UBS Global Healthcare Conference - DAVITA INC

Hi, everybody. We'll get going with our next presentation. We're very pleased to have Davida with us today. We've got Joel Ackerman, Chief Financial Officer, and Nick Eliason, Head of Investor Relations. So we're 10 months into the year. How has the year been so far? Would have been the positives, would have been surprises, challenges? Yeah. So, look, year's not over yet. First of all, thank you for having us, and hello, everyone. Year's not Over Yet, but I think we have a pretty good sense of the contours for the year. I'll get to the U.S. dialysis business second, but I'll start with the other two businesses, International and IKC. International is just clicking along as expected. Nothing surprising there, positive or negative. We've always said over the long-term 1% addition to OI growth, and that's happening. IKC is having a strong year. We're looking at about a 2% contribution to OIs growth this year versus the normal 1% we call out. And the business, I think, is just hitting its stride. We, five years ago, I think we called out 2026 was going to be the first break-even year, and it's just continued to click along, growing, delivering great value to patients and payers, and we're 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 two percent um volume growth from so that that was the start um i'd say the things that have gone well are one volume that uh we are growing this year and we're happy about that and we think that sets a good foundation for next year and second um revenue per treatment has been stronger than expected The big challenge for us has been on the cost side. And 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've been investing a lot in IT. IT's been growing north of 20% a year for the last, I think this is four years in a row. We're 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's an intentional decision. And we see opportunity to invest there. DNA will continue to grow, although we think it'll decelerate. And the benefits of that show up everywhere else in the P&L, in volume, in RPT, in patient care costs, and in gene. So 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're 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, so, you know, I'm not going to try and predict what the new Congress is going to do from a politics or a policy standpoint. There's 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. And if there's a way for the exchanges to get back to where they were, continue to grow from where they are today, that'll certainly have a positive impact on revenue per treatment and our bottom line. Okay. And at the macro level as well, we had an introduction of a national kidney care 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 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. I remember they subpoenaed us. We've disclosed this in our Q&RK around FTC concerns. And 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 is 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 has 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 voor Medicare or Medicare Advantage. And eliminating charitable premium assistants 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 spring competition or driving innovation. We think it'll do the exact opposite. So look, 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's just a reasonable component of how the system works today. Okay, that makes sense. um medicare esrd rules but another topic of debate and discussion um uh the calendar year 27 rule has a few more moving parts than usual investors see a headline of 3.5 percent increase for large dialysis organizations but you've talked about it an effective full year increase of one and a half to two. Can you walk us through that difference in plain English? What stays fixed and what changes from what you'll get in one Q27? Sure. So look, the important thing to recognize about that three and a half percent 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. And if you look at the disclosure, if anyone wants to find it on their own, it's table 30 on page 320 of the CMS rule. There's about a 40 basis point increase that's disclosed that remains constant through the year. That's for the LDOs. It'll work different for different companies, depending on some of the subcomponents. It's that additional 3.1% related to DAPA that will evolve. And how it evolves remains to be seen. It'll depend on how some of the add-on payments work for certain drugs, and you put that all together, and again, we don't 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 to DAPA and entered the add on period. We think one and a half to 2% is a reasonable estimate for the full year. Okay. I know when you reported 3Q, you were still sort of working through some of the calculations you said, or having your people look at it. Has anything changed in your thinking since then? And even the 1.2 to 2% range, what accounts for the variance in the range? Yeah, so 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 Tdapas 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 Tdappa drugs. So that's the big gap. I don't 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. And so separate the binder payment from the Dev and Cath payment. I think that's where there's some confusion. You get $1,285 for the binder statement. That stays in the bundle. It's updated annually. it sounds like you believe, while the $8 to $9 for the DEF and CAF component can reset each quarter, what is driving your expectation for a sharp decline in that second payment after 1-2-27? Right. So you're right on the binder payment. That does not change over the course of the year. That's locked in. And it doesn't, it will, I think next year in 2028, it'll disappear as a distinct number. It'll just be part of the bundle the way we don't get a separate payment for dialysers or anything else. So that, I think, as a revenue story, the binders are pretty much done. In terms of the FENCATH, what you have to remember is CMS has changed the way they're handling post to DAPA add-on payments for innovation. And that's the FENCAF. That's where the FANCAF is getting handled. And our expectation, again, based on historical patterns of drugs coming off to DAPPA is that you'll 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. So, going into the year, you'll have a pretty good fix on that? Unclear what we'll know exactly about where it is, and we'll 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. So you have no exposure to that product, Def and Kath. 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? That is the right way to thinking 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've said that the effective Medicare increase is still below your cost trend, but it's not unusual over the years for Medicare rate increases to underfund the pace of nominal treatment cost increases from year to year. The company's 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 27? Yeah, so look, 27 is going to be a challenging revenue pretreatment year. And the underfunding of Medicare fee-for-service is one. The bigger dynamic is actually going to be around commercial. And this relates to the expiration of the enhanced premium tax credits and the decline in commercial mix that results from that. We've 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've used for years, probably decades now. The big one we're calling out for next year is around pharmaceutical costs. We see opportunities with binders. We see opportunities with other pharmaceutical costs. And 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're actually part of a 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. So 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's a couple things on those comments I'd like to pursue. On the exchanges, you're planning for about 70 million of additional pressure next year on top of the 40 million you absorbed this year. What's driving that increase. I think most providers are looking for something that's similar this year or even a little less onerous. Is this just annualizing changes already underway, or is there something else that you're looking at that says you think it's going to step up? Yeah, so 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're on the exchanges and they've lost enhanced premium tax credits. and the and so we're we're 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're 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 it takes us longer to get there. There's a bit of a delay in when you see it in our mix. So next year is the result of that delay and the annualization of some of what we're 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's right? Yeah, so look, most of them go on to Medicare, and that's either Medicare or Medicare Advantage, although some go find alternative commercial insurance. And that's really the big thing we're 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's already covered there or they're going back to work somehow. So it's what percentage of exchange patients figure out how to retain commercial coverage is really the big question. Okay. And you've cautioned people in wrapping up the discussion around the exchanges not to simply take the earnings, 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. So 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. So 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 percent 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, and we think that will help mitigate some of the mixed 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 calcium emetics 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 it 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 ofthe 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 their financial opportunities? So again, we have the ability to invest. I mean, AI, you know, 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 abilityto 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 quite so. I'll stay out of any details on that. All right. So 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 Advvantage have not changed much. I mean, 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 bring in some revenue as well. But I wouldn't think of all the dynamics in Tdappa 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. Census was a little stronger than expected in Q3, even with some more mistreatments 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 27 before the new dialysers 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. So 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. So you net those two things out. We think we start off with about a 25 basis point tailwind next year versus this year. And 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 gonna land on. The mistreatament pressure you've called out, you said it was largely, I think, related to hospitalization. Is this sort of a vicious cycle? Mistreatments leads to hospitalisation, which leads to more mistreatments? Or is there the population you're seeing when they start on dialysis, just sicker and requiring more hospitalizations? What would, when you drill down, what's the driving force behind that? Yeah. So look, the, the vicious cycle you talk about is true. It's, 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, you know, 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 Kauffman Hall data. So 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, so 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. And 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. And as a result of that, we concluded operationally we can handle this. The supply is there. The physicians are excited about it. So 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, Nick and I went and visited a clinic last week. The first day they were rolling out these dialyzers. And 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. So it was fun to see that. So you said that you really don't expect financial impact until the second half of 28. Why does it take that long? Is there any chance it'll be quicker than that? So 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. So we're relying on that. Could it come earlier? Who knows? Who knows. We're certainly not banking on it. So it remains to be seen. So you've got a target by 29 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. So 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 clearances on its own could get 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 uh 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 um it doesn't sound like it's it's going to a negative but it sounds like it'll be less of a head wind than it's been the last few years can you just describe a little bit more what's happening there uh projects maturing what what what is going on yeah so um 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's changed to make you more confident that the sustainability of that service? Yeah. So look, the core of the IKC business is about delivering quality care at a lower cost. And 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 you to grow the operating income so it's it's a complicated business it's different than our normal business it took a while for it to grow and for us to gain the confidence but I think we've been at it long enough that we feel good about that and you've entered into a new relationship with Humana 10,000 lives I think how's that going to impact economics of the company? It'll take a while. We generally incur costs in the first year before we generate any revenue. It's also CKD patients, not ESRD patients. And those are more challenging because they're not showing up to our clinic. So engagement and be a challenge with them so it remains to be seen but again it's a headwind on economics the back half of this year and the front half of next year okay um maybe just on capital allocation your cash flow guidance one to one point and a quarter billion your leverage is about 3.4 times 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 wanna maintain our leverage in three to three and a half times target range. And we're careful about maintaining liquidity. So, none of that has changed. When we see opportunities like Alara, the investment we made in home health or the acquisitions. In Latin America, we're going to invest capital for growth and innovation. But, you know, we don't find those every quarter. So 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. Well, we covered a lot of the waterfront there. Appreciate Davida participating in our conference once again, Joel and Nick. Actually, there's a break in this room next, so we'll reconvene in about an hour from now. Thanks, AJ. Thanks, everyone.