Good morning. Welcome back to day two of the Barclays Global Healthcare Conference. My name is Andrew Mok. I'm the Managed Care and Facilities Analyst here at Barclays. Joining me on stage is Joel Ackerman, CFO, and Nic Eliason, Group Vice President of Investor Relations. Welcome.
Good morning, Andrew. Thanks for having us.
Thanks for joining. Maybe to start with we'll start with 2023 operating performance, which was pretty remarkable following a challenging 2022. Can you speak to the underlying performance drivers that led to your impressive turnaround with respect to admissions growth, mortality, labor, things of that nature? Which areas do you expect to see continued improvements this year?
Sure. Yeah, since 2023, right as you said, it was a great year, but coming off a very tough 2022. From our standpoint, we think it demonstrates the resilience of the business. In terms of performance, I'd really bifurcate it into two pieces. One is environmental, things that happened outside of DaVita that impacted the results. Second is what we did. Environmentally, clearly the volume was helped by continued decline in mortality, and we expect that to continue in 2024. Then the labor environment improved. We saw that mostly in the reduction of contract labor. We called out some other challenges in 2022, especially related to turnover, how it's impacting productivity primarily through training. Frankly, that did not improve in 2023, and we're not really relying on that for 2024 yet either. The productivity challenges continue. That's what I'd point to environmentally.
In terms of what we did, I'd really point to three things. One was on revenue operations. We invested a lot in people, in process, and in technology, continue to drive better revenue operations that leads to both better billing and better collection in terms of our yield, which impacts revenue per treatment, as well as the timeliness of collections, which ultimately impacts our days sales outstanding. We saw strong improvement on both of those in 2023. For 2024, I'd say we're expecting continued improvement on that on the RPT line, and a lot of that is really just the annualization of what we saw come through over the course of 2023. On the DSO side, I don't expect a huge improvement the way we saw in 2023. So that's revenue operations. Second would be on pharmaceutical costs. We switched from EPO to Mircera.
I think we've called this out in advance. To me, this is part of a broader pattern of what DaVita can do as a scale provider with a national footprint and our ability to manage pharmaceuticals in a way that really both helps our patients, helps our physicians, and helps our shareholders, frankly. We've seen that in numerous cases. We've seen that with EPO over the better part of a decade. We saw it when calcimimetics were introduced to the bundle, and we saw it here with Mircera. The final one would be in terms of our center footprint. We lost roughly 10% of our patients as a result of COVID. It was nothing unique to DaVita. It was an industry phenomenon. But as you would imagine, that resulted in our capacity utilization going down, and we thought it was important to address that.
So we closed 200 centers, and ultimately that shows up in an improvement in fixed cost leverage. Those are the things I would highlight that really drove the 2023 performance and how they played through 2024.
Great. And I want to go further on each one of those points a little bit. Maybe to start on revenue, what specifically prompted those revenue initiatives to begin with? Can you help us understand what drove that? And it seems like this announced year two of a multi-year potential tailwind here. How much room is there to grow?
Yeah, so I'd say they're rooted in a strong culture of continuous improvement and the recognition that I think one of the things that has made DaVita great over 20 years is our operating excellence. A lot of people assume that's all about cost cutting. I think the reality is it can play through in other areas, and this is a great example of that. In terms of what specifically drove it, the biggest factor was the growth of Medicare Advantage. When a patient moves from Medicare fee-for-service to Medicare Advantage, they are effectively moving from the easiest payer to collect, which is Medicare fee-for-service. That's a huge bolus of patients with really one set of rules, to Medicare Advantage, which I think you could say is our hardest payer class.
They look a lot like commercial in terms of the complexity of the information needed and the diversity, and they tend to move around more than commercial patients. So that growth, and if you think about it using very rough numbers, a few years ago, less than a quarter of our Medicare patients were Medicare Advantage, and now it's more than half. So recognizing that growth, we decided we needed to invest in that area.
Great. I think on the fixed cost leverage, I think that's a point that maybe a lot of investors underappreciated throughout 2023, particularly as you optimized the clinic footprint. When you do close clinics, what's your typical patient retention look like? Can you walk us through some of those dynamics?
Sure. So I think you have to look at two different types of situations. One is an urban environment where closing a center is really largely about consolidating a center into one or two nearby clinics. And in those instances, we retain virtually all of the patients and the providers and the teammates. So that's one area. And in terms of patient retention, it's pretty close to 100% there. The other situation is a more rural environment where we do not have a clinic nearby. And those oftentimes are closed not because of financial reasons, but really for clinical reasons, for issues of clinical safety. People forget that staffing, both at the nurse and the patient care technician and from a medical director coverage standpoint, is not only a cost issue, but it's a patient safety issue.
If we're in a rural environment where we can't staff a clinic, sometimes we're forced to close it. In those instances, our patient retention numbers are pretty low.
Great. If we translate this into a financial perspective, can you help us understand the fixed and variable costs of this?
Sure. So we are at the center level so this ignores anything of corporate, but at the center level, it's about 2/3 variable and 1/3 fixed. The variable is dominated by labor and drugs and supplies. And then the fixed costs are everything you'd imagine: rent, insurance, medical director fees, things like that.
Great. And going back to the switch from Epogen to Mircera, can you help us understand how that transition unfolded versus your expectations throughout 2023 from both a timing and clinical perspective?
Sure. So it was well planned. The field does an amazing job of working with physicians because ultimately DaVita doesn't prescribe drugs. It's the patient's nephrologists who are not employed by us who prescribe the drugs. And I'd say it went out pretty much as planned, both financially and clinically. We do it region by region, so it's not all done at once. And it's just, I'd say, a good practice around change management, which is what's so much of the challenge is here. But from a clinical standpoint, there were really no problems that I've heard of. And financially, it rolled out kind of through the year as expected.
Great. And was it complete by the end of the year?
It was largely complete. There's a little bit of anniversary that we'll see in 2024, maybe $20 million of benefit from that. But that's really just because it played out over the course of the year.
In addition to that dollar cost benefit, is there also a productivity benefit that comes from switching to a long-acting ESA?
I would not expect to see that. There's a fixed number of people in a clinic, and you really have to make a step function change in productivity in order to really eliminate teammates as a result of that. So I wouldn't build any of that into a model.
Understood. Last week, I think you announced four recent acquisitions in Latin America. Can you give us a quick overview of those transactions?
Sure. So stepping back, our international business really has not gotten a lot of attention, I'd say, over the last five years since we hit break-even, which I think was five years ago, maybe six years ago. And it's been a nice steady contributor for us. It drives both organic and inorganic growth, and it's been a relatively steady $10 million-$15 million OI growth every year. Those numbers can vary a little bit. And it's an area we like. It's one we continue to invest in. We've been reasonably selective about which markets we want to be in. Before this announcement, we were in 11 countries outside the U.S. with a lot of diversity in terms of the nature of each of those markets. And we like the team. We like our performance. We like the opportunity to invest capital there at good rates of return.
Everything that I've ever said about capital-efficient growth and all of our guardrails around capital discipline apply outside the U.S. just as much as they do in the U.S. With that as a foundation, we've been in Latin America for a while. Brazil is one of our larger growth markets. We've also got a strong presence in Colombia. We saw an opportunity to get into two new countries as well as build our capabilities in both Brazil and Colombia. We liked the deal. These were quality clinics, well-run. Our expectation is we will see synergy, but that's largely at the G&A level rather than some sort of view that we can necessarily run these better than the seller did.
Right. And to your point, it's been somewhat quiet from your end on the international market. Why the investment now? And is this an area we should see continued investment?
Yeah. We've been investing in it all along. We haven't done a single transaction of this scale. So we've been deploying capital there. This one happened to come about at a good time for us. So I don't view it as somehow we're changing our posture on international. It's just, as I've learned through my career, when you're disciplined on M&A, there can be long, dry spells, and then something interesting can come along. And that's really what happened here. I think we will continue to invest in international, but I wouldn't view this as some sort of turning point where all of a sudden we're going to start deploying significantly more capital internationally year after year after year. We'll continue to like international. We'll continue to invest there. I continue to prefer organic growth to inorganic growth because of the capital efficiency.
If we see attractive assets come up for sale, we will certainly go after them.
Great. The other big piece of news that came out last week was Novo's headline results from the FLOW trial. My initial take was that the demonstrated reduction in CKD progression was at or below the base case assumptions you laid out a few months ago. What was your reaction and takeaway from these headline results?
Yeah, so I think headline is the right way to characterize the results. That's really all we got was a headline. There's a lot of detail behind this 24% number that we're curious to see. That said, the results did not contradict our views, and I used those words carefully. I didn't say they support our views because they were so high-level. And just to be clear, when we talked on our Q3 earnings call about a 25% delay in progression, that was a number we plugged into our analytics to make sure investors understood how the math works and how we think about it. That 25% number is different than this 24% number. The 24% number that they announced was not a percent delay in CKD progression. It was the percentage of the patients in the trial who met one of the five endpoints.
One of those or some of those endpoints are good surrogates for delay in ESKD progression. Others are very different, in particular the one that shows lower mortality. So if you think about how this 24% number plays into a model, if you're trying to build up the impact of FLOW and the GLP-1s on volume, some of these endpoints, like a delay in CKD progression, would be great for patients and lower ESKD utilization. Others, like delay in mortality, would also be great for patients, but they would actually drive utilization up because there are many more patients with CKD who are passing away of cardiac issues, and those would ultimately progress to ESKD if they lived longer than there are those who are actually progressing to ESKD. The 24% number is headline.
It's frankly hard to figure out how to use that to inform our models. None of our views have changed, and we continue to view the data as something we'll learn more about, but also it doesn't appear in a vacuum. These drugs are well-studied, and we continue to believe these drugs are great for patients. The ultimate impact on our volume is likely to be small.
Great. Maybe going back to your 2024 guidance for a minute, I just want to understand the key variables of treatment growth. I think there's 1%-2% treatment growth embedded in the guide. How are things trending with respect to mortality, missed treatments, vaccine-induced efficacy, and what's going to drive upside to treatment growth?
Yeah. So missed treatments could drive upside, although that would be a one-time thing. We don't expect missed treatments to continue to decline below where they were at the pre-COVID level. In terms of mortality, there's a lot we still need to learn about what's driving excess mortality today. It's a phenomenon that I think is being seen across the population, not exclusively to DaVita or exclusively to dialysis patients. I think there's a lot more data to come to really understand what that is. Is it endemic COVID that's likely to feel like a bad flu season for many more years? Are there other factors like missed treatments that were related to COVID but were likely to work through? Are there other changes in people's behavior that's leading to more car crashes or overdoses or something else? So I think we're waiting to understand that.
I think mortality could be a driver of where we fall in that range or if we fall outside that range. So we are keeping a very, very careful eye on how mortality progresses.
Can you share where mortality is today and maybe how it's trended?
Yeah. I don't think we have a lot of updates since the Q4 call. It has trended down since the peak. It is slightly above where it was pre-COVID. But I think it's important to realize it ranged pre-COVID. You can see a pretty good correlation between good flu years and bad flu years associated with the mortality in our population. So I think you really have to think about this as a range rather than comparing it to a point estimate. And it's slightly above the high-end range.
Understood. I think last we spoke, you were still waiting on 2022 performance data from CMS on the CKCC program. Has that data come in? And if so, do you have any initial impressions to share?
Yeah, the data has not come in. CMS has been a bit late in getting that to us. This has nothing to do with DaVita. My understanding is they will let everyone know at the same period of time. So we're still waiting on that. That said, we continue to be excited about IKC. We're making a lot of progress in there along the three dimensions that we're focused on, which is, one, just growing the program, adding patient medical cost dollars under management. We saw that grow well in 2023, and we're expecting continued growth in 2024. The second is the net savings rate. Ultimately, we need to drive high value, which is higher quality care to patients at lower costs. And that's something that we deliver in partnership with nephrologists. And we share some of those savings with our nephrology partners as well as with the payers.
And that's why we refer to it as net savings. It's the savings that come to DaVita after achieving the reductions and then sharing with our partners. And finally, is the cost of delivering the care. And we see that continuing to scale. When we talked about a 15% reduction in our costs, it was really that line item on a PM/PM basis that we're expecting in 2024. So overall, IKC as a business is maturing, but it's still early. We're seeing good progress, and there's a lot to learn. And as you pointed out, CKCC is probably the area where we have the most to learn. It represents the biggest pool of our patients. So we are anxiously awaiting the results from CMS.
Great. Then last topic that I want to make sure we have time to cover is Change Healthcare. It's been on a lot of people's minds this week. How is DaVita affected by the disruption here? And what are your impressions of some of the plans to address this?
Yeah, so we are absolutely affected. We use Change for the vast majority of our claims. I'd say I spoke about this last week. There's not a lot to update on. We are focused, as you would expect, on ensuring we can file claims. We are, as I think the rest of the provider community is watching carefully what Change and United announces about this. And there's certainly been some good news about the timing of that over the last week. So that's been positive. We have lined up alternative ways to submit claims. And some of that is direct. So Medicare fee-for-service is the best example of that. And we've submitted all our claims directly through them. And then we've got other exchanges available to us.
Overall, it is a challenging situation for us, but we feel like we've got good alternatives, and we can manage what really is the big question, which is the timing of how all this plays out.
Right. Can you share what's your completion rate on claim submissions?
I'm not sure what you mean by that.
The percentage of claims that you're able to submit versus what you're incurring.
I would say right now, I will put it as a percentage of revenue. About half our revenue is covered today. The other half would be dependent on either Change or the alternative vendor that we've got.
Understood. After an event like this, how does that shape your way of thinking about vendor concentration risk, things like that? Do you reevaluate here?
The answer is absolutely. It's not just in the claim submission area. You just have to learn from an area like this and think about enterprise risk across every area and anywhere we have vendor concentration. It also, as you would expect, makes us think about liquidity, ensuring that we've got sufficient liquidity to cover areas like this and contingency plans around liquidity to make sure we're being prudent as things like this pop up.
Great. Well, with that, we're just about out of time. So why don't we wrap it there, Joel? Nic, thank you so much for joining. And please enjoy the rest of the conference.
Great. Thank you, Andrew. Thanks, everyone.