Q3 2022 DaVita Inc Earnings Call
Good morning, My name is Amanda and I will be your conference facilitator today at this time I would like to welcome everyone to the Davita third quarter 2022 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.
I would like to withdraw your question. Please press Star then number two thank you. Mr. Ackerman 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 am Joel Ackerman, CFO and Treasurer and joining me today is Javier Rodriguez our CEO .
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 for further.
Tailed 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 all subsequent.
Clearly report on.
Form 10-Q and in other subsequent filings that we make with the SEC.
Our forward looking statements are based on 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.
Additionally, we'd 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'll now turn the call over to Javier Rodriguez.
Thank you Joe Good morning, everyone and thank you for joining our call today.
Q3 was a challenging quarter for us.
Natural Covid statistics have been declining the cumulative impact of Covid on the <unk> patient community continues to grow.
Might the economic challenges, we continued to deliver high quality clinical care for our patients.
We remain incredibly grateful for the amazing work of our frontline teammates who are unrelenting and theyre focused on caring for our patients.
While our commitment to patients is a constant it is particularly highlighted when a community as a need as.
As you know on September 28.
Hurricane Dorian made landfall in southwest, Florida, Subjecting the community is <unk>.
100, plus mile per hour winds and significant flooding.
This led to many health and safety issues for the people in the area, especially people who require life sustaining dialysis treatment.
Davita operate 230 dialysis centers in Florida, with approximately 14000 patients and 3250 teammates.
Through our comprehensive preparedness planning I'm grateful that 100% of our patients were accounted for and all had received dialysis within days of landfall of the hurricane.
We deployed water tankers generators fuel tankers to quickly restore operations in affected areas as well as provide dialysis patients from across the kidney care community.
Now turning to our financial results.
As I mentioned it was a challenging quarter for Q3, our adjusted operating income was $351 million and adjusted earnings per share was $1 45.
Adjusted operating income was down sequentially by $88 million from Q2, and it was below our expectations for the quarter.
The headwinds and volume have persisted longer than we assume and contract labor costs and productivity did not begin to improve in the quarter as we had expected.
We are now assuming these pressures will continue longer than previously anticipated.
As a result, and given the continued uncertainty from Covid and the labor market, we are lowering our guidance for the year and our outlook for 2023 as well.
We are reducing our 2022 adjusted operating income guidance to a range of $1 $3 75 billion to $145 billion and our 2022 adjusted EPS guidance to $6 20 to $6 70 per share.
Our 2023, we're updating our outlook for year over year, adjusted operating income growth to negative $50 million to positive 150 million as outlined in our press release for this quarter.
As we have said in the past volume in labor continuing to be the biggest drivers of uncertainty in our results.
Let me walk you through the details on what we have seen on each of these and what we're assuming going forward.
Let's start with the three main drivers of volume.
Centered growth before excess mortality mid treatment rate and excess mortality.
I will cover each of these individually.
Sure.
This growth excluding excess mortality, we have seen a decline in patient had mentioned during each COVID-19 surge followed by a rebound after each serge.
The decline we saw early in the year was attributed to Ami Cross surge, which we anticipated would rebound in the second half of the year as it has in prior surges.
We did not see the expected rebound in Q3 and are assuming continued pressure on admissions in Q4 and through 2023.
Next net.
Net treatment rates as.
As we discussed during our Q1 earnings call as a result of omicron charges mid treatment rates had increased and we're having a meaningful impact on the change in our treatment volumes.
We anticipated these increase it would return to seasonal norm after the winter surge and they have not.
As a result, we're now assuming these will remain elevated through the end of this year.
Through 2023.
Finally on excess mortality.
While COVID-19 mortality rates in 2022 are down from prior year's access mortality remains a challenge for us.
We expect this to persist in Q4 and into 2023.
The magnitude of the impact will depend on the size and the severity of Covid charted this winter and through the rest of 2023.
Okay.
Taking this three metrics together volume remains the biggest source of uncertainty in our forecast for Q4 2022 and 2023.
Moving on to labor.
I will cover three drivers.
Wage rate contract labor and training costs.
As we've talked about in the past we've been assuming a significant wage pressure in 2022 with some offset from lower benefit cost overall.
Overall, we expected a headwind in 2022 of approximately $100 million to $125 million.
Year to date, our results are consistent with this forecast.
We had also seen significant pressure from our contract labor costs in the first half of the year we.
We expect these to remain elevated in Q3, although at levels below Q2.
In fact, the contract labor costs in Q3 increased relative to Q2, and we're now forecasting that that decline will be later and slower than originally anticipated.
On training, we went into Q3 with elevated costs as a result of more higher which is consistent with the increases we have seen in past during hiring peak.
Training costs accelerated in Q3, which resulted in approximately $20 million higher costs in quarter than expected.
Because of the elevated turnover. This has not yet resulted in a magnitude of positive impact we would normally expect on contract labor or staffing levels.
As a result, we expect training cost to remain elevated in Q4 and early 2023.
In response to these challenges we continue to work on a number of cost saving initiatives for 2023.
First we expect to deliver meaningful savings from our new contract from anemia management, we will begin to transition to our new contract for Mr era in 2023.
Second we are optimizing our clinic footprint for the current operational environment, which we expect to result in higher capacity utilization and better leveraging of our clinic fixed costs, including labor costs.
Finally, we have initiatives underway to reduce our G&A in several areas of the business, while investing in our future.
As discussed the.
Cumulative and continued effects of Covid and labor are the key drivers of the shift in our outlook for the balance of 2022 and two 2023.
We have anticipated that volume declines from Covid and labor market pressures would impact our revenue growth and margins in 2022.
We had expected relief on both dimensions in 2023.
We are now assuming these challenges will persist longer than expected, which is what accounts for the change in our guidance.
As we step back we remain confident in our strategy and we are focused on responding to the current industry challenges.
We are dedicated to delivering high quality care of our patients, creating a great place to work for our teammates and sustaining our investment in the future to drive growth in integrated kidney care have more patients treated at home.
And increase access to transplant.
I will now turn it over to Joel to discuss our financial performance and outlook in greater detail.
Thanks, Javier let me first give a few more details on Q3 results before I turn to the rest of 2022 and 2023.
As Javier mentioned, we continued to experience treatment volume pressure and higher labor costs in Q3.
These challenges were partially offset by lower spend on the ballot initiative than expected and lower losses than expected on <unk> in the quarter.
Spend on the ballot initiative this quarter was $28 million as compared to $23 million last quarter.
We recognize the benefit in <unk> of approximately $8 million.
Related to shared savings revenue that was anticipated in Q4, and we anticipate could be offset with higher <unk> see losses in Q4 than expected.
U S dialysis treatments per day were down <unk>, 4% compared to the second quarter.
Approximately half the decline was the result of elevated missed treatments and half from lower census.
Revenue per treatment grew quarter over quarter by $2 13.
Primarily due to favorable adjustments increased acute treatment as well as the continued shift to MA plans.
Partially offset by the reinstatement of Medicare sequestration.
Patient care cost per treatment was higher by $8 72, <unk> quarter over quarter, primarily due to higher wage rates training expenses for new teammates due to increased hiring and timing of T made health benefit expenses.
G&A expense was up approximately $56 million versus Q2 <unk>.
46 of the $56 million is the result of three items.
First in Q2, we had a one time gain related to some self developed properties of $22 million.
Second in Q3, there was $11 million of expense recognized related to closure charges. This $11 million is excluded from the adjusted Oi.
Third there was our $28 million contribution to the industry campaign against the ballot initiatives in California and increase of $5 million over Q2.
<unk> for the quarter over quarter change is related to higher compensation expense and typical fluctuations in G&A spend.
As I've discussed on previous calls we've identified a number of initiatives to lower our fixed cost structure and our G&A as part of these efforts in Q3, we recorded recorded $40 million of expense, including accelerated depreciation and the write off of the.
Net book value of assets related to certain centers, we closed as we seek to optimize our clinic footprint.
These expenses are excluded from our adjusted operating income.
We anticipate additional expenses will be excluded from our adjusted operating income in our guidance for both 2022 and 2023.
I also want to add some details about 2023 as.
As Javier mentioned, we've updated our year over year, adjusted operating income growth estimate to negative $50 million to positive $150 million.
The change comes primarily in our assumptions around the continued headwind on treatment volume.
We've also made small adjustments to two other drivers.
We've changed the outlook on labor costs, primarily associated with the training cost of new hires now pushed into 2023 as a result of 2022 performance and inflation.
We've also lowered the range for year over year improvement in <unk> operating income by $25 million.
This is due to outperformance in 2022, rather than a change in the outlook for 2023.
Finally during the quarter, we repurchased approximately two 1 million shares which brought the total for 2022, thus far to approximately $8 1 million shares.
Looking forward, we expect the pace of our share repurchases to slow significantly. We currently plan to focus more of our capital deployment to lowering our debt levels to get back to our target leverage ratio of three to three five times EBITDA.
Operator, please open the call for Q&A.
Thank you. Our first question comes from Andrew Mok with UBS. Your line is open.
Hi, Good morning, appreciate all the color on the headline headwinds.
When I look at the guide it implies a Q4 range of about $240 million to $320 million of Oi, which is a pretty material step down from recent quarters can you maybe help rank order or the headwinds you laid out were off in terms of what's driving the sequential decline and what are you assuming with respect to COVID-19 and its impact on treatment and labor in Q4. Thanks.
Sure. Thanks, Andrew for the question.
So if I were to bridge Q3 to the middle of the range for Q4 first we have the benefit of ballot. So that's in the high 20 $28 million benefit in terms of the headwinds rank ordering them one into our.
<unk> salary wage and benefit would be number one and that's a higher training costs wage rate increases and some benefit seasonality.
Two would be volume, which is an accumulation of the sensus mis so.
The kind of a full quarter's worth of the lower census, we we experienced in Q3, plus some additional census headwinds as well as the spike in the MS treatment rate historically Ms treatment rates are lowest in Q3 and Q4 I'm sorry in Q2 and Q3 they go up in Q.
Four and then again in Q1, partly due to.
Weather and.
And flu season, and then also partly due to holidays and then third would be RPT, we had some.
Favorable variability in Q3 that will come down and we typically see a bit of a decline in commercial mix from the middle of the year through the end of the year. So those would be the big ones I think theres, a little bit of stuff in depreciation and amortization I think Casey will come down a bit again as well and there is some.
Seasonality in G&A, so that would be the bridge in terms of what we're assuming here for Q4, we're assuming continued.
Excess mortality, we're assuming the.
The the mistreatment right that we've seen being above historical norms persists and we are assuming some of the admissions or the.
<unk>.
Call it organic growth challenges that we saw in Q3 were assuming those persist as well.
Got it Okay, and then Colorado, Andrew Let me, let me just add a little color because of what you speak of is the magnitude I think it's important to note that underlying all the assumption that Joe just went through we had a philosophical change in how we look at the future.
So in the past.
We were building in a rebound.
We were assessing the uncertainties, but we thought that they would taper out by around Q3 and well into Q4. So now we're assuming that COVID-19 remains an uncertainty on labor and volume stays longer and so that that really shifts the models.
And the dramatic way that you're trying to bridge.
Got it okay. That's helpful.
Color on how much higher the Ms treatment rate is in 2022 versus historical levels.
Yes, it's about 100 basis points higher so you can think of that as just a 1% headwind on our treatment volume.
And just to give you a number 1% of treatment volume is worth about $50 million of operating income.
Got it and then you mentioned contract labor costs increased sequentially to the somewhat surprising trend was that driven by higher utilization or higher rates and where their specific markets driving that sequential increase.
Yeah, Let me, let me grab that one.
The reality is there is no one market it is spread across the country.
And the reason why that variable I E contract labor is behaving a little less predictable than usual.
Is because normally you would look at your training is a leading indicator.
The decrease of contract labor in the future I E. You're training a team a teammate and that person is going to hit the floor.
Whatever three four months.
And and then you you would in essence model your contract labor decreasing.
Because of persistence and turnover. Unfortunately are leading indicator of training isn't translating to lower contract labor and therefore, we're having higher contract labor and higher training, which of course is the double whammy that we're speaking of.
Got it that's helpful and then.
Just to just to add on to Javier it's more about.
The number of contract labors and less about rate.
Okay. That's helpful last question for me and I'll hop back in the queue. You mentioned that you plan on switching your Esa regimen from Epogen to Mircera in 2023 can you help us understand the pace of that transition.
Yeah.
We've gotten a lot of questions on that and as you can imagine safety is utmost importance and we wanted to do it at the right pace.
We will be done by 2023.
But of course, the doctors have to review all the protocols and make sure that its proper for their patient population and so we don't have a particular goal we're just saying.
Please review the documents and get.
Get the proper prescription for your patients.
Okay. Thank you.
Thank you.
Thank you. Our next question comes from Kevin Fischbeck with Bank of America. Your line is open.
Great. Thanks.
Wanted to ask a little bit about the Smiths treatment dynamic I guess is this something that you have seen.
Happened in the past before what would cause people.
To Miss treatments on a consistent basis, it seems like something that.
You really can't happen for any extended period of time, so that's ever happened and how long does it normally take to come back.
The causes and your view of why its happening now and persisting longer.
Yeah, Kevin Thanks for the question Yeah, you know Mitch treatments are common at certain volumes because just life happens.
Transportation vacations et cetera, where you Miss one treatment.
Thank you are right in assessing that theres, not what I'd call a chronic message you can go too long without dialysis, but when we studied the data we found that that it is consolidated meaning roughly.
Roughly 15% of the patients are causing 70% of the Miss treatments.
So when when you started to look into that we found that roughly half of the miss treatments or hospitalizations.
And the other half is it.
Potpourri of things from from the patient him or herself being L with COVID-19 or something else, so sustaining home transportation issues, either due to staffing or other things.
And then scheduling scheduling either due to the patient or or or center and so there's a lot of things that go into the Ms treatment and what we're trying to do right now is make sure that we doubled down on our processes to reschedule the patients, but this is where it's all connected.
If you have a tight labor market and staffing as tight sometimes it's harder to get that rescheduled. So we're working on it and basically we had never really talked about Ms treatment, because it was pretty flat year over year, and then with the Covid.
Sort of introduction, if you will that number started to move and we thought it would revert back to normal and we're now seeing it to stay elevated.
Okay that makes sense and then I guess what drove the commercial.
Mix in the quarter I think that was a headwind this quarter, but a tailwind year to date so.
Anything going on there and then any update or.
Thoughts on where the Marriott is impacting pricing at all.
Yeah, no our commercial mix was flattish.
And if it was down it was down and a what I'd call normal immaterial.
On the commercial side and then you got to remember that mix is a numerator denominator and because of excess mortality in particular in our older population, which is Medicare.
That number is moving a little unusually as well, but nothing nothing to report on that.
And it's not about pricing, it's marietta, having any impact there.
No.
Pricing I remember our contracts are set for an extended period of time.
So if you were gonna say than the negative.
Our long term pricing is that of course they didn't incorporate.
The inflation that we're experiencing.
Youre going to look at the positive and we've talked about this.
But we have very predictable and stable relationships with our payers and therefore.
No you're not susceptible to the bumps of everyday life.
Can plan.
With a three four year time horizon.
Alright, great. Thanks.
Thank you.
Thank you. Our next question comes from Tito Chickering with Deutsche Bank. Your line is open.
Hey, good morning, guys for taking my questions.
Going back to sort of two key when you reported your results you know beginning of August I'm, just sort of curious what changed in August September versus what you saw through July .
Led to this very dramatic Miss any kind of guidance.
Yeah, let me grab the high level.
And I think I'll be a little repetitive, but the main thing is the philosophical change in guidance.
So if you start to think we have this rebound that we thought a lot of these numbers that were high it would revert to normal we've spoken of a couple in particular training and Miss treatments already and so when you grab all those numbers and you say theyre going to revert to normal and instead of.
That it actually goes to an all time high meaning it goes the opposite way than that.
That starts to open up a big gap and then instead of assuming well maybe that the rebound is going to happen a quarter from now we just said we don't have any data.
That would make us any smarter on.
On on really predicting where this will change.
We had conversations internally and.
And we had a couple of options we have three options right. The first one is you just don't give guidance at all.
It is just too much to predict for 2023.
Second as you try to predict the unpredictable.
And and really try to merge.
Educated prediction about when Covid and labor markets regulate.
And then the last one is you.
Assuming the current environment doesn't change until Theres clear data.
And so we used to take.
Something closer to.
Option too, which is we had assumptions of Covid and volume and we thought that they would get better at the back end of 'twenty, two and improving into 2023.
Now, we're taking closer adoption three which is we assume these dynamics that are strange and COVID-19 volumes and the labor markets continue.
Continue until we have further data.
So Peter let me let me.
It's still in Javier has a high level view with just a little bit of quantification on the details. So if you look at our 'twenty two guidance today versus where we were three months ago. It's.
It's down about $150 million at the center of the range.
That is the biggest component of that is volume, which is I'd say roughly split 50% from lower census, and 50% from our higher Miss treatment rate.
On the mistreatment right, it's not that it's going up further it's just that it's not coming down the way we had.
Anticipated. So that's 22 looking forward to the change on 2023.
It's really much more about volume again.
Census, being the biggest driver on that and missed treatment rates also not coming down with our with our new philosophy and then the other big component would be labor two thirds training one third contract and that's really about pushing out from the second half of <unk>.
This year to the first half of next year, when we start seeing the benefits of.
Some of the new hires that we're putting in place and the reduction in training costs and then ultimately lower contract volume. So those are those are the numbers.
Okay.
On the treatment assumptions are actually on treatment I guess during <unk> SOR, ignoring the mystery Vince for a second if I sort of break out for us.
The three key drivers here its incidence rate of newly ESR.
He is already patients patient mortality and access patient mortality from Covid I guess these are breakdown what you saw.
This quarter in those three buckets and is there a slower incidence rate, which could be leading to lower commercial commercial mix in the quarter does that catheter.
Yeah, let me grab those because you've got the components right. So let's just start from the top you start with new AD met.
The new admit or down.
Roughly a couple of thousand patients.
Venue, you subtract transplant, which had been flattish and then you subtract mortality, which as we've discussed has been higher.
And then you subtract the Miss treatments, which we've already discussed has been higher at roughly 100 basis points, depending on the starting point.
So that's the entire equation then the next question.
We've been really studying is why our new AD merch down what is happening with the population upstream which is sort of the natural question.
Unfortunately that leads to a dissatisfy answered and that's because of what we've talked about all along which is there is very low visibility to the CK depopulation and roughly half of the patients actually crash into dialysis. So you start getting into a lot of different data sources and datasets.
And what we've looked at isn't conclusive and so right now the hypothesis one could have a good hypothesis that says there happened to be a bit more depth in that patient population. There are others that think that that might be offset over time, because the volume.
And the pace at which someone will progress from CK D into E. S. K D will be bigger post time.
Covid progresses.
And so right now unfortunately again.
The upstream is the one that we have the least visibility and the other variables we've already discussed.
Okay, Okay got it.
I know you don't give revenue guidance for 2023, but I prefer this be a pretty large decrease oi guidance can you help guide us or what revenue growth do you assume in 2023 or 2022.
With all these changes.
Changes that.
They were making.
Yeah. So I think the best components to think about would be RPT and volume and I think at a very high level.
They will offset each other next year so.
Again, I don't want to get into too much specificity, but I think thinking about our P. T. In the 2%, maybe a little bit better range and then a volume decline. If you take everything we've said at the middle of the range would be about a 2% volume decline so those would offset each.
Each other and wind up at kind of flattish revenue.
Okay.
Okay, great great. Thanks, so much.
Yes.
Thank you and as a reminder, if you would like to ask a question. Please press star and then number one on your telephone keypad.
Our next question comes from Justin Lake with Wolfe Research. Your line is open.
Thanks, Good morning.
Just a quick follow up on the volume question, so volumes down 2% for next year, what you're assuming Gov. Mr. B Corp.
Yes.
Okay.
Did I Miss treatments.
Yeah.
Year over year, there's no missed treatment impact because what we're basically saying is its running 100 basis points higher than normal in 2022, and we're assuming that it'll continue to run at that 100 basis point higher than normal level. So.
It's 100 basis points relative to pre COVID-19, but year over year, it's no change.
Right. So this is 100% coming from either new I admit below mortality.
Okay.
Yeah, I mean, it's it's a combination of new add Mitch running below historical plus continued excess mortality.
And then I think the other important thing to recognize is as as.
As we have excess mortality throughout the year of 2022 that has a negative impact on the full year over year as that the impact of that mortality annualize.
Okay, and then you talked about the the court closures in the in the third quarter can you tell us how many clinics are closed.
In the third quarter and then how many do you expect to close for the full year this year.
And any insight into how many you've closed in 2023.
Sure Justin for the year is it you know there's a little timing in there so let's give a range between 130 and 150 for the year.
Or so.
And for next year, we're forecasting between 50, and 60 and again those could bounce around depending on timing.
And so just to remind you because I think we spoke of this last time, we put through several lenses. The first is to make sure we have.
The right patient access.
Secondly, we look for the availability of home and then and then lastly, we look at sort of a local market dynamics the lens of the leases in those types of things.
But it's a it's a complicated process that we have to be really thoughtful to make sure that we're being responsible.
Joseph.
The number was 44.
Okay, and then does this have any impact on patient growth as well or do you feel like you're retaining pretty close to 100% of these patients because the seller.
We don't we don't.
Retain 100%, but we retain the vast majority so it shouldn't have much of an impact on volume.
Okay, then last question before I jump back.
Leverage.
So it would be would you agree EBITDA next year.
Somewhere in the $2 billion range.
I don't want to get into the specifics, but I think.
If you're asking about leverage we're at where we round up to 3.9. This quarter. It is above our target range of three to three and a half times and we are we would like to get the leverage down over the course of next year.
Obviously, what happens too.
EBITDA year over year will be an important driver of that but to further that effort. We are certainly going to rethink how much of our free cash flow, we're deploying to share buybacks and lean more heavily to debt pay down. So the revolver was down from 450 <unk>.
Last quarter or two dropped $2 75, this quarter and I think it's fair to say that our share buyback pace excuse me will come down over the next year and our leverage levels should come down as well I'm, sorry, our total leverage should come down as well.
Yeah, Joel I guess, what I was trying to deal with like the number you have in the press release, there's a little bit backward looking like if the EBITDA covenant is the <unk> coming down next year to one for Amit.
I mean do you get to like two to one on EBITDA in total.
With the DNA.
That would leave you closer I think you said in the release you are at 8.8 net.
Got it.
Because that would put you closer to a 445.
I'm kind of a forward loss versus a backward look that you have in the release what is that a right number that too maybe like I. Appreciate the help in understanding you know debt pay down over share repo.
But you know if you if you could give us a little bit more color in terms of if you have a dollar of free cash flow next year, maybe you could just tell US previously it's been 100% towards share repo.
Now 70 525.
Or at four four times that you're doing any share repo until you get closer to three and a half.
Yeah.
Yeah. So.
I'd start with a higher EBITDA number for next year.
If you take a I think in the middle of our range you get somewhere a little north of 1.45, I think it's 146 on O Y add back a $700 million.
Depreciation depreciation amortization you'd get to an EBITDA number that's more in the two one to two two range.
And then.
In terms of how much of the free cash flow, we deploy I would think it would be a higher percentage to debt pay down.
And then the kind of $75 25.
I don't want to give a specific number but I think we're gonna cut way back on sure.
Share buybacks.
Got it that's helpful guys I appreciate it.
Thank you our next question.
Our next question comes from Peter Chickering with Deutsche Bank. Your line is open.
Yes.
Hey, guys just to sort of follow up here looking just at the fourth quarter.
Implied Oi, if I annualize that it's it's you know a.
A lot lower than for the new 23, so curious sort of what costs are sort of more onetime in nature in <unk> that we won't because it went right into 'twenty three.
Sure. So let me try and build that bridge up off of Q4 annualized to the 2023 guide I think you wind up with about a $350 million gap that we would need to bridge and here's how I do it.
First volume will be a headwind from Q4 to the full year call that $100 million ARPA.
<unk> will be a tail excuse me will be a tailwind north of $200 million I think important to realize their again RPT, we think will run stronger next year year over year than historically.
One of the big drivers of that will be Medicare fee for service, where the final rule is not out we're expecting it imminently. We are anticipating that the final rule will be better than the preliminary rule. So that will help our P. T and then just all the norm.
Our P T increases so call that north of 200.
I would add in $150 million of cost savings, which is in the table that we called out in the press release and then there is a bit of negative seasonality on Q4, that's probably worth $50 million to $75 million. So if you were to add that all up you would get somewhere.
Around 350, the one thing that wasn't on my list I just want to highlight was labor relative to Q4, we could see 2023 as being relatively flat.
Labor being flat in 2023 relative to Q4, and what you see there is higher wage rates.
Offset by the lower training costs, which we see coming down in the back half of the year as well as contract labor coming down over time.
Yes.
Okay got it and then I know.
<unk> versus the other moving parts as a small one but.
Sure.
The ITC guidance for 2023.
I guess, what what's changing assumptions or is it is it higher utilization that you are assuming is it lower reimbursement you're assuming is it increased investments kind of what's driving that change for Ikea cheaper for 2023.
I'm, sorry, Peter I missed that could you repeat the question I apologize you bet <unk>.
All of these are looking at your 2023 guidance you previously youre guiding to.
Specifically on the ITC, you're guiding to a.
Zero to $25 million.
And now it's at 25 months.
Headwind or to flat headwinds so just swing here in iqs see guidance for next year, just curious exactly what's driving that is it more utilization is it.
What's the key driver of that Delta, yes, sorry about that so if I look at 'twenty three for I K C. I think there are really two factors at play here on the bridging it from 22 to 23. One is 22 is coming in a lot better than we expected so you're you're comping to a two way.
A much smaller loss. The second thing is we now expect growth in 2023 again and as we've called out in the past I K C growth is a headwind in year, one to O Y so you're.
The overall result, hasnt changed much its that 'twenty, two has gotten better and to some extent some of the benefit we're seeing in 'twenty two is going to get offset by the impact of growth in 'twenty three.
Is that growth coming from more than a contracts converting into a casey.
There's a little mix of that but the bulk of it is we are opening a lot more of the suitcase you see programs. So we had 11 this year when we're doing 11 more next year, there will be a little more in may but the the predictable large volume will be government.
Okay Fair enough and then I guess.
With all these moving parts do you view, the breakeven points for <unk> getting better or worse than previous guidance.
I would say.
The business is performing better than we expected.
But.
In the short term.
Growth has a negative impact on Oi.
Okay, great. Thanks, a lot.
Okay.
Thank you our last question comes from Andrew Mok with UBS. Your line is open.
Hi Tech loving you back in the queue.
First do you have the excess mortality number in the quarter that you can give to US and then you noted that the add new elevation of excess mortality negative for next year. When you look at the patient populations are you seeing any evidence of reduced mortality rates for the current population such that when you're finished finished annualizing this excess <unk>.
<unk> treatment should start to accelerate.
Yes, so excess mortality in the quarter was a little bit north of a thousand call. It 1100 in.
In terms of are we seeing what we call. The pull forward effect. It is very hard for us to tease out the difference between higher COVID-19 mortality and lower <unk>.
Mortality from pull forward. So the excess mortality number we give is effectively a blend or is the net of those two numbers.
We still believe in.
The concept of the pull forward.
Some patients.
Our census is being positively impacted by lower mortality from the.
The earlier excess mortality, but we're just not in a position to quantify it. So I think it is fair to think of our excess mortality as a as a net number of the number of patients in the quarter, who died as a result of COVID-19 offset by a lower mortality from from the <unk>.
Prior.
Mortality that isn't occurring this quarter I hope.
I hope that's clear.
Okay, I think I understand and then on the Hurricane you noted that you were able to get all the patients down in Florida access to dialysis throughout the hurricane impact can you quantify what impact that had on your P&L. This quarter and is there any lingering impact of the hurricane into the fourth quarter.
Yeah, Andrew There was there was no significant impact on the P&L and again nothing in Q4 for that.
Okay, and then on the Medicare rate I think you said, you're already assuming better Medicare rates about 100 basis points better can you give us some color on what youre assuming there.
Yeah, that's a that's a reasonable estimate we've looked at.
What other sectors have seen in the delta between their prior in their final. So we're thinking about three and 3.4% I think is a reasonable number.
Okay. That's all the questions. Thank you.
Thank you and we did have another question come through Justin Lake with Wolfe Research. Your line is open.
Guys can you hear me okay.
We can hear you fine Justin.
Great.
No I agree.
Maybe we just throw in one more question.
They don't cut cost going through 2023.
The for instance, Andrew earlier brought up you know myself.
Given implementing out through the year. So just looking to see like is there any potential.
No light at the end of the tunnel as we go through the year.
So my share of costs for the year the benefit of that you won't see it but you'll be at.
A higher run rate on savings at the end of 'twenty three that you've worked through 'twenty.
Was also thinking about the potential because you talked about contract labor.
Being higher than you expected I think that's going to hopefully moderate through 2023.
So just wondering if you could give us some numbers around that for instance thereof.
Within that cost cutting how much is my Sarah did not cost cutting number and then how much do you think you could get out how much of the total savings be that you could run rate in the 23 and that maybe you could tell us what your contract labor costs are running in the third and fourth quarter and how you expect those to run through 'twenty. Three so we can think about the exit rate in <unk>.
For it.
Yeah. So.
First I think you're thinking about things directionally correctly that the the front half of the year will be tougher than the back half of the year.
And for <unk>.
I put it into three buckets. One is Q1 is always seasonally tough because of revenue per treatment.
And that's just how we account for the.
The non payment or the bad debt associated with.
Deductibles and co pays.
Second is.
A combination of the savings from our <unk> and some of the other initiatives building over the course of the year combined with some of the pressures associated with contract labor and training declining over.
Over the course of the year and then finally I K C is a business that we have generally assumed we'll have a better Q4 than other quarters because of how revenue recognition works. We saw we're seeing less of that pattern in 2020.
Two we've seen more of the revenue that we expected to recognize in Q4 earlier in the year, but again I think we're anticipating a better Q4 for Ik C. Although that's not something that you could annualize. So those are the things in terms of.
How to quantify some of this stuff.
Contract Labor for Q3 is running at about.
30, a little bit north of $30 million for the quarter.
We're looking at that to come down a bit in Q4, and Q1, and then really start declining starting Q2 of next year, although we're assuming it will remain elevated relative to our historical rate, which was almost insignificant.
That's contract labor.
In terms of quantifying the magnitude of the cost savings. So we called out $150 million for next year at the middle of the range more Sarah is the biggest component of that the.
The realignment of the footprint is number two and the G&A is number three so we're not going to give specific numbers on those things, but I think that can help you get in the right ballpark on those three numbers.
Got it <unk> would be.
With a fourth quarter run rate double.
The first is the annualized one.
Is it going to be something that's kind of ratable through the year, but second quarter exit is going to be a lot higher.
Then the full year about it but it's it's hard it's hard to tell just in this remember this is an operationally intensive effort ultimately physicians do the prescribing not us and it'll be a question of how they're thinking about it how long it takes them to integrate the information.
How many will make the change in win so I don't think we're ready to make a prediction on that.
Okay and then last question for me is on revenue per tree.
So you talked about there were some time ago.
Moving parts there that goes with it.
Revenue per treatment first can you put a number around that in terms of how much.
And revenue per treatment.
We saw a benefit just trying to understand one how much of that.
And two what's the what's a reasonable run rate to think about going into <unk>.
<unk>.
Into the fourth quarter, and then lastly, maybe you could give us a number on that commercial treatments that <unk>.
Commercial mix decline.
Yeah. So.
I think you can think of the quarter as has having benefited by two to $3 of normal fluctuation, we see that all the time.
If you want a good exit run rate I think $365 or P. T is a reasonable exit run rate for Q4 and for the full year of 2022 off of which to build your 23 number in terms of.
So <unk>.
Mix. It was it was a few basis points down for the fourth.
In the quarter.
So really not significant.
I think it was a.
10, 4% last quarter and it rounds to 10, 3% this quarter, but.
It was it was pretty small.
Great. Thanks for all the color.
Thank you.
I apologize at this time, we have no further questions. Mr. Rodriguez I'll hand, the call back to you.
Thank you Amanda as you can see from all the conversation we had guidance is harder with the COVID-19 uncertainty on volume and the labor dynamics that we have spoken of.
We of course are working very hard to give you our best estimate and now are assuming that they will stay elevated for a period of time.
Let me just close with a couple of comments. One is these are very challenging times for davita.
And they are challenging times for the broader kidney care community and all health care providers.
As I separate myself from this moment in time.
Look further out.
I can't help but to say, we are incredibly well positioned to differentiate.
And outperform given the experience of our team the clarity of our strategy.
And the strength of our balance sheet.
Appreciate your time today have a good day.
Take care.
Okay.
Thank you that concludes today's conference. Thank you for participating you may disconnect at this time.
Yeah.