Q3 2021 DaVita Inc Earnings Call
Yeah.
Good evening My name is Michelle and I will be your conference facilitator today.
At this time I would like to welcome everyone to the Davita third quarter 2021 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 number one on your telephone keypad if.
If you would like to withdraw your question. Please press Star then the number two thank you. Mr. Gustafson you may begin your conference.
Thank you and welcome everyone to our third quarter Conference call. We appreciate your continued interest in our company I'm, Jim Gustafson, Vice President of Investor Relations and joining me today are Javier Rodriguez, our CEO and Joel Ackerman. Our CFO. Please note that during this call. We may make forward looking statements within the meaning of the.
Federal Securities laws. All of these statements are subject to known and unknown risks and uncertainties that could cause the actual results to differ materially from those described in the forward looking statements.
Further details concerning these risks and uncertainties. Please refer to our third quarter earnings press release, and our SEC filings, including our most recent annual report on Form 10-K, and subsequent quarterly reports on Form 10-Q, and any subsequent filings that we may make with the SEC.
Our forward looking statements are based upon information currently available to us and we do not intend and undertake no duty to update these statements except as may be required by law.
We would like to remind you that during this call we will discuss some non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our earnings press release furnished to the SEC and available on our website.
I will now turn the call over to Javier Rodriguez.
Thank you Jim and good afternoon.
Q3 was another strong quarter for Davita in the face of a challenging operating environment.
Despite another ryzen Covid case count across the United States and an increasingly challenging labor market, we continue to provide quality care to our patients and execute on our strategic objectives.
I want to begin my remarks by highlighting an exciting milestone we surpassed 15% of our patient dialogues at home.
Means in approximately 30000 of our patients received the clinical and lifestyle benefits of home dialysis.
As we've explained before to be sustainable provider of home dialysis. It requires a comprehensive infrastructure, including convenient and easy access to a home center for training session.
And recurring visits with our care teams.
Our current network of centers provides easy access such that 80% of our dialysis patients live within 10 miles of the Davita home Center.
In addition, we continue to innovate on our platform to help make home dialysis and easier choice for patients and their physicians and to extend the duration on home dialysis once patients have made that choice.
A few highlights of note.
First we recently rolled out an enhanced education program, along with supporting technology for a new patients to ensure that they receive timely and comprehensive modality education, which is tailored to each patient's individual needs.
We also continue to work on additional enhancements and customization to our education process for different communities, such as black and Hispanic patients to improve their chance of selecting this modality and therefore improve health equity.
Second we develop a patient portal and telemedicine platform that support remote monitoring and communications between Davita caregivers.
<unk> partners and our home patients.
Third we develop a team of industry, leading whole position to create an expert network, which works closely with practicing physician and practice leaders to help them understand the benefits of home modalities troubleshooting complex clinical issues and elevate their home clinical skills.
Last we're testing out our AI and other technology to optimize PD prescription.
<unk> physicians in real time, when an update prescription might be needed.
We will discuss the strategic advantages of our platform in greater detail on November 16th on our virtual capital markets day.
Onto our Q3 results our business model continues to prove resilient and pace of operating challenges Q3 operating income grew approximately 9% year over year when adjusted earnings per share grew by more than 31% over the same period How's.
However, the ongoing Covid pandemic continues to take its toll on too many of human lives in the world at large and amongst our patient.
Across the broad U S population the current surge driven by the Delta variant appears to have peaked in early September with new case counts, reaching approximately two third of the peak during the past winter Fortunately within our dialysis patient population. The new case counts peaked approximately one third of the winter peak and mortality.
<unk> rates were relatively lower likely due to the vaccination rates amongst our patients.
Incremental mortality increase from fewer than 500 in Q2 to approximately 2000 in Q3.
After quarter end Covid infection have continued to decline with our new case count during the week ending October 16 down by approximately 60% relative to the recent Delta peak.
Switching to vaccine approximately 73% of our patients have now been vaccinated. In addition, we have started the rollout with vaccine boosters for eligible patients in accordance with CDC guidelines.
We are hopeful that any future COVID-19 charges and breakthrough infection will be more limited relative to what we saw in the peak of last winter.
Shifting to cost cost management continues to be strong in the quarter. Although we are facing the same competitive dynamic in the market for health care workers and other companies have mentioned.
Despite these challenges I'm pleased with how our frontline leadership team has been responding.
It has long been a key part of our mission to be the employer of choice.
How we live this aspect of our mission has been evident throughout the pandemic as our team has retained relentless focus on the safety and care of our patients as well as one another.
As we have discussed in past calls, we continue to offer a safe and fulfilling work environment and have provided incremental pay and benefits to help our frontline caregivers during this challenging time.
These efforts are ongoing given the current environment, we expect to provide our teammates with higher annual compensation increases and in typical years.
This will put additional pressures on our cost structure, but we believe this will help us attract and retain the talent needed to achieve our long term objective.
Just as critical and aligns with our mission and builds on our history of investing in our people.
Finally, I would like to say a few words about integrated kidney care or I can't see last quarter. We shared details on our planned investment in AKC and long term opportunity this creates for patients payers and our shareholders.
At the end of Q3, we now have over 22000 patients in some form of integrated care arrangements, representing $1 7 billion of value based care contracts next year, we expect to approximately double the size of our <unk> business driven primarily by our participation in the federal government.
New peak Casey program.
It is still early and contingent on successful execution.
We believe that the investing in AKC represents a new and potentially meaningful earnings opportunity for us in the coming years. This is another area, we plan to discuss in detail at our upcoming virtual capital markets day.
With that I will turn it over to Joe for more details on the quarter.
Thanks Javier.
Spite the operating challenges Javier referenced we delivered another quarter of strong results operating income was $475 million and earnings per share was $2 36.
Our Q3 results include a net COVID-19 headwind of approximately $55 million, an increase relative to the quarterly impact that we experienced in the first half of the year.
As Javier mentioned the latest Covid surge resulted in excess mortality in the quarter of approximately 2000 compared to fewer than 500 in Q2.
We're also anticipating the mortality in Q4 to be higher than it was in Q2, although we have seen a decrease in the last few weeks that we hope continues.
Our current view of the Oi impact of Covid for the year is worse by approximately $40 million compared to our expectations from last quarter for 2021, we now expect a total net COVID-19 impact of approximately $210 million.
Treatments per day were down by 536 or <unk>, 6% in Q3 compared to Q2.
The primary headwind was the increase in our estimated excess mortality and higher missed treatments as a result of the Covid surge. In addition, the quarter had a higher ratio of Tuesdays, Thursdays, Saturdays, which lowered treatments per day for the quarter by approximately 300.
In light of the current Delta surge and the compounding impact of mortality on our year over year growth. We believe that the timing of a return to positive Nag will now be delayed into 2022.
Revenue per treatment was essentially flat quarter over quarter.
Patient care cost per treatment was up approximately $5 quarter over quarter, primarily due to higher teammate compensation and benefit expenses.
This is the result of higher wages additional training costs associated with an increase in our new hires and seasonality in health care benefit expenses, which we expect to continue into Q4.
Our integrated kidney care business saw an improvement in its operating loss in the quarter, which is due primarily to positive prior period development and our special needs plan.
We continue to expect increased cost in Q4, especially in our projected ckc markets as we ramp up staffing in preparation for 2022.
Dsos for our U S dialysis and lab business increased by approximately three days quarter over quarter, primarily due to fluctuations in the timing of billing and collection.
Other loss for the quarter was $7 6 million, primarily due to a $9 million decline in the mark to market of our investment in neuro matrix the value of this investment at quarter end was $14 million.
Now turning to some updates for the rest of the year and beyond.
As I mentioned on the Q2 earnings call, we excluded any impact of a significant surge in COVID-19 from the Delta variance in our revised guidance, but noted that a wider range of outcomes with possible depending in part on how a fourth surge would develop.
Now that we've seen the impact of the Delta surge, we are increasing our estimate of COVID-19 impact for the year by $40 million.
Given where we are in the year. We are now incorporating this COVID-19 impact into our revised adjusted <unk> guidance of $1 76 billion to $1 eight 1 billion.
We are also narrowing our guidance for adjusted EPS to $8 80 to.
To $9 15 per share.
And we are maintaining our free cash flow guidance of 1 billion to $1 2 billion.
Although there is some chance that our free cash flow may fall below the bottom end of the range, depending on the timing of our DSO recovery.
Our revised guidance.
Implies a decline in our Q4 financial performance relative to Q3.
This is partially explained by the incremental COVID-19 mortality impact and by expected higher salaries and wages for existing frontline teammates.
Our guidance anticipates Q4 operating income to be negatively impacted by approximately $75 million of seasonally high or one time items, including certain compensation expenses elevated training costs higher health benefit expenses.
And G&A.
Looking ahead to 2022.
Three expected headwinds I talked about on the Q2 earnings call remain as a reminder.
We expect to have added expense related to the <unk> portion of the industry effort to counter the ballot initiatives in California.
We anticipate a year over year incremental investment in the range of $15 million as we continue to grow our <unk> business and.
And we will also begin depreciating, our new clinical IP platform, which we expect to be approximately $40 million.
A few additional things to help you with or thinking about 2022.
Covid remains a big uncertainty.
We are anticipating the end of the temporary sequestration suspension, which would be at $70 million headwind for the full year.
We also expect that some of the costs that spiked during COVID-19 in particular PPE may not return as quickly to pre COVID-19 levels due to the challenges of the global supply chain.
Finally, COVID-19 impact on mortality next year remains a large swing factor enel.
Another winter surge would negatively impact treatment volume and could delay the timing of achieving positive Nag <unk>.
However, if the recent surge proves to be the last significant in Covid surge then we would expect a tailwind from lower than typical mortality, which could result in treatment growth higher than pre COVID-19 levels.
In 2022, we expect net labor costs will increase more than in typical years as a result of market pressures. Our current estimate is a net headwind of $50 million to $75 million.
We expect to offset a significant amount of these incremental costs with continuing MA penetration growth above historical levels and strong management of non labor patient care costs from.
From an operating income growth perspective, we expect 2022 will be a transition year with some significant but largely temporary headwinds to get through after which we expect our platform to continue to support strong profit growth.
While the range of potential outcomes for 2022 is broad.
A reasonable scenario could result in an oi decline of $150 million from our 2021 guidance.
This includes the impact from the expected valid initiatives.
I K C and the increased depreciation.
This scenario also includes a modest headwind from Covid, although there are scenarios, where the impact of COVID-19 could be significantly worse.
Looking forward to 2023, we anticipate a reserve a reversal of the net impact of these 2022 headwinds.
Plus incremental operating income growth.
Such that we expect 2023 operating income to show a low to mid single digit CAGR from the midpoint of our updated 2021 guidance.
Which would be in line with the multi year outlook, we have shared historically.
We expect this to be the result of the lack of ballot initiative related costs.
The recognition of savings and I Casey.
An improved COVID-19 situation and continued growth of the core business.
We will have more to say about long term guidance at our capital markets day in a couple of weeks.
Finally during the third quarter, we repurchased two 7 million shares of our stock and in October to date, we repurchased an additional one 2 million shares.
Operator, please open the call for Q&A.
Thank you at this time, if you would like to ask a question you May Press star followed by the number one to withdraw your question you May Press Star two one moment please.
Justin Lake from Wolfe Research you May go ahead Sir.
Thanks, and thanks for all the color here, let's start on the fourth quarter, you're talking about.
Does it it sounds like most of the $40 million.
Incremental COVID-19 costs are actually happening in the fourth quarter is that correct.
Most yes, but there was some in in Q3 as well. So I would think Q3 is $55 million. If you take the number we gave for Covid for the full year, what would be left is about 85 million for Q4.
Okay, and then can you help us on the mortality side, what you're seeing there and.
How much of that $40 million or you know, maybe we just talk about the $75 million that you talked about.
Higher costs how.
How much of that's coming from mortality.
Yeah, So what what we've seen in mortality is a pick up in Q3 to about 2000 excess mortality remember we were below 500 in Q2.
And there's no doubt the Delta surge has good <unk>.
Came on.
Bigger than we expected and we expect that to continue in to Q4 a bit. So if you look at if you're if you're trying to triangle triangulate in on growth. What you see for the quarter Q3 over Q2 is treatment growth per day that is down a bit that's largely.
The result of the excess mortality. There also there were more Tuesday, Thursday, Saturday and Monday, Wednesday, Friday, and that was about a 300 treatment per day headwind in the quarter as well.
So that's the those are the numbers behind it in terms of the financial impact from Covid, what Youre seeing is definitely the excess mortality that hits in Q3, it hits even harder in Q4, you were also seeing some.
Increase in Miss treatments, which which we've seen in prior surges and we're anticipating in Q4 again and then you also see some increased labor costs associated with the cohort ing and stuff like that so that's how I'd lay out.
The impact of mortality and other things on Covid in Q3 and Q4.
Okay, and then in terms of the.
You know the $75 million is any of that you know it sounded like some portion of that that's one time. It was just not you know that they are the kind of implied Q4 O why is that a reasonable run rate or is there.
They kind of jump off of.
Or is there some one time costs within that 75 million that got it.
Drop you off a bigger base.
Yeah. So I would think of the 75 is coming in two forms either one time or seasonal pickups. The one time things I'd call out are some comp bonus type stuff and then training is up when we hire new teammates that tends to lead to a.
Higher training number so those are the one time things in the 75 and then there are some seasonal items, there's a seasonal benefit impact in Q4 and also a seasonal increase in G&A. Those are things we tend to see in most years and they're a bit exaggerated this year as a result of.
The patterns, resulting from COVID-19, but to get to your fundamental question of <unk>.
What's a good jumping off point for next year I think the full year number for.
For 2021 is a reasonable baseline off of which to jump off for next year. If you took Q4 and adjusted for the $75 million you'd get to about the same spot.
Got it and if I could squeeze in one more you talked out to 2023 and a lot of this stuff makes sense in terms of kind of transitory costs, but you talked about two pieces you're ik's these savings.
So you talked about 2022 you get to a $50 million of incremental losses, how much better desired Casey you know whats the tail winded twenty-three there.
Ed you talked about improved Covid could you talk about the tailwind there.
In terms of sizing that that'd be really helpful.
Sure. So I'll start with a caveat that 2023 is a long way away and we're we've been cautious about talking about 'twenty two given the uncertainty. So I wouldn't think of this as guidance, but just some reasonable estimates to help you think things through so.
Casey I think of $50 million reversal of the headwind we're seeing in 'twenty. Two is a reasonable way to think about 'twenty three so basically winding up in 'twenty three about where we are in 'twenty one.
Covid is really really hard to think about.
That said, if you assume that COVID-19 disappear or is at some point next year.
I think the right way to think about it and now I'm bridging basically from 'twenty one to 'twenty. Three is we've got a $70 million sequestration suspension that becomes a tailwind right. We're getting all of that in 'twenty, one that goes away in 'twenty, two and stays at.
Wait forever, so theres, a $70 million headwind there.
We've got roughly a comparable number of net expenses associated with Covid think about labor think about the increased spend on PPE with some offset related to TNT, primarily and that net number is seven.
<unk> million dollars number today, so was that dissipates, what you've really got is effectively a tailwind from that that offsets the headwind from sequestration and what you're left with is mortality.
And mortality today is on a run rate basis somewhere in the $240 million number and what we would expect is over some long period of time 4567 years for that number to go to zero so as that 200.
$40 million.
A headwind we've got today dissipates.
Then.
You would see that coming back into earnings over time.
So that's the Covid <unk> for all that.
Great. Thank you.
And then I'll just add one thing as you're finishing your bridge Justin don't forget that there's a 60 million dollar, California ballot.
That's gonna be in 'twenty, two sorry, 'twenty two they wont be in 'twenty three.
Another or a couple.
Couple number to bridge too.
Thank you.
Thank you.
Hi, Michelle.
Kevin Fischbeck from Bank of America, You May go ahead Sir.
Great. Thanks wanted to maybe follow up on that last question.
That mortality number until I guess, you're talking about.
Or maybe seven years getting that back I guess that might be a little bit longer than I might have thought of that time period to think about that number coming back I mean, why why wouldn't it be something more like three years, rather than four to seven.
Yeah. So Kevin first of all you might be right and I think there's there's likely to be a tail to it right and we don't know how long that tail is but there is certainly a very reasonable scenario, where most of that bounce back comes out comes back quicker.
Quicker than seven years, and potentially quicker than four years. So it probably doesn't come back evenly over whatever number you you choose and I think there is reasonable.
Subject to say you get more early on in that period and the tail gets a little thin towards the end. So I would say you could be right in terms of getting most of it in three years.
Okay. That's helpful. And then I think you mentioned that because of the Covid Spike you know don't expect a lag to get back to positive until next year I forget what I guess, maybe I don't remember if you said that you thought it was going to happen by year end or not but I guess that is that how we should think about it that you had the last spike in.
Q1, and then you thought you might be able to get back to positive by year end and now that we have won in Q3, maybe three quarters later will.
Positive magazine the right.
You know waiting period.
I think that that's a good start for thinking about it. Although this the size of the Spike also impacts how long it takes us to get back to a positive nag because if the spike is lower our natural growth can kind of overcome that in a in a shorter period of time.
<unk>.
As I've as I've said I think on prior calls I've I've found thinking about quarter over quarter treatment per day patterns to be a much easier way to think about what's going to happen to our volumes and then ultimately revenue over the next few years Nag can be a little.
Bit of a clunky number when in times like this where there's so much volatility.
Okay, and then maybe a last question you mentioned kind of doubling the size of I can see and Ah yeah, it's not like a big portion of that with the government program. I guess is there a way to break out you know your view about growth and M. A.
Horses.
The new program.
Sure.
Right now what.
What we're seeing is that more patients are reviewing their insurance and selecting MAA and so if you were to look at the broader population I think the last number I saw and non kidney is around 43% of patients are choosing M. A R. Number is now close to getting close to that were roughly around.
And 41% and so as that MA grows of course.
That's likely to be a big feeder into the risk because those plans are coming to us and wanting to contract as it relates to the government. We are in the final stages here of sizing the practices that are really going to enroll in there therefore attribute their patient.
But our estimates have it having both doubling roughly.
From what we have now and and we'll give you information as it plays out.
Okay.
So so a N a as already kind of at penetration.
The doubling then is from.
Moving contracts with MH plans that you already have from a fee for service to high K C type.
Yes, yes, some more plans are wanting to have I can't see type structure correct.
Okay and then just last question on that then.
Is there anything different or are these contracts coming together quickly.
So if you think about timing of all of the stuff you know.
This year is the first year. So I can see a lot of companies dragging their feet would you expect to largely have penetrated that contra.
Contract opportunity within MA plans or.
What percentage of your epic contracts would be this type of arrangement.
You know next year and when would we expect to see.
The vast majority are going to be that type of arrangement.
Yeah, I think it's specific by payer, it's quite customized as as we all know payers have different strategies and different cadences as to where they put their focus.
Again, the range of contracts instructions from anywhere from fee for service to pay for performance gained shared shared risk all the way to full risk Ah is basically customized by payer. So the cadence is really customized we're ready to go and so we're talking to them.
And there's nothing really interesting to report on timing per se.
It's it's a steady and constant.
Okay. So it's not like a huge drop next year, it's constant growth in that increase in that number as a way to think about it.
We're not forecasting any drastic change.
Perfect. Thank you.
Our next question comes from Quito Chickering from Deutsche Bank, You May go ahead Sir.
Yeah. Good afternoon, guys, taking my questions a follow up to Justin's questions and forgive me. If there are a lot of numbers on this call.
If you take the midpoint of guidance for 'twenty, 'twenty, one and put a 4% CAGR on that for 2023, where you get to about 1.93 billion of operating income how much of that comes from I K C versus core dialysis and how does the I T. C change the low to mid single digit CAGR of ally going forward.
Yeah.
Yeah. So.
Yes.
In terms of how much of the O Y in 'twenty three comes from K C.
Again.
With all the caveats about uncertainty and everything else, you're really going to see no change in O I and I Casey from 'twenty, one to 'twenty three that's again, that's a reasonable scenario from where we are so if you think about.
Oh why growth.
Total Oi growth, 21% to 23, you basically see is zero in that scenario for my Casey.
Okay. So that is for a 4% oi growth or CAGR for next two years that Congress is coming from core dialysis at this point.
And even.
You know the right way to think about it is it's largely coming from core dialysis. There we've called out a bunch of headwinds entailed wins the ones from Bally.
Ballots and I K C kind of offset each other so they're a net zero.
The depreciation from our new clinical IP system stays with us and you'll have that tailwind from COVID-19.
Okay, but so let me just start workers numbers for a second if I take again the O Y from this year, that's embedding 121 hours of losses from high K C.
You're saying that by 2023, we will still run 120 $201 million of losses through the P&L on the Aki C.
What we're effectively saying is the 120 in 2021 goes to 170 next year and that's the one of the big headwinds for next year and that reverses itself in 'twenty three.
Okay. So the full 170 reverses or just a 50 year versus just the 50, Okay got ultimately our expectation would be that the full $1 50 would reverse itself in the business would become profitable, but it wouldn't happen all in 23.
Okay, and then Oh.
Side as you sort of think about you know three huge sports do you cost per treatment yep. How much of this is is statutory from premium labor versus wage inflation, which may continue in 2022, and can you remind us sort of what your normal wage inflation was in kind of what we should be thinking about.
For for three and <unk>.
Yeah. So.
The the numbers in Q3 and Q4, there is some wage inflation, but where youre really going to start seeing that is next year and I know I went through a lot of numbers quickly in the script, what we called out at the beginning of the call was a $50 million to $75 million net les.
Or a headwind next year.
And that would be wages, it would be training and there could be potential offsets from benefits of productivity and stuff like that but I think the right number for next year is a net headwind given the challenging labor environment, a $50 million to $75 million.
Okay fair enough for Ikea C will you plan to break out sort of the revenues and cost per patients at some point. So we can help model out how that's tracking.
Yeah.
I think we're on a bit of a path to continue to.
Create a disclosure package around the Ik see that'll give shareholders the the visibility they need into our progress.
Okay and then the last question for me you know, there's $1 billion of cash sitting on the balance sheets were now how much cash do you guys need to run the core dialysis and now you know the.
The new I can see that grows in 2022 and how much do we think about that going back into share repo at this point. Thanks, so much.
Yeah. So I would think about us typically meeting somewhere around $300 million of cash on the balance sheet just to run the business.
I don't think that number will change significantly with I can't see where we're not a regulated entity. We don't have statutory capital requirements. Okay. So that's fair to think about you know some $9 million of excess cash being used for share repo.
Rather than later.
I'd say, yes on the $700 million of excess cash look we clearly are.
Ben been buyers of the stock we bought more than usual since the last earnings call. As we've said in the past we're not agnostic on price if we liked the price we will buy more.
Great. Thanks, so much.
Thank you Sarah James from Barclays. You May go ahead.
Thank you and I appreciate all the color about.
22, as a whole, but I'm, hoping that you could give us a little bit more on the cadence of how the year will rollout.
Some of those headwinds are they are starting at the beginning of the year or later on.
And then on the labor cost side.
Sure.
Some of the acute guys talking about labor costs, improving in the back half of the year and just wasn't sure. If that's what you were anticipating in your guidance as well.
Sure so on.
On labor timing I don't I don't think we have a particular view about the macro economy and the labor market and how that's going to going to play out. So I don't have anything to add there.
I K C. I think you'll see a lot of that starting in the beginning of the year, you'll actually start seeing some of that in Q4, but it certainly could build up over the course of the year.
The ballot initiative is similar to what we've seen historically, it's plays out largely in Q3, although there can be pieces in other quarters.
The depreciation number ive talked about is probably likely to be more of a back half of the year event you might see some in in Q2, but it'll be back end loaded.
And Covid is.
Complicated you'll it'll.
The sequestration, assuming it goes away will happen on one one so there'll be a big hit related to that starting in January how exactly the the other costs rollout hard to predict although net net you'd probably see that improving as the year goes on although not.
That big a number and.
I'm not sure how to even help.
Help you with the mortality figure historically, even when mortality comes down it's still accumulates next year. If there is no winter wave and Covid overall begins to go away I think you'd expect to see that starting to improve over the course of the year.
I hope that helps.
That's very helpful. Thank you.
And just one more here on labor.
Can you give us any more color on where you're seeing that labor pressure.
So is it in a certain skill level or type of position that you're seeing it and then how material is that classes employee.
So your overall at WP expenses.
I'm, sorry, I wish we could point to one but the reality is while it is a more acute in certain geographies. It is it is very widespread and across most of our clinical teammate.
So it.
It is.
Mm wide.
And many geographies.
Got it thank you very much.
You.
Thank you and as a reminder, if you would like to ask a question you May Press Star one to withdraw your question you May Press Star two.
Our next caller is Lisa Clive from Bernstein, you May go ahead.
Hi, there two questions from me just on the wage inflation so Medicare.
Obviously inevitably delayed and and how their rate.
Come through.
Could you just give us some information on the rate Adjustors in your private contracts is it similar to Medicare where there's that once a year and I'm looking at metrics that are somewhat back weighted.
And then the second question on integrated.
Integrated care and in a down $120 million of losses still in 2020 three I'm just trying to understand this and really sort of thinking about scaling up that program CK C C.
<unk> is obviously one major driver how big do you envisage that program getting in and I said, what is the ramp up look like.
Let me grab the first part and then Joe can supplement.
First in case, it's useful Medicare has a basket update and the way. It's calculated is not looking at pure dialysis and what's happened to cost either retrospective or prospectively, rather than economic firm that forecast inflation and then they.
What they call a productivity adjustment, which in essence is a 10 year average that's trying to measure the efficiency of the economy.
As you can imagine that's got some complexity as it relates to the.
Commercial business the way it's done is it's usually through a negotiated.
<unk> way and so every single one of them has negotiated individually and the timing tends to be effective whenever the contract was signed.
And so if you think of a contract that was signed in February usually.
Annual escalator would be done in February of next year, that's the most.
The traditional way of doing it of course, there can be.
Other ways that have a pay for performance or our other mechanisms, but in general that's how.
That works.
As it relates to your your second question on suitcase you see the short answer is we don't know for right now it's a C&I my pilot and so its authorized for two years of course intent.
To try it out and see if it's effective and if it works for the system and if we're doing well by the patients and then I would assume that then Medicare would try to extend it we try to think of a world where hopefully you get to somewhere in the 30000 patients.
In one way or another being through M&A or a CMI vehicle, but we will see.
Okay. Thanks, a lot.
Thank you Lisa.
And our next caller is Peter Chickering from Deutsche Bank, You May go ahead Sir.
Hey, guys. Thanks, a follow up here I start one go back to the Yankee see losses in 2023, I'm, just I'm just struggling a little bit on the heart and one inland ours. The losses you guys are assuming that we'll have there when the ESCO program you guys have been running was.
So savings right out of the gate he was gonna stay on while still see $120 million in.
I can't see three years out when ESCO is profitable in year one thanks, so much.
Well, let me describe the high level and then Joe you can supplement with numbers.
The best way to think of the ESCO.
Not that they were profitable, but but what the non dialysis savings were actually quite good. But then of course you have to apply the operating model and then you have to load the G&A and now and in the models that we have we also have to share with partners and so that's how the numbers the numbers sort of.
Trickles down.
And you have to get to scale and so a good way of thinking is that once you do all that and you go through all those iterations you probably will get to.
Low single digit Oi number.
And depending on if you're grabbing non dialysis I would think of it somewhere in the three ish percent or so if you're thinking of the entire number it's one and a half or so because it's it's roughly half dialysis and half the other the.
The other non dialysis cost, but in the ESCO is when you fully load them, we didn't make money rather people, we're measuring whether it was effective at reducing non dialysis costs.
Yeah, Peter the thing I'd add there Javier paint the kind of the endgame. There. The question is how do you get there and the thing I would remind you is in.
The costs all come upfront you're paying for the model of care to deliver the savings you are paying for the G&A you're building capabilities.
The revenue is delayed and we won't see any revenue in year, one year or two we'll start to see some but the number will grow over time as the effectiveness of the shared savings continues to grow. So there is not a good matching of revenue and cost, especially in.
In years so.
Part of it is the investment in the scale that Javier talked about part of it is the delay in the revenue.
Okay. Thanks.
Thank you Gary Taylor from Cowen You May go ahead Sir.
Okay.
Hey, good afternoon.
Just two quick ones, Joe did you ever give us the quarterly step up in depreciation that you've mentioned a few times, but I don't know that I have it quantified.
For the claim system.
Yeah, It's 40 million is the annualized number Gary.
And it will probably start sometime in Q2, but youll see most of it in Q3 and Q4.
Okay.
I'm, just making a note.
The other is anything happening on you cited a commercial favorable commercial mix a couple of quarters in a row is there anything happening there. Besides the Medicare mortality, that's that's changing that that's worth calling out.
Oh, no I think there's been a very much an appreciation during the pandemic that people want to keep their insurance and they value it and so it's been very resilient and constant.
Got it and then my last one is.
Going back to silicon back to 2023, so if we take 2021.
We walk it down $150 million, but they were getting back to low to mid single digit CAGR in towards towards the one nine and change for 2023, that's about a $300 million.
Step up from 22 to 23, so the parts of that would be an incremental 50 million I cant see.
$60 million reduction advocacy spend.
Low to mid single digit organic and then the rest of that whole would be some portion of this growth.
Covid mortality in indirect expenses coming down is that the.
You got it exactly right.
Okay perfect. Thank you.
Thank you Lisa Clive from Bernstein, you May go ahead.
Hi, there I just wanted to follow up on the crowd.
Contracting them.
Yeah.
In terms of the structure of how their rate increases works out you have a say for your contracts or the rate adjustments for all four years fully taxed at the outset or is there any ability for those rate adjustments.
Increase if there is higher inflation than you're currently experiencing now or they just you know probably.
Kelly.
The percentage increase in and that's that over the course of the contract.
Most of them are fixed Lisa some of them you have to earn your way to them. So they can fluctuate year over year, depending on performance, but most of them are perfect.
Perfect.
Okay, but it would they would they would vary based on performance not on your underlying cost structure.
Correct.
Sometimes you could have of course, something that that's linked to an index or something like that but but in general it's defined.
And understood.
Okay, that's clear thanks.
Thank you.
Yeah.
And at this time I'm showing no further questions.
Thank you Michelle Ah well, we've covered a lot.
So let me just tried to summarize as cleanly as I can three takeaways number one our core business is strong.
Number two 2022, we'll have a lot of temporary decreases that will correct back to historical Oh.
And 'twenty three.
And then 0.3, our teams are working really hard on innovation to deliver on our integrated care Dream.
We look forward to discussing our strategy in more detail on November 16th during our capital markets day.
And talk to you then be well everyone.
And thank you. This concludes today's conference call. You May go ahead and disconnect at this time.
Yeah.