DaVita Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
October 27, 2021

There are 9 speakers on the call.

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 Xetna First Quarter 2021 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Thank you. Mr. Gustaflin, you may begin your conference.

Speaker 1

Thank you, and welcome everyone to our Q3 conference call. We appreciate your continued interest in our company. I'm Jim Gustafson, Vice President of Investor Relations. And joining me today are Javier Rodriguez, our CEO and Joe Lacherman, our CFO. Please note that during this call, Genesys.

Speaker 1

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 Genesys. For further details concerning these risks and uncertainties, please refer to our Q3 earnings press release and our SEC filings, including our most recent Annual Report on Form 10 ks and subsequent quarterly reports on Form 10 Q and any subsequent filings that we may make with the SEC. Our forward looking statements are based upon the 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 We will discuss some non GAAP financial measures.

Speaker 1

A reconciliation of these non GAAP measures to the most comparable GAAP financial measures is included in our earnings press release segment furnished to the SEC and available on our website. I will now turn the call over to Javier Rodriguez.

Speaker 2

Thank you, Jim, and good afternoon. Q3 was another strong quarter for DaVita in the face of a challenging operating environment. Despite another rise in COVID chase counts across the United States Genesys. In an increasingly challenging labor market, we continue to provide all the aid care to our patients and execute on our strategic objectives. I want to begin my remarks by highlighting an exciting milestone.

Speaker 2

We surpassed 15% of our patients dialyzing at home. This means that approximately 30,000 of our patients receive the clinical and lifestyle benefits of home dialysis. As we've explained before, to be a sustainable provider of home dialysis, it requires a comprehensive infrastructure, including convenient and easy access to a home center for training sessions and recurring visits with our care team. Our current network of centers Center. Provides that easy access such that 80% of our dialysis patients live within 10 miles of the DaVita home center.

Speaker 2

In addition, we continue to innovate on our platform to help make home dialysis an easier choice for patients and their physicians Genentech. And to extend the duration on home dialysis once patients have made that choice. A few highlights of note. First, we recently rolled out an enhanced education program along with supporting technology for our new patients to ensure that they receive timely Genentech's comprehensive modality education, which is tailored to each patient's individual needs. We also continue to work on additional enhancements Genesys and customization to our education process with different communities, such as black and Hispanic patients Gencita Center to improve their chance of selecting this modality and therefore improve health equity.

Speaker 2

2nd, we developed a patient portal and telemedicine platform platform that supports remote monitoring and communications between DaVita caregivers, our nephrologist partners and our home patients. 3rd, we developed a team of industry leading home physicians to create an expert network, which works closely with physicians and practice leaders to help them understand the benefits of home modalities, troubleshooting complex clinical issues Genesys and elevate their home clinical skill. Last, we're testing out our AI and other technology to optimize Genshinus. We will discuss the strategic advantage of our platform in greater detail on November 16 on our Virtual Capital Markets Day. On to our Q3 results.

Speaker 2

Our business model continues to prove resilient in the face of operating challenges. Q3 operating income grew approximately 9% year over year and adjusted earnings per share grew by more than 31% over the same period. However, the ongoing COVID pandemic continues to take its toll on too many human lives in the world at large and amongst our patients. Across the broad U. S.

Speaker 2

Population, the current surge driven by the delta variant appears to have peaked in early September new case counts reaching approximately twothree of the peak during the past winter. Fortunately, within our dialysis patient population, new case counts peaked approximately onethree of the Winnet peak and mortality rates were relatively lower likely due to the vaccination rates among our patients. Incremental mortality increased from fewer than 500 in Q2 to approximately 2,000 in Q3. After quarter end, COVID infections continued to decline with our new case count during the week ending October 16 Approximately 73% of our patients have now been vaccinated. In addition, we've started to roll out vaccine boosters for both of patients Genesys' Q guidelines.

Speaker 2

We're hopeful that

Speaker 3

future COVID surges and breakthrough infections

Speaker 2

Gensitos. Cost management continues to be strong in the quarter, although we are facing the same competitive dynamics in the market for healthcare workers Genesys. As other companies have mentioned, despite these challenges, I'm pleased with how our frontline leadership team Genesee. It has long been a key part of our mission to be the employer of choice. How we live this aspect of our mission has been evident throughout the pandemic and our team has retained relentless focus Genentech.

Speaker 2

Thank you. Thank you. Thank you. Thank you. Thank you.

Speaker 2

Thank you. Thank you. Thank you. Thank you. Thank you.

Speaker 2

Thank you. Thank you. Thank you.

Speaker 3

Thank you. Thank you. Thank you. Thank you.

Speaker 2

Thank you. Thank you. Thank you. Thank you. Thank you.

Speaker 2

Thank you. Our next question comes from the line of Gensitos and have provided incremental pay and benefits to help our frontline caregivers during this challenging time. Genshin. These efforts are ongoing. Given the current environment, we expect to provide our teammates with higher annual compensation increases the continued strength of our business.

Speaker 2

This will put additional pressures on our cost structure, but we believe this will help us attract and retain the count needed Genesys. Our long term objectives, just as critical and aligned with our mission and build on our history of investing in our people. Finally, I'd like to say a few words about Integrated Kidney Care or IKC. Last quarter, we shared details on our planned investments in IKC Genentech and long term opportunity this creates for patients, payers and our shareholders. At the end of Q3, We now have over 22,000 patients in some form of integrated share arrangement, representing $1,700,000,000 of value based share contracts.

Speaker 2

Next year, we expect to approximately double the size of our IKT business, driven primarily by our participation GSK program. While it is still early and contingent on successful execution, We believe that the investing in IKC represents a new and potentially meaningful earnings opportunity for us in the coming years. Genesys. This is another area we plan to discuss in detail at our upcoming virtual Capital Markets Day. With that, I will turn it over to Joel for more details on the quarter.

Speaker 3

Thanks, Javier. Despite the operating challenges Javier referenced, We delivered another quarter of strong results. Operating income was $475,000,000 and earnings per share was $2.36 Gensitos. Our Q3 results include a net COVID headwind of approximately $55,000,000 an increase relative to the quarterly impact that we Genentech. As Javier mentioned, the latest COVID surge resulted in excess mortality in the quarter of approximately 2,000 compared to fewer than 500 in Q2.

Speaker 3

We're also anticipating the mortality in Q4 to be higher It was in Q2, although we've seen a decrease in the last few weeks that we hope continues. Our current view of the OI impact of COVID Genentechanical segment. Our next question comes from the line of John Treatments per day were down by 536 or 0.6% in Q3 compared to Q2. The primary headwind was the increase in our estimated excess mortalities and higher mistreatment as a result of the COVID surge. In addition, the quarter had a higher ratio of Tuesday, Thursdays Saturdays, which lowered treatments per day for the quarter by approximately 3 In light of the current delta surge and the compounding impact of mortalities on our year over year growth, Revenue per treatment was essentially flat quarter over quarter.

Speaker 3

Patient care cost per treatment was up approximately $5 quarter over quarter,

Operator

casino

Speaker 3

segment. This is a result of higher wages, additional training costs associated with an increase in our new hires and seasonality in healthcare benefit expenses, Which we expect to continue into Q4. Our integrated kidney care business saw an improvement in its operating loss in the quarter, segment, which is primarily the positive prior period development in our special needs plan. We continue to expect increased costs in Q4, Gensit, especially in our projected CKCC markets as we ramp up staffing in preparation for 2022. DSOs for our U.

Speaker 3

S. Dialysis and lab business increased by approximately 3 days quarter over quarter, primarily due to fluctuations in the timing of billing and collections. Other logs for the quarter was $7,600,000 casino. Now turning to some updates for the rest of the year and beyond. As I mentioned on the Q2 earnings call, we excluded any impact of a significant surge in COVID from the Delta variant Genesina segment.

Speaker 3

We've noted that a wider range of outcomes was possible depending in part on how a 4th surge would develop. Now that we've seen the impact of the telco surge, we are increasing our estimate of COVID impact for the year by $40,000,000 We are also narrowing our guidance for adjusted EPS to $8.80 to $9.15 per share And we are maintaining our free cash flow guidance of $1,000,000,000 to $1,200,000,000 Although there is some chance that our free cash flow may fall below the bottom end of the range depending on the timing of our DSO recovery. Our revised OI guidance implies a decline in our Q4 financial performance relative to Q3. This is partially explained by the incremental COVID mortality impact and by expected higher salaries and wages Geneseev's team. Our guidance anticipates Q4 operating income Genentech.

Speaker 3

We negatively impacted by approximately $75,000,000 of seasonally high or one time items, Looking ahead to 2022, the 3 expected headwinds I talked about on the Q2 earnings call remain. As a reminder, we expect to have added expense related to Gensita's portion of the industry effort casino. We anticipate a year over year incremental investment in the range of $15,000,000 Genesys. We continue to grow our ITC business and we will also begin depreciating our new clinical IP platform, segment. We expect to be approximately $40,000,000 A few additional things to help you with our thinking about 2022.

Speaker 3

COVID remains a key uncertainty. We are anticipating the end of the temporary sequestration suspension, which would be a $70,000,000 headwind for the full year. We also expect that some of the costs that spiked during COVID, Finally, COVID's impact on mortality next year remains a large swing factor. Another winter surge would negatively impact We expect net labor costs will increase more than in typical years as a result of market pressures. Our current estimate net headwind of $50,000,000 to $75,000,000 We expect to offset a significant amount of these incremental costs Genentech.

Speaker 3

Continuing MA penetration growth above historical level and strong management of non labor patient care costs. From an operating income growth perspective, we expect 2022 will be a transition year with some significant but largely temporary headwinds to get through, after which we expect our platform to continue to support strong profit growth. While the range of potential outcomes for 2022 is broad, a reasonable scenario could result in an OI decline of $150,000,000 from our 2021 guidance. This includes the impact from the expected valid initiatives, casino. This scenario also includes a modest headwind from COVID, Gensitos.

Speaker 3

Although there are scenarios where the impact of COVID could be significantly worse. Looking forward to 2023, We anticipate a reversal of the net impact of the 2022 headwinds plus incremental operating income growth, At Snap, we expect 2023 operating income to show a lowtomidsingledigitcagger Gensitos. From the midpoint of our updated 2021 guidance, which would be in line with the multiyear outlook we have shared historically. We expect it to be the result of the lack of valid initiative related costs, the recognition of safety in IKC, for an improved COVID situation and continued growth of the core business. We'll have more to say about long term guidance at our Capital Markets Genesys.

Speaker 3

Finally, during the Q3, we repurchased 2,700,000 shares of our stock. And in October to date, we repurchased an additional 1,200,000 shares. Operator, please open the call for Q and A.

Operator

Justin Lake from Wolfe Research, you may go ahead, sir.

Speaker 4

Thanks and thanks for all the color here. Let's start on the Q4. You're talking about It sounds like most of the $40,000,000 of incremental COVID costs are actually happening in the Q4. Is that correct?

Speaker 3

Most, yes, but there was some in the Q3 as well. So I would think that Q3 is $55,000,000 And if you take the number we gave for COVID for the full year, what would be left is about $85,000,000 for Q4.

Speaker 4

Okay. And then can you help us on the mortality side, what you're seeing there? And How much of that $40,000,000 or maybe we can talk about the $75,000,000 that you talked about for the higher costs? How much of that's coming from mortality?

Speaker 3

Yes. So what we've seen in mortality is a pickup in Q3 to about 2,000 excess mortality. Remember, we were below 500 in Q2, and there's no doubt the delta surge has came on bigger than we expected, and we expect that to continue into Q4 a bit. So if you look at If you're trying to triangulate in on growth, what you see for the quarter Q3 over Q2 Is treatment growth per day that's down a bit? That's largely the result of the excess mortality.

Speaker 3

There were also there were more Tuesday, Thursday, Saturdays and Monday, Wednesday, Fridays, and that was about a 300 treatment per day headwind in the quarter as well. So that's the those are the numbers behind it. In terms of the financial impact from COVID, what you're seeing is Definitely, the excess mortality that hits in Q3, it hits even harder in Q4. You're also seeing some increase in mistreatments, which we've seen in prior surges and we're Cohorting and stuff like that. So that's how I'd lay out the impact of mortality and other things On COVID in Q3 and Q4.

Speaker 4

Okay. And then in terms of the $75,000,000 is any of that it sounded like some portion of that's one time. So is this not The kind of implied Q4 OI, is that a reasonable run rate or is there to kind of jump off of Or is there some onetime cost within that $75,000,000 that kind of jump you off the bigger base?

Speaker 3

Yes. So I would think that $75,000,000 is coming in 2 forms for one time or seasonal pickups. The one time things I call out are some comp bonus type stuff and then training is up. When We hire new teammates that tend to lead to a higher training number. So those are the onetime things in the 75.

Speaker 3

And then there are some seasonal items. There's a seasonal benefit impact in Q4 and also a seasonal increase in G and A. Those are things we tend to see in most years, and they're a bit exaggerated this year as a result of the patterns resulting from COVID. But to get to your fundamental question of what's a good jumping off point for next year, I think the full year number For 2021 is a reasonable baseline off of which to jump off for next year. If you took Q4 And adjusted for the $75,000,000 you'd get to about the same spot.

Speaker 5

Got it. If I could just squeeze

Speaker 4

in one more. You talk out to 2023 and a lot of this stuff makes sense in terms of transitory costs. But you talked about 2 pieces here. IKC savings, like you talked about 2022, you're going to

Speaker 5

have $50,000,000 of incremental losses.

Speaker 4

How much better did I see the with the tailwind in 'twenty three there? And then you talked about improved COVID. Can you talk about the tailwind there in terms of size? That would be really helpful.

Speaker 3

Sure. So I'll start with the caveat that 2023 is a long way away, and we're even cautious about talking about 'twenty two given the uncertainty. So I wouldn't think of this as guidance, but just some reasonable estimates to help you think things through. So On our IKC, I think a $50,000,000 reversal of the headwind we're seeing in 'twenty two is a reasonable way to think about 23, so basically winding up in 'twenty three about where we are in 'twenty one. COVID is really, really hard

Speaker 2

to think

Speaker 3

about. That said, if you assume that COVID Disappears at some point next year. I think the right way to think about it, and now I'm bridging basically from 21 to 2023 is we've got a $70,000,000 sequestration suspension That becomes a tailwind, right? We're getting all of that in 'twenty one. That goes away in 'twenty two and stays away forever.

Speaker 3

So there's a $70,000,000 Genesys. Headwind there. We've got roughly a comparable number of net expenses associated

Speaker 2

with COVID.

Speaker 3

Think about labor, think about the increased spend on PPE with some offset related to T and E primarily. And that net number is a $70,000,000 number today. So that dissipates What you've really got is effectively a tailwind from that that offsets the headwind from sequestration. And what you're left with is mortality. And mortality today is, on a run rate basis, Somewhere in the $240,000,000 number.

Speaker 3

And what we would expect is over some long period of time, 4, 5, 6, 7 years for that number to go to 0. So as that $240,000,000 Genesys. If the headwind we've got today dissipates, then you would see that coming back into earnings

Speaker 2

And then I'll just add one thing. As you're finishing the bridge, Justin, don't forget that it's a $60,000,000 California ballot. It's going to be in 'twenty two sorry, yes, in 'twenty two, it won't be in 'twenty three. That's another

Operator

and Schwartz of Bank of America. You may go ahead, sir.

Speaker 5

Great. Thanks for letting me follow-up on the last question. That mortality number, Joel, I guess you're talking about 4 to maybe 7 years getting that back. I guess that might be a little bit longer than I might have thought on the time period to think about that number coming back. I mean, why Why wouldn't it be something more like 2 years rather than Q2?

Speaker 3

Yes. So Kevin, first of all, You might be right. And I think there's likely to be a tail to it, right? And we don't know how long that tail is. There is certainly a very reasonable scenario where most of that bounce back comes out comes back Genesys.

Speaker 3

Certainly quicker than 7 years and potentially quicker than 4 years. So it probably doesn't come back talked evenly over whatever number you choose, and I think there's reasonable logic to say you get more early on in that period and the tail gets a little thin towards the end. So I'd say You could be right in terms of getting most of it in 3 years.

Speaker 5

Okay. That's helpful. And then I think You mentioned that because of the COVID-nineteen spike, you now don't expect negative back to positive until next year. Encina. I guess maybe I don't remember if you thought that was going to happen by year end or not.

Speaker 5

I guess, is that how we should think about it, but you had the last spike Q1 and then you thought about a better way to get back to positive by year end and now that we have more in Q3, maybe 3 quarters later, we'll Gensit.

Speaker 3

I think that's a good start for thinking about it, although The size of the spike also impacts how long it takes us to get back to a and A. Because despite its lower, our natural growth can kind of overcome that in a shorter period of time. Gensivus. As I've said, I think, on prior calls, I found thinking about quarter over quarter Encinas. We can see that our got volumes and then ultimately revenue over the next few years.

Speaker 3

Mag can be a little bit of a clunky number When in times like this where there's so much volatility.

Speaker 5

Okay. And then maybe last question, you mentioned Is there a way to break out your view about growth in MA versus new program.

Speaker 2

Sure. Well, right now, what we're seeing is that more patients I think the last number I saw in non kidney is around 43% of patients are choosing MA. Our number is now Close to that, we're roughly around 41%. And so as MA grows, of course, That's likely to be a big feeder into risk because those plans are coming to us and wanting the contract. As it relates to the government, we are in the final stages here of sizing the practices that are really going to enroll and therefore attribute their patient.

Speaker 2

Our estimates have been both doubling roughly from what we have now, And we'll give you information as it plays

Speaker 5

out. Okay. And if I can say that again, so if MA is already kind of at penetration, casino. The doubling then is from just moving contracts with NA plans that you already have from a fee for service to an IKC type

Speaker 2

Yes. So more plans are wanting to have IKC type structures. Correct. Okay.

Speaker 5

And then just last question on that. Is there anything different of these contracts coming together quickly? So if you

Speaker 4

think about timing of all this stuff,

Speaker 5

this year is the 1st year that we see a lot of companies ready to proceed. Would you expect to largely have penetrated that Contract opportunity within MA plans or what percentage of your MA contracts would be this type of arrangement Next year and when do we start to see the benefit or even be backed up of our insurance?

Speaker 2

Yes. I think it's specific by payer. It's quite customized. As we all know, payers have different strategies and different cadences as to where they focus Again, the range of contracts and structures from anywhere from fee for service to performance, gain shared, shared risk all the way to full risk Basically customized by payer. So the cadence is really customized.

Speaker 2

We're ready to go. And so we're talking to them and there's nothing really interesting to report on timing per se. It's steady and constant. Okay.

Speaker 5

So it's not like a huge drop next year. It's

Speaker 2

GEC. We're not forecasting any drastic change.

Speaker 4

Okay. Thank you.

Speaker 2

Thank you.

Operator

Our next question comes from Pito Chickering from Deutsche Bank. You may go ahead, sir.

Speaker 6

Genesys. Yes. Good afternoon, guys. Thanks for taking my questions. A follow-up to Justin's questions, and forgive me, there are a lot of numbers sort of on this call.

Speaker 6

Midpoint of LOI guidance for 2021 and put 4% CAGR on that. For 2023, you've got 1,930,000,000 Of operating income, how much that comes from IKC versus core dialysis? And how does IKC change

Speaker 3

Yes. So In terms of how much of the OI in 'twenty three comes from IKC, Again, with all the caveats about uncertainty and everything else, you're really going to see no change in OI and IKC from 21 to 2023. That's again, that's a reasonable scenario from

Speaker 2

where we are. So if

Speaker 3

you think about OI growth total OI growth 'twenty one to 'twenty three, you basically see a 0 in that scenario from IKC.

Speaker 6

Okay. So that's for a 4% OI growth for Tacker next year. Is that 100 coming from core Gensitos.

Speaker 1

Good evening. I think

Speaker 3

the right way to think about it is it's largely coming from core dialysis. There, we called out a bunch of headwinds and tailwinds. The ones from ballots and IKC kind of offset each other, so they're net 0. The depreciation from our new clinical IT system stays with us, And you'll have a tailwind from COVID.

Speaker 6

Okay. But so let me just start working on numbers for a second. If I take again the OI from this year, That's embedding $120,000,000 of losses from IKC. You're saying that by 2023, we'll still run $120,000,000 of losses through the P and L on the ITC.

Speaker 3

Right. What we're effectively saying is 120 in 2021 goes to 170 next year, and that's one of the big headwinds for next year, and that reverses itself in 'twenty three.

Speaker 6

Okay. So the full 170 reverses or just

Speaker 2

the 50 reverses? I mean just No, just

Speaker 4

the 50.

Speaker 3

Ultimately, our expectation would be the full $150,000,000 would reverse itself and the business would become profitable, but it wouldn't happen all in 'twenty three.

Speaker 6

From a labor side, as we start to think about treating the 4Q cost per treatment, How much of this is trajectory from premium labor versus wage inflation, which may continue in 2022? And can you remind us What the normal weight

Speaker 5

of patient was and kind

Speaker 6

of what we should think about for 3 and 4Q?

Speaker 3

Yes. So casino. The numbers in Q3 and Q4, there is some wage inflation, but where you're really going to start seeing that is next And I know I went through a lot of numbers quickly in the script. What we called out at the beginning of the call was a $50,000,000 to $75,000,000 net labor headwind next year. And that would be wages, it would be training and there could be potential offsets from benefits or productivity and stuff like that.

Speaker 3

But I think the right number for next year net headwind given the challenging labor environment of $50,000,000 to $75,000,000 Okay.

Speaker 6

Fair enough. For IKC, Will you point out sort of the revenues and costs per patients at some point so we can help model out how that's tracking?

Speaker 3

Yes. I think we're on a bit of a path to continue to create a disclosure package around IKC that will give shareholders the visibility they need into our progress.

Speaker 6

Okay. And then the last question casino. For me, there's $1,000,000,000 of cash in the balance sheets right now. How much cash do you guys need to run the core dialysis and now the new IKC VCAT. How much we think about microbancation should we do at this point?

Speaker 3

Yes. So I would think about us We need somewhere around $300,000,000 of cash on the balance sheet just to run the business. I don't think that number will change significantly with IKC. We're not a regulated entity. We don't have extra capital requirements.

Speaker 3

Okay.

Speaker 6

So that's fair to think about the $700,000,000 of excess cash that you use for share repo, etcetera, while doing it later.

Speaker 3

I'd say, yes, on the $700,000,000 of excess cash, clearly, The buyers of the stock, we bought more than usual since the last earnings call. As we've said in the past, we're not agnostic on price. If we like the price, we will buy more.

Operator

Center. Thank you. Sarah Jane from Barclays, you may go ahead. Thank you. And I appreciate all of the color about 2022 as a whole.

Operator

But I'm hoping that you could give us a little bit more on the cadence of how the year will roll out. So some of those headwinds, are they starting at the beginning of the year or later on? And then on the labor cost side, we heard some of the acute guys talking about labor cost improving in the back half of the year and just wasn't sure if that's what you were interested in your guidance as well.

Speaker 3

Sure. So On labor timing, I don't think we have a particular view about the macro economy in the labor market and how that's going to play out. So I don't have anything to add there. IKC, I think you'll see a lot of that Starting in the beginning of the year, you'll actually start seeing some of that in Q4, but it certainly could build up over the course of the year. The ballot initiative is similar to what we've seen historically.

Speaker 3

It plays out largely in Q3, although there can be Genesina's. The depreciation number I've talked about is probably likely to be more of a back casino year event. You might see some in Q2, but it will be back end loaded. And COVID is complicated. The sequestration, assuming it goes away, will happen on oneone, so there'll be a big hit related to that Starting in January, how exactly the other costs roll out, hard to predict, although Net net, you'd probably see that improving as the year goes on, although not that big a number.

Speaker 3

And I'm not sure how to even help you with the mortality figure. Historically, Even when mortality comes down, it still accumulates. Next year, if there is no Winter wave and COVID overall begins to go away, I think you'd expect to see that starting to improve over the course of the year. I hope that helps.

Operator

That's very helpful. Thank you. And just one more here on labor. Can you give us any more color on where you're seeing the labor pressure most acutely? So is it in a certain level or type of position that you're seeing it and then how material is that class of employee for your overall SWD expenses.

Speaker 2

I wish we could point to 1, but the reality is While it is more acute in certain geographies, it is very widespread and across most of our clinical teammates.

Operator

Our next caller is Lisa Krive from Bernstein. You may go ahead. Hi, there. Two questions for me.

Speaker 7

Just on the wages section. So Medicare is obviously inevitably delayed rate update come through. Could you just give us some insight on the rate adjusted in your private contracts? Similar to Medicare where the cycle of the year and are looking at metrics that are somewhat vaccinated? And then the second question Genentechanical.

Speaker 7

I'm just trying to understand this and really sort of thinking about scaling up that program. CKCC GSK. One major driver. How big do you envision that program getting? And I suppose, what does the ramp up Genesys.

Speaker 2

Let me grab the first part, and then Joel can supplement. First, in case it's useful, Medicare has a basket update,

Speaker 5

and

Speaker 2

the way it's calculated is not Genesys. Looking at pure dialysis and what's happened to cost either retrospective or prospectively, rather There's an economic firm that forecasts inflation, and then they subtract what they call a productivity adjustment, Which in essence is a 10 year average that's trying to measure the efficiency of the economy. So as you can imagine, that's got some complexity. As it relates to the commercial business, The way it's done is usually through a negotiated way. And so every single one of them is Negotiated individually and the timing tends to be effective whenever the contract was signed.

Speaker 2

And so if you think of a contract of a time in February, usually the annual escalator would be done in February of next year. That's the most Traditional way of doing it. Of course, there can be other ways that have a potential performance or other mechanisms. But in general, that's how that works. As it relates to your second question on CKCC, The short answer is we don't know.

Speaker 2

So right now, it's a CNMI pilot. And so it's authorized for 2 years. Of course, the intent is to try it out and see if it's effective and if it works for the system and if we're doing well by the patients. And then I would assume that then Medicare would try to extend it. We try to think of a world where hopefully You get somewhere in that 30,000 patients in one way or another being through MA or a CMMI vehicle, We will see.

Speaker 7

Thanks a lot.

Speaker 5

Thank you, Lisa.

Operator

And our next caller is Tito Schickering from Deutsche Bank. Please go ahead, sir.

Speaker 6

Hey, guys. Thanks for the follow-up here. I sort of want to get back to I can see losses in 2023. I'm just struggling a little bit on $120,000,000 of losses you guys are assuming that we'll have there. When the ESCO program has been running was so savings right out of the gate, do you understand why we'll still see $20,000,000 casino.

Speaker 6

In IGC 3 years out when ESCO is profitable on year 1.

Speaker 2

Well, let me just grab the high level and then, Joel, you can The best way to think of the escrow is actually not that they were profitable, but what the Non dialysis savings are actually quite good. And of course, you have to apply the operating model and then you have to load the G and A. And now in the models that we have, we also have to share with partners. And so that's how the number sort of trickles down. And you have to get to scale.

Speaker 2

And so a good way of thinking is once you do all that and you go through All those iterations, you probably will get to a low single digit Hawaii number And depending on if you're grabbing non dialysis, I would think of it somewhere in the 3 ish percent or so. You're thinking of the entire number, it's 1.5 or so because it's roughly half dialysis and half Yes, they're non dialysis costs. And in the ASCO is when we fully load them, we didn't make money. Rather, people were measuring whether it was effective at reducing non dialysis costs.

Speaker 3

Yes, Peter, the thing I'd add there, Javier paints the kind of the end game there. The question is how do you get there? And the thing I would remind you is The costs all come upfront. You're paying the model of care to deliver the savings. You're paying for the G and A, you're building capabilities.

Speaker 3

The revenue is delayed, and you won't see any revenue in year 1. Year 2, we'll start to see some, but the number will grow over time as the effectiveness of the shared savings continues to grow. So there is not a good matching of revenue and costs, especially in the end years. So Part of it is the investment and the sale that Javier talked about. Part of it is

Speaker 5

the delay in the revenue.

Speaker 6

Okay. Thanks.

Operator

Thank you. Gary Taylor from Cowen. You may go ahead, sir. Thank

Speaker 8

you. Two quick ones. Joel, did you ever give us the quarterly step up in depreciation that you

Speaker 3

Encino segment. Yes. It's $40,000,000 is the annualized number, And it will probably start sometime in Q2, but you'll see most of it in Q3 and Q4.

Speaker 2

Okay.

Speaker 8

Just making a note. The other is, anything happening on you've cited commercial funeral

Speaker 4

commercial mix

Speaker 8

a couple of quarters in a row. Is there anything happening there besides the Medicare mortality that's changing that

Speaker 2

No. I think there's been a very much an appreciation During the pandemic, the people want to keep their insurance and they value it. And so it's been very resilient and constant.

Speaker 8

And then my last one is going back to Welcome back to 2023. So if we take 2021, we walk you down $150,000,000 but then we're getting back casino. To low to mid single digit CAGR and towards the 'nineteen and change for 2023, that's about a 300,000,000 Step up from 22 to 23. So parts of that would be an incremental $50,000,000 IKC, $60,000,000 reduction in advocacy spend, some low to mid single digit organic And then the rest of that whole would be some portion of this gross, COVID mortality and direct

Operator

segment. Thank you. Lisa Clive from Bernstein, you may go ahead.

Speaker 7

Heather, I just wanted to follow-up on Private contracting. In terms of the structure of how the rate increases work, so if you have a, say, 4 year contract, Are the rate adjustments for all 4 years fully fixed at the outset? Or is there any ability for those rate adjustments to increase Is there a buyer inflation as you're clearly experiencing now or they just fully set as a

Speaker 2

casino. Most of them are 6, Lisa. Some of them, you have to earn your way to them so they can fluctuate year over year depending on performance, but most of them are sick.

Speaker 7

They would vary based on performance, not on their underlying cost structure.

Speaker 2

Sometimes you could have, of course, something that's linked to an index or something like that, But in general, it's fine and understood.

Operator

Okay. That's clear. Thanks.

Speaker 2

Thank you.

Operator

And at this time, I'm showing no further questions.

Speaker 2

Thank you, Michelle. Well, we've covered a lot. So let me just try to summarize as cleanly as I can, 3 takeaways. Number 1, our core business is strong. Number 2, 2022 will have A lot of temporary OI decreases that will correct back historical OI in 'twenty three.

Speaker 2

And then point 3, our teams are working really hard on innovation to deliver on the integrated care dream. We look forward to discussing our strategy in more detail on November 16th on our Capital Markets Day,

Operator

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

Powered by Quartr
Earnings Conference Call
DaVita Q3 2021
00:00 / 00:00