Hi, everybody. We'll get going with our next presentation. We're very pleased to have DaVita with us today. We've got Joel Ackerman, Chief Financial Officer, and Nic Eliason, Head of Investor Relations. We are 10 months into the year. How has the year been so far? What have been the positives? What have been the surprises, challenges?
Yeah. Look, year is not over yet. First of all, thank you for having us, and hello, everyone. Year is not over yet, but I think we have a pretty good sense of the contours for the year. I will get to the U.S. dialysis business second, but I will start with the other two businesses, international and IKC. International is just clicking along as expected. Nothing surprising there, positive or negative. We have always said over the long term, 1% addition to OI growth, and that is happening. IKC is having a strong year. We are looking at about a 2% contribution to OI growth this year versus the normal 1% we call out. The business, I think, is just hitting its stride.
Five years ago, I think we called out 2026 was going to be the first break-even year, and it has just continued to click along, growing, delivering great value to patients and payers, and we are feeling really good about that. In terms of U.S. dialysis, going into the year, we expected it would be a tough year. We knew we had challenges on commercial mix from the ACA. We knew we were not going to get back to our normal 2% volume growth. That was the start. I would say the things that have gone well are, one, volume, that we are growing this year, and we are happy about that, and we think that sets a good foundation for next year. Second, revenue per treatment has been stronger than expected. The big challenge for us has been on the cost side.
While there are things in patient care costs that have been a little noisy, the big headwind has really been on G&A, and in particular, IT. We have been investing a lot in IT. IT has been growing north of 20% a year for the last, I think this is four years in a row.
We are able to mitigate some of that by bringing the non-IT component of G&A down, but that number continues to be higher than we forecasted, and I would say it is an intentional decision. We see opportunity to invest there. G&A will continue to grow, although we think it will decelerate, and the benefits of that show up everywhere else in the P&L, in volume, in RPT, in patient care costs, and in G&A. We feel good about the IT investment, but it certainly has been a bit of a headwind for the year.
Okay. You brought up a number of things I want to drill down a little more on, but maybe keeping it at a high level for a few more minutes. We are past the midterms. How do you view the outcome for DaVita? Are there any particular areas of optimism or pessimism with those, how you expect the new Congress to approach dialysis providers?
Yeah. I am not going to try and predict what the new Congress is going to do from a politics or policy standpoint. There is not much dialysis-specific that I think anyone campaigned on. I think the big opportunity for us is on payer mix, and in particular, somehow reversing the impact of the enhanced premium tax credits. If there is a way for the exchanges to get back to where they were or continue to grow from where they are today, that will certainly have a positive impact on revenue per treatment and our bottom line.
Okay. At the macro level as well, we had an introduction of a Kidney Care National Plan in the last few weeks. Which ideas do you think could lead to practical changes for patients and providers? Where would better incentives for innovation and less regulatory burden make the biggest difference?
Yeah. So, look, we've got a lot of energy around the goals of the plan, of increasing innovation, increasing quality, and driving competition. We've got a lot of shared goals with the government on that. I think where we differ from them is why we are where we are and how to solve that. The government seems to have a lot of energy for holding the large dialysis organizations accountable for some of the problems. You see that in the bill and some of the questions they have about charitable premium assistance. You see that in other things the government has done. You remember, they subpoenaed us. We've disclosed this in our 10-Q and our 10-K around FTC concerns.
In our discussions with them around the FTC issues as well as this plan, what we're trying to emphasize is, one, we believe DaVita's part of the solution, not part of the problem. We have delivered on mortality benefits and higher quality. We have delivered lower costs for the system, and we see an opportunity for us to partner with the government to help solve these problems. We do not see taking money out of the system, either through charitable premium assistance or other areas, as a viable path to accomplishing their goals.
The whole area of premium assistance hasn't been in the forefront for a few years now. Without getting way into the policy debate about that, what would you want people to understand about its role in maintaining coverage and the implications of any changes to that whole program?
Yeah. So look, I think you have to start with exactly what you said. Charitable premium assistance is about helping patients maintain their coverage through a very, very challenging part of their lives, when they're getting onto dialysis and dealing with clinical issues and financial issues and psychosocial issues associated with that. Most patients on charitable premium assistance are not using it for commercial. They're using it for Medicare or Medicare Advantage. Eliminating charitable premium assistance will hurt patients. It'll cost the government more money, and we don't think it will have any impact, or it certainly won't have any positive impact on spurring competition or driving innovation. We think it'll do the exact opposite.
This is a component of the dialysis ecosystem that has been tested time and time again, and it has remained durable, and we think it is just a reasonable component of how the system works today.
Okay. That makes sense. Medicare ESRD rule has been another topic of debate and discussion. The calendar year 2027 rule has a few more moving parts than usual. Investors see a headline of 3.5% increase for large dialysis organizations, but you have talked about an effective full-year increase of 1.5%-2%. Can you walk us through that difference in plain English? What stays fixed and what changes from what you will get in 1Q 2027?
Sure. The important thing to recognize about that 3.5% for the LDOs is that that is Q1. Historically, the rule came out, and it was an annual number, and most of what goes into the rate increase remains an annual number. If you look at the disclosure, if anyone wants to find it on their own, it is table 30 on page 320 of the CMS rule. There is about a 40 basis point increase that is disclosed that remains constant through the year. That is for the LDOs. It will work different for different companies depending on some of the sub-components. It is that additional 3.1% related to TDAPA that will evolve, and how it evolves remains to be seen. It will depend on how some of the add-on payments work for certain drugs.
You put that all together, and again, we do not have perfect visibility, but we have a reasonably good sense of how to estimate it based on historical dynamics with drugs after they came off TDAPA and entered the add-on period. We think 1.5%-2% is a reasonable estimate for the full year.
Okay. I know when you reported 3Q, you were still working through some of the calculations, you said, or had your people look at it. Has anything changed in your thinking since then? Even the 1.2%-2% range, what accounts for the variance in the range?
Yeah. The variance in the range, there are a number of things, the biggest one being around the TDAPA thing and how that plays out. Remember, the add-on payments for TDAPA drugs are based on a lagging view of both ASP and volume, and we estimated how those things would play out based on historical dynamics with other TDAPA drugs. That is the big gap. I do not think a lot has changed in our thinking around that. Others have weighed in on how that could play out, but we feel like our range is a reasonable range.
Okay. Separate the binder payment from the DefenCath payment, I think that is where there is some confusion. You get $1,285 for the binder payment. That stays in the bundle and is updated annually, it sounds like you believe, while the $8-$9 for the DefenCath component can reset each quarter. What is driving your expectation for a sharp decline in that second payment after 1Q 2027?
Right. You are right on the binder payment. That does not change over the course of the year. That is locked in, and it does not. It will, I think, next year in 2028, it will disappear as a distinct number. It will just be part of the bundle, the way we do not get a separate payment for dialyzers or anything else. That, I think as a revenue story, the binders are pretty much done.
In terms of DefenCath, what you have to remember is CMS has changed the way they are handling post-TDAPA add-on payments for innovation, and that is the DefenCath. That is where DefenCath is getting handled. Our expectation, again, based on historical patterns of drugs coming off TDAPA, is that you will see a decline in ASP and potentially a decline in utilization in Q3 of this year, of 2026, which will drive what happens to rates next year.
Okay. Going into the year, you will have a pretty good fix on that.
Unclear what we will know exactly about where it is, and we will only have one quarter's more view, and there are some peculiarities of how ASP is calculated that we may not have visibility into either.
You have no exposure to that product, DefenCath. Any decline in reimbursement over the course of the year is not likely to result in an offsetting reduction in cost. Is that the way to think about it for you? Is that the way to think about it?
That is the right way to think about it. It is a revenue issue for us. It doesn't really play out in our cost structure.
Okay. Putting the mechanics aside, you have said that the effect of Medicare increase is still below your cost trend, but it is not unusual over the years for Medicare rate increases to underfund the pace of nominal treatment cost increases from year to year. The company has generally been able to find efficiencies to live with that dichotomy. How much room do you have to close the payment gap through productivity and purchasing as you look ahead to 2027?
Yeah, look, 2027 is going to be a challenging revenue per treatment year, and the underfunding of Medicare fee-for-service is one. The bigger dynamic is actually going to be around commercial mix, and this relates to the expiration of the enhanced premium tax credits and the decline in commercial mix that results from that. We have called that out for more than a year now at about a $70 million headwind for next year. I think there are all the normal opportunities to mitigate the reimbursement headwinds that we have used for years, probably decades now. The big one we are calling out for next year is around pharmaceutical costs. We see opportunities with binders. We see opportunities with other pharmaceutical costs. I talked before about the government's view that large dialysis organizations are part of the problem.
I think pharma is a good example where we are actually part of the solution. We are in a position to negotiate prices with pharmaceutical companies that smaller players or certainly individual clinics owned by nephrologists would not be in. We think pharma is the big one to call out for next year as a way to help mitigate some of the revenue per treatment challenges.
There is a couple things on those comments I would like to pursue. On the exchanges, you are planning for about $70 million of additional pressure next year on top of the $40 million you absorbed this year. What is driving that increase? I think most providers are looking for something that is similar this year or even a little less onerous. Is this just annualizing changes already underway, or is there something else that you are looking at that says you think it is going to step up?
Yeah, we think the dynamic for us is different than for most providers because our patients treat with us for a number of years. And what we expected and what we have seen is patients who were on the exchanges last year and are on dialysis are doing a better job of maintaining their coverage, even if they are on the exchanges and they have lost enhanced premium tax credits. We are less susceptible to the change in coverage for our existing patients, what we call our prevalent patients, and the impact really happens when new-to-dialysis patients are being admitted, and they are being admitted with a lower commercial mix than our prevalent patients. The net result is we wind up in the same spot as everyone. It just takes us longer to get there. There is a bit of a delay in when you see it in our mix.
Next year is the result of that delay and the annualization of some of what we are seeing this year.
I got you. When patients leave the exchanges, where are they generally moving? What will you be watching during open enrollment or in the new year to say whether that $70 million number is right?
Yeah, look, most of them go onto Medicare, and that is either Medicare or Medicare Advantage, although some go find alternative commercial insurance. That is really the big thing we are watching, is what percentage of exchange patients find their way either to staying on the exchanges without the enhanced premium tax credits or getting employer coverage, either because they have a spouse who is already covered there, or they are going back to work somehow. It is what percentage of exchange patients figure out how to retain commercial coverage is really the big question.
Okay. You've cautioned people, and wrapping up the discussion around the exchanges, not to simply take the normal earnings growth and subtract $70 million exchange headwind, and that's your new 2027 number. Obviously, you're not going to give formal guidance, but how would you frame the main puts and takes around that?
Yeah. Look, all the normal dynamics around labor and rate increases and all that are in play. I'd say that we've called out really two things that are different next year to help mitigate that. One is on the volume side. We've gone five years now without what was a normal pre-COVID volume growth of 2% plus. This year, we're solidly positive, and we feel good about that, and we think next year will be another positive year, even better than this year. So, getting back to the 2% plus volume growth we've talked about for 2029 is one component. The other is on the pharmaceutical side. We think the cost savings opportunities on pharma are bigger than normal in 2027. We think that will help mitigate some of the mix pressure.
Okay. So, to come back to that, you said the binders, you expect operating income growth even as the reimbursement rate goes down. What gives you the confidence that costs can fall faster than revenues, and where's the big opportunity? Contracting, generic conversion, something else?
The opportunity is all the above, contracting, generic conversion, mix changes, dosing modifications. So, there's a whole suite of opportunities. I think we get the confidence really based on our history, and going back to calcimimetics, and even before that to EPO, I think what we have demonstrated is, as a scale provider, we can influence pharmaceutical costs. We can influence the ability to negotiate with pharmaceutical companies in a way that individual providers can't. So, we feel pretty good about that.
Okay. Obviously, prescribing is somewhat physician-driven, and it doesn't look like you've changed your formulary. How much of the opportunity is already in place somehow, or is dependent on drug mix and utilization developing differently?
Yeah. So, look, pharmaceutical prescribing is 100% physician-driven. I think there are opportunities we present, sometimes with technology, sometimes with better information, to help the physicians decide what they want to do. I would say we've got reasonable confidence in our ability to deliver this based on some of the things we've already put into place, some of the contracting changes we're making. So, I feel good about that.
Okay. You've also said that there's pharmaceutical savings beyond the binders. Sort of describe that opportunity and why is that presenting itself?
Look, there are a number of other drugs in the bundle today. That suite is evolving over time. It's something we're always working with our chief medical officers on, is understanding what are the right drugs, how do they impact clinical care, and then derivative from that, what are the financial opportunities? Again, we have the ability to invest. I mean, AI, it's a good example of AI, where we've leveraged AI to develop new protocols for how drugs are prescribed that can deliver both positive clinical care and cost savings. So, we're really proud of our ability to lean into that and our ability to leverage better clinical care to deliver better savings.
Any particular therapeutic category where you see there's an opportunity or anything?
I'm not going to get into the details. As you can imagine, our conversations with pharmaceutical companies are-
Competitive?
Quite.
Okay.
I'll stay out of any details on that.
All right. We've talked about the ESRD rules. There's always the question about, is there anything that's happening there that has a ramification for Medicare Advantage or commercial contracting?
I would say the rates we're seeing on commercial and Medicare Advantage have not changed much. I think they're relatively similar to the rate increases we've seen for the last few years. Some of the dynamics with TDAPA generally don't play out with commercial or Medicare Advantage unless we're bringing in the cost and then we're bringing in some revenue as well. I wouldn't think of all the dynamics in TDAPA for 2027 as affecting things other than Medicare fee-for-service.
Okay. Pivot over to volumes. That's still one of the first things investors ask us about, clearly. Since this was a little stronger than expected in Q3, even with some more missed treatments that you called out, any comment on what you're seeing so far in Q4 and what gives you confidence that treatment growth will be better in 2027, before the new dialyzers start to contribute?
Yeah. It's too early to comment about Q4. There's enough month-to-month variability that I wouldn't say we've learned anything from October. In terms of next year, look, the biggest positive for next year relative to 2026 growth is just about the calendar. This year, because of the way days laid out, we had about a 25 basis point headwind on volume growth. Next year, that flips to a 25 basis point tailwind. That in and of itself gives us about 50 basis points of positivity for next year. You've got to take away from that some of the non-recurring benefit we had in 2026 from clinic closures, from Fresenius, worth, call it, 25 basis points. You net those two things out, and we think we start off with about a 25 basis point tailwind next year versus this year.
Then we're going to have to see how that plays out with flu season, with mistreatment rate, admits, mortality, all the normal dynamics. But it's too early to know where we're going to land on that.
The mistreatment pressure you've called out, you said was largely, I think, related to hospitalization. Is this sort of a vicious cycle? Mistreatments leads to hospitalization, which leads to more mistreatments? Or is there the population you're seeing when they start on dialysis just sicker and requiring more hospitalizations? When you drill down, what's the driving force behind that?
Yeah. So, look, the vicious cycle you talk about is true. There's absolutely a clinical link between mistreatments and mortality. We don't think that's what was going on in the quarter. We think acute care admissions were higher in the quarter nationally. I think you see that in some of the public company reporting. You certainly see it in CDC data and Kaufman Hall data. We don't see any underlying trend within our population or within the ESRD population. We see this more part of a broader national dynamic in the quarter.
Okay. You said you're going to roll out the expanded HD faster than originally anticipated with a broad rollout plan for November. What did you see in the data on the 10,000 patients and the pilots that made you comfortable going with a faster pace?
Yeah. Look, this is a huge change for our patients, possibly the most exciting clinical change, certainly in my 10 years, maybe in the last 20 or 30 years for our population. But we need to do this carefully. We ran a scale pilot to make sure operationally we could implement this, see how the patients felt, and probably most importantly, how the physicians would respond to this. Physicians need to change the prescription. The actual dialyzer choice is part of the prescription they made, and the dialyzers need to be put on the formulary of every center by the governing body of the center. What we found was that physicians were quite excited about this, that with very few exceptions, physicians were leaning in on getting this new technology available to these patients. As a result of that, we concluded operationally we can handle this.
The supply is there. The physicians are excited about it. We decided rather than rolling it out division by division or region by region, to just deliver it out for the whole country in one shot. I will tell you personally, Nic and I went and visited a clinic last week, the first day they were rolling out these dialyzers. It was too early for patients to be excited about it. They hadn't yet gotten their dialysis. But the excitement from the teammates and the facility administrator was quite palpable. It was fun to see that.
You said that you really don't expect financial impact till the second half of 2028. Why does it take that long? Is there any chance it'll be quicker than that?
The reason we think it'll take that long is just based on clinical results from historical trials. If you look at the CONVINCE study, which compared traditional dialysis to middle molecule clearance, it took about 18 months before the control group and the active arm started showing a difference in mortality. We're relying on that. Could it come earlier?
Who knows?
Who knows? We're certainly not banking on it. So-
Okay
Remains to be seen.
So, you've got a target by 2029 of getting to 2% or better volume growth back to pre-pandemic levels. How much should be driven by the expanded HD? How much by other improvements already in line of sight? What are the biggest things that still need to develop?
Yeah. Look, if middle molecule clearance achieved the mortality improvements that we saw in the CONVINCE trial, that would get us to our 2% and then some. We're not expecting, we're not banking on getting those levels because real life and clinical trials are very different scenarios. But we think middle molecule clearance on its own could get us back there. We've got a number of other clinical initiatives going on in terms of fluid management and pharmaceuticals and better vaccination rates that we think can contribute as well. So, on the middle molecule side, the implementation is happening. I think the patients will be getting that. What we see in real life relative to clinical trials, I think, is really the big question.
Okay. You mentioned technology earlier has been a headwind the last four years. Does sound like next year at least the spending is going to moderate, maybe hopefully the returns are kicking in. It doesn't sound like it's going to a negative, but it sounds like it'll be less of a headwind than it's been the last few years. Can you just describe a little bit more what's happening there? Projects maturing? What is going on?
Yeah. Look, you said it right. Our spend on technology is not going to go down, but the growth rate will decelerate. I think we've had a huge push over the last four years in getting all our core systems really up to the level where we think they can support the volume initiatives we're driving, the revenue initiatives in terms of bad debt collection and other things we're driving, and the cost side, both on patient care and G&A. I'd say this year, we're absorbing a particularly high growth rate related to AI, which we've got a lot of hope for, although we're not seeing the returns on yet. And we think next year, again, a growth rate well above our normal cost growth, but not in the 20s the way we've seen for the last four years.
Maybe just to speak for a minute about your IKC commentary. Obviously, you've got seemingly confidence now that the business is in a position where it's going to be sustainably profitable. You can ramp up growth there. What changed? What's changed to make you more confident in the sustainability of that service?
Yeah. So look, the core of the IKC business is about delivering quality care at a lower cost. We have now watched the shared savings that we can deliver, develop, and evolve for enough years that we remain confident that it is a sustainable business where we can continue to deliver those shared savings and continue to grow the operating income. It is a complicated business. It is different than our normal business. It took a while for it to grow and for us to gain the confidence, but I think we have been at it long enough that we feel good about that.
You have entered into a new relationship with Humana, 10,000 lives, I think.
Yeah.
How is that going to impact economics of the company?
It will take a while. We generally incur costs in the first year before we generate any revenue. It is also CKD patients, not ESRD patients, and those are more challenging because they are not showing up to our clinic, so engagement can be a challenge with them. So, it remains to be seen, but again, it is a headwind on economics the back half of this year and the front half of next year.
Okay. Maybe just on capital allocation, your cash flow guidance, $1 billion-$1.25 billion. Your leverage is about 3.4 x. How are you weighing repurchases, debt reduction, investment in the business, and now potentially some new expanded IKC opportunities?
So, look, no change to our philosophy. We want to invest in growth and innovation. We want to maintain our leverage in the 3x- 3.5 x target range, and we're careful about maintaining liquidity. None of that has changed. When we see opportunities like Elara, the investment we made in home health, or the acquisitions in Latin America, we're going to invest capital for growth and innovation. But we don't find those every quarter. All else being equal, we'll use the free cash flow to buy back stock. I think we're seven or eight years into that plan now. It seems to be working well, so we're sticking to it.
Great. There you go. We covered a lot of the waterfront there. Appreciate DaVita participating in our conference once again, Joel and Nic. Actually, there's a break in this room next, so we'll reconvene in about an hour from now.
Great. Thanks, A.J.
Thanks.
Thanks, everyone.