Ladies and gentlemen, thank you for standing by. I'm Stuart, your Chorus Call operator. Welcome, and thank you for joining the Fresenius Medical Care earnings release for the second quarter 2019 results. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question and answer session. If you would like to ask a question, you may press star followed by one on your touch-tone telephone. Press the star key followed by zero for operator assistance. I would now like to turn the conference over to Dominik, Head of Investor Relations. Please go ahead, sir.
Thank you, Stuart. We would like to welcome all of you to the Fresenius Medical Care earnings call for the second quarter 2019. We appreciate you joining today. It is my pleasure, as always, to start out the call by mentioning our cautionary language that is in our safe harbor statement, as well as in our presentation and in all the materials that we have distributed earlier today. For further details concerning risks and uncertainties, please refer to these documents as well as our SEC filings. Given that there has been so much news flow with the CMS rates coming out with the proposed rule for next year with President Trump's executive order and the special effect in the quarter, I assume that there might be a good number of questions.
Therefore, it would be great if we could limit the number of questions, again, to two in order to give everyone the chance to ask questions. If there are further questions, we are more than happy to go a second round. I hope this works for everyone. With us today is, of course, Rice Powell, our CEO and Chairman of the Management Board. Rice will give you some more color around how the quarter has developed. We'll go through some of the major topics of the quarter. Of course, also with us is Mike Brosnan, our Chief Financial Officer, who will give you an update on the financials and the outlook. I will now hand over to Rice. The floor is yours.
Thank you, Dominik. Hello, everyone. It's great to have you with us today. I'll start my prepared remarks on slide four, and I'll give you a second to get over to that slide. Our growth trend continued in the second quarter. We provided just shy of 13 million treatments. As you can see, we have approximately 340,000 patients that FMC cares for at the end of the second quarter. Now, turning to slide five, we'll take a moment and look at our clinical outcomes.
Our quality outcomes are the most important commitment that we make to our patients. I'm pleased as you look across these four regions in the year-over-year comparison, I see stability and good performance in those metrics that we measure from quarter to quarter relative to our clinical outcomes. Turning to slide six, my commentary on the quarter in and of itself.
Our underlying business performance developed in line with our expectations. We've seen healthy organic revenue growth globally, and additionally, we've seen very healthy growth in our U.S. dialysis business. With this growth prospect in mind, I believe we will achieve adjusted revenue growth in the mid to upper end of our guided range for the year. As the reconciliation for the ESCO savings has been ongoing for such a long time, it is prudent to adjust the resulting savings. Therefore, we have an adjustment in Q2 based on recent reports for prior year plans. This does not mean that we have not delivered savings, but the savings rate is lower than we had anticipated and hoped for. This ESCO adjustment was not part of our planning when we issued our guidance for the year back in February.
Therefore, we believe we will now be closer to the lower end of our adjusted net income growth guidance for 2019. As you know, we are investing in increasing the home penetration in the U.S., and we’ve seen our efforts take root as evidenced by an 11% increase in home growth in the second quarter. We are also executing on our cost optimization program that targets the rationalization of our geographical footprint in the United States. Detailed planning and communication took place in the first half of the year. The execution activity is on target to be worked on in the second half or H2, if you will, of this year. Our GEP program continues to progress in line with our plans over the course of this year.
Before I turn to the next slide, I'll take a very brief moment to give you an update, somewhat off-script, as it relates to our CFO search in trying to fill the rather large shoes of Mike Brosnan as he retires at the end of the year. We are in the final stages of our CFO search, and I will think probably in the next several weeks, we'll have more of a detailed update that we can provide for you. Stay tuned on that, but I thought it was worth sharing with you. Now, turning to slide seven. I will highlight the adjusted numbers to show the underlying business performance. We achieved on a constant currency and an adjusted basis a solid 5% revenue growth.
Due to the adjustments for our ESCOs, an operating income of EUR 490 million was achieved in the quarter and a net income of EUR 279 million. Excluding the mentioned effect from the ESCO adjustment, revenue and EBIT would be EUR 41 million higher in the quarter. Net income would be EUR 26 million higher in the quarter as well. Turning to slide eight and looking at organic growth. We achieved global organic growth of approximately 4.5% with good contributions from North America and Asia Pacific. Please do keep in mind that the reported revenue growth in North America was impacted by the divestiture of Sound a year ago. Adjusting for the effects from Sound, IFRS 16, and NxStage, we saw growth of around 11% and 4% on a constant currency basis.
Europe, Middle East, and Africa had a negative impact in their products business. I'd like to come back to this in a subsequent slide. Asia Pacific, as you can see, had continued good organic growth. We've seen high growth in Latin America driven by price inflation. Turning to slide nine on our services business. We saw strong growth on an organic basis. Same market growth further improved. After a good start in the first quarter, same market growth in North America continued to perform nicely with an increase of around 4%. On a sequential basis, Q1 of 2019 was around 3.5%. You're seeing about 50 basis points improvement. The development in North America was impacted again by the divestiture of Sound. As in the first quarter, our second quarter payer mix continued to improve.
We are continuing to see ourselves better and better month to month with payer mix. The EMEA services saw healthy organic growth of 5% in the quarter. Obviously, currency volatility in Latin America resulted in high organic growth, and the volumes continued to grow as well. Turning to products. Product growth in the quarter was supported by the NxStage acquisition in North America. We saw an accelerated growth of 29%. Excluding the acquisition, the organic growth was solid with a 4% result. Keeping in mind that a year ago in Q2, the organic growth was around 10%. Q2 2018, 10%, Q2 2019, 4% organic growth. In the EMEA region, our dialyzer sales to North Africa and the Middle East impacted the product growth. The country mix in that region, unfortunately, does include volatility.
We don't think it's a matter of will we get sales. We think it's a matter of when we will get sales as we look to the back half of the year, and we're able to fill some of these tenders and things that we're counting to do in H2. Asia Pacific delivered solid growth with 7% reported in organic growth. Latin America saw high organic growth, obviously supported by pricing. I think net-net, a good products quarter for us beyond the issues that we had in Middle East and Africa. Turning to slide 11, my last slide. You are all aware of President Trump's Executive Order on advancing kidney care. Although it was not a Q2 event, many of you asked us for commentary within hours and a day or two of when this was done. We've taken some time.
There's more to do, but let me make the following remarks about President Trump's executive order. We launched our care coordination strategy in 2014 in order to prepare ourselves for a value-based care future. As you know, we launched our intensified home strategy in 2016. As with all new programs, the details are important, and Health and Human Services has yet to release many of the important details for these upcoming programs. We are in the midst of commenting and asking questions on both the mandatory model as well as the voluntary models. The question one might ask is whether we as FMC will participate in these voluntary demonstrations in light of our recent experience with the ESCO program. Health and Human Services has taken steps in developing these models to address some of our concerns from the ESCOs.
For instance, voluntary models will have upfront alignment and more transparency when it comes to benchmark setting. We remain cautious given the lack of claims transparency and the moving benchmark targets that have made it difficult for us to be as successful as planned in the ESCO program. That is an overhang for us as we contemplate how we go forward in these future programs. We have been, and we will continue to be partners in transforming kidney care, but we cannot be successful or commit to participate unless the models are fully transparent, and this transparency is essential for us to be able to impact cost and increase quality.
These comments that I'm making to you today have been made to the appropriate people in Washington, and we're going to make them again, and probably again, and maybe one more time in order to be able to make sure that we are doing the best we can for our patients and supporting the initiative because we believe what the President has laid out in his Executive Order absolutely corroborates our strategy of more people at home, finding a way to be more involved in transplantation in the right way, continuing value-based care, and working on trying to delay the onset of stage 5 dialysis.
We're supportive. We just want to get it right, and we'll continue to fight to make that happen. With that, I'll turn it over to Mike and let him take you through his ideas and thoughts on the quarter.
Thanks, Rice, hello, everybody. I'm on chart 13, revenue and net income growth. We have a high-level reference slide to guide you through the developments in the second quarter. If we start on the top with revenues, you can see in the base period, we reflected a $258 million revenue adjustment associated with the fact that we divested Sound in the second quarter of 2018. This would get you to a measurement base of EUR 3.9 billion and change. You can see the 5% business growth that we had or EUR 188 million on a constant currency basis. The revenue development is clearly within the targeted range of 3% to 5% for the full fiscal year. Currency translation was favorable with EUR 140 million additional on the top line.
There was EUR 18 million for transactions that under the old leasing standard, prior to IFRS 16, would have been classified as revenue. The EUR 79 million generated from the newly acquired NxStage, which Rice mentioned a few moments ago, get us to a reported figure of just over EUR 4.3 billion in revenues. Now if we look at the development of net income, the adjustments for the gain from the divestiture of care coordination activities was EUR 686 million to get you to a base of EUR 308 million for the measurement period.
You can see that the business development was a loss of EUR 33 million to get to growth on a constant currency basis of -14%. This growth is affected by the escrow adjustment, as Rice indicated, which accounts for about 8% of the 14%. Following on, there was favorable currency translation effects of EUR 15 million.
The unfavorable front-loading effect from the implementation of IFRS 16 of EUR 10 million, unfavorable effects from the NxStage operations of EUR 19 million and transaction integration costs of EUR 3 million, as well as EUR 2 million related to the cost optimization program and a EUR 9 million gain from divestitures of some care coordination activities in the second quarter. All of that brings you to a reported net income of EUR 254 million. Turning to Chart 14 and looking at the operating income and margins. You can see the strong operating income from the previous year was largely driven by the gain related to the care coordination divestitures of EUR 833 million. The margin decreased accordingly from 33.3% in the second quarter of 2018 to 12% in the second quarter of 2019.
When you look at margin on an adjusted basis, consistent with our guidance, this excludes the divestitures of care coordination activities, the contribution from Sound in 2018, the favorable effects from the IFRS 16 leasing implementation, and the integration and operational costs associated with NxStage. Last but not least, costs associated with the improvement in our cost base under the cost optimization program. Looking at it that way, EBIT margins declined from 14.1% to 11.5%. This is about 260 basis points. The main drivers for that decrease, as noted on the page, were higher personnel costs in North America and EMEA. Again, the effect of the adjustment we took in the escrow program, partly offset by a favorable impact associated with higher utilization of the oral-based ancillaries. Turning to Chart 15 and continuing with cash flows.
In the second quarter of 2019, you see an increase in comparison to the prior year. This is driven by the implementation of IFRS 16. From some of the reports coming out earlier today, I think there may be a question or two on that. I'm happy to address that in the Q&A.
The favorable impact associated with the seasonality of invoicing between the first and second quarter. Typically, Q1 cash flows are a bit lower as a % of revenues than we recover in the second quarter. You're seeing that again this year. These effects were partly offset by the settlement payment we made on the agreement with the SEC and the Department of Justice. The net result of this was cash from operations of just under 20% of revenues, compared to a little over 15% of revenues in Q2 2018.
Looking at CapEx, it's increased by EUR 66 million, reflecting a higher level of spend in our clinical network. Nothing extraordinary to report there. That leads to free cash flow at EUR 559 million for the quarter. As a result of the developments of our free cash flows and our acquisition spending, our net debt, this is our debt less cash on hand, and excluding IFRS 16, has increased from EUR 5.4 billion at the end of December 2019 to EUR 7.9 billion as of June 30, 2019.
Including the additional lease liabilities as a result of IFRS 16, the debt increased to EUR 12.5 billion. Lastly, when you look at the leverage ratios on the bottom left of the page, excluding IFRS 16, leverage is at 2.6 times, an increase up from 1.8 at the end of 2018, obviously inclusive of the effects of closing the NxStage deal.
The same ratio inclusive of the change in the accounting on leasing gets you to 3.3x debt to EBITDA. Turning to my last chart, and talking a bit more about the outlook. Just a few more words. Revenue growth adjusted of 3% to 7% at constant currency using EUR 16,026. Earnings growth unchanged at -2 to +2 constant currency with EUR 1.341 billion as the base.
As Rice indicated, given where we are at the half-year mark, we would say we're trending towards the middle or high end on the revenue side, and at least in part as a consequence of the ESCO adjustment trending to the lower end of the range on the earnings side. We're also confirming our midterm targets for 2020, anticipating the increases that we had indicated to you earlier this year. That concludes my remarks. I'll turn the call back to Dominik.
Thank you.
Thank you, Mike. Thank you, Rice, for the presentation. I'm happy to turn it over to Q&A. Stuart, could you please open the line?
Thank you, ladies and gentlemen. At this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you are using speaker equipment today, please lift the handset before making your selections. In the interest of time, please limit yourself to two questions only. Anyone who has a question may press star followed by one at this time. One moment for the first question. The first question is from the line of Veronika Dubajova from Goldman Sachs. Please go ahead.
Good afternoon, gentlemen. Thank you for taking my questions. I will keep it to two, please. My first question is on ESCOs and the adjustment that you've had to make today. I appreciate the mechanics of it. I'm just wondering, in light of what you are seeing and hearing from CMS around this baseline conversation, is your assessment of the growth and earnings potential of the U.S. Care Coordination business changing in any shape or form? I think historically you've talked about this mid to high single-digit top-line growth and margin somewhere in the low teens. Is that something we should be reassessing as a result of that? I will ask my second question after you answer this one.
Sure.
Go ahead, Mike.
Hi, Veronika. Let's see, just to give a little bit more detail to everybody on the phone, when you look at the care coordination margins in Q2, absolutely right, adjusted, it was -2.2%. The ESCOs accounted for 11.1 percentage points of that negative margin. Without considering the ESCO adjustment, we'd be at around 9% for the quarter. On a year-to-date basis, we're at 5.2%, including the ESCOs, and 10.4% excluding. For the full- year, we'd expect with the ESCO adjustment to most likely be in the mid-single digit margins for North America. If you excluded the ESCOs for the full- year, we'd be just shy of double digits, just to give some perspective.
When we think about 2020, because I'm anticipating your question in that regard, with the ESCO adjustment behind us and with what we see underlying the development of the remaining parts of our care coordination business, we'd expect to see, again, double-digit margins in the care coordination business, if that's helpful.
Even though there's potentially questions around your choice to participate in some of the ESCO programs going forward, do you still think you can achieve a low double-digit margin in the overall care coordination business in the medium term? Is that a fair way to interpret your comments, Mike?
I think that's fair, yeah.
Okay. My second question is just on the full-year guidance. Obviously, with this ESCO headwind, it's roughly 2% of growth for the year. What is going on better in the business that gives you the confidence that you can compensate for it within the guidance range that you've given?
Yeah, I think you've come up with two great questions to start the call. Maybe because obviously we spent some time with the notes that all of you published earlier this morning. Maybe I'll answer this in a fairly comprehensive way with regard to the second half versus the first half for 2019. We expect an improvement to come largely from North America in order to achieve the guidance range that we indicated, which when you look at that on a pre-tax basis, would be about €300 million. Approximately one-third of that would come from top-line improvements, mostly the positive trends you see in treatment growth and commercial mix in the U.S., which is further supported by the de novos coming online this year, and supported by developments in product sales and care coordination, excluding the ESCOs.
We are seeing some positive results in the vascular business as a consequence of the ASC conversions that we've undertaken, and that we've talked about a number of times previously. About one-third of that improvement will come from the cost optimization program, the GEP program, from purchasing activities in the back half of 2019, and other efforts. The last third would be from timing effects. In that category, Rice mentioned, in particular, sales in MEA, as it relates to the Middle East. We do see product sales improving in the back half, largely associated with those customers that are dependent on letters of credit. That's a timing. We think we have the sale, it's just when it closes.
Some costs incurred in the first half of the year that will not repeat. Our normal truing up of our self-insurance reserves and other improvements in the back half of the year. Roughly a third in terms of top line, a third in terms of cost management programs, and a third in terms of timing effects. If that's helpful.
That's very helpful. Thank you very much.
Next question is from Patrick Wood of Bank of America. Please go ahead.
Perfect. Thank you very much. Two for me, please, as well. On the ESCO charge, that timing thing. CMS at the same time, CMMI has been putting out so many of these bundles and trial programs from CJR to RADON to BPCI. There's been millions of them. Do you get the feeling that they run a little bit ahead of where they have the capacity to manage?
In relation to that, if that is the case, do you think that creates a problem for them managing the shift to home and making that shift? Is that just a much simpler program to execute than the shared savings schemes? That's the first question. For the second question, on the commercial rate environment in the U.S., is it just some of the regional contracts where you're seeing a little bit of the pressure there?
How should we think about commercial rates going forward? Should we expect to get back to a slight inflationary environment? That would be helpful. Thanks.
Hey, Patrick. I'll take one. Mike, do you want to take two? Here's what my personal opinion is when you look at this. You're right. There are lots of pilots out there. There are lots of demo projects that are out there. I think here's what I would say to you. As we look at our ESCO situation and we talk to other people that are doing pilots of one nature or the other, benchmarks that move around.
Timing and transparency of data and reconciliation is a general issue. In fairness, and to the folks at CMMI, particularly at the very senior levels, they will tell you these were programs that were developed under a different administration. They've inherited them, and they're trying hard to make them work as best they can. They will say that we're learning lessons about how we want to go forward.
In my particular case, as we talk about the Executive Order in kidneys. We do see that they're trying to simplify and make it easier. I will offer this to you. When we look at our Medicare Advantage programs that we are running for some of the payers, we know very well in a broad sense where we need to manage expenses, how we need to intervene, what we need to do. We see profitability, we see savings.
It is a much simpler architecture, if you will, to what we have tried to understand and work with within the ESCO program. I'm convinced that this works. Value-based care is here to stay. Yes, I think you're asking a very good question around just how busy are these folks, can they really get to all of this? Is it just too overly burdensome?
I think we've been awfully ambitious, is the way I would say it. I'll turn it over to Mike for the commercial rate.
Sure. Yeah, Patrick, I think on just overall on the revenue per treatment for this year. Typically, I guide to revenue per treatment excluding the calcimimetics. We are essentially flat at the half year mark, year-over-year in terms of revenue per treatment. I would confirm that my expectation is it will be flat to slightly down for the full year. We are seeing our commercial mix improve as we expected, we are continuing to manage the renewals this year with the net rates being down just a bit. When you think in terms of midterm and you move out beyond this year, I think that the U.S. folks have done a really good job managing a very complicated environment over many, many years, I would generally characterize what we see in commercial rates as relatively stable.
Helpful. Thanks, guys.
Thank you.
Next question is from Tom Jones of Berenberg. Please go ahead.
Okay. Good afternoon, thanks for taking my questions. For Rita, I've got so many questions. I'm going to try and bundle them all into one, really, to be honest. If you had to assess the, I'm referring particularly to the U.S. here, the political tailwinds versus political headwinds situation. You've got so many different things going on, ESCOs, the CKCC model, the ETC model, the KCF model. We've seen this tech add-on proposal come in last night.
There's changes around the way this ZAP has been handled. I mean, we could talk about the details all day, but let's put it this way. If the headwindometer was, say, -10 on the day that the Medicare decided to try and cut your rates 9% back in 2013, 2014, that was as bad as it's ever been. Maybe plus 10 is the opposite end of that spectrum.
If you look at everything as you sit in your office today, all these different programs, what's going on in home, the executive order, et cetera. Where on that -10 to +10 scale would you put the political environment in the U.S. at the moment?
Tom, before I would begin to think about that, I'd probably have to have a drink if I were sitting in my study at home. Let me say this. Yeah, it can seem to be very schizophrenic, and I understand that. Here's the way I look at it. We're winning more than we're losing. I'm frustrated about the ESCOs, and those of you that know me well understand that, because we're doing good work, and I don't think it's getting recognized from a financial standpoint. Here's what I would say to you. You look at the PPS comes out, it's roughly 1.6, a little bit better than last year. I think that's a good thing. If people really read into the detail, there's no more ESA measurement.
For everybody that was worried about the clawback, which I still say never came because they tried it and it didn't work, I think we've moved past that boogeyman, if you will. We see in the proposal, we are very happy with what we see for vascular access at a 2.7% increase in the renal side of the vascular business and in the cardio side where we do some work, we've seen some procedures be included at good reimbursement levels.
All of those things we take as positives. We believe in home or we shouldn't have spent the EUR 2 billion that we did. I think in the big picture, I think the climate as it sits today with this president, this administration, this Congress, I'm bullish. I think we got lots of work to do. We got lots of things to explain, questions to ask.
The chaotic part of this is just trying to get it right and have it be more simple when I think about this mandatory piece of the Executive Order and I think about the voluntaries. The good news is we get to decide whether we want to be part of the voluntaries or not, and we are 80% of value-based care in the U.S. We do get a chance to sit and talk to people. We just got to sharpen our thinking, be collaborative, and try to work at getting this better for the long run.
If you had asked me, Tom, back in 2013, would I ever sit on an earnings call and talk about the fact that the president put out an executive order that's dealing with moving kidney care in places that we as FMC have been talking about for years, I would've said you'd had too many drinks when you asked me that question. I do think, in fact, it's not as dire as it seems, but there's going to be a lot of work that's got to go in. There's got to be a lot of listening that goes on, but it's better than I imagined it would be. We've just got to be able to gather all those puppies up, so to say, and get them in the box at the same time. Think how bad it could be.
The flip of that is we could be looking at a whole different environment, in terms of no caring about kidney, none of the opportunities. They could be doing things that make our NxStage acquisition look foolish. Thank God all of those things are in our favor and not going against us. Long-winded answer, but I hope that helps.
Don't hold your breath. We might have Medicare for All in two years' time. My follow-up question, I guess, underlying the one I just asked was really the bit that we're all kind of salivating over is the Global Kidney Care Contracting Model and what that might do for your business. I know it's very early days and discussions are still relatively preliminary. What are the key things that are giving you concern around that model, and what might you like to see improved with it before you'd commit more wholeheartedly to participating in a program of that nature?
Yeah. When I think about it, when you look at the way they've laid it out, the fact that you've got nephrologists in there, you've got not a requirement for dialysis clinics to be there. That gives me concern that one of the first things we have to do is sit down with our physician partners and make sure we're all locked and loaded about how we want to go forward and what we want to do. I will tell you the thing that is concerning to me is when you look at attribution being based on the physicians rather than the clinic, that's a problem. I just think we've got to push back on that.
It's not because I don't love our physicians, but I think that attribution has been hard enough for us in the ESCO program, Mike, I would say, that to go into something this significant with this kind of potential and our clinic base is not part of the attribution, that's pause for concern. We're going to push on that. We'll have to do more with it. Tom, I don't think I can drop into more detail than that, but that is the one thing that sort of jumps out at me in that as we will now, I guess, start to call it forever the CKCC model.
Perfect. That's very helpful. It gives us at least an idea on what bits of it to focus on. That's very useful. Thanks.
Next question is from Michael Jungling from Morgan Stanley. Please go ahead.
Thank you so much. Two questions, please. Firstly, on the ESCO savings. Of the profits that you've reversed of $41 million, what is the amount of cost savings which you have booked in the past but have not yet impaired or adjusted? I'm just trying to work out the potential at risk at some time in the future if things don't improve in the ESCO projects. Question number two is on Medicare Advantage. Can you comment on the progress you're making in negotiating with the commercial payers for 2020, and do you get a sense that you will get a rate above the Medicare rate? In that, how do you feel about the disruption whereby an insurance company actually become a dialysis service provider in their own right? Thank you.
I'm just thinking about your question, Michael, because we're constrained a little bit in the following way. I think that when we finished the plan year one with the government, which was tail end of 2015 into 2016, the agreement we have is that we don't talk specifics until the years are closed and fully reconciled. Unfortunately, we would have loved to have been in a position to do that on year two sometime last year. As it's happened, that just hasn't worked out that way. There's additional work that's being done. We do have an agreement that we don't talk about the specifics of any of the plan years until they're fully closed and reconciled.
What that leaves us with is essentially about 2.5 years of activity. We've got Plan Year two, which the latest communication we received from the government is that they would expect that that will be closed out sometime this fall. I'd say best case, September, worst case, Q4, hopefully. Plan Year 3, which we just got the preliminary full-year reports. Lots of questions that are going back and forth in terms of patient attribution, benchmarks, and the cost savings estimates. I expect those discussions will continue. What we typically do in the current period is we take a very hard look at the most recent year, which would be Plan Year three, 2018, and we considered that when we booked the adjustment in the second quarter.
It's not really answering your question, but I'm explaining why I'm somewhat reluctant to talk about hard numbers in terms of what we've recognized cumulatively in the program until we get to some closed plan years. We did it for plan year one. We'll do it again for plan year two if we get there this year. Then as soon as we're fully reconciled with the government, we'll do it for 2018 or plan year three. We are still saving money in these programs. As Rice indicated, we think it's very important that we participate in these programs to get the right base of knowledge to be successful under value-based care, whether you're talking about the new Executive Orders or frankly, even if you're talking about the PATIENTS Act and what may happen in Congress relative to getting to a capitated rate program for dialysis patients.
We see the investment we've made in the ESCOs as very important in that regard, and we are still generating savings that we're sharing with the government.
Michael, it's Rice. The only thing I'd add to that is it is a reconciliation. It can go up, or it can go down. We happen to be dealing with gravity right now in what we've done. I'm not totally convinced that we'll never see any positive on this either. I think we hold that out to see where it goes. On your second question on the Medicare Advantage negotiation, those are underfoot. I don't think there's a lot I can tell you about that at the very moment, other than obviously we're six months away from a new year. We're into discussions on that. I think your other question about how do we feel about an insurer becoming a provider, that's certainly something that could happen.
I think part of why we, as a long-term focused provider, have always been comfortable that we have quality parameters and we have quality metrics that we have to meet in these programs because it's not as easy as one might assume that they can flip from being on the insurer side of the business to the provider side, and they're going to necessarily be able to make that happen, with whatever kind of form they take, if you will, to become a provider. It's a little theoretical. I don't think I can say much more than that, but we stand by our ability to manage our patients and do what we need to do. We'll see how that evolves over time.
Great. Maybe just one for Mike on this ESCO. Thank you for the explanation. Maybe I can ask in a different way, is there a material risk or so that you would come back to us in the next 12 months of a further correction to the downside? Is there enough left over that there could be a material amount to the downside?
I think that we do every quarter, and we did make a judgment with regard to this EUR 41 million that we took in the second quarter. I would say these are still risk-based programs. We're still potentially plus/minus in any given period based on the most recent information we have from the government. This EUR 41 million was substantial, so I'd like to think that the worst is behind us.
The nice thing, Michael, is just the fact that we've got these other programs as part of the executive order we're talking about. We're pushing for improvements from what we've seen in ESCO. I hope some of that bleeds over into the ESCO conversation as well, because those years are still out, as Mike has said. We can't say no, but at the same time, I think we're trying to be as clear with you as we can be, and I think Mike just was.
Thank you.
Next question is from Sebastian Walker of UBS. Please go ahead.
Hi there. Thanks for taking my questions. Two, if I could. Could you maybe comment on the ESRD PPS that we got last night in terms of how that compared relative to expectations when you're thinking about 2020 guidance, and then in particular, how large of a tailwind calcimimetics has been on the North American dialysis care and products margin for 2019? That's the first one, and I'll ask the second one after you had a chance to answer. Thanks.
We'll split that one up. Just on the PPS that came out last night. The expectation that we had going into 2020 was pretty close to where they ended up. We kind of felt like the one and a half, 1.4 we're seeing this year was going to be probably rational for 2020, and I think at this point it seems to be. We all have to remember this is draft proposal till it gets to be final rule. As I said, we think this translates to 1.6. I think everybody's got a little different number depending on how you back things out. Mike, I'll let you handle the tailwind on the calcimimetics.
Yeah. Overall, we haven't differentiated between what reimbursement is going through the services versus the products business. I'd say generally, the calcimimetics has been, when you look at our margin reports, last year and this year has been a positive for the business. We would expect that to continue and make a contribution to the third that I mentioned at the beginning of the call when to Veronika's question. I'd probably stop there rather than try to tease out products versus services.
Sorry, just to follow up. When calcimimetics go from being reimbursed at ASP plus six to ASP plus zero, I guess I'm trying to understand how that translates into a 2020 impact.
No, I appreciate that. At that level of granularity, we're probably going to wait until we see how we perform this year and talk more about that when we give 2020 guidance.
Yeah.
Okay.
Sebastian, the only thing we could add is we, I think, told you guys early in the year we thought there'd be a couple of generics out there, and we sit here today with five. That will also play into how we look at next year and where we're going depending on how they launch and get utilized in the ASP calculation.
Okay, great. Thank you. One was just on home dialysis, and I think there's an appreciation for some of the potential financial implications here, but just trying to understand the transition period, if you could talk about how investments are going to be phase. I think you talked about investments falling off in the second half of 2020. If you could also talk about the potential impact of a lower utilization rate within your traditional clinic base, that would be really helpful.
I think very broadly speaking, and this goes back a ways, this goes back to kind of the discussions we had when we announced the NxStage deal in 2017 and then some of the additional discussions we've had. There was a home call. I didn't participate in that.
Yeah
I know Rice and Dr. Maddux did. Broadly speaking, we, and I'll repeat this a bit, we're supporting home. We think that to the extent to which, as a site of service, patients choose home over in-center, that this is something that will be somewhat gradual over time. We indicated we thought we'd be at 15%+ by 2022, and we've told you recently that with the improvement we saw in 2018, we're focusing on the plus. We think that's very manageable in terms of our infrastructure. Over the midterm, I'd expect that, and we've already said that we expect fewer de novos as a consequence of the move to home.
As some of the facilities come up for lease in the U.S., we think we can manage those lease renewals in such a way that we'll have the right level of clinical infrastructure to support the home patients, because every home patient needs a center they can go to meet with the nurse, to take care of the evaluation of their clinical indicators, their blood work, et cetera, potentially get injections. We think that we'll be able to manage the clinical network very smoothly over this period where patients start choosing home as a site of service more and more in the interim.
Yeah. Sebastian, it's Rice. On the one point on the clinical utilization, as we have run out our models and we look at what we think we're capable of doing, ex executive order, set that aside for a moment. We're out in the 2030 timeframe before we start to see real utilization, I'm not going to say issues, utilization activities we have to think about and take care of. It is a ways out.
Now, I think it's fair, you look at the executive order and you hear them say, "We want 80% of the patients either on transplant or home by 2030." That's a great goal. I don't know exactly how you make that happen, I guess we could theorize that clinical utilization discussions could come earlier if we're up at 30% or 40%, instead of where we think it's rational.
I'm not going to let the Executive Order cloud the thinking and the work we've done right now. We'll kind of get into that as we go through time and see where we are and we see how it's working. I would caution anybody that just presumes that our acquisition of NxStage and President Trump's Executive Order are going to all of a sudden, we're going to wake up one day and Mike and I are going to tell you, "Oh my God, we got 100 clinics that are going away or 1,000 clinics." It just isn't going to work that way. Again, you have to kind of get into that detail, but Mike makes a really good point. Every home patient has to have a clinic.
We've got time to work through that utilization, and that's probably one of the things that we're better at than most because we've been in this business for so long. Will there never be a utilization impact? I wouldn't say that. I'd say we've got time to plan it and think about it, independent of what the administration may like to see the rates be for home and transplant.
Great. Thank you. Sorry, just to confirm, in terms of thinking about the investments, I think you said on that home call, expect to see them taper off in the second half of 2020. Is that still your current thinking?
Yeah.
Yeah.
Yes, you're correct, Sebastian.
Fantastic. Thanks, both.
Next question is from Ed Ridley-Day from Redburn. Please go ahead.
Hi, good afternoon. Thanks. Firstly, on the GEP program, can you remind me, Mike, where you got to in terms of that, in terms of savings achieved so far and the savings you hope to achieve by the end of this year? Also on the Asia Pacific margin, clearly you well flagged investments diluting the profitability in that region. Can you give us a bit of color on the phasing of those investments? What you have completed and what is still to come. Thanks.
Well, on the GEP, I would say, as recent I talked about this leading up to the call, I think between the GEP and the cost optimization program, we probably want to talk more specifically next quarter, in terms of how it's playing out year to date this year and maybe some indication as to what it might mean for 2020 at that time. The program's running, it's very effective. I wouldn't change our overall expectations from what we've indicated in terms of guidance. I think when we get into the detail on that, we'll probably do both next quarter.
One number we will remind you that we gave you was we were looking at savings of around, I think it was EUR 150 million by the end of 2020. I think what Mike's saying is we are still kind of hanging with that number at the moment. We need to do some more work. As you guys got jammed with PPS and all that stuff, we have kind of gotten jammed with some of that too. We will come back and do a little more in-depth for you on cost optimization and GEP too.
On China and the investments, if you recall, predominantly where we are looking at sort of two buckets of activity. One is production plant expansion construction. Secondly, it is clinic development. I think what Mike and I would say to you is the clinic development will come quicker.
It's a lot easier to build clinics and begin to approach that than it is a huge construction project for adding on a factory or building a de novo factory. Think of it in terms of the investment in the clinic side, as it relates to 2019 and 2020 should come sooner, then you're going to see an impact from the production side because it's just a bigger construction and longer construction window. Mike, I don't know if you want to add anything on that.
No, I think that's complete, Rice. Yeah.
Okay, thanks.
Next question is from Hans Bostrom from Credit Suisse. Please go ahead.
Yeah. Hi. I just had one question remaining. That relates to your performance on the products business in EMEA. It seems like you've had comments in the last few quarters relating to tender businesses not necessarily going your way. I'm just wondering whether this weak growth you saw in Q2 had anything to do with increased competitive nature of the products business in the region, or indeed it is just purely a timing issue.
Yeah, Hans, it's Rice. I don't know if I've commented on this previously or not, let me do it now. When you look at the regions around the world, I would tell you, I think the Europe, Middle East, and Africa region is probably the most competitive products region we have. I would tell you that the guys in Asia Pacific would tell you it's their region, but I think they're pretty neck and neck, but it is very competitive.
I think there's a couple things going on here. Particularly as we call out Middle East and parts of Africa, this is tender business. We've won tenders, two things go on. One, we have product we're ready to ship. We can't ship without them telling us to fulfill the tender. Here's what we need. We've had some fits and starts there.
We've talked about that before. It is frustrating. Secondly, we're also in situations where we're dealing in markets that we are looking for letters of credit. We want to make sure that we're not just going to ship something down a black hole, and that's a change. Honestly, 10 years ago, we probably were less worried about that. Now we're a lot more focused on making sure that we're managing that very dutifully, and I think Katarzyna and her team are doing a good job there. It's a little bit of both.
I know people get tired of hearing about that, but that's kind of the nature of where those particular markets are going on. You look at Eastern Europe and you look at the equipment business, you look at some of what's going on with solutions, tubings, and things like that, it's a little bit better business.
It's happening a little more, how shall I say this? Probably a little more effective in just what we see going on. I think sometimes we lose sight of the fact it wasn't that long ago Libya was in complete uproar. Part of what we're missing are letters of credit from Libya. Egypt was a great business, and it went poof, with the Arab uprising, that's just now coming back. Some of this is that we're in markets where there are fits and starts. That makes this a little lumpy, if you will.
Some people tell us we're crazy, we should stay out of those markets. We should just stay in the places where we don't have those issues. It's a fair comment, but I think at this point, we believe we can try to manage our way through it.
I think in quarter or two ago, you talked about the U.K. being a market where you'd seen some weakness due to failure to win tenders. Obviously, I imagine it's not the same reasons relating to financing in that type of market.
Yeah. With the national health system in the U.K., it's not so much about disruption and things like that. It's lack of money and the price points they wanted on tenders. We do walk away from some things. I think everybody's got to kind of remember there's business that we're not going to go take and just completely destroy our pricing structure. I'm not going to say that exactly is what happened in the U.K., I think you get the message that I'm trying to deliver. Part of that is we control as well as to how bad we want a tender and what we're going to do.
Okay. Thank you.
Next question is from Oliver Metzger of Commerzbank. Please go ahead.
Hi. Thanks for taking my question. My first one is about the ESCO interpretation and some general dynamics in the evaluation of savings. How does it come to the different reviews on the achieved savings? Would you say that the achieved savings were, at the end, higher than initially anticipated, and therefore adjustments to the rates were made to limit payments? That's the first question. The second one is about the HHS proposals on home dialysis, given now more public support for home dialysis. You were bullish on this topic before. How have these proposals changed your underlying assumptions for the development, in particular of PD and HHD for the next years?
Oliver, on the first question, and I think you know this, but just my understanding of the way you asked the question, the ESCOs are retrospective shared savings programs. There's no change in the reimbursement rate we're getting upfront just for the treatment. Everything else we do falls into the periodic reporting that the government gives us after the fact. Essentially, the three major elements you're dealing with is attribution, what patients is the government crediting to your program.
That is based principally on the available treatments that that patient should be experiencing in a given period, what percentage of those patients were done in your facility. The benchmark that's being used and changes to the benchmark, then the actual measurement of current costs. In our discussions with the government, both for PY2 and PY3, those discussions have covered all three of those elements.
It's not a case where any adjustments were raised to reimbursement rates up front and then there was a disappointment. It's essentially just making sure that there's good transparency, good understanding as to how those three elements are aggregated and reported. I would add to that, as we've gone from plan year to plan year, a good understanding as to what, if any, policy changes were made under the program from each of those years. That's what gets our time and attention when we're looking at these reports that are issued after the fact.
Yeah. Oliver, it's Rice. Our enthusiasm for home has not waned at all. Here's the way I'd say it. We know where we want to go and what we need to do, and we're all about going and making that happen. I think the executive order is great. I think it is helpful to put awareness out there and to put an exclamation point on home and transplants and vascular care, or value-based care. Those are some very lofty goals that the presidential executive order lays out.
We're going to keep our heads about us. We're going to go as hard and fast as we can. We're not less enthusiastic at all. We just know what we're capable of doing and how we want to go about it. Don't read anything I say to be less enthused or less motivated.
It's just, at this point, the executive order and the goals of 80% of the new patients by 2030 being transplanted or being at home, that's a big task to figure out how you're going to get that done. We don't have details to the program. That's all I'm saying is we have to stay within ourselves and know what we're capable of doing, interface with the government about how they want these pilots to be run and what they want, and look at them that way. The ESCOs has informed us. It's helped us understand now a lot better questions to be asking about these future demos. That's really what I'm trying to say. We're probably smarter today than we were a couple of years ago as we think about this. That's the way we're approaching it.
Okay, great. Thank you.
Next question is from Hassan Al-Wakeel from Barclays. Please go ahead.
Thank you for taking my questions. A couple from me. Firstly, another follow-up on the ESCOs. If you can't answer the specific part of the question there is a broader element to it. In the first year of the program, you generated EUR 8 to EUR 9 of savings net per treatment. What was assumed for year 2 and 3? I believe likely lower because of the introduction of quality parameters. What are you assuming now following changes to benchmarks? Any color here around the magnitude of the change would be helpful. More broadly, is this still an attractive business as it stands, and what gives you confidence that goalposts could not be changed in the future? Secondly, on cost per treatment, could you talk about the moving parts underlying the plus 3% growth year-over-year in cost per treatment relative to guidance, please? Thank you.
Hassan, it's Mike. For the reasons that I indicated earlier, I'm going to disappoint you on giving you a current assumption in terms of our savings rate. I think the EUR 41 million we took in the second quarter, as I mentioned earlier in the call, was substantial. I think if you measure it against year one, which we did report, the savings rate is lower. That's in part what led to the charge. We still think this is very much an open discussion with the government, and we're not done yet either for PY plan year two or three.
We're still in it. As Mike said, we are saving money. The quality is good. This is a bump in the road, and we're not going to run from that. We just want to get more aggressive in making sure we understand how we ultimately end up reconciling these things.
Yeah.
Assuming no change to the current benchmark, is this still an attractive business?
Well, yeah, as I said, we're still saving money. Again, we still think this is important to optimize our participation in the ESCOs so that as the executive order, and as these things become more of the business model, the way the government wants to operate in end-stage renal disease, that we're prepared.
Yeah. I think the follow on that we all have to kind of keep in mind, this program will end. It's shared savings. We've laid out for you where we want to go to a capitated rate in the PATIENTS Act. We've had lots of discussions at both the House and the Senate. We haven't gotten them there yet. This work we're doing now informs us for how we're going to go forward when we're in a capitated world, and I think we're going to get there, and we're in that world today with certain providers in the Medicare Advantage side of the house.
Even though Mike and I are disappointed about where we are today with what happened, this is still giving us experience and view and a way to think about how we're going to go forward in the future when it's capitated and when we're doing other types of arrangements. ESCOs, as they exist today, are not going to be this way forever.
On the second question, Hassan, relative to cost per treatment, I think that when you do look at cost per treatment for the half year as reported, it's up 3.5%. I would tell you, if you exclude calcimimetics, it's still up, but a bit less, at about 2.6. We do expect in the back half of 2019, not surprisingly, with regard to how I described the second half improvements, we do expect cost optimization program GEP, and some other ways that we're optimizing costs to see some of that effect in the services business in the U.S. The expectation is that the cost per treatment will decline in the back half of 2019.
I would say, order of magnitude, probably EUR 10-EUR 12 a treatment with some decline in the calcimimetics costs, but most of the decline in the underlying core business as a consequence of those programs.
That's very helpful. Thank you.
Okay, it looks like we have no further questions. Therefore, we would then close the call, and we do say thank you for taking the time to be on the call with us today, and we wish all of you a good summer break.
Thanks, folks.
Thank you very much.
Thanks for your interest. Take care.
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Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.