DaVita Inc.

Good evening. My name is Michelle and I will be your conference facilitator today. At this time, I would like to welcome everyone to the DaVita fourth quarter 2021 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. Today's call is being recorded. If anyone has any objections, you may disconnect at this time. Thank you, Mr. Gustafson. You may begin your conference.

Thank you, and welcome, everyone, to our fourth quarter conference call. We appreciate your continued interest in the 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 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 fourth quarter earnings press release and our SEC filing, including our most recent annual report on Form 10-K and all subsequent quarterly reports on Form 10-Q and any subsequent filing we make with the SEC. 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. A reconciliation of these non-GAAP measures to the more comparable GAAP financial measures is included in our earnings press release furnished to the SEC and available on our website. I will now turn the call over to Javier Rodriguez.

Thank you, Jim, and thank you all for joining today's call to discuss our fourth quarter performance and our thoughts on 2022. Each quarter for the last two years, I hope it's the last time that the pandemic is the start of my discussions with you. Yet, COVID continues to evolve and have a direct impact on our world, especially on our healthcare system. Similar to what's been seen in the general population, COVID infections within our patient population spiked significantly in late December through January. At its peak during the second week of January, the new case count was more than twice as high as it peaked from last winter. The mortality rate to date with the latest surge has been lower than in prior surges. For the fourth quarter, we estimate that the incremental mortality due to COVID was approximately 1,100 compared to approximately 1,600 during the third quarter. Despite the challenges associated with COVID, I continue to be in awe at the resilience and dedication of our teammates across the DeVita Village, from our direct patient caregivers to our corporate teammates. All are unrelenting in their commitment to provide high quality care, respond to quickly changing environments, and show incredible compassion and support for our patients. For the balance of my remarks, I will cover five topics. Transplants, labor markets, our supply chain, integrated kidney care, IKC, and then I will wrap up with our fourth quarter results and our outlook. Transplant. At our Capital Markets Day presentation in November, I discuss our focus on innovation to improve the patient experience at every single stage along the patient's kidney care journey, from delaying the progression of kidney disease to transplant, and from acute hospital care to dialysis at home or in center. Transplant is the preferred treatment option for most of our patients, and during 2021, despite the challenges posed by the COVID pandemic, We celebrated that nearly 8,000 DaVita patients received a transplant, exceeding our pre-pandemic level. With that said, the transplant process is long and complicated, with an average wait time of between four and five years for an organ. Staying active on the wait list for such a long time is difficult. As a result, patients sometimes miss their window for a transplant. We've been working to address some of these challenges through our industry-leading Transplant Smart Education program and our partnership with the NKF to help more patients find living donors. In early January, we announced the acquisition of MedSloop, whose software enables closer partnerships and better coordination between transplant centers, nephrologists, and kidney care providers, with all three working together to support our patients' transplant journey. These efforts can also benefit another meaningful goal of ours, to improve health equity. Many process and outcome results in transplant are quite inequitable, different by race and ethnicity, economic means, and insurance coverage. We believe it doesn't have to be this way. Removing barriers to access, making process as easy as possible, and providing strong care coordination and support through the transplant journey can all contribute to making transplants not just more available, but also more equitable for our patients. Now, let me shift to an update on the labor markets. I've been fortunate enough to be part of DaVita Village for over 20 years, and in all that time across my many roles, I've never experienced a labor market as challenging as we face today. To help deal with the challenge, we have provided incremental pay and benefits to help our frontline caregivers during COVID. We've also accelerated wage increases with a particular focus on our teammates in the clinics. As previously communicated, we expect higher than usual wage increases in 2022, which will put some additional pressure on our cost structure going forward. We believe this investment in our people will contribute to our ability to track and retain the talent needed to achieve our learning term objective. That said, The labor markets remain highly dynamic and will continue to be a swing factor for the year. Over the years, in particular during the pandemic and natural disasters, we have navigated many supply chain challenges. To date, our supply chain has proven very resilient. Currently, we're working through a supply shortage primarily related to dialysis, which is a fluid solution used in hemodialysis to filter toxins and fluid from the blood. The shortage has rippled through the entire kidney care community and as a community we have once again come together in support of our dialysis patients and thus far have been able to provide uninterrupted life-sustaining care. We expect that these challenges related to dialysis will remain with us until the second quarter. Turning to IKC, we now have confirmation on the markets where we will partner with physicians under the federal government's new five-year CKCC demonstration. These programs added approximately 12,000 ESKD patients and an additional 12,000 CKD patients across 11 value-based programs in different markets. We're engaging with our nephrologist partners to develop personalized care plans for each covered patient and identify opportunities to improve clinical outcomes and lower costs for each patient. Participating in these and other programs will more than double the number of patients we serve in value-based care arrangements. In light of our upfront costs of these programs and the lag of shared savings payments, as we discussed in November, we continue to expect that our operating loss in 2022 in our U.S. ancillary segment will increase by approximately $50 million although this could increase or decrease depending on the number of new arrangements we enter into during the year. We believe that we are well positioned for the future and in particular to deliver positive clinical and financial results in our IKC business over the long term. Now let me finish with fourth quarter results and our updated outlook. Despite the negative impact of the Omicron surge, our fourth quarter results were slightly above the midpoint of our revised guidance. This resulted in a full year adjusted operating income increase of approximately 3% over 2020. Adjusted EPS from continuing operations grew by approximately 26% year over year, and we generated more than $1.1 billion of free cash flow, which we largely deployed to return capital to our shareholders. For 2022, we expect adjusted operating income guidance of $1.525 billion to $1.675 billion. The midpoint of this guidance range is $35 million below our expectations from Capital Markets Day last November, which is primarily driven by our updated views on COVID and labor costs. As we said previously, while 2022 will be a transition year due to some near-term investment and challenges that we're facing, we continue to believe that we're well positioned to perform across the kidney care continuum in the years to come. we still believe we can deliver the long-term compounded annual growth of adjusted operating income of 3% to 7% that we discussed at Capital Markets Day. With that, I will turn it over to Joel to discuss our financial performance and outlook in more detail.

Thanks, Javier. As Javier mentioned, our fourth quarter results were slightly above the midpoint of our revised guidance. Q4 results included a net COVID headwind of approximately $80 million, an increase relative to the quarterly impact that we experienced in the first three quarters of the year, primarily due to the impact of the incremental mortality from the Delta surge in Q3, and some temporary labor cost increases. For the year, we experienced a net COVID headwind of approximately $200 million. As Javier said, The incremental mortality due to COVID in the fourth quarter was approximately 1100 compared to approximately 1600 in Q3. While it's too early to accurately forecast incremental mortality in 2022, given the significant uptick in infections in January, we expect COVID driven mortality in the first quarter to be at or above what we experienced in Q4. U.S. dialysis treatments per day were down 135 or 0.1% in Q4 compared to Q3. The primary headwind was the increase in mortality and higher mistreatments as a result of the ongoing COVID pandemic. U.S. dialysis patient care costs per treatment were up approximately $6 quarter over quarter, primarily due to the increased wage rates and health benefit expenses. Our integrated kidney care business saw an increase in its operating loss in Q4, which is due primarily to positive prior period development in our special needs plans recognized in the third quarter and increased costs incurred in Q4, including preparation for new value-based care arrangements effective in 2022. Our adjusted effective tax rate attributed both to the VITA was 16% for the fourth quarter and approximately 22% for the full year. The adjusted effective tax rate was lower quarter over quarter, primarily due to a favorable resolution of a state tax issue during Q4. Finally, in 2021, we repurchased 13.9 million shares of our stock, reducing our shares outstanding by 11.5% during the year. We have repurchased to date an additional 1.4 million shares in 2022. Now looking ahead to 2022, our adjusted OI guidance is a range of $1.525 billion to $1.675 billion, and our adjusted EPS guidance is $750 to $850 per share. The midpoint of the OI guidance range is $35 million below the $1.635 billion that we discussed during our recent capital markets day due to offsetting puts and takes. First, we have a tailwind from both higher final Medicare rate update as well as a partial extension of Medicare sequestration relief. This is more than offset by headwinds due to the recent COVID surge, as well as incremental wage rate pressure. At the midpoint of our guidance range, we have incorporated the following assumptions related to COVID. Excess patient mortality due to COVID of 6,000. This, along with our normal growth drivers, would result in a total treatment growth range of approximately one-half to 1%. A year-over-year improvement to various COVID-driven costs, such as PPE, which will be largely offset by the loss of revenue from Medicare sequestration relief beyond Q2 2022. As you would expect, the high and low end of our guidance incorporates a range of COVID scenarios for 2022. There are scenarios that could lead us to performance above or below this range. In addition to COVID, the expected headwinds I talked about on the Q3 earnings call and that our capital markets day remain. As a reminder, we expect to incur expenses related to the biggest portion of the industry effort to counter the expected ballot initiative in California. Our guidance assumes an incremental increase of between $100 and $125 million in labor costs above a typical year's increase, which is $50 million higher than what we communicated at Capital Markets Day. Third, we anticipate a year-over-year incremental operating loss in the range of $50 million as we continue to invest to grow our IKC business And fourth, we will also begin to depreciate our new clinical IT platform, which we expect to be approximately $35 million in 2022 and will begin in Q2. A few additional things to help you with our current thinking about 2022. We expect to offset a significant amount of these incremental costs with continuing MA penetration growth above historical levels and strong management of non-labor patient care costs. We are forecasting our tax rate at 25% to 27% due to non-deductibility of ballot expense. Regarding seasonality, remember that Q1 had seasonally higher payroll taxes and seasonal impact of copayments and deductibles. The vast majority of our ballot-related expenses will fall in Q3. we have historically experienced higher G&A in Q4. Looking past 2022, we continue to expect compounded annual OI growth relative to 2021 of 3% to 7% and compounded annual adjusted EPS growth relative to 2021 of 8% to 14%. Finally, we expect free cash flow of $850 million to $1.1 billion in 2022. As we communicated at Capital Markets Day, we expect free cash flow to remain above adjusted net income, with that difference contracting over time. Operator, please open the call for Q&A.

Thank you, sir. At this time, if you would like to ask a question, you may press star 1. To withdraw your question, you may press star two. One moment, please. Sarah James from Barclays, you may go ahead.

Hi, Sarah. Thank you. Yes, hi. So I wanted to get a sense, you know, as we go through Omicron and we think about the waves that are coming ahead, there seems to be more mild outcomes, like you mentioned today. And I'm wondering if that's contemplated when we think back to your capital markets today, when you talked about the 160 to 200 million in OI drag over the next four to seven years from excess mortality, if that contemplates a continuing more mild COVID trends as the years go on.

Well, I'll let Joel talk about the numbers in a second, but let me just start by saying the way we're talking about it internally in the company is that we are no longer going to speculate how this is going to behave because we have been so surprised over time. We all had such hope when the vaccines came out and then when the boosters came out. And, of course, it has resulted in a milder hospitalization and mortality rate But at the end of the day, I think we can all now accept that no one can speculate where this is going. Our hope is that it does become less impactful in our business, and eventually it's something that we can deal with in the normal course of business. But that would not be a prudent thing to assume. So why don't you go ahead, Joel, and talk about what we've built into the numbers.

Sure. Thanks, Sarah. So as I think about how COVID impact will play out going forward relative to a wave like Omicron or a wave like Delta, there are a whole bunch of impacts that COVID has across the P&L. And what we've said and remains to be true that there are a lot of offsets in everything except the excess mortality. And the net impact that we expect from COVID will largely be the net impact of excess mortality. What you see with Omicron is while, yes, it is a milder disease because it was so much more transmissible that it still led to a big wave of excess mortality. We saw that in Q4. We're continuing to see that in Q1. So as I think about different variants and how they might play out going forward, I think net-net the question is what's the impact on excess mortality?

Okay, and can you update us on your conversations with payers if, when you're talking about future rates, you're building in inflationary factors for wages? I don't know if it would be for 24 contracts now.

Well, those conversations are playing out in real time, but the reality is that, as you know, and we've talked about for some time, our contracts tend to be longer term in nature. And so the bulk of our contracts are not up for renegotiation. So we'll have to, of course, assess how inflation behaves over time when each and every one of those contracts comes up. And so right now, let's call it in what was negotiated previous to seeing this ramp up in inflation.

Thank you.

Thank you.

And our next caller is Justin Lake from Wolf Research.

Hey, Justin. Thanks, guys. Hey. So I wanted to go through a few things in detail. First, Joel, you talked about the first quarter being similar to the fall quarter in terms of the mortality headwind from an OI perspective. Can you walk us through again, and I might have this somewhere, but the OI headwind by quarter? first quarter through fourth quarter in 2001?

The OI headwind by quarter, I'm going to do this off the top of my head. It was in the 30s each of the first two quarters, so mid-30s, 55 in Q3, and then 80 in Q4. And I'm getting thumbs up in the room, so I got it right.

Okay. So then...

80 is the number for Q1. No, no, Justin, let me clarify before you go. What I said in the script was that the excess mortality in Q1 was going to be at least as large as what we saw in Q4. So that's about the mortality. Remember, in terms of COVID impact, excess mortality has a cumulative effect. So adding another 1,100 deaths or more, you would add that to what we're seeing in the quarter. There are other dynamics, of course, but when you just focus on the excess mortality, which is the dominant dynamic, you'd expect that number to go up a bit.

Got it. So 50 to 80 might be 80 to 110, something like that, given its similar trajectory incrementally. Is that a way to think about it?

That sounds a bit high, and I think that's really a function of two things. There were a significant number of mistreatments in Q4, which is a temporary negative impact of COVID. We would expect that to go down. And second, there were some non-recurring labor components to the COVID impact in Q4 as well.

Got it. Is there – I apologize if you said this, but is there a number, like 200 in 2021, is there a number that you gave for 2022 that you think that's embedded in guidance?

It's embedded in guidance. I think as we think about COVID impact, we've spent the last seven quarters calling it out on a cumulative basis. As we get further and further away from the beginning of COVID, it gets harder and harder to – estimate what the cumulative impact is. The baseline is we're so far removed from the baseline that it's hard to talk about the cumulative impact. So we're thinking about what the COVID that's baked into the numbers as effectively the new normal from which we're going to go forward. We'll continue to talk about the impact we see quarter over quarter, but I think we're going to move away from talking about it as a cumulative number.

Okay. And then you talked about Medicare Advantage penetration being an offset year. Can you tell us what that was at year end and where you are kind of after open enrollment in your own market?

Yeah. At the end of the year, which is the most recent number I have, Justin, we were at 42.3% on MA. And I think that's the latest one we want to discuss.

Yeah, if we think about it for the year, I would say we would expect growth to continue to be strong, but not as strong as we saw in 21.

Okay, great. And then last question just on the dialysate issue. Can you tell us, you know, you talked about that, and there's been some discussion of this in the industry. Prasinius apparently has an issue with Can you confirm that, like, where the issue is coming from? And you said it will continue to at least the second quarter, or you think to the second quarter. Is there any visibility on this improving?

Well, yes. The community, you know, this is a national issue for all providers, so there has been a shortage in supply. You can trace it back, of course, to the chain supply issues across the country. and the distribution centers and the labor issues. So it's a cumulative of all of them. So there was labor, transportation, everything all came together as it has happened in so many other places. What we did as a community is, of course, the first thing is get the clinical leadership to make sure that we were doing safe dialysis. Then we started to basically titrate so we would use less of the product. And then we made sure that everybody understood what kind of inventory was at each location so that we would not have anyone stack or stock inventory. So the entire community did that. The visibility that we have right now is that, again, that will play out, and we will be back to normal sometime in Q2 is what we're being told. And so we will continue in the state where we're all – if you will, in a much lower inventory level. Did I answer your question, Justin?

Yeah, thanks. I appreciate it. I'll jump back in.

I don't know if it was entirely clear as to this whole notion of why we don't want to go back to this baseline because it's so far. So just to put a finger on something that we are all experiencing is travel and entertainment. which we, of course, at one quarter over another, you could say we used to have a run rate. Has the world actually changed in travel and entertainment? It's going to be completely different. Then we had benefits, which we told you we had a run rate, but the benefits have changed in the run rate. So that's why it starts to get a little harder to go to that. And as Joel said, we want to go now into sort of let's call it the new normal and go off of that. And so hopefully that made sense to you. Got it. Thanks. Thank you.

Thank you. Pito Chickering from Deutsche Bank. You may go ahead.

Hey, good afternoon, guys. Thanks for taking my questions here. Going down into the OI guidance for 2022, so we're down 35 million. Did I hear you right that there's an additional $50 million of labor costs versus the analyst day? And then you obviously have the more COVID excess mortality than you'd expected. and you now assume 6,000 excess mortality at death in 2022, it seems like a lot of headwinds versus your guidance of only down 35 million. So I just wanted to understand what were the tailwinds versus your previous guidance?

Yeah, Peter, I'd point to two tailwinds. One is the final Medicare fee-for-service rate came in at 1.9%, which was above our estimate. And the second is We got partial sequestration relief for the year, which is about $25 million. So those two offset those, and you wind up with a net $35 million decline.

Okay. And on the excess mortality, I understand that that's impossible to forecast at this point. You know, with, you know, like 1,100 for the first quarter. It's a little unclear what the incidence rate is for new patients entering dialysis, so any chance you can give us the color of how many patients you guys had at the end of third quarter, how many you had at the end of fourth quarter, and where that's tracking at this point in the first quarter?

I'm not sure I understand your question, Pito.

Yeah, so you've given us the excess mortality for death for the fourth quarter and the first quarter. And I guess on the other side of the equation, you have the incidence of new patients entering into dialysis. So just curious if you can give us sort of what, you know, how many patients you had at the end of third quarter, how many you had at the end of fourth quarter, and sort of where that is at this point today, you know, in the first quarter.

Yeah, so the patient count is relatively flat. In terms of the underlying drivers that drive the new to dialysis admits, We really haven't seen any changes there. It continues at the pattern that we saw pre-COVID, and there are really only two dynamics if you were looking at treatment count or treatment volumes or treatments per day between Q3 and the end of the year, and that's, one, the continued excess mortality that we talked about, and the second is the dynamic of mistreatments. So if you're asking about the pipeline of new to dialysis patients, that remains quite healthy.

Okay. And then from a modeling perspective, as we think about first quarter sequential treatment versus the fourth quarter, we obviously have the excess mortality, sort of the time lag between different quarters, and then the lost treatments that we had. during the fourth quarter due to patients that were in hospitals. Should we be modeling first quarter down a little bit versus fourth quarter or relatively flat sequentially?

It'll depend a lot on mistreatment rates. I'd say for the... Actually, there's one other dynamic. We did make an acquisition in Q4, and that was almost 1,000 patients, about 750 patients So that adds to the dynamic, and that'll help Q1 as well. But I'd say for the course of the full year, we are, based on the COVID numbers that we've built into our forecast, we're thinking of treatment volume growing somewhere between half and 1% for the year. Obviously, as COVID plays out, that number could vary. Okay.

And then on the IKC... I think at the analyst day you got to sort of $50 million and $75 million of incremental costs in 2022. On the script, I think you said $50 million. I want to see if the incremental costs for IKC have changed versus what you told us at the analyst day.

Yeah, I think the number hasn't changed, Peter. So it is a 50, just to clarify, incremental 50.

Perfect. And then, sir, one more question for IKC. Looking at the class of patients that you guys enrolled into the first quarter of 2021 in terms of how those losses were in the first quarter when you first got them versus the end of the fourth quarter of 2021, any clarity on sort of how that class of patients or how those losses progressed throughout the year?

Yeah, not yet, Peter. Remember, in the first year, we generally drive no revenue, so it'll really be sometime in 2022 where we'll start to see that playing through in the financials.

Okay, and then two more super quick ones here. What were your home treatments at the end of the fourth quarter? How should that progress through 2022?

Yeah, the home penetration rate was in the low 15% range. Home grew about 3% in the year versus in-center, which shrunk 2%. So our continued path to grow home and be a leader in that modality continues strong. We're not guiding specifically on that number for next year.

And then to Justin's question on the dilatate supply shortage, Is there any inflationary cost pressures if you have to hit a spot market to get the dial states required, or are those under those contracts? Thanks so much.

Yeah, thanks, Vito. On the dial state in particular, it is contracted, so no is the answer to that one. Great. Thanks so much. Thank you.

Thank you. Once again, if you would like to ask a question, you may press star 1. To withdraw your question, you may press star 2. Kevin fish back from bank of America. You may go ahead.

All right, great. Thanks. Um, I guess not a hundred percent clear to me, um, what you guys are, are signaling about the 2023 outlook. I know, um, still far out, but you, you gave us some comments last quarter about what 2023 would look like. And it seems like some of the headwinds here might persist into 2023 as far as maybe higher labor costs or, Mortality being a little bit higher from a starting point perspective. But some of the tailwinds like sequestration delay would not. But at the same time, you're also kind of saying your growth rate off of 2021 hasn't changed. In fact, 2021 is a little higher, which would point to a little bit higher 2023 number. I'm just trying to think directionally how should we think about 2023 versus your prior comments.

Yeah, so... I would say the following. First, you're pointing out that labor and COVID remain big uncertainties through 2022 and potentially 2023 is spot on. That said, the uptick that we talked about in 2023 at Capital Markets Day remains something that we've got a lot of confidence in. And if I had to bucket them, I'd say The easier things that we can anticipate driving in 23 over 22, one would be the ballot initiative going away, right? We don't have those in odd years. Second would be IKC will start seeing revenue in 2023 from the big cohort of patients that are being added in 2022. Third are a number of cost initiatives that we are implementing across the P&L. And so those are the, I'd say the ones that we've got a lot of visibility on. The one we have less visibility on is the COVID unwind. We continue to believe that as COVID moves into the background in the future, that will be a tailwind for us. It'll be a tailwind for us on certain cost items, but most importantly, it'll be a tailwind for us on patient growth. So our views on those have not changed. And if I had to put a number on those, I think you could add those up and easily get to a $200 million opportunity that we're going after. And that would be over and above the normal growth we would expect in a typical year.

But your current outlook for COVID mortality feels a little bit higher. So I would think that would kind of maybe delay kind of that realization of that $200 million opportunity. which might make how much you recapture in 2023 less than what you would have thought a few months ago.

It will depend on the timing, and we don't profess to have a crystal ball about COVID. We want to be crystal clear about what we built into our forecast, and obviously it could be better, it could be worse. Depending on how the timing plays out in 2022, there are different scenarios about what this number could look like in 2023.

Okay, that's fair enough. And then I guess in the quarter, it looks like you've closed 30 centers, which I think is like as many as you've ever closed in a year, like for the last decade plus that I've been covering VITA. So I want to understand what was driving those closures, you know, in Q4. I guess the year number's advice we've never done in a year before?

Yeah, thanks for the question. It is a little higher than normal, although we always have some center closures and consolidations, etc. I think the best way to think of footprint is we have three lenses. The very first one is, of course, access to patients to ensure that patients are safe and have the right access. The second lens would be what is a mix of home and and in-center, and as that changes over time. The third is utilization, which is we've had, of course, because of this excess mortality, we've had some utilization decrease. And then the last is sort of you think of the local market dynamics. And so we want to be really careful and we want to be very thoughtful. But if you were going to say what's the net takeaway is that we continue to think that we will build less de novos and more home centers over time.

Okay, but I guess, I mean, if a shift, if you're talking about recapturing the COVID headwind, then your low volume this year would say that those sites should still stay open because they're going to recapture that volume over. Is it really more that shift to home is the biggest driver to that?

No, if you look at our utilization over time, we actually started to grow less pre-COVID than we had COVID, so the compounding of that actually has our footprint having less utilization than we've had historically. And then you add the dynamic of home growing, and so that's what we're doing. We just want to make sure that we have the right modality in the right market, and so we continue to assess that at every market.

Okay. And then just maybe the last question, the higher labor costs that you're building in now versus the previous guidance, are these underlying wage costs increases that kind of increase the base going forward, or is there some component of that? I think last time you talked about increased training and things like that. Is there some of that that would go away, or is this $50 million kind of added to the base going forward?

Yeah, it's interesting. We were just talking about that because, of course, there has been a bit more turnover, and we're working on how to get training to be a bit more efficient and effective. But the bulk of the number will stick with us.

Okay, great. Thanks.

Thank you.

Thank you. Gary Taylor from Cowan, you may go ahead, sir.

Hi, good evening. A couple small questions and then a larger one. The comment about the increase in commercial mix sequentially that's playing out, is that still just the mortality impact, the primary driver there?

Yes, and the consistent thing that the patients are really valuing choice of keeping their commercial insurance, it has really demonstrated through the pandemic resilience and value of the patient wanting to keep their insurance, and then the excess mortality coming, as you said, from a bigger number of Medicare patients.

And then the mention in the release about part of the revenue sequential growth was flu vaccine. I know that's a seasonal thing for you guys. How material is that, and is there any larger pickup in that this year that's material in any way, just given, I imagine, the awareness?

Oh, sorry. I thought you were done, Gary. The number is immaterial and is actually offset on the cost line item. So it's basically a service that we offer to our patients because it's good and convenient for them as opposed to thinking of it as an economic one.

Yeah. Last question. I just want to get your view. I haven't heard you guys talk about, you know, the Supreme Court case on ERISA plans that have made changes to dialysis payments and benefit structure. I think the oral arguments are coming up on March 1st and presumably a ruling this summer. I think I understand your view would be that it's discriminatory practices and I guess that's what the court's going to decide. But what do you think the implications are if the Sixth Circuit is overturned and the Ninth Circuit sort of upheld and it gives ERISA plans some B-way, I guess, to pursue cost containment strategies, for lack of a better word.

Yeah, thanks for the question. And I worry it's a complicated one if people haven't been tracking the details. So I'll probably just let me pull up a little and explain the case. And so at the heart of the issue is if Medicare and the Secondary Payer Act, commonly referred to as MSPA, protect patients from direct and indirect discrimination? So that's really kind of the question. And so more narrowly, is there a distinction between dialysis patients or what's in the statute, which is ESRD patients? And so that might sound like words smithing, but it's really at the heart of it. And so you say, how did we get here? Could you explain how we got here? And it's basically, as you know, There's small employer groups guided by third-party benefit design that limited benefits of dialysis patients and, in essence, de facto pushed them to Medicare. And then that went into certain courts, and then, as you said, the Sixth and the Ninth Circuits split ruling, and then Supreme Court said they wanted to take it up. We won't speculate on the ruling. but you're basically asking, okay, what happens if you do lose? Of course, I get my energy from winning, but if you ask me what happens if we do lose, there are several scenarios. As you know, the Supreme Court is highly nuanced, and so it could be a narrow loss, which may not have any impact, and they might provide a lot of clarity. And then you might say, okay, well, what happens if it's a broader loss, The first thing is you probably want to quantify it and I don't think I can help you there because it is impossible to forecast what would plans do and how would they consider it in the light of their reputation risk and in the fact that there's all kinds of legal requirements under the ADA now. And in addition, we have discrimination provision in the ACA. And so it might be that we're arguing one pillar, but the other two pillars are so strong that it actually has no impact. But we don't know. We will continue to advocate hard, and if we lose, we will continue to seek clarity in a legislative way. But the most important thing for us is that our patients are protected so that they have the right to get care just like in any other disease. And so we are going to be really, really focused on it and be aggressive both legally and legislatively because we believe that our patients deserve it. So I said a lot, so let me, because it's such an important thing. So any follow-up questions? Yes.

No, I think, I mean, obviously, you know, investors are trying to think about how to quantify the possibility of a loss, and I'm struggling with that as well and tend to agree it'd be a big step to think a lot of plans would significantly change behavior. So I think for now I just appreciate what you laid out there. Thank you. Thanks.

Thank you. Lisa Clive from Bernstein, you may go ahead.

Hi there. Two questions. Just number one, could you give us the percentage of your patients, of your Medicare-eligible patients that are in MA now? I think the last number you gave us was around 41% around your Q3 results. And then number two, just on the labor costs, Is it wage inflation mainly? Or is it also staffing shortages? Or if you could just give us an idea of how that splits out.

Yeah, so quickly on the MA, it's a little north of 42% of our total Medicare patients are on MA. On the labor side, it's generally wage inflation that we're talking about.

Okay, so you don't have a lot of vacancies or needing to use agency staff, that sort of thing?

No, we do, but we're pretty good at that being kind of short-term. So I think we're answering to be as helpful as possible as to you're saying, is this a good stepping stone to go into the future? And the fact is that it is, even though we're struggling. One of the things that we do when we have labor shortages is sometimes leadership, which is fixed salary, will step into the floor because we have a lot of our facility administrators that are nurses. That's not something we want to do for a long period of time. It's unsustainable. But that's very helpful when you're short-staffed. So there's a lot of dynamics, as you know, in interplay when you're looking at staffing. But I think if you were going to say what's the bulk of that number, it is inflationary in the wages.

Okay, great. And one last question, just on home dialysis. How has the growth rate changed, if at all, over the last year or two, I guess? There may be more interest in it, but are you also having more sort of bottlenecks around being able to train patients because of stretched staff? That would be helpful to understand how that's going.

Yeah, I think, you know, COVID, of course, creates some air pockets as it relates to growth. And we've talked a lot about during the call excess mortality. So if you were going to just step back and look at the mix overall and In the last couple of years, we've basically gone from a little over 12% to 15% of our patients being in some kind of a home modality. So the modality was driving double-digit growth for quite some time, and then COVID occurs. And so what happened during the year is we were between 2% and 3% growth during the year, but then again our in-center shrunk. And so the modality is still thriving. People are still picking it. We continue to create the best home suite out there surrounding patients with all kinds of things so that they can get onto the modality. As it relates to training, of course, COVID has added some challenges, and then also COVID has had some tailwinds in the sense that people say, gosh, if this happens again, maybe I want to dialyze at home. Still, it is not an easy answer, but hopefully those trends give you a sense of the appetite for the modality.

Great. Thanks very much.

Thank you.

Thank you. Peter Chickering from Deutsche Bank. You may go ahead, sir.

Hey there, guys. Thanks for taking my last follow-up here. Just a really quick question here. And I understand it's impossible to model excess COVID mortality from COVID just because, you know, these waves are possible to predict. But could you give us some sensitivities around operating income impact if excess mortality is 3,000 versus 6,000, you guys are assuming?

I think the rough math on that would be about a $30 million delta. So basically... And that's for the year, and that uses a mid-year convention.

Yep. So since I definitely, if you guys, you know, hadn't taken your, you know, excess COVID mortality up to 6,000, that probably would have been almost a delta between... that God has provided the analysts today versus today.

Yeah, I think that math works, Peter.

Okay, thanks so much, guys.

Thank you.

And at this time, I'm showing no further questions.

All right, well, thank you, Michelle, and thank you all for your interest in our company. As you can see, like many other companies, the short term is a tough one with the macro landscape being quite complex and dynamic, in particular, in the labor markets. That said, hopefully you hear from our voices that in the long term we continue to build the differentiated capability and that we are very positive on how we are positioned to deliver integrated care for our patients, deliver world-class outcomes, and bring savings to our payers. I would be just remiss if I don't finish by saying that this is all possible because the resilience, the passion, and the dedication of the Dedea team that wakes up every single day to deliver life-sustaining therapy. So thank you for your time and we'll talk again next quarter. Be well.

Thank you. Thank you. This concludes today's conference call. You may go ahead and disconnect at this time.