor on the premises.  They are essentially running these places with technicians and maybe a nurse.