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Davita - How can they achieve 30% ROIC (tangible)


LongHaul
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It's a complicated and costly business (dialysis).  Most hospitals don't want the headache of a patient who is profitable for six months before they go on Medicare/Medicaid.  In fact that's been the attraction for hospitals to divest their dialysis facilities and invite Davita to set up a center close by.

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There's economies of scale in the industry (procurement, insurance processing, etc). There are two large players followed by a large amount of single site operations. Pricing allows the single sites to stay in business which drives high margins for davita and fresenius.

 

At least that's how its been explained to me.

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Why don't doctors and others with capital come in and drive that down?

 

DaVita makes kidney doctors sign non-compete agreements.  DaVita has been accused of giving doctors equity ownership in their dialysis centers, which is illegal.  The problem with kidney doctors owning dialysis centers (or portions of them) is that they may refer patients to their own dialysis clinic, even if the quality of care is subpar or if there are more cost-effective alternatives elsewhere (e.g. other dialysis clinics, at-home dialysis, etc.).  Other countries have much higher rates of at-home dialysis, which allows patients to hold normal jobs.

 

DaVita has also faced many, many accusations of defrauding Medicare.  Defrauding Medicare is something that scales.

- Intentionally wasting drugs so that drug manufacturers make more money and give kickbacks/rebates to DaVita.

- Overdosing patients on EPO so that the EPO manufacturer makes more money.  (One of the side effects of EPO is death.)

- Gaming the quality of care metrics by using their own blood testing clinics and by overstating the number of patients with fistulas.

 

2- DaVita also makes high returns in legitimate ways.  Their culture is unique and has been described as "cult-like".  Regardless, their culture seems to be good for morale.

 

They measure their dialysis clinics on various metrics, to ensure that their clinics are well-managed.

 

They also have various initiatives such as their fistula first program.

 

3- DaVita used to have international operations and exited those markets shortly after Kent Thiry turned the company around.  If you compare the US healthcare system to other countries, you'll quickly see that the US system is horribly messed up.  Other countries:

- Push at-home dialysis

- Have lower costs

- Do not re-use dialysis filters.  Re-using dialysis filters require staff attention in cleaning the filters.  There is a small risk of things going wrong if a staff member does not clean the filter properly.  Re-using filters can "save" DaVita money because they can simply overwork their staff.  Staff time has a cost, but if you overwork the techs then their time is "free".

 

Seems like there are no huge barriers to entry.

Part of the reason why there are barriers to entry is because there is a very limited supply of kidney doctors, and because dialysis patients do not want to drive 2-3+ hours to a dialysis clinic and 2-3+ hours back for something they have to do frequently.

 

The kidney doctors tend to band together into practice groups.  It's cartel-like.

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Why don't doctors and others with capital come in and drive that down?

 

DaVita makes kidney doctors sign non-compete agreements.  DaVita has been accused of giving doctors equity ownership in their dialysis centers, which is illegal.  The problem with kidney doctors owning dialysis centers (or portions of them) is that they may refer patients to their own dialysis clinic, even if the quality of care is subpar or if there are more cost-effective alternatives elsewhere (e.g. other dialysis clinics, at-home dialysis, etc.).  Other countries have much higher rates of at-home dialysis, which allows patients to hold normal jobs.

 

DaVita has also faced many, many accusations of defrauding Medicare.  Defrauding Medicare is something that scales.

- Intentionally wasting drugs so that drug manufacturers make more money and give kickbacks/rebates to DaVita.

- Overdosing patients on EPO so that the EPO manufacturer makes more money.  (One of the side effects of EPO is death.)

- Gaming the quality of care metrics by using their own blood testing clinics and by overstating the number of patients with fistulas.

 

2- DaVita also makes high returns in legitimate ways.  Their culture is unique and has been described as "cult-like".  Regardless, their culture seems to be good for morale.

 

They measure their dialysis clinics on various metrics, to ensure that their clinics are well-managed.

 

They also have various initiatives such as their fistula first program.

 

3- DaVita used to have international operations and exited those markets shortly after Kent Thiry turned the company around.  If you compare the US healthcare system to other countries, you'll quickly see that the US system is horribly messed up.  Other countries:

- Push at-home dialysis

- Have lower costs

- Do not re-use dialysis filters.  Re-using dialysis filters require staff attention in cleaning the filters.  There is a small risk of things going wrong if a staff member does not clean the filter properly.  Re-using filters can "save" DaVita money because they can simply overwork their staff.  Staff time has a cost, but if you overwork the techs then their time is "free".

 

Seems like there are no huge barriers to entry.

Part of the reason why there are barriers to entry is because there is a very limited supply of kidney doctors, and because dialysis patients do not want to drive 2-3+ hours to a dialysis clinic and 2-3+ hours back for something they have to do frequently.

 

The kidney doctors tend to band together into practice groups.  It's cartel-like.

 

Informative response ItsAValueTrap. Much appreciated.  Tenet Healthcare was making good margins back in 2001 and prior or so  until they were caught overcharging medicare and then their high margins evaporated.  I think the CEO at the time was a ex investment banker.

 

The overcharging would explain some of it - that has multiple levels of risks for an investor.

 

The kidney doctors have a lot of power.  Interesting point.  I would think that the doctors would extract more in pay if they have so much power.  Perhaps they are but still with that high cost input Davita is able to charge a lot.

 

I can imagine it is cartel like also with 2 big guys.  Are they just tacitly colluding to keep prices high which will evaporate with time?  Industry after industry consolidates, jacks up prices too high and then competition comes in to bring down returns on capital - perhaps this is one.  Looks like the the 2 big guys have 75% - 80% of the market.  That is huge.  I would curious if there were any challengers out there who are taking a ton of share from the 2 big guys.

 

 

Just kind of funny if you follow the link

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