DaVita Q3 2024 Earnings Report

DaVita EPS Results

• Actual EPS: $2.59
• Consensus EPS: $2.76
• Beat/Miss: Missed by -$0.17
• One Year Ago EPS: $2.85

DaVita Revenue Results

• Actual Revenue: $3.26 billion
• Expected Revenue: $3.25 billion
• Beat/Miss: Beat by +$16.63 million
• YoY Revenue Growth: +4.60%

DaVita Announcement Details

• Quarter: Q3 2024
• Date: 10/29/2024
• Time: After Market Closes
• Conference Call Date: Tuesday, October 29, 2024
• 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 Q3 2024 Earnings Call Transcript

Key Takeaways

• DaVita’s dialysis centers reopened within days after Hurricanes Helene and Milton, deploying generators, water, fuel and crews to support patients, with only one center still rebuilding and ongoing humanitarian efforts.
• The closure of Baxter’s North Cove facility disrupted home PD solution and saline supply, temporarily halting new PD starts and prompting an estimated $10 million to $20 million drag on Q4 operating income, though normalization is expected by Q1 2025.
• In Q3, DaVita reported $535 million of adjusted operating income, $2.59 adjusted EPS and $555 million free cash flow, and reaffirmed its full‐year 2024 guidance despite volume headwinds.
• Management anticipates the CMS 2025 ESRD final rule will include a ~2.1% market basket update and the mandatory transition of oral‐only drugs into the dialysis bundle, but is awaiting details on reimbursement and unbillable items.
• Looking to 2025, DaVita expects persistent volume headwinds from elevated mortality, supply and interest cost pressures to be largely offset by declining closure costs, international acquisitions and potential savings from drug bundle inclusion, with formal guidance to be provided on the Q4 call.

Presentation

[Operator]

Good evening. My name is Michelle, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the DaVita Third Quarter 2024 Earnings Call. 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, then the number one on your telephone keypad. If you would like to withdraw your question, press star, then the number two. Thank you, Mr. Eliason. You may begin your conference.

[Nic Eliason, VP of Investor Relations at DaVita]

Thank you, and welcome to our third 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 third 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.

[Nic Eliason, VP 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 all for joining the call today. I'm grateful for the incredible effort of our frontline caregivers as we deliver outstanding care for our patients while also navigating recent hurricanes and related supply disruption. Alongside these challenges, we continue to execute on operating efficiencies and innovate across the continuum of care. Today, I will cover our third quarter performance, which was in line with our expectations, provide an update on our supply chain, discuss our expectations for upcoming CMS 2025 final rule, and wrap up with some comments about next year. But first, we will start the call, as we always do, with a clinical highlight. This quarter, we'll use this opportunity to highlight the remarkable resilience our patients and teammates have demonstrated in the face of recent storms.

[Javier Rodriguez, CEO at DaVita]

Over the past month, millions of lives were impacted by the devastation caused by hurricanes Helene and Milton. Despite hundreds of centers being in the path of these storms, most were open within days of the storm relenting, and all but one is fully operational today, providing care in these communities. Many inspirational stories emerged from the dialysis community, which came together to support those in need. In the immediate aftermath of these storms, our care teams from across the country rallied to support the regions affected. DaVita deployed generators, water tankers, over 20,000 gallons of fuel, and high-water crews to conduct wellness checks and search for missing patients and teammates. Local leadership worked tirelessly to account for all patients and teammates and to coordinate transportation for urgent access to the dialysis care many patients needed to survive.

[Javier Rodriguez, CEO at DaVita]

Our Asheville Kidney Center opened on the Sunday immediately after Hurricane Helene under generator power to provide the care for patients from six nearby facilities. We and others in the kidney care community open our doors to anyone needing treatment, including those who normally treat with other providers. I was proud to see the dialysis community come together in common support of patient care. Combined with the dedication of our local care teams, our successful emergency response has again underscored the importance of scaled resources and operating discipline. Although the storms have since passed, our efforts are ongoing to coordinate humanitarian needs, including food, housing, and other assistance. We continue to work with the impacted communities to rebuild. Thank you all to the teammates who have gone above and beyond to care for one another and our patients.

[Javier Rodriguez, CEO at DaVita]

Beyond the community impact, key supply lines were disrupted by Hurricane Helene due to the closing of Baxter's North Cove facility. Baxter supplies us with the majority of our peritoneal dialysis, or PD solution, used for home PD therapy, and the majority of our saline used during each in-center hemodialysis treatment. Baxter and other manufacturers have been able to provide sufficient supply for all our current PD patients to continue their treatment relatively uninterrupted.

[Javier Rodriguez, CEO at DaVita]

While we have had to temporarily suspend new patient starts on PD, thanks to the great efforts of our regulators, government officials, and Baxter, we expect to resume new PD starts next month, and we expect supply dynamics to normalize in the first quarter. Shifting to saline, Baxter is now able to supply us with approximately 60% of their pre-storm levels as they continue their work to bring the North Cove facility back online.

[Javier Rodriguez, CEO at DaVita]

Fortunately, we've been successful in securing alternative supply to ensure continuity of care and safety for our patients. Because these challenges occurred near the end of the quarter, the impact on Q3 financial results was minimal. For the fourth quarter, we estimate an impact of approximately $10 million-$20 million due to the high supply costs, lower PD patient starts, and lower productivity from our home caregivers. This is now included within our 2024 adjusted operating income guidance range, and we expect a portion of this quarterly impact will continue into 2025, depending on the duration of the supply challenges. I'll transition now to our expectations for the ESRD final rule from CMS, which we anticipate will be published shortly. While there are many aspects of the rule, we'll be primarily focused on two areas.

[Javier Rodriguez, CEO at DaVita]

First, the market basket update, including how CMS handles the new proposed wage index and the base rate. As a reminder, the proposed rule led to an approximate 2.1% increase. Second is the transition of oral-only drugs into the bundle beginning January 1st. As a reminder, this is a statutory mandate by which oral-only drugs, which are mostly phosphate binders, will transition from the Medicare drug benefit over to Medicare Part B. While CMS made clear its intent for these drugs to enter the bundle, we are waiting on information such as initial reimbursement and the treatment of unbillable items.

[Javier Rodriguez, CEO at DaVita]

We continue to believe this transition to the bundle will provide more patients with access to these important therapies. We recognize that some pharmaceutical manufacturers continue to advocate for the legislation to delay the implementation of this long-standing rule, but urge legislators to put patient access first.

[Javier Rodriguez, CEO at DaVita]

We're prepared to implement this transition in support of our patients. Transitioning to our third quarter performance, adjusted operating income was $535 million, and adjusted earnings per share was $2.59. We view our third quarter results as fairly straightforward, consistent with how we have delivered value through this entire year. Although treatment volume growth remains a challenge, our business continues to demonstrate resilience as we mitigate the volume headwinds with margin expansion, including the momentum of our IKC and international results, all while continuing to invest in our future. Cash flow remains strong, and we continue to deliver on our disciplined capital allocation strategy, returning capital to shareholders through share repurchases. Turning to the full year, we remain on track to deliver results consistent with our 2024 guidance range. We're reconfirming our 2024 adjusted operating income guidance of $1.91 billion-$2.01 billion.

[Javier Rodriguez, CEO at DaVita]

This forecast now includes the impact of Baxter's supply shortage. It is a bit early to give specific guidance for 2025, although I know that many of you are already looking ahead to next year. Over the next few months, we'll learn more key factors, including open enrollment, oral drugs in the bundle, integrated kidney care, and others, so we will provide formal 2025 guidance on the fourth quarter call, consistent with our normal cadence.

[Javier Rodriguez, CEO at DaVita]

That said, some multi-year context may be helpful. After challenging years in 2021 and 2022 during the pandemic, we're now on track to deliver our second consecutive year of double-digit adjusted OI growth despite continuing volume and labor pressures. Looking forward, we expect to return to adjusted OI growth more consistent with our historic pre-pandemic multi-year guidance. I will now turn it over to Joel to discuss our financial performance and outlook in more detail.

[Joel Ackerman, CFO at DaVita]

Thank you, Javier. For the quarter, adjusted operating income was $535 million, adjusted EPS was $2.59, and free cash flow was $555 million. Let me start with some details behind the Q3 results. Quarter over quarter, treatment volume per day was flat. This was in line with our expectations and is the result of continued strong admissions offset by elevated mortality and slightly higher missed treatment rates resulting from inclement weather, namely Hurricane Beryl in July and Hurricane Helene in September. We remain confident that our full-year treatment volume growth will fall in the range of 0.5%-1%. Revenue per treatment was up more than $4 versus the second quarter, in line with our expectations. Our revenue cycle performance is sustaining the strong RPT results we've seen throughout the year. We still expect full-year RPT growth to be within the range of 3.5%-4%.

[Joel Ackerman, CFO at DaVita]

Patient care costs per treatment increased $2 sequentially. This was primarily the result of continued labor cost pressure, plus higher medical benefits expense in the quarter. G&A costs increased by $19 million quarter over quarter due to typical quarterly variability in expense timing. Depreciation and amortization increased by $11 million in Q3 versus Q2 as a result of higher center closure costs. International OI increased slightly in the quarter as the result of strong operational performance offset by $4 million of unfavorable foreign exchange impact. Adjusted operating results within Integrated Kidney Care, our value-based care segment, increased $32 million sequentially due to lower costs in our Special Needs Plans and timing of revenue recognition related to CKCC, the government value-based care demonstration program. As always, we recommend evaluating IKC performance on an annual basis given the propensity for quarterly variability.

[Joel Ackerman, CFO at DaVita]

We still believe IKC will have a full-year operating loss of approximately $50 million. Below the OI line, third quarter debt expense was $37 million higher than in Q2. This was due to two main factors. First, our 2% interest rate caps expired at the end of June, and our current caps have a weighted average rate of approximately 4.3% for the rest of 2024. This impact is in line with our expectations and consistent with our guidance from the beginning of the year. The second factor contributing to the increase this quarter was the additional debt raised in August. Following our second quarter earnings call, we successfully completed two debt transactions totaling $2.1 billion. The proceeds from these deals were used in part to repay our Term Loan B maturing in 2026, now making our nearest debt maturity 2028.

[Joel Ackerman, CFO at DaVita]

Leverage at the end of Q3 was 3.17 times EBITDA, a slight increase from Q2, while remaining below the midpoint of our target range of 3 to 3.5 times EBITDA. In the third quarter, we repurchased 2.7 million shares, and we have repurchased approximately 600,000 shares to date in October. Let me close out with some comments on what remains of 2024 and our thoughts as we look towards 2025. As Javier said, we are reaffirming our adjusted OI guidance range of $1.91 billion-$2.01 billion. Despite the anticipated hurricane-related OI impact in the fourth quarter, we expect continuing operating momentum to offset the headwind. We are also maintaining our adjusted EPS range of $9.25-$10.05 and our free cash flow range of $950 million-$1.2 billion. Looking forward to 2025, as Javier mentioned, it is too early to give formal guidance.

[Joel Ackerman, CFO at DaVita]

Regarding some of the components of earnings, I would like to call out a few unique potential headwinds and tailwinds outside of our normal dynamics. For the headwinds, first, we expect mortality will remain elevated in 2025. Second, we expect the impact of the Baxter facility closure will continue in 2025. Third, the full-year impact of the expiration of our 2% interest rate caps will negatively impact EPS. For the tailwinds, first is the declining center closure costs in 2025 that we called out last quarter. Second is the positive OI impact from our international business driven by our Latin America acquisitions.

[Joel Ackerman, CFO at DaVita]

And finally, we expect that the inclusion of orals in the bundle would be a tailwind if the pharma companies are unable to get legislation passed to delay the inclusion. Lastly, regarding RPT and PCC growth, we expect both to be elevated relative to pre-COVID levels.

[Joel Ackerman, CFO at DaVita]

We will give an update on all these factors along with more quantitative guidance on the Q4 earnings call. That concludes my prepared remarks for today. Operator, please open the call for Q&A.

[Operator]

Thank you, sir. If you would like to ask a question during this time, simply press star and then the number one on your telephone keypad. If you would like to withdraw your question, please press star then the number two. Our first caller is Andrew Mok with Barclays. You may go ahead, sir.

[Andrew Mok, Director at Barclays]

Hi, good afternoon. It sounded like there was a fair amount of operational changes to help navigate the hurricanes, but most of that would be felt in Q4. So I wanted to better understand, one, how much of an impact hurricanes had on 3Q treatment volumes, if any. And then, Joel, I think I heard you reiterate full-year treatment growth between 50-100 basis points of growth, which would imply a fairly significant acceleration in 4Q against the presumably greater impact from hurricanes. So I just wanted to understand how we should think through that and square those comments. Thanks.

[Joel Ackerman, CFO at DaVita]

Yeah, thanks, Andrew. So for Q3, I'd call out the impact from hurricanes as about 10 basis points, and that shows up in Missed Treatment Rate. In Q4, I don't think this does much to change how we were thinking about Q4 before hurricanes.

[Andrew Mok, Director at Barclays]

Q4, so the hurricanes aren't expected to have an impact on Q4 volumes?

[Joel Ackerman, CFO at DaVita]

Significantly less than the 10 basis points from what we've seen so far. The quarter's not over, obviously, so there could be additional challenges. But so far, no, it would be less than the 10 basis points.

[Andrew Mok, Director at Barclays]

Got it. Okay. And then appreciate the early comments on 2025 headwinds and tailwinds. Can you help us understand the order of magnitude of some of those? And hoping specifically you could comment on the potential financial impact of the inclusion of phosphate binders that could have on next year's results. Thanks.

[Javier Rodriguez, CEO at DaVita]

Let me start with the end on that, on the phosphate binders, because we really tried quite a lot to give you a useful range, and unfortunately, we can't, and it's just because there's not enough information to give you a useful number, so let me just give you an explanation of the underlying dynamics so everybody can be on the same page, so first of all, there is a class of drugs, phosphate binders, that will be the biggest part of the orals in the bundle.

[Javier Rodriguez, CEO at DaVita]

The first thing is we do not know, because the rule hasn't come out, although we expect it here shortly, what the reimbursement will be by the government. Secondly, there are four products within the phosphate binders, and we don't know the mix of those products, and the pricing is quite different between those four products, between branded and generic.

[Javier Rodriguez, CEO at DaVita]

And within that, the branded have had restrictions and authorizations and other things that once those go away, we don't know what's going to happen with the mix. And then the last thing is the volume. There's about 10%-15% of our patients that don't have Medicare Part D and weren't participating in these orals in the bundle, and that's why we think that this is so good for access for those patients. And so we don't know what will happen with that volume. So if you start to play with the variables, they start to get quite wide because in essence, the volume could tighten up, but then the reimbursement has a wide range, and then the one that really throws a lot of dynamics into it is the pricing and the mix within that pricing.

[Javier Rodriguez, CEO at DaVita]

Unfortunately, we're going to have to wait till next quarter to give you a better number, better sense of that.

[Joel Ackerman, CFO at DaVita]

Yeah. And, Andrew, to follow up on the first part of your question, so I called out five factors, three tailwinds, two headwinds that would impact operating income. There was one additional, the interest expense, but that only hits EPS. Like the orals in the bundle, it is hard. There's a lot of swing factors that could apply to each of these, so I'm not going to quantify them individually. That said, I think a reasonable starting point for modeling would be that the headwinds and the tailwinds will offset each other at the OI line.

[Andrew Mok, Director at Barclays]

Got it. So when we think about the referenced target growth, which I think is 3%-7% pre-COVID, that's inclusive of all those headwinds and tailwinds. That's how we should think about it?

[Joel Ackerman, CFO at DaVita]

I think that's, yeah, I think that's right.

[Andrew Mok, Director at Barclays]

Great. Thanks for the caller.

[Operator]

Thank you. Our next caller is A.J. Rice with UBS. You may go ahead.

[A.J. Rice, Managing Director at UBS]

Thanks. Hi, everybody. I think I know the answer to this point of clarification, but I'll just make sure to get on the record. The $10 million-$20 million of hurricane impact, I assume that's EBITDA, not revenue. And then maybe just more broadly on the treatment patterns. In the last quarter, you said that non-acquired growth was back to pre-pandemic levels. It sounds like it was positive again this quarter. I just want to, is there any, is it stronger or is it about the same? And then the elevated missed treatments, is that strictly the hurricane impact, or is there anything else going on there?

[A.J. Rice, Managing Director at UBS]

And then on mortality, it sounds like you're now extending that into 2025. Is that just because this is the first time you're commenting on 25, or is there something new that's making you call out 25 on the heightened mortality rates?

[Joel Ackerman, CFO at DaVita]

Yeah. So let me try and get these in order. So first, in terms of the Baxter impact in Q4, it would be largely in EBITDA. There's the potential for a little bit in the revenue line if we lose some patients to another provider that's able to provide peritoneal dialysis, and a patient, for whatever reason, chooses to go that direction. But I would say the vast majority of it will not be revenue. On the three factors affecting volume, nothing new on admits. It's running consistent with what we've talked about in the past. Missed Treatment Rate, it's never just storms, right? Historically, it's always been somewhere around 6% on average during the year, although not the same quarter to quarter. Q1 and Q4 tend to be elevated, and Q2 and Q3 less so.

[Joel Ackerman, CFO at DaVita]

So the 10 basis points from the storms was kind of the 10 basis points more than what we probably otherwise would have expected, but it's not the total missed treatment rate. And then on mortality, I don't think there's anything new here that negatively impacts our view of 2025. I think the fact that the elevated mortality continues and hasn't gone back to pre-COVID levels, every quarter that that happens, it informs our views a bit. But I don't think we saw anything over this quarter that changed our views for next year significantly.

[A.J. Rice, Managing Director at UBS]

Okay. Thanks a lot.

[Operator]

Thank you. Our next caller is Pito Chickering with Deutsche Bank.

[Pito Chickering, Analyst at Deutsche Bank]

Hey, good afternoon. So back on that non-acquired treatment growth number here, there's obviously a lot of focus here. Can you quantify the number of new patients you added in the first quarter, second quarter, and third quarter? Any color on how many you lost to transplants for this year? Any color on those patients moving to other centers or geographies? I'm just looking for sort of any other reasons besides mortality. I'm trying to tie out the treatment growth. I think as you're looking at, you're showing with the delayed USRDS quarterly data on incidence and prevalence. Thank you.

[Javier Rodriguez, CEO at DaVita]

Thank you. Pito, let me just grab it at the high level because there is sort of, let's call it a restless energy of trying to figure out what's happening with volume. But the reality is that it's just as straightforward as elevated mortality. That when you look at the admit growth, it is healthy. When you look at the mix, it is healthy. When you look at transplants, they are constant. It moves a little, but it doesn't really move the needle at all. It goes up and down a bit. Our share of transplants has continued to be constant. So at the end of the day, we could have missed treatments move a little here and there because of storms or other things that are seasonal, but the bulk of it is elevated mortality.

[Joel Ackerman, CFO at DaVita]

Yeah. And let me just.

[Andrew Mok, Director at Barclays]

Sorry, go ahead.

[Joel Ackerman, CFO at DaVita]

Let me just pop onto the first question was about the NAG in the quarter, and let me just give you a little bit on that. Quarterly NAG has some volatility in it. If you're trying to do what I think you're trying to do, which is trying to piece out the volume trends, which we're all trying to figure out, I don't think looking at quarter-over-quarter NAG is a great number for that. Within that number is factors including Missed Treatment Rate, a lot about timing of census during the quarter. So it's down 60 basis points quarter-over-quarter. I don't think that says anything material about where the volume overall is trending.

[Pito Chickering, Analyst at Deutsche Bank]

Okay. Fair enough. Sort of follow-up here on IKC. Usually, you true up with your payers during the third quarter. Payers have had a lot of, we'll say, payer-level volatility this quarter. Just curious how that true-up went with the payers for 2023 during the third quarter.

[Joel Ackerman, CFO at DaVita]

Yeah. So we are on track for the year. I would say I would encourage you and everyone, as we always have, let's look at IKC on an annual basis rather than a quarterly basis. We're reaffirming our -$50 million for the year, which has been our number all year long. And I would say the volatility that we read about in the payer market largely has not impacted us.

[Pito Chickering, Analyst at Deutsche Bank]

Okay. But then don't you guys do your big annual true-ups from the previous year during the third quarter? Is that the?

[Joel Ackerman, CFO at DaVita]

We do them in the third quarter and the fourth quarter, and they're going as planned.

[Pito Chickering, Analyst at Deutsche Bank]

Okay. Fair enough. Okay. And then sort of last question here, just looking at commercial and MA price increases for 2025, are these tracking in line with historical levels? Thank you so much.

[Javier Rodriguez, CEO at DaVita]

Yeah. There's nothing interesting to call out. Going as expected.

[Pito Chickering, Analyst at Deutsche Bank]

Great. Thank you.

[Joel Ackerman, CFO at DaVita]

Thank you.

[Operator]

Thank you. Our next caller is Lisa Clive with Bernstein.

[Lisa Clive, Senior Research Analyst at Bernstein]

Hi. Just on volume growth, given the continued decline, how should we think about volume growth for the year? I think previously you were at 0.5%-1%. And any thoughts into 2025? And also in IKC, can you give us any indication in terms of how your reimbursement is split between capitated, shared savings? That would be helpful. Thanks.

[Joel Ackerman, CFO at DaVita]

Yeah. Starting on the volume for 2024, we're still thinking 50-100 basis points of growth. So no change there. On the IKC thing, I think we'll have to get back to you on that one. Did I miss a question, Lisa?

[Lisa Clive, Senior Research Analyst at Bernstein]

No, no. I was just, yeah. I mean, I think just trying to think through the potential growth of IKC, both on the top line and revenue, just it would be helpful at some point to get some indication of how the economics work in there. Thanks. But I'll wait for you to get back on that.

[Joel Ackerman, CFO at DaVita]

Great. Thank you.

[Operator]

Thank you. Once again, if you would like to ask a question, you may press star one. Our next caller is Joanna Gajuk of Bank of America. You may go ahead.

[Joanna Gajuk, Equity Research Analyst at Bank of America]

Hi. Thank you so much for taking the question here. So I guess I'll just follow up on the last question here around volumes, right? So you expect this to grow slightly for the year. And then how should we think about, I guess, next year and your kind of ultimate target of growing 2% volumes same store?

[Joel Ackerman, CFO at DaVita]

Yeah. So for next year, as Javier mentioned, most of the story is about mortality and what happens to mortality next year. To put a little bit more color on that, I would say if you take the middle of our range for this year of 75 basis points of growth, if you want to think about how to model next year, there's a slight headwind on treatment days for next year, about 25 basis points. And then there's one headwind and one tailwind. The headwind would be associated with clinic closures. We called that out last quarter as a source of headwind on volume for the year. And as the clinic closures come further into the background, further into our history, then I think we'll see a little bit of tailwind of that.

[Joel Ackerman, CFO at DaVita]

And then we could also potentially have a headwind next year associated with PD and the Baxter issue that we're having. And that's pretty simple. There are some patients who might want to start PD now. We don't have the ability to start all of the new PD patients over the quarter, and they might go to another provider. I would call those two things, the clinic closures and the Baxter PD, as offsetting. So you really have next year starting with a base of this year's 75 basis points, less 25 basis points of day mix. And so you start with a base of 50 basis points. And then getting back to what Javier said, it's up to everyone to figure out what they think will happen to mortality next year versus this year.

[Joel Ackerman, CFO at DaVita]

Obviously, Missed Treatment Rate can also be another source of variability from one year to the next. That's the framework I would lay out for how to think about it.

[Joanna Gajuk, Equity Research Analyst at Bank of America]

Okay. That's very helpful. Thanks for flagging the day's impact. But if I may have another question, but before I go there, just follow up on the PD patients. So I guess, yeah, what's your home dialysis mix? And then inside that, what's the PD versus HD home?

[Javier Rodriguez, CEO at DaVita]

So our mix in PD hasn't changed because it happened by the end of the quarter. And that's in the mid-15s% is the range. HHD is like a 2% or so mix. And I would take this moment just to thank Baxter and the government. They've been amazing, working literally around the clock to make sure that all of our patients get their supply. And so as we look at what they've told us, we will obviously see a little deterioration in that through the fourth quarter, but we will normalize by the first quarter and try to get all our patients back on track.

[Joel Ackerman, CFO at DaVita]

Yeah. And the one thing I'd add, Joanna, is of those PD patients, remember, we expect to keep the vast majority of them. The new patients, many of them, about half of them are already dialyzing in our clinics, and we think it won't be too much of an inconvenience for them to wait a little bit before they move to PD. Those new-to-dialysis patients who are going to go on PD have options, including postponing dialysis, assuming they have residual renal function. They could go in-center and then transition to PD. And then there could be some who decide that they don't want to wait and will go to another provider. So what we would expect you to see is a decline, a potentially significant decline in our home mix over the next quarter.

[Joel Ackerman, CFO at DaVita]

But the number of patients that actually leave DaVita or don't join DaVita, we don't think will be that high.

[Joanna Gajuk, Equity Research Analyst at Bank of America]

Okay. That's super helpful. If I may, another question I had on next year's outlook, I guess following up on your comment around you expect the RPT growth next year to be still elevated. So are you kind of implying 3.5-4 that you're guiding for this year is the number to think for next year, or is it a little bit less, a little bit more? How to think about that? Thank you.

[Joel Ackerman, CFO at DaVita]

It's too early to guide quantitatively, but I would think lower than that.

[Joanna Gajuk, Equity Research Analyst at Bank of America]

Okay. So slightly lower than three and a half to four, but you're saying higher than your historical range.

[Joel Ackerman, CFO at DaVita]

Yeah.

[Joanna Gajuk, Equity Research Analyst at Bank of America]

Okay. Great. Thank you so much for taking the question.

[Javier Rodriguez, CEO at DaVita]

Joanna, this is Javier. Just to clarify the comment I said because I don't think I was clear that I should have been. 15.5% is our mix of home patients total, of which 2% are HHD and 13% and change are PD. I don't think that that was clear.

[Joanna Gajuk, Equity Research Analyst at Bank of America]

Okay. 13% is PD. Okay. Great. Thank you.

[Javier Rodriguez, CEO at DaVita]

Thank you.

[Operator]

Our next caller is Ryan Langston with TD Cowen. You may go ahead, sir.

[Ryan Langston, VP of Healthcare Research at TD Cowen]

Hi. Thank you. In the release, I think it said that our advocacy costs had increased. But I think in the second quarter, those were down year-over-year. Can you just kind of give us a sense on what those are related to?

[Javier Rodriguez, CEO at DaVita]

We've got several things going on through the advocacy costs, but a couple of the main drivers are California and the elections there, and then, of course, what we're doing with the restore of the patients in Washington, D.C., and then the last one would be the orals in the bundle because, as you might have heard, there's some campaigns from pharmaceutical companies that are trying to delay orals in the bundle, and so we're having to mobilize our resources in Washington, D.C. to make sure people are educated as to the good that orals in the bundle can do.

[Ryan Langston, VP of Healthcare Research at TD Cowen]

Got it. And then just last from me, I think on missed treatment, second quarter in a row, just elevated from weather. Assuming we don't have any more, I guess, hurricanes, other weather events, etc., would we expect those to revert back to sort of normalized historical levels? Thanks.

[Joel Ackerman, CFO at DaVita]

So their missed treatment rate is still running elevated relative to pre-COVID levels. So I think without additional storms, we would expect them to continue to tick down over time. The pace of that is to be determined. That said, remember, they do go up seasonally in Q4. So even without additional storms, you'd expect missed treatment rate to be up in Q4.

[Pito Chickering, Analyst at Deutsche Bank]

Got it. Appreciate the help. Thank you.

[Operator]

Thank you. Our next caller is Justin Lake with Wolfe Research.

[Justin Lake, Healthcare Services Analyst at Wolfe Research]

Thanks. Good evening. First question, just going back to your headwinds and tailwinds. I didn't hear you mention RPT annualizing, the strength of 2024 annualizing next year. Just my numbers, I have you going from 2.5%-3%-3.5%-4%, right? So you guide it up by 1%. A lot of that ramps in the second half of the year. So I would have thought the annualization of that strong second half 2024 growth would be a pretty good tailwind to 2025. Any comment on that? Am I missing something?

[Joel Ackerman, CFO at DaVita]

Yeah. Justin, your math is all right, and we stand by our comments. We had a lot of debates, as you can imagine, about what to call out as unique headwinds and tailwinds versus non-unique headwinds and tailwinds. So I think we stand by that, and that's why we called out RPT is going to be higher than normal next year. We just chose not to put it in the bucket of headwinds and tailwinds we called out.

[Justin Lake, Healthcare Services Analyst at Wolfe Research]

Okay. I'll take that offline. Then the $135 million of interest expense, is this a good run rate, or does it potentially migrate higher into 2025?

[Joel Ackerman, CFO at DaVita]

No. I think it's a good run rate. Our caps for next year are actually slightly lower than our caps for this year. So that could work. Just to be clear, the $135 million is the uptick for next year. So I think you should think about this as $270 million for the year. Oh, hold on one second. My team is looking at me, and let me come back to you in a second, Justin.

[Justin Lake, Healthcare Services Analyst at Wolfe Research]

Sure, sure, and to be clear, I wasn't talking about the year-over-year. I was just talking about the $135 million.

[Joel Ackerman, CFO at DaVita]

Oh, sorry. I'm sorry. The $135 million for the quarter, that is a reasonably good number. For next year, it could come down as a quarterly number because our caps are a little bit lower. But if you think of the two things that are driving the number up, it's more debt, which I wouldn't expect us to incur more debt over the next few quarters. And then our caps aren't going to change materially.

[Justin Lake, Healthcare Services Analyst at Wolfe Research]

Okay. Do those caps expire, or are they kind of at a reasonable rate? You could re-up them right now. If they expired at the end of next year and interest rates didn't change, it'd be fine.

[Joel Ackerman, CFO at DaVita]

Yeah. So we changed the way we do it. We have a cliff. We had a cliff at the end of Q2 because we used to do a three- or four-year cap. Now we do it rolling. So going forward, you wouldn't see a big change like this. It'll gradually move up and down depending on where interest rates are when the caps are put in place.

[Justin Lake, Healthcare Services Analyst at Wolfe Research]

Perfect. And then lastly, just apologize if I missed this, but did you give a mixed number for the quarter versus, I think, the 11% you talked about last quarter commercial mix?

[Joel Ackerman, CFO at DaVita]

Yeah. There were really no material changes in the mix for any of our usual mix numbers.

[Justin Lake, Healthcare Services Analyst at Wolfe Research]

Great. Thank you.

[Operator]

Thank you. Andrew Mok with Barclays. You may go ahead, sir.

[Andrew Mok, Director at Barclays]

Hi. Thanks. Thanks for letting me back in. I just wanted to follow up on G&A. It looks like that was up 7% sequentially and 10% year-over-year. What were the drivers of that in the quarter?

[Javier Rodriguez, CEO at DaVita]

Yeah. In the G&A, we have a lot going on because we're trying to really go through the entire continuum of care and unite it, all the transitions of care. But the big bulk of it is going into IT, is going in. And the second part is, of course, you've got wages in there. And the third part would be the reimbursement operations investment that rendered the increase in revenue per treatment. So those explain the vast majority of the increase.

[Andrew Mok, Director at Barclays]

Got it. Okay. And then maybe on the follow-up to the commercial mix, how much is the ACA Exchange mix within the commercial mix within that 11%? And how much growth are you seeing on the ACA Exchanges this year? Thanks.

[Javier Rodriguez, CEO at DaVita]

Just to make sure I've got the right language, I think on the QHPs, so on the QHPs, the country's running around 7%-8% mix, and our population is running around 3% mix. We're underrepresented because in QHPs, if one of our patients picks Medicare, they are out of the QHP. That's why we're underrepresented.

[Andrew Mok, Director at Barclays]

Got it. And can you give us a sense of how much growth you've seen in that payer class? Thanks.

[Javier Rodriguez, CEO at DaVita]

We're growing exactly as the market grows. So that has been literally. The lines are on top of each other.

[Andrew Mok, Director at Barclays]

All right. Thanks for all the color.

[Javier Rodriguez, CEO at DaVita]

Thank you.

[Operator]

Thank you. Pito Chickering with Deutsche Bank. You may go ahead, sir.

[Pito Chickering, Analyst at Deutsche Bank]

Hey, guys. A quick follow-up here for 2025. Will depreciation be another tailwind for next year?

[Joel Ackerman, CFO at DaVita]

I'm sorry. I didn't hear that. Pito, can you say that again?

[Pito Chickering, Analyst at Deutsche Bank]

Yeah, you bet. Will depreciation be another tailwind for next year EPS?

[Joel Ackerman, CFO at DaVita]

It'll be flat to down. Well, the answer is yes. Part of it comes from the center closure number coming down. But excluding that, it'll be flat to down.

[Pito Chickering, Analyst at Deutsche Bank]

Okay. So sort of doing just some quick back-of-the-envelope math, mortality, I get, on the lack of PD that hurts, but Baxter's ramping up their facilities pretty rapidly. So that's pretty much solved in the first part of the first quarter. To Justin's question on interest rates caps, that's just math. The center closure is international. That's, again, just math. Depending upon where the bundle goes, when you put together the headwinds and tailwinds, depending upon the bundle, isn't it a possibility this will be more of a tailwind than headwind? But we just want to see where the bundle ends up. Is that a fair way of thinking about this?

[Joel Ackerman, CFO at DaVita]

Just help me again with the end of the question, Pito. What specifically are you asking if it's a headwind or tailwind, the bundle?

[Pito Chickering, Analyst at Deutsche Bank]

Yeah. So the tailwinds seem just putting the math together on the headwinds, understand those, and understand the math of the tailwinds. The biggest variable here seems to be with the bundle. And depending upon.

[Joel Ackerman, CFO at DaVita]

Oh, with the bundle. Got it. Okay.

[Pito Chickering, Analyst at Deutsche Bank]

And so depending upon where the bundle goes, that will define whether the headwinds or tailwinds are a tailwind versus a maybe your commentary about a push. Depending upon the pricing we'll get soon, this could be, I guess, more favorable depending upon what the government says in a week or two. Is that a fair way of thinking about it?

[Joel Ackerman, CFO at DaVita]

I think there's probably a little bit more variability in a bunch of these lines than you're giving credit to. So orals could be better. It could be worse. But all of these probably have a decent amount of play in them. So I think it could go either way, a net headwind or a net tailwind.

[Pito Chickering, Analyst at Deutsche Bank]

Okay. Fair enough. Thanks, guys.

[Operator]

Thank you. At this time, I am showing no further questions. I'll turn the call back over to you for closing comments.

[Javier Rodriguez, CEO at DaVita]

Okay. Thank you, Michelle. And thank you all for your interest in DaVita. I will end the call where we started with appreciation for the hard work of our DaVitaCare teams on behalf of our patients. Although we will incur some additional expenses related to recent storms, we expect to absorb these costs within the continued strong performance of our underlying business. We've covered a lot on volume. And as we said, while mortality remains elevated, our investments in people and infrastructure and capabilities have returned our operating income to the pre-pandemic trajectory. Thank you for your continued interest and be well.

[Operator]

Thank you. This concludes today's conference call. You may go ahead.

Participants

Executives

• Nic Eliason, VP of Investor Relations
• Javier Rodriguez, CEO
• Joel Ackerman, CFO

Analysts

• Andrew Mok, Director at Barclays
• A.J. Rice, Managing Director at UBS
• Pito Chickering, Analyst at Deutsche Bank
• Lisa Clive, Senior Research Analyst at Bernstein
• Joanna Gajuk, Equity Research Analyst at Bank of America
• Ryan Langston, VP of Healthcare Research at TD Cowen
• Justin Lake, Healthcare Services Analyst at Wolfe Research