Q4 2023 DaVita Inc Earnings Call
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 fourth quarter 2023 earnings call. Today's conference is being recorded if you have any objections you may disconnect. At this time 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 you would like to withdraw your question Press Star then the number two Mr. Eli assign you may begin your conference.
Thank you and welcome to our fourth quarter Conference call. We appreciate.
Your continued interest in our company I'm Nicolaisen group, Vice President of Investor Relations and joining me today are Javier Rodriguez, our CEO and Joel Ackerman our CFO.
Nicolaisen: 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 details concerning these risks and uncertainties. Please refer to our fourth quarter earnings press release, and our SEC filings, including our most recent annual report on Form 10-K, all subsequent quarterly reports on Form 10-Q, and 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.
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 will now turn the call over to Javier Rodriguez.
Thank you Nick and thank you all for joining the call today.
As we reflect on the past year, our 2023 financial performance highlighted the resilience of our business and reveal some of the early benefits of our multiyear investment in strengthening our platform.
The external challenges of the past few years, ultimately made us stronger and with continued investment in our teammates systems and capabilities. We believe that we're well positioned for the years ahead we.
Nicolaisen: We begin 2024 with great momentum and a reduction in the risk and uncertainties that characterize the recent years.
I will cover our 2023 results and our 2024 guidance provide an annual update on integrated kidney care.
We continue our discussion on G. L P. One drugs.
First however, I would agree.
Nicolaisen: Get them to call as we always do with the clinical highlights.
For more than 20 years, we have strived to be a community first and a company second.
This means that we're committed not only to providing outstanding care, but also to get back in 2023, our teammates logged over 42000 hours of service to their communities, which marks our highest year ever and a step towards achieving our cumulative goal of 125000 hours by 2025.
And some of our special teammates donating their personal time to advance our goal of raising awareness for kidney disease.
We recently wrapped our 2023 health tour, our mobile health screening and kidney care education program supporting local communities across the country.
Today, 15% of our U S population has kidney disease, which often goes undiagnosed and untreated until symptoms become severe.
Our mobile Health tour was designed to help identify risk factors that may lead to chronic kidney disease, including screening for obesity diabetes high blood pressure and family history of kidney disease.
After two months on the road or bus travel is 17000 miles the offers free screenings and 48 communities across eight states.
The power of this tour more than 300 of our teammates volunteer 1200 hours in service to their local communities.
This effort is a wonderful example of combining our dedication to service with our ongoing commitment to raising awareness for early detection and prevention of kidney disease.
Transitioning to our performance.
Full year 2023, adjusted operating income adjusted EPS and free cash flow all came in well above our guidance from the beginning of the year.
Nicolaisen: As context, I think it's helpful to reflect back on our progress over the year.
We began 2023 and an uncertain environment and shared the assumptions in our guidance that volume and labor challenges would continue throughout 2023.
We're simultaneously developing and executing on a number of initiatives focus on offsetting some of those financial headwinds we were facing.
Nicolaisen: As the year progressed, we saw encouraging data points early in the year, which ultimately turned into consistent positive trends. These improved trends combined with the strong operating performance and a positive impact on the initiatives. We implemented resulted in a 20% year over year growth in adjusted operating income 28% growth in adjusted <unk>.
And the return of our leverage ratio back to the target range.
I'll share three points for additional color first on volume, we enter 2023 with a 2% growth headwind due to the annualized nation of excess mortality from prior year. Since then successive COVID-19 searches have been weaker in magnitude with lower mortality at the same time, we're able to produce four consecutive.
They've quarters with year over year growth in new patient admins, adding these factors together 2023 saw increased patient census for the first time since Covid started and volume there was approximately flat year over year landing at the top of our guidance range.
Second our labor performance in 2023 was better than 2022, we cut our reliance on contract labor more quickly than anticipated and improve staffing in our centers on the other side of the ledger. He may turnover has remained elevated in line with the strong health care labor markets looking forward improve retention and training costs.
<unk> represent an opportunity for improvement in the years ahead and.
And third independent these trends, we drove strong operating performance through our differentiated platform and capabilities.
Most notably we invested in our revenue operations to achieve sustainable improvements in our collections.
Nicolaisen: This resulted in an additional $3.50 in revenue per treatment for the full year, while reducing more than 12 days from our U S days sales outstanding.
Adding to this we executed against our cost saving initiatives related to pharmaceutical spend and further consolidated our facility footprint. Finally, we exceeded our annual profitability targets for integrated kidney care, which I'll cover more in detail in a moment.
To summarize we entered 'twenty 'twenty four with more visibility and confidence that we have had since the start of Covid in 2020.
Our ability to invest in our people process and systems. Despite the operational and financial challenges of the last few years has positioned us well for the years ahead.
On that note, let me transition to our value based care business, which we will call integrated kidney care or eye Casey we.
Nicolaisen: We have consistently our investors to assess this business on an annual basis, rather than focusing on our quarterly results.
Nicolaisen: So now is a good time to pause and reflect on our performance and outlook of Ik see.
At a high level, we assess AKC performance based on three primary metrics one total medical expense in patients in our IQ C programs, which represents growth to our clinical performance or effectiveness of reducing total medical costs and three per member per month span on our model of care.
G&A, which indicates cost management.
Walk through each in a bit more detail.
Nicolaisen: First.
Total medical expense of patients in our IQ C programs grew to 4.6 billion, reflecting approximately 30% growth year over year.
Nicolaisen: This represents a carrot for 58000 patients as of year end at 38% increase from 2022.
Within our traditional value based care programs, we continue to be discipline prioritizing profitable growth for 'twenty 'twenty four we expect growth in excess of 25% for total medical expense and covered lives.
Second our model of care has proven effective in helping our patients lead healthier lives and reducing medical costs, reflecting net savings rate that is slightly ahead of our expectations.
The largest driver is year over year reduction in hospitalizations, especially readmission rates.
Nicolaisen: This relies on our collaboration efforts between our care teams and physician partners to prevent rising acuity and address the needs of our most complex and vulnerable patients and finally, our per member per month costs continue to trend down as a result of the program growth and improved fixed cost leverage in 'twenty.
'twenty three our per member per month costs declined by 7%, we expect per member per month costs to further declined by approximately 15% in 2024.
The result of these efforts is that we outperformed our 'twenty 'twenty through adjusted operating loss forecast and we believe we remain on track to deliver breakeven or better performance by 2026.
Beyond the core metrics, we can further break down our performance based on three primary components of our ITC business, our special need plant our value based care portfolio focused primarily on Medicare advantage patient and the C. K C. C demonstration project for our Medicare fee for service patients.
Within that portfolio after many years of investment and consistent year over year improvements in cost savings or M. A contracts and special needs plans have now reached profitability.
Keep in mind that the third component C. K C. C represents approximately 50% of our value based care census.
As we adjust the changes from CMS and further optimize our model of care. We expect this program to become profitable in 2026 timeframe.
Before we get into 'twenty 'twenty four I'll offer a quick comment on G. L. P. One to be clear none of our thinking has changed since our last earnings call.
Shortly after our call results for the select clinical trial were released as expected the trial confirmed certain cardiovascular benefits in people with obesity and cardiovascular disease, including a 20% reduction in all cause mortality.
Next on the near term horizon will be the flow study, which we anticipate will demonstrate efficacy on multiple endpoints, including slowing the progression of chronic kidney disease. As a reminder, such efficacy that may be demonstrated in the flow study is already incorporated into our G. L. P. One base case, which reflects a.
A net neutral impact of dialysis volume growth as adoption ramps up over the next decade.
Shifting of 'twenty 'twenty four we're setting guidance for adjusted operating income growth of 10% and adjusted EPS growth of 9%, reflecting the midpoint of our respective guidance range for each metric. This incorporates our expectations of a more predictable operating environment continued returns from our revenue cycle investment.
And further progress in Ik see this guidance demonstrates the resilience of our business and our ability despite external challenges to provide high quality care, while delivering strong financial results.
Let me touch on a few drivers of our forecast first 2024, adjusted operating income will benefit from the full year impact of positive development in 2023, including the utilization of revenue cycle improvements are transitioned to mircera and savings related to our center consolidation.
Second as noted we're demonstrating progress in our Ikea business and continue to expect breakeven by 2026, and finally adjusted earnings per share will benefit from our share repurchase program offset by other factors below the Oi line, including other losses, our interest expense and higher effect.
Tax rate.
As we turn the page of 'twenty 'twenty four we have a great opportunity to drive operating advancements that further differentiate davita within kidney care.
I will now turn it over to Joe to discuss our financial performance and outlook in more detail.
Thanks Javier in Q4, we delivered $415 million of adjusted operating income and $1 87 of adjusted earnings per share our strong performance for the quarter puts us just above the top end of our updated full year guidance range from the Q3 call.
Our outperformance in the quarter relative to our expectations was primarily related to prior period development in our special needs programs in our Ik C business plus revenue per treatment growth from continued improvements in our revenue cycle management.
In the U S dialysis segment fourth quarter treatments per day were flat versus the third quarter.
As a reminder, mis treatment rates are seasonally higher in the winter months, which was offset by an improvement in our day of week mix relative to the third quarter.
Nicolaisen: Revenue per treatment was up approximately $6 quarter over quarter.
About half of this was due to normal quarterly fluctuations. The remaining increase was driven equally by continued improvements in our revenue cycle management and typical fourth quarter seasonality related to higher acute mix and reimbursement for flu vaccines.
Adjusted patient care cost per treatment was up $13 sequentially, driven primarily by seasonality, including higher benefits expense and continued investment in our teammates.
In our I K C business adjusted operating results were down $39 million sequentially due primarily to timing of shared services revenue recognized in Q3, primarily from arrangements from 2022.
Additionally, in Q4, we recognized incremental shared savings revenue of $55 million associated with Medicare advantage value based care arrangements for plan year 2023.
This is earlier than we had previously anticipated recognizing revenue for 2023 arrangements and as the result of the clearing of several revenue recognition hurdles earlier than otherwise anticipated.
This revenue would have otherwise been recorded in 2024.
As a result, we now anticipate that our recognition of shared savings revenue for our Medicare advantage contracts in 'twenty 'twenty four and beyond will generally align with the plan year in which they are earned although there will likely continue to be updates in our estimates.
During each plan year and beyond until final reconciliation.
This $55 million shared savings revenue recognized in 2023 has been excluded from our adjusted operating income as it represents earnings incremental to what would've been expected in 2023 absent the change.
International adjusted operating income was down $18 million quarter over quarter. The largest component of this sequential change was driven by an increase in bad debt reserves.
Transitioning to capital structure during the fourth quarter, we repurchased 2.9 million shares and since the start of 'twenty 'twenty four we repurchased an additional 1.5 million shares. We ended 2023 with zero balance on our revolving credit facility and our leverage ratio.
Declined slightly to 3.15 times consolidated EBITDA below the midpoint of our target leverage range.
The strong free cash flow was partly the result of continued reduction of our U S dialysis Dsos, which ended the quarter at 54 days down three days from last quarter and 12 days below the level at the end of 2022.
Nicolaisen: Turning now to detail on 2020 for guidance.
Our adjusted operating income guidance for the year is 1.825 billion to 1.97 and $5 billion, representing 9.6% year over year growth at the midpoint.
This is above our long term expectation of 3% to 7% growth in adjusted operating income.
Driven by higher revenue per treatment growth and typical as a result of our investments in our revenue cycle management.
And cost savings in our non labor patient care costs due to annualized nation of Mers, Sarah and footprint related cost savings to.
To give you more detail let me first cover the three main drivers of U S dialysis growth versus 2023.
First we expect treatment volume growth of 1% to 2%.
Nicolaisen: This is the result of continued new patient admissions growth on par with pre pandemic averages partially offset by mortality that is expected to remain slightly higher than pre COVID-19 levels.
Second we anticipate revenue per treatment growth of 2.5% to 3% Approx.
Approximately two thirds of this growth is due to rate increases the remaining third of the expected increase is primarily from annualized nation of the revenue cycle management improvements we saw in 2023.
Nicolaisen: Third we expect adjusted patient care cost per treatment to increased 2.5% to 3%.
We continue to expect wages to increase at rates above pre COVID-19 levels.
<unk> to offset this include leverage of fixed costs as treatment volume grows and annualized nation of cost savings initiatives in 2023, including our conversion to Mircera for anemia management and our center consolidation efforts.
Speaker Change: Let me mention a couple of other items to help your thinking with U S dialysis.
We expect adjusted depreciation and amortization to decline by approximately $10 million to $15 million of market.
<unk> from historical increases of approximately $20 million annually.
This is the delayed result of our consistent effort over many years to increase our capital efficiency.
As it relates to policy matters, we do not expect to spend the $50 million to $60 million related to ballot measures that would have been typical of past election years.
Where I Casey our guidance assumes an adjusted operating income loss of approximately $50 million.
This reflects our expectation of continued growth in total medical spend and covered lives within our Ik C programs improved shared savings performance and further fixed cost leverage as outlined and Javier <unk> earlier comments.
In our international business, we incorporated in our guidance continued growth in adjusted operating income of approximately $20 million year over year.
Below the line, we expect losses of approximately $60 million largely as a result of our share of the losses in Mozart, our co investment with Medtronic in kidney products.
We expect interest expense of $100 million to $110 million per quarter in the first half of the year and $130 million to $140 million per quarter in the second half of the year.
This increase is due to expiration of our 2% interest rate caps at mid year.
We expect an adjusted effective income tax rate of 24% to 26%.
Speaker Change: For free cash flow, we expect 900 million to $1.15 billion approximately a 125% of adjusted net income.
Speaker Change: Consistent with our long term capital strategy, we expect to deploy the vast majority of our free cash flow towards either capital efficient growth when such opportunities exist or otherwise return capital to shareholders through share repurchases.
We anticipate ending the year within our long term target leverage ratio range of three to three and a half times.
That concludes my prepared remarks for today operator, please open the call for Q&A.
Thank you Sir at this time, if you would like to ask a question you May press star one and to withdraw. Your question you May Press Star two one moment. Please for the first question Jeff.
Justin Lake with Wolfe Research you May go ahead Sir.
Hi, this is being resolved on for Justin.
Justin Lake: My question is on your Medicare risk businesses wondering what you're seeing there in terms of trend through.
Through 2023.
Justin Lake: And then specifically on special needs products, how many members do you have there exactly.
How much revenue was in those products and could you speak to what you've seen in terms of costs year to date and then specifically Q4. Thank you very much.
Speaker Change: Thanks, Deane, so what I'd highlight on.
Speaker Change: The risk side of Medicare advantage is I think it's important to realize that the ESR D population is different than the broader MA population in some of the trends you might be seeing with other payers, which we certainly watch very carefully don't necessarily apply to our population I'd I'd highlight three things.
First.
Speaker Change: The needs of these patients and the medical cost that they are.
Speaker Change: That they bear are very different than a population given the high acuity of these patients. So that's one SEC.
Speaker Change: Second I would also note the reimbursement for this population runs differently and it's a separate reimbursement rate that comes out in in both the preliminary and the final rule and third that the coding changes that apply to the broader MA population do not apply to the ESR deep.
Population so with that.
Speaker Change: Sure.
It's early for us to really have a full view on what 2023 is that said, we're feeling pretty good about where our net savings came in both on the SNP side and on the Medicare advantage population within our value based care in terms of just some of the cleanup we have about three.
We.
As in members in our SNP products.
And in terms of revenue.
Somewhere north of $300 million.
Speaker Change: Thank you.
Thank you our next caller is Peter Chickering with Deutsche Bank You May go ahead Sir.
Good afternoon, guys looking at 2024 guidance Youre, assuming a loss of 50 million in our KC can you refresh can you refresh us what there wasn't 2023 and in the script I think you talked about 25% growth.
Revenues of Ikea has seen a 15% reduction of P. M. P. M. I would've assumed that would have shifted from a loss to a gain in 2024 of those metrics.
If you can sort of help bridge that and then.
Speaker Change: I think youre shifting from a cash accounting to an accrual accounting.
Seemed like a pretty big Big shift for you guys I guess, what's giving us comfort that that accrual makes sense at this point.
Speaker Change: Yes, so a lot in there let me try and take this in.
In the logical order so so first.
On revenue accounting what.
Historically, we did not record revenue until we were comfortable that we could reasonably estimate what our share of the shared savings would be and that was true for both our MA population and our Medicare fee for service population. The CK C. C program. This.
Snip.
Product, we've always accounted for.
Speaker Change: And I'll use your words in an accrual method.
Change we're talking about is about the change in the timing of when we get comfortable with those estimates and and you asked why it's really three things. One is we've made some changes to the contractual language that gives us earlier clarity on attributed lives. So that's one.
Second we're getting our data earlier, which obviously helps us do some of the calculations earlier.
Speaker Change: And then third just with the experience we've had.
We've got better actuarial models and putting those three things together, we're comfortable now that we can reasonably predict our share of the shared savings revenue, which ultimately turns into revenue in the plan year. So that's on the change in the estimate.
In terms of you asked about 2023, so we're guiding to a loss of $50 million for 2024 hour.
Our non-GAAP number for 2023 is a loss of $94 million the thing to realize about that $94 million is it includes the revenue from the value based care products from plan year 'twenty, three which is the result of this estimate.
Change that I mentioned as well as the revenue from that product line for 2022, So I think the way too.
Speaker Change: Think about 2023 to make it a little bit more apples to apples with 24 would be the back out somewhere around <unk>.
$25 million 25, maybe $30 million to make it a bit more apples to apples.
Speaker Change: And then what was your other question there was a <unk> question there, yes, so so you're taking you're taking that.
The net loss of $94 million. After you back out the 25 to 30 million.
You guided to in the script sort of growth and I can't see a 25% and then a 15% reduction of P. M. P. M. In 24 so.
I would assume that that grows and those reductions would have resulted in higher.
Operating income versus operating loss of kind of how can we sort of.
Take those growth metrics in those cost reduction metrics and still get to a $50 million loss.
Speaker Change: Yeah. So a few things first this.
Just to clarify that estimate change I referred to only is true of the Medicare advantage business. The CK cc business is still new enough that we're not comfortable estimating.
The savings in the plan year, so that that part Hasnt changed in terms of your question. So the cost savings, we're referring to is only related to our model of care and our G&A it's not.
What you'd call the MLR in our health plan business, it's not that equivalent for US second there are some there was a significant amount of positive period development in 2023 in particular in the sniff business that we're not forecasting to recur so that would be.
Another adjustment, which I think would help.
Speaker Change: Help bridge the question of why now why aren't we getting to profitability next year or this year and 24.
Okay and then on.
Treatment growth you're looking at the normalized.
<unk> and <unk> grew 50 50 bps in the third quarter.
Is a key driver in the fourth quarter.
New patients.
Is it lower mortality and also when you close a center and those patients don't want another center is that organic growth at the New center is the old one is your discontinued ops, even those patients don't actually changed the numbers.
Yes, so no on the last one.
If a.
Patient moves from one clinic to another it doesn't show up as any sort of growth anywhere it's still our patient.
In terms of the the volume growth I would point to Q4 over Q3 is effectively being flat treatments per day were flat and thats.
Really a combination of a small census decline, which is not uncommon in Q4.
Offset by a better treatment mixed day, so more Monday Wednesday, Friday, eight fewer Tuesday, Thursday, So Q4 was really I would call a flat volume quarter over quarter.
Okay, great I'll jump back in the queue.
Thank you and once again, if you would like to ask a question you May Press Star one Kevin Fischbeck with Bank of America. You May go ahead Sir.
Alright.
Good evening actually this is Joanna gotcha filling in for Kevin today actually have a first question just to follow up on that on the volume discussion and so it sounds like flattish sequentially, but I guess year over year up less than 1%.
And your guidance for 'twenty, four assumes 1% to 2% volume growth. So kind of how do you sell to that going forward, especially for the high INR, 2%. What gives you confidence that I guess.
Speaker Change: You could you could get to that volume growth for the year.
Yes, thanks, Joanna so I'd start with the fact that the single biggest impact on volume year over year as census, and remember that census builds over the course of the year. So if you look at the 23 growth, which was effectively flat that was bird.
And by the fact that the census declined over the course of 2022 and only started building in 'twenty three so a lot of it is zero in 2023 is the annualized nation of.
The negative impacts of 2022, as we think about 'twenty four I really break it down into two components first is.
New to dialysis admissions and we've watched that build over the course of 2023.
We feel comfortable that that growth rate is back to pre COVID-19 levels.
Speaker Change: Where.
The reason, we don't get back to what you'd call. It 2% number pre COVID-19 or that would be the high end of the range is mortality continues to run higher than it did pre COVID-19. It is way down off it's COVID-19 peak, but it's still running a bit higher than a typical pre COVID-19.
Remembering that mortality moved around in pre Covid years, primarily as a result of the severity of the flu season. So if you take a more normal new to dialysis admit.
Speaker Change: Outlook, and then a slightly negative mortality outlook, that's how we get to the 1% to 2%.
Thank you for that and another follow up on the on the guidance I guess.
You talk about your outlook for revenue per treatment.
Specifically can you talk about you know to build I guess with that you know how much I guess is the commercial rate increases and I guess last quarter. You mentioned there that there is some larger contracts absolutely. You also so any color in terms of these rate increases you've seen there and also inside of it you know your mix of commercial versus government and then.
Specifically in May a way, where you stand up and that next.
Thank you.
Great. Let me grab that join up a couple of things.
Because I think underlying those questions. There's usually a is there something unusual in the payer dynamic and let me go ahead and start by.
No. We are in a normal period and of course, we're trying to make sure that our rate reflect the inflationary pressures that we are receiving.
To your direct question on what percent.
Is that what part is made out of the rate roughly two thirds of the.
The increase will be right.
And one third remaining.
A good chunk of that is annualized nation of the.
Reimbursement operations improvements, we saw in 2023 and the remaining is mix.
As you have seen our mix is trending slightly above the market.
M. A mix finished the quarter around 52% and we expect that number to be a couple of points higher at the end of 'twenty four.
Yes, somewhere in the $54 $55 range, depending on open enrollment.
And I guess on these commercial plans that you mentioned some of the larger plants up for renewal any any update there in terms of the rate increases you're seeing.
Commercial negotiations, we're not going to go into specific.
We can ship, we continue to see that our commercial patient value their private insurance and commercial mix is flattish.
Speaker Change: No nothing to report on that.
And of course, that's embedded in the guidance.
Guidance of the RPT that we gave you.
Great. Thank you so much for taking the question.
Thank you Joanna.
Thank you a J rice with UBS you May go ahead Sir.
Thanks, Hi, everybody.
Can't let you get through the call without asking one G. L. P. One question. So in your prepared remarks, you're staying.
And then for the flow steady you anticipate efficacy on multiple endpoints, including slowing.
TKD predict rush and I think that's generally where the market's at I wondered given your analysis.
<unk> offer and it seems to have really gotten traction in the financial community.
Are there anything is there anything that could come out of the flow study.
He said the high probability range that would make you revisit it seems like you've covered most of what you expect in your analysis, but I wonder is there something that would make you more optimistic less optimistic about how this will impact your business.
Sort of a dissertation on chip P. One.
I've gotten a lot of conversation at the end of the day, we of course wanted to make sure that our shareholders and others.
Really well versed on it and and I think that while there could be an unusual.
Speaker Change: Prize because you never want to say that the chances are zero highly highly improbable that we didn't capture.
And our range what is likely to play out.
So that is.
But at the end of the day.
We expect a net neutral impact on dialysis volume over the next decade.
Speaker Change: And we did a lot of probabilistic adjustments and weighted at.
How many people would participate in all the all the normal math that we discussed and we don't want to change our position a bit.
Speaker Change: Okay.
Great.
Maybe if I could pivot and ask you about your.
Our assumptions around labor going into 'twenty four I know there's the underlying.
Banking on for wages and benefits for your permanent workers I believe you still should have a tailwind.
Contract labor at least Annualizing, where you're ending the year and then there's the whole issue of the California minimum wage for a low wage.
Health care workers I know you said you wouldn't be spending.
<unk> election, spending, but I wonder what you're factoring in for that when you anticipated to start to have an impact.
Yes.
Yeah, a J thanks for that so for.
For labor for the year, so we called out 2.5% to 3% of patient care cost growth per treatment I break that down that's roughly half labor and have other stuff on the labor side.
Were thinking something around 5%.
For the year and that in California would be baked into that.
We called out.
A few a few months ago, something around $30 million to $40 million is the net impact of that once it's fully rolled out in a number of 20 to 25 for 24, we've been rolling it out a little bit quicker than we anticipated. So I would expect the number will probably be somewhere in that 25.
<unk> 30 range and that's baked into our number the reason, we're comfortable with the patient care cost being only 2.5% to 3% given that half of it is labor, which is growing at 5% is we've got savings from the the annualized nation of both Mercer.
Speaker Change: Sure the ship to Mircera as well as some of the clinic footprint actions. We took we've also got fixed cost leverage as we add volume without adding centers and a lot of those other costs are fixed costs that don't grow with volume in and are under long term.
Tracks. So we feel like despite a 5% wage pressure, we can get to that two 5% to 3%.
Okay, that's great. Thanks, a lot.
Thank you our next caller is Gary Taylor with TD Cowen You May go ahead Sir.
Hi, This is Ryan <unk> on for Gary This evening, I think dean touched on it earlier, but maybe just to go back how is the higher sort of Medicare advantage trend. We saw in the back half of the year impacting the accruals I guess that for not only for 'twenty, three but sort of your guidance for 'twenty four and Joel can you remind us when.
Do you anticipate to have the final reconciliation with their plan partners. Thanks.
Yes. So the final reconciliation will depend its plan by plan it can often take three or four quarters.
And that will be ultimately be baked into prior period development in the <unk> business in terms of the.
The impact of some of the cost on the broader MA population in Q4 again we.
Speaker Change: I think it's too early for us to say, whether whether we think thats going to impact us but again.
Reiterate that our population is very different than the broader population.
In terms of 2024, we're keeping a careful eye on it.
To see how it plays out and it's built into it is built into our range.
Thanks.
Thank you our next caller is Lisa Clive with Bernstein, you May go ahead.
Lisa Bedell Clive: Hi, two.
Two questions from me.
Number one we're 18 months since then Marietta ruling your commercial.
So next in pricing seems pretty stable. So just wanted to know if you have any thoughts on what that one has meant over the last year and whether you expect any changes and then also just a clarification in terms of the fact that you don't need to spend on the ballot initiative and obviously here.
Wages are going up in California.
It seems like a reasonable troops with the SEIU and is this something that we should expect.
To continue or is it really just this election cycle.
Obviously nice for you guys to be out of that two year cycle of fighting ballot initiatives.
Alright, Thank you Lisa so let's start with Marietta.
We have discussed in the past.
We have not seen a lot of employer groups change benefit.
Which is absolutely great.
Would be terrible.
Players to not give their employees that have end stage renal disease choice.
That said, we continue to be very mindful and of course work with the kidney community in disability groups.
It is a sort of a dangerous risk out there that we want to make sure.
Not taken advantage of and so.
I'd say in a town hall when someone asked me if I have why I have so much passion on and it's like saying.
The door in your house the lock is broken.
And he said, yeah, but no one's broken in or very little and they say well you still want to fix it and so from our perspective, it's something that the Supreme Court said it needed to be clarified and the champions in Congress and others believe it should be clarified now we've just got to work the process.
I also think and we've discussed that our verification process.
Admissions has helped in that we had an example of an employer group that that actually did apply this and when they found out that their employees didn't actually have a network than they change their benefits again, and basically reverted back to an in network benefit.
So I think sometimes people explore ideas without really understanding the full ramifications and in that case it worked out well and so we will continue to put a lot of energy on that.
Lisa Bedell Clive: Your second question was around the ballot.
Of course.
What we liked about it is that we were spending money on making sure that our patients and our teammates didn't suffer from what we call a very dangerous.
Ballot process, but it takes a lot of money to educate the broader state on how to think about that and so we are extremely happy that at the end of the day instead of spending the money on that.
Teenage get the benefit of that as it relates to is it just this election cycle.
We talked about two election cycle.
And that that would be good.
Good time to hopefully ironed out and revisit our relationship with labor.
Great. Thanks for the clarification.
Thank you Lisa.
Lisa Bedell Clive: And our next caller is Justin Lake with Wolfe Research you May go ahead.
Okay.
Hi, This is dean on again for Justin My Question's on center closings and I'm, sorry, if you've touched on it already but how much more is there to do here and could you speak or could you parse out the impact to the P&L from a set of closing right. So so revenue versus cost savings from fixed from lower fixed cost.
Loss and our efficiencies thank.
Thank you.
Yes, so I appreciate the question.
We are thinking that the year will have roughly 50 centers.
Either close or merge into other centers.
And thinking about roughly in the ZIP code of 20, new centers. So net 30.
Speaker Change: As it relates to the P&L I'm not sure I understood your question.
Could you try it again.
Speaker Change: More just the the moving parts impact to.
So the P&L just could you speak to how you guys.
The ones that are closed are good healthy way to think about it is you'll have a little volume loss and patient choice.
Speaker Change: But when you strip all of that in these centers tend to be inefficient and so what you do is you consolidate.
And medical director fees and so at the end of the day, that's where the savings come from inefficient center with some fixed expenses that get eliminated.
Got it thank you so much.
Thank you.
Thank you Peter Chickering with Deutsche Bank, You May go ahead Sir.
Hi, guys.
Follow ups here to join his question what was the commercial mix in the quarter and what are you seeing for 'twenty 'twenty four.
Yeah.
Commercial mix for the quarter was $10 nine and we expect it to stay flattish.
Alright, great and then free cash flow conversion.
It was very strong in 'twenty three guidance is about 54% and 24.
Is there anything changing within casual conversion or is it simply the dsos that you got what.
What 12 days and Tony.
<unk>, which will not repeat in 'twenty four.
Yeah, you've got it right 23 was.
Really.
Impressive decline in Dsos 'twenty for the free cash flow conversion remains well above net income and that's really driven by two things. One is just structurally our capex is lower than our depreciation and amortization and second is share based comp stock based comp and.
Those two things should persist and that's why the call. It 125% of net income that we're driving in free cash flow for this year, we would expect to persist for some time.
Okay like any updates on <unk> to 90.
Yeah.
There is a little update there was some activity on it but at the end of the day, maybe the best way to summarize it is that.
The judge Hasnt had a final ruling but gave some color and then that color basically both parties one some point and both parties lost one point.
And so therefore, the odds of an appeal are quite high when there is a final ruling.
And so the next question is probably.
If you if you were to say what will be the financial impact we had guided to.
In the past something in that $25 million to $40 million range and as less people are.
On the AK ASP I think that number is likely to be lower more like $25 million would be a good range.
Okay.
Okay, Great and then last question I'm asked the center.
Closure question differently.
What was center liquidation at the end of it.
Speaker Change: In the fourth quarter of 'twenty three.
What do you assume that goes in the fourth quarter of 'twenty four.
I'm, sorry did you say capacity utilization, yes, I mean, just.
Thinking about combination of centers closing and patients coming back and there's the overall center utilization where did you exit the year in 'twenty three and what do you think that can get to by the end of 'twenty four.
Yes, so where we're exiting the year at about 58% and.
I would expect picking up a point, maybe a little bit more over the course of the year.
And just as a point of reference.
If you want to go back pre Covid I'm going to go back several years in the 2016 or so range, we would be in the 65 or so percent range and then just how you see the impact of all of this California conversation that we've had California because.
How difficult the operating environment is roughly in the 70% range because people aren't opening centers. So all these are very expensive propositions and poor conduct that.
Had an impact that people do not want to open centers there.
And then just out of curiosity.
If over a multiyear period to get back to 65% kind of is this worth like 300 bps of G&A leverage here I'm kind of size up that for me that'd be wonderful.
Yes so.
The leverage you'd see would be in our patient care cost is not in the G&A. Because there is there is a fixed cost associated with a clinic that's in the patient care costs, so you'd see it there.
I think the best I can do to help you with that math would be to think about our patient care cost per treatment number right. So running at $255 for 2023.
That is roughly two thirds variable one third fixed so if you if you imagine us growing that volume without building as many centers and just to be clear, we would have to build some centers because even though capacity utilization is low the capacity may not.
B exactly where in the country you need it to be so depending on what assumption you make there recognizing that a third of that PCC per treatment is fixed I think that'll give you everything you need to do to do the math on what it could be worth.
Okay, great. Thanks, so much guys. Thank you Pedro.
And at this time I am showing no further questions.
Okay. Thank you Michelle and thank you all for your interest in Davita.
Just in summary, we had a strong close to the year and that combined with our guidance for 2024, we are now back on a path to recuperate, our pre pandemic financial trajectory.
We'll continue to work hard to deliver strong results innovate and most importantly provide a great clinical care for our patients. Thank you all for joining the call.
Thank you. This concludes today's conference call you May go ahead and disconnect at this time.