Q3 2020 DaVita Inc Earnings Call
Good evening My name is Michelle and I will be your conference facilitator today at this.
I would like to welcome everyone to the Davita third quarter 2020 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer period. If you would like to ask a question. During this time simply press Star and then the number one on your telephone keypad. If you would like to withdraw your question press.
Star and the number two thank you Mr. Gustafson you may begin your conference.
Thank you and welcome everyone to our third quarter conference call.
And your continued interest in our company.
President of Investor Relations and joining me today are Javier Rodriguez, our CEO and Joel Ackerman our CFO.
During this call.
Have you seen that's within the federal Securities laws. All of these statements are subject to known and unknown risks and uncertainties that could cause actual results could differ materially from those described in the forward looking.
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For further details concerning these risks and uncertainties. Please refer to our third quarter earnings press release and our.
Filings, including our most recent annual report on form 10-K, and subsequent quarterly reports on form 10-Q.
Forward looking statements are based upon information currently available to us.
Intend and undertakes no duty to update these statements except as required by law.
Additionally, we'd like to remind you that during this call we will discuss some non-GAAP financial measures reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our earnings press release submitted to the FCC.
On our website.
I will now turn the call over to Javier Rodriguez.
Thanks, Jim and good afternoon, everyone. Thank you for joining us to review our third quarter financial results.
We are now nine months into the pandemic and one thing is clear our team of caregivers is committed to serving our patients because of our team our business is performing well despite disruptions from the pandemic wildfires and hurricane.
Data before and it's worth repeating I am incredibly proud to be part of Davita disturb alongside or 65000 teammates who work so hard to provide our patient with life sustaining care. It is our people will make our business resilient in the face.
They have so many challenging externalities.
Today's challenging times, our focus remains on our patients and on building capabilities to enhance their care and their experience in the future.
Today, there are still too many patients who are surprised by their start undoubted, which impacts their ability to adjust their lifestyle and then to choose their optimal modality. Therefore, we work with patients with chronic kidney disease known at CKD to help them understand how to stay healthy delay the progression of kidney disease.
Pursue transplantation and evaluate different treatment options.
Education is one important factor to avoid a surprise start we're excited to have reached a milestone this quarter of educating 200000 people through our can do smart program and no cost CKD education program.
During the pandemic, we have shifted all kidney smart glasses to virtual format and we continue to have high engagement with CKD patients.
Program has healthy results and individuals would tend to kidney smart glass or six times more likely to start balances at home experience, 30% fewer minutes treatment in the first 90 days on dialysis and have 30% fewer hospitalizations.
Now onto the quarterly results.
I agree with another strong quarter for our company total revenue came in largely as expected while volume growth was weaker than historical levels due to the impact of cobot total revenue held up due to the year to date improvement in revenue per treatment.
Our cost came in significantly below our forecast as a result of lower TCO wouldn't impact this quarter and continued strong cost management look.
Looking forward I remain confident in the strength of our business model as well as our earnings and free cash flow growth due.
Due to our strong performance over the past year. We're ahead of plan that we discussed last years capital markets day, both financially and strategically.
Financially. We are ahead of the expected adjusted earnings per share guidance, we shared both in 2020 and 2022 today. We are again, raising our 2020 adjusted earnings per share guidance range to 735 to 760.
Over the past year, we've been able to achieve operating margin increases in share repurchases faster than expected. In addition, we've also lowered our debt costs consistent to what we expressed at capital markets day.
Looking forward, we are confident in our ability to deliver continued capital efficient growth from 2020 level over the next few years to quantify that we expect to be able to deliver annual adjusted EPS growth on average in the low double digits.
I want to highlight that we are accomplishing that while continuing to invest in innovation building new capabilities and strengthening our platform.
Strategically we have made tangible progress in extending the breadth and depth of our clinical and operational capabilities fueled by our digital transformation in several areas we.
We believe that these capabilities in our platform will create a competitive advantage with a focus on our patients Nephrologists partners and payer partners.
I'll go see a path to using these capabilities to improve the quality and value of care for our patients across the health care delivery system.
For example, we're personalizing the care for patients across the kidney care continuum using proprietary system weve been developing for years in partnership we've been with industry leaders, including epic Cerner Salesforce and Google.
We have more to do to effectuate our strategy, we're beginning to see the benefits from these tools in the form of AI driven model that personalized dosing for certain therapeutic anticipate patients clinical data and help avoid hospitalization anticipate patients who may drop off from therapy and I.
Benefits CKD stage, four patients who are likely to progress quickly to yesterday and help avoid unplanned dialysis starts.
As we place these tools and information in the hands of Nephrologists and our caregivers, we envision three significant benefits one in.
Labeling that best in class patient experience delivering individualized care at scale.
Enabling our position us to deliver industry, leading clinical outcome and three lowering the total cost of care of kidney care population through avoiding disruptions caused by preventable hospitalization stayed in changes in modalities that are not clinically driven.
We're also making strategic progress in our shift to value based payment model over the last decade, we've built capabilities and real world experience managing the total cost of care for yesterday patients through our partnerships in the unique relationships and access we have to more than 200000 dialysis patients.
We've developed a model of care that is tailored to the specific needs of dialysis patients and have applied that to a variety of value based payment models, including shared savings in full capitation.
Our discussions with payers about using value based arrangements to align incentives and drive better outcomes have accelerated in recent quarters on the government side, we're carefully considering the models for value based arrangements developed by CMS.
On the commercial side, we continue to contract for pay for performance model for both yes, R&D and CKD patients.
We're also using the expected growth of Medicare advantage in the it started to population to accelerate conversations with any plans about new payment models.
We're excited for the momentum toward value based care and we're prepared for opportunities to partner with government and commercial payers.
We believe that our current capabilities deep experience and national scale, given just the pure platform for delivering value to our partners patients and payers.
Now I'll turn it over to Joe who will discuss our financial results and outlook in more detail.
Thanks Javier.
Three results reflected another quarter of strong financial performance for it to be.
We significantly outperformed expectations as a result of strength in the underlying business and the benefits from some nonrecurring tailwinds.
Start my comments with Q3, then cover our guidance for Q4, and some thoughts about longer term outlook.
Adjusted operating income for the quarter was $438 million, a sequential decline of approximately $24 million compared to the adjusted Oh why in Q2.
This decline is primarily the result of two things.
First is the ballot in California, we contributed approximately $66 million for the industry initiative to the fee prop 23 in Q3 in line with our expectations for full year impact from ballot initiative costs of approximately 50 cents per share.
Second we saw an approximately $50 million Oh why improvement in Q3 compared to Q2 from Cogan.
On our last call I cited an estimated $20 million to $30 million of net cost associated with Kobe <unk> in the second quarter we.
We expect it could be the impact in Q3 to be similar to Q2.
However, we actually experienced a net positive impact of approximately $20 million to $30 million in the quarter.
$15 million favorable swing over last quarter at the midpoint of the ranges.
This was the result of significantly lower direct costs from from coated with almost no change in the offsets we saw in Q2.
After adjusting for these two items.
Underlying earnings power of the business remained strong in Q3 and consistent with Q2.
Looking forward Coburn remains a source of significant uncertainty of course, it depends emick remain difficult to forecast and its impact on nag commercial mix and the operating expense creates a wide range of potential outcomes for Q4 and for 2021.
Driven by the strong performance in Q3.
In anticipation of another strong underlying results in Q4, and allowing for a range of potential kobin related costs.
In California were to pass and be implemented we expect that there would be a material cost and operating challenges to comply with its requirement in 2021.
Third.
Cobiz is impossible to predict although our current expectation is that could it could be a significant headwind next year.
The negative impact on Nag accumulates overtime, so we'd expect our year over year growth in treatment volume to continue to be depressed, even as the direct impact on our patients diminishes.
We also expect to lose the benefit of Medicare Sequestrations suspension.
And expect some of the other mitigating like lower health benefit expenses and travel costs to reverse.
The impact on commercial enrollment has been lower than expected to date, although the longer term impacts of cobot on the economy could result in mix deterioration in 2021.
We're also seeing increased unit costs for people.
They are likely to be a headwind for 2021.
We believe the one potential tailwind from co bid would be a reduction in some of the direct cost that we incurred.
In the early on in the pandemic.
Next while the contribution from Calcimimetic should be relatively flat year over year, we will no longer call. It out as nonrecurring as it becomes a permanent component of our run rate.
Other swing factors include potential changes in Medicare advantage enrollment and potential costs associated with initiating value based care contract.
A few additional items since our second quarter earnings call, we repurchased approximately 10 million shares of our common stock. So our share count as of today is approximately $112 million for your EPS modeling you also need to consider the dilutive impact from outstanding equity awards, which in the third.
Third quarter was approximately 3 million shares.
Finally, as a result of lower LIBOR rates and interest expense from debt financings that we have completed this year, we expect quarterly debt expense to be approximately $65 million in Q4 with that operator. Please open the line for QNX.
Thank you at this time, if you would like to ask a question you May Press Star one to ask your question to withdraw. Your question you May Press Star two please unmute your phone so state your first and last name when prompted.
Our first question comes from Kevin.
Just back from Bank of America, You May go ahead Sir.
Great. Thanks, I guess, maybe just starting off with the guidance commentary I appreciate the headwinds and Tailwinds as you were discussing which are really good stuff [laughter] 2021, but I'd just to be clear in your double digit EPS growth Youve incorporated a reasonable assumption for all these headwinds or tailwinds in that double digit.
Growth assumption over the next couple of years.
So yes, Kevin we did and I'd just point out that that EPS guidance is multi year, it's not for next year, specifically, but yes, we have taken into account.
The headwinds and Tailwinds that we pointed out.
And the base number is that 735 to 760, you mentioned up or kind of one time items in the quarter I want to make sure that you are saying that secretary. If I was ever 60 is the base off of which to use that growth rate yes.
Yeah, I think I think this year is a good base.
Okay.
And then I guess as far as M&A goes you Didnt, specifically I don't think mentioned that being a headwind or tailwind or they just kind of I stat and uncertainty.
Can you talk a little bit about your thoughts on how I may is shaping up and any update on that and then a contract.
Sure Kevin So there's a bunch of dynamics in that so let me grab them one at a time number one we continue to think that the enrollment and then they will be gradual consistent to what we said in other quarters.
Number two the open enrollment it just started and so we don't have anything to report on it and even if we were further we have very little visibility. So we will wait until basically.
January when we get the numbers and then lastly, as it relates to Humana, There's a couple of things that I would say.
Normally we don't talk about individual account.
But on this one since they got public I'll make a couple of statements I think the broader question a that.
We should address is is there a big bolus or a wave of negotiations coming out of the M&A and the answer is no humana is the exception.
We are comprehensively contracted across and they book and so we're in a good spot and the majority of our portfolio is contracted beyond 12 months as it relates to Humana, specifically being notified us of a non renewal a were in a very constructive dialog with them on a risk.
Deal and as you know the risk you will take some time.
So we're negotiating with them and we hope to get the issues resolved.
Okay, Great and then I guess just last question for now.
You mentioned in the quarter that commercial pricing was a headwind even though because it was a tailwind for the year to date. So that's what happened in the quarter is that a onetime item or there is something that we should be thinking about.
Going on there.
Yes, Kevin it's much more of a one time thing I'd I'd continue to focus on the full year over year, rather than focus on the individual quarter.
Okay. So you wouldn't expect that to be a Q4 impact as well.
No.
Okay, great. Thanks.
Thank you.
And our next question comes from Andrew Marc with Barclays. Please go ahead Sir.
Hi, good afternoon. Thanks for the question.
Javier back in May you mentioned that peak level of unemployment matters more than the shape of the recovery. We're now at the end of October and keep unemployment at least the headline number is likely to find out how does that pick number combined with the internal data you see on Cobra uptake shape your thinking on the potential impact that commercial mix may have on your business in 2021. Thanks.
[noise] yeah. Thank you Andrew I don't know when the peak will be on unemployment so.
So what we have seen from from our patient is that there have been incredibly resilient about trying to keep their jobs and their coverage. So we are very happy with where we are right now in mix as it relates to where we were a couple of quarters ago, meaning it's held up.
But then of course, we don't know, where the pen, which which direction. The pandemic will go and how the labor markets will go.
But that is right now where we stand today, we're in a stronger position than I thought last quarter.
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Got it that's helpful. And then secondly can you help us quantify the impact on treatment growth between patient mortality from co bit and slowing the girl sources. Thanks.
Sure Andrew It's Joe here I'll take that one so.
We as you look at the impact.
NAD co there really five things that we think about mortality transplants, Ms treatments acute and new patient starts and if you go back last quarter mortality was was the biggest headwind and then transpire.
Hansen Ms treatments were small tailwind and acute and new starts were small headwinds the four things other than mortality have really played through and maybe either diminished or Dave reversed and as we see it now obviously things could change but largely.
Those things are not playing through for NAD going forward. So it's largely a mortality story.
Got it thanks for the color.
Thank you thank you Andrew.
And our next question comes from Justin Lake with Wolfe Research.
[noise] do thanks.
Hi.
Wanted to follow up first.
On the 2021 headwinds and Tailwinds.
Just trying to think about when you look at coal where did you talked about it could be a significant headwind next year.
But you do have the lack of advocacy costs to kind of offset that do you look at those right now is being neutral.
And overall headway into a normal tailwind without giving too many specifics.
Yeah, I'd say, Justin it's too early to tell there is really a lot of uncertainty about what what cobot has in store for us for 2021. So I don't think we're in a position right now to give a sense of order of magnitude.
Okay, but we know the lack of advocacy clauses gigawatts or the 50 cents number that you're talking about you're saying these cobi costs could be.
That march or more depending.
Depending on what happens over the next few months into next year.
Yes. So look you have to think about co bid along a few different dimensions. There. There's the direct costs knows those could remain flat. They could go down they could go up theoretically as well I'd say a lot of uncertainty there there are the offsets and from where we stand right now.
Now the Medicare sequestration relief is going to go away unless something new happens there and that will clearly be a headwind the savings we've experienced some benefits is likely to be a headwind as well as as our.
Teammate start going back and getting the care that they need and then T. Any is a question mark so there that some of the the impact around the cost and the offset numbers and then what you've got to add to that is the impact on volume and remember that accumulates.
So the impact from Q2, plus Q3 will likely be a we will continue to be a headwind till those declines anniversary and that will take a while and then the impact on mix is unknown as Javier said, it's been a lot better than we ever expected, but we don't know.
What what Cogut has in store for the economy going forward.
Okay, and then you mentioned mix I think it was in the release, you said mix trended down in the third quarter versus Q2.
Or against you, but can you give some more color in terms of how much mix change you saw there.
Now I'll grab that Justin there's not a lot that stood out on mix, so I'm not sure what weve.
What you're citing there, but but theres nothing that I would point to that's relevant for your model.
Okay, maybe I'll just run back and then.
Last question just another follow up on Kevins question on Japan on.
The show.
They're out of network I know you are having a conversation with them if they are out of network.
For 2021.
You've already told us it's going to be in a slow steady growth in Medicare advantage and do you think you know I know somebody is going to depend on what are you retaining numbers and I think you know that might even paying you a little more than average.
We are supporting them. So when you net it all out you think it's possible that Medicare advantage could still be a positive meeting.
Throwing off to offset the humana losses.
Or do you think this ends up being more like a neutral or maybe even a headwind given that you are seeing that engine that altogether.
Yeah, I mean, obviously, there's a couple of pieces there number one is enrollment and do we get it right that is gradual I think again, we will get that right.
It relates to the contracting as I said were comprehensively contracted so we think that we've got it in the in the right box.
And again, depending on Humana, it's a it's a decent sized player.
I think it's embedded in our guidance, but but I don't think its going to be anything that sticks out in your model is a big up or down.
So those variables will move in a.
In a band that won't.
I don't anticipate it will be too too big.
Got it thanks for the color.
Thank you.
Our next question comes from Lisa Clive from Bernstein.
Hi, there.
Two questions yet.
On the on the previous question.
It did mention on the revenue there was the quarterly change was primarily due due to a decrease in commercial that need for treatment. You mentioned that was really sort of one off.
Favorable changes in setting government payer mix, so that was sort of particularly.
Oddly freeze and then a declining catherine that it sort of as expected.
I just wanted to circle back to make sure there's nothing for that.
Going on in in patient mix, and and particularly if there was a bit of a headwind that would sort of be odd given that I understand but the mortality that you're seeing amongst covered patients is it.
It's mainly elderly patients so if anything it would be a slight tailwind to patient mix and.
And then so just some clarification then that would be great and then the second question.
For your extra cover bid costs around your teammates.
What proportion or sort of how much of that was for child care and that could that possibly decrease notably now that schools are back in person said, most part and hopefully we'll continue to be.
Yes, so Lisa let me grab the R.P.T. one.
The the the government stuff is a seasonal thing that happens typically in Q3 around re enrollment in Medicare in terms of the commercial side you are right that Kobe. It is a small head a small tailwind it helps our commercial mix to some extent.
Because mortality is differentially impact.
Impacting older patients were more likely to have.
Have Medicare.
Okay.
Perfect. The second part was around the cost of childcare, Yeah, I don't think it's going to be a fascinating to see what happens with the schools I don't know my kids in what I'm hearing from our teammates is that it's been very fluid Weve had a wide range from.
People that have been Ah stay at home the whole time to all the way to full time in school and somewhere in between there has been positive starts and finishes. So what we're trying to do is support our teams and create the resources. So that they can go to work and so we've got some safety nets and different programs that we're funding.
And we hope that we haven't covered of course, if this gets materially worse than that and we go back to a really acute shutdown everybody will be in the same pickle.
So we prepared for that and and again, it's all in the bandwidth of how this pandemic behaves.
Okay. So it sounds like.
People still do you need the extra support so so it's not it probably isn't.
The cost probably aren't decreasing on your end.
At this point.
Yeah at least I mean, it was like the different parts of the country are at different.
Ways of handling the education system, and so we're seeing different pockets of expenses in demand.
And constraints on our teammates and how they're handling their child care. So it's been bumpy and regional yeah.
Our broadly I'd say as we think about the code impact on Q4, our expectations is it a look closer to what we saw in Q2 than Q3, and it's likely to be a negative.
Rather than the positive we saw in Q3.
Okay. That's very helpful. Thank you.
Thank you and sorry, just to clarify that encompasses everything right that yeah, it's not the narrowed land of education, yes.
Yes, yes. Thank you.
And our next question comes from Tito Chickering with Deutsche Bank You May go ahead Sir.
Hi, Good afternoon, guys. Thanks for taking my questions I'm a few questions for you on the fourth quarter guidance. It looks like in third quarter, you had a 50% operating income margin despite $66 million of ABS, it get advocacy costs and you're guiding to margin declines in the fourth quarter QQ somebody's or quantify what is implied within the fourth quarter Mark.
And then a little more detail on the positive could impact you had in the third quarter I was a little unclear on that.
Yeah, so for.
For Q4, I think there are two things driving it first is co bid and as I. Just mentioned we saw co bid was a call. It 20 to 30 million positive to apply in Q3 for Q4 were expecting something more like what we saw in Q2 so.
A large reversal and.
So thats the biggest driver of the Q4 decline over Q3, we're also anticipating some seasonal and other stuff that will likely drive the more the kind of the underlying earnings power for Q4 down a bit but cove. It is the biggest driver of the margin.
Klein that we talked about.
In terms of.
Q3.
As it relates to cope with what what you really see there is a bunch of positive impacts to the TNL associated with co bid the ones I'd call out most are the sequestration suspension lower t. any lower benefit costs and the the deal.
Direct costs that we saw in Q2, largely went away not completely went away but to a large extent went away and the result was the offsets were larger than the direct cost and Thats why code was a net positive for the quarter. Okay.
Okay. So, saying if you take the midpoint of your fourth quarter operating guidance say $420 million.
We as you know as you mess for 2021 and $60 million of covert swinging into the sort of the core.
Run rate here should be in a 470 range.
If we annualize that is that's how we should be seeing that from a base running between 21 or something you know assuming that covidien slows down or is there anything that wouldn't sort of skew that logic, one way or another way.
Ballot initiatives and Kobe. It is the right way to think about the starting point for a model for next year. Okay. I will point out to as I said calcimimetic, but remember we called out Calcimimetic says roughly flat in 2021 versus 2020.
The reason I call. It out is because in 2020, we viewed it as nonrecurring in 2021, it will be a recurring part of ROI. Okay. And then one more follow up question for you. How we're hearing that home dialysis is continuing to accelerate I was really help quantify what the operating margin leverage is for every 100 basis points of pieces move.
MS Center into home how much of a margin impact is that to your bottom line. Thanks. So much. So yeah, we haven't given that number it's a it's a very complicated question and it it moves over time, it depends which patients are moving from in center to home. So.
We generally shied away from trying to put a specific number on that but overall it is a knot is a the move the whole overalls and net operating margin improving for you correct yes.
Yes. Thanks.
Thanks, so much.
Thank you once again, if you would like to ask a question you May press star one on your telephone keypad.
Our next question comes from Whit Mayo with you. Yes, you May go ahead Sir.
Hey, Thanks, and a follow up on that last question just a different way what's the difference in the non acquired treatment growth profile Oaks in clinic versus home I know home is growing much faster as Peter alluded to but if we stripped out the home what would be in clinic growth rate look like.
Yes.
Uh huh.
We.
Sorry, Whit I'm struggling well first of all it's a hard number to give in the context of co, but where where nag is moving around so much are you asking now were you asking kind of pre kobin.
Pre covert.
We've what we've historically said is that.
The home is growing about five times faster than in center.
Yeah.
Okay, well, maybe just follow up on maybe kind of a rule of thumb to think about the conversion of in clinic and home I'm, sorry, not not was not asked.
No I guess I'm, just trying to kind of if we're if we're growing let's say, 1% at the enterprise level on nags.
And at home is growing.
8% or 10% then I guess.
We can follow up but it's fine.
I may have missed this earlier, but what was one time about the commercial revenue declined in the quarter was just normal pay or settlements or just one against you.
Just normal fluctuations nothing nothing worth, noting nothing that I think will recur in any way or has any impact on how to think about our commercial rates going forward.
Okay, and maybe one more just stuff I don't know if you gave this already and I missed it but the council medix RPT and the cost per treatment.
I have not given those but I've got them handy hold on one second so for Q3, our P.T. per Calcimimetic Switz $6.31.
And for and cost per treatment were $4.31.
So if you think about the Oh why from Calcimimetic in Q3, it was about $15 million.
Okay.
And the expectation maybe for the fourth quarter event I know, we've got a ASP down a bunch.
Yes. So we've we've called out 50 to 70 would be at the high end of the range. I think we can continue to think will be near the high end of the range, we might actually be a little bit above it.
Okay. That's helpful. Thanks, guys.
Thank you. Our next question comes from Gary Taylor with Jpmorgan.
Hi, good morning.
Joe maybe just going back to the home versus end Center. You. You said it was a complicated question someone ask it a little more.
Complicated fashion when when you talk about the home incremental margin you know is that percentage or dollars and when you think about.
You know a center thats up and running and the contribution of an incremental you know patient versus.
A sort of a fully loaded patient does that change how you. How you think about the answer and then does PD or her home hemo change how you answer the question.
Yes, so I.
I, it's true for both percentage and dollars.
In terms of the other things you cited all those things factor in there.
Into it as does try.
Treatment as does a commercial mix and a bunch of other things right.
Okay I think.
That's helpful. I think I understand which way those upswing I was just looking on advocacy costs $66 million in the quarter those were immaterial in the two q. I think.
Yeah that right and I and a year ago.
Third quarter of 19, I would've thought.
They were immaterial I couldn't find them in my notes.
If you don't have an anti IL Oh took areas as a reminder, we think about our advocacy costs in two buckets, there's about a $30 million number that recurs year after year, and that's really not what we're referring to thats baked into all our other numbers. This is the advocacy specifically related to.
Prop 23, the California ballot initiative, which happened in 2018. So there was nothing in 29 team. It's in right now, it's an even year no extra okay issue.
Just two more quick ones. If I could you haven't really talked about E. T. C. I'm very much and you Didnt cited in your headwinds Tailwinds how are you thinking about.
A treatment choices next year.
Hi, Gary Thank you I'll grab that the PC came out cleared out some things made some improvements which were very appreciative to the administration that they heard from the community. We're going to obviously work really hard to meet their objectives, because they're aligned with our objectives with.
Just to get more people to the right modality and to make sure that as many people as possible can get transplant.
If you're looking for something as to what the plug into your model. The reality is it's a bit early but I'm going to use CMS as what the what they said they said that it would be a saver of $34 million over six years.
And so.
And that's for the entire industry. So if you grab a third of that and so my understanding is it's a little more forgiving on the front end and then it grabs a little more on the backend, but as you can see the numbers.
Our digestible.
And then last one.
Any thoughts around how the veto might eventually participate in CMS direct contracting and.
A lot of ways at the surface that sounds like exactly what you've been asking for you know for CMS for your patient population.
For a long time, so you know it does seem like potentially there'd be I don't know how you play out through the passive enrollment, but seems like there would be an opportunity to some voluntary.
Enrollment potentially in your population I'm sure you guys have probably looked at it any high level thoughts on it.
Well, we are you're absolutely right. There we continue to explore every option. We continued to go after kidney care Act and we are evaluating all of these voluntary models they come out with rules as we go and so they're quite dynamic and so one.
Today, we're very excited about one format and then the rules come out and it is a either a disappointing are harder for us to participate in it and so we continue to evaluate it and we will get back to you. Once everything is finalized yesterday actually for the voluntary models.
The financial structure came out it's a roughly 100 pages and so we're still digesting it and but we'll be back to you when we have a conclusion.
Thank you.
Thank you.
Thank you and our next question comes from John Ransom with Raymond James You May go ahead Sir.
Hey, good evening everybody.
Just kind of stepping back and asking maybe a bigger question media.
I mean, it would seem like the incentives are aligned between my plans, taking capitation for Medicare and then working with you to capitate These high risk patients.
Certainly you had eight years experience with Davita medical on capitation.
I guess, it's just not clear to me.
Are we going to be stuck in a fee for service land 5000 years analysis is going to move like glacially or what's the impediments for.
Getting this into a more global discussion because it seems like we're just.
So where we were you know 510 years ago in terms of like 99.9% of your revenues are still being just speak for service and you have these food fights over you know dollar here at dollar there I mean, just what's your perspective there.
Thanks, Jeff.
Well, we we agree with you that there is a big movement and right now there is appetite there is momentum there's a lot of interest. These deals are a lot more complicated to do setting up the baseline setting up the incentive so they're multi year. So we can do the investment but to your point, it's taken us.
While but I think that there is a intersection point right now of momentum. So it takes two to tango and it feels like the the other side is willing and we are ready and so I think over the next couple of years, you're going to see a lot more of these deals come across.
Great.
And then my other question is just that if you go back to your last analyst day, and you laid out your targets I mean, there's obviously been a lot of noise or whats kind of it and some temporal factors of if we step back and look at what you saw US then and what we think is changed structurally in the business of what would you point out that it's changed either positive or.
Negative as we think about the.
Earnings power of data.
Yeah, So oh I'll take that.
Fundamentally we made a lot more margin progress than we thought quicker than we thought we could.
And part of that comes from our P.T. part of that comes from cost management on the RPT side I wouldn't point to anything specific there is there's some mix in there there are some rate both commercial and Medicare that has improved bad debt. So it's pretty broad.
Based and similarly on the cost side I think we've done a great job on productivity, we continue to see benefits on the pharma side, we manage some of the non people costs than the clinics extremely well. So overall driving the O. line margin has been important and then below the line.
Interest costs are way down and we bought back more stock faster than we thought we would so there's no magic bullet in there it's pretty it's pretty balanced across the the income statement, but we're we're super proud I think.
The results have been strong and we're really excited with where we are right now.
And if we were just to say like in the old World. If next are the same and the world was the same as it was are you still having you know score certified silver commercial contracts and revenue for treatment and we're not talking about Medicare or have we sort of gotten past appeared as contentiousness.
And.
Some of these unfortunately negotiations or your six years ago.
Well, John I mean to be honest with you. It's it's weird, what what analysts and others here because at the end of the day, the negotiation tend to be quite constructive and productive most of the time and maybe it's that you hear of the outliers that are really contentious.
But on average we all try to get to the same output, which is can we deliver more for the patients can we offer the best network and Ken when you bring it in a way that flattens or improves the cost curve and so we all sit down with the same.
Goals in mind, and then it just sometimes it happens to be the people.
Either us or perceived does.
Getting greedy or them perceived as being greedy oh, so there's not a meeting of the mine but.
But if you if you talk if you go back and do an inventory of how many of those were so contentious and.
And and drawn out you can count them in your hand and.
So maybe we just tend to remember him 'cause they are oh visible.
Right.
All right. Thank you.
Thank you.
Our next question comes from Matt Liberal with William Blair You May go ahead Sir.
Hi, Good afternoon, Hey, Joel I do want to take one more swing at sort of the kovar dynamics Threeq to Fourq, you and appreciate that the tendency to quantify it. This is challenging but just directionally I'm still trying to make sense in my head which of those factors.
Would be reversing in terms of the d. impacts from a positive negative standpoint from Q3 to Q4, and maybe just at least understanding which items are expecting reversal and Mike might help.
Sure. So it's a little it's a little bit more on the direct cost side.
It's a little bit more impact from the treatment volume decline and it's a little bit from reductions in the offsets. So it's coming from all three of those buckets.
Okay.
And then Javier the interesting update on the kidney smart platform in some good metrics. There just curious where are you seeing the most adoption.
And then just would be curious what maybe your economics, if any it looked like a linear.
When you're partnering with folks to provide that platform.
Yeah, the economics are not there so.
So it's free and access to all the community and so the anyone could could get it in the whole hope there is of course that people can transition to modality planning.
In many instances just good mentally.
Mentally acclimated to the lifestyle change that you're going to have and so it is just literally a gift to the community and hopefully helps people transition into.
What is likely to be a very big lifetime lifestyle change.
And so we're very proud of it it's it's a if you ever gone and it's very comprehensive but easy to understand and we think it's making a real impact in the community.
Sure. Thank you.
Thank you.
Our next question comes from Kevin Fischbeck from Bank of America, You May go ahead Sir.
Great. Thanks, a couple of.
Follow up questions here appreciate.
Appreciate you.
Breaking down the guidance that you'd be a little bit maybe you could break down the building blocks a little bit more of the operating income growth is there a way to think about.
You know how much revenue growth versus continued margin expansion you're already above.
You targeted for your point quite your margins, so sorry to grab that there's there's more room to go there.
Yes, Kevin I think it's it's a bit early for us to get into that level of detail that can obviously play out in different ways over time, depending on some industry dynamics could also depend on some capital allocation dynamics. So.
I think we're going to stick with just Oh why in Es.
Okay and then other question just being you talked about.
Got it and then about doing a capitated type contract and.
You based contract I guess and.
That broadly speaking, there's a lot more doing these types of things how should we think about the profitability of these types of contracts is not.
Not specifically humana, but just in general like.
When you enter into these is the expectation that you would be doing it as a way to kind of maintain the current economics that you have on those patients or is there a view that since you're taking risk.
You should be paid more and maybe making more off that patient for for inherently taking risk on top of just the fee for service structure than the past.
Yeah, I mean, it's a it's a fair question, Kevin and the reality is that there is not a simple answer the starting point matters and the baseline of the structure of Ah matters and then in some of these you have to invest upfront to get the returns on the backend and so there's.
Not a smooth.
You know the answer to that but in general I think what we're all trying to do here is a bend the cost curve and then if we can create a bigger pool for us to play in and participate in that hopefully we can participate in that but it takes it takes some investment upfront and so.
How I think about it.
Okay, and I guess in the past you had issues with some of the way the government structures bid, where you're going to have this consistence you know.
Adjustment to the baseline as you deliver savings you're get reimbursement gets caught up with some of the.
Prior demos of words, my assumption is that the conversations with managed care or more.
Oh amenable I guess in in their structure, but they're kind of more.
Tied to the overall and may rate, rather than two and the savings that you deliver.
Yeah, usually an M&A of course, you have risk adjustment and so on that you get to acclimate to the patient there and how sick they are and the other government programs. It's been a little black box fish and then all of sudden at the end of the program and then after X amount of months.
You find out that you were rebase. So it just makes it really hard to forecast how aggressively you want to invest and that's been the biggest challenge.
Challenge that we've had with the government programs and in a in the opposite goes for M&A that you could actually understand your risk you can understand your level of investment and the upside and downside.
Okay, Alright, great. Thank you thank.
Thank you.
Lisa Clive from Bernstein, you May go ahead.
Hi, there I'm just one follow up question about home Dallas is perhaps a different way of thinking about it the profit impact is.
Is there a notable difference in the length of time that a patient days on their private insurance when they're in the clinic versus at home I imagine if they're getting from Dallas if they can.
Can stay employed so does that materially impact and impact the number of months abaxis privately insured.
The short answer is no there is nothing magical about home versus private insurance, there's a pre selection bias maybe that more people that work will pick home and so if you might recall from capital markets. The other thing that's really important to remember is that.
Roughly 85% of our patients die lies at home.
Hi lies in a center at some point.
And so either on the front end around the backend or even during their care and so we've always debated you know or some of these dynamics that you're trying to get to that.
Economically or length of private pay et cetera is it because of the modality or is it because of the patients have picked a modality and we don't know.
Okay. Thanks.
Thank you.
And at this time I'm showing no further questions.
Okay. Thank you Michel let me make a couple of closing comments.
Well it goes without saying it is a challenging environment out there and so I just want to thank again, the dedication the caring and professionalism of our team. It has really energized our entire organization.
Secondly, we've delivered on the commitments that we made to you ahead of schedule and we are really well positioned to deliver on our multiyear earnings growth stay safe and thank you for your interest in Davita.
Thank you this concludes today.
Today's conference call you May go ahead and disconnect at this time.