DaVita Q2 2023 Earnings Report

DaVita EPS Results

• Actual EPS: $2.08
• Consensus EPS: $1.66
• Beat/Miss: Beat by +$0.42
• One Year Ago EPS: $2.30

DaVita Revenue Results

• Actual Revenue: $3.00 billion
• Expected Revenue: $2.95 billion
• Beat/Miss: Beat by +$48.60 million
• YoY Revenue Growth: +2.50%

DaVita Announcement Details

• Quarter: Q2 2023
• Date: 8/3/2023
• Time: After Market Closes
• Conference Call Date: Thursday, August 3, 2023
• Conference Call Time: 5:00PM ET

DaVita (NYSE:DVA) (NYSE: DVA) is a healthcare company focused primarily on kidney care. Through its DaVita Kidney Care business, the company provides outpatient dialysis services for people with chronic kidney failure, including in-center hemodialysis and home-based dialysis options. Its services also include clinical care, education, nutrition support and other resources intended to help patients manage kidney disease.

DaVita also provides broader kidney-care services, including chronic kidney disease management, care coordination and support for patients who may be candidates for kidney transplantation. The company operates dialysis centers and related care programs primarily in the United States, with additional operations in selected international markets.

The company traces its history to 1979, when it was established as Medical Ambulatory Care, and adopted the DaVita name in 2000. Javier Rodriguez serves as DaVita’s chief executive officer. The company’s operations are centered on its kidney-care platform and its network of clinicians, physicians and other healthcare professionals.

DaVita Q2 2023 Earnings Call Transcript

Key Takeaways

• CWOW rollout is now live in all ~2,700 U.S. clinics, delivering real-time clinical dashboards, unified data flow and an AI-ready platform to enhance care delivery over the long term.
• Q2 results beat expectations with $432 million in adjusted operating income and $2.08 adjusted EPS, fueled by sequential gains in treatment volume, stronger revenue per treatment and lower patient care costs.
• FY 2023 guidance was raised to $1.565 billion–$1.675 billion in adjusted operating income and $7.00–$7.80 in adjusted EPS, reflecting robust volume trends, RPT growth and cost-efficiency initiatives.
• The proposed 2024 CMS rate update falls short of forecasted cost inflation, driving DaVita to push for a reconciliation mechanism and pursue facility consolidations and MIRCERA adoption to offset margin pressure.
• Leverage stood at 3.7x EBITDA at quarter-end with no share repurchases, as the company targets a 3.0–3.5x range before resuming buybacks and has closed or consolidated 36 centers year-to-date.

Presentation

[Operator]

Good evening. My name is Michelle, I will be your conference facilitator today. At this time, I would like to welcome everyone to the DaVita Second 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 speaker's remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press Star and the number 1 on your telephone keypad. If you would like to withdraw your question, press Star, then the number two. Mr. Eliason, you may begin your conference.

[Nic Eliason, Group Vice President of Investor Relations at DaVita]

Thank you, and welcome to our second quarter conference call. We appreciate your continued interest in our company. I'm Nic Eliason, Group 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. For further details concerning these risks and uncertainties, please refer to our second 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 may make with the SEC.

[Nic Eliason, Group Vice President of Investor Relations at DaVita]

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 will now turn the call over to Javier Rodriguez.

[Javier Rodriguez, CEO at DaVita]

Thank you, Nic, and thank you for joining our call today. I hope that everyone's having a safe and joyful summer. At DaVita, we've been focused on innovation and continuous improvement to provide the highest quality of care for our patients. Hand in hand with these efforts, we've been driving operational improvements across our organization. Our second quarter performance reflects strong traction across those initiatives, putting us on a path to deliver strong clinical outcomes and financial results for the year. Today, I will cover the second quarter results, offer some perspective on the industry landscape and drivers of long-term performance, and update our full-year guidance. Before we get into the second quarter details, I would like to take a moment to celebrate a clinical and technological milestone.

[Javier Rodriguez, CEO at DaVita]

On our February call, we mentioned the rollout of our next-generation clinical IT system, which we refer to as Center Without Walls, or CWOW. I'm happy to report that after five years of development, CWOW is now live in each of our approximately 2,700 clinics across the United States. This patient-centric, cloud-based system combines and replaces four legacy systems and is designed to provide seamless flow of information across each of our centers and all modalities. This includes real-time clinical dashboards, data sharing with our physicians and integrated kidney care platforms, and notifications such as critical lab alerts. For ease of use, it features wristbands for quick teammate login, improved ability to track and reschedule missed treatments, enhanced real-time documentation, and consolidated reporting for streamlined analysis.

[Javier Rodriguez, CEO at DaVita]

While we're enthused about these immediate benefits, the most significant enhancement is the state-of-the-art data structure and platform upon which we can build further capabilities, including artificial intelligence, to advance the care delivery in the years ahead. With this groundbreaking platform, our clinicians are able to access the right information at the right time, in the right place. Transitioning to our financial performance. In the second quarter, we delivered adjusted operating income of $432 million and adjusted EPS of $2.08. These results were driven by improvements across our financial trilogy of treatment volume, revenue per treatment, and patient care costs. I'll touch on each of these in a bit more detail. On volume, we saw our second consecutive quarter of improvements in census and treatments per day.

[Javier Rodriguez, CEO at DaVita]

This is encouraging as it is a result of better macro environment and progress in our operating initiatives. We're trending near the top of our original volume range of down 3% to flat year-over-year. If these trends continue, we would anticipate delivering volume growth in 2024. Shifting to revenue and revenue per treatment. Revenue per treatment was particularly strong in the quarter. This was primarily driven by typical seasonal factors from patients meeting their copays and deductibles, along with normal expected rate increases and improvement in mix, including Medicare Advantage. Adding to the RPT increase, we have seen progress from investments we've been making in our revenue cycle capabilities. These investments resulted in higher cash collections and a decline in our DSO. I'm excited about the investments we've been making in this area, which represent a good example of how we are constantly improving operations.

[Javier Rodriguez, CEO at DaVita]

Finally, patient care costs improved as expected in the quarter. Although base wage increases remain well above historic pre-pandemic levels, other expenses, including contract labor and pharmaceuticals, continued to decline. This benefit was partially offset by elevated training costs. While staffing levels in our clinic are in a much better position compared to last year, we continued to experience above-average turnover among facility teammates. As a result, we no longer expect an improvement in our training productivity during the back half of this year. Taking a step back from the most recent results, I would like to offer some reflections on the broader industry landscape and our effort to drive performance going forward. Beginning with the reimbursement rates, we're disappointed by CMS's proposed rule to update the ESRD prospective payment system for 2024.

[Javier Rodriguez, CEO at DaVita]

Specifically, the proposed rate increase falls short of expected cost inflation in 2024, and it fails to adjust for the acknowledged inflation forecast miss relative to actual wage and inflation increases over the past two years. The kidney care community will continue to advocate for an adjustment mechanism to reconcile these forecast errors, similar to what exists today for skilled nursing facilities. In response to the persistent cost inflation, we're continuing our track record of innovation across all areas of our cost structure. Most recently, we consolidated portions of our facility footprint and reduced pharmaceutical costs through our conversion to Mircera for anemia management. These programs are proceeding in line with our expectations. Going forward, we will continue to drive cost efficiencies across the P&L.

[Javier Rodriguez, CEO at DaVita]

Through these efforts and continued improvement in our volume trends, we continue to target 3%-7% long-term growth of our enterprise Adjusted Operating Income. Looking forward to the remainder of the year, given our progress during the second quarter, we're revising our Adjusted Operating Income range of $1.475-1.625 billion to a new range of $1.565-1.675 billion. We're also updating our Adjusted Earnings Per Share range of $6.20-7.30, to a new range of $7.00-7.80. Our performance relative to this guidance will continue to depend heavily on momentum and patient census trends, our ability to manage patient care costs within the broader labor environment, and sustain improvement in revenue cycle management.

[Javier Rodriguez, CEO at DaVita]

I'll now turn the call to Joel to discuss financial performance and outlook in more detail.

[Joel Ackerman, CFO and Treasurer at DaVita]

Thanks, Javier. I'll walk through a few factors driving our strong performance in the second quarter, starting with treatment volume. In the second quarter, U.S. dialysis treatments per day were up by approximately 0.3% sequentially. This is the result of continued census gains in the second quarter, driven by an increase in new-to-dialysis admits. Mortality remains higher than pre-COVID levels, but came in lower than Q1 and in line with our expectations for the quarter. Our mistreatment rate continues to be elevated relative to historic levels. Revenue per treatment was up $10.59 versus Q1. Approximately half of this increase was the result of seasonality, primarily due to higher patient responsibility amounts in the first quarter. Approximately $2 came from normal, expected rate increases and continued increases in patient mix. An additional roughly $2 was the result of strong cash collections in Q2.

[Joel Ackerman, CFO and Treasurer at DaVita]

As Javier said, we have been investing in improvements in our revenue cycle management systems and processes and are beginning to see the benefits of these efforts in both RPT and DSOs. We were anticipating these improvements, but they came earlier than forecasted. We expect these benefits to persist in the back half of the year and going forward. As a result, we now anticipate year-over-year RPT growth to be 2.5%-3%. On a non-GAAP basis, patient care costs per treatment decreased 1.5% sequentially. While base wage increases remain high, we have successfully reduced most of the temporary compensation measures we relied on during 2022. At the end of Q2, contract labor has returned back to pre-pandemic levels. Operating income from our integrated kidney care business was approximately flat with Q1.

[Joel Ackerman, CFO and Treasurer at DaVita]

The quarter benefited from positive prior period developments in our special needs plans and the timing of expenses that were delayed until later this year. For the full-year, we now expect IKC adjusted operating income to be approximately flat to 2022 operating income loss of $125 million. Regarding our clinic footprint, in Q2, we closed or consolidated 16 centers in the US, bringing our year-to-date US closures to 36. We continue to assess further facility consolidation and closures during the back half of the year. Regarding capital structure, we ended the quarter with a leverage ratio of approximately 3.7x EBITDA and did not repurchase any shares during the second quarter.

[Joel Ackerman, CFO and Treasurer at DaVita]

Our capital allocation strategy remains focused on capital-efficient growth, a target leverage ratio of 3-3.5 times EBITDA, and the return of excess cash flow to investors through share buybacks. Given our increased guidance for the balance of the year, we have increased visibility towards bringing our leverage level back within our target range. That concludes my prepared remarks for today. Operator, please open the call for Q&A.

[Operator]

Thank you. At this time, if you would like to ask a question, you may simply press star and then the 1 on your telephone keypad. If you would like to withdraw your question, you may press star, then the two. Our first caller is Kevin Fischbeck with Bank of America. You may go ahead, sir.

[Joanna Gajuk, Director, US Equity Research, Health Care Facilities and Managed Care at Bank of America]

Good afternoon. Actually, this is Joanna Gajuk filling in for Kevin. Thanks for taking the question here. Thanks for the color around the revenue per treatment breakdown in terms of the drivers there, including very strong performance. I appreciate a commentary expect, I guess, a faster growth for the year. Just looking into the pieces, because you, you said, better payer mix, one of the drivers. Can you talk about specific commercial pricing and what kind of rate increases are you getting, you know, this year? Also, you know, any indications for how things are tracking into next year, because I guess that's where maybe one area, because you also mentioned the Medicare rate out there being lower than cost inflation. Is the commercial pricing, I guess, tracking better?

[Javier Rodriguez, CEO at DaVita]

Yeah, thank you for the question, Joanna. I'll start off and, Joel, you can supplement if I miss anything of importance. Private pay mix is holding up. It picked up 20 bps, and we continue to see that our private pay patients really value their insurance. As it relates to rate increases, just a reminder, most of our contracts are multi-year, so in any given year we don't negotiate that many contracts. There's nothing really to call out on that. Our revenue per treatment increases are in line with expectations. Is there, is there another part to your question that I didn't answer, Joanna?

[Joanna Gajuk, Director, US Equity Research, Health Care Facilities and Managed Care at Bank of America]

No, this was... Yeah, this was it. I guess also, related, if I can, follow up to that topic, in terms of the Marietta case, and I guess we spoke before and, there's still, you know, bipartisan support for a fix. Can you give us any update on that? I guess on that topic, as it relates to pricing, commercial pricing, you know, are you seeing employers using this court decision to, to restrict networks, or are they using it to maybe, you know, they bring it up in the price negotiations when it comes to pricing for self-employed?

[Javier Rodriguez, CEO at DaVita]

Sure. Let me take.

[Joanna Gajuk, Director, US Equity Research, Health Care Facilities and Managed Care at Bank of America]

Sorry, sure.

[Javier Rodriguez, CEO at DaVita]

Let me lens up a little, since some people are not tracking all of the Marietta, so it's probably best for me to divide it into what we know and what we don't know. Let me start with what we do know. As we look at our claims year-to-date, we have not seen much change compared to prior years, so there's not a lot of volume. We have learned more about how employers change benefits and mislead members on how it's done, and so we don't want to accommodate this poor behavior. What we have done is we've implemented a verification process at admissions, and if an employer eliminates a network dialysis benefit for its member, then we have the right to prevent that plan from having access to our centers.

[Javier Rodriguez, CEO at DaVita]

In addition, we continue to have very high interest, bipartisan interest in making sure that policymakers protect our patients. Those are the things that we do know. What we don't know is how many employer groups are considering carving out dialysis from network in the future, and we also don't know if or when members of Congress will introduce the bill and how the CBO will score it. The last part of your question was, are payers using this in one way or another? It has not come up in one negotiation, because this is really more of, of a dynamic between the employer trying to decide what to do with the plan, not what the payer does with the provider. The provider and the payer both value network. Does that help you, Joanna?

[Joanna Gajuk, Director, US Equity Research, Health Care Facilities and Managed Care at Bank of America]

Yeah, that makes sense. No, no, that totally makes sense, and I appreciate it. So in terms of what's going on in Congress and the score, so is there any indication what we might hear about this, or that's not really something that we can predict from the outside?

[Javier Rodriguez, CEO at DaVita]

Yeah, there's, there's nothing we can predict from the outside. That's, that's left to policymakers, champions, and, and the dynamics of Washington, D.C.

[Joanna Gajuk, Director, US Equity Research, Health Care Facilities and Managed Care at Bank of America]

Great, thank you. If I may, just on the guidance phase, right, it sounds like some improvement in the pricing rate and then I guess contract labor sounds like that's better. Is that the way to frame the guidance rate, the $70 million of the operating income, or just the operating income guidance?

[Joel Ackerman, CFO and Treasurer at DaVita]

Yeah, Joanna, if I were to kind of give you the pieces of what drove $70 million of increased guidance, that's middle of the range to middle of the range on OI. I'd say about half is the RPT, as you called it out. The other half is volume. We saw stronger admissions this quarter, and the nature of volume is it's cumulative. It'll never really kick in in any one quarter in that big a way, but as it accumulates, you know, stronger in Q1, stronger in Q2, and we see it better in the back half of the year. For the full-year, we think that'll contribute about half of the $70 million beat. Contract labor, it continues to improve, but it's now pretty much in line with what we were expecting.

[Joel Ackerman, CFO and Treasurer at DaVita]

As we said in the prepared remarks, it's really back down to pre-COVID levels, and hopefully it won't be much of a topic going forward.

[Joanna Gajuk, Director, US Equity Research, Health Care Facilities and Managed Care at Bank of America]

Thank you. I appreciate it. Thanks for the call.

[Operator]

Thank you. Once again, if you would like to ask a question, you may press star one. Our next caller is Andrew Mok with UBS. Sir, you may go ahead.

[Andrew Mok, Director at UBS]

Hi, good afternoon. Appreciate all the color on the sequential RPT improvement, but just a couple of follow-ups there. First, is the seasonality component in line with historical seasonality, or is there something about the patient benefit design that's creating more acute seasonality this year? Can you go into a bit more detail on what's driving the better cash collections? Thanks.

[Javier Rodriguez, CEO at DaVita]

Yeah, Andrew, thanks. So on the seasonality, no, it was a little bit more than $5, which is per treatment, which is right in line with we, with what we've seen historically. In terms of collections, look, we have invested in our processes and in our technology to get better information and to give better information to the health plans on everything from prior authorizations to other data required to claim submissions. That's both the quality of the data and the timeliness of the data. What we're seeing is we're getting paid quicker, and that's why you saw DSOs come down last quarter and again this quarter, and we're also seeing we're collecting more, and that's what's driving the RPT increase. I think the most important thing from our standpoint is this is not a one-time thing.

[Javier Rodriguez, CEO at DaVita]

These are fundamental changes that we've made that we think will persist.

[Andrew Mok, Director at UBS]

Great. Appreciate the color. As a follow-up, the guidance, the OI guidance is up about 5%. I think your free cash flow is up about 10%. Can you help bridge the difference there or help us understand why the free cash conversion is better on the new guide? I think I missed your comments on share repurchase, but would love to get your latest thoughts around there and the potential resumption of share repurchase. Thanks.

[Javier Rodriguez, CEO at DaVita]

Sure. The, the big difference between OI and free cash flow is the DSOs. As, as we see those DSOs come down, that'll add to the free cash flow for the year. In terms of share repurchases, we're, we're on track with what we set out to do. Our leverage levels were above our target range. I think we were, we were quite clear with everyone. We wanted to get back down to 3.5 or below. We're making good progress on that. We're at 3.7 for the quarter, and we didn't buy back any shares. We don't expect to buy back any shares in Q3, but we feel like we've got better visibility now to get back to the 3.5 or below.

[Andrew Mok, Director at UBS]

Great. Thank you. I'll hop back in the queue.

[Javier Rodriguez, CEO at DaVita]

Thank you.

[Operator]

Thank you. Our next caller is Pito Chickering with Deutsche Bank. Sir, you may go ahead.

[Javier Rodriguez, CEO at DaVita]

Hey, Peter.

[Operator]

Peter, your line is open? We'll go to the next caller. Lisa Clive with Bernstein. You may go ahead.

[Lisa Clive, Senior Analyst at Bernstein]

Hi. Hi there. apologies, Javier, if you touched on this in the opening remarks, I was a few minutes late. just could you comment on the CMS rate increase, and, you know, the fact that they admitted a mistake in the calculations and what the chances are of getting an improvement there? also, just as we think about going into 2025, what would a fair rate increase look like? perhaps, what lower numbers should our expectation around that actually be?

[Javier Rodriguez, CEO at DaVita]

Yeah, thanks for the question, Lisa. It, it's kind of funny. I've been here for a very long time, and not many questions used to come up about the rate increase with Medicare. We, we start to ask ourselves, why is this a new dynamic? The reality is, is that the system is quite complicated, but it works relatively well in times where there's economic stability. When it's, when we're experiencing times of inflation or lack of stability, it's really showing that it doesn't work in many ways. Let me step back.

[Javier Rodriguez, CEO at DaVita]

If, if you, if you were to spend time on trying to understand the methodology, you would really come to the conclusion that it is practically not possible to forecast because there's just too many things that are either proprietary or use lag data or a benchmark that is not related to dialysis. It's a benchmark related to all healthcare costs, it's all weighted and then discounted with some kind of productivity factor. The short answer is: It's a big complicated equation with some variables that we will not have visibility to. That's the short answer. We can't forecast it. I can't believe anyone from the outside world can. Secondly, what is an appropriate one and what we are advocating for is let's not have, let's call it winners or losers.

[Javier Rodriguez, CEO at DaVita]

We understand that forecasting is difficult, let's have a reconciliation that is actually linked to actual costs, and that if costs-- if you get an increase and it's and exceeds what inflation, that there could be a decrease or, or vice versa. That's what we're advocating for. As you know, it is very difficult in Washington, D.C., right now on trying to get funding, we are trying to make our case.

[Lisa Clive, Senior Analyst at Bernstein]

Maybe just touching on MedPAC's role here. I mean, they're sort of, well, the economic advisor to Medicare, but they don't have any enforcement power. I think there's sometimes, some years, there's a big disconnect between the MedPAC recommendation and the rate, and then this year it was actually quite in line. I mean, from your perspective, do you guys even look at the MedPAC numbers? I think it seems like it should be a useful data point, but it often isn't.

[Javier Rodriguez, CEO at DaVita]

Yeah, you know, the process for MedPAC is, is a bit opaque to us. We try to educate and highlight what is really happening with our cost structure. Again, in periods of stability, it happened to be, give or take within reason, acceptable. Now the gap is widening, and it's widening compounded year-after-year, so it's really starting to be significant.

[Lisa Clive, Senior Analyst at Bernstein]

Okay. Last follow-up is, does this have, just given how the rate increase was, does this change your decision on some clinic closures in, in any way? Obviously that's always the worry, that if, if the Medicare rates get too low, you just have, you know, clinics here and there where you're on all Medicare, and it just doesn't financially make sense anymore.

[Javier Rodriguez, CEO at DaVita]

Yeah. There, there's lots to go into the decision to close a clinic. In particular, we've got to really focus on patient care and making sure that our patients are being taken care of. It is absolutely a consideration when you look at the economics. The, sort of the first filter is continuity of care. The second is, is there a convenient place where that patient can be taken care of? Then after that, you get into economic factors such as reimbursement, leases, and, and other things. We are aggressively looking at our footprint, and we continue to right-size to make sure that we are thoughtful about our resource allocation and capital allocation.

[Lisa Clive, Senior Analyst at Bernstein]

Great. Thanks for that.

[Javier Rodriguez, CEO at DaVita]

Thank you, Lisa.

[Operator]

Thank you. Once again, that is star one, if you would like to ask a question. Our next caller is Pito Chickering with Deutsche Bank. Sir, you may go ahead.

[Pito Chickering, Director and Senior Equity Research Analyst at Deutsche Bank]

Hey, can you guys hear me now?

[Javier Rodriguez, CEO at DaVita]

Yes. Yes, Pito.

[Pito Chickering, Director and Senior Equity Research Analyst at Deutsche Bank]

All right. Sorry about that. I'm not sure what happened there. Back to treatment growth here. Pre-COVID, you know, like, you were getting about 4,000 new patients a year, about two-thirds of those in the first half of the year, from nephrologists dropping on, and then I'll see the rest coming from hospitalizations dropping to you guys. I guess, how is that tracking this year at this point, relative to sort of that 4,000 times two-thirds? Is that what you guys are seeing for new patients at this point?

[Javier Rodriguez, CEO at DaVita]

Yeah. Pito, the short answer is, if you're looking at admits, we are tracking pretty much to pre-COVID levels. The challenge is excess mortality, that remains elevated, and that's the reason that we're not yet ready to say we're gonna return to pre-COVID growth levels. That said, mortality has been coming down year-after-year since COVID started. It's down Q2 versus Q1. If mortality continued to decline and return to pre-COVID levels, then the math you laid out of 4,000 new patients a year, we'd be back there.

[Pito Chickering, Director and Senior Equity Research Analyst at Deutsche Bank]

Which is a perfect segue for, for the next question about, you know, mortality. You sort of talked about that sort of coming down. I guess, is there any way that you can give us or what is the rate of that decline? And if it follows the path you've seen for the last three quarters, you know, so what glide path would that indicate?

[Javier Rodriguez, CEO at DaVita]

Yeah, that's it's a tough piece of analysis to do because it hasn't necessarily been smooth quarter-to-quarter or year-to-year. Look, we're watching it carefully. We all know there's a minor surge going on, but I think minor is, is the operative word from what we've seen so far. We're keeping a careful eye on it, but I don't think we can we can draw a trend line based on the history to say when we think mortality gets back to zero, or excess mortality gets back to zero.

[Pito Chickering, Director and Senior Equity Research Analyst at Deutsche Bank]

Okay, like, is there some way, you can quantify for us to what, what excess mortality was this, this quarter and when it's, where it was last quarter?

[Javier Rodriguez, CEO at DaVita]

Yeah. Last quarter it was roughly, 900 lives. This quarter, it was, between 500 and 600. Remember, we, we will sometimes update those over time. We get, we get better views of excess mortality as time goes on. Somewhere, between 500 and 600 is our best estimate for Q2.

[Pito Chickering, Director and Senior Equity Research Analyst at Deutsche Bank]

Okay. I definitely understand sort of the complexity of, of coming up with those for a variety of different reasons. For Medicare Advantage, what percent of your MA patients are you currently taking risk for one way or another?

[Javier Rodriguez, CEO at DaVita]

I'd have to do the math quickly in my head. Peter, I don't want to give you a bad number, so I'm gonna. Let's take that offline.

[Pito Chickering, Director and Senior Equity Research Analyst at Deutsche Bank]

Okay. next one here is, you know, on the managed care rate increase question that was asked earlier, I guess, are you seeing managed care do anything different in terms, not just in the rate increases, but potentially trying to steer patients? Like, have you seen any behavior changes from managed care in the last, you know, 90 days or so? Obviously, as they're seeing increased relations elsewhere, just curious if they're trying to control costs within other parts of the, the business.

[Javier Rodriguez, CEO at DaVita]

No, we haven't seen no changes at all.

[Pito Chickering, Director and Senior Equity Research Analyst at Deutsche Bank]

Okay, got it. Last one here. On the pace of consolidation for facilities, obviously you guys do the lowest hanging fruit first. As you see success of capturing those patients served within other, other centers, do you get more aggressive about consolidation than maybe you had originally planned for about a year from now? When these patients, you know, are consolidated, do you see an increase of home, home treatments at that point?

[Javier Rodriguez, CEO at DaVita]

Yeah, I think we want to be really careful about being, quote-unquote, aggressive, but we want to be really thoughtful and balanced in all the trade-offs that go into closing a center. We have to remember, our patients are incredibly vulnerable, and one of the most important things is to be close to their home. So 90-some odd % of our patients are within 10 miles of their home, and that is one of the best things we can offer: convenience. You know, we talk a lot about health equity issues and not being in the communities. We are in the communities, and so we take that pretty seriously. But, as the economics constraints happen, if we are able to accommodate our patients, we are being very thoughtful on that.

[Javier Rodriguez, CEO at DaVita]

We have other obligations like leases and other things. There's a natural time to review a clinic to see if it's appropriate for closure.

[Pito Chickering, Director and Senior Equity Research Analyst at Deutsche Bank]

Okay, and then-

[Javier Rodriguez, CEO at DaVita]

The second part to your question, I think, Peter?

[Pito Chickering, Director and Senior Equity Research Analyst at Deutsche Bank]

Yeah. you know, I'll sort of ask, ask the same question in different ways, I guess. If a patient is consolidated, do you see an increase utilization of home treatments? The second part of the question is, what % of treatments today are being done in the home?

[Javier Rodriguez, CEO at DaVita]

No is the answer. We are not seeing any changes in whether a patient goes home or not. We continue to be a very much an advocate of home. There's a lot of dynamics and education that go into that, and we want the right modality for the right patient. We are huge home champions, and the mix on home is roughly around 15%, a little above that, like 15.2 or so, but it's been hanging around that 15%. COVID had a big impact on home, that many patients felt more comfortable in that time of insecurity to go and be taken care of by professionals. We're starting to see a slight pickup in patient choice to go home.

[Pito Chickering, Director and Senior Equity Research Analyst at Deutsche Bank]

Okay. Then I think the last question for me here. Can we get an update on Medtronic JV? I guess, you know, how much of the drag is that on, on OI? Just, you know, as you look at it today, kind of what's the pathway to that becoming operating income neutral? Just, can you just, you know, refresh us on sort of why you saw it as a good opportunity for you guys? Thanks so much.

[Javier Rodriguez, CEO at DaVita]

Sure. Just as a reminder, it doesn't hit our operating income. It's below the OI line, so it hits EPS. It's worth about $15 million pretax per quarter. That's on a non-GAAP basis. This quarter, we actually had some positive gain as a result of the transaction, and we think that number will decline over the next couple of years, and we anticipated getting to breakeven in two to three years. In terms of why we like this, look, as Javier mentioned, we are really interested in figuring out ways to help our patients get home, and new technology can be part of that answer. We're looking for other ways to innovate, beyond just the service and information capabilities that we can do.

[Javier Rodriguez, CEO at DaVita]

We recognize Medtronic as a world-class leader in innovation on the medical device side, we just thought their history here, combined with our knowledge, would make for a great partnership, which is why we invested in Mozarc.

[Pito Chickering, Director and Senior Equity Research Analyst at Deutsche Bank]

Perfect. All right, the last quickie for me. I may have missed it. Did you guys quantify what the turnover was, nurses and technicians for this quarter and how it compares versus 2019? Thanks so much.

[Javier Rodriguez, CEO at DaVita]

Thank you for that last question. We did not go into that level of detail. I think what we can say on labor, because we've gone into so much detail on labor, is in, in the overall category, it's playing out as expected. Some of the underlying components have shifted a bit, just to give a little more detail on that, base wages are above our normal averages. Our contract labor is back in line to normal, we continue to have elevated training. That's how the levers are moving. Overall, the category is as expected.

[Pito Chickering, Director and Senior Equity Research Analyst at Deutsche Bank]

Great. I'll stop there. Thank you guys very much.

[Javier Rodriguez, CEO at DaVita]

Thank you.

[Operator]

At this time, I am showing no further questions, sir. We do have one more question. Andrew Mok from UBS. You may go ahead, sir.

[Andrew Mok, Director at UBS]

Hi. just wanted a couple follow-ups on the clinic closures. You closed down 16 clinics but opened 10 new dialysis clinics. I'm just trying to better understand what's driving the new clinics at this point, given I thought a lot of the clinic closures was a result of excess mortality. What are you seeing in the market that's causing you to open new clinics? Are, are there any characteristics that you would call out about them, whether they're home dialysis programs or anything like that? Thanks.

[Javier Rodriguez, CEO at DaVita]

In general, you can imagine healthcare is local, and so there are areas where there, there are literally full clinics. There's sometimes relocations, sometimes, as you called out, there might be just a home center that was needed. There's, there's a little of all. As you can see, the number is materially smaller as we are very focused on making sure that capacity utilization is where it needs to be and that we're capital efficient.

[Andrew Mok, Director at UBS]

Got it. On the mortality, I think you, you gave us the absolute number in the quarter. Can you give us a sense for how the mortality rate in general is tracking, and how far off are you against pre-pandemic levels? Thanks.

[Javier Rodriguez, CEO at DaVita]

The mortality level looks, roughly 1% or so higher than pre-pandemic, and as Joel talked about it, it's a bit cyclical and depending on the surge or if there is one, or sort of the, the front end tends to have higher mortality, the front end of the year or the, or the back end of the year versus the middle of the year. I think a good number is roughly 1% or give or take 2,000 patients.

[Andrew Mok, Director at UBS]

Great. Thanks for all the color.

[Javier Rodriguez, CEO at DaVita]

Thank you.

[Operator]

At this time, I'm showing no further questions.

[Javier Rodriguez, CEO at DaVita]

Okay. Well, thank you, Michelle. Thank you all for your questions. As you heard through our comments today, we've continued to drive operational efficiencies and make investments to fuel our performance now into the future years as well. Some of those seeds that we planted are beginning to sprout. Some will take additional time and continued effort. We look forward to keeping you updated on our continued progress in the back half of the year. Thank you for joining the call. Be well.

[Operator]

Thank you. This concludes today's conference call. You may go ahead and disconnect at this time.

Participants

Executives

• Javier Rodriguez, CEO
• Joel Ackerman, CFO and Treasurer
• Nic Eliason, Group Vice President of Investor Relations

Analysts

• Andrew Mok, Director at UBS
• Joanna Gajuk, Director, US Equity Research, Health Care Facilities and Managed Care at Bank of America
• Lisa Clive, Senior Analyst at Bernstein
• Pito Chickering, Director and Senior Equity Research Analyst at Deutsche Bank