DVA – DaVita HealthCare Partners

[sleepydragon]

Maybe this is the moat: I am keeping a lot of patient alive, and they can't go anywhere else. You want to pay less, you need to move these people or you have to step over their dead bodies.

 

maybe I cut price for you, but I can't take on new patients anymore as I am not making much here. The new patients have no place to go and will cost you 10x more in hospitals.

 

[Read the Footnotes]

Can you two take that part of the discussion offline please?

 

Can you not take that part of the discussion offline please.  8)

 

Years ago he [Kent Thiry] was very well respected. If there is a well reasoned and respectful argument why he did not or does not deserve that respect, I would be very interested in hearing it.

 

I haven't been following DaVita closely for updates, so I would be very interested in hearing what if anything has changed.

 

Who is the "he" you are referring to? Thanks!

 

My apologies for the confusing use of quotes from the thread. I was reponding to posts about Kent Thiry, CEO of DaVita. Years ago he had the respect of many industry experts I met. I was never really convinced or swayed by all the praise I heard, but I am always interested to hear details of a reversal in common opinion, whether about companies themselves or company leadership.

 

Of course, this is also fertile ground for mockery without regard for serious analysis, but John Oliver seems to have the funny stuff covered for us on this subject.

[Read the Footnotes]

Maybe this is the moat: I am keeping a lot of patient alive, and they can't go anywhere else. You want to pay less, you need to move these people or you have to step over their dead bodies.

 

maybe I cut price for you, but I can't take on new patients anymore as I am not making much here. The new patients have no place to go and will cost you 10x more in hospitals.

 

These are good points, but they address market demand and price inelasticity, whereas a moat refers to a barrier to new entrants or supply. These desirable demand attributes should attract entrants unless their is a barrier to entry.

[sleepydragon]

Maybe this is the moat: I am keeping a lot of patient alive, and they can't go anywhere else. You want to pay less, you need to move these people or you have to step over their dead bodies.

 

maybe I cut price for you, but I can't take on new patients anymore as I am not making much here. The new patients have no place to go and will cost you 10x more in hospitals.

 

These are good points, but they address market demand and price inelasticity, whereas a moat refers to a barrier to new entrants or supply. These desirable demand attributes should attract entrants unless their is a barrier to entry.

 

Scale/Size is maybe a moat. As a patient, he/she will choose one that has high ratings (life at stake!) and hopefully is close to work/home. It will take time and a lot of efforts for any new entrants to establish that track record of good ratings. It's also hard to earn a profit without scale (the new player needs to have enough patients that are from private insurance and can't reject anyone from lower paying medicare).

 

[sleepydragon]

Goldman Sachs' US analyst has a sell ratings on DVA for the last two years. The Analyst left earlier of 2017, but I think now his Associate took over and still have the Sell rating. Anyway, they have nothing good to say about DVA. :) However, here is what' Goldman's europe analyst, who has a conviction buy rating on FMS, says in his research note about FMS:

 

----

We hosted Mike Brosnan, CFO of Fresenius Medical Care, at our 6th German Corporate Conference ...

3) Constructive conversations with commercial payors: In spite of commentary from peers to the contrary, management stressed that its relationships with

commercial payors have remained constructive ytd, and that the company has not witnessed the tensions that peers have talked about to-date. Importantly, FMC is

increasingly working with payors to deliver total care savings by reducing hospitalizations: all three of the major contracts renegotiated ytd included an element of value-based care. The company has now begun renegotiating contracts with the smaller regional payors, ie the Blues; these discussions will conclude by

year-end.

--

 

 

 

 

[Spekulatius]

Can you two take that part of the discussion offline please?

 

Can you not take that part of the discussion offline please.  8)

 

Feelings don’t matter. My opinion that Thiry has outlived his usefulnes are based on anecotdal observations (or probably heresay) that they core value (Villages = local management, leaders walk-in the talk etc.) don’t permeate to the local level any more (if they ever have done so). His corporate Khumbaja meetings are a joke and quite honestly hard to relate too. I don’t think there is a lot of employee loyalty either.  It is true that he saved what would later become DaVita and grew it into an industry leading company, that is hard driving and cost concisous. I think management would have more credibility if they would put it just like that, without all the bravura that Thiry considers important. I think for some long term employees that have been around for a long time, it may be important still, but for new employees,it just does not ring true. Fresenius seems to do just as well without this stuff and they are better positioned, imo, because they have put their muscle behind the equipment and the consumable sides of the business as well, rather than just the service.

 

That said, I don’t consider DVA badly managed, but I am not sure that management has the right LT vision to really continue to grow the company and make it future proof.

[sleepydragon]

https://www.bloomberg.com/news/articles/2017-09-28/when-warren-buffett-runs-your-pension-plan

 

"Take Burlington Northern Santa Fe. Before Berkshire took control, in 2010, the railroad’s pension fund held hundreds of securities and was 73 percent funded, meaning it had only 73¢ for every dollar owed to plan participants. By the end of last year the situation had changed: The plan was 9 percent overfunded. Four stocks—DaVita, VeriSign, General Motors, and Verizon Communications—accounted for more than half its assets as of Sept. 30, 2016, a Labor Department filing shows.

"

[MrB]

Can you two take that part of the discussion offline please?

 

Can you not take that part of the discussion offline please.  8)

 

Feelings don’t matter. My opinion that Thiry has outlived his usefulnes are based on anecotdal observations (or probably heresay) that they core value (Villages = local management, leaders walk-in the talk etc.) don’t permeate to the local level any more (if they ever have done so). His corporate Khumbaja meetings are a joke and quite honestly hard to relate too. I don’t think there is a lot of employee loyalty either.  It is true that he saved what would later become DaVita and grew it into an industry leading company, that is hard driving and cost concisous. I think management would have more credibility if they would put it just like that, without all the bravura that Thiry considers important. I think for some long term employees that have been around for a long time, it may be important still, but for new employees,it just does not ring true. Fresenius seems to do just as well without this stuff and they are better positioned, imo, because they have put their muscle behind the equipment and the consumable sides of the business as well, rather than just the service.

 

That said, I don’t consider DVA badly managed, but I am not sure that management has the right LT vision to really continue to grow the company and make it future proof.

Dialysis providers have to deliver for the patient and CMS is footing the bill for the most part so you better deliver for government. That means better service delivery at lower costs and with mortality rates down and service levels up (see QIP numbers) at cost per treatment down (especially if you look at real versus nominal) it is tough to argue the providers are not earning their keep. Same goes for private where they can complain all they want, but hospitalization (largest cost for patient) is down due to better dialysis management.

DVA outscores both FSN and the rest of the industry on QIP and costs i.e. lowest cost provider, best service delivery.

Kent Thiry is who he is, but you cannot deny his track record both at his previous dialysis company, which he sold for $1.6Bn in the late 1990's and then took over a bancrupt, demoralized company and built it into arguably the best dialysis company globally. You don't like his or Wal-Mart's team and creed approach, but it works for them. Sure I also find it cultish, but maybe that is the point. Thiry's largest cost item is team mates, so in the lowest cost game you have to motivate them in some other way and he's delivered on that. In my view, Thiry for all his faults is part of the moat and when he goes I will seriously reconsider. 

As for new people not liking Davita; read reviews on places like Indeed.com 3.6 stars out of 5 from 2k reviews and then read individual accounts where you will find that Thiry is not above meeting with new recruits during their initial training, he gave the top floor (with the best views) of their HQ to the staff (canteen), etc, etc. These are things that count for a lot of paycheck.

One can take issue with the fact that his approach is not for you, but I don't think that tranlsates in people not wanting to work there. A lot of people love it and are willing to give up some of the paycheck; as mentioned Thiry's largest cost item at 40% of cost per treatment. 

 

P.S. DVA payments to FSN is something like 3% of DVA's operating costs. It's a business that meaninfully depresses FSN's ROE. Ultimately though, why would one want to give up investing in the lowest cost provider? 

[MrB]

Section 5000 of the IRC of 1986, imposes an excise tax penalty on employers and employee organizations that contribute to nonconforming group health plans. They are taxed 25 percent of the employer's or employee organization's expenses incurred during the calendar year for each group health plan (conforming as well as nonconforming) to which they contribute. This tax penalty does not apply to Federal and other governmental employers.

The term "nonconforming group health plan" means a group health plan or LGHP that at any time during a calendar year, fails to comply with any of the following provisions of the working aged, disability, or ESRD Medicare secondary laws.

[sleepydragon]

I don't think the "cult" like culture and all the company shows (I.e. CEO riding a horse) etc shall be holding against them. Look at walmart, Costco, HTC, etc.

[Spekulatius]

I don't think the "cult" like culture and all the company shows (I.e. CEO riding a horse) etc shall be holding against them. Look at walmart, Costco, HTC, etc.

 

Corporate culture is only a positive when it permeates trough the entire company, not just a few managers. Most companies will tell you that they have a culture, but it is BS.  I think the culture of Walmart is for example is Long gone, at least the reports about female employees of my local Walmart sorting out their differences in a fistfight after work suggest so.

Costco certainly has one, as has Starbux or Company like Merck. Generally , employees will have a strong loyalty to employers that treat them well in terms of pay, benefit and perks. DVA has some of this on a management level, but I am not sure that is true on thrnvery ground level of a dialysis center - at least my small sample size suggests that it is not true everywhere. Also  anothè food for though, even if the relation AKF is not illegal and may not be that important than some of the bearish articles suggest, there is the simple fact that this somewhat sophisticated kickback schemes exists suggest to me ethics isn’t DVA’s strong suit.

 

That said, I do think the company provides a valuable service at a fairly low cost and they try to get it right for patients; it can’t be compared to VRX at all. I own a few shares, but just those basic observations and the scuttlebut that I am getting prevents me from buying more.

[MrB]

I don't think the "cult" like culture and all the company shows (I.e. CEO riding a horse) etc shall be holding against them. Look at walmart, Costco, HTC, etc.

Corporate culture is only a positive when it permeates trough the entire company, not just a few managers. Most companies will tell you that they have a culture, but it is BS.  I think the culture of Walmart is for example is Long gone, at least the reports about female employees of my local Walmart sorting out their differences in a fistfight after work suggest so.

Costco certainly has one, as has Starbux or Company like Merck. Generally , employees will have a strong loyalty to employers that treat them well in terms of pay, benefit and perks. DVA has some of this on a management level, but I am not sure that is true on thrnvery ground level of a dialysis center - at least my small sample size suggests that it is not true everywhere. Also  anothè food for though, even if the relation AKF is not illegal and may not be that important than some of the bearish articles suggest, there is the simple fact that this somewhat sophisticated kickback schemes exists suggest to me ethics isn’t DVA’s strong suit.

Worthwhile reading the David Barbetta settlement to answer two questions.

1. What is the culture and how high does the rot (if any) go, especially considering that the investigative period covered 2005-2014. Hard not to end up with similar sentiments as expressed above.

2. Considering the sanctions, what does it say about the future and the moat about the company e.g. monitors embedded in the company and they have to sign off on a pretty broad range of things like deals etc (so all good now?) and also does the settlement imply some resistance to put it out of business, because it will impact Medicare and the industry's ability to take care of ESRD patients.

For anyone actually bothering to read the settlement, please tell me how Thiry managed to survive that without getting fired?

 

That said, I do think the company provides a valuable service at a fairly low cost and they try to get it right for patients; it can’t be compared to VRX at all. I own a few shares, but just those basic observations and the scuttlebut that I am getting prevents me from buying more.

I think generally speaking the VRX comparison is weak, but some similarity. The difference between VRX/Philidor and AKF/DVA & FMC seems essentially to be the legal cover provided by the 1997 OIG opinion and the fact that it is not a sub, but for the rest it smells the same.

 

Having said that the AKF issue is not as one sided as many would like to paint it. The recent (May) letter signed by 184 members of congress in support of premium assistance is a case in point.

 

https://www.nephrologynews.com/dialysis-providers-akf-program-benefit-hhs-requires-health-plans-accept-charity-based-premiums/

 

EDIT: Found the actual letter https://www.dropbox.com/s/y9hbf3qzbhe28ri/Rep.%20Cramer%20-%20Third%20Party%20Payer%20Letter.pdf?dl=0

 

[cubsfan]

Mr B - thank you for contributing mightily to this DVA board. You and others are posting some great docs, like this last one.

Do you by chance have a doc discussing the David Barbetta settlement?

[MrB]

Mr B - thank you for contributing mightily to this DVA board. You and others are posting some great docs, like this last one.

Do you by chance have a doc discussing the David Barbetta settlement?

You're welcome.

Not sure exactly what you're after, but this will keep you busy at least.

 

Light read

https://www.foley.com/files/Publication/bd469faa-7ccf-46e4-8dfd-dd908fadbf99/Presentation/PublicationAttachment/ff94190f-82ca-4baf-b165-e03e820587f2/HFRA.Lori.DaVita.1210.pdf

 

Not so light read

https://oig.hhs.gov/fraud/cia/agreements/Davita_Healthcare_Partners_Inc_10222014.pdf

 

Door stop (includes excellent center specific data from Exhibit 6 onwards)

https://www.phillipsandcohen.com/wp-content/uploads/US-Barbetta-v-DaVita-First-Amended-Complaint-Exhibits.pdf

[DooDiligence]

Mr B - thank you for contributing mightily to this DVA board.

 

Seconded...

[MrB]

DD +1

Ok so here is something interesting to ponder.

 

If you read the CIA (Corporate Integrity Agreement), which was part of the Barbetta settlement https://oig.hhs.gov/fraud/cia/agreements/Davita_Healthcare_Partners_Inc_10222014.pdf

 

then there is a few interesting things to note.

 

Agreement put in place a Compliance Program (CP). Obligation was put on DVA's  Compliance Officer (Jeanine Jiganti) to affect the CP and she chairs the specially created Management Compliance Committee and she reports directly to Thiry and the Board Compliance Committee, which had 90 days to appoint a Compliance Advisor to independently review DVA's CP. Needs to be at least quarterly meetings and reports.

 

Independent Monitor (IM): Appointed by agreement between DVA and OIG. All monitor's reports submitted to OIG and DVA simultaneously and no draft reports are allowed with DVA. Monitor is not an agent of OIG, but OIG can remove him/her at its sole discretion. IM can retain staff, consultants, etc. 

 

The scope of the CP: "Arrangements" shall mean every arrangement or transaction that involves, directly or indirectly, the offer, payment, solicitation, or receipt of anything of value, and is between DaVita Dialysis and any actual or potential source of health care business or referrals to Da Vita Dialysis or any actual or potential recipient of health care business or referrals from Da Vita Dialysis....service for which payment may be made in whole or in part by a Federal health care program

 

So everything that relates to deals or transactions, in particular the Federal health care program, the False Claims Act and the Anti-Kickback Statute needs to be run by the committees and the IM. The IM's also has authority over "Focus Arrangements" means every Arrangement that is between DaVita and any Health Care Provider and involves, directly or indirectly, the offer, payment, or provision of anything of value. Basically any deal to buy or sell centers.

 

So after that mouthful there are two things I'm thinking about.

1. If DVA essentially had the OIG camping out in HQ or had extremely granular oversight, since Oct 2014 (5 year agreement) and they have to sign off on just about everything then it should be darn difficult to have any hanky panky going on including

2. any of the suggested misconduct regarding AKF and ACA, but it might also explain why DVA immediately ended premium assistance for Medicaid eligible patients late last year after it surfaced in the press (my assessment). It could be because of the CIA, which puts them on an extremely short leash if anything remotely sinister pops up.

 

Any lawyers want to chime in?

 

[cubsfan]

Mr B - thank you for contributing mightily to this DVA board. You and others are posting some great docs, like this last one.

Do you by chance have a doc discussing the David Barbetta settlement?

You're welcome.

Not sure exactly what you're after, but this will keep you busy at least.

 

Light read

https://www.foley.com/files/Publication/bd469faa-7ccf-46e4-8dfd-dd908fadbf99/Presentation/PublicationAttachment/ff94190f-82ca-4baf-b165-e03e820587f2/HFRA.Lori.DaVita.1210.pdf

 

Not so light read

https://oig.hhs.gov/fraud/cia/agreements/Davita_Healthcare_Partners_Inc_10222014.pdf

 

Door stop (includes excellent center specific data from Exhibit 6 onwards)

https://www.phillipsandcohen.com/wp-content/uploads/US-Barbetta-v-DaVita-First-Amended-Complaint-Exhibits.pdf

 

Mr. B

 

You gave me exactly what I was looking for - which was a high level explanation of the Barbetta Settlement, that imposes sanctions and OIG reporting requirements in place of a "death penalty" or something less extreme by the Feds.

I was trying to understand your comments about the Feds reluctance to not interrupt the business operations for the good of the patients.  The Foley & Laudner document does that. I'll work my way through the "door stop" materials! Ha! Thanks.

[DooDiligence]

Jeez, imagine if pharma were treated the same way...

[sleepydragon]

Tom Price is out, most likely candidate is Seema Verma.

She visited a dialysis center in Texas post Harvey.

 

https://www.houstonpublicmedia.org/articles/news/2017/09/18/237773/visiting-houston-medicare-chief-says-key-post-harvey-priority-is-safety-of-health-care-facilities/amp/

 

 

[JRM]

Jeez, imagine if pharma were treated the same way...

 

The pharmaceutical industry is a mess in a lot of ways.

 

So, just to be clear; the bull thesis relies on the following to hold:

 

1.  The Affordable Care Act is not revised in such a way that takes away the large payouts to dialysis patients.

2.  Regulators do not remove the "self-licking-lollipop" loophole where dialysis companies contribute to AKF, then AKF helps pay the higher premiums under the ACA.

 

Good to know one of the reasons why my insurance premiums keep going up.

[MrB]

Jeez, imagine if pharma were treated the same way...

 

The pharmaceutical industry is a mess in a lot of ways.

 

So, just to be clear; the bull thesis relies on the following to hold:

 

1.  The Affordable Care Act is not revised in such a way that takes away the large payouts to dialysis patients.

2.  Regulators do not remove the "self-licking-lollipop" loophole where dialysis companies contribute to AKF, then AKF helps pay the higher premiums under the ACA.

 

Good to know one of the reasons why my insurance premiums keep going up.

 

I think the lens through which you view those things is critical, though.

 

Speaking for myself the bull thesis relies on the following,

1. Government made a moral commitment in 1973 to provide access and cover to all ESRD patients. The probability seems low that it will change.

2. Government has understood, since 1973 that it needs to retain control over serving the ESRD population if it wants to ensure access, control costs and improve quality. The probability seems low that it will change.

3. Government co-opted private healthcare companies since the early 1980s to improve access, lower costs and increase quality.  a) Access has improved in various ways, but mainly because ESRD itself is the entitlement, immediately classifies the patient as disabled and government has worked hard since the early 1980s to ensure private companies do not discriminate against ESRD patients. b) Government uses three broad strategies to drive down costs cost shifting (private), bundling (simplifying the cost structure) and capitation (capping costs) c) quality through various ways, but most recently through the star system. The probability seems low that the industry structure will change, especially considering the success since 1973; 50k v 628k patients, costs per patient per annum more than halved in real terms and quality up e.g. mortality rates more than halved.

 

So I look at things like ACA, AKF, etc, etc within the historical context and within the industry framework. Otherwise I find myself seeing the wood for the trees. Not saying those are not valid short to medium term issues, just that I think history and industry structure is poorly understood, which results in a low quality investment decision. 

[DooDiligence]

Jeez, imagine if pharma were treated the same way...

 

The pharmaceutical industry is a mess in a lot of ways.

 

So, just to be clear; the bull thesis relies on the following to hold:

 

1.  The Affordable Care Act is not revised in such a way that takes away the large payouts to dialysis patients.

2.  Regulators do not remove the "self-licking-lollipop" loophole where dialysis companies contribute to AKF, then AKF helps pay the higher premiums under the ACA.

 

Good to know one of the reasons why my insurance premiums keep going up.

 

I think the lens through which you view those things is critical, though.

 

Speaking for myself the bull thesis relies on the following,

1. Government made a moral commitment in 1973 to provide access and cover to all ESRD patients. The probability seems low that it will change.

2. Government has understood, since 1973 that it needs to retain control over serving the ESRD population if it wants to ensure access, control costs and improve quality. The probability seems low that it will change.

3. Government co-opted private healthcare companies since the early 1980s to improve access, lower costs and increase quality.  a) Access has improved in various ways, but mainly because ESRD itself is the entitlement, immediately classifies the patient as disabled and government has worked hard since the early 1980s to ensure private companies do not discriminate against ESRD patients. b) Government uses three broad strategies to drive down costs cost shifting (private), bundling (simplifying the cost structure) and capitation (capping costs) c) quality through various ways, but most recently through the star system. The probability seems low that the industry structure will change, especially considering the success since 1973; 50k v 628k patients, costs per patient per annum more than halved in real terms and quality up e.g. mortality rates more than halved.

 

So I look at things like ACA, AKF, etc, etc within the historical context and within the industry framework. Otherwise I find myself seeing the wood for the trees. Not saying those are not valid short to medium term issues, just that I think history and industry structure is poorly understood, which results in a low quality investment decision.

 

This is definitely more complicated than I thought at 1st.

 

Thanks to you & others for explaining the situation to a 5 year old (me.)

 

It's a 4% position for me & if it dropped another 10% I may or may not push it up to 6% (would probably do it with long dated calls & maybe shorting some puts.)

 

Cognitive biases everywhere...

[MrB]

Yep not the simplest story DD. Maybe JPM gets you to your -10%

 

09-Oct-2017 09:57:54 AM - DAVITA INC DVA.N: JP MORGAN CUTS TARGET PRICE TO $51 FROM $66 -Reuters News

[DooDiligence]

Yep not the simplest story DD. Maybe JPM gets you to your -10%

 

09-Oct-2017 09:57:54 AM - DAVITA INC DVA.N: JP MORGAN CUTS TARGET PRICE TO $51 FROM $66 -Reuters News

 

Anatomy of a knife catcher:

 

1. Thinks he's right but EEEK! OK, breathe & go watch Wayne Brady do Let's Make a Deal.

 

2. OK, calmed down enuf to tear away from LMAD & re-read COBF DVA thread.

 

3. Realizes that downward price wishes seem nicer when you're just wishing for them.

 

4. Still want to go long, long Calls (if it goes down some more.)

 

Which will probably segue to a scene in the ER's hand bandaging room.

 

---

 

If Fidelity doesn't list JPM's rating, do they matter?  :o

 

Neutral 2 Underweight, pfffft, let's some Sell's from all these neutrals.

 

http://uglymule.com/images/DVA-Fidelity-JPM.png

[walkie518]

JPM  is certainly after the fact...

 

I bought more today