DVA – DaVita HealthCare Partners

[KCLarkin]

Seems like a good entry point.

 

I'm somewhat stuck on the economics of the dialysis business. According to the NYT, most of their patients pay $200 per session via medicare etc. These patients are unprofitable. All of the profits come from a sliver of patients who pay more than $4000 via private insurance.

 

http://www.nytimes.com/2016/07/02/business/unitedhealthcare-sues-dialysis-chain-over-billing.html?_r=0

 

Like most of the U.S. healthcare system, this seems very broken. Why aren't private insurers demanding a "fair" price? And is this "two-tiered" system sustainable?

[orthopa]

Its interesting value wise here but I need to learn more about the business. Dialysis centers are popping up all over the place here and are constantly booked. Its a slow process so hard to "turn over" patients quickly but pts very dependent obviously due to lack of kidneys avail and if not getting tx will die.

[flesh]

ANyone know why the big down spike today?Heavy volume.

[xtreeq]

ANyone know why the big down spike today?Heavy volume.

 

http://www.stltoday.com/business/local/davita-encouraged-some-low-income-patients-to-enroll-in-commercial/article_ec5dc34e-ca4d-52e0-bc26-a3e56e1e2c85.html

[flesh]

Great thanks a bunch!

 

So basically, davita's employees "encourage" patients to get off medicare/medicaid and steer them towards commercial insurance. Their premiums are paid by a charity in which all the dialysis companies likely contribute too. Because this is an "option" for patients and comes with some perks and doesn't cost them anything, why not.

 

On the one hand, clearly they make more money and this cost's the commercial insurers more money(rising insurance costs for everyone) . On the other hand, if a charity wants to pay someone's premiums for them and they benefit in more ways than one, is this so bad? If I'm an employee administering dialysis and I know there's a better option for my patient that doesn't cost anything, should I speak up?

Can anyone shed some light on the advantages/disadvantages of commercial vs medicaid/medicare from a dialysis patient's pov?

 

Before obama care these patients would have been considered catastrophic and as a result would be unlikely to be on commercial insurance. I don't know the dva story back to pre obamacare, maybe someone here does? Did dva receive more money from medicare/medicaid pre obamacare per patient?

[flesh]

I found this site and this post helpful.

 

http://ihatedialysis.com/forum/index.php?topic=32917.0

[frankhkii]

At current prices Mr Market seems to be pricing in a large hit from the recent article about steering customers to AKF. Can someone who has followed or invested with DVA for a while explain the workings of these higher paying commercial plans and give a valid argument for why they won't go away? If the CMS is able to revise enrollment rules for Medicare and Medicade and/or make "regulatory changes that would allow individual market plans to limit their payment to healthcare providers to Medicare-based amounts" it seems this entire division would be unprofitable. Since this would put them out of business resulting in catastrophic consequences for their patients, it seems a long shot, but its hard to invest with the knowledge and comfort I currently have on why this couldn't or won't happen.

 

Any links or recommendations to help me understand this outside of DVA filings/calls would be helpful. So much of their profitability comes from these plans and it seems there is a lot of pressure on them while their leverage to fight back is hard to see.

 

Thanks for any help. 

[whiterose]

The stock is down nearly 30% from the July highs. It was either way overpriced back then or now seems a good time to enter. Maybe it will drop until the market sees BRK or Weschler stepping in. Does anyone have any particular insights? Thanks!

[valueinvesting101]

DaVita Falls on Report It Encouraged Unneeded Insurance (Sunday) By Lee Spears

 

(Bloomberg) -- DaVita Inc. fell as much as 3.9% to lowest since 2013 after St. Louis Post-Dispatch reported Oct. 23 that DVA encouraged patients who were eligible for Medicaid to buy private insurance.

[flesh]

At current prices Mr Market seems to be pricing in a large hit from the recent article about steering customers to AKF. Can someone who has followed or invested with DVA for a while explain the workings of these higher paying commercial plans and give a valid argument for why they won't go away? If the CMS is able to revise enrollment rules for Medicare and Medicade and/or make "regulatory changes that would allow individual market plans to limit their payment to healthcare providers to Medicare-based amounts" it seems this entire division would be unprofitable. Since this would put them out of business resulting in catastrophic consequences for their patients, it seems a long shot, but its hard to invest with the knowledge and comfort I currently have on why this couldn't or won't happen.

 

Any links or recommendations to help me understand this outside of DVA filings/calls would be helpful. So much of their profitability comes from these plans and it seems there is a lot of pressure on them while their leverage to fight back is hard to see.

 

Thanks for any help.

 

I am long.

 

Here's the short story to get you started.

Davita is the low cost provider.... 10-15% lower cost per patient vs fresenius by my unit economics estimates. Davita and Fresenius have around 1/3 of us market each. The other 1/3 Is mom in pops not benefiting from the economies of scale. Davita and Fresenius have slowed their acquisitions in the us at this point to keep the current market share balance. As a result, any change in pay would cause mom and pops to shut down. Also, patients may have to drive further to get their treatments.

 

 

[rb]

At current prices Mr Market seems to be pricing in a large hit from the recent article about steering customers to AKF. Can someone who has followed or invested with DVA for a while explain the workings of these higher paying commercial plans and give a valid argument for why they won't go away? If the CMS is able to revise enrollment rules for Medicare and Medicade and/or make "regulatory changes that would allow individual market plans to limit their payment to healthcare providers to Medicare-based amounts" it seems this entire division would be unprofitable. Since this would put them out of business resulting in catastrophic consequences for their patients, it seems a long shot, but its hard to invest with the knowledge and comfort I currently have on why this couldn't or won't happen.

 

Any links or recommendations to help me understand this outside of DVA filings/calls would be helpful. So much of their profitability comes from these plans and it seems there is a lot of pressure on them while their leverage to fight back is hard to see.

 

Thanks for any help.

 

I am long.

 

Here's the short story to get you started.

Davita is the low cost provider.... 10-15% lower cost per patient vs fresenius by my unit economics estimates. Davita and Fresenius have around 1/3 of us market each. The other 1/3 Is mom in pops not benefiting from the economies of scale. Davita and Fresenius have slowed their acquisitions in the us at this point to keep the current market share balance. As a result, any change in pay would cause mom and pops to shut down. Also, patients may have to drive further to get their treatments.

Flesh, you seem to have done quite a bit of research on this so you you don't mind, can you provide a bit more detail regarding a couple more issues.

 

Firstly, DaVita seem to be very aggressive in sales/marketing. This is not their first scandal. In your view is this just stupid over zealousness at the top or is this kind of stuff what drives a good chunk of profits? If they ease up on the pressure will that be a small decrease in profits or will it be significant?

 

Secondly, what always bothered me about DaVita is that the bulk of the patients are Medicare. In those cases Medicare dictates the terms and they don't seem to make any money off these patients. They mostly service them to pay the rent and the power bill shall we say. The profits seem to be made off of the few patients with private insurance for whom they seem to charge a pretty penny. Give this do you think that their profits are sustainable? What prevents Medicare to cut the rate (i know there were some issues around this a couple of years ago) and push DaVita in a loss per medicare patient? Or otherwise what prevents private insurance to cut payments for dialysis? Or maybe a shift in the mix of private/public insurance? It seems to me like DVA is very exposed to these issues. If any of them would come to be it would evaporate a good chunk of DVA profits.

 

You seem very confident in the company so I assume you understand these issues better than me. I would appreciate it if you could share your thoughts around these issues.

[DooDiligence]

DaVita Falls on Report It Encouraged Unneeded Insurance (Sunday) By Lee Spears

 

(Bloomberg) -- DaVita Inc. fell as much as 3.9% to lowest since 2013 after St. Louis Post-Dispatch reported Oct. 23 that DVA encouraged patients who were eligible for Medicaid to buy private insurance.

 

Not an exact corrolary to Wells Fargos operation but damn, WEB must be beside himself.

 

Anyone seen any comments from Munger on this?

[Graham Osborn]

DaVita Falls on Report It Encouraged Unneeded Insurance (Sunday) By Lee Spears

 

(Bloomberg) -- DaVita Inc. fell as much as 3.9% to lowest since 2013 after St. Louis Post-Dispatch reported Oct. 23 that DVA encouraged patients who were eligible for Medicaid to buy private insurance.

 

Not an exact corrolary to Wells Fargos operation but damn, WEB must be beside himself.

 

Anyone seen any comments from Munger on this?

 

Given Munger's comments on VRX, it is indeed ironic that BRK owns DVA.  Not saying the situation is as extreme, but these healthcare rollups have certain common traits.

[whiterose]

Secondly, what always bothered me about DaVita is that the bulk of the patients are Medicare. In those cases Medicare dictates the terms and they don't seem to make any money off these patients. They mostly service them to pay the rent and the power bill shall we say.

 

This is correct, but on the other hand, rather than seeing it as a weakness it could possibly be a strength at the same time. While negotiating with the government/public payer they can truthfully argue that they are already at cost today, any rebate in reimbursements is not economically viable. Noone wants to be responsible for killing of the whole industry. Dialysis is a much needed medical service, keeping patients/voters/humans alive.

[rb]

Secondly, what always bothered me about DaVita is that the bulk of the patients are Medicare. In those cases Medicare dictates the terms and they don't seem to make any money off these patients. They mostly service them to pay the rent and the power bill shall we say.

 

This is correct, but on the other hand, rather than seeing it as a weakness it could possibly be a strength at the same time. While negotiating with the government/public payer they can truthfully argue that they are already at cost today, any rebate in embursements is not economically viable. Noone wants to be responsible for killing of the whole industry. Dialysis is a much needed medical service, keeping patients/voters/humans alive.

Ok, so what's your point? We're just gonna keep our fingers crossed and hope it doesn't happen? Is this the first time a company would have a loss leader? In the context of Davita Medicare would be almost the portrait of a loss leader.

 

But while the public sector clients are a concern, my bigger concern in about the private sector insurance business. What prevents them from saying well if Medicare pays you so little why should we pay you so much? Why should we subsidize your profits?

[DooDiligence]

Secondly, what always bothered me about DaVita is that the bulk of the patients are Medicare. In those cases Medicare dictates the terms and they don't seem to make any money off these patients. They mostly service them to pay the rent and the power bill shall we say.

 

This is correct, but on the other hand, rather than seeing it as a weakness it could possibly be a strength at the same time. While negotiating with the government/public payer they can truthfully argue that they are already at cost today, any rebate in embursements is not economically viable. Noone wants to be responsible for killing of the whole industry. Dialysis is a much needed medical service, keeping patients/voters/humans alive.

Ok, so what's your point? We're just gonna keep our fingers crossed and hope it doesn't happen? Is this the first time a company would have a loss leader? In the context of Davita Medicare would be almost the portrait of a loss leader.

 

But while the public sector clients are a concern, my bigger concern in about the private sector insurance business. What prevents them from saying well if Medicare pays you so little why should we pay you so much? Why should we subsidize your profits?

 

Yeah; and then it'd be pointless for Davita employees to get patients to buy private insurance so Davita could switch payers & make better margins.

 

Then they might be able to eliminate that scandal at the expense of lower margins (a not so virtuous circle...)

[DooDiligence]

DaVita Falls on Report It Encouraged Unneeded Insurance (Sunday) By Lee Spears

 

(Bloomberg) -- DaVita Inc. fell as much as 3.9% to lowest since 2013 after St. Louis Post-Dispatch reported Oct. 23 that DVA encouraged patients who were eligible for Medicaid to buy private insurance.

 

Not an exact corrolary to Wells Fargos operation but damn, WEB must be beside himself.

 

Anyone seen any comments from Munger on this?

 

Given Munger's comments on VRX, it is indeed ironic that BRK owns DVA.  Not saying the situation is as extreme, but these healthcare rollups have certain common traits.

 

In the October 1967 partnership letter WEB spoke of the trend of capital heading to momentum funds & he said "Essentially I am out of step with present conditions."

 

This is of course one sound bite from an exceedingly forthright letter (as all have been) but it leads into his shift to relying more on qualitative "high probability insight" (sic) decisions which he says "really make the cash register sing." (sic - again...)

 

It seems that he has relied a lot on a gut feel for the quality of managements character & may have been conned by Stumpf & now Rodriguez, Thiry & Kogod.

 

Still doesn't take anything away from the man himself who I believe has impeccable character!

[whiterose]

In the context of Davita Medicare would be almost the portrait of a loss leader.

But while the public sector clients are a concern, my bigger concern in about the private sector insurance business. What prevents them from saying well if Medicare pays you so little why should we pay you so much?

 

I'm not an expert on this, but I guess the industry-dynamic is comparable to the commodities sector, in which DVA is the lowest cost producer (due to sheer size and the accompanying effects of scale, good management, company culture) and medicare the external set market price. The private insurers have not that many options besides DVA, once the mom-and-pop centers close/get bought. If the competition is losing even more on medicare, they have to be even more expensive for the private insurers to get even. As said, I'm not an industry insider nor am I living in the US, maybe I'm missing sth. obvious.

[orthopa]

So how does divination become more profitable over time if market share is purposefully kept steady? More patients? Raise prices on commercial only patients?

[KCLarkin]

So how does divination become more profitable over time if market share is purposefully kept steady? More patients? Raise prices on commercial only patients?

 

Demographics.

[rb]

So how does divination become more profitable over time if market share is purposefully kept steady? More patients? Raise prices on commercial only patients?

Oh it's pretty clear that patients will go up. It's pretty clear that 5% of people with diabetes need dialysis. So the chain is get fat->get diabetes->become a DVA customer. Americans are really good at getting fat and getting diabetes. Not only that, but they're getting fat and getting diabetes earlier in life. So the mix will probably shift to more private, less medicare which is good for DVA in its current form.

 

The risks here are that the insurance co's negotiate down DVA's prices, or political/legislation risks such as an expansion of California prop 61. Of course this is not imminent, but my investment horizon is longer than 6-12 months. My problem with US health care stocks is the same as with any bubble. Healthcare costs in the US are out of control. And just like anything else that cannot go on forever, it will eventually stop. What happens then?

[DooDiligence]

So how does divination become more profitable over time if market share is purposefully kept steady? More patients? Raise prices on commercial only patients?

 

For that we'd need to hear from the divine master WEB (and/or his foil "the West Coast Philosopher")

[DooDiligence]

So how does divination become more profitable over time if market share is purposefully kept steady? More patients? Raise prices on commercial only patients?

Oh it's pretty clear that patients will go up. It's pretty clear that 5% of people with diabetes need dialysis. So the chain is get fat->get diabetes->become a DVA customer. Americans are really good at getting fat and getting diabetes. Not only that, but they're getting fat and getting diabetes earlier in life. So the mix will probably shift to more private, less medicare which is good for DVA in its current form.

 

The risks here are that the insurance co's negotiate down DVA's prices, or political/legislation risks such as an expansion of California prop 61. Of course this is not imminent, but my investment horizon is longer than 6-12 months. My problem with US health care stocks is the same as with any bubble. Healthcare costs in the US are out of control. And just like anything else that cannot go on forever, it will eventually stop. What happens then?

 

My preferred bet being NVO

[KCLarkin]

Because Medicaid reimburses for dialysis at a lower rate than ACA Plans, DaVita estimates that a policy change that prevents patients with minimum essential Medicaid coverage from accessing charitable premium assistance to enroll in ACA Plans would result in a reduction in its annualized operating income of up to approximately $140 million before any offsets.  If CMS were to issue a broader ruling that made access to charitable premium assistance unavailable to all ESRD patients on ACA Plans, the estimated financial impact would increase by up to $90 million, based on our estimate that a significant number of ESRD patients would lose their ACA coverage and end up completely uninsured, while others could continue the coverage with federal subsidies.

DaVita looks forward to continuing a collaborative dialogue with regulators and issuers on efforts to strengthen the sustainability of the ACA and continue to provide clarity and access to coverage for patients in the future.  We will provide additional details on our third quarter earnings call on Wednesday, November 2, 2016.

 

http://phx.corporate-ir.net/phoenix.zhtml?c=76556&p=irol-newsArticle_print&ID=2217263

 

Stock up about 6% after this press release.

[loganc]

So how does divination become more profitable over time if market share is purposefully kept steady? More patients? Raise prices on commercial only patients?

 

For that we'd need to hear from the divine master WEB (and/or his foil "the West Coast Philosopher")

 

Why do you keep referencing Buffett with respect to the DVA investment?  It is very well known that this is Weschler's investment.