DaVita Inc.

Good evening. My name is Andy, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the DeVito Second Quarter 2020 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remark, there will be a question-and-answer period. If you would like to ask a question during this time, simply press star and then the number 1 on your telephone keypad. If you would like to withdraw your question, press star, then the number 2. Thank you. Mr. Gustafson, you may begin your conference.

Thank you, and welcome, everyone, to our second quarter conference call. We appreciate your continued interest in our company. I'm Jim Gustafson, Vice President of Investor Relations, and joining me remotely today are Javier Rodriguez, our CEO, Joel Ackerman, our CFO, and Leanne Zumwalt, Group Vice President. 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 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 second quarter earnings press release and our SEC filings, including our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q. 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. Additionally, we'd like to remind you that during this call, we will discuss some non-GAAP financial measures. Reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our earnings press release submitted to the SEC and available on our website. I'll now turn the call over to Javier Rodriguez.

Thank you, Jim, and good afternoon, everyone. Thank you for joining us for our second quarter financial results. First, I want to start, as I did last quarter, by acknowledging and thanking all of our teammates, especially the thousands of clinicians who provide our patients with life-sustaining care each and every day. The past several months have been amongst the finest and most exceptional chapters in our history, reflecting the compassion and the dedication of our teammates. The company's strong performance this quarter demonstrates the benefits of our patient-centric, comprehensive kidney care platform, beginning with CKD all the way through ESRD and transplant. The continuity of care that we offer our patients allow us to meet the patient where they are through offering modality options in the hospital, in the patient's home, or in the dialysis center. We're now nearly six months into this pandemic, and if you were to walk into one of our centers, you still would experience a high level of energy and intensity amongst our teammates as they provide for the health and safety of our patients. We have supplemented our effective infection control policies by conducting COVID tests for patients and teammates both within our lab as well as with special partnerships with external labs. These physician and clinician-led efforts have enabled us to maximize the number of patients treated outside of the hospital, which of course is good for patients and has helped reduce the burden on hospitals. While we cannot know for certain what lies ahead, I can say that we feel prepared to continue our work to keep our patients and our teammates safe. We had a strong financial second quarter. As a result, we're raising our adjusted earnings per share guidance for the year by 50 cents to 625 to 675. Our strong operational performance came despite investments and expenses we incurred in response to COVID. offset by savings associated with COVID in the form of reduced travel and health benefit expenses, among other items, which Joel will explain in more detail. Today, I'd like to cover four additional items. Let me start off by talking about treatment volumes and commercial mix, two of the largest uncertainties associated with the pandemic that we identified last quarter. Our patient census has been negatively impacted primarily by COVID-related deaths delayed by patient starts on dialysis. And we expect our treatment volumes for the remainder of the year to fall below the low end of the range of 1.5 to 2.5% provided in September. The patients that unfortunately passed away due to COVID were primarily among our older population and therefore were more frequently covered by government insurance. As a result thus far, we have not seen a material negative impact on our commercial mix, although with only three months of actual data on job losses, any assessment of our commercial patient population and their ability to access private versus government health insurance are preliminary. What we do know is that our private pay census fared better than expected in the quarter as our patients worked hard to maintain their employment and their insurance coverage. While the long-term impact of COVID remain uncertain, some natural offset exists and we believe in the resilience of our business model. For the second topic, I'd like to share some exciting development in our home business. As you know, we start from a leadership position in home with approximately 14% of our patient population on home modality and more than 25% utilizing a home modality at some point during their care journey. Our home growth continues to outpace our in-center dialysis growth by more than five times. And during the pandemic, we've seen a slight uptick in interest from patients wanting to dialyze at home. We now have over 28,000 home patients who receive training, education, lab jobs, and medication at over 1,750 programs across the United States. In fact, 95% of dialysis patients live within 30 miles of a DaVita home program. The scale of our home business is the result of many years of investment that we have made in capabilities, education, and technology to help give patients and physicians the option to choose home dialysis if it is right for them. Let me provide a couple of examples. Several years ago, we launched our home remote monitoring platform, which enabled daily monitoring of vitals for approximately 5,000 of our high-risk patients. In addition, early last year, we released a robust home telehealth platform, which now has a user base of over 19,000 patients. More recently, we've continued building out these platforms to provide patient support features like virtual disease management programs, virtual patient support groups and capabilities that promote continuity of care and support return home therapy for hospitalized patients. We believe that these capabilities have allowed us to significantly increase the frequency of home patient touches to continue to enhance the quality of care and to help extend the amount of time home patients spend on the therapy. The fact that we already had telehealth in place has also served as a significant advantage in our ability to keep these patients and their caregivers connected during the pandemic. A second example we're excited about is a launch of our artificial intelligence system that helps identify PD patients that may be at risk for hospitalization, which is one of the largest causes of home patients switching to in-center dialysis. Home growth and innovation continue to be amongst my top priorities, and we continue to pilot many new programs and ideas around the country to help support patients for whom home dialysis is the best modality. We also believe that our full suite of modality offerings enable us to help patients seamlessly access the right modality at the right time in their dialysis journeys. Our patients can continue to benefit from our national footprint, our physician partnerships, and our unique capabilities as we seek to lead the industry in growing homes. My third topic is calcium and medics. As many of you know, we're now moving into the next phase of calcium and medics reimbursement as CMS proposed including calcium medics in the Medicare Bundle Payment in the recently issued proposed payment rule for 2021. We believe that the DAPA period gave CMS sufficient time to observe utilization and pricing data especially in the light of the mix of IV therapy and oral therapy. Over the last couple of years, our physicians and our clinical teams developed patient-centered protocols to achieve our high-quality standards for care, which in this instance also drove down the cost for healthcare systems because the protocol resulted in a higher mix of low-cost generic drugs and a lower mix of higher-cost IV alternatives. We believe that the new rule will result in similar economics for counseling medics in 2021 as we have guided in 2020, which will help to offset the underfunding of the remaining Medicare bundle. My last topic is Medicare Advantage. As many of you are aware, in 2016, Congress enacted the 21st Century Cures Act to provide all Medicare eligible patients with the option to enroll in Medicare Advantage plans, including all ESRD patients. We believe that the ending of the barriers that have prevented active dialysis patients from enrolling in Medicare Advantage will be a positive development for many patients, providers, and managed care organizations as this new rule will expand the opportunity to provide coordinated care to patients who suffer from multiple chronic conditions. Unfortunately, CMS's recent ruling that loosened MA network adequacy requirements for only dialysis services calls into question the breadth of the choices available to dialysis patients. There are many factors that will shape the eventual enrollment in Medicare Advantage plans, and although we have no clear visibility, we do continue to believe that enrollment in MA plans by ESRBD patients will be gradual over the coming year. Now, I'll pass it on to Joe to provide an update on our Q2 results and to discuss our financial outlook.

Thanks, Javier. We had a strong quarter despite the net headwind from our COVID response, primarily as a result of improved adjusted margins in our core kidney care business. Here are some specifics. Our non-acquired treatment growth slowed from 2.3% in Q1 to 1.6% in Q2. We believe the primary drivers of this decrease were COVID-related, as increased mortality and lower new patient starts were partially offset by a nationwide decrease in kidney transplants and lower mistreatments. We expect this next COVID NAG headwind to persist at least until this time next year. Total revenue was in line with our expectations as a result of lower volumes offset by higher revenue per treatment. RPT was up due to normal seasonality in coinsurance and deductibles and the temporary Medicare sequestration relief, partially offset by lower calcium and medics revenue. As Javier said, while the long-term impacts of COVID remain uncertain, we did not see any net impact on our commercial mix quarter over quarter. There are a number of factors that we believe underlie this dynamic, including, among other things, The job loss rate for our commercial patient population was lower than the national unemployment rate. Many of our commercial patients who were initially furloughed have since returned to work or expect to return to work. And finally, we believe that our patients who were laid off have been enrolling in other commercial insurance, such as COBRA and exchange plans, at a higher rate than we have seen in the past. Adjusted operating income margin was strong for the quarter at 16%. On a year-over-year basis, our margin expanded due to strong cost management across the P&L and an improvement in RPT. Calcimimetics contributed approximately $19 million to our operating income in the second quarter. Now let me give you some details about the impact of COVID on our financial results. For Q2, we estimate that we incurred expenses and other negative impacts on our operating income of approximately $85 million. Incremental compensation and benefits to our teammates was the largest contributor to these costs. Offsets in the quarter to the $85 million include, among other things, decreased travel, lower health benefits expenses, and lower facility and training costs. We also had the benefit of the temporary halt on Medicare sequestration that started in May. As a result of these offsets, we estimate that the net impact of COVID on our operating income for the quarter was between $20 and $30 million. Looking forward to the second half of 2020, the impact of COVID is hard to forecast given the uncertainty in the progress of the virus and the economic impact. While extreme situations could occur that are beyond our range, we have incorporated a wide range of scenarios in our updated guidance, including scenarios in which the net financial impact of COVID-19 in each of Q3 and Q4 could be similar to what we experienced in Q2. Let me next turn to our 2020 guidance. Given the strength of our first half performance, we are updating our guidance ranges. We are raising our adjusted diluted earnings per share guidance range by 50 cents to $6.25 to $6.75. We are raising the guidance range for adjusted operating income margin to 14% to 14.75%. We're increasing our cash flow guidance to $800 million to a billion dollars an increase of $200 million over our previous guidance range. We are maintaining our guidance range for revenue of $11.5 to $11.7 billion, but we now expect to be below the midpoint of the range due to the anticipated slowdown in volume growth. On capital expenditures, we provided an estimated range of $700 to $750 million. We now expect to come in at the bottom end of that range as the pandemic has delayed some project spending. While we will not provide specific guidance on 2021 today, I do want to highlight some of the larger anticipated headwinds and tailwinds compared to our 2020 non-GAAP adjusted operating income. Primary anticipated headwinds are the volume and next implications of COVID. The primary anticipated tailwinds include the assumed lack of ballot initiative defense costs, and hopefully a reduction in net COVID-related direct impact. On calcium emetics, while we still need to wait for CMS's final rule later this fall, we do not expect for calcium emetics to be a large headwind or tailwind to adjusted OI. Finally, on share repurchases, we had indicated in March that we are temporarily suspending share repurchases. We did not repurchase any shares during Q2 or during the month of July. We are carefully considering when to restart our share repurchase activity and will do so at the discretion of management and within the authorization provided by our board of directors. With that, operator, please open the line for Q&A.

Thank you. We will now begin the question and answer session of today's conference. For participants over the phone, if you would like to ask a question, please press star, followed by the number one in your phone. Unmute your phone and record your name when prompted. Your name is required to introduce your question. And to cancel your request, press star, followed by the number two. One moment, please, for incoming questions. Speakers, the first question is from Pito Chikering from the Deutsche Bank. Your line is now open.

Good morning, guys. Thanks for taking my questions. Could you talk a little bit more about operating income guidance? Looking at the first half of the year, 16.2%, despite all these COVID costs, and it looks as though the implied margin for the back half of the year is sort of between, you know, 12% and sort of 13.4%. It's a pretty big decline. Can you sort of walk us through sort of how we would get there? Is it from the treatment growth sort of flowing down? Just walk us through the details of sort of how we get to sort of pretty big margin of attraction in the back half of the year.

Sure. So, hello, Peter. I'll take Joel here. So, if you take the middle of our range, well, again, we're not guiding to OI, but taking the middle of our guidance, I think you would calculate a roughly $175 million decline in OI from the first half of the year to the second half of the year. The three biggest components of that are The reduction in calcium emetics profits, which as we've talked about in the past, most of our number are 40 to 70 million. And by the way, we do expect that number to be in the top half of that range. So most of that comes in the first half of the year. Second is the ballot initiative in California. We've talked about that as a 50 cents a share cost. And that is primarily in the back half of the year. And then third, I point to COVID, that while the costs associated with COVID could come down over the course of the year, the offsets could also come down. And we're using a pretty wide range of assumptions around what could happen in the back half of the year with COVID. But the back half of the year will have two quarters worth of COVID, while the first half of the year really only had one quarters worth of COVID. So, if you put those three things together, you'll get the vast majority of that $175 million decline. A couple of other things I'd point out. One is there were some relatively small one-time things in the front half of the year that aided OI and those could and there could be some negative one-time things in the back half of the year. Because of COVID and potentially other dynamics, there are some costs that we didn't incur in the first half of the year, and we think those could show up in the back half of the year, and that could be anything from G&A projects to facility maintenance, and those would be the other two components that would get you to that $175 million adjusted OI decline at the center of the guidance range.

Okay, and then as a follow-up, could you talk a little bit more about the final Medicare Advantage rule? Can you sort of walk us through how that impacts your negotiations with MA plans? When do you think you'll start seeing impact from the changing rule to the 2021 event because the multi-year contract is more spread out? And in your discussions with MA plans, have you had conversations around bonus payments for better managing patients, or is it too soon? And then finally, what's the checks and balances on AMA plans that don't certify a network that is too narrow?

Peter, let me grab that. And Joel, if you want to supplement it, and you had several pieces, so if I missed anything, please come at me again. The short answer is we don't know what the implications are. What we do know is that from a network adequacy, there used to be an objective standard that had time and distance. And now it's subjective standard. It might mean nothing. It might mean that the plan is just now a test and life goes on as it did in the past. It also might mean that some plans might get aggressive and not have adequate standards and networks. So it's too early to tell, but from our perspective, it is pulling out and discriminating against the ESRD patients. because if you don't have the proper network adequacy, you, in essence, are disencouraging enrollment. And so from our perspective, it's just an unusual thing, and it goes against the patient's rights. We waited for a very long time to have the ESRD patients be on equal footing to everyone, and they deserve the right to pick MA just like anyone else. And so that was the disappointing part. As it relates to negotiations, as you said, we have multi-year contracts with most of our MA plans. We are working with them. We think that we combined can work well together, can work on MLR, and can do really good things for the patients as it relates to coordination of care. But it is too early to tell as not many contracts have occurred. Did I miss any of your question?

No, but I mean, you know, I guess the last one would be, you know, what are the checks and balances? So if an MA plan has to self-certify, what's the balance to make sure that they don't self-certify and network that is too narrow?

Yeah, I mean, that's part of the problem, that right now it goes into some kind of subjective attestation that they have a proper network. And from our perspective, of course, what we're doing is keeping our radar up to make sure that, the spirit of the law is adhered to, but we don't know how it will be enforced. Great. Thanks so much. Thank you.

Thank you. The next question is from Kevin Fishback from Bank of America. Your line is now open.

Great. Thanks. Just wanted to maybe follow up on that. I guess you mentioned most of your contracts are multi-year contracts. So does that mean that you're entering 2021 with relatively similar economics within your MA plans as you have today in 2020?

I think it's fair to say that, yes, on any given year you have renegotiations, but it's the same every year. Once in a while they overlap, but it is a fair assumption at this juncture. Of course, we still have the back end of the year to do negotiations. And there is a big appetite from us and from the plan on trying to do something that is useful and creative to the system so that we take more risk and provide higher-end services to the patient. So we're still in the conversation. We'll see how it pans out.

Yeah, and I guess it just happened a couple months ago, so maybe not many contracts have been implemented yet. But, I mean, are you at all – I assume you always have conversations with health plans. I mean, does it sound like they're planning for progressive changes at this point, or do you have any sense?

Yeah, I think the reality, Kevin, is that everybody is trying to do something constructive as it relates to this opportunity for the patients to have coordinated care. And so the plans and us are trying to see – what risk appetite they have, what can our system do, what can their system do, but both sides have big appetite to do something that's useful for this patient population, and so we'll see how that pans out over time.

And is there a point in time this year where you think you would have a better sense of this on the Q3 call? Will you pretty much have good visibility as far as at least 2021 goes, or do we have to wait until Q4 results?

I think it'll take a little longer to play out because of the interplay of expirations and when contracts come up, coupled with the fact that I don't know how COVID is going to impact negotiations. So if I had to guess, I think it's going to take a bit longer than that.

Okay. And then, Joel, I guess as far as your cosmetics point, I guess you're saying that next year it will be neutral to earnings. So if you're making close to $70 million this year, The thought is that it should be a similar number next year. Is that the right way to think about it?

Yeah. So, look, there remains some uncertainty for next year, but there was certainly a scenario where the OI went to zero. So, relative to that, we feel like we're in much better shape. And I'd say 70-ish is a reasonable midpoint of the range. That said, I would highlight one thing that's important for the way we're thinking about OI going forward, which is we have called out calcium emetics as something that I guess I'd call non-recurring because of the TdapA period and the nature of TdapA reimbursement. It is not permanent. As this enters the bundle next year, I would consider the OI that we are generating from Calcimimetics to now be part of our core OI because it has permanent funding. It's a permanent component of the bundle. We're going to stop calling it out, and in my mind, it will become part of our core earning power of the business.

And, Kevin, I'll just add one point in case it's not clear for some. The reason why we don't have a precise number, and Joe gave you a bit of a range, is because CMS is going to adjust the amount with Q4ASP, and we don't have an exact number. We have an estimate.

Okay, that all makes sense. And I guess the way we think about it is that in the first half of next year, it will be a headwind, but in the back half of next year, year over year, it will be a tailwind because it will be uniformly spread out throughout the year instead of trying to unload it this year.

I think that's a good way to think about it.

Maybe last question. It wasn't clear to me exactly. You mentioned about why the commercial mix was strong. I think you made some comments around your patients signing up for COBRA and buying alternative coverage. That makes sense to me. But some of the comments about less job loss and things like that. Can you go back over what you were getting at there and why it would be the case that maybe so far at least that the job loss has been less impactful to your patients than it would be otherwise, than you would expect?

Sure. So, there are three dynamics affecting NICS. The unemployment question is one of them, so let me tackle that. And we highlighted three things. Job loss in our population is lower than what we're seeing in the national averages. And we think that is because the employment mix, I'm not exactly what to call it, of our commercial population leans more towards things like government and education and less towards things like hospitality and travel. the sectors that our employees, our patients work in have been less impacted by the economic effects of COVID. So that's number one. Second, a lot of the unemployment that we saw in our population was was the result of furloughs rather than job losses. And a lot of those have reversed. So those patients never lost their coverage and they're now back at work or they expect to be back at work. And third, as our patients have lost their employer-based commercial coverage, they have worked hard to maintain alternative commercial coverage either through COBRA or the exchanges. And we're seeing that happening at a rate higher than what we've seen historically. That said, we don't have a lot of historical experience with exchanges because the exchanges didn't exist during the Great Recession in 2008 and 2009. So, that's why we think we're seeing less of a mixed decline on commercial related to unemployment. I would also point out that mortality is actually beneficial to commercial mix in the short term because older patients are passing away at a higher rate than younger patients. And government patients tend to be older and commercial patients tend to be younger. So that's helping. And then the decline in transplants is also helping. Commercial patients get transplanted at a much higher rate than government patients.

Kevin, I'd just like to state one thing, an overarching important part that we've learned, and that is that in talking with our commercial patient, it has really reinforced how hard our patients work to keep their commercial insurance and how much they value it. And so that has been an absolute clear takeaway from this period.

All right, great. Thanks.

Thank you.

Thank you. The next question is from Andrew Muck from Barclays. Your line is now open.

Hi. Good afternoon. Thanks for the question. Just wanted to follow up on Medicare Advantage. As we approach the fall open enrollment season, what's the awareness level among your traditional Medicare patients that they're going to have the option to enroll in a private Medicare plan this fall? And relatedly, what are some of the patient education efforts you're doing on this topic? Thanks.

Let me grab that one. As you would expect with any population and anything new, the information flow is wide in range from the people that are up to speed to the people that are completely uninformed on it. What we're working really hard to do is to have totally unbiased and objective training that is customized to each person so you can look at it from your personal perspective because what's good insurance for one person might not be good insurance for the other depending on what you have as a secondary coverage or what your family needs are or where you are in your life. And so our main objective is for people to have a balanced perspective that are aware of their choices and actually gets them to pick what's right for them. And the knowledge base is pretty much all over the place.

Got it. Okay. And then just wanted to follow up on the strong cost management in the quarter. Can you put some numbers around some of the productivity and GNA gains you saw in Q2 and how much of that you think is sustainable heading into 2021? Thanks.

Yeah. So there's nothing in particular I'd call out on either of those things. I'd say on the G&A maybe there's a little bit of a question on whether we're going to give some of that back in the back half of the year and not some of that half one over half two bridge that I put back, that I pointed out at the beginning of the call. But there's nothing unusual that I'd call out other than that. Okay, thanks.

Thank you. The next question is from Justin Lake from Wolf Research. Your line is now open.

Thanks. Good afternoon. I appreciate the question. First, just one more on Medicare Advantage networks. Javier, I was a little surprised when you answered a previous question saying you might not know how the networks look by your next fall. My understanding of M.A., The plants have to put out their products by, I think it's mid-October. At that point, don't they have to publish their networks? Don't you know whether you're in or out of a network at that point, for 2021 at least?

Yes, you're absolutely correct, Justin. Maybe I was answering a different question, which is, I think what I was answering is, will you understand the sustainability or if there's going to be macro changes? In the short-term networks, I don't anticipate anything major changing. I could be surprised, but I don't anticipate that. What I was answering is, how will it change over time? And I thought that by then we would not see how it will behave over an extended period of time.

Got it. So the takeaway is, given your conversation, given how late we are in the year already, you don't think there's much likelihood of being removed from a network in Medicare Advantage for 2021. But there could be some evaluation over time into 2022, 2023 in terms of pricing and network design.

Yeah, I mean, said differently, you have some at-bats, but you won't have, you know, a significant part of the portfolio or anything. And so that'll play over time. And so you are correct in your assumptions that in the fall, we will have clarity. But as you know, you could be in the network in the fall, and then a month or two later, you can be out of network. So I don't know how much you can bank on that fall in-network statement holding for the future.

Got it. Thanks. And then I wanted to ask about, you know, the, I apologize if I missed this, Joel, but your revenue for treatment was up pretty significantly sequentially. Can you give us as much detail, and that's with calcium emetics looking like it's, you know, declining. So, ex-calcium emetics, what's the number there and the sequential increase, and what are the kind of key drivers that you want us to focus on?

Sure. So, X calcium emetics, it's between $5 and $6. We're talking quarter over quarter RPT change. A lot of that is seasonal. And think of coinsurance and deductibles and some lower bad debt associated with patients blowing through those. That is by far the biggest factor. The other stuff is is just some, I'd say, typical bouncing around of MA mix and commercial mix and a little bit of pricing. It's mostly a seasonal impact.

Yeah, Joe, the only thing I would add to that is there's a little sequestration in there as well.

Yeah. Oh, yes. That is awesome. I forgot about that. Thank you, Javier. Yeah, me too.

So that's, I'm sorry, Justin, but just to be clear, the number I gave backed out to sequestration. So that five to six was without sequestration. Sequestration is worth about a buck and a half.

Okay. And what was calcium medics worth since we're on this topic?

I know someone was going to ask me that. I think it was $0.50, although I'll get you that exact number.

That revenue or profit?

Oh, no, I'm sorry. Ignore the $0.50 number. The RPT from Calcimimetics went from $9.55 to $7, so about a $2.50 profit. decline as a result of calcium emetics RPT. The OI, so the dollar number went from 35 million in Q1 to 19 million in Q2.

Okay. And then in terms of commercial mix and commercial treatment growth, you're saying mix was flat and therefore commercial patient growth was similar to overall patient growth. Mix didn't have much to do with this in terms of that $5 to $6. Right. And is this a reasonable number to jump off of, ex-counselor medics? Do you think this is a good number for 3Q4Q that we should think about?

I think it is a reasonable starting point, although I think you'll see that negative seasonality in Q1. You'd expect to see that next year. So don't use it as an annual run rate, but use it as a number for the next couple of quarters.

Okay, great. I'll go back to the Q&A.

Thank you. The next question is from Ruth Mayo from UBS. Your line is now open.

Thanks. I'm still trying to wrap my head around the implied core growth in the quarter. You guys usually have tremendous visibility into a lot of the expenses as you set your original plan, and now we're looking at a number that's, you know, much higher, so it certainly seems to imply that something got much better, so I'm really kind of curious what that is, because as we you know, net out the COVID cost and council of medics to sequester everything you've laid out. I mean, it implies by my math that the core OI was up, you know, 8% year over year. So I'm just trying to take a crack at this from the cost structure standpoint. Again, is there anything else that you can point to that has come in, you know, meaningfully below what your original expectations were coming into the year?

So if I were to try and to explain that, why the numbers are better than what we expected. First, it's all core margin. There's nothing unusual here. The business, the core business is performing well. I would point to productivity being a bit better than we expected. Facility costs are a bit better than we expected. RPT is a little bit better, but that's offset a fair bit by volume being light. So think of core margin largely driven by good cost management.

Is there any way to put numbers around, you know, either the COBRA or the exchange uptake? I mean, I presume you have a lot of data internally around your patients and their coverage. And I'm just sort of trying to wrap my head around the conversion rate into COBRA because I presume that it's fairly high. So I thought I'd just maybe ask a little bit more directly the question.

You know, I looked at the question you're asking. We don't disclose it in detail, but I think what you're trying to get to directionally is do we have a big spike in COBRA that in 18 months or in some date in the future, that will come to roost. Is that fair? Where are you going?

No, that actually isn't the premise at all. I mean, I think the debate in the marketplace to be, you know, perfectly candid is that you have, you know, you're very dependent on your commercial mix, and so people have been concerned. And, you know, I think my point is that a lot of these patients find that they have alternative options and a great number of them, high percent, find coverage through COBRA. So it was actually, the premise was totally the opposite.

Now, I think what I would say is what we said earlier, which is, and I think it's consistent to what you're saying. Yes, our business relies on that patient population in an incredible way. We have been very impressed with the passion that our patients have to keep their commercial coverage in one way or another, and as Joel said, there's a big distinction between furloughed versus permanent job loss, and we have seen that a good chunk of our patients that are working that were furloughed are back to work, and then out of the ones that had permanent job loss, which the number, again, was less than we anticipated, many have had alternative coverage. I think that covers the whole spectrum there.

No, it's helpful. Maybe one last one, and this is perhaps an impossible question, but I thought I'd ask it. Javier, what does a hypothetical Biden administration mean for DaVita and the industry? The charitable premium rule has been sitting out at the OMB forever, and that was obviously there under the prior administration. Who knows if that revives itself? I have no idea what the status of it is, and we rarely talk about public option, Medicare expansion on these calls. Maybe we're all just smart enough to be more skeptical on policy like this. But I'd just be curious to hear, you know, your general thoughts about what Biden would mean.

Yeah, it's a great question, one that we've talked about. In general, what we try to do, and we've done a decent job, is to make sure that we're talking to both Republican and Democrats because our issue is goes across both sides. I mean, the biggest change that we can think of as it relates to the policy is probably one of tax and whether they're able, if there is a Biden administration, whether you also have the Senate or not will obviously be a big driver of tax policy. As it relates to healthcare policy, as you know, it is, as you said, a much a much bigger lift to change, and we will, of course, be a part of it. But what we want to do is continue to push and advocate for our patients and for integrated care, regardless of who's in the White House.

Okay. Thanks a lot.

Thank you.

Thank you. The next question is from Gary Taylor from J.P. Morgan. Your line is now open.

Hi, Gary. Good afternoon. I wanted to just come back to one topic that's been asked about a few different ways, and I'll ask it a little bit different, see if I can get a little more help. Obviously, an amazing job on expense management. Maybe 2Q is turning out to be the amazing cost management quarters. But when you had laid out last quarter up to an incremental $100 million of COVID expenses, which is like $13 a treatment, certainly didn't think patient care costs would go up 62 cents sequentially. So I've heard the comments about the productivity, the facility costs, health benefits. I guess, could we just talk a little more about the source of the productivity? I know you would even for a period of time, I think we're paying an extra $100 a month to a fair number of your clients. teammates and, you know, it's kind of the, you know, opposite of productivity. You had set up some split shifts to sort of isolate, you know, COVID positive and suspected patients. So the whole orientation, I guess, was this was going to be the opposite of a really strong, you know, productivity quarter. And yet, you know, you've performed really, really well. So maybe just some examples of how you're finding this productivity and what sort of facility costs and With the health benefits piece, just your own employees, you know, consuming less health care, and that was quite material. I know you've been asked several times, so just anything incremental would just help us sort of think about, you know, modeling going forward.

Yeah, there's a lot going on, and we're very proud, Gary, of the cost management situation. So let me try to be as helpful as possible because there are several things. First, a clarification, yes. On our healthcare expenditures, our teammates, just like everybody else, used less benefits on nonessential care. So that is one. Number two, our caregivers' sense of purpose was really passionate. And so, therefore, we had less turnover because people felt that sense of obligation to take care of our patients. And so the combination of economic need and appreciating a job while so many people were furloughed and lay off and the sense of commitment to our patients had less training expense. And then the last thing that I would say is that also there were some of our teammates that were COVID-positive. And so what we ended up doing is having to basically in some places like New York and others where staffing was really at a premium. And so when you cohorted centers, et cetera, which is what you were alluding to earlier, sometimes those shifts were not as inefficient as we anticipated because those shifts tended to be more full than once anticipated. And so if you have a full COVID positive shift, even though it's cohorted, it's not inefficient. When it's really inefficient is if you have one or two patients in it. And so the cumulative math compounded over the quarter, and we were very diligent in trying to manage it all.

That's helpful. Two more quick ones. On the $35 million legal charge question, Was that related to any legal issue that had been historically disclosed in your filings or was this professional liability issue or any other color on that?

Yeah, I'll take that one, Gary. It was related to shareholder litigation that's been hanging out there for a bunch of years related to CPA. Our view is what we did was appropriate, but to just clean this up and move on. We thought it was worth settling this. So it's related to that issue.

Thank you. And this last one for me, and I've just forgotten. The difference between your 0.7% increase in treatment per day and your 1.6% normalized when you have the exact same number of treatment days, 78.0, 78.0, so the calendar isn't... driving that, and I don't think there's been divestitures, so I'm just trying to recall how we square that.

Yeah, there's a bunch of noise associated with divestitures and some other things, but there is one big movement that I would highlight there, which is we had a bunch of clinics that we deconsolidated as of the first of the year, and those are treatments that we would back out of NAG, but we don't back them out of the treatment count. And that's worth, I think, about 50 bps of the difference. Okay.

Thank you.

Thank you. The next question is from Matt Leroux from William Blair. Your line is now open.

Hi. Good afternoon. I wanted to ask a little about the footprint. I think we heard on the first quarter that in terms of the footprint build, I think you said maybe wait and see in terms of what happens with industry volumes and what happens on the home side, and obviously 28 new centers, and then maybe added on to that after a couple years of, you know, kind of a stagnant OUS number. I know there's a lot of rationalization going on. We've now added about 40 new centers OUS in the last four quarters, so maybe just an update on in terms of development both on the U.S. and OUS side.

Yeah, I'll take that one, Javier. So most of the action is on the U.S. side, as you would expect. The number there is a bit of a lagging indicator because it depends on when we get certified by CMS. If you wanted to think about a number that tracked more carefully with the decision-making and the CapEx number, it would be based on when – when the clinics are completed, what we call a certificate of occupancy, and you'd see that number much lower. So for next year, I don't want to give a range yet, but you'll see that number come way down again. And I think going forward, people want to understand how we're doing in terms of building capacity and being capital efficient. I think the development CapEx number is going to be a better indicator of that than the clinic number that we've disclosed historically. And that's driven partly by this time issue. It's also driven by the fact that we're building more home-only clinics, which tend to be cheaper and aren't in the clinic count that we've historically disclosed. So the message is the de novo continues to come down as NAG comes down, as we move more to home, there could be a kind of an additional delay associated with COVID, partly because of a temporary decline in NAG, partly because it's just hard to build clinics in the context of COVID. But relative to the commitment we made around capital efficiency, I think we're continuing to deliver on what we said we would.

Got it. That's helpful. And then I just want to ask a little bit about the comment you made around mistreatments. I know you mentioned that commercial patients tend to be higher in terms of transplants, but what did you see in terms of discrepancies amongst different payer classes for visit patterns? Did patients in the Medicare population tend to have higher mistreatments during this period, and was the mistreatment much lower with commercial? I guess just what does that look like amongst payer classes?

Yeah, we didn't break it out by pair class, but one of the things that we are very, very happy about is the fact that mistreatments went down during this period, meaning that our patients were taking the virus very seriously. They were taking care of themselves, and then we were able to take care of them outside of the hospital. And so I would have to say that the way the math works is It was across all paired classes, but I don't know that with certainty because I didn't divide it up by paired class. But in general, we were very happy to see that hospitalizations went down for our chronic population in a significant way.

And was there any change in terms of referral origin throughout the quarter or anything you see from COVID? I know normally about half your patients start dialysis in the hospital setting, but just curious as COVID has progressed and hospital visit patterns have changed a little bit what you're seeing in terms of origination.

So, I think your question is the way that we get our patients change, meaning is there's less crashes into the hospital and going in through our center first. And the short answer is that we have not seen a change, a noticeable change in the way that our patients come.

Okay, fair enough. Thanks.

Thank you.

Thank you. The next question is from Kevin Fishback from Bank of America. Your line is now open.

Hey, just a couple of things. I guess first, you know, you obviously write the low end of your treatment guidance for the quarter. It sounds like you could be below that for at least a few more quarters. You know, how confident are you that this is, you know, purely COVID-related and not a continuation of the decline I guess that we've been seeing the last couple of years and you had a much higher growth rate a few years ago. You've taken that down a couple of times. What amount of visibility do you have that this is a temporary thing and we'll get back to the one and a half, the two and a half?

Kevin, why don't I give you a little of the variables and then if you want to test the assumptions you can because there is an interplay of several variables. And so in essence, what would happen in the quarter is mortality increase. And as we've told you, it skewed toward the more older population. The acute volume, the acute treatments went down. And that's obviously in our mind because of non-essential care being delayed. So we think that that is absolutely COVID related. The incidence of our new patients came down As we talk to our nephrologist, you know, we tend to think just in a high level, okay, your kidneys fail, you have to go dialysis. But the reality is that it's more nuanced than that, that you have some remaining renal function and sometimes your nephrologist has a decision to make, are you better off starting dialysis with some renal function so that you do better on the therapy? And right now, during the pandemic, They were saying, is it better to start you off a little later? So we saw our new patient incidence decrease. We, of course, saw no visitors because of travel restrictions. And then we saw a decrease in transplants because, obviously, transplants were shut temporarily, which, in essence, was an offset. And then, as we already talked about, we saw mistreatment. go down, so that was also an increase to volume. So, when we net all of that and we give you what we expect in the back end, our assumption is that over time, this is likely to normalize except of the impact on mortality over time.

So, all that makes sense. Does that then mean that kind of a response to the last question about, you know, how patients are coming in? that you're not seeing more patients crash now, but you think that if this continues that we will then see that, and not that that's a good sign at all, but it would be at least a good sign that fundamental demand is higher than what you're seeing?

Yeah, that would be all speculative. I'm just telling you what our nephrologists are telling us about their practices, and most of their practices for a little while obviously were shut down for the nonessential care. They were still rounding in the hospitals. So what we're anticipating now that we're talking to our nephrologists and their practices are back open is that they have not seen any dramatic change. And, of course, that's not scientific. We're just telling you what we're hearing from our nephrology practices.

All right. And then I guess, you know, you talked earlier about how this quarter is coming better because productivity has come in better than expected. Is there a reason to think that These productivity gains cannot be maintained into a more normal operating environment if COVID, you know, starts to go away next year. Can you keep this productivity going? I don't think you mentioned that as one of the headwinds since 2021.

Yeah, productivity will be interesting. Of course, some of the things will go away. You know, people will end up going back to the doctor and our benefit expense will go back up. as it relates to training expenses and retention, I think that will be highly linked to the economy and how that's doing and how people are feeling about valuing their job and the sense of purpose that we're giving them. And so I think, in general, you could say it could stay, and then you could make an argument that it will go back to what it was, but I think it will be highly linked to what the broader economy is doing and how COVID is impacting the time.

All right. Great.

Thanks. Thank you.

Thank you. The next question is from Justin Lake from Wolf Research. Your line is now open.

Thanks. A few follow-ups here. One, Joel, your corporate and ancillary segments look down pretty materially 2Q versus 1Q. Just curious if you can note anything there and how to think about those numbers in the second half.

Yeah, I am trying to remember if there's anything in particular. We had a severance charge built in. It was about $12 million, and I'm trying to remember if that was Q1 or Q2. I'll get you the answer on that.

Joel, that was Q2, and that was in the corporate segment. Q1 had a large benefit in international, which is in the strategic initiative segment, from exchange rates. Right, right. You know, it swung a little bit the other way.

Yeah, we had, thank you, Jim, I appreciate it. We had 10 million of positive foreign exchange in Q1 through international, and that swung to a 4 million negative in the second quarter.

That explains it. Thanks. So then, you know, back to which question, you know, the obviously the on, you know, your comments around COVID exchange take up being greater, given the where the economy is going, that's a pretty important swing factor. And obviously, sounds like it's going better than expected. So it would be helpful to us to kind of understand where it's been historically. and where it is now. Could you share this even round numbers?

Yeah, well, I won't give you round numbers. And let me make sure I'm answering the right question, Justin. Are you asking a mix of COBRA versus other commercial insurance?

No, I'm asking the, you said there's, you know, it's been a pretty, you know, material increase in the number of people signing up for COBRA exchanges when they lose their jobs. versus what you've seen in other F periods like this?

Yeah, what I would say right now, without getting into details, is I'll just reinforce what I've said, that our patients are very passionate about keeping their commercial insurance for a variety of reasons, including their family coverage, and some believe that it enhances their odds of getting a transplant And in some instances, it's obviously the cheapest coverage with with the most flexibility. And so they're making those decisions carefully as they know it impacts your life in a non trivial way since they consume so much health care.

No, then, Joel, you gave 2021 headwinds tailwinds. And you didn't mention Medicare Advantage. accelerating growth as a tailwind to 2021. I'm curious as to your view that we shouldn't expect it to be impactful next year, meaning you don't think it's going to ramp versus what we've seen the last two or three years, and if so, why not?

Well, I think we've been pretty consistent with what we've said about Medicare Advantage, which is we don't see 2021 is this huge inflection point in enrollment. We think MA enrollment will continue to grow. It could grow a little bit faster next year. But we've just had a different view than others in the industry. We think a lot of our patients are happy with their Medicare fee for service coverage. There is some level of inertia. and we just don't see it being this massive uptake in one year.

Got it. I just think there's a pretty big delta between, you know, massive uptake and what looks like, you know, a couple percent increase in penetration a year, maybe a little more, right? So, are you saying that you really think it's probably going to be the typical 200 to 300 basis point increase that we've seen the last few years? relative to what I think some might have expected it to be more like 500 plus.

Yeah, let me jump in because you have as much information as we do on this, Justin. What we can tell you is we're roughly around 25% of the Medicare patients have MA in our population. You probably have a better number than I do, but the industry is around 35%. Right. And so everybody continues to say, will it be more than 35% Are we going to get to 35 in year one of enrollment? And what we've consistently said quarter over quarter is that we think it will be more gradual, and we think it's more gradual for some of the dynamics that have been said today, that there's a patient population that's uninformed. There's a patient population that likes status quo. And so don't underestimate inertia. If you say, well, even though there might be a better product for me, I like my product or I'm satisfied with my product, and many people just don't have interest in switching because they fear the unknown. And so we're just saying change for some are hard, and we think that it will be more gradual and we could be wrong. But what we want to make sure is there's a time where there was a lot of people saying that the change was going to be very, very fast, and it was going to be a quick ramp up, and while they could be right, we don't think that that's the way it'll play out.

Okay. Thanks for the call, guys.

Thank you, Justin.

Thank you. The next question is from Pito Shikaring from Deutsche Bank. Your line is now open.

Hey, guys. Thanks for the follow-ups. I'll keep this brief due to the time. Can you remind us of what your commercial pricing was during 2Q, and has it been relatively stable for 2020 so far?

I'm sorry, what is the question on commercial pricing?

Can you tell us what commercial pricing was, you know, the increase in 2Q, and has what you've seen in commercial pricing been fairly stable so far in 2020?

Yeah, there's nothing to call out on our commercial pricing.

Okay. How much productivity that you guys saw in 2Q came from shifting people into the home setting?

I don't know.

I don't know the answer that Joel, do you know the answer that I mean, in general, I think we're, we're, we're not going to get into the nuances of productivity changes on a quarter to quarter basis. I think the message we're trying to deliver is we continue to do a good job on on cost management. It's driving good margins in the core. But I don't think we're going to get into that level of detail.

Okay. And then the last one here is, as was brought earlier on the call, I guess it opened up 28 centers during 2Q. To your point, that's a lag indicator of where things are going. If we think about sort of 2021 in terms of the split between home clinics and standard clinics, what's the right split as these eventually, you know, flow through into where you guys, you know, want to target opening up clinics?

I do not have the number in here, but Joel, keep me honest that our number is roughly 50-50 on our growth for next year between in-center and home centers.

That is correct.

Perfect. Thanks, guys, very much.

I appreciate your time. Thank you.

Thank you. The next question is from from UBS. Your line is now open.

Thanks. You guys just have to cut us off. I've got one more because I've had several emails on the topic of revenue per treatment. And you reported $3.52 in the quarter. Take out, you know, $7 for calcium medics. We're down to $3.45. You know, I calculated the sequester maybe being $1.60. So I'm getting down to, you know, $3.44. And you did the same math last quarter. It was $3.38. So you've got $6 of growth. in the second quarter versus the first quarter. So I guess the question is if your commercial mix is largely flat versus the first quarter, what drove that incremental improvement? I mean, historically, there's not that much seasonality in the pricing when we reflect back on prior years. So just trying to flesh out if there's anything else that might be influencing that number up.

Yeah, so it is largely seasonality. I think we're seeing a little bit more seasonality this year because of some bad debt dynamics. But I would say about two-thirds of that $6, and your math is pretty spot on, is seasonality. The balance is, I'd say, normal fluctuations.

When you say bad debt, does this mean that patients have already run through their deductible?

I guess I want to maybe understand a little bit more exactly what... Yeah, as patients run through their deductibles and their coinsurance, and there are some other dynamics that play through in bad debt, that's exactly what it is. It's exactly what you'd expect, I think.

Okay. Okay, but no other like...

pay your settlements or anything unusual that... Nothing else, you know, nothing else to call out. I think Justin asked me before, is this a reasonable RPT to use to start your modeling for the rest of the year? And I think the answer is yes.

Thanks for the clarification.

Thank you. At this time, speakers wouldn't have any questions on cue.

well let me uh thank you for all the questions uh and thank you for the interest in the company let me finish with three statements number one i just want to reiterate how proud i am of the care and the accomplishments of the team they are working non-stop and it is a beautiful thing number two our core business is strong and number three we continue to make great strides on our capabilities to advance the care continuum across home hospital and center. We look forward to speaking to you again next quarter. Be well and stay safe.

And that concludes today's conference. Thank you all for your participation. You may now disconnect.