DaVita Inc.
New Coverage: DaVita Bonds Lower Following SCOTUS Ruling; Company Estimates 10% Payor Shift of Small Self-Insured Plans to Medicare Lowers Profit by $20M
Thu 06/23/2022 15:16 PM
Relevant Documents:
Q1 2022 10-Q
2021 10-K
November 2021 Investor Presentation
Business Update Call Transcript June 23, 2022
Supreme Court Opinion
Following a ruling on Tuesday, June 21, by the U.S. Supreme Court in the case of Marietta Memorial Hospital Employee Health Benefit Plan vs. DaVita Inc., bonds of DaVita, one of the largest providers of kidney care services in the United States, sold off. The ruling decided that Marrietta had not discriminated against patients with end-stage kidney disease. DaVita had brought the suit arguing that Marrietta’s plan violated the Medicare Secondary Payer Act and said it was “deeply disappointed with the outcome.” The company has also said that the intent of this is to move patients from commercial insurance to Medicare prematurely. On a call this morning, DaVita said that for “every shift of 10% of [the commercial payor] segment to Medicare fee for service [would represent] approximately $20 million [hit to] operating income.” In 2021, commercial payors represented about 30% of DaVita’s revenue.
On a conference call today, DaVita management downplayed the likely financial impact. CEO Javier Rodriguez said, “We believe there remains a number of other reasons why plan[s] would not attempt to change their benefit designs to push ESRD (end-stage renal disease) patients to Medicare or severely limit the scope of outpatient dialysis services covered.” Rodriguez cautioned that “we are not in a position to predict if plans might try to take advantage of this ruling,” effectively declining to estimate a value of revenue at risk.
Capital Structure
DaVita’s capital structure is shown below. The company had over $1.3 billion of liquidity as of March 31, comprising $327 million of cash and an undrawn $1 billion revolver. The company’s nearest maturities are its term loan A and revolver in August 2024.
In recent months, DaVita’s bond and equity prices have traded down significantly. As of Jan. 1, the company’s 3.75% notes were quoted at 97, and its 4.625% notes were quoted at 103, according to Solve Advisors. The two series of notes were quoted at 70 and 75, respectively, as of June 23. On Friday, June 17, the business day prior to the SCOTUS decision, the 3.75% notes were quoted at 72, and the 4.625% notes were quoted at 78.
The company’s common equity has also come under pressure, trading at $79.54 per share intraday today, compared with $115.43 on Jan. 3. The stock closed at $76.05 on June 21, the day of the Supreme Court decision, down $13.43, or 17.7%, from the prior day, according to Yahoo Finance.
While the company reported no letters of credit outstanding under its revolving credit facility as of March 31, the company noted in its 10-K that it has approximately $108.1 million of LCs outstanding under a separate bilateral LC facility as of March 31 but did not disclose the total borrowing ability of the facility.
Summary Financials
DaVita’s patient service revenue has been steady over the past five quarters and increased slightly from 2020 to 2021. Gross margin, as calculated by Reorg, has also been relatively steady throughout 2021 but declined slightly in the first quarter of 2022.
In the first quarter, the company said its financial results were hurt by “continued volume pressures from COVID-19, including excess patient mortality and higher missed treatments” as well as “higher than normal wage rate increases.”
The company’s average patient service revenue per treatment in the first quarter was $361.35, substantially unchanged from $361.70 in the previous quarter and up from $354.50 in the prior-year period. The company wrote in its 10-Q that it benefited from an increase in the Medicare base rate in 2022 and “increases in commercial rate and mix.” Patient care cost per treatment was $252.61 in the first quarter, compared with $248.12 in the previous quarter and $238.69 in the prior-year period. Costs were higher as a result of increased wages as well as fixed operating expenses, according to the 10-Q. Higher costs contributed to a decline in margins in the first quarter, as shown below.
The company’s U.S. dialysis treatment count declined 5% sequentially in the first quarter.
Historical financials for DaVita are below:
The company’s revenue stream is diversified between commercial insurance payors and the U.S. federal government through its Medicare and Medicaid programs.
In the below table, Reorg shows the company’s reported split of dialysis revenue by payor in the United States. The company’s revenue is predominantly generated in the United States. In 2021, $10.667 billion, or 95%, of its total dialysis revenue was generated domestically.
Impact of Ruling and Call Summary
On a business update call this morning, the company tried to quantify the financial impact of the ruling, saying it thinks the greatest risk of plans that may look to follow Marietta would be from “small self-insured plans.” CEO Javier Rodriguez said, “Every shift of 10% of this segment to Medicare fee for service is approximately $20 million in operating income.” CFO Joel Ackerman later added, “It’s a bit of judgment required in how you define the segment in terms of plan[] size and self-insured versus fully insured, … but it’s 10% of that, not 10% of the total commercial.” Management stressed that “the bulk of our OI [operating income] is protected contractually.” An analyst asked, when sizing the smaller segment “does that imply that the small group is around 10% or 15% of the total mix,” to which Ackerman responded, “I think you're in the right general range, yes, I'd say on the lower end.”
Management said that because of the lead time in changing any plans, the impact would be limited in 2023, and the 2024 plan year would most likely be the earliest any changes to plans would take place, if changes are made at all. When asked at what rate its commercial contracts expire, management said that for “an average contract, … the range goes from probably two to four years, and so you can start to get a sense of on any given year, roughly a fourth or so of our contracts would be renewed.”
Management also expressed optimism that either “Congress will want to fix the loophole that SCOTUS decision created in the MSPA” or that the Centers for Medicare & Medicaid Services, or CMS, could “clarify that guidance.” The company said that it is pursuing both a legislative and regulatory path, concluding that “we believe that there is a reasonable chance of getting this fixed in Washington.”
Management said that it expects no changes to its shareholder distribution plans as a result of the court decision.
--Jeremy Sherby
Q1 2022 10-Q
2021 10-K
November 2021 Investor Presentation
Business Update Call Transcript June 23, 2022
Supreme Court Opinion
Following a ruling on Tuesday, June 21, by the U.S. Supreme Court in the case of Marietta Memorial Hospital Employee Health Benefit Plan vs. DaVita Inc., bonds of DaVita, one of the largest providers of kidney care services in the United States, sold off. The ruling decided that Marrietta had not discriminated against patients with end-stage kidney disease. DaVita had brought the suit arguing that Marrietta’s plan violated the Medicare Secondary Payer Act and said it was “deeply disappointed with the outcome.” The company has also said that the intent of this is to move patients from commercial insurance to Medicare prematurely. On a call this morning, DaVita said that for “every shift of 10% of [the commercial payor] segment to Medicare fee for service [would represent] approximately $20 million [hit to] operating income.” In 2021, commercial payors represented about 30% of DaVita’s revenue.
On a conference call today, DaVita management downplayed the likely financial impact. CEO Javier Rodriguez said, “We believe there remains a number of other reasons why plan[s] would not attempt to change their benefit designs to push ESRD (end-stage renal disease) patients to Medicare or severely limit the scope of outpatient dialysis services covered.” Rodriguez cautioned that “we are not in a position to predict if plans might try to take advantage of this ruling,” effectively declining to estimate a value of revenue at risk.
Capital Structure
DaVita’s capital structure is shown below. The company had over $1.3 billion of liquidity as of March 31, comprising $327 million of cash and an undrawn $1 billion revolver. The company’s nearest maturities are its term loan A and revolver in August 2024.
(Click HERE to enlarge.)
In recent months, DaVita’s bond and equity prices have traded down significantly. As of Jan. 1, the company’s 3.75% notes were quoted at 97, and its 4.625% notes were quoted at 103, according to Solve Advisors. The two series of notes were quoted at 70 and 75, respectively, as of June 23. On Friday, June 17, the business day prior to the SCOTUS decision, the 3.75% notes were quoted at 72, and the 4.625% notes were quoted at 78.
The company’s common equity has also come under pressure, trading at $79.54 per share intraday today, compared with $115.43 on Jan. 3. The stock closed at $76.05 on June 21, the day of the Supreme Court decision, down $13.43, or 17.7%, from the prior day, according to Yahoo Finance.
While the company reported no letters of credit outstanding under its revolving credit facility as of March 31, the company noted in its 10-K that it has approximately $108.1 million of LCs outstanding under a separate bilateral LC facility as of March 31 but did not disclose the total borrowing ability of the facility.
Summary Financials
DaVita’s patient service revenue has been steady over the past five quarters and increased slightly from 2020 to 2021. Gross margin, as calculated by Reorg, has also been relatively steady throughout 2021 but declined slightly in the first quarter of 2022.
In the first quarter, the company said its financial results were hurt by “continued volume pressures from COVID-19, including excess patient mortality and higher missed treatments” as well as “higher than normal wage rate increases.”
The company’s average patient service revenue per treatment in the first quarter was $361.35, substantially unchanged from $361.70 in the previous quarter and up from $354.50 in the prior-year period. The company wrote in its 10-Q that it benefited from an increase in the Medicare base rate in 2022 and “increases in commercial rate and mix.” Patient care cost per treatment was $252.61 in the first quarter, compared with $248.12 in the previous quarter and $238.69 in the prior-year period. Costs were higher as a result of increased wages as well as fixed operating expenses, according to the 10-Q. Higher costs contributed to a decline in margins in the first quarter, as shown below.
The company’s U.S. dialysis treatment count declined 5% sequentially in the first quarter.
Historical financials for DaVita are below:
(Click HERE to enlarge.)
The company’s revenue stream is diversified between commercial insurance payors and the U.S. federal government through its Medicare and Medicaid programs.
In the below table, Reorg shows the company’s reported split of dialysis revenue by payor in the United States. The company’s revenue is predominantly generated in the United States. In 2021, $10.667 billion, or 95%, of its total dialysis revenue was generated domestically.
Impact of Ruling and Call Summary
On a business update call this morning, the company tried to quantify the financial impact of the ruling, saying it thinks the greatest risk of plans that may look to follow Marietta would be from “small self-insured plans.” CEO Javier Rodriguez said, “Every shift of 10% of this segment to Medicare fee for service is approximately $20 million in operating income.” CFO Joel Ackerman later added, “It’s a bit of judgment required in how you define the segment in terms of plan[] size and self-insured versus fully insured, … but it’s 10% of that, not 10% of the total commercial.” Management stressed that “the bulk of our OI [operating income] is protected contractually.” An analyst asked, when sizing the smaller segment “does that imply that the small group is around 10% or 15% of the total mix,” to which Ackerman responded, “I think you're in the right general range, yes, I'd say on the lower end.”
Management said that because of the lead time in changing any plans, the impact would be limited in 2023, and the 2024 plan year would most likely be the earliest any changes to plans would take place, if changes are made at all. When asked at what rate its commercial contracts expire, management said that for “an average contract, … the range goes from probably two to four years, and so you can start to get a sense of on any given year, roughly a fourth or so of our contracts would be renewed.”
Management also expressed optimism that either “Congress will want to fix the loophole that SCOTUS decision created in the MSPA” or that the Centers for Medicare & Medicaid Services, or CMS, could “clarify that guidance.” The company said that it is pursuing both a legislative and regulatory path, concluding that “we believe that there is a reasonable chance of getting this fixed in Washington.”
Management said that it expects no changes to its shareholder distribution plans as a result of the court decision.
--Jeremy Sherby
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