Hi, good morning. Welcome back to the Barclays Global Healthcare Conference. My name is Andrew Mok. I'm the Facilities and Managed Care Analyst here at Barclays, and I'm pleased to be joined on stage with Joel Ackerman, CFO of DaVita, and Nic Eliason, Group Vice President of IR. Welcome to the conference.
Thank you.
Let's start with volumes. Last year, at this time, you were guiding to 1-2% treatment growth. You finished the year close to flat, and now you're guiding to another year of flat treatment growth. On the one hand, I think it's remarkable that you were able to exceed earnings to the extent you did without treatment growth. Why does the visibility into treatment growth seem more clouded today than it did even just a year ago?
Yeah, I don't first, thank you for having us here. And hello, everyone. I don't think it's more cloudy. I think it's not more uncloudy or more visible than it was. I don't think our visibility, though, has deteriorated. That said, look, we got it wrong last year, and we didn't want to get it wrong again. So we put out flattish without a range, which we thought was a prudent way to approach it. Volume is challenging for a few reasons. One, we're talking about very small numbers. People are asking about us about 10, 20, 30 basis point moves, which are tiny in underlying variables like admissions, like mortality that historically have been quite volatile. So the signal-to-noise ratio is quite low. We're talking about dynamics that are happening upstream from us, which is admissions with CKD4 patients, and then downstream from us, which is mortality.
Remember, these patients aren't passing away in our clinics. They're leaving our clinics. They're not getting discharged. You don't get discharged from a dialysis clinic, typically. You just don't show up. Then we have to go and try and find that mortality data, both who passed away and why. I think for those reasons, these analytics are challenging, but I wouldn't say they're less visible than they were a year ago.
Got it. You have embedded the flat treatment growth, but is there an expectation, at least internally, that these volumes should recover? I think you have been saying this for a few years now. Is there kind of a disconnect on what you think and what you might have in the guide?
I do not think it is a disconnect, but I do think, yes, we do think volumes will recover. We think the dynamics that are affecting us today will ultimately prove to be transitory. As you said before, we have been able to continue to deliver on our financial guide of 3-7% OI growth even without the volume. We think those two things will continue to be true. We will get back to 2% volume growth, and we can deliver 3-7% for a few years even without the volume. On the volume, we have just been unwilling to speculate about when we think we get back there.
Right. You've called out missed treatments and mortalities as factors weighing on the treatment growth but haven't really attributed anything to closed clinics, which accelerated in the back half of 2022 and throughout 2023. When you close a clinic down, you're not retaining 100%, right? That seems to me like one of the more logical explanations for the lack of treatment growth. Why is that not the case?
Look, I think you're right. Closing clinics, we don't retain 100% of the patients. The dynamic is even more complicated than that. Sometimes you retain patients, but ultimately they're not getting the shift they want, so they'll end up leaving, not immediately. There are admissions you may not get that you would have gotten had the clinic been open. It's a complicated dynamic. Now that it's been some time, the further you get away from the event, the harder it is to measure those kinds of things. We haven't put it in our calculation.
Got it. Okay. Let's shift to oral phosphate binders, which have historically been reimbursed through Part D and will now be reimbursed under TDAPA for a few years before they enter the bundle as part of Part B. You included $0-$50 million benefit in the guide for the first year of phosphate binders. How do you arrive at that number? What are some of the key swing factors at the bottom and top end of that range?
Sure. We build it up. The dynamic in TDAPA, as you pointed out, is different than in the bundle. It's actually more complicated because it's patient by patient and drug by drug calculating what ultimately the profitability will be. I think there are really three major swing factors here. One is volume. What % of the eligible patients will ultimately be on the drug? History may not be the best guide there because now that patients actually benefit from orals being in the bundle, more patients will have access, and the economics will be better for the patients. We think there may be some volume growth associated with that. That's one. Second is mix. These drugs range from very cheap generics to very expensive branded drugs. The mix will have a big impact on our profitability.
We get paid a different amount from CMS for each of these drugs, and we negotiate separate contracts with the different drug manufacturers, so our margins differ by drug. The third are our internal costs of implementing this program. That's everything from bad debt to a whole slew of other costs associated with the delivery of the drug and the ultimate management of the program. I'd say those are the three big swing factors. I think we'll know a lot more about that over the coming quarter.
Can you share anything about the mix of your patients today, or what do you need to get more visibility into the mix?
It is a majority generic, but small swings in the mix, especially on the branded drugs, can have meaningful impact on the different margins. That is something we really need to see. Remember, we are not prescribing these drugs. These are choices that physicians make and see how the physicians choose the different drugs. Now that the formularies have changed and the access is better for the patients, remains to be seen.
Understood. Maybe lastly on this topic, how would you compare the transition of oral phosphates now to the transition of calcimimetic from 2018 to 2020?
I'd say operationally very similar, very smooth. We have just a remarkable team operationally. I think it's one of the things DaVita does so well is being able to anticipate the challenges, roll through all the necessary changes, everything from IT to clinic-level operations to reimbursement. I think it's gone quite smoothly.
Great. If we adjust for phosphate binders out of your RPT, revenue per treatment and cost per treatment, I think RPT is tracking close to 3%. Cost per treatment is tracking close to 4%. Why is that underlying unit revenue cost spread a bit wider than we're used to seeing?
Yeah, I'd say probably the single biggest dynamic is that labor and inflation are running higher than they were pre-COVID. When I say labor, I mean wage rate inflation and other inflation. While our reimbursement is up, we have not gotten reimbursement rates high enough to completely offset that. We are dependent on driving efficiencies in the cost structure to offset that. It remains a more difficult environment.
Right. You saw some nice benefits to RPT and revenue cycle management both in 2023 and 2024. Can you help us understand what's embedded in that 3% RPT number for 2025? Are there incremental or annualizations of benefits from 2024? I think you also made increased investments in G&A late in the year. Last year, should we expect to see incremental gains on those investments in 2025?
Yeah. The 3% is rate increases, mix, and then some annualization of the benefits we've seen in our revenue operations. In terms of the G&A, I think part of G&A is revenue operations. It's actually a fairly big chunk of our G&A number. We continue to invest in there. I think we have certainly picked the low-hanging fruit and even some of the middle-hanging fruit. We're going up after the apples at the top of the tree now. There's probably a little bit left, but I wouldn't expect continued benefits in our RPT from the revenue operations that we've seen in the past.
Great. You mentioned mix as contributing to the RPT growth. What are you seeing? What are the latest trends you're seeing in commercial mix? Where did it end the year? What is the underlying assumption for 2025?
Yeah. Commercial mix continues to be at around 11%. For 2025, we think it'll grow a little bit, largely driven by continued growth in the exchanges.
Got it. Okay. Maybe sticking on the exchanges, you previously laid out a multi-year headwind of about $75 million-$120 million should the enhanced ACA subsidies expire. Would love to dig into the underlying assumptions here. One, what level of attrition would you expect if industry enrollment's down, call it 20% or so? How would you contrast the decision and likelihood for your patients to keep ACA coverage versus the broader market?
Right. First, on the range of $75-$120, we still think that's a good range. We think we'll be towards the high end of the range because of the growth in the exchanges that we're seeing early this year. I think the right way to think about it is to bifurcate what happens with our existing patient base at the beginning of 2026 versus new patients, new incidents of dialysis. We think for our existing patient base, they're likely to stay on the exchanges for the same duration they would have even without the enhanced premium tax credits. Our patients tend to, inertia tends to bring them along with where their coverage is. They tend to prefer commercial over Medicare. Many of these patients, because of the, they'll still have premium tax credits. They just won't have the enhanced ones.
MA will be the most economically advantageous coverage for them, even relative to Medicare fee for service.
QHP. You said MA there. QHP.
Oh, yes, QHP. Sorry.
Thank you, Nic. We think the ones we have, they'll attrit the way they normally would. Most of them will be back on Medicare after, call it, three years, but it'll take some time. What we expect to see, though, is for incoming patients, a much lower utilization of the exchanges. That is where, and as that becomes the dominant component of our population and the ones who are prevalent at the beginning of 2026 decline, that is why we think it'll take two to three years for us to feel the full impact of this rather than a cliff decline at the beginning of 2026.
Right. Okay, so there's no cliff decline event. Are you, is there other premium assistance available to those patients? Just trying to understand why they wouldn't see the economic sensitivities there.
There could be other premium assistance. Some of them could go on EGHP. Some of them, there are other alternatives for them. It was probably one of the biggest lessons we learned at the beginning of COVID, when you might remember our big concern at the beginning of COVID was what was going to happen to commercial mix. Patients were very resilient in finding ways to maintain commercial coverage.
Right. Okay. So you think the same factors would be at play for ACA coverage for. Great. Moving on, I do want to hit on this topic. There's an existing share repurchase agreement with Berkshire Hathaway to keep their ownership limited to 45%. There was a big transaction outside of that share repurchase agreement last month. Can you help us understand, one, the mechanics of the original agreement, and two, any color you can add around the transaction that occurred outside of that agreement?
Sure. This agreement that you're referencing was put in place a few quarters ago. It was, in many ways, a continuation of the agreement we've had with Berkshire. The old agreement prevented them from buying stock in the open market. As their percentage ownership grew because of our share buybacks, we put in a new component whereby every quarter we would measure their ownership percentage. If it went above 45%, we would buy shares from them to bring their ownership back down to 45%. This happens every quarter. A couple of days before the earnings call, they get paid the same weighted average price as we used for buying back stock that quarter. That test was the first time they went above 45% was in February. We bought back a couple of hundred thousand shares from them right before the earnings call.
As you mentioned, a few days later, they filed Form 4 disclosing that they had sold 750,000 shares. We really do not have anything to add about why they did that. I would recommend calling them if you want to understand their thought process. In terms of how this plays out going forward, it depends on what they do. If they do not sell any additional shares, the likely impact is, as our share buyback program plays forward, we will continue to buy back shares from them, and they will remain at that 45% plus or minus ownership level. The fact that they sold in the open market will only offset shares we would have otherwise bought from them through the established mechanism. That is, again, assuming they do not sell more shares. If they continue to sell shares, again, it will depend on how many they sell.
If it's below what we otherwise would have bought them, it doesn't have an impact on their ownership level. It just changes the dynamic of where they're selling, whether they're selling to us or they're selling in the open market. For us, it just impacts whether we'll buy more from them or we'll buy more in the open market.
Right. Understood. Presumably, to the extent they keep selling and reduce their ownership below 45%, it just means more open market share repurchase for your company.
Exactly.
Moving on to the Latin America acquisitions. I think you acquired about $400 million in revenue or so and are expecting international segment EBIT to be up $50 million or so this year. That guidance would imply something to the tune of low double-digit EBIT margins, which looks very attractive compared to the rest of the international portfolio. Can you comment on that integration and how you're able to achieve that outcome this quickly?
Yeah. There are a bunch of dynamics going on in that $50 million OI growth for international for the year. One is a provision we took in 2024 for AR in Brazil, and that relates to our existing business. It has nothing to do with the business we acquired from Fresenius. The Brazil component of that acquisition has not even closed yet. There is obviously organic growth. I do not think you can take the $50 million divided into the $400 million and make a conclusion about the margins. I think we would expect the margins on this business to be similar to the margins we have seen in our existing business. It will take time. Some of the countries, two of them closed earlier in 2024, mid-2024. We got part of the benefit in 2024 already. One closed at the very end of 2024.
The last one, Brazil, has not closed yet and is not going to close for a few more months, probably. The number is not quite as clean on the year-over-year as you would think.
Got it. That does imply some pretty significant growth in the international business on the kind of core portfolio outside of the acquisitions. Anything to add on there in terms of what you're doing to drive better performance?
Look, international has always been a higher grower. It has got more organic growth. The volume growths are higher. I think we have more margin expansion potential in international than we do in the U.S. because it is not scaled in every country. We continue to be excited about international, but I would not expect $50 million a year as our run rate OI improvement. It will be a lot lower than that.
Got it. Okay. You're now a few years into the IKC business. We'd love to hear your early learnings from this business. Going upstream to serve patients, does that increase your visibility into the late-stage CKD population? Are you seeing anything incremental that helps inform your view on the volume outlook?
Yeah. I would say the big learnings, one, it's a tough business. It is hard to change patient behavior. I think because many of these patients are in our clinics, we have the ability to interact with them more easily than others might. That's a real advantage. I think our relationship with the nephrologists is an advantage. No one should think this is easy. That's number one. Second, there's a lot of variability in it. I mean, you follow the managed care industry. You know how much variability they've had in their business recently. A lot of those same dynamics apply to our business, maybe on different time frames. We're managing $5 billion of cost. Small percentage differences in that can have big changes for our bottom line.
Third, I think the other learning is that it is a great opportunity for our patients, for our physicians, for the whole system, and for DaVita. It's really a win-win-win across the board if we can get this to really work at huge scale. In terms of CKD, CKD is harder for us than ESKD. These patients aren't coming to our clinics. By definition, they don't have renal failure yet. I think we learn a lot about the dynamics of CKD and, in particular, about the transition from CKD to ESKD. I don't think we have enough scale to really come to any conclusions about what's happening with volumes and admit growth in the CKD population. We'd need a much larger business to really have enough statistical just scale to figure that out.
I guess from our seats, it's a little bit difficult to measure the progress of some of these programs. What are the key markers and KPIs that we should be monitoring here? How do you think the earnings contribution of this business will evolve over the next several years?
Yeah. Look, I think growth is an important one. We disclose medical cost under management and the number of lives. We have seen a lot of growth recently. We are anticipating less growth in the near future. I like to quote a managed care executive who I worked with for many, many years. He used to say, "It's easy to grow an HMO, and it's easy to get an HMO profitable. It's doing both at the same time. That's challenging." Our focus right now is more on achieving profitability, break-even, rather than on growth. That is the number one metric I would point to. The second one would just be the bottom line. To your other part of your question, we have set out a target of getting to break-even by 2026. We continue to view that as the right target for us.
Great. Maybe with the last few minutes here, a couple of follow-ups on some of the earlier questions. You mentioned wage inflation driving a higher CPT for this year. Would love to hear your perspective on the broader labor market. How does the labor market, kind of the post-pandemic labor market, compare to the pre-pandemic labor market? Where are you seeing the greatest challenges? When you do lose some of your employees, where are they going?
Yeah. I'd point to two big challenges. One is just wage rate pressure, which remains higher than it was pre-COVID. The other is turnover. The way you see turnover in our P&L, the most explicit is in training productivity, which is expensive. I mean, it takes the better part of three months to train a patient care technician. If they turn over, that's really three months of unproductive compensation. That's kind of the difference that we're seeing right now: continued wage pressure and higher turnover.
Got it. Home dialysis is a topic that we have not been talking as much today as maybe we were five years ago when some of these programs were implemented. I think there was a target at one point to get to 25% penetration. Where does the latest penetration stand on home dialysis? What is holding back the industry from getting to those higher levels of penetration?
Yeah. Our penetration took a dip in Q4. There were some PD supply issues, peritoneal dialysis supply issues associated with a hurricane at a big facility in North Carolina. We think that will rebuild back into the 15+% range. In terms of the 25% goal, I think we always knew that was aspirational. The challenge really, I think, ultimately lies with the patients and the physicians. Home dialysis is a great modality for many patients, but not all patients. It's a challenging modality. It's not about a nurse or a technician coming to your home. It's about self-care. There are a lot of patients for whom it's not appropriate, a lot of patients who go on home dialysis, but ultimately wind up in the clinic. There are some physicians who remain uncomfortable with the modality.
We're investing a lot of money and a lot of effort to continue to grow that and make sure patients get access to the right modality for them. I think it remains a challenging goal.
Great. We'll leave it at that. We're out of time here. Thank you so much for joining. Please enjoy the rest of the conference.
Thank you. Thanks, everyone.