DaVita Thesis?

[mountboney]

If Geoff Gannon's facts are correct that 100% of profits come from 10% of patients with no profits from the 90% on medicare/medicade then that's roughly $1.5mm in enterprise value per profitable patient.  I hope I never have kidney failure.

[ItsAValueTrap]

In 2011 it averaged out to around $49,000/year in revenue for a patient.

 

2- Please... sign up for organ donation.  Kidney disease is a terrible thing.  You're tied to a hospital (and you still have health issues because dialysis doesn't replace all the functions of a kidney).

[enoch01]

Instead of thinking about the Medicare/Medicaid revenue as profitless business, maybe it’s just as easy to think about it as float that costs very little.  The economies of scale that DaVita is achieving as they get bigger flows to the owners.  Medicare is financing the operation and asking nothing in return.

 

Does Medicare reimburse different amounts for the same service at different dialysis centers?  If not, then DaVita's increasing market share enhances it's moat, so long as it continues to gain bargaining power on its costs.

 

Update: Hm, I didn't realize they also carry about $8B in debt.  That undercuts my idea.

[ItsAValueTrap]

Davita's and Fresnius' margins seem to have stayed the same over the past decade.

 

http://www.gurufocus.com/financials/dva

http://www.gurufocus.com/financials/FMS

 

I'm guessing that economies of scale have been offset by lower profitability of the overall industry.  (Does anybody know the actual answer to this?  I don't.)

 

2- This blog is interesting:

http://whyisamericanhealthcaresoexpensive.blogspot.ca/search?q=dialysis

 

It seems that the level of dialysis care provided depends on social, political, and ethical issues. 

An argument can be made for spending more money on keeping people alive.

An argument can be made for spending less money and allowing some people to die a peaceful death (instead of being medical zombies).

 

And then there are issues of fairness.

[fareastwarriors]

http://www.bloomberg.com/news/2013-05-24/berkshire-s-weschler-holds-almost-150-million-of-davita.html

 

 

Ted Weschler has a personal holding in the dialysis provider valued at almost $150 million.

Weschler has 1.19 million shares, or about 1.1 percent, of the Denver-based company, according to a regulatory filing yesterday. The holding was amassed before he joined Omaha, Nebraska-based Berkshire, according to the document.

[Yours Truly]

http://www.bloomberg.com/news/2013-05-24/berkshire-s-weschler-holds-almost-150-million-of-davita.html

 

 

Ted Weschler has a personal holding in the dialysis provider valued at almost $150 million.

Weschler has 1.19 million shares, or about 1.1 percent, of the Denver-based company, according to a regulatory filing yesterday. The holding was amassed before he joined Omaha, Nebraska-based Berkshire, according to the document.

 

I don't see Ted's name anywhere on the DVA 13G? whereas on the Starz, DTV 13G, its listed

[ItsAValueTrap]

I've been doing some research on DaVita.

 

I can see why somebody might be attracted to the stock.  Kent Thiry is one of the best CEOs in that niche.  Davita and Fresenius post similar returns on capital though Davita stock has performed better due to superior asset allocation (?and faster growth?).

 

HOWEVER... Thiry strikes me an unethical.  Yes, the whole for-profit dialysis industry is unethical.  The economic reality is that only the cutthroat survive.  Both Fresenius and Davita have paid settlements over Medicare fraud.  But, Thiry strikes me as an unethical person.

 

-He talks a lot about improving patient outcomes.  Yet his company was putting patients at risk by overprescribing EPO just to make a little extra profit.  They reuse dialysis filters (unlike Fresenius, which has moved towards single-use filter).  Many of the staff at DaVita are unhappy that cost-cutting measures are putting patients at risk.

 

-He talks a lot about saving the American taxpayer money.  Yet DaVita has participated in many instances of Medicare fraud: overprescribing EPO, wasting drugs, etc.

 

-Thiry's salary has grown much faster than Davita's profits.

 

Presumably, the board made Weschler enter into a standstill agreement.  Berkshire Hathaway gets very little out of the standstill agreement while the board of directors gets extra job protection.

 

Does Medicare reimburse different amounts for the same service at different dialysis centers?  If not, then DaVita's increasing market share enhances it's moat, so long as it continues to gain bargaining power on its costs.

DaVita actively tries to create monopolies in local markets.  For example, they paid doctors to enter into 10-year non-compete agreements.

 

Patients do not want to drive excessive distances to get to a dialysis clinic (especially if they are so sick that they cannot drive themselves).  So if there is only one clinic near them, they don't have much of a choice.

[rogermunibond]

CMS proposes 9.4% cut for dialysis providers

 

By Rich Daly

 

Posted: July 1, 2013 - 8:00 pm ET

 

Dialysis service providers would see a 9.4% cut to their Medicare pay in 2014 under a proposed CMS update (PDF) issued late Monday.

 

Under a provision of the last-minute fiscal deal reached on New Year's Eve, the CMS proposed recalculating payments to dialysis providers to obtain $4.9 billion in savings.

 

Dialysis provider shares lost value in afterhours trading on word of the proposed rate cut. For instance, DaVita HealthCare Partners, the country's second-largest dialysis provider, dropped 5.5% Monday night.

 

The new rate stems from rebasing Medicare's bundled payments to dialysis providers to bring the reimbursement in line with lower use of a costly group of anti-anemia drugs, which represent Medicare's largest drug expenditure. The current rate is based on 2007 treatment protocols, and the use of them has dropped significantly in recent years due to safety concerns.

 

The agency compared treatment costs for end-stage renal disease in 2007 and 2012 and concluded that a $29.52 reduction in the $246.47 base rate per treatment was in order. That cut would provide a 2014 dialysis base rate of $216.95, or down 12%. That blow is mitigated somewhat by an adjusted marketbasket update of 2.5%.

 

The proposed rule sought comments over whether the phase-in period should occur over longer than one year.

 

In 2011, the CMS spent $10.1 billion on 365,000 beneficiaries with end-stage renal disease, according to the Government Accountability Office

 

The legislative requirement for Medicare to change the dialysis payment—folded into the American Taxpayer Relief Act of 2012—followed a December GAO report that argued Medicare has overpaid for end-stage renal disease treatment by relying on 5-year-old drug use trends that are no longer accurate.

 

The proposed rule also includes changes to the ESRD Quality Improvement Program, which could cost dialysis providers as much as 2% of their Medicare payments if they fail to meet performance targets.

 

The CMS will accept comments on the proposed rule until Aug. 30.

 

 

[fareastwarriors]

http://www.bloomberg.com/news/2013-07-05/buffett-s-berkshire-increases-davita-stake-4-3-amid-stock-slide.html

 

Berkshire bought 639,200 DaVita shares on July 2 and 3 for about $73.4 million, according to a regulatory filing today by the Omaha, Nebraska-based investment company.

[twacowfca]

I smell a deal.

 

The pattern of BRK's buying DVA over the last two years is reminiscent of their pattern of acquiring BNSF. Opportunistic purchases on the dips at gradually increasing prices for a massive holding.  The maximum price BRK paid this year was $119.98/ share, not far from the current price.

 

There are three recent events that suggest there could be an offer to acquire DVA announced by BRK as soon as Q4 this year.

 

1) DVA's board has authorized an initiative that may increase the existing grants of stock appreciation rights to their CEO and other key employees.  A proposal by a shareholder activist to eliminate the immediate vesting of these rights upon a change of control was voted down at their recent AGM.

 

2) The recent standstill agreement signed with longtime DVA shareholder Ted Weschler acting also for BRK may be a prelude to an acquisition offer.

 

3) DVA has finally hired a permanent CFO with an interesting background. He holds a Ph.D in molecular biology from Cambridge University. He has run biotech companies. In recent years he has worked on Wall Street, first as a deal maker for Credit Suisse and recently for Goldman Sachs.  It goes without saying who WEB's favorite investment banker is.

 

DVA's new CFO will be joining them as their Financial VP in mid September.  He will officially assume the duties of CFO on Sept. 31, one day after they file their Q3.  It will be interesting to see what happens after that.  :)

[rogermunibond]

Their new cfo's background would be useful less with a BRK deal and more if DVA went on a Valiant Pharma path.

[twacowfca]

Their new cfo's background would be useful less with a BRK deal and more if DVA went on a Valiant Pharma path.

 

That's interesting as well.  Their recent large acquisition seems to be working out well. It certainly hasn't cooled Weschler's ardor for buying their stock. 

 

It's not incompatible with the other thesis, however.  The companies Berkshire acquires are enabled to do many potentially high return, usually bolt on acquisitions of their own without being constrained by financing or worries of becoming over levered, or the possibility of the CEO losing his job if an acquisition doesn't  work out as well as expected.

 

Upon reflection, the idea of Davita's having acquisition prowess in an industry  that looks attractive for BRK could strengthen the thesis that there are mutual incentives to embrace each other.  :)

[JBird]

http://m.bizjournals.com/denver/news/2013/05/07/warren-buffetts-berkshire-hathaway.html?r=full

 

I thought this meant Berkshire won't acquire Davita?

[enoch01]

http://m.bizjournals.com/denver/news/2013/05/07/warren-buffetts-berkshire-hathaway.html?r=full

 

I thought this meant Berkshire won't acquire Davita?

 

From the Agreement:

 

Section 4. Termination. Notwithstanding any provision of this Agreement to the contrary, this Agreement, and all restrictions set forth herein, (i) shall automatically terminate and be of no further force and effect (without any further action on the part of any party hereto) if the Company enters into a definitive agreement with respect to, or publicly announces that it plans to enter into, a transaction involving all or a controlling portion of the Company’s equity securities or all or substantially all of the Company’s assets (whether by merger, consolidation, business combination, tender or exchange offer, recapitalization, restructuring, sale, equity issuance or otherwise), or (ii) shall terminate immediately upon delivery by Investor of written notice to the Company’s CEO if Investor at any time (subsequent to the date it first becomes a beneficial owner of more than 15% of the Company’s then-outstanding Common Stock) ceases to beneficially own more than 15% of the Company’s then-outstanding Common Stock.

 

 

On another note, it looks to me like the future is just as much in HCP as in the dialysis business (maybe more?).  The capitation model, plus scale, looks promising.

[Kiltacular]

I smell a deal.

 

The pattern of BRK's buying DVA over the last two years is reminiscent of their pattern of acquiring BNSF. Opportunistic purchases on the dips at gradually increasing prices for a massive holding.  The maximum price BRK paid this year was $119.98/ share, not far from the current price.

 

There are three recent events that suggest there could be an offer to acquire DVA announced by BRK as soon as Q4 this year.

 

The behavior is similar to BNSF -- though I can't recall if there was standstill with BNSF.  My main -- and not insignificant -- feeling against a deal is that I would be surprised if Berkshire wants to own all of (as opposed to a percentage of a publicly traded) business which derives its revenues / profits from healthcare.

 

It's easier to attack a possession of the king than it is that of the commoner.  "Heavy is the head..." and all that.

[SwedishValue]

I bought some stock today. I think it is interesting that Weschler bought a lot of stock at prices somewhat higher than these, and I don't think the dialysis business is going anywhere. The announced rate cuts will obviously hurt their profitability in the short term, but I don't see how it influences their long term economics significantly.

[SwedishValue]

Cool, might buy more today.

[ItsAValueTrap]

Having done my research on this stock, I'm not sure why Weschler is so enamored with it.  Management strikes me as extremely unethical.  There's a reason why its settlements are so large.

[ItsAValueTrap]

Here's an old blog post of mine on Davita that explains why I think that most of the industry and Davita are unethical:

http://glennchan.wordpress.com/2013/06/17/for-profit-dialysis-an-unethical-industry-davita-dva/

[twacowfca]

I think their incentives are in alignment with the health interests of their customers.  They talked in their recent call about how they slowly have brought down the mortality rate of their patients, lowering the death rate about 30% in the last few years to the current annual death rate of about 13+%.

 

That's like the virtuous alignment a traditional life insurance company has with its customers, longer life : more profit.  :)

 

I had the privilege a few years ago of consulting with the late Dr. Cade, the retired U of FL outstanding professor who developed Gatorade in the 1960's. He was a kidney specialist, one of the first physicians to treat patients with dialysis.  He literally had to make decisions about which of his patients were going to live or die because the limited availability of dialysis had to be rationed in the early days. Now, thanks to for profit companies like DaVita, those decisions are mostly history in the US, but not elsewhere, including countries with socialized medicine where medical care is "free".

[ItsAValueTrap]

If you turn away the most difficult patients then your mortality figures may improve.

 

DaVita is doing some things well: they are encouraging their patients to get fistulas and made an investment in NxStage.  I think most doctors would choose NxStage as the treatment option for themselves as they can hold a job and more frequent dialysis makes them healthier.  Unfortunately, the current system doesn't encourage nocturnal home dialysis because it's not as profitable for the dialysis clinics (and there may be liability and legal malpractice issues that I don't understand).

They may have significant cost efficiencies in getting their staff to be more efficient and using metrics to measure their performance.

 

There are things that DaVita can do better:

- Not overdose their patients on EPO

- Not scam Medicare

- Switch to single-use filters, instead of re-using them.  Re-using filters is error prone.  The Lufkin clinic (where a patient died or was murdered) had a huge number of problems, some of which were made worse by needing to clean filters.

- Not inflate their numbers by having techs repeat tests.  Their techs are gaming the measurements / inflating them.

- Get rid of the conflicts of interests in having kidney doctors owning equity in DaVita clinics.  They should not profit from their patients' dialysis treatments.

[rogermunibond]

DaVita seems to be a perfect hedge for longevity and morbidity risk of retirees in pension funds. That's my guess why Ted was buying previously for his biggest hedge fund investee, WR Grace, and why he continues to buy for Berkshire and increasingly in the pension funds that Berkshire controls.  It's much better than any pharma or medical device company.

[Palantir]

I don't understand why we're expecting Davita to have ethical management?

[Kiltacular]

DaVita seems to be a perfect hedge for longevity risk of retirees in pension funds. That's my guess why Ted was buying previously for his biggest hedge fund investee, WR Grace, and why he continues to buy for Berkshire and increasingly in the pension funds that Berkshire controls.  It's much better than any pharma or medical device company.

 

Very interesting insight.

[hyten1]

damn it, in the middle of building a position

 

http://www.bloomberg.com/news/2013-11-22/davita-spared-as-medicare-wipes-out-9-4-dialysis-cut.html?cmpid=yhoo