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DaVita Q4 2021 Earnings Call Transcript


Listen to Conference Call

Participants

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 Fourth 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 period. [Operator Instructions]

Thank you, Mr. Gustafson. You may begin your conference.

Jim Gustafson
Vice President of Investor Relations at DaVita

Thank you, and welcome, everyone, to our fourth quarter conference call. We appreciate your continued interest in the company. I am Jim Gustafson, 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 federal securities laws. All of these statements are subject to known and unknown risks and uncertainties that could cause the actual results to differ materially from those described in the forward-looking statements. For further details concerning these risks and uncertainties, please refer to our fourth quarter earnings press release and our SEC filings, including our most recent Annual Report on Form 10-K and all subsequent quarterly report on Form 10-Q and any subsequent filing we make with the SEC.

Our forward-looking statements are based upon 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 financial measures to the 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
Chief Executive Officer at DaVita

Thank you, Jim, and thank you all for joining today's call to discuss our fourth quarter performance and our thoughts on 2022. Each quarter for the last few years, I hope it's the last time that the pandemic as a start of my discussions with you. Yet, COVID continued to evolve and have a direct impact on our world, especially on our health care system. Similar to what's been seen in the general population, COVID infections within our patient population spiked significantly in late December through January. At its peak during the second week of January, the new case count was more than twice as high as a peak from last winter. Gratefully, the mortality rate to date with the latest surge has been lower than in prior surges. For the fourth quarter, we estimate that the incremental mortality due to COVID was approximately 1,100 compared to approximately 1,600 during the third quarter.

Despite the challenges associated with COVID, I continue to be in awe at the resilience and dedication of our teammates across the DaVita Village. From our direct patient caregivers to our corporate teammates, all are unrelenting in their commitment to provide high quality care, respond to quickly changing environment, and show incredible compassion and support for our patients. For the balance of my remarks, I will cover five topics, transplant, labor market, our supply chain, Integrated Kidney Care, IKC, and then I will wrap up with our fourth quarter results and our outlook.

First, transplant. At our Capital Markets Day presentation in November, I discussed our focus on innovation to improve the patient experience at every single stage along the patient's kidney care journey, from delaying the progression of kidney disease to transplant and from acute hospital care to dialysis at home or in-center. Transplant is the preferred treatment option for most of our patients and during 2021, despite the challenges posed by the COVID pandemic, we celebrated nearly 8,000 DaVita patients receive their transplants, exceeding our pre-pandemic level.

With that said, the transplant process is long and complicated with an average wait time of between four and five years for an organ. Staying active on the wait list for such a long time is difficult. As a result, patients sometimes miss their window for a transplant. We've been working to address some of these challenges through our industry-leading Transplant Smart education program and our partnership with the NKS to help more patients find living donors. In early January, we announced the acquisition of MedSleuth, whose software-enabled closer partnerships and better coordination between transplant centers, nephrologists, and kidney care providers with all three working together to support our patient transplant's journey.

These efforts can also benefit another meaningful goal of ours, to improve health equity. Many processing outcome results in transplant are quite inequitable, different by race and ethnicity, economic means and insurance coverage. We believe it doesn't have to be this way. We're moving barriers to access, making process as easy as possible, and providing strong care coordination and support through the transplant journey can all contribute to making transplants not just more available, but also more equitable for our patients.

Now, let me shift to an update on the labor market. I've been fortunate enough to be part of DaVita Village for over 20 years, and in all that time across my many roles, I've never experienced a labor market as challenging as we face today. To help deal with the challenge, we have provided incremental pay and benefits to help our frontline caregivers during COVID. We've also accelerated wage increases, with a particular focus on our teammates in the clinics. As previously communicated, we expect higher than usual wage increases in 2022, which will put some additional pressure on our cost structure going forward. We believe this investment in our people will contribute to our ability to attract and retain the talent needed to achieve our long-term objective. That said, the labor markets remain highly dynamic and will continue to be a swing factor for the year.

Over the years and particularly during the pandemic and natural disasters, we have navigated many supply chain challenges. To date, our supply chain has proven very resilient. Currently, we're working through a supply shortage primarily related to dialysate, which is a fluid solution used in hemodialysis to filter toxins and fluid from the blood. The shortage has rippled through the entire kidney care community and as a community, we have once again come together in support of our dialysis patients, and, thus far, have been able to provide uninterrupted, life-sustaining care. We expect that these challenges related to dialysate will remain with us until the second quarter.

Turning to IKC, we now have confirmation on the markets where we will partner with physicians under the federal government's new 5-year demonstration CKCC demonstration. These programs added approximately 12,000 ESKD patients and an additional 12,000 CKD patients across 11 value-based programs in different markets. We are engaging with our nephrologist partners to develop personalized care plan for each covered patient and identify opportunities to improve clinical outcomes and lower cost for each patient. Participating in these and other programs will more than double the number of patients we serve in value-based care arrangement.

In light of our upfront cost of these programs and the lag of shared savings payment, as we discussed in November, we continue to expect that our operating loss in 2022 in our US ancillary segment will increase by approximately $50 million, although this could increase or decrease depending on the number of new arrangements we enter into during the year. We believe that we are well positioned for the future, and, in particular, to deliver positive clinical and financial results in our IKC business over the long term.

Now let me finish with fourth quarter results and our updated outlook. Despite the negative impact of the Omicron surge, our fourth quarter results were slightly above the midpoint of our revised guidance. This resulted in a full year adjusted operating income increase of approximately 3% over 2020. Adjusted EPS from continuing operations grew by approximately 26% year-over-year, and we generated more than $1.1 billion of free cash flow, which we largely deployed to return capital to our shareholders. For 2022, we expect adjusted operating income guidance of $1.525 billion to $1.675 billion. The midpoint of this guidance range is $35 million below our expectation from Capital Markets Day last November, which is primarily driven by our updated views on COVID and labor costs.

As we said previously, while 2022 will be a transition year due to some near-term investment and challenges that we're facing, we continue to believe that we're well positioned to perform across the kidney care continuum in the years to come. We still believe we can deliver the long-term compounded annual growth of adjusted operating income of 3% to 7% that we discussed at Capital Markets Day.

With that, I will turn it over to Joel to discuss our financial performance and outlook in more detail.

Joel Ackerman
Chief Financial Officer at DaVita

Thanks, Javier. As Javier mentioned, our fourth quarter results were slightly above the midpoint of our revised guidance. Q4 results included a net COVID headwind of approximately $80 million, an increase relative to the quarterly impact that we experienced in the first three quarters of the year, primarily due to the impact of the incremental mortality from the Delta surge in Q3 and some temporary labor cost increases. For the year, we experienced a net COVID headwind of approximately $200 million.

As Javier said, the incremental mortality due to COVID in the fourth quarter was approximately 1,100 compared to approximately 1,600 in Q3. While it's too early to accurately forecast incremental mortality in 2022, given the significant uptick in infections in January, we expect COVID-driven mortality in the first quarter to be at or above what we experienced in Q4.

U.S. dialysis treatments per day were down 135 or 0.1% in Q4 compared to Q3. The primary headwind was the increase in mortality and higher missed treatments as a result of the ongoing COVID pandemic. U.S. dialysis patient care costs per treatment were up approximately $6 quarter-over-quarter, primarily due to the increased wage rates and health benefit expenses. Our Integrated Kidney Care business saw an increase in its operating loss in Q4, which is due primarily to positive prior-period development in our special needs plans, recognized in the third quarter and increased costs incurred in Q4, including preparation for new value-based care arrangements effective in 2022.

Our adjusted effective tax rate attributable to DaVita was 16% for the fourth quarter and approximately 22% for the full year. The adjusted effective tax rate was lower quarter-over-quarter, primarily due to a favorable resolution of a state tax issue during Q4. Finally, in 2021, we repurchased 13.9 million shares of our stock, reducing our shares outstanding by 11.5% during the year. We have repurchased to date an additional 1.4 million shares in 2022.

Now looking ahead to 2022. Our adjusted OI guidance is a range of $1.525 billion to $1.675 billion; and our adjusted EPS guidance is $7.50 to $8.50 per share. The midpoint of the OI guidance range is $35 million below the $1.635 billion that we discussed during our recent Capital Markets Day, due to offsetting puts and takes. First, we have a tailwind from both higher final Medicare rate update, as well as a partial extension of Medicare sequestration relief. However, this is more than offset by headwinds due to the recent COVID surge, as well as incremental wage rate pressure.

At the midpoint of our guidance range, we have incorporated the following assumptions related to COVID. Excess patient mortalities due to COVID of 6,000. This, along with our normal growth drivers, would result in a total treatment growth range of approximately 0.5% to 1%. A year-over-year improvement to various COVID driven costs such as PPE, which will be largely offset by the loss of revenue from Medicare sequestration relief beyond Q2 2022. As you would expect, the high and low-end of our guidance incorporates a range of COVID scenarios for 2022. There are scenarios that could lead us to performance above or below this range.

In addition to COVID, the expected headwinds I talked about on the Q3 earnings call and at our Capital Markets Day remain. As a reminder, we expect to incur expenses related to the biggest portion of the industry effort to counter the expected ballot initiative in California. Our guidance assumes an incremental increase of between $100 million and $125 million in labor costs, above a typical year's increase, which is $50 million higher than what we communicated at Capital Markets Day.

Third, we anticipate a year-over-year incremental operating loss in the range of $50 million, as we continue to invest to grow our IKC business. And fourth, we will also begin to depreciate our new clinical IT platform, which we expect to be approximately $35 million in 2022 and will begin in Q2. A few additional things to help you with our current thinking about 2022. We expect to offset the significant amount of these incremental costs with continuing MA penetration growth above historical levels and strong management of non-labor patient care costs. We are forecasting our tax rate at 25% to 27% and the non-deductibility of valid expense. Regarding seasonality, remember that Q1 has seasonally higher payroll taxes and seasonal impact of co-payments and deductibles. The vast majority of our ballot-related expenses will fall in Q3. We have historically experienced higher G&A in Q4.

Looking past 2022, we continue to expect compounded annual OI growth relative to 2021 of 3% to 7% and compounded annual adjusted EPS growth relative to 2021 of 8% to 14%. Finally, we expect free cash flow of $850 million to $1.1 billion in 2022. As we communicated at Capital Markets Day, we expect free cash flow to remain above adjusted net income, with that difference contracting over time. Operator, please open the call for Q&A.


Questions and Answers

Operator

Thank you, sir. [Operator Instructions] Sarah James from Barclays, you may go ahead.

Javier Rodriguez
Chief Executive Officer at DaVita

Hi, Sarah.

Sarah James
Analyst at Barclays

Thank you. Yes, hi. So I wanted to get a sense as we go through Omicron, we think about the waves that are coming ahead. There seems to be more mild outcomes like you mentioned today. And I'm wondering if that's contemplated when we think back to your Capital Markets Day, when you talked about the $160 million to $200 million in OI drag over the next 4 to 7 years from excess mortality, if that contemplates continuing more mild COVID trends as the years go on?

Javier Rodriguez
Chief Executive Officer at DaVita

Well, I'll let Joel talk about the numbers in a second, but let me just start by saying the way we're talking about it internally in the company is that we are no longer going to speculate how this is going to behave, because we have been so surprised over time. We all had such hope when the vaccines came out and then when the boosters came out. And of course, it has resulted in a milder hospitalization and mortality. But at the end of the day, I think we can all now accept that no one can speculate where this is going. Our hope is that it does become less impactful on our business and eventually, it's something that we can deal with in the normal course of business. But that would not be a prudent thing to assume. So why don't you go ahead, Joel, and talk about what we've built into the numbers.

Joel Ackerman
Chief Financial Officer at DaVita

Sure. Thanks, Sarah. So as I think about how COVID impact will play out going forward relative to a wave like, Omicron or a wave like Delta, there are whole bunch of impacts that COVID has across the P&L. And what we've said and remains to be true that there are a lot of offsets in everything, except the excess mortality. And the net impact that we expect from COVID will largely be the net impact of excess mortality. What you see with Omicron is well, yes, it is a milder disease, because it was so much more transmissible that it still led to a big wave of excess mortality. We saw that in Q4. We're continuing to see that in Q1. So as I think about different variants and how they might play out going forward, I think net-net, the question is what's the impact on excess mortality.

Sarah James
Analyst at Barclays

Okay. And can you update us on your conversations with payers, if -- when you're talking about future rates you're building in inflationary factors for wages? I don't know if it would be for '24 contracts now.

Javier Rodriguez
Chief Executive Officer at DaVita

Well, those conversations are playing out in real time, but the reality is that as you know, and we've talked about for some time, our contracts tend to be longer term in nature. And so the bulk of our contracts are not up for renegotiation. So we'll have to, of course, assess how inflation behaves over time when each and every one of those contracts comes up. And so right now, there -- let's call it in and what was negotiated previous to seeing this ramp-up in inflation.

Sarah James
Analyst at Barclays

Got it. Thank you.

Javier Rodriguez
Chief Executive Officer at DaVita

Thank you.

Operator

And our next caller is Justin Lake from Wolfe Research.

Javier Rodriguez
Chief Executive Officer at DaVita

Hey, Justin.

Justin Lake
Analyst at Wolfe Research

Thanks, guys. Hey. So wanted to go through a few things in detail. First, Joel, you talked about the first quarter being similar to the fourth quarter in terms of the mortality headwind from an OI perspective. Can you walk us through again, and I might have this somewhere, but the OI headwind by quarter, first quarter through for fourth quarter in 2001?

Joel Ackerman
Chief Financial Officer at DaVita

The OI headwind by quarter, I am going to do this off the top of my head, it was in the 30s each of the first two quarters, so mid 30s, 55 in Q3 and then 80 in Q4. And I'm getting thumbs-up in the room, so I got it right.

Justin Lake
Analyst at Wolfe Research

Okay. So then 80 is the number for Q1.

Joel Ackerman
Chief Financial Officer at DaVita

No, no, Justin, let me clarify before you go. What I said in the script was that the excess mortality in Q1 was going to be at least as large as what we saw in Q4. So that's about the mortality. Remember, in terms of COVID impact, excess mortality has a cumulative effect. So adding another 1,100 deaths or more, you would add that to what we're seeing in the quarter. There are other dynamics, of course. But when you just focus on the excess mortality, which is the dominant dynamic, you'd expect that number to go up a bit.

Justin Lake
Analyst at Wolfe Research

Got it. So 50 to 80, might be 80 to 110, something like that, given its similar trajectory incrementally, is that a way to think about it?

Joel Ackerman
Chief Financial Officer at DaVita

That sounds a bit high. And I think that's really a function of two things. There was -- there were a significant number of missed treatments in Q4, which has a temporary negative impact of COVID that would -- we would expect that to go down. And second, there were some non-recurring labor components to the COVID impact in Q4 as well.

Justin Lake
Analyst at Wolfe Research

Got it. Is there -- I apologize if you said this, but is there a number like 200 in 2021, is there a number that you gave for 2022, you think that's embedded in guidance?

Joel Ackerman
Chief Financial Officer at DaVita

It's embedded in guidance. I think as we think about COVID impact, we've spent the last seven quarters calling it out on a cumulative basis. As we get further and further away from the beginning of COVID, it gets harder and harder to estimate what the cumulative impact is. The baseline is we're so far removed from the baseline that it's hard to talk about the cumulative impact. So we're thinking about, what, the COVID that's baked into the numbers as effectively the new normal from which we're going to go forward. We'll continue to talk about the impact. We see quarter-over-quarter, but I think we're going to move away from talking about it as a cumulative number.

Justin Lake
Analyst at Wolfe Research

Okay. And then you talked about Medicare Advantage penetration being an offset here. Can you tell us what that was at year-end and where you are kind of after open enrollment?

Javier Rodriguez
Chief Executive Officer at DaVita

Yeah. At the end of the year, which is the most recent number I have, Justin, we were at 42.3% on MA. And I think that's the latest one we want to.

Joel Ackerman
Chief Financial Officer at DaVita

Yeah. If we think about it for the year, I would say we would expect growth to continue to be strong, but not as strong as we saw in '21.

Justin Lake
Analyst at Wolfe Research

Okay, great. And then last question just on the dialysate issue. Can you tell us -- you talked about that and there has been some discussion of this in the industry. Fresenius apparently has an issue. Can you confirm that, like, where the issue is coming from? And you said it will continue to at least the second quarter or you think through the second quarter. Is there any visibility on this improving?

Javier Rodriguez
Chief Executive Officer at DaVita

Well, yes, the community -- this is a national issue for all providers, so there has been a shortage in supply. You can trace it back, of course, to the chain supply issues across the country and the distribution centers and the labor issues. So it's a cumulative of all of them. So there was labor, transportation, everything all came together as it has happened in so many other places. What we did as a community is, of course, the first thing is get the clinical leadership to make sure that we were doing safe dialysis. Then we started to basically titrate, so we would use less of the product, and then we made sure that everybody understood what kind of inventory was at each location so that we would not have anyone stack or stock inventory. So the entire community did that. The visibility that we have right now is that again that will play out and we will be back to normal sometime in Q2 is what we're being told. And so we will continue in the state where we're all, if you will, in a much lower inventory level. That makes -- did I answer your question, Justin?

Justin Lake
Analyst at Wolfe Research

Yeah, thanks. I appreciate it. I'll jump back in queue.

Javier Rodriguez
Chief Executive Officer at DaVita

And I don't know if it was entirely clear as to this whole notion of why we don't want to go back to this baseline, because it's so far. So just to put a finger on something that we are all experiencing is travel and entertainment, which we, of course, at one quarter over another, you could say we used to have a run rate. As the world actually changed and travel and entertainment is going to be completely different. Then we had benefits, which we told you we had a run rate, but the benefits have changed in the run rate. So that's why it starts to get a little harder to go to that and as Joel said, we want to go now into sort of let's call it the new normal, and go off of that. And so, hopefully, that made sense to you.

Justin Lake
Analyst at Wolfe Research

Got it. Thanks.

Javier Rodriguez
Chief Executive Officer at DaVita

Thank you.

Operator

Thank you. Pito Chickering from Deutsche Bank, you may go ahead.

Pito Chickering
Analyst at Deutsche Bank Aktiengesellschaft

Hey, good afternoon, guys. I'll just take my questions here. Drilling down into the OI guidance for 2022, so we're down $35 million. Did I hear you right that there is an additional $50 million of labor costs versus the Analysts Day? And then, you obviously have the more COVID excess mortality than you had expected. And you now assume 6,000 excess mortality or deaths in 2022. It seems like a lot of headwinds versus your guidance of going down $35 million. So I just wanted to understand what were the tailwinds versus your previous guidance.

Joel Ackerman
Chief Financial Officer at DaVita

Yeah, Pito, I'd point to two tailwinds. One is the final Medicare fee-for-service rate came in at 1.9%, which was above our estimate. And the second is we got partial sequestration relief for the year, which is about $25 million. So, those two offset those, and you wind up with a net $35 million decline.

Pito Chickering
Analyst at Deutsche Bank Aktiengesellschaft

Okay. And on the excess mortality, I understand that, that's impossible to forecast this at this point, with like 100 for the first quarter. It's a little unclear, so, what the incidence rate is for new patients entering dialysis. So any chance you can give us sort of the color of how many patients you guys had at the end of the third quarter? How many you had at the end of fourth quarter and where that's tracking sort of at this point in the first quarter?

Joel Ackerman
Chief Financial Officer at DaVita

I'm not sure I understand your question, Pito.

Pito Chickering
Analyst at Deutsche Bank Aktiengesellschaft

Yeah. So you've given us the excess mortality or deaths for the fourth quarter and the first quarter. And I guess on the other side of the equation, you have new patients entering into dialysis. So, I was just curious if you can give us sort of what -- how many patients you had to be at the end of third quarter? How many you had at the end of fourth quarter, so where that is at this point today in the first quarter?

Joel Ackerman
Chief Financial Officer at DaVita

Yes. So the patient count is relatively flat. In terms of the underlying drivers that drive the new to dialysis admits, we really haven't seen any changes there. It continues at the pattern that we saw pre-COVID. And they're really only two dynamics if you are looking at treatment count or treatment volumes or treatments per day between Q3 and the end of the year, and that's, one, the continued excess mortality that we talked about, and the second is the dynamic of missed treatments. So if you're asking about the pipeline of new to dialysis patients, that remains quite healthy.

Pito Chickering
Analyst at Deutsche Bank Aktiengesellschaft

Okay. And then from a modeling perspective as we think about first quarter sequential treatment versus the fourth quarter, we obviously have the excess mortality, sort of the time lag between different quarters, and then the lost treatments that we had during the fourth quarter due to patients that were in the hospitals. Should we be modeling first quarter down a little bit versus the fourth quarter or relatively flat sequentially?

Joel Ackerman
Chief Financial Officer at DaVita

It will depend a lot on missed treatment rates. I'd say for the -- actually there is one other dynamic. We did make an acquisition in Q4. And that was almost 1,000 patients, a little bit -- about 750 patients. So that adds to the dynamic and that'll help Q1 as well. But I'd say, for the course of the full year, we are -- based on the COVID numbers that we've built into our forecast, we're thinking of treatment volume growing somewhere between 0.5% and 1% for the year. Obviously, as COVID plays out, that number could vary.

Pito Chickering
Analyst at Deutsche Bank Aktiengesellschaft

Okay. And then on the IKC, I think at the Analysts Day, you guided to sort of $50 million to $75 million of incremental costs in 2022. On the script, I think you said $50 million. I just want to see if the incremental costs for IKC are -- have changed versus what you told at the Analysts Day?

Javier Rodriguez
Chief Executive Officer at DaVita

Yeah, I think the number hasn't changed, Pito. So it is the $50 million, just to clarify, incremental $50 million.

Pito Chickering
Analyst at Deutsche Bank Aktiengesellschaft

Perfect. And then, so one more question for IKC. Looking at the class of patients that you guys enrolled into the first quarter of '21 in terms of how those losses were in the first quarter when you first got them versus the end of the fourth quarter of 2021, any clarity on sort of how that class of patients, sort of how those losses progressed throughout the year?

Joel Ackerman
Chief Financial Officer at DaVita

Yeah, not yet, Pito. Remember, in the first year, we generally drive no revenue. So it will really be sometime in 2022, where we'll start to get to see that playing through in the financials.

Pito Chickering
Analyst at Deutsche Bank Aktiengesellschaft

Okay. And then two more super quick ones here. What were your home treatments at the end of the fourth quarter? How should that progress through 2022?

Joel Ackerman
Chief Financial Officer at DaVita

Yeah. The home penetration rate was in the low 15% range. Home grew about 3% in the year versus in-center, which shrunk 2%. So our continued path to grow home and be a leader in that modality continues strong. We're not guiding specifically on that number for next year.

Pito Chickering
Analyst at Deutsche Bank Aktiengesellschaft

And then to Justin's question on the dialysate supply shortage, is there any inflationary cost pressures if you have to hit a spot market to get the dialysate requirement or are those out of those contracts? Thanks so much.

Javier Rodriguez
Chief Executive Officer at DaVita

Yeah. Thanks, Pito. On the dialysate, in particular, it is contracted. So, no is the answer to that one.

Pito Chickering
Analyst at Deutsche Bank Aktiengesellschaft

Great, thanks so much.

Javier Rodriguez
Chief Executive Officer at DaVita

Thank you.

Operator

Thank you. [Operator Instructions] Kevin Fischbeck from Bank of America, you may go ahead.

Kevin Fischbeck
Analyst at Bank of America

Great, thanks. I guess, not 100 is unclear to me, what you guys are signaling about the 2023 outlook? I know still far out, but you gave us some comments last quarter about what 2023 would look like. And it seems like some of that headwinds here might persist into 2023, as far as maybe higher labor costs or mortality being a little bit higher from a starting point perspective, plus some of the tailwinds like sequestration delay would not -- but at the same time, you're also kind of saying your growth rate off of 2021 hasn't changed. In fact, 2021 is a little higher, which would point to a little bit higher '23 number. Just trying to think directionally, how should we think about 2023 versus your prior comments?

Javier Rodriguez
Chief Executive Officer at DaVita

Yeah. So I would say the following. First, you're pointing out that labor in COVID remain big uncertainties through 2022, and potentially 2023 is spot on. That said, the uptick that we've talked about in 2023 at Capital Markets Day remains to be something -- remains something that we've got a lot of confidence in. And if I had to bucket them, I'd say the easier things that we can anticipate driving in '23 over '22, one would be the ballot initiative going away, right. We don't have those in odd years. Second would be IKC, we'll start seeing revenue in 2023 from the big cohort of patients that are being added in 2022. Third are a number of cost initiatives that we have that we are implementing across the P&L. And so those are the, I'd say, the ones that we've got a lot of visibility on. The one we have less visibility on is the COVID unwind. We have -- we continue to believe that as COVID moves into the background in the future, that will be a tailwind for us. It will be a tailwind for us on certain cost items, but most importantly, it will be a tailwind for us on patient growth. So our views on those have not changed. And if I had to put a number on those, I think you could add those up and easily get to a $200 million opportunity that we're going after. And that would be over and above the normal growth we would expect in a typical year.

Kevin Fischbeck
Analyst at Bank of America

But your current outlook for COVID mortality feels a little bit higher, so I would think that would kind of maybe delay kind of that reutilization of that $200 million, which might make how much you recapture in 2023 less than what you would have thought a few months ago?

Javier Rodriguez
Chief Executive Officer at DaVita

It will depend on the timing, and we don't profess to have a crystal ball about COVID. We want to be crystal clear about what we built into our forecasted. Obviously, it could be better, it could be worse. Depending on how the timing plays out in 2022, there are different scenarios about what this number could look like in 2023.

Kevin Fischbeck
Analyst at Bank of America

Okay, now that's fair enough. And then I guess in the quarter, it looked like you closed 30 centers, which I think is like as many as you've ever closed in a year, like, for the last decade plus that I've been covering DaVita. So I want to understand what was driving those closures in Q4? I guess, the year number is twice what you've ever done in the year before.

Javier Rodriguez
Chief Executive Officer at DaVita

Yeah, thanks for the question. It is a little higher than normal, although we always have some center closures and consolidations, etc. I think the best way to think of footprint is, as we have three lenses. The very first one is, of course, access to patients, and ensure that the patients are safe and have the right access; the second lens would be what is the mix of home and in-center and as that changes over time; the third is utilization, which is, we've had, of course, because of this excess mortality, we've had some utilization decrease. And then the last is sort of you think of the local market dynamic. And so we want to be really careful, and want to be very thoughtful, but if you were going to say what's the net takeaway is, that we continue to think that we will build less de novos and more home centers over time.

Kevin Fischbeck
Analyst at Bank of America

Okay. But I guess, I mean, if the shift -- if you're talking about recapturing the COVID headwind, then your low volume this year would say that those sites still stay open, because they're going to recapture that line over. Is it really more of that shift to home is the biggest driver to that, or is it --

Javier Rodriguez
Chief Executive Officer at DaVita

No, if you look at our utilization over time, we actually started to grow less pre-COVID, then we had COVID. So the compounding of that actually has our footprint having less utilization than we've had historically. And so we're just -- and then you add the dynamic of home growing, and so that's what we're doing. We just wanted to make sure that we have the right modality in the right market, and so we continue to assess that at every market.

Kevin Fischbeck
Analyst at Bank of America

Okay. And then just maybe last question, the higher labor costs that you're building in now versus the previous guidance, are these underlying ways increases that kind of increase the base going forward or is there some component of that? I think last time you talked about increased training and things like that. Is there some of that doesn't go away or is this $50 million kind of added to the base going forward?

Javier Rodriguez
Chief Executive Officer at DaVita

Yeah, it's interesting we were just talking about that because, of course, there has been a bit more turnover, and we're working on how to get training to be a bit more efficient and effective. But the bulk of this number will stick with us.

Kevin Fischbeck
Analyst at Bank of America

Okay, great. Thanks.

Javier Rodriguez
Chief Executive Officer at DaVita

Thank you.

Operator

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

Gary Taylor
Analyst at Cowen

Hi, good evening.

Javier Rodriguez
Chief Executive Officer at DaVita

Hi, Gary.

Gary Taylor
Analyst at Cowen

Couple of small questions and then a larger one. The comment about the increase in commercial mix sequentially that's playing out, is that still just the mortality impact the primary driver there?

Joel Ackerman
Chief Financial Officer at DaVita

Yes. And the consistent thing that the patients are really valuing choice of keeping their commercial insurance, it has really demonstrated through the pandemic resilience and value of the patient wanting to keep their insurance. And then the excess mortality coming, as you said, from a bigger number of Medicare patients.

Gary Taylor
Analyst at Cowen

And then the mention in the release about part of the revenue, sequential growth was flu vaccine, I know that's a seasonal thing for you guys. Is that -- how material is that and is there any larger pickup in that this year that's material in any way, just given that [Speech Overlap] awareness? Yeah.

Javier Rodriguez
Chief Executive Officer at DaVita

I'm sorry. I thought you were done, Gary. The number is immaterial, and it's actually offset.

Gary Taylor
Analyst at Cowen

Okay.

Javier Rodriguez
Chief Executive Officer at DaVita

On the cost line item. So it's basically a service that we offer to our patients because it's good and convenient for them as opposed to thinking of it is an economic one.

Gary Taylor
Analyst at Cowen

Yeah. Last question, I just wanted to get your view, I haven't heard you guys talk about the Supreme Court case on ERISA plans that have made changes to dialysis payments and benefit structure. I think the oral arguments are coming up on March 1 and presumably a ruling this summer. I think I'd understand your view would be that it's discriminatory practices, and I guess that's what the court is going to decide. But what do you think the implications are, if the 6th Circuit is overturned and the 9th Circuit sort of upheld, and it gives ERISA plans some leeway I guess to pursue cost containment strategies for lack of a better word.

Javier Rodriguez
Chief Executive Officer at DaVita

Yeah, thanks for the question. And I worry it's a complicated one and people haven't been tracking the details. So I'll probably just let me pull up a little and explain the case. And so at the heart of the issue is Medicare in the Secondary Payer Act, commonly referred to as MSPA, protects patients from direct and indirect discrimination. So that's really kind of the question. And so more narrowly, is there a distinction between dialysis patients or what's in the statute, which is ESRD patients. And so that might sound like words knitting, but it's really at the heart of it. And so you say how did we get here, could you explain how we got here. And it's basically, as you know, there is a small employer groups guided by third-party benefit design that limit benefit of dialysis patients and in essence de facto push them to Medicare. And then that went into certain court, and then as you said, the 6th and the 9th circuits split ruling and then Supreme Court said, they wanted to take it up. We won't speculate on the ruling, but you're basically asking, okay, what happens if you do lose.

Of course, I put -- get my energy from winning, but if you ask me what happens if we do lose, there are several scenarios. As you know, the Supreme Court is highly nuanced, and so it could be a narrow loss, which may not have any impact, and they might provide a lot of clarity. And then you might say, okay, well, what happens if it's a broader loss. The first thing is you probably want to quantify it and I don't think I can help you there, because it is impossible to forecast what would plans do and how would they consider it in the light of their reputation risk, and in the fact that there is all kinds of legal requirements under the ADA now. And in addition, we have discrimination provisions in the ACA. And so it might be that we're arguing one pillar, but the other two pillars are so strong that actually has no impact. But we don't know.

We will continue to advocate hard and if we lose, we will continue to seek clarity in a legislative way. But the most important thing for us is that our patients are protected, so that they have the right to get care just like in any other disease. And so we are going to be really, really focused on it and be aggressive both legally and legislatively, because we believe that our patients deserve it. So I said a lot. So let me -- because it's such an important thing, so any follow-up questions?

Gary Taylor
Analyst at Cowen

No, I think, I mean, obviously investors are trying to think about how to quantify the possibility of a loss. And I'm struggling with that as well, and tend to agree it would be a big step to think a lot of plans would significantly change behavior. So I think for now, I just appreciate what you laid out there.

Javier Rodriguez
Chief Executive Officer at DaVita

Thank you.

Gary Taylor
Analyst at Cowen

Thanks.

Operator

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

Lisa Clive
Analyst at Sanford C. Bernstein

Hi, there. Two questions. Just number one, could you give us the percentage of your patients, of your Medicare eligible patients that are in MA now? I think the last number you gave us was around 41%. It's around the Q3 results. And then number two, just on the labor costs, is it wage inflation mainly or is it also sort of staffing shortages or if you could just give us an idea of how that splits out?

Joel Ackerman
Chief Financial Officer at DaVita

Yeah. So quickly on the MA, it's a little north of 42% of our total Medicare patients are on MA. On the labor side, it's generally wage inflation that we're talking about.

Lisa Clive
Analyst at Sanford C. Bernstein

Okay. So you don't have a lot of vacancies or needing to use agency staff that sort of thing?

Javier Rodriguez
Chief Executive Officer at DaVita

No, we do, but we're pretty good at that being kind of short-term. So I think we're answering to be as helpful as possible as to you're saying is this a good stepping stone to go into the future. And the fact is that it is, even though we're struggling. One of the things that we're doing when we have labor shortages is sometimes leadership, which is fixed salary will step into the floor, because we have a lot of our facility administrators that are nurses. That's not something we want to do for a long period of time. It's unsustainable, but that's very helpful when you're short-staffed. So there's a lot of dynamics as you know in interplay when you're looking at staffing. But I think if you were going to say what's the bulk of that number, it is inflationary in the wages.

Lisa Clive
Analyst at Sanford C. Bernstein

Okay, great. And one question just on home dialysis. How has the growth rate changed, if at all, over the last year or two? I guess, there may be more interest in it, but are you also having more sort of bottlenecks around being able to train patients, because of stretched staff, that would be helpful to understand how that's going.

Javier Rodriguez
Chief Executive Officer at DaVita

Yeah, I think COVID, of course, creates some air pockets as it relates to growth. And we've talked a lot about during the call, excess mortality. So if you were going to just step back and look at the mix overall in the last couple of years, we'd basically gone from a little over 12% to 15% of our patients being in some kind of a home modality. So the modality was driving double-digit growth for quite some time, and then COVID occurs. And so what happened during the year is we were between 2% and 3% growth during the year, but then again our in-center shrunk. And so the modality is still thriving. People are still picking it. We continue to create the best home suite out there, surrounding patients with all kinds of things so that they can get onto the modality.

As it relates to training, of course, COVID has added some challenges. And then also COVID has had some tailwind in the sense that people say, gosh, if this happens again, maybe I want to dialyze at home. So it is not an easy answer, but hopefully those trends give you a sense of the appetite for the modality.

Lisa Clive
Analyst at Sanford C. Bernstein

Great. Thanks very much.

Javier Rodriguez
Chief Executive Officer at DaVita

Thank you.

Operator

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

Pito Chickering
Analyst at Deutsche Bank Aktiengesellschaft

Hey, there, guys. Thanks for taking my last follow-up here. Just a really quick question here, and I understand if it's possible to model excess COVID mortality from COVID piece, because these waves are possible to predict. But could you give us some sensitivities around operating income impact, if excess mortality is 3,000 versus the 6,000 you guys are assuming?

Joel Ackerman
Chief Financial Officer at DaVita

I think the rough math on that would be about a $30 million delta.

Pito Chickering
Analyst at Deutsche Bank Aktiengesellschaft

So basically --

Joel Ackerman
Chief Financial Officer at DaVita

And that's for the year and that uses a mid-year convention.

Pito Chickering
Analyst at Deutsche Bank Aktiengesellschaft

Yeah. So said differently, if you guys hadn't taken your excess COVID mortality at the 6,000, that probably would have been almost a delta between that guidance you provided at the Analysts Day versus today?

Joel Ackerman
Chief Financial Officer at DaVita

Yeah, I think that math works, Pito.

Pito Chickering
Analyst at Deutsche Bank Aktiengesellschaft

Okay. Thanks so much, guys.

Javier Rodriguez
Chief Executive Officer at DaVita

Thank you.

Operator

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

Javier Rodriguez
Chief Executive Officer at DaVita

All right. Well, thank you, Michelle, and thank you all for your interest in our company. As you can see, like many other companies, the short term is a tough one with the macro landscape being quite complex and dynamic, in particular, in the labor markets. That said, hopefully, you hear from our voices that in the long term, we continue to build a differentiated capability and that we are very positive on how we are positioned to deliver integrated care for our patients, deliver world-class outcomes, and bring savings to our payers. I would be just remiss if I don't finish by saying that this is all possible because the resilience, the passion, and the dedication of the DaVita team that wakes up every single day to deliver life-sustaining therapy. So thank you for your time, and we'll talk again next quarter. Be well.

Operator

[Operator Closing Remarks]

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