WOLFE RESEARCH HEALTHCARE CONFERENCE 2026 - DAVITA INC

All right. Good morning. My name is Justin Lake. I cover health care services here at Wolf Research. Pleased to have with us on our second day of our Wolf health care conference, Davida and the company 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. So 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 mistreatment-driven. The census being the more important component because it's permanent and it drives next quarter and next year, and mistreatment being a little bit more of temporary variability. And we missed because of mistreatments rate. Census came in actually a little better than expected. And the mistreatement rate missed by about 20 bips. It was 20 bps worse than expectations and about 20 bits worse than Q3 of last year. can split mistreatment rate into two components, which are roughly equal in scale in a normal quarter. Patients miss treatments because they're in the hospital. They're not—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 are not feeling well, and there can be other factors, for or, for example, transportation problems, some of which we can reschedule, some which we can't. This was mistreatment 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 26 versus Q3 25. We saw that in the public reporting of the large hospital companies. We certainly saw it in Kauffman Hall data and then in CDC data as well. So we don't think there was anything particular to our population. It was just a broader impact. Our assumptions for next quarter is that mistreatment rate normalizes to the typical seasonal pattern. And to be clear, what that means is our assumption is mistreatment 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 26 and Q4of 25. So, mistreatment rate goes up for Q4, but reverts to a normal pattern year over year. So, 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. And the challenge with taking toxins Out of the Blood is you've got to take out the bad stuff and leave in the good stuff, the good stuff generally being proteins or albumin. And 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 dializers 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. And 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. And 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's pretty material. So 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, the fourth-quarter volume, or is it pretty flat? No, there will be a very meaningful step down. So 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 26 versus 25 of about 65 basis points. I'm 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. So 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 normal is treatments per normalized day we disclose how many normalized their days there are in any quarter and that should be the number that that tends to look smoother because it removes this whole calendar impact so treatments down somewhat materially q3 to q4 one of the questions I've gotten is you know 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's expected to come outside. I think all of it's expected to come out of the dialysis business, right? Your IKC business. Right, IKCs, exactly. That's a great, you know, fourth quarter, typically, right, you see a lot benefit there. Maybe a little bit of, you now, a little sequential headwind from the international business. Q3 there was amazingly good. Right. So probably won't step it 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 if volumes down sequentially, what offsets that? Yeah. So, look, you've got you've Got the pieces right. And I think it highlights that seasonality is is not the easiest dynamic to unpack at DaVita for for a whole variety of reasons. And 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, 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 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 nonrecurring 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 so last year to your point revenue for treatment was up like three percent twelve bucks third quarter the fourth quarter massive right yeah we saw that in the numbers in the stock price you're saying you're seeing that you know this year uh you know it's going to be up maybe not twelve dollars 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 Q5 as we're resolving historical claims like we did last quarter. This year, though, there's a headwind from one commercial mix and the ACA decline, which has been coming down over the course of the year. And we'd 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'd see the contribution to revenue per treatment and cost per treatment decline over the course of the year and we'd expect that to happen again from Q3 to Q4 and that will drive an RPT decline, but 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's helpful uh you mentioned rate and binders you know the uh 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 um and i thought i'd take my shot like you know a lot of questions on this rate this medicare and trying to understand and i 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's a lot of moving parts in there. You're telling folks to kind of focus on a one and a half to two percent rate increase. Right. And I think which are the way the lens that we're 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 Fencath. And 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's a component of it that is just an annual number, the way it used to work, and that won't change. And then there's bit of a moving piece around the Tdapa add-on payment. I think how those two things break apart, I think there's actually a bit more that's 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, right? 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're referring to, they give the breakdown of the rate between the base rate and the outlier adjustment and the labor adjustment and that type of 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. And it's super complicated. We actually have trouble reverse engineering some of their math. I mean, we know the end point. We know what rate we're going to get paid. But we have trouble inverse engineering some of the percentage growth changes. But also, it's different for us and Fresenious for a whole bunch of reasons. So, 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 like inflationary updates only in that 40, 50 basis point. Right. So if you had to break down that one and a half to two and say, okay, what we really think are kind of year over year X all the Tdapa stuff, would you say that's – you're saying that's more than that 50 basis points? It is more. Is it closer to 100? We haven't quantified it, but ultimately, I think the important thing is it doesn't matter. What matters is the bottom line rate we're getting. And I appreciate investors and the sell side trying to figure out how to reverse engineer this. And I think there's too much complexity to try and reverse engineer it. So I think the 1.5 to 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. And look, we'll know more quarter by quarter. This is not something we're going to know for sure next quarter. It's each quarter we'll be able to look back and see what happened to ASP, what happened utilization, and we'll be able to update the numbers. That said, I'll remind you, because you've 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. This used to maybe the single biggest driver of next year's economics. Now, 1% is worth about $30 million of OI. So a 50 basis point swing, it's not unimportant at all. It's certainly material, or it's certainly important. I don't know if it's material, but it's 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, no. They're negotiated with the payers very similar to how our commercial rates are negotiated. 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. So you could bring binders in and that would lead to more MA payer reimbursement. But on this other to DAPA-related issue, we use a different technology. So historically, that wouldn't have been part of the MA conversation. Got it. And then on the exchanges, thinking about next year, you've talked about the $70 million. And that is mostly from just your new patient starts coming in with lower commercial mix, right? Right. And the new patient starts for next year, coming in at a lower mix, and the annualization of this year as well. This is not, you don't expect people to be losing coverage. You're pretty good at helping people keep their coverage. In general, that's 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 on to it for some period of time. I mean, ultimately patients almost always, you know, they don't stay on yet. So 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 QHB for the broader population. It just takes longer to get there. Got it. And that, and to be clear, you've seen that you've, you've been successful in keeping people on. It's, it's really just a new patient starts has been the issue and it's all been consistent with what your expectations have Yes. There was a lot of noise in the first half of the year because it wasn't clear exactly what patients had and coverage updates can be a little bit delayed. But 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's settled down. And, you know, I know there's a lot of debate about the exchanges for 27. Is there a assumption built in for further exchange membership declines for next year? And maybe you could share that with us. Yeah, we've generally stuck with the CBO estimates for what happened, for what we expect to happen. I think all else being equal, they're better at forecasting this than we are. We don't have any unique insights. So that's what we've stuck with. Got it. And, you know, kind of flipping away from dialysis for a second or kind of looking at a separate business than just the treatment side. You know, IKC has been really successful in terms of the of what you've been able to drive there over the last few years. Right. The improvement in OI and wanted to, you Know, number one, confirm. And I think, you KNOW, we've talked about this, that in a year you've outperformed in that business this year, it looks like. Yes. But in no way, shape or form, do you think that that does that, you know, limits the opportunity in twenty twenty seven? You still feel like the contributor there, you Know, let's call it twenty five million dollars of improvement a year that you've expected. You still expect off this baseline you'll be able to get that next year. Yeah. So, look, if if you go back four or five years, what we said was we thought this could contribute, call it 20 to 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 of a multi-billion dollar medical cost under management number. And 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've been wrong on both accounts. We have delivered a lot better than that 1 percent. It's been more like 2 percent a year of contribution, so that's 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 on for you know 10 or 15,000 new CKD patients this year and new contracts are loss-making for us because we're generally we don't take revenue in year one for these contracts till we have some visibility on what the shared savings would be so in the first year you have all the expense of the new patient base without any of the revenue. So we're 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, like the analogy is kind of more like a managed care business. And, you know, we spend a lot of time on the managed care side looking at earnings power. And so I'd love to kind of get an update of, you talked about like, look, we have this multi-billion dollars under management that we're managing a medical cost. And then you would think about a target margin that's reasonable on that. So maybe you can give us an update there. Yeah. So 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. And 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 cost through the revenue. We're just taking the margin through. So if you divide our profit by our health plan, we're just by our mental health. We take our medical cost under management. This year, that number is about 1%. And 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 one percent and that we have to grow only through growing lives and growing top line so i think that'll be uh an important consideration going forward of how do we contribute to growth from both those items yeah the my recollection is so one percent i think you talked about oi this year of 65 million dollars in that business so let's call it six billion dollars 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 it was like in the 1% to 3% range, so maybe 2% in the middle. That was a long time ago. That was a longtime ago for us. It was a lifetime ago for MA plans. You know that better than I do. So I don't 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'll also depend on a bunch of things on our scale. It'll 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. So there's a lot of math that'll inform that question, but I don't think 1% is a cap? If I think about, you know, 2027, and, you know, I was hoping maybe we could talk a little bit about headwinds and tailwinds, right? I know you haven't given guidance here. If I think about the headwind, you've talked about the exchanges of $70 million. And then, you know, the open question is always volume growth, right. I think, you're going to have about your volume growth I think you've talked about adjusted volume growth of 75 basis points this year I think he said 25 basis points of that came from Fresenius so call it 50 and I think said the calendar will be a 25 basis point tailwind next year so we're 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, you know, kind of other things, right? The other things I think about are the exchanges on one end and costs, especially pharma costs that you've talked about as being an opportunity on the other. So let's say, you Know, my hypothetical, those just offset one another, right, you guys get enough cost savings. if if what are the other moving parts that I might be missing and can you grow I a core volume is 75 basis points without other help yeah so I'll start where you started we haven't given 27 guidance yet look I would 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 two plus percent we would like to get back to, we often, although not every year, figure out a way to get there. So 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 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 so 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 50 15 different countries and it's very hard to generalize about anything about international right you could ask about what's volume growth in international and their markets that are shrinking their markets that are growing very fast so I think the margin question will will depend a lot on the mix of markets were 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 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 disciplined with our capital in the U.S. So 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. And 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. 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. So, yeah, I think there's plenty of opportunity there. Right. I think we need to end it there. Joel, thanks for being with us. I appreciate it. Thank you, Justin. Thanks, bud.