UBS Global Healthcare Conference - DAVITA INC

Financial Performance:

• International and IKC segments are performing as expected, with IKC contributing ~2% to Operating Income growth (versus the normal 1%) and International contributing ~1%; IKC is on track to be profitable, having missed the 2026 break-even target previously set.
• U.S. dialysis volume growth is positive this year, exceeding expectations, and revenue per treatment is stronger than anticipated.
• Significant headwinds are present on the cost side, driven primarily by intentional IT investments growing at >20% annually for four years, which has elevated G&A above forecasts.
• A $70 million headwind is expected next year due to the expiration of enhanced premium tax credits and a resulting shift in commercial payer mix.
• Free cash flow guidance remains $1.0 to $1.4 billion, with leverage targeted at 3.0 to 3.5 times.
• Management reaffirms a capital allocation strategy prioritizing growth investment, maintaining leverage targets, and utilizing free cash flow for stock buybacks.

Guidance and Future Outlook:

• Full-year 2027 Medicare FFS effective rate increase is estimated at 1.5% to 2%, down from the headline 3.5% Q1 rate, due to evolving Dynamic Add-on Payment Amount (DAPA) calculations for off-patent drugs.
• Volume growth is projected to improve in 2027, driven by a calendar tailwind (+25 bps vs 2026 headwind), a net 25 bps positive impact from non-recurring clinic closure benefits in the prior year, and a return to >2% growth by 2029.
• The expansion of High-Volume Dialysis (HVD) is being rolled out nationwide in November, with financial impact not expected until the second half of 2028.
• Pharmaceutical cost savings are a primary lever for mitigating 2027 revenue headwinds, with opportunities in contracting, generic conversion, and AI-driven dosing protocols.

Business Segments and Product Lines:

• IKC (Inpatient Kidney Care): Confirmed sustainable profitability with a strong focus on quality care at lower costs; a new agreement with Humana covering 10,000 lives is expected to create a near-term economic headwind in the back half of this year and first half of next year due to pre-revenue costs and the complexity of engaging CKD patients.
• U.S. Dialysis: Successfully pivoting from pre-pandemic volume stagnation to growth; clinical initiatives include expanded HVD (middle molecule clearance), fluid management improvements, and vaccination campaigns.
• Technology: Heavy investment in AI and core systems to support volume and revenue initiatives; while growth rates will moderate from the >20% seen previously, spending remains elevated to fund these strategic upgrades.

Market and Competitive Landscape:

• Regulatory Environment: Management views the proposed National Kidney Care Plan and FTC scrutiny with caution, emphasizing that DaVita is part of the solution regarding mortality and quality, opposing moves that remove funds from the system via charitable premium assistance reductions.
• Payer Mix: The expiration of enhanced premium tax credits is shifting new dialysis patients from commercial plans to Medicare/Medicare Advantage, a trend more acute in 2027 than 2026 due to the lag in coverage loss for prevalent patients.
• Competition: No major shifts in commercial or Medicare Advantage rates are anticipated from the 2027 ESRD rules; the focus remains on Medicare FFS dynamics.

Risks and Challenges:

• Cost vs. Reimbursement: The effective Medicare rate increase (1.5-2%) is expected to underfund the pace of nominal treatment cost increases, particularly in pharmaceuticals.
• IT Spending: Continued high growth in IT investment is creating a near-term margin headwind before anticipated efficiency returns.
• Regulatory Uncertainty: Potential legislative changes regarding charitable premium assistance and FTC actions pose risks to revenue per treatment and ecosystem stability.
• Operational Complexity: The Humana partnership faces challenges in patient engagement, as CKD patients do not visit clinics as frequently as ESRD patients.

Management Commentary and Tone:

• Management maintains a confident but realistic tone, acknowledging 2026 as a "tough year" due to cost pressures while emphasizing strong foundations for 2027 and beyond.
• There is strong optimism regarding the clinical efficacy and operational readiness of the expanded High-Volume Dialysis rollout, citing physician excitement and successful pilot data.
• Leadership emphasizes the company's scale advantages in negotiating pharmaceutical costs, positioning the firm as a solution provider rather than a contributor to industry problems.

Analyst Questions and Answers:

• 2027 Guidance: Management declined specific earnings guidance but framed 2027 as challenging, citing the $70M exchange headwind offset by volume growth recovery and pharmaceutical savings.
• Medicare Rate Mechanics: Clarified that the $1,285 binder payment is fixed through 2027 but will disappear as a distinct line item in 2028; the $8-9 DEF/CATH component is expected to decline due to drug pricing dynamics post-DAPA.
• Volume Drivers: Analysts questioned volume growth confidence; management attributed next year's improvement to calendar effects and a return to pre-pandemic volume trends, while noting mistreatment rates are currently elevated due to broader national hospitalization trends rather than patient acuity.
• Capital Allocation: Confirmed no change to buyback strategy, with flexibility for strategic acquisitions (e.g., home health, Latin America) and a target leverage of 3.0-3.5x.

Other Key Points:

• The "vicious cycle" between mistreatments and hospitalizations is acknowledged clinically, but current data suggests the Q3 spike was a national phenomenon rather than a systemic internal issue.
• AI is being leveraged to develop new prescribing protocols, aiming to deliver both clinical care improvements and cost savings.
• The company operates under the belief that charitable premium assistance is a durable and necessary component of the dialysis ecosystem; removing it would likely increase government costs and harm patients.