All right, good morning. My name is Justin Lake. I cover healthcare services here at Wolfe Research. Pleased to have with us on our second day of our Wolfe Healthcare Conference, DaVita and the company's CFO, Joel Ackerman. Joel, thanks for being with us.
Thank you, Justin. It's a pleasure to be here.
Maybe before we get started, you just reported a pretty good third quarter, talked about a little bit of improvement in volume, patient census, a lot of things, kind of moving parts into 2027. You want to give us a one-minute kind of State of the Union update before we go into Q&A?
Sure. Volume is number one on people's minds, for good reasons. The quarter was light on volume relative to our expectations by about 20 basis points. You can think of volume as being census-driven and then missed treatment-driven. Census being the more important component because it's permanent and it drives next quarter and next year, and missed treatment being a little bit more of temporary variability. And we missed because of missed treatment rate. Census came in actually a little bit better than expected, and the missed treatment rate missed by about 20 basis points. It was 20 basis points worse than expectations and about 20 basis points worse than Q3 of last year. You can split missed treatment rate into two components, which are roughly equal in scale in a normal quarter. Patients' missed treatments because they're in the hospital.
They're not missing dialysis, but they're getting dialysis in the hospital. The other is what we call no-shows. Patients don't show up for their treatment. A lot of that is because they're not feeling well, and there can be other factors, for example, transportation problems, some of which we can reschedule, some of which we can't. This was missed treatment rate related to hospitalizations, and what we saw was, I think, what was seen broadly in the U.S., which is hospitalizations were up in Q3 of 2026 versus Q3 of 2025. We saw that in the public reporting of the large hospital companies. We certainly saw it in Kaufman Hall data and then in CDC data as well. We don't think there was anything particular to our population. It was just a broader impact. Our assumptions for next quarter is that missed treatment rate normalizes to the typical seasonal pattern.
To be clear, what that means is our assumption is missed treatment rate will be higher in Q4 than it was in Q3, which is what we see virtually every year, and that's largely about seasonal patterns related to flu. But we're not anticipating the spread between Q4 of 2026 and Q4 of 2025. So, missed treatment rate goes up for Q4, but reverts to a normal pattern year-over-year. That's the big volume story. On the other big topic we talk about is mortality. We continue to feel good about the progress we've seen on mortality from a lot of the clinical initiatives we've implemented, and the biggest opportunity for mortality improvement over the next few years is from a new modality that we just introduced to help clear middle molecules. As you'll remember, dialysis is about two things.
Our chief medical officer likes to talk about it as a washing machine and a dryer. The dryer is removing fluids, and fluid management is an important clinical initiative we have, and we're feeling good about that. The washing machine is about taking toxins out of the blood. The challenge with taking toxins out of the blood is you got to take out the bad stuff and leave in the good stuff. The good stuff generally being proteins or albumin. Historically, the way you do that is you make the filter small enough so the small toxins come out and proteins, which are large, stay in the blood. That leaves a category of toxins, they call them middle molecules, that historically have not been cleared well because the filter was too fine.
We've now got new technologies, both new dialyzers as well as a new machine that can do that. We've leaned in on the new dialyzers to do this. We've done a really exciting pilot over the last few months that was very successful with patients, with our teammates, and in particular, with our physicians. We're now rolling out those dialyzers to all our clinics, and we expect to have them available for the vast majority of our eligible patients in November. So, that, I'm coming back to volume because that, we believe, based on a lot of good clinical evidence, will drive improvements over mortality over the next few years, and that's really the next biggest opportunity to drive volume improvement.
Got it. I know you have some headwinds and tailwinds going into the fourth quarter on volume specifically. You talked about the improving census in the third quarter that should run right into the fourth quarter. You also have a calendar headwind in the fourth quarter that is pretty material. If I think about instead of year-over-year, if I think about sequentially, is there a meaningful step-down just because of the calendar, third quarter to the fourth quarter in volume, or is it pretty flat?
No, there will be a very meaningful step-down. The calendar issue is a few things. One is how many treatment days there are in the quarter. When New Year's Day falls is important. Remember, we are talking about basis points worth of volume, which is why little things like that matter, and how many Monday, Wednesday, and Fridays versus Tuesday and Thursdays and Saturdays there are in the quarter. We do more treatments on Monday, Wednesday, Friday than Tuesday, Thursday, Saturday. Q3 had a calendar tailwind in 2026 versus 2025 of about 65 basis points. I am looking at my team here to make sure I get my numbers right. So, benefited by that, and Q4 actually has a headwind of almost 100 basis points year-over-year.
What we would expect in treatment days would be something around flattish, maybe even a little negative, and what we recommend to investors is the best way to model it is treatments per normalized day. We disclose how many normalized days there are in any quarter, and that should be the number that tends to look smoother because it removes this whole calendar impact.
Got it. Treatments down somewhat materially Q3 to Q4. One of the questions I have gotten is, from a guidance perspective, looks like your OI at the midpoint needs to be up $30 million, give or take, 3Q to 4Q. I think a lot of that is expected to come outside. I think all of it is expected to come outside of the dialysis business, right?
Right.
Your IKC business-
IKC, exactly.
has a great fourth quarter, typically, right? You see a lot of benefit there. Maybe a little bit of sequential headwind from the international business. Q3 there was amazingly good. So, probably won't step at the same way. But let's say the other businesses outside of dialysis drive all the growth, and dialysis is expected to be flat. The question I'm getting is, if volume's down sequentially, what offsets that?
Yeah. So, look, you've got the pieces right, and I think it highlights that seasonality is not the easiest dynamic to unpack at DaVita for a whole variety of reasons. For that reason, we always push people, focus year-over-year. I think you'll get a better fundamental understanding of how the economics are doing. That said, we understand why people are interested in the quarter. So, the answer to your question is, RPT is really the biggest driver. We expect a quarter-over-quarter uptick in RPT, as we often see in Q4. We saw it last year in a very exaggerated way and we called that out in Q3 of last year as well. I think there was some skepticism about whether that would happen, and it did happen, which is why you saw some of the stock effect at the beginning of the year.
We expect to see a similar dynamic this quarter, although much muted. So, what we would expect is RPT to be up in Q4 over Q3 this year, but actually down in Q4 versus Q4 of last year, because Q4 of last year was so exaggerated. On the other components, IKC, you're absolutely right, and that's always been a tough one to pick up quarter- by- quarter, but we expect a big step up. And international really benefited in Q3 from some non-recurring divestitures in Brazil that offset some non-recurring negatives from divestitures in Brazil in Q2. So, those two things really blended out. But yeah, you wouldn't expect the uptick in international in Q4.
Got it. Last year, to your point, revenue per treatment was up like 3%, $12, third quarter to fourth quarter. Massive, right?
Yeah.
Obviously, we saw that in the numbers and the stock price. You're saying that this year, it's going to be up maybe not $12, but it'll be up somewhat materially, and that'll be the offset.
That'll be the offset, right. And RPT in Q4 has a lot of dynamics. There's often strength in Q4 as we're resolving historical claims like we did last quarter. This year, though, there's a headwind from lower commercial mix. And the ACA decline, which has been coming down over the course of the year, and we would expect that to continue in Q4. The second would be binders, which, as we said early in the year, would be relatively flat from an operating income standpoint across the year, but you would see the contribution to revenue per treatment and cost per treatment decline over the course of the year, and we would expect that to happen again from Q3 to Q4.
That will drive an RPT decline, but it will also, cost per treatment will come down, and we would expect cost per treatment year-over-year to be a contributor to the strength as well for Q4.
Got it. That is helpful. You mentioned rate and binders. I know you were down in Miami for a competitor conference yesterday. I appreciate you guys getting on a plane and coming up here and being with us today. I thought I would take my shot, like, a lot of questions on this rate and this Medicare and trying to understand, and I think you guys have done a great job of kind of simplifying it for people and saying, "Look, forget what CMS says because there is a lot of moving parts in there." You are telling folks to kind of focus on a 1.5%-2% rate increase, right?
Right.
I think the way the lens that we are supposed to look at it through is like, think about almost like a half a percent of a typical rate increase, and then the other 100, 150 basis points comes from this drug moving into the bundle, the DefenCath. The swing factor there is just how that rolls through the year. Is that a somewhat concise way to look at it, or am I missing some pieces?
I think the overall structure is right, that there is a component of it that is just an annual number. The way it used to work, and that won't change. Then there is a bit of a moving piece around the TDAPA add-on payment. I think how those two things break apart, I think there is actually a bit more that is structurally consistent over the course of the year. The challenge with using the CMS data is that they actually give a fair bit of breakdown. If you go to page 320, table 30 of their disclosure, and I say that first tongue in cheek just to show you how long and complicated this is, but also to make sure everyone understands what numbers we are referring to.
They give the breakdown of the rate between the base rate and the outlier adjustment and the labor adjustment and the TDAPA stuff for the industry, but then they also break it down in a way. They use LDO, which is large dialysis organizations, which is us and our large competitor, Fresenius. It is super complicated. We actually have trouble reverse engineering some of their math. I mean, we know the end point. We know what rate we are going to get paid, but we have trouble reverse engineering some of the percentage growth changes. But also, it is different for us and Fresenius f or a whole bunch of reasons.
Long way of saying, I think the structural part that remains consistent is probably a little higher than the 40 basis points that they have in for the LDOs. But the most important point is exactly what you said. How things play out with the TDAPA add-on payments is what's going to drive the majority of the variability there.
That's interesting because you have talked about the fact that you think you have a little less exposure to this outlier cut. That's the reason why your typical inflationary update's only in that 40, 50 basis point range. If you had to break down that 1.5- 2 and say, "Okay, what we really think are kind of year-over-year X, all the TDAPA stuff," you're saying that's more than that 50 basis points?
It is more.
You think that is closer to 100?
We have not quantified it, but ultimately, I think the important thing is it does not matter. What matters is the bottom line rate we are getting. I appreciate investors and the sell side trying to figure out how to reverse engineer this, and I think there is too much complexity to try and reverse engineer it. So, I think the 1.5- 2 is a good range. It incorporates what we think is a reasonable set of boundaries about what could happen with the TDAPA add-on payments. Look, we will know more quarte- by- quarter. This is not something we are going to know for sure next quarter. It is each quarter we will be able to look back and see what happened to ASP, what happened to utilization, and we will be able to update the numbers.
That said, I will remind you, because you have been following the stock for so long, with the growth of MA, the importance of the Medicare fee-for-service rate is not what it used to be, right? This used to be, I mean, maybe the single biggest driver of next year's economics. Now, 1% is worth about $30 million of OI. So, I am not a 50 basis point swing. It is not unimportant at all. It is certainly material, or it is certainly important. I do not know if it is material. But it is not as big as it used to be.
How do those Medicare Advantage rates get set? Are they typically tied to that fee-for-service rate, or is that-
No. They are negotiated with the payers very similar to how our commercial rates are negotiated.
Got it. They just have escalators in them that have no tie to what Medicare says inflation is.
Right. They could have additional reimbursement for new technology that we use. You could bring binders in, and that would lead to more MA payer reimbursement. But on this other TDAPA-related issue, we use a different technology. Historically, that would not have been part of the MA conversation.
Got it. On the exchanges, thinking about next year, you have talked about the $70 million. That is mostly from just your new patient starts coming in with lower commercial mix, right?
Right.
The population has it.
The new patient starts for next year coming in at a lower mix, and the annualization-
of this year.
of this year as well.
Right. You do not expect people to be losing coverage. You are pretty good at helping people keep their coverage.
In general, that is what we expected based on what we've seen historically. We saw it during COVID, for example. When patients lose their commercial coverage, there's a lot of opportunities for them to hold onto it for some period of time. I mean, ultimately, patients almost always, they don't stay on. That's the dynamic we've seen. We expect that to continue. But ultimately, we would expect QHP for us to be the same as QHP for the broader population. It just takes longer to get there.
Got it. To be clear, you have seen that you have been successful in keeping people on. It is really just the new patient starts has been the issue, and it has all been consistent with what your expectations have been.
There was a lot of noise in the first half of the year because it was not clear exactly what patients had, and coverage updates can be a little bit delayed. I think we felt good coming out of Q2 that we, okay, now we had decent visibility, and with now Q3 playing out the way we expected, it feels like it has settled down.
I know there is a lot of debate about the exchanges for 2027. Is there an assumption built in for further exchange membership declines for next year, maybe you could share that with us?
We have generally stuck with the CBO estimates for what happened, for what we expect to happen. I think all else being equal, they are better at forecasting this than we are. We do not have any unique insights, so that is what we have stuck with.
Got it. Kind of flipping away from dialysis for a second, or kind of looking at a separate business than just the treatment side, IKC's been really successful in terms of what you've been able to drive there over the last few years, right? The improvement in OI, and wanted to, number one, confirm, and I think we've talked about this, that in a year, you've outperformed in that business this year, it looks like. But in no way, shape, or form do you think that that limits the opportunity in 2027? You still feel like the contributor there at, let's call it $25 million of improvement a year that you've expected. You still expect off this baseline you'll be able to get that next year?
Yeah. Look, if you go back four or five years, what we said was we thought this could contribute, call it $20 million-$25 million of OI a year, 1% to enterprise OI growth, and we thought it would be choppy. It's very dependent on a shared savings percentage off a multi-billion dollar medical cost under management number. As that shared savings number moves around, goes up and down the way you'd see MLR bounce around at a health plan, we would have thought it would be a pretty choppy number. We have been wrong on both accounts. We have delivered a lot better than that 1%.
It has been more like 2% a year of contribution, so that has been great. We got to profitability earlier than we expected, so that has been great. The second is that it really has not been particularly choppy. It has been a relatively smooth path to where we are today. That said, we still feel like 1% a year and choppy is the right way to think about the business going forward. The choppiness could come from this medical loss ratio, or what we call shared savings rate, moving around. Also, growth can be choppy. We signed an exciting deal for 10 or 15,000 new CKD patients this year, and new contracts are loss-making for us because generally, we do not take revenue in year one for these contracts till we have some visibility on what the shared savings would be.
In the first year, you have all the expense of the new patient base without any of the revenue. So, we are feeling really good about where we are now, and we got here faster than we expected, and we believe there continues to be a lot of opportunity to continue to deliver that 1% a year.
You mentioned this business, the analogy is kind of more like a managed care business. Right? We spend a lot of time on the managed care side looking at earnings power. I'd love to get an update of, you talked about, "Look, we have this multi-billion dollars under management that we're managing of medical costs," then you would think about a target margin that's reasonable on that. Maybe you can give us an update there.
Yeah. I'm not going to use the word margin, or I'm going to try to avoid using the margin, because we're not actually dividing our profit by our revenue. We're dividing our profit by our medical cost under management. We do that because of how we account for this. We don't account for most of our lives the way a health plan does, where you take the full cost, all the medical costs through the revenue. We're just taking the margin through. So, if you divide our profit by our medical cost under management this year, that number's about 1%.
We see opportunity to continue to drive that up, both from increasing our shared savings rate and from leveraging what is a pretty sizable fixed cost there. I don't have a new number for you, but I don't feel like that's a cap, that 1%, and that we have to grow only through growing lives and growing top line. I think that'll be an important consideration going forward of how do we contribute to growth from both those items.
Yeah. My recollection is, so 1%, I think you talked about OI this year of $65 million in that business, so let's call it $6 billion round number of kind of the medical costs you're managing today. Am I misremembering and thinking that you had maybe talked about a 2% margin there, or better, as kind of a reasonable-ish target?
Yeah. I think what we talked about many years ago, and this was when we were loss-making. I mean, this was- This was when break-even was a distant dream. We talked about thinking about margins comparable to what MA plan margins were at the time, and I think it was more like in the 1%-3% range, so maybe 2% in the middle. That was a long time ago. That was a long time ago for us. It was a long time ago for MA plans.
You know that better than I do. I do not know that I have a refreshed number relative to, I think, when we gave that five years ago, but I think your memory is correct about what we were potentially thinking back then. It will also depend on a bunch of things on our scale. It will depend on the mix between CKD and ESRD. It will depend on which kind of lives, whether these are Medicare fee-for-service lives or MA lives. There is a lot of math that will inform that question, but I do not think 1% is a cap.
Got it. If I think about 2027, I was hoping maybe we could talk a little bit about headwinds and tailwinds, right? I know you have not given guidance here. If I think about the headwinds, you have talked about the exchanges of $70 million, and then the open question is always volume growth, right? I think about your volume growth. I think you have talked about adjusted volume growth of 75 basis points this year. I think you said 25 basis points of that came from Fresenius, so call it 50, and I think you said the calendar will be a 25 basis point tailwind next year.
We are back to 75 basis points, give or take, right? If you think about your business at core beyond that, is that a volume level where OI can be flat without kind of other things, right? The other things I think about are the exchanges on one hand and costs, especially pharma costs, that you have talked about as being an opportunity on the other. Let us say, my hypothetical, those just offset one another, right? You guys get enough cost savings. What are the other moving parts that I might be missing, and can you grow OI at core if volume is 75 basis points without other help?
Yeah, I will start where you started. We haven't given 2027 guidance yet. Look, I would look at the last four or five years as a reasonable starting point, and I think a reasonable takeaway from those is there are headwinds, there are tailwinds, and despite that, in the context of volume pressure, meaning below the 2%+ we would like to get back to, we often, although not every year, figure out a way to get there. It's a complicated dynamic at this time in year. There's still a lot of swing factors that we are looking at and trying to pin down. We've got a lot of opportunities that we're looking at about decisions we can make and levers we can pull to offset the headwinds or negative swing factors. Overall, it's too early to give a full view on that.
Got it. Maybe just end with another success story on the international side. That business had a great 2025, right? You saw margins improve dramatically, and then in 2026, you've grown off that base and done a really nice job. How do we think about, like, that business, I think, is running something in the mid-eights on a margin basis for this year. Is that the right margin for that business, or do you still see opportunities? Like, what is the long-term margin of international in your mind?
Yeah. Our head of international likes to say that international is not a thing, and what he means by that is it's a portfolio of 15 different countries, and it's very hard to generalize about anything about international. You could ask about, what's volume growth in international? And there are markets that are shrinking, there are markets that are growing very fast. I think the margin question will depend a lot on the mix of markets we're in over time. I think about it more from the lens of return on capital, and are we getting a return on the capital that we've deployed and the capital that we will continue to deploy? And we've been very disciplined.
We've been disciplined with our capital there every bit as much as we've been disciplined with our capital in the U.S. I don't think we're at a margin cap or a margin peak. I think there are ways to grow the business nicely without margin expansion, depending on capital utilization. But I think we've got just continued more runway to deliver on that 1% of OI growth contribution from the international business.
Do you still see the same level of opportunities? You've deployed a bunch of capital there over the last few years. Is the opportunity set on capital deployment still as material as it was before?
I think so. I say that because if you had asked me this before the big acquisition in Latin America came on, I would have said, "I think so," even though I didn't know about that opportunity. It's a big world.
Right.
We're willing to go into new markets, although we're pretty disciplined about it. We don't have the same market share in our markets as we do in the U.S., so we've got more opportunity to deploy capital in markets we're already in. Yeah, I think there's plenty of opportunity there.
Great. I think we need to end it there. Joel,
Thanks
Thanks for being with us. I appreciate it.
Thank you, Justin.
Thanks, Joel.