This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk04: 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 third quarter 2020 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, 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 one on your telephone keypad. If you would like to withdraw your question, press star and then the number two. Thank you. Mr. Gustafson, you may begin your conference.
spk09: Thank you, and welcome everyone to our third quarter conference call. We appreciate your continued interest in our company. I'm Jim Gustafson, Vice President of Investor Relations, and joining me today are Javier Rodriguez, our CEO, and Joel Ackerman, our CFO. Please note that during this call, we may make forward-looking statements within the meanings of 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 third 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 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. The 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 will now turn the call over to Javier Rodriguez.
spk07: Thanks, Jim, and good afternoon, everyone. Thank you for joining us to review our third quarter financial results. We are now nine months into the pandemic, and one thing is clear. Our team of caregivers is committed to serving our patients. Because of our team, our business is performing well despite disruptions from the pandemic, wildfires, and hurricanes. I've said it before, and it's worth repeating. I am incredibly proud to be part of DaVita and to serve alongside our 65,000 teammates who work so hard to provide our patients with life-sustaining care. It is our people who make our business resilient in the face of so many challenging externalities. Through these challenging times, our focus remains on our patients and on building capabilities to enhance their care and their experience in the future. Today, there are still too many patients who are surprised by their start on dialysis, which impacts their ability to adjust their lifestyle and then to choose their optimal modality. Therefore, we work with patients with chronic kidney disease known as CKD to help them understand how to stay healthy, delay the progression of kidney disease, pursue transplantation, and evaluate different treatment options. Education is one important factor to avoid a surprise start. We are excited to have reached a milestone this quarter of educating 200,000 people through our Kidney Smart program, a no-cost CKD education program. During the pandemic, we have shifted all Kidney Smart classes to virtual format, and we continue to have high engagement with CKD patients. The program has healthy results as individuals who attend a kidney smart class are six times more likely to start dialysis at home, experience 38% fewer mistreatments in their first 90 days on dialysis, and have 30% fewer hospitalizations. Now on to quarterly results. Q3 was another strong quarter for our company. Total revenue came in largely as expected. While volume growth was weaker than historical levels due to the impact of COVID, total revenue held up due to the year-to-date improvement in revenue per treatment. Our cost came in significantly below our forecast as a result of lower COVID impact this quarter and continued strong cost management. Looking forward, I remain confident in the strength of our business model as well as our earnings and free cash flow growth. Due to our strong performance over the past year, we're ahead of plan that we discussed last year's capital markets day, both financially and strategically. Financially, we're ahead of the expected adjusted earnings per share guidance we shared both in 2020 and 2022. Today, we are again raising our 2020 adjusted earnings per share guidance range to 735 to 760. Over the past year, we've been able to achieve operating margin increases in share purchases faster than expected. In addition, we've also lowered our debt cost consistent to what we expressed at Capital Markets Day. Looking forward, we're confident in our ability to deliver continued capital efficient growth from 2020 levels over the next few years. To quantify this, we expect to be able to deliver annual adjusted EPS growth on average in the low double digits. I want to highlight that we are accomplishing this while continuing to invest in innovation, building new capabilities, and strengthening our platform. Strategically, we have made tangible progress in extending the breadth and depth of our clinical and operational capabilities, fueled by our digital transformation in several areas. We believe that these capabilities in our platform will create a competitive advantage with a focus on our patients, nephrologists, partners, and payer partners. We also see a path to using these capabilities to improve the quality and value of care for our patients across the healthcare delivery system. For example, we're personalizing the care for patients across the kidney care continuum using proprietary systems that we've been developing for years in partnership. We've been with industry leaders including Epic, Cerner, Salesforce, and Google. We have more to do to effectuate our strategy, but we're beginning to see the benefits from these tools in the form of AI-driven models that personalize dosing for certain therapeutics, anticipate patients' clinical status and help avoid hospitalizations, anticipate patients who may drop off home therapy, and identify CKD stage 4 patients who are likely to progress quickly to ESRD and help avoid unplanned dialysis starts. As we place these tools and information in the hands of nephrologists and our caregivers, we envision three significant benefits. One, enabling the best in class patient experience, delivering individualized care at scale. Two, enabling our physicians to deliver industry leading clinical outcomes. And three, lowering the total cost of care of kidney care populations through avoiding disruptions caused by preventable hospitalization stays and changes in modalities that are not clinically driven. We're also making strategic progress in our shift to value-based payment model. Over the last decade, we've built capabilities and real world experience managing the total cost of care for ESRD patients through our partnerships and the unique relationships and access we have to more than 200,000 dialysis patients. We've developed a model of care that is tailored to the specific needs of dialysis patients and have applied this to a variety of value-based payment models, including shared savings and full capitation. Our discussions with payers about using value-based arrangements to align incentives and drive better outcomes have accelerated in recent quarters. On the government side, we're carefully considering the models for value-based arrangements developed by CMS. On the commercial side, we continue to contract for pay-for-performance models for both ESRD and CKD patients. We're also using the expected growth of Medicare Advantage in the ESRD population to accelerate conversation with MA plans about new payment models. We're excited for the momentum toward value-based care, and we're prepared for opportunities to partner with government and commercial payers. We believe that our current capabilities, deep experience, and national scale give us a superior platform for delivering value to our partners, patients, and payers. Now I'll turn it over to Joel, who will discuss our financial results and outlook in more detail.
spk08: Thanks, Javier. Q3 results reflected another quarter of strong financial performance for DaVita. We significantly outperformed expectations as a result of strength in the underlying business and the benefits of some non-recurring tailwinds. I'll start my comments with Q3, then cover our guidance for Q4 and some thoughts about longer-term outlook. Adjusted operating income for the quarter was $438 million, a sequential decline of approximately $24 million compared to the adjusted OI in Q2. This decline is primarily the result of two things. First is the ballot in California. We contributed approximately $66 million to the industry initiative to defeat Prop 23 in Q3 in line with our expectations for a full year impact from ballot initiative costs of approximately 50 cents per share. Second, we saw an approximately $50 million OI improvement in Q3 compared to Q2 from COVID. On our last call, I cited an estimated $20 to $30 million of net costs associated with COVID in the second quarter. We expected COVID impact in Q3 to be similar to Q2. However, we actually experienced a net positive impact of approximately $20 to $30 million in the quarter, a $50 million favorable swing over last quarter at the midpoint of the ranges. This was the result of significantly lower direct costs from COVID with almost no change in the offsets we saw in Q2. After adjusting for these two items, the underlying earnings power of the business remains strong in Q3 and consistent with Q2. Looking forward, COVID remains a source of significant uncertainty. The course of the pandemic remains difficult to forecast, and its impact on NAG, commercial mix, and operating expense creates a wide range of potential outcomes for Q4 and for 2021. Driven by the strong performance in Q3, our anticipation of another strong underlying result in Q4, and allowing for a range of potential COVID-related costs, we're updating our 2020 guidance as follows. We are increasing our guidance for adjusted operating income margin in 2020 to 15.3 to 15.6 percent. We're increasing our guidance for adjusted EPS in 2020 to $7.35 to $7.60. And we are increasing our 2020 free cash flow guidance to $1.1 to $1.25 billion. Let me add a few thoughts to Javier's comments on our longer-term outlook for low double-digit adjusted EPS growth. First, we currently expect this growth to be the result of adjusted operating income growth in the low to mid single digits with the balance resulting from disciplined capital allocation and lower debt costs. Second, this excludes any large uncertain events such as changes to federal tax rates or the repeal of the ACA, and third, We see this as the earnings and cashflow potential of the business in an average year, but performance in any individual year could vary materially from these trends. For 2021, we plan to give more details on our next earnings call. With that said, I'll call out some headwinds and tailwinds that could materialize. First, we expect the absence of ballot initiative costs to be a tailwind. Next, If Prop 23 in California were to pass and be implemented, we expect that there would be a material cost and operating challenges to comply with its requirements in 2021. Third, COVID is impossible to predict, although our current expectation is that it could be a significant headwind next year. The negative impact on NAG accumulates over time, So we'd expect our year over year growth in treatment volume to continue to be depressed even as the direct impact on our patients diminishes. We also expect to lose the benefit of Medicare sequestration suspension and expect some of the other mitigants like lower health benefit expenses and travel costs to reverse. The impact on commercial enrollment has been lower than expected to date although the longer-term impacts of COVID on the economy could result in mixed deterioration in 2021. We're also seeing increased unit costs for PPE that are likely to be a headwind for 2021. We believe the one potential tailwind from COVID would be a reduction in some of the direct costs that we incurred early on in the pandemic. Next, while the contribution from calcimimetics should be relatively flat year over year, we will no longer call it out as non-recurring as it becomes a permanent component of our run rate. Other swing factors include potential changes in Medicare Advantage enrollment and potential costs associated with initiating value-based care contracts. A few additional items. Since our second quarter earnings call, we repurchased approximately 10 million shares of our common stock So our share count as of today is approximately 112 million. For your EPS modeling, you also need to consider the dilutive impact from outstanding equity awards, which in the third quarter was approximately 3 million shares. Finally, as a result of lower LIBOR rates and interest expense from debt financing that we have completed this year, we expect quarterly debt expense to be approximately $65 million in Q4. With that, operator, please open the line for Q&A.
spk04: Thank you. At this time, if you would like to ask a question, you may press Star 1 to ask your question. To withdraw your question, you may press Star 2. Please unmute your phones and state your first and last name when prompted. Our first question comes from Kevin Shisbeck from Bank of America. You may go ahead, sir.
spk11: Great. Thanks. I guess maybe just starting off with the guidance commentary. You know, I appreciate the headwinds and tailwinds that you were discussing, which were really, I guess, about 2021. But just to be clear, in your double-digit EPS growth, you've incorporated, you know, a reasonable assumption for all these headwinds and tailwinds in that double-digit growth assumption over the next couple of years.
spk08: So, yes, Kevin, we did. And I'd just point out that EPS growth guidance is multi-year. It's not for next year specifically, but yes, we have taken into account the headwinds and tailwinds that we pointed out.
spk11: And the base number is that 735 to 760. You mentioned a number of kind of one-time items in the quarter. I just want to make sure that you're saying that 735 to 760 is the base off of which to use that growth rate.
spk08: Yeah, I think this year is a good base.
spk11: Okay. And then I guess As far as MA goes, you didn't specifically, I don't think, mention it being a headwind or tailwind. I think you just kind of mentioned it as an uncertainty. Can you talk a little bit about your thoughts on how MA is shaping up and any update on that contract?
spk07: Sure, Kevin. So there's a bunch of dynamics in that, so let me grab them one at a time. Number one, we continue to think that the enrollment in MA will be gradual, consistent to what we've said in other quarters before. Number two, the open enrollment, it just started, and so we don't have anything to report on it. And even if we were further, we have very little visibility, so we will wait until basically January when we get the numbers. And then lastly, as it relates to Humana, there's a couple of things that I would say. Normally we don't talk about individual accounts, but on this one, since it got public, I'll make a couple of statements. I think the broader question that we should address is, is there a big bolus or a wave of negotiations coming out of the MA? And the answer is no. Humana is the exception. We are comprehensively contracted across the MA book, and so we're in a good spot, and the majority of our portfolio is contracted beyond 12 months. As it relates to Humana specifically, they notified us of a non-renewal. We're in a very constructive dialogue with them on a risk deal. And as you know, the risk deals take some time. So we're negotiating with them, and we hope to get the issues resolved.
spk11: Okay, great. And then I guess just the last question for now. You mentioned in the quarter that commercial pricing was a headwind. even though I guess it was a tailwind for the year to date. So I guess what happened in the quarter, is it a one-time item or is there something that we should be thinking about going on there?
spk08: Yeah, Kevin, it's much more of a one-time thing. I'd continue to focus on the full year over year rather than focus on the individual quarter.
spk11: Okay. So you wouldn't expect that to be a Q4 impact as well? No. Great. Thanks. Thank you.
spk04: And our next question comes from Andrew Mock with Barclays. You may go ahead, sir.
spk12: Andrew Mock Hi. Good afternoon. Thanks for the question. Javier, back in May you mentioned that peak level of unemployment matters more than the shape of the recovery. We're now at the end of October and peak unemployment, at least the headline number, is likely to find us. How does that peak number combined with the internal data you see on COBRA updates shape your thinking on the potential impact that commercial mix may have on your business in 2021? Thanks.
spk07: Yeah, thank you, Andrew. I don't know when the peak will be on unemployment. So what we have seen from our patients is that they have been incredibly resilient about trying to keep their job and their coverage. So we are very happy with where we are right now in mix as it relates to where we were a couple quarters ago, meaning it's held up. But then, of course, we don't know where the pen, you know, which... which direction the pandemic will go and how the labor markets will go. But that is right now where we stand today. We are in a stronger position than I thought last quarter.
spk12: Got it. That's helpful. And then secondly, can you help us quantify the impact on treatment growth between patient mortality from COVID and slowing referral sources? Thanks.
spk08: Sure, Andrew. It's Joel here. I'll take that one. So we... As you look at the impact on NAG of COVID, there are really five things that we think about. Mortality, transplants, mistreatments, acutes, and new patient starts. And if you go back last quarter, mortality was the biggest headwind, and then transplants and mistreatments were small tailwinds. and acute and new starts were small headwinds. The four things other than mortality have really played through, and they've either diminished or they've reversed. And as we see it now, obviously things could change, but largely those things are not playing through for NAG going forward. So it's largely a mortality story.
spk12: Got it. Thanks for the call, Eric.
spk04: Thank you. Thank you, Andrew. And our next question comes from Justin Lake with Wolf Research.
spk00: Hey, Justin. Thanks. Hi. I wanted to follow up first on the 2021 headwinds and tailwinds. Just trying to think about when you look at COVID and you talked about it could be a significant headwind next year, but you do have the lack of advocacy costs to kind of offset that. Do you look at those right now as being neutral, an overall headwind or an overall tailwind without giving too many specifics?
spk08: I'd say, Justin, it's too early to tell. There's really a lot of uncertainty about what COVID has in store for us for 2021. So I don't think we're in a position right now to give a sense of order of magnitude.
spk00: Okay, but we know the lack of advocacy clauses, the 50 cent number that you talked about. You're saying these COVID costs could be that much or more, depending on what happens over the next few months into next year.
spk08: Yeah, so look, you have to think about COVID along a few different dimensions. There's the direct costs. Those could remain flat. They could go down. They could go up, theoretically, as well. I'd say... A lot of uncertainty there. There are the offsets, and from where we stand right now, the sequestration relief is going to go away unless something new happens there, and that will clearly be a headwind. The savings we've experienced on benefits is likely to be a headwind as well as our teammates start going back and getting the care that they need. And then T&E is a question mark. So that's some of the impact around the cost and the offset numbers. And then what you've got to add to that is the impact on volume. And remember, that accumulates. So the impact from Q2 plus Q3 will likely be, it will continue to be a headwind till those declines anniversary, and that'll take a while. And then the impact on mix is unknown. As Javier said, it's been a lot better than we ever expected, but we don't know what COVID has in store for the economy going forward.
spk00: Okay. And then you mentioned mix. I think in the release, you said mix trended down in the third quarter versus Q2 or against you. Can you give some more color in terms of how much mix changes saw there?
spk07: I'll grab that, Justin. There's not a lot that stood out on mix, so I'm not sure what you're citing there, but there's nothing that I would point to that's relevant for your model.
spk00: Okay. Maybe I misread that. And then last question, just another follow-up on Kevin's question on Humana. So if they're at a network, I know you're having a conversation with them about If they are at a network for 2021, you've already told us it's going to be slow, steady growth in Medicare Advantage. I know some of this is going to depend on whether you retain numbers, and I think you might have been paying you a little more than average, at least according to them. So when you net it all out, do you think it's possible that Medicare Advantage could still be a positive, meaning that it'll grow enough to offset the amount of losses? Or do you think this ends up being more like a neutral or maybe even a headwind, given that, you know, when you net it all together?
spk07: Yeah, I mean, obviously, there's a couple of pieces there. Number one is enrollment, and do we get it right, that it is gradual? I think, again, we will get that right. As it relates to the contracting, as I said, we're comprehensively contracted to So we think that we've got it in the right box. And, again, depending on Humana, it's a decent-sized player. I think it's embedded in our guidance, but I don't think it's going to be anything that sticks out in your model as a big up or down. So those variables will move in a band that I don't anticipate will be too big. Got it. Thanks for the call, Eric. Thank you.
spk04: Our next question comes from Lisa Clive from Bernstein.
spk02: You may go ahead. Hi there. Two questions. Yeah, just following up on the previous question, it did mention on the revenue there was the quarterly change was primarily due to a decrease in commercial revenue for treatment.
spk03: You mentioned that was really sort of one-off. Unfavorable changes, it said in government payer mix, so that was sort of particularly oddly phrased, and then a decline in calcium medics, which was sort of as expected. So I just wanted to circle back to make sure there's nothing sort of odd going on in patient mix. And particularly if there was a bit of a headwind, that would sort of be odd given that I understand that the mortality that you're seeing amongst COVID patients is mainly elderly patients. So if anything, it would be a slight tailwind to patient mix. and then so just some clarification on that would be great and then the second question for your extra COVID costs around your teammates what proportion or sort of how much of that was for child care and that could that possibly decrease notably now that schools are back in person for the most part and hopefully will continue to be yeah so Lisa let me grab the RPT one
spk08: The government stuff is a seasonal thing that happens typically in Q3 around re-enrollment in Medicare. In terms of the commercial side, you are right that COVID is a small tailwind. It helps our commercial mix to some extent because mortality is differentially impacting older patients who are more likely to have have Medicare.
spk07: The second part was around the cost of childcare. Yeah. I think it's going to be fascinating to see what happens with the schools. I don't know. My kids and what I'm hearing from our teammates is that it's been very fluid. We've had a wide range from people that have been staying at home the whole time to all the way to full-time in school. and somewhere in between there's been pauses, starts, and finishes. So what we're trying to do is support our teams and create the resources so that they can go to work. And so we've got some safety nets and different programs that we're funding, and we hope that we have them covered. Of course, if this gets materially worse and we go back to a really acute shutdown, everybody will be in the same pickle. So we've prepared for that. And again, it's all in the bandwidth of how this pandemic behaves.
spk03: Okay, so it sounds like, you know, people still do need the extra support, so it's not, it probably isn't, the costs probably aren't decreasing on your end at this point.
spk07: Yeah, Lisa, I mean, look, different parts of the country are at different ways of handling the education system. And so we're seeing different pockets of expenses and demand and constraints on our teammates and how they're handling their childcare. So it's been bumpy and regional.
spk08: Yeah, more broadly, I'd say as we think about the COVID impact on Q4, our expectations is it'll look closer to what we saw in Q2 than Q3, and it's likely to be a negative. rather than the positive we saw in Q3.
spk03: Okay, that's very helpful. Thank you.
spk04: Thank you.
spk07: And sorry, just to clarify, that encompasses everything. Right. That is not the narrow lens of education.
spk03: Yes.
spk07: Thank you.
spk04: And our next question comes from . You may go ahead, sir.
spk13: Good afternoon, guys. Thanks for taking my questions. A few questions for you on the fourth quarter guidance. It looks like in third quarter you had a 50% operating income margin despite $66 million of advocacy costs in your guiding to margin declines in the fourth quarter. Can you help me sort of quantify what is implied within the fourth quarter margin and in a little more detail on the positive COVID impact you had on the third quarter? I was a little unclear on that.
spk08: Yeah, so... For Q4, I think there are two things driving it. First is COVID, and as I just mentioned, we saw COVID was a, call it 20 to 30 million positive to OI in Q3. For Q4, we're expecting something more like what we saw in Q2, so a large reversal. And so that's the biggest driver of the Q4 decline over Q3. We're also anticipating some seasonal and other stuff that will likely drive the more, kind of the underlying earning power for Q4 down a bit, but COVID is the biggest driver of the margin decline that we talked about. In terms of Q3, as it relates to COVID, what you really see there is a bunch of positive impacts to the P&L associated with COVID. The ones I'd call out most are the sequestration, suspension, lower T&E, lower benefit costs, and the direct costs that we saw in Q2 largely went away, not completely went away, but to a large extent went away. And the result was the offsets were larger than the direct costs, and that's why COVID was a net positive for the quarter.
spk13: Okay. So if we take the midpoint of your fourth core operating guidance, say $420 million, we, you know, anything that's for 2021, add in the $50 million of COVID swing, that the sort of the core run right here should be in a 470 range. If we annualize that, how would you be thinking that from a base running in 2021? Assuming that COVID slows down, or is there anything that would sort of skew that logic one way or another way?
spk08: Yeah. So look, COVID, there's a lot of uncertainty about COVID in Q4, so I don't want to get overly precise, but if you're looking for a jump off point for modeling next year, I think full year adjusting for the three big items, which are calcium medics, um, ballot initiatives and COVID is the right way to think about the starting point for a model for next year. Okay. I will point out, as I said, calcium emetics, but remember, we've called out calcium emetics as roughly flat in 2021 versus 2020. The reason I call it out is because in 2020, we viewed it as non-recurring. In 2021, it will be a recurring part of our OI. Okay.
spk13: And then one more follow-up question for you. We're hearing that home dialysis is continuing to accelerate. Is there any way to help quantify what the operating margin leverage is for every 100 basis points of patients who move from in-center into home? How much of a margin impact is that to your bottom line? Thanks so much.
spk08: Yeah, we haven't given that number. It's a very complicated question, and it moves over time. It depends which patients are moving from in-center to home. So we've generally shied away from trying to put a specific number on that.
spk13: But overall, the move to the home overall is a net operating margin improvement for you, correct? Yes. Thanks so much.
spk04: Thank you. Once again, if you would like to ask a question, you may press star 1 on your telephone keypad. Our next question comes from Whit Mayo with UBS. You may go ahead, sir.
spk10: Hey, thanks. Let me follow up on that last question just a different way. What's the difference in the non-acquired treatment growth profile of in-clinic versus home? I know home is growing much faster as Pito alluded to, but if we stripped out the home, what would the in-clinic growth rate look like?
spk08: Sorry, Whit, I'm struggling. Well, first of all, it's a hard number to give in the context of COVID where our NAG is moving around so much. Are you asking now or are you asking in kind of pre-COVID?
spk10: Pre-COVID.
spk08: What we've historically said is that the home is growing about five times faster than in-center.
spk10: Okay, well, maybe we just follow up on maybe kind of a rule of thumb to think about the conversion of in-clinic and home.
spk08: I'm sorry, was I not asked?
spk10: No, I guess I'm just trying to kind of, if we're growing, let's say, 1% at the enterprise level on NAG, you know, and if home is growing, you know, 8% or 10%, then I guess we can follow up. It's fine. I may have missed this earlier, but what was one time about the commercial revenue decline in the quarter? Was this normal payer settlements that just went against you?
spk08: Just normal fluctuations, nothing worth noting, nothing that I think will recur in any way or has any impact on how to think about our commercial rates going forward.
spk10: Okay. And maybe one more, just, I don't know if you gave this already and I missed it, but calcium medics, RPT and the cost per treatment.
spk08: I have not given those, but I've got them handy. Hold on one second. So for Q3, RPT for calcium medics was $6.31 and for, and cost per treatment were $4.31. So if you think about the OI from Calcimimedics in Q3 was about $15 million. Okay.
spk10: And the expectation maybe for the fourth quarter, I know we've got ASP down a bunch.
spk08: Yeah, so we've called out 50 to 70 would be at the high end of the range. I think we can continue to think we'll be near the high end of the range. We might actually be a little bit above it.
spk10: Okay, that's helpful. Thanks, guys.
spk04: Thank you. Our next question comes from Gary Taylor with JP Morgan.
spk01: Hi, good morning. Joel, maybe just going back to the home versus in-center, you said it was a complicated question, so I'm going to ask it a little more complicated fashion. When you talk about the home incremental margin, is that percentage or dollars? And when you think about A center that's up and running and the contribution of an incremental patient versus sort of a fully loaded patient, does that change how you think about the answer? And then does PD or home hemo change how you answer the question?
spk08: Yeah, so it's true for both percentage and dollars. In terms of the other things you cited, all those things factor in. They're into it, as does treatment, as does commercial mix and a bunch of other things.
spk01: Okay. I think that's helpful. I think I understand which way those swing. I was just looking on advocacy costs, $66 million in the corridor. Those were immaterial in the 2Q, I think? Yeah. Is that right? And a year ago, third quarter of 19, I would have thought they were material. I couldn't find them in my notes. If you don't have them handy, I'll follow up.
spk08: So, Gary, as a reminder, we think about our advocacy costs in two buckets. There's about a $30 million number that recurs year after year, and that's really not what we're referring to. That's baked into all our other numbers. This is the advocacy specifically related to Prop 23, the California Ballot Initiative, which happened in 2018. So there was nothing in 2019. Right now it's an even year issue.
spk01: Just two more quick ones, if I could. You haven't really talked about ETC very much, and you didn't cite it in your headwinds, tailwinds. How are you thinking about treatment choices next year?
spk07: Gary, thank you. I'll grab that. The ETC came out, cleared out some things, made some improvements, which we're very appreciative to the administration that they heard from the community. We're going to obviously work really hard to meet their objectives because they're aligned with our objectives, which is to get more people to the right modality and to make sure that as many people as possible can get transplants. If you're looking for something as to what to plug into your model, the reality is it's a bit early, but I'm going to use CMS as to what they said. They said that it would be a saver of $34 million over six years. And that's for the entire industry. So if you grab a third of that. And so my understanding is it's a little more forgiving on the front end, and then it grabs a little more on the back end. But as you can see, the numbers are digestible.
spk01: Got it. And the last one, any thoughts around how DaVita might eventually participate in CMS direct contracting and financing? a lot of ways at the surface that sounds like exactly what you've been asking for, you know, for CMS for your patient population for a long time. So, you know, it does seem like potentially there'd be, I don't know how you'd play out in terms of passive enrollment, but it seems like there would be an opportunity to do some voluntary enrollment potentially in your population. I'm sure you guys have probably looked at it. Any high-level thoughts on it?
spk07: Well, you're absolutely right that we continue to explore every option. We continue to go after Kidney Care Act, and we are evaluating all of these voluntary models. They come out with rules as we go, and so they're quite dynamic. And so one day we're very excited about one format, and then the rules come out, and it is either disappointing or harder for us to participate in it. And so we continue to evaluate it and we'll get back to you once everything's finalized. Yesterday, actually, for the voluntary models, the financial structure came out. It's roughly 100 pages. And so we're still digesting it, but we'll be back to you when we have a conclusion. Thank you. Thank you.
spk04: Thank you. And our next question comes from John Ransom with Raymond James. You may go ahead, sir.
spk10: Hey, good evening everybody. Just kind of stepping back and asking maybe a bigger question. I mean it would seem like the incentives are aligned between MA plans taking capitation from Medicare and then working with you to capitate these high-risk patients and certainly you had eight years experience with Aveda Medical on capitation. I guess it's just not clear to me Are we going to be stuck in fee-for-service land 5,000 years from now? Is this just going to move like glacially? What's the impediment for getting this into a more global discussion? Because it seems like we're just stuck where we were, you know, 5, 10 years ago in terms of like 99.9% of your revenue still being just fee-for-service and you have these food fights over, you know, a dollar here, a dollar there. I mean, just what's your perspective there?
spk07: Thanks, John. Well, we agree with you that there's a big movement right now. There's appetite. There's momentum. There's a lot of interest. These deals are a lot more complicated to do, setting up the baseline, setting up the incentives so they're multi-year so we can do the investment. But to your point, it's taken a while, but I think that there is an intersection point right now of momentum. So it takes two to tango and it feels like the, the other side is willing and we are ready. And so I think over the next couple of years, you're going to see a lot more of these deals come across.
spk10: Great. And then my other question is just, if you go back to your last analyst day and you laid out your targets, I mean, there's obviously been a lot of noise with COVID and some temporal factors, but if we step back and, look at what you thought then and what we think has changed structurally in the business, what would you point out that has changed, either positive or negative, as we think about the earnings power of DaVita?
spk08: Yeah, so I'll take that. Fundamentally, we've made a lot more margin progress than we thought, quicker than we thought we could. And part of that comes from RPT. Part of that comes from cost management. On the RPT side, I wouldn't point to anything specific. There's some mix in there. There's some rate, both commercial and Medicare, that has improved bad debt. So it's pretty broad-based. And similarly, on the cost side, I think we've done a great job on productivity. We continue to see benefits. On the pharma side, we've managed some of the non-people costs in the clinics extremely well. So overall, driving the OI margin has been important. And then below the OI line, our interest costs are way down, and we've bought back more stock faster than we thought we would. So there's no magic bullet in there. It's pretty balanced across the income statement, but we're we're super proud. I think the results have been strong and we're really excited with where we are right now.
spk10: And if we were just to think like in the old world, if next were the same and the world was the same as it was, are you still having, you know, scorched earth fights over commercial contracts and revenue for treatment? And we're not talking about Medicare or have we sort of gotten past the period of contentiousness and, and, some of these unfortunate negotiations years ago?
spk07: Well, John, I mean, to be honest with you, it's weird what analysts and others hear, because at the end of the day, the negotiations tend to be quite constructive and productive most of the time. And maybe it's that you hear of the outliers that are really contentious. But on average, we all try to get to the same output, which is, Can we deliver more for the patients? Can we offer the best network? And can we bring it in in a way that flattens or improves the cost curve? And so we all sit down with the same goals in mind, and then just sometimes it happens to be that people, either us, perceived as getting greedy or them perceived as being greedy, so there's not a meeting of the minds. But if you go back and do an inventory of how many of those were so contentious and drawn out, you can count them in your hand. And so maybe we just tend to remember them because they are so visible.
spk12: Great.
spk07: All right. Thank you. Thank you.
spk04: Our next question comes from Matt LaRue with William Blair. You may go ahead, sir.
spk06: Hi. Good afternoon. Hey, Joel, maybe I want to take one more swing at sort of the COVID dynamics 3Q to 4Q and appreciate that attempting to quantify this is challenging. But just directionally, I'm still trying to make sense in my head which of those factors would be reversing in terms of the impact from a positive-negative standpoint from Q3 to Q4, and maybe just at least understanding which items you're expecting reversal in might help.
spk08: Sure. So it's a little bit more on the direct cost side. It's a little bit more impact from the treatment volume decline, and it's a little bit from reductions in the offset. So it's coming from all three of those buckets.
spk06: Okay. And then, Javier, there's an interesting update on the KidneySmart platform and some good metrics there. Just curious, where are you seeing the most adoption? And then just would be curious, you know, what maybe your economics, if any, look like when you're partnering with folks to provide that platform?
spk07: Yeah, the economics are not there. So it's free and access to all the community. And so anyone could get it. And the whole hope there is, of course, that people can transition through modality planning and in many instances just get mentally acclimated to the lifestyle change that you're going to have. And so it is just literally a gift to the community and hopefully helps people transition into what is likely to be a very big lifestyle change. And so we're very proud of it. If you ever go on it, it's very comprehensive but easy to understand, and we think it's making a real impact in the community. Fair enough. Thank you. Thank you.
spk04: Our next question comes from Kevin Fishbeck from Bank of America. You may go ahead, sir.
spk11: Great. Thanks. Just a couple of follow-up questions here. Appreciate you breaking down the guidance for EPS a little bit, but maybe you could break down the building blocks a little bit more. The operating income growth, is there a way to think about how much is revenue growth versus continued margin expansion from here? Because you're already above what you targeted for your point 22 margins, so trying to figure out if there's more room to go there.
spk08: Yeah, Kevin, I think it's a bit early for us to get into that level of detail. It can obviously play out in different ways over time, depending on some industry dynamics. It could also depend on some capital allocation dynamics, so I think we're going to stick with just OI and EPS.
spk11: Okay, and then Other questions just being, you talked about, you know, you're talking to Humana about doing a capitated type contract or value-based contract, I guess. And that broadly speaking, there's a lot more interest in doing these types of things. How should we think about the profitability of these types of contracts? You know, not specifically Humana, but just in general, like when you enter into these, is the expectation that you would, be doing it as a way to kind of maintain the current economics that you have on those patients? Or is there a view that since you're taking risk, you should be paid more and maybe making more off that patient for inherently taking risk on top of just the fee-for-service structure from the past?
spk07: Yeah, it's a fair question, Kevin. And the reality is that it's not a simple answer. The starting point matters. and the baseline of the structure of matters. And then in some of these, you have to invest upfront to get the returns on the back end. And so there's not a smooth, you know, easy answer to that. But in general, I think what we're all trying to do here is bend the cost curve. And then if we can create a bigger pool for us to play in and participate in, that hopefully we can participate in that. But it takes some investment upfront. And so that's how I think about it.
spk11: Okay. And I guess in the past, you know, you've had issues with some of the way the government structures have been where you kind of have this consistent, you know, adjustment to the baseline. As you deliver savings, your reimbursement gets cut. That's been some of the prior demos have worked. My assumption is that the conversations with managed care are more focused I guess, in their structure, that they're kind of more tied to the overall MA rate rather than to the savings that you deliver?
spk07: Yeah, usually in MA, of course, you have risk adjustment. And so on that, you get to acclimate to the patient there and how sick they are. And in the other government programs, it's been a little black box-ish, and then all of a sudden at the end of the program and then after X amount of months, you find out that you were rebased. So it just makes it really hard to forecast how aggressively you want to invest, and that's been the biggest challenge that we've had with the government programs. And the opposite goes for MA, that you could actually understand your risk, you can understand your level of investment, and the upside and downside.
spk11: Great. Thank you.
spk07: Thank you.
spk04: Lisa Clive from Bernstein. You may go ahead.
spk03: Hi there. I'm just one follow up question about home dialysis. Perhaps a different way of thinking about it. Um, the, the profit impact is, is there a notable difference in the length of time that a patient stays on their private insurance when they're in the clinic versus at home? I imagine if they're doing home dialysis, they can stay employed. So does that material impact impact the number of months that they actually stay privately insured?
spk07: The short answer is no, that there's nothing magical about home versus private insurance. There's a preselection bias, maybe, that more people that work will pick home. And so if you might recall from capital markets, the other thing that's really important to remember is that roughly 85% of our patients that dialyze at home dialyze in a center at some point. And so either on the front end or on the back end or even during their care. And so we've always debated, you know, are some of these dynamics that you're trying to get to economically or length of private pay, et cetera, is it because of the modality or is it because of the patient that picked a modality? And we don't know.
spk03: Okay. Thanks.
spk07: Thank you.
spk04: And at this time, I'm showing no further questions.
spk07: Okay. Thank you, Michelle. Let me make a couple of closing comments. Well, it goes without saying, it is a challenging environment out there. And so, I just want to thank again the dedication, the caring, and the professionalism of our team. It has really energized our entire organization. Secondly, we've delivered on the commitments that we made to you ahead of schedule and we are really well positioned to deliver on our multiyear earnings growth. Stay safe and thank you for your interest in DeVito.
spk04: And thank you. This concludes today's conference call.
Disclaimer