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DaVita Q4 2022 Earnings Call Transcript


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Participants

Corporate Executives

  • Nic Eliason
    Group Vice President of Investor Relations
  • Javier J. Rodriguez
    Chief Executive Officer
  • Joel Ackerman
    Chief Financial Officer

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 2022 Earnings Call. [Operator Instructions] Thank you Mr. Eliason, you may begin your conference.

Nic Eliason
Group Vice President of Investor Relations at DaVita

Thank you, and welcome to our fourth 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 fourth quarter earnings press release, and our SEC filings, including our most recent annual report on Form 10-K all subsequent quarterly reports on Form 10-Q, and other subsequent filings that we may make with the SEC.

Our forward-looking statements are based on information currently available to us, and we do not intend and undertake no duty to update these statements except as may be required by law. Additionally, 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 J. Rodriguez
Chief Executive Officer at DaVita

Thank you, Nic, and thank you all for joining the call today. We started 2023 with a mix of optimism and uncertainty about the year ahead, and with continued conviction in our long-term capabilities and strategy. We're grateful for getting through the winter without a surge of COVID-related mortality, and like bunch of society wondering whether the worst of the COVID pandemic is finally behind us.

I'm encouraged by the progress we've made in the recent months to improve that which is within our control, while we continue to invest in our future. That said, we're cautious in our optimism today because we're still experiencing the impact on volume and labor.

For today, I'll spend a few minutes on fourth quarter results, and then focus on the future with a summary of our 2023 strategic priorities, and then -- and with our 2023 outlook. Before I dive into these topics, I'll start, as I always do, with a clinical highlight. Our most impactful clinical initiatives by those that directly improve the quality of life, and vitality of our patients. There are many measures serving that important purpose and today, I'll take a moment to recognize the successful efforts, to decrease infection rate amongst our vulnerable patient population.

One way we measure success is by tracking blood stream infection, and I am proud to share that we achieved an all-time low blood stream infection rate for our patients as of the third quarter last year. This reflects a 20% improvement within the last year alone. These results represent just one of many efforts we have undertaken to reduce hospitalizations and mortality, which is a tremendous gap for our patients and their family.

I will now pivot to our results. Our full year 2022 adjusted operating income came in at the top end of our revised guidance at $1.45 billion. Adjusted earnings per share from continuing operations for the full year 2022 was $6.60 and we generated $817 million of free cash flow. The primary driver of our fourth quarter performance, coming in at the high end of our range was improvement in labor cost. The labor environment continues to be challenging across many dimensions with fourth quarter was certainly better than third quarter.

One particular highlight, our focus on reducing contract labor produced results earlier than expected. We still expect contract labor will be higher than pre-COVID levels in 2023, by $20 million to $40 million, but that will be significant improvement for 2022. We continue to make progress in hiring team mates during the quarter, as we work to stabilize center staffing levels, and increase retention.

Off note, this increase in labor capacity will continue to drive higher than typical training and onboarding costs in 2023, until retention normalizes to historical levels. We continue to expect wage pressure above historical norms in 2023, but anticipate wage growth at levels below 2022. Despite early optimism for improvement in 2023, the labor markets remain highly dynamic, and will remain a key swing factor in our performance. Our fourth quarter results give us increased confidence in achieving the improvement we discussed last quarter.

Now at the volume, overall results for Q4 were in line with our guidance from last quarter. COVID infection and mortality rates in December and January were lower than in prior years, which is a welcome relief for our patients and our caregivers. Because the winter surge has historically occurred late in December, the lack of a surge did not result in material improvement in our treatment volumes in Q4 relative to our expectation, but have to reduce our expectations for total excess mortality in 2023 by approximately 1,000 patients, as compared to our expectations in the range provided last quarter.

Last quarter, we also highlighted that patient admissions in mid-treatment rates as a key variable to our volume. We continue to see pressure on both of the metrics, but at the levels in line with our most recent expectation.

For 2023, we continue to use a wide range of possible volume outcomes in our guidance, given the uncertainty of the virus. We have shifted the range up to account for the lack of a meaningful winter surge so far, but have not fully discounted the possibility of a COVID surge later in the year.

Our 2023 volume guidance includes a treatment range of down 3% the flat relative to 2022. All else equal, the lack of COVID event over the remainder of the year would move us toward a better end of our volume range.

Looking forward to 2023, we kicked off the year with a robust and exciting set of priorities. We remain resolute in our commitment to pursue strategic goals, they create a strong future for our patients and our company. I will highlight five of these priorities today, beginning with innovation.

First, we're approaching a key milestone in our journey toward digital modernization. After years of development, this year we're deploying our next-generation clinical IT platform. This new cloud-based system is designed to provide seamless access to patient record, across location, supporting integrated kidney care and enhancing data reporting and analytics. Roll out is well underway and we expect this system will be live in our centers across the country in 2023. This platform will provide a superior experience for our team mates and physician partners, while enhancing clinical care for our patients.

Second, on policy, the kidney care community remains active working with CMMI to enhance innovative model that improves care coordination in advanced initiatives around transplant, home and health equity. At the same time, we're advocating for an update to the industry bundle payment system to better reflect year-over-year cost increases.

And finally, we continue working with a broader kidney community to restore benefit protections for our patients through legislative and regulatory efforts.

Third, operationally, we remain committed to educating our patient and our physicians, to increase adoption of home modalities, where clinically appropriate. In support of our over 1,700 existing home programs, we are launching transitional care programs across the country, to educate new dialysis patients on their modality options.

We're also working toward a full integration of our technology platform to create a holistic informational ecosystem for a better home patient management.

Fourth, our integrated kidney care business is expected to deliver another year of significant patient growth, with the benefit of increased scale, it will be important year for us to continue building on our capabilities for IKC, to achieve its purpose of driving better outcome for our patients, better collaborations with physicians and an economic alignment with our payer partners, particularly within the growing Medicare Advantage segment.

And finally, to fuel these initiatives, we're maintaining a disciplined approach with our cost structure. For example, this includes our ongoing transition on ESA therapy, and the ongoing consolidation of our facility's footprint to align capacity with treatment volume. This discipline is particularly important in the context of Medicare fee-for-service rate, which as you know have not kept pace with our increasing patient care costs.

As you can see, 2023 will be a dynamic year across many of these efforts, and we remain firmly focused on the key operating drivers I previously mentioned.

Now, shifting out to outlook. For 2023, we're initiating guidance for adjusted operating income of $1.4 billion to $1.6 billion, and adjusted earnings per share of $5.45 to $6.95. This reflects our latest view on continued but moderating labor headwinds over the balance of the year, persisting volume pressures, offset by the positive impact of avoiding a winter surge, and the benefit of the cost saving initiatives we have previously outlined.

Looking longer term, if we continue to see diminished impact from COVID and moderating the labor pressure, we would expect to return to a more normal adjusted OI growth trajectory of 3% to 7%.

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

Joel Ackerman
Chief Financial Officer at DaVita

Thanks, Javier. Let me first share a few more details on Q4 performance, and then I'll add some color on 2023 guidance. For Q4 we delivered $317 million of adjusted operating income and $1.11 of adjusted earnings per share from continuing operations, which resulted in the full year coming in right at the top of the updated guidance range we provided last quarter.

For the U.S. dialysis segment, treatments per day were down 1.3% compared to the third quarter, in line with our expectations. This was the result of lower patient count due to excess mortality and a higher seasonal mistreatment rate. Adjusted patient care cost per treatment was up $1.78 sequentially. There were three primary drivers of this increase, seasonal flu expense, year-end benefits, and lower fixed cost leverage because of the decline in treatment volume. These were offset by lower contract labor costs in the quarter. Adjusted G&A was down $24 million quarter-over-quarter. This decrease was primarily driven by the $28 million of California ballot initiative expense in Q3.

Turning to our other segments. For our IKC business, operating income was roughly flat quarter-over-quarter. International adjusted operating income decreased $15 million quarter-over-quarter. This is primarily driven by $7 million in foreign exchange headwinds and an expense related to acquisitions in Brazil.

This acquisition expense has an offsetting decrease in taxes, so there is no net impact on the P&L. During Q4, we did not repurchase any shares. As we communicated on the Q3 call, our primary deployment of the excess capital will be to pay down debt to return to our target leverage ratio of 3 times to 3.5 times EBITDA.

Turning to 2023, let me add some more detail on our guidance. Our 2023 adjusted operating income guidance is $1.4 billion to $1.6 billion. Compared to our comments on the Q3 call about our expectations for 2023, the only significant update to our expectations is higher treatment volume due to the lack of a winter COVID surge.

To give some more color, let me run through our latest expectations on the three drivers of the U.S. dialysis business in 2023. First, we expect the year-over-year change in treatment volume to be between 0% and negative 3% due primarily to the annualization of excess mortality in 2022 and continued excess mortality through 2023.

Second, we anticipate revenue per treatment will increase approximately 2% to 2.5% year-over-year, driven roughly two-thirds by rate increases and one-third by higher Medicare Advantage and commercial mix. And third, we expect patient care cost per treatment to increase approximately 2% to 2.5%, driven by wage rate growth and inflationary pressures, partially offset by savings from our new anemia contract and other cost-saving initiatives.

A few additional things to help your thinking about 2023, each of which is incorporated in our guidance. Year-over-year, adjusted operating income is benefited by approximately $50 million due to the absence of the ballot initiative spend in 2023.

Regarding timing of adjusted operating income in 2023, we expect Q1 adjusted OI to be approximately $75 million to $100 million lower than the average of Q2 to Q4, due to typical seasonal factors, impacting among other things, RPT, treatment days per quarter and labor.

Regarding our previously disclosed agreement with Medtronic, we anticipate the transaction will close in the first half of this year. Our initial cash investment will be approximately $300 million at closing. On the P&L, we expect approximately $60 million of pre-tax losses below OI in 2023, which assumes approximately $30 million in the second quarter and $15 million per quarter, over the remainder of the year.

The EPS impact of this will be approximately $0.47 in 2023. For IKC, We expect the OI to be flat to slightly down in 2023, relative to 2022. This is driven by additional growth expenses, offset partially by increased shared savings. Our interest expense assumption for the year is $405 million to $425 million. For income tax, we anticipate an effective rate of 25% to 27%.

On cash flow, we expect free cash flow from continuing operations of $650 million to $900 million. And finally, we anticipate our leverage ratio at the end of 2023 to be in the range of 3.6 times to 3.9 times 2023 EBITDA. That concludes our prepared comments for today. Operator, please open the call for Q&A.

Questions and Answers

Operator

Thank you. [Operator Instructions] Our first caller is Andrew Mok with UBS. You may go ahead, sir.

Andrew Mok
Analyst at UBS Group

Hi, good afternoon. To start, you delivered the high end of the revised guide this quarter, but you're leaving the OI growth for 2023 unchanged. So can you help us understand those dynamics a bit better, because, it sounds like labor costs and volumes are both trending better, which would presumably lead to a better OI outlook for 2023. Thanks.

Joel Ackerman
Chief Financial Officer at DaVita

Yeah, Andrew. Hello. I'll take that one. So, I'd say relative to the guidance we gave on the Q3 call, we've really learned two things. One is, as you highlighted, the quarter came out at the high end of our range, largely as a result of labor. And the second is, we didn't have a winter surge.

As we looked at guidance for the year, we incorporated the volume improvement from no winter surge. We looked at the labor dynamic and ultimately we concluded to leave our labor guidance for 2023 unchanged, really for two reasons. One, we did see improvement in Q4 but some of that was improvement that we really anticipated in the front half of 2023, it just came in earlier than expected. So you wouldn't expect that to change '23.

The second is, we're in a really dynamic labor environment, and given all the moving pieces, we ultimately concluded one quarter's worth of outperformance wasn't enough yet for us to change our views. So for that reason, we kept labor where it is, and the improvement in the guide for next year is really the result of better volume because of no COVID surge in the winter.

Andrew Mok
Analyst at UBS Group

Got it. Do you have the number for a contract labor cost in the quarter?

Javier J. Rodriguez
Chief Executive Officer at DaVita

Yeah. Contract labor cost in Q4 was down about $14 million relative to Q3.

Andrew Mok
Analyst at UBS Group

Okay. And then in the prepared remarks, you noted that you'd expect to return to a more normal OI trajectory of 3% to 7% if COVID normalizes. Can you help us understand, what level of visibility you have into incident rates for new patients to drive the competence and that restore growth rate should COVID normalize?

Javier J. Rodriguez
Chief Executive Officer at DaVita

Sure. I'll grab that one. In essence that when we think of growth, we think of it in two categories. One is, what's within our control and the other is the macro factors. Within our control as we said, in the fourth quarter we've made some progress, and we will continue to make progress on being staffed and ready to accept new patients.

On the macro, which is sort of the question that many are asking, what is upstream new patient looking like. There are some questions that we still can't quantify, some variables that we still can't quantify.

That said, there is nothing we've seen that leads us to conclude that there's a permanent change to new starts. And so the best assumption at this juncture is to assume that after COVID plays out that admits would revert to the roughly 2% that we experienced historically.

Andrew Mok
Analyst at UBS Group

Got it. And just a follow up, wanted to ask about the ESA switch from Epogen to Mircera. What sort of cadence are you expecting with respect to transitioning patients? What have you done so far and when do you expect that transition to be complete? Thanks.

Javier J. Rodriguez
Chief Executive Officer at DaVita

Yeah, the cadence is obviously done very carefully with the coordination of all the physicians making their own independent decisions as to what's right for each patient. It will roll out throughout the year and which should be done by the end of 2023.

Andrew Mok
Analyst at UBS Group

Great. Thanks for the color.

Javier J. Rodriguez
Chief Executive Officer at DaVita

Thank you.

Operator

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

Pito Chickering
Analyst at Deutsche Bank Aktiengesellschaft

Hey guys, good afternoon. Sticking with the incidents for a few minutes. It's pretty delayed, but looking at the USRDS incident count for the first half of 2022 is down sort of 5% versus 21%. That does -- could you guys help quantify sort of what your new ads were sort of quarterly throughout 2022? What do you guys sort of assume for that to be in 2023?

Javier J. Rodriguez
Chief Executive Officer at DaVita

Yeah. So, our admission rate in 2022 was lower than what we've seen prior to COVID. We called that out, and I think that's really one of the big drivers of why what I'd call organic volume or organic growth is down. That's been persistent. It kind of picked up through the back half of the year and yet we haven't seen it come down, which is why our guide for 2023 continues basically to track what we saw in 2022. We haven't built in any material improvement to that. That said, as Javier noted, we expect that to revert back to what we saw pre-COVID once the direct and indirect impacts of COVID are done.

Pito Chickering
Analyst at Deutsche Bank Aktiengesellschaft

Okay. So, looking at the press release, is that about 1,200 patients sequentially, I guess, actually can you quantify for us, is it like 3,000 adds with the delta being sort of mortality, I mean, does any color just sort of it can quantify what the new adds were in the fourth quarter.

Javier J. Rodriguez
Chief Executive Officer at DaVita

We haven't historically reported a new adds number, and I'm hesitant to give it now. I think there'd be a bunch of different ways to calculate it. So I'm not sure I have a good answer for that number.

That said, look, it is -- it continues to be depressed. We saw that in Q4 there is seasonality that number -- it tends to pick up in the front half of the year and so obviously we're going to be looking for that in the front half of 2023.

Joel Ackerman
Chief Financial Officer at DaVita

Yeah, if you were going to use really a high level math, then I'm just trying to help get the direction going, and you say we guided to negative 3% to 0%, but I would give you a midpoint of negative 1.5%. And if you just do the math of the excess mortality starting off in 2023, that's a sort of a negative 2%. There's other variables going into it, but that would get you to a plus 50 basis point from new admits give or take, and there's other dynamics but that gives you direction.

Pito Chickering
Analyst at Deutsche Bank Aktiengesellschaft

Okay. Which actually is segueing, I mean, I guess prior to COVID, and 2019 you saw sort of generally about a 17% sort of mortality rate gets you to just under sort of six years or on average. And during 2020 it was, for 20 plus percent mortality rates were a sub five years. I guess as you're looking at fourth quarter, are we seeing sort of mortality rate, sort of go back to previous levels? There's expectations at one point that it would be extended, just from a pull forward due to excess mortality from COVID in 2021 to seeing, if that number is starting to extend back again.

Javier J. Rodriguez
Chief Executive Officer at DaVita

Yeah, so if you just look at the numbers, just to make sure, because there is new people to the story is, in 2020 we announced like roughly 6,800 or so excess mortality, and we're guiding roughly to 3,000 in 2023. So it is coming down quite aggressively. And I think you, again, we don't have visibility exactly as to when that would revert, but as COVID unwinds, it looks like it would -- it should go with the visibility we have back to normal.

Joel Ackerman
Chief Financial Officer at DaVita

Yeah. And just -- Pito, just to add to that, to help you with remodeling, the excess mortality number in Q4, based on what we know now and these numbers get updated as the data catches up was roughly 900. If you want to compare that to Q4 of 2021, that number was somewhere around 1,500. So Q4 over Q4 the numbers come down significantly.

Pito Chickering
Analyst at Deutsche Bank Aktiengesellschaft

Okay, great.

Joel Ackerman
Chief Financial Officer at DaVita

And we would expect similarly Q1 '23 over Q1 '22 because of the lack of the surge.

Pito Chickering
Analyst at Deutsche Bank Aktiengesellschaft

Okay. One quick follow-up. Can you sort of talk about the nurse turnover that was stabilized at this point? And then on the contract labor, what was contract labor running sort of in 2019 Just as -- as we think about this normalizing out kind of -- where did you guys expand your contract labor in pre-COVID?

Joel Ackerman
Chief Financial Officer at DaVita

Pre-COVID was roughly a little below $20 million. When we got to a high, we got to roughly $100 million last year. And what we told you is that we would run roughly $20 million to $30 million higher in 2023. So that would put you right around $50 million or so. So trying to get halfway through if you will.

Pito Chickering
Analyst at Deutsche Bank Aktiengesellschaft

That's great. Thank you so much guys.

Javier J. Rodriguez
Chief Executive Officer at DaVita

Thank you.

Operator

Thank you. [Operator Instructions] Our next caller is Gary Taylor with Cowen. You may go ahead, sir.

Gary Taylor
Analyst at Cowen

Hi, good afternoon guys. Couple of quick questions. Going back to integrated kidney care, 42,000 full risk patients, what is the guidance or what's built in for 2023? How much patient growth?

Joel Ackerman
Chief Financial Officer at DaVita

I'd say 50% is a good number to use there, Gary.

Gary Taylor
Analyst at Cowen

So I mean 50% patient growth and then you're saying the loss is going to be fairly similar to slightly better than the $125 million [Phonetic], right?

Joel Ackerman
Chief Financial Officer at DaVita

Right. I think the way to think about that rough numbers is a $50 million improvement in shared savings revenue, and that's really driven by the shared savings in 2023 that we get for patients that we were at risk for in 2022, and that's offset by roughly $50 million of cost associated with that growth that we're going to see in 2023.

Gary Taylor
Analyst at Cowen

That makes sense. And I think I understand the accounting you do for that, but the $378 million of revenue you booked this year for that segment, you've got about $3.5 billion of spend, I know that's not all rateable necessarily, but that implies like your net savings that's going into your revenue numbers, like 11% of the spend, is that the right way to think about the results you're achieving so far?

Joel Ackerman
Chief Financial Officer at DaVita

I think it's tough to do that calculation. The $377 million of revenue in '22 really comes in two buckets. $300 million of it is from the snips, which is what I'll call gross revenue. Think of it is accounting similar to a health plans' accounting where the full medical cost comes through revenue.

And then the other $76 million is shared savings revenue where we only book, the actual shared savings amount, we don't book the full cost of the medical amount. And I think if you really wanted to look at a number, you take the call it the gross margin, associated with that $377 million, it's not -- that's not an accounting gross margin, this is kind of a financial calculation we would, it wouldn't comply with GAAP. And you divide that number, which is call it $100 million by the prior year medical spend or the dollars under management from the prior year, because that shared savings revenue is associated with the prior year, and that ratio would get you to what I'd call a net savings number.

Gary Taylor
Analyst at Cowen

Got it. I'm following that. Appreciate it. Last one, Javier you talked about... [Speech Overlap]

Joel Ackerman
Chief Financial Officer at DaVita

Hey, Gary. I'm sorry, just a quick correction. I think you said that '23 would be flat to slightly better than '22, and I agreed with that. What I said in the prepared remarks, it would be flat to slightly worse. So I just wanted to clean that up.

Gary Taylor
Analyst at Cowen

Okay, thanks. I just wanted to go to Marietta for a second, Javier, I mean for Syneos is talking about having a lot of confidence in regulatory or legislative and you suggested you're still active there, I guess. Is there anything else you can share on where you think that relief is more likely to come? CMS making a regulatory language change or the legislation that was introduced last year.

And then -- and the last part of it would just be, any evidence at all, any of the regional TPAs or doing anything with this yet? It sounds like not given your commercial mix guide for '23, but just want to see.

Javier J. Rodriguez
Chief Executive Officer at DaVita

Yeah, thanks for the question, Gary, I won't speculate as to how it will come or if or when it will come, but we continue to work very diligently with the kidney community and disability groups to restore our protection for our patients. As it relates to, what are we seeing, we have not seen any significant uptick.

But we wouldn't expect it, given the time of the year we're in, because there is a lag in claims and payments. So right now, it's going as expected. But one of the things that we're working with the congressional champions is that they've asked that we produce examples because they're very interested in protecting patients. So, that's all we have at this juncture.

Gary Taylor
Analyst at Cowen

Great, thank you.

Javier J. Rodriguez
Chief Executive Officer at DaVita

Thank you.

Operator

And our next caller is Justin Lake with Wolfe Research.

Austin Gerlach
Analyst at Wolfe Research

Hi, everyone. This is Austin [Phonetic] on for Justin. I appreciate the questions here. Joel, I guess, I wanted to start real quick just on sort of the leverage outlook in that 3.6 to 3.9 that you're speaking to. A, just kind of curious, what sort of needs to happen to reach both ends of that range? And then off of that, on the share repo thinking, is there any timing or outlook embedded in the '23 guidance when that might resume? Or, like alternatively, what are you guys kind of need to see on the debt side to start to resume the repurchase activity?

Joel Ackerman
Chief Financial Officer at DaVita

Yeah. So we have not built any share repurchases into our guidance for next year. We just think that's a prudent way to model things out. The range is largely driven by the range in OI, which translates into a range in EBITDA, so that's what drives the range there.

In terms of what we need to see, we -- look, we need to see a very clear path to getting back into the range before we shift our capital allocation priorities back to share repurchases.

Austin Gerlach
Analyst at Wolfe Research

Okay, great. And then on the follow-up kind of on the clinic closures, I think you guys 44 last quarter, 58 this quarter. Like as we think ahead to '23, is there kind of, like a point in time number that you guys are kind of targeting in terms of further clinic consolidation? And then off of that just kind of an update on how the patient retention is tracking off of that?

Javier J. Rodriguez
Chief Executive Officer at DaVita

We don't have a target per se. As you can imagine, it's a process that we take incredibly seriously, to make sure that patients are taken care of and the community is taken care of and we evaluate a lot of dimension. But it looks to be that the range will be in 50 to 70 in 2023 clinics will likely consolidate. As it relates to retention of patients, that is an equation that goes -- that's part of that calculation. And we continue to see strong retention of patients wanting to stay at DaVita.

Austin Gerlach
Analyst at Wolfe Research

Great. And then just one last one from me kind of on an IKC follow-up. The number of at-risk patients bounces around a little bit during the year. Just wondering what are the drivers of that in terms of attribution to you guys, and then is there an expectation that like patient mortality at a certain sense is sort of showing up there?

And then on the med cost under management just, I guess, what are your expectations for cadence and how that moves through 2023?

Joel Ackerman
Chief Financial Officer at DaVita

Yes, so there's nothing I'd call out in terms of the movement on the lives over the course of the year. Contracts go up or down the number of lives in our snip plans can move around a little bit. Some of it I think this quarter was more around rounding than any major moves. In terms of medical spend under management, I think for next year, we expect that number to end somewhere in the $5 billion range, with a lot of that growth coming at the beginning of the year.

Austin Gerlach
Analyst at Wolfe Research

Great. And then sorry, let me just squeeze in now just one more. You guys mentioned the commercial mix and MA just wondering kind of where that tracked in 4Q and then what's kind of embedded for year-end '23 just on the mix side?

Joel Ackerman
Chief Financial Officer at DaVita

We ended the year with the mix of 10.4%, and we don't usually give forward guidance on mix, but that's where we ended the year.

Austin Gerlach
Analyst at Wolfe Research

Great. Thanks, guys

Joel Ackerman
Chief Financial Officer at DaVita

Thank you.

Operator

Our next caller is Kevin Fischbeck with Bank of America. You may go ahead, sir.

Kevin Fischbeck
Analyst at Bank of America

Great, thanks. I guess last quarter you mentioned a lot about the mistreatment dynamics, is there any update there, it sounds like you're saying it came in line with seasonality, does that mean it's back to normal or back to -- as you would have expected based upon how things have traded --played out in Q3 plus Q4 seasonality?

Javier J. Rodriguez
Chief Executive Officer at DaVita

Kevin, on the mix treatments, we just highlighted that it was trending higher than it had historically by 1 percentage point. We also said that this is a dynamic that's going to take some time to, A, understand and then B, fix. And so in our guidance, we do not have any significant progress in there until we can really understand the dynamic and lower it. So it came in line in the sense that it wasn't modeled to improve in any dramatic way.

Kevin Fischbeck
Analyst at Bank of America

And so you're assuming that in your 0 to 3 -- 0 to down 3 volume guidance stays stable?

Javier J. Rodriguez
Chief Executive Officer at DaVita

Correct.

Kevin Fischbeck
Analyst at Bank of America

Okay. And then as far as Medtronic JV goes, it sounds like $15 million a quarter rest of this year, we're assuming when does that become breakeven in your minds, is that kind of ratable to whatever that year is?

Joel Ackerman
Chief Financial Officer at DaVita

Yeah, I'd say ratable to 2026 is a reasonable estimate.

Kevin Fischbeck
Analyst at Bank of America

Okay. And so if you're still going to be at 3.6% to 3.9% leverage, I guess, going back to earlier point, is it safe to assume that there probably won't be share repo in the first half of next year too? Or if you feel like there's core growth going on, you could potentially see that pathway to deleveraging that would allow you to start repo before you're actually kind of right at that range?

Joel Ackerman
Chief Financial Officer at DaVita

I think it's a little early to speculate, but we certainly want to retain the optionality to start the share repurchase program before we get there. I'm not saying we will, but we'd want to know that we've got a clear path to getting there.

Kevin Fischbeck
Analyst at Bank of America

Okay. And then I guess maybe going back to the mix point, you guys did highlight that I think it was a third of the rate growth driver for 2023. Given that the expectation is that there's going to be some sort of recession at some point, I mean, I guess, directionally, it sounds like you're still assuming commercial is up. Is that a issue of number of months and when those -- that loss is happened, so it's more of a '24 pressure than '23 pressure? And then, I guess, if you could provide a little color, more color around where you are on the MA penetration side of things, and where you might think that can go over time? Thanks.

Joel Ackerman
Chief Financial Officer at DaVita

Well, let me grab the private pay mix and the recession impact. It will be, of course, very specific to what segments get impacted, and how long the recession lasts, because our patients have shown that they would like to get COBRA and maintain coverage. In addition, they've also have had great success in their coverage and the exchanges, and so that would make it more resilient. And then, of course, if the recession is long-lasting, then who knows what the impact would be. But assuming that it is a normal recession in time length, I think that our patients have shown a tendency to want to keep their private insurance.

On your second question, which I think was MA mix, we ended the year at 47.3%. What we continue to see is, now we're into normal open enrollments and we have a little more of a tick now every quarter. And so it will continue to increase. And if you had to put a leveling place over the long term, I think it would be slightly below 50% or around 50% if you push me to speculate into the future.

Kevin Fischbeck
Analyst at Bank of America

All right. Great. And then maybe just one last question. The cost-cutting initiative that you did, I mean, maybe it's just that there's more specificity as far as the charges and everything else that you outlined here. But I just want to make sure that this is more or a less kind of as you envisioned it last quarter. Or did you accelerate anything or do anything differently as Q4 played out?

Javier J. Rodriguez
Chief Executive Officer at DaVita

No, I think Joel said it well, we are doing what we said we would in Q3 along all the dimensions that we spoke of and then on labor, some of the efficiencies just came slightly faster than we anticipated. The rest of the stuff remains.

Kevin Fischbeck
Analyst at Bank of America

All right. Great. Thanks.

Javier J. Rodriguez
Chief Executive Officer at DaVita

Thank you.

Operator

Thank you. Andrew Mark with UBS. You may go ahead, sir.

Andrew Mok
Analyst at UBS Group

Great. Just a few numbers questions to follow up. Your D&A increased about $20 million sequentially. Is that from the new clinical IT investments? Or is there something else driving that D&A higher in the quarter? Is that a good number to think about for 2023 from a run rate perspective?

Joel Ackerman
Chief Financial Officer at DaVita

Yeah, I think modeling consolidated D&A for 2023, I'd say, we don't expect that to change very much from the full year 2022.

Andrew Mok
Analyst at UBS Group

So D&A will be flat even though it ticked up in the fourth quarter is that, what you're saying on a full year basis?

Joel Ackerman
Chief Financial Officer at DaVita

Yeah.

Andrew Mok
Analyst at UBS Group

And what's driving the decrease then, is that from lower clinics?

Joel Ackerman
Chief Financial Officer at DaVita

I think the important thing here, Andrew, would be a focus on the non-GAAP D&A, you've got to exclude the costs associated with clinic closures and anything else. On a non-GAAP basis, I think you'll see it's relatively flat in Q4 over Q3.

Andrew Mok
Analyst at UBS Group

Okay, got it. And then maybe just a quick update on home dialysis initiatives, where is that tracking relative to long term goals? And as you shut down clinics, should we expect that number to trend higher over time? Thanks.

Javier J. Rodriguez
Chief Executive Officer at DaVita

Yeah. Thanks for the question, Andrew. Our home mix ended up 15.2% and that is tracking consistent to where we expected. We do not think there is a linkage between closing centers and having home mix increase, but rather the transitional centers that we talked about and making sure that our patients have home remote monitoring and other tools that they feel confident and connected and want to be able to go home.

We're in essence also re-educating nephrologists, so they can be comfortable to have more patients at home. Those variables will be way more important than the centers, because we're being so thoughtful as to which clinics we closed and so patients in essence still have access.

Andrew Mok
Analyst at UBS Group

Got it. And maybe on that point, I think you've touched on this briefly, but what exactly are you doing to ensure that you're retaining patients in the clinics that you do close? What are you doing to prevent any sort of leakage there?

Javier J. Rodriguez
Chief Executive Officer at DaVita

Well, the patients have choice of course, and then nephrologists have choices and they can go wherever they deem appropriate for their life. But in general, we have relationships with them and they feel comfortable with their care. And so when we sit with the patient and tell them about a center closure, we tell them about their options and then they choose and many times they feel comfortable staying within DaVita center and then the ones that, obviously, choose to go somewhere else, choose to go somewhere else, but the vast majority have decided to stay with DaVita and their nephrologists.

Andrew Mok
Analyst at UBS Group

Got it. Thanks for all the color.

Javier J. Rodriguez
Chief Executive Officer at DaVita

Thank you.

Operator

And at this time, I am showing no further questions.

Javier J. Rodriguez
Chief Executive Officer at DaVita

Okay. Well thank you, Michelle and thank you all for your questions, and for your continued interest in DaVita. I'll finish where I started with optimism for the year ahead. Although we will continue to stay away from any COVID predictions, I'm encouraged by our recent progress.

As outlined today, we will continue to pursue our strategic priorities to create the best long-term capabilities and outcomes for our patients, team mates and shareholders. Thank you all for joining the call today, and be well.

Operator

[Operator Closing Remarks]

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