DaVita Inc.

I would like to welcome everyone to the DaVita fourth quarter 2023 earnings call. Today's conference is being recorded. If you have any objections, you may disconnect at this time. 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 number one on your telephone keypad. If you would like to withdraw your question, press star then the number two. Mr. Eliason, you may begin your conference.

Thank you, and welcome to our fourth quarter conference call. We appreciate your continued interest in our company. I'm Nick Eliason, Group 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 the 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 filings, including our most recent annual report on Form 10-K, all subsequent quarterly reports on Form 10-Q, and other subsequent filings that we make with the SEC. Our forward-looking statements are based on 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 most 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, Nick, and thank you all for joining the call today. As we reflect on the past year, our 2023 financial performance highlighted the resilience of our business and reveals some of the early benefits of our multi-year investment in strengthening our platform. External challenges of the past few years ultimately made us stronger, and with continued investment in our teammates, systems, and capabilities, we believe that we're well-positioned for the years ahead. We begin 2024 with great momentum and a reduction in the risk and uncertainty that characterized the recent years. Today, I will cover our 2023 results and our 2024 guidance, provide an annual update on integrated kidney care, and briefly continue our discussion on GLP-1 drugs. First, however, I will begin the call as we always do with the clinical highlight. For more than 20 years, we have strived to be a community first and a company second. This means that we're committed not only to providing outstanding care, but also to give back. In 2023, our teammates logged over 42,000 hours of service to their communities, which marks our highest year ever and a step toward achieving our cumulative goal of 125,000 hours by 2025. And some of our special teammates donated their personal time to advance our goal of raising awareness for kidney disease. We recently wrapped our 2023 Health Tour, a mobile health screening and kidney care education program supporting local communities across the country. Today, 15% of our U.S. population has kidney disease, which often goes undiagnosed and untreated until symptoms become severe. Our mobile health tour was designed to help identify risk factors that may lead to chronic kidney disease, including screening for obesity, diabetes, high blood pressure, and family history of kidney disease. After two months on the road, our bus traveled 17,000 miles to offer free screenings in 48 communities across eight states. To empower this tour, more than 300 of our teammates volunteered 1,200 hours in service to their local communities. This effort is a wonderful example of combining our dedication to service with our ongoing commitment to raising awareness for early detection and prevention of kidney disease. Transitioning to our performance, full year 2023 adjusted operating income, adjusted EPS, and free cash flow all came in well above our guidance from the beginning of the year. As context, I think it's helpful to reflect back on our progress over the year. We began 2023 in an uncertain environment and shared the assumptions in our guidance that volume and labor challenges would continue throughout 2023. We're simultaneously developing and executing on a number of initiatives focused on offsetting some of those financial headwinds we were facing. As the year progressed, we saw encouraging data points early in the year which ultimately turned into consistent positive trends. These improved trends, combined with the strong operating performance and the positive impact on the initiatives we implemented, resulted in a 20% year-over-year growth in adjusted operating income, 28% growth in adjusted EPS, and a return of our leverage ratio back to the target range. I'll share three points for additional color. First, on volume, we entered 2023 with a 2% growth headwind due to the annualization of excess mortality from prior year. Since then, successive COVID surges have been weaker in magnitude with lower mortality. At the same time, we were able to produce four consecutive quarters with year-over-year growth in new patient admins. Adding these factors together, 2023 saw increased patient census for the first time since COVID started and volume that was approximately flat year-over-year landing at the top of our guidance range. Second, our labor performance in 2023 was better than 2022. We cut our reliance on contract labor more quickly than anticipated and improved staffing in our centers. On the other side of the ledger, teammate turnover has remained elevated in line with the strong healthcare labor markets. Looking forward, improved retention and training costs represent an opportunity for improvement in the years ahead. Third, independent of these trends, we drove strong operating performance through our differentiated platform and capabilities. Most notably, we invested in our revenue operations to achieve sustainable improvements in our collections. resulted in an additional $3.50 in revenue per treatment for the full year, while reducing more than 12 days from our U.S. day sales outstanding. Adding to this, we executed against our cost-saving initiatives related to pharmaceutical spend and further consolidated our facility footprint. Finally, we exceeded our annual profitability targets for integrated kidney care, which I will cover more in detail in a moment. To summarize, We entered 2024 with more visibility and confidence than we have had since the start of COVID in 2020. Our ability to invest in our people, process, and systems, despite the operational and financial challenges of the last few years, has positioned us well for the years ahead. On that note, let me transition to our value-based care business, which we will call Integrated Kidney Care, or IKC. We have consistently urged our investors to assess this business on an annual basis rather than focusing on our quarterly results. Now is a good time to pause and reflect on our performance and outlook of IKC. At a high level, we assess IKC performance based on three primary metrics. One, total medical expense and patients in our IKC programs, which represents growth. Two, our clinical performance or effectiveness of reducing total medical costs. And three, per member per month spend on our model of care and GNA, which indicates cost management. I'll walk through each in a bit more detail. First, total medical expense of patients in our IKC programs grew to $4.6 billion, reflecting approximately 30% growth year-over-year. This represents care for 58,000 patients as of year-end, a 38% increase from 2022. In our traditional value-based care programs, we continue to be disciplined, prioritizing profitable growth. For 2024, we expect growth in excess of 25% for total medical expense and covered lives. Second, our model of care has proven effective in helping our patients lead healthier lives and reducing medical costs, reflecting in a net savings rate that is slightly ahead of our expectations. The largest driver is is year over year reduction in hospitalizations, especially readmission rates. This relies on a collaboration efforts between our care teams and physician partners to prevent rising acuity and address the needs of our most complex and vulnerable patients. And finally, our per member per month costs continue to trend down as a result of the program growth and improved fixed cost leverage. In 2023, Our per-member per-month costs declined by 7%. We expect per-member per-month costs to further decline by approximately 15% in 2024. The result of these efforts is that we outperformed our 2023 adjusted operating loss forecast, and we believe we remain on track to deliver break-even or better performance by 2026. Beyond the core metrics, we can further break down our performance based on three primary components of our IKC business. Special need plans, our value-based care portfolio focused primarily on Medicare Advantage patients and the CKCC demonstration project for our Medicare fee-for-service patients. Within that portfolio, after many years of investment and consistent year-over-year improvements in cost savings, our MA contracts and special need plans have now reached profitability. Keep in mind that the third component, CKCC, represents approximately 50% of our value-based care census. We adjust the changes from CMS and further optimize our model of care. We expect this program to become profitable in 2026 timeframe. Before we get into 2024, I'll offer quick comments on GLP-1. To be clear, none of our thinking has changed since our last earnings call. Shortly after our call, results for the select clinical trial were released. As expected, The trial confirmed certain cardiovascular benefits in people with obesity and cardiovascular disease, including a 20% reduction in all-cause mortality. Next on the near-term horizon will be the FLOW study, which we anticipate will demonstrate efficacy on multiple endpoints, including slowing the progression of chronic kidney disease. As a reminder, such efficacy that may be demonstrated in the FLOW study is already incorporated into our GLP-1 base case. a net neutral impact to dialysis volume growth as adoption ramps up over the next decade. Shifting to 2024, we're setting guidance for adjusted operating income growth of 10% and adjusted EPS growth of 9%, reflecting the midpoint of our respective guidance range for each metric. This incorporates our expectations of a more predictable operating environment, continued returns from our revenue cycle investment, and further progress in IKC. This guidance demonstrates the resilience of our business and our ability, despite external challenges, to provide high-quality care while delivering strong financial results. Let me touch on a few drivers of our forecast. First, 2024 adjusted operating income will benefit from the full-year impact of positive development in 2023, including the annualization of revenue cycle improvements, our transition to Mercera, and savings related to our center consolidation. Second, as noted, we're demonstrating progress in our IKC business and continue to expect break-even by 2026. And finally, adjusted earnings per share will benefit from our share repurchase program, offset by other factors below the OI line, including other losses, higher interest expense, and higher effective tax rate. As we turn the page to 2024, we have a great opportunity to drive operating advancements, that further differentiate DaVita within kidney care. We'll now turn it over to Joel to discuss our financial performance and outlook in more detail. Thanks, Javier.

In Q4, we delivered $415 million of adjusted operating income and $1.87 of adjusted earnings per share. Our strong performance for the quarter puts us just above the top end of our updated full-year guidance range from the Q3 call. Our outperformance in the quarter relative to our expectations was primarily related to prior period development in our special needs programs in our IKC business, plus revenue per treatment growth from continued improvements in our revenue cycle management. In the US dialysis segment, fourth quarter treatments per day were flat versus the third quarter. As a reminder, mistreatment rates are seasonally higher in the winter months which was offset by an improvement in our day of week mix relative to the third quarter. Revenue per treatment was up approximately $6 quarter over quarter. About half of this was due to normal quarterly fluctuations. The remaining increase was driven equally by continued improvements in our revenue cycle management and typical fourth quarter seasonality related to higher acutes mix and reimbursement for flu vaccines. Adjusted patient care cost per treatment was up $13 sequentially, driven primarily by seasonality, including higher benefits expense and continued investment in our teammates. This sequential increase was higher than typical for Q4, but in line with our expectations described on our Q3 earnings call. In our IKC business, adjusted operating results were down $39 million sequentially due primarily to timing of shared services revenue recognized in Q3 primarily from arrangements from 2022. Additionally, in Q4, we recognized incremental shared savings revenue of $55 million associated with Medicare Advantage value-based care arrangements for plan year 2023. This is earlier than we had previously anticipated recognizing revenue for 2023 arrangements and is the result of the clearing of several revenue recognition hurdles earlier than otherwise anticipated. This revenue would have otherwise been recorded in 2024. As a result, we now anticipate that our recognition of shared savings revenue for our Medicare Advantage contracts in 2024 and beyond will generally align with the plan year in which they are earned, although there will likely continue to be updates in our estimates during each plan year and beyond until final reconciliation. This $55 million shared savings revenue recognized in 2023 has been excluded from our adjusted operating income as it represents earnings incremental to what would have been expected in 2023 absent the change. International adjusted operating income was down $18 million quarter over quarter. The largest component of this sequential change was driven by an increase in bad debt reserves. Transitioning to capital structure, during the fourth quarter, we repurchased 2.9 million shares, and since the start of 2024, we repurchased an additional 1.5 million shares. We ended 2023 with zero balance on our revolving credit facility, and our leverage ratio declined slightly to 3.15 times consolidated EBITDA, below the midpoint of our target leverage range. The strong free cash flow was partly the result of continued reduction of our US dialysis DSOs, which ended the quarter at 54 days, down three days from last quarter, and 12 days below the level at the end of 2022. Turning now to detail on 2024 guidance. Our adjusted operating income guidance for the year is $1.825 billion to $1.975 billion, representing 9.6 percent year-over-year growth at the midpoint. This is above our long-term expectation of 3 to 7 percent growth in adjusted operating income. Driven by higher revenue per treatment growth than typical as a result of our investments in our revenue cycle management, and cost savings in our non-labor patient care costs due to annualization of Mercera and footprint-related cost savings. To give you more detail, let me first cover the three main drivers of U.S. dialysis growth versus 2023. First, we expect treatment volume growth of 1% to 2%. This is the result of continued new patient admissions growth on par with pre-pandemic averages, partially offset by mortality that is expected to remain slightly higher than pre-COVID levels. Second, we anticipate revenue per treatment growth of 2.5% to 3%. Approximately two-thirds of this growth is due to rate increases. The remaining third of the expected increase is primarily from annualization of the revenue cycle management improvements we saw in 2023. Third, we expect adjusted patient care cost per treatment to increase 2.5% to 3%. We continue to expect wages to increase at rates above pre-COVID levels. Savings to offset this include leverage of fixed costs as treatment volume grows and annualization of cost savings initiatives in 2023. including our conversion to Mercera for anemia management and our center consolidation efforts. Let me mention a couple of other items to help your thinking with U.S. dialysis. We expect adjusted depreciation and amortization to decline by approximately $10 to $15 million, a marked change from historical increases approximately 20 million dollars annually. This is the delayed result of our consistent effort over many years to increase our capital efficiency. As it relates to policy matters, we do not expect to spend the 50 to 60 million dollars related to ballot measures that would have been typical of past election years. For IKC, our guidance assumes an adjusted operating income loss of approximately $50 million. This reflects our expectation of continued growth in total medical spend and covered lives within our IKC programs, improved shared savings performance, and further fixed cost leverage as outlined in Javier's earlier comments. In our international business, We incorporated in our guidance continued growth in adjusted operating income of approximately $20 million year over year. Below the OI line, we expect losses of approximately $60 million, largely as a result of our share of the losses in Mozark, our co-investment with Medtronic in kidney products. We expect interest expense of $100 to $110 million per quarter in the first half of the year and $130 to $140 million per quarter in the second half of the year. This increase is due to expiration of our 2% interest rate caps at mid-year. We expect an adjusted effective income tax rate of 24 to 26%. For free cash flow, we expect $900 million to $1.15 billion, approximately 125% of adjusted net income. Consistent with our long-term capital strategy, we expect to deploy the vast majority of our free cash flow towards either capital-efficient growth when such opportunities exist or otherwise return capital to shareholders through share repurchases. We anticipate ending the year within our long-term target leverage ratio range of three to three and a half times. That concludes my prepared remarks for today. 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. And to withdraw your question, you may press star 2. One moment, please, for the first question. Justin Lake with Wolf Research. You may go ahead, sir.

Hi, this is Dean Rosales on for Justin. My question's on your Medicare risk businesses. Wondering what you're seeing there in terms of trend through 2023, and then specifically on special needs products. How many members do you have there exactly? And how much revenue is in those products? And could you speak to what you've seen in terms of costs year to date, and then specifically Q4? Thank you very much.

Thanks, Dean. So what I'd highlight on the risk side of Medicare Advantage is I think it's important to realize that the ESRD population is different than the broader MA population. And some of the trends you might be seeing with other payers, which we certainly watch very carefully, don't necessarily apply to our population. I'd highlight three things. First, the needs of these patients and the medical costs that they bear are very different than a population, given the high acuity of these patients. So that's one. Second, I would also note the reimbursement for this population runs differently, and it's a separate reimbursement rate that comes out in both the preliminary and the final rules. And third, that the coding changes that apply to the broader MA population do not apply to the ESRD population. So with that, I think it's early for us to really have a full view on what 2023 is. That said, we're feeling pretty good about where our net savings came in, both on the SNP side and on the Medicare Advantage population within our value-based care. In terms of just some of the cleanup, we have about 3,000 members in our SNP products. And in terms of revenue, it's somewhere north of $300 million.

Thank you.

Thank you. Our next caller is Peter Chickering with Deutsche. You may go ahead, sir.

Hey, good afternoon, guys. Looking at 2024 guidance, you're assuming a loss of $50 million in IKC. Can you refresh us what that was in 2023? And in the script, I think you talked about 25% growth in revenues of IKC and a 15% reduction of PMPMs. I would assume that would have shifted from a loss to a gain in 2024, those metrics. So if you can sort of help bridge that. And then I think you're shifting from a cash accounting to an accrual accounting approach. That seems like a pretty big shift for you guys. I guess what's giving you guys comfort that accrual makes sense at this point?

Yeah, so a lot in there, Pito. Let me try and take this in the logical order. So first on revenue accounting, historically we did not record revenue until we were comfortable that we could reasonably estimate revenue. what our share of the shared savings would be. And that was true for both our MA population and our Medicare fee-for-service population, the CKCC program. The SNP product we've always accounted for in, I'll use your words, in an accrual method. The change we're talking about is about the change in the timing of when we get comfortable with those estimates. And And you asked why. It's really three things. One is we've made some changes to the contractual language that gives us earlier clarity on attributed lives. So that's one. Second, we're getting our data earlier, which obviously helps us do some of the calculations earlier. And then third, just with the experience we've had, We've got better actuarial models and putting those three things together, we're comfortable now that we can reasonably predict our share of the shared savings revenue, which ultimately turns into revenue in the plan year. So that's on the change in the estimates. In terms of, you asked about 2023. So we're guiding to a loss of 50 million for 2024. Our non-GAAP number for 2023 is a loss of 94 million. The thing to realize about that 94 million is it includes the revenue from the value-based care products from plan year 23, which is the result of this estimate change that I mentioned, as well as the revenue from that product line for 2022. So I think the way to think about 2023 to make it a little bit more apples-to-apples with 24 would be to back out somewhere around – $25 million, $25, maybe $30 million to make it a bit more apples to apples. And then what was your other question? There was a PMPM question in there.

Yeah, so taking that loss of $94 million after you back out of the $25 to $30 million, you got it to the script sort of growth of an IKC of 25%, and then a 15% reduction of PMPM in 24, so it I would assume that that growth and those reductions would have resulted in a higher or in an income versus operating loss. So kind of how can we sort of take those growth metrics and those cost reduction metrics and still get to a $50 million loss?

Yeah, so a few things. First, just to clarify, that estimate change I referred to only is true of the Medicare Advantage business, the CKCC business. is still new enough that we're not comfortable estimating the savings in the plan year. So that part hasn't changed. In terms of your question, so the cost savings we're referring to is only related to our model of care and our G&A. It's not what you'd call the MLR in a health plan business. It's not that equivalent for us. Second, there was a significant amount of positive period development in 2023, in particular in the SNP business, that we're not forecasting to recur. So that would be another adjustment, which I think would help bridge the question of why aren't we getting to profitability next year or this year in 2024.

Okay, and then on treatment growth, you know, looking at the normalized growth in 4Q of 70 bps, you grew 50 bps in the third quarter. Is a key driver in fourth quarter new patients? Is it lower mortality? And also, you know, when you close a center and those patients join another center, is that organic growth at the new center as well as the discontinued ops, even though the patients don't actually change the numbers?

Yeah, so no on the last one. If a patient moves from one clinic to another, it doesn't show up as any sort of growth anywhere. It's still our patient. In terms of the volume growth, I would point to Q4 over Q3 is effectively being flat. Treatments per day were flat, and that's really a combination of a small census decline, which is not uncommon in Q4, offset by a better treatment mix day. So more Monday, Wednesday, Fridays, fewer Tuesday, Thursday. So Q4 was really, I would call, a flat volume quarter over quarter.

Okay, great. I'll jump back in the queue.

Thank you. Once again, if you would like to ask a question, you may press star 1. Kevin Fischbeck with Bank of America. You may go ahead, sir.

Hi. Good evening. Actually, this is Joanna Gadzik filling in for Kevin today. Actually, first question, I'll just follow up on the volume discussion. And so it sounds like flattish, you know, sequentially, but I guess you're up, you know, less than 1%. And your guidance for 24 assumes 1% to 2% volume growth. So kind of how do you build to that growth, especially to the higher end of 2%? What gives you confidence that I guess, you know, you could get to that volume growth for the year?

Yeah, thanks, Joanna. So I'd start with the fact that the single biggest impact on volume year over year is census growth. And remember that census builds over the course of the year. So if you look at the 23 growth, which was effectively flat, that was burdened by the fact that the census declined over the course of 2022 and only started building in 23. So a lot of the zero in 2023 is the annualization of the negative impacts of 2022. As we think about 24, I'd really break it down into two components. First is new to dialysis admissions, and we've watched that build over the course of 2023, and we feel comfortable that that growth rate is back to pre-COVID levels, where The reason we don't get back to what you'd call a 2% number pre-COVID, or that would be the high end of the range, is mortality continues to run higher than it did pre-COVID. It is way down off its COVID peak, but it's still running a bit higher than a typical pre-COVID year, remembering that mortality moved around in pre-COVID years primarily as a result of the severity of the flu season. So if you take a more normal new to dialysis admit outlook and then a slightly negative mortality outlook, that's how we get to the 1% to 2%.

Thank you for that. And another follow-up on the guidance, I guess you talk about your outlook for revenue per treatment. So specifically, can you talk about, you know, the build, I guess, for that, you know, how much, I guess, is the commercial rate increases? And I guess last quarter you mentioned there's some larger contracts up for renewal. So any color in terms of these rate increases you've seen there? And also inside of, you know, your mix, commercial versus government, and then specifically MA, where you stand on the MA mix? Thank you.

Great. Let me grab that, Joanna. A couple of things, because I think underlying those questions, there's usually a, is there something unusual in the payer dynamics? And let me go ahead and start by, no, we are in a normal period. And of course, we're trying to make sure that our rates reflect the inflationary pressures that we are receiving. To your direct question on what percent of that what part is made out of the rate. Roughly two-thirds of the increase will be rate, and one-third remaining, a good chunk of that is the annualization of the reimbursement operations improvements we saw in 2023, and the remaining is mix. As you have seen, our mix is trending on MA slightly above the market. So our MA mix finished the quarter around 52%, and we expect that number to be a couple points higher at the end of 24. So, you know, somewhere in the 54, 55 range, depending on open enrollment.

And I guess on this commercial plan that you mentioned, some larger plans out for renewal, any update there in terms of the rate increases you're seeing?

Commercial, on the negotiations, we're not going to go into specifics. We continue to see that our commercial patients value their private insurance and commercial mix is flattish. So nothing to report on that. And, of course, that's embedded in the guidance of the RPT that we gave you.

Great. Thank you so much for taking that question.

Thank you, Joanna. Thank you. AJ Rice with UBS. You may go ahead, sir.

Thanks. Hi, everybody. I can't let you get through the call without asking one GLP-1 question. So, in your prepared remarks, you're saying that for the flow study, you anticipate efficacy on multiple endpoints, including slowing CKD progression. I think that's generally where the market's at. I wondered, given your analysis, that you've offered and seems to have really gotten traction in the financial community. Are there anything, is there anything that could come out of the flow study, at least in the high probability range, that would make you revisit? It seems like you've covered most of what you expect in your analysis, but I wonder, is there something that would make you more optimistic, less optimistic about how this will impact your business?

Thanks for the question, AJ. And as you know, last quarter we had sort of a dissertation on GFP1 that's gotten a lot of conversation. At the end of the day, we, of course, wanted to make sure that our shareholders and others were really well versed on it. And I think that while there could be an unusual surprise, because you never want to say that the chances are zero, highly, highly improbable. that we didn't capture in our range what is likely to play out. And so that is that at the end of the day, we expect a net neutral impact on dialysis volume over the next decade. And we did a lot of probabilistic adjustments and weighted as to how many people would participate and all the normal math that we discussed, and we don't want to change our position a bit.

Okay. That's great. Um, maybe if I could pivot and ask you about, um, your assumptions around labor going into 24, I know there's the underlying, uh, what you're banking on for wages and benefits for your permanent workers. I believe you still should have a tailwind from contract labor, at least annualizing where you're ending the year. And then there's the whole issue of the California minimum wage for low wage. health care workers. I know you said you wouldn't be spending for election spending, but I wonder what you're factoring in for that when you anticipated to start to have an impact.

Yeah, AJ, thanks for that. So for labor for the year, so we called out two and a half to three percent of patient care costs growth per treatment. I'd break that down. That's roughly half labor and half other stuff. On the labor side, we're thinking something around 5% for the year in that, and California would be baked into that. We called out a few months ago something around 30 to 40 million as the net impact of that once it's fully rolled out, and a number of 20 to 25 for 24. We've been rolling it out a little bit quicker than we anticipated, so I would expect the number will probably be somewhere in that 25 to 30 range, and that's baked into our number. The reason we're comfortable with the patient care cost being only 2.5 to 3%, given that half of it is labor, which is growing at 5%, is we've got savings from the annualization of both the ship to Mercera, as well as some of the clinic footprint actions we took. We've also got fixed cost leverage as we add volume without adding centers. And a lot of those other costs are fixed costs that don't grow with volume and are under long-term contracts. So we feel like despite a 5% wage pressure, we can get to that 2.5% to 3%.

Okay, that's great. Thanks a lot.

Thank you. Our next caller is Gary Taylor with TD Cowan. You may go ahead, sir.

Hi, this is Ryan Langston. I'm for Gary this evening. I think Dean touched on it earlier, but maybe just to go back. How is the higher cost sort of Medicare Advantage trend we saw in the back half of the year, impacting the accruals, I guess, not only for 23, but sort of your guidance for 24. And Joel, can you remind us when you anticipate to have the final reconciliation with your plan partners? Thanks.

Yeah, so the final reconciliation will depend. It's plan by plan. It can often take three or four quarters, and that'll ultimately be baked into prior period development in the IKC business. In terms of the impact of some of the costs on the broader MA population in Q4, again, I think it's too early for us to say whether we think that's going to impact us, but again, I'd reiterate that our population is very different than the broader population. In terms of 2024, we're keeping a careful eye on it to see how it plays out and it's built into our range. Thanks.

Thank you. Our next caller is Lisa Clive with Bernstein. You may go ahead. Hi. Just two questions for me.

Number one, we're 18 months since the Marietta ruling. Your commercial mix and pricing seems pretty stable. So just wanted to know if you have any thoughts on what that ruling has meant over the last few years and whether you expect any changes. And then also just a clarification in terms of the fact that you don't need to spend on a ballot initiative and obviously your wages are going up in California. seems like a reasonable truce with the SEIU. Is this something that we should expect to continue, or is it really just this election cycle? It would be obviously nice for you guys to be out of this two-year cycle of fighting ballot initiatives. Thanks.

All right. Thank you, Lisa. So let's start with Marietta. As we have discussed in the past, we have not seen a lot of employer groups change benefits, which is absolutely great. It would be terrible for employers to not give their employees that have end-stage renal disease choice. That said, we continue to be very mindful and, of course, work with the kidney community and disability groups because it is sort of a dangerous risk out there that we want to make sure is not taken advantage of. And so, you know, the analogy I say in a town hall when someone asks me if I have, why I have so much passion on it, it's like saying, you know, the door in your house, the lock is broken. And you said, yeah, but no one's broken in or very little. And you say, well, yeah, you still want to fix it. And so from our perspective, it's something that the Supreme Court said it needed to be clarified. And the champions in Congress and others I believe it should be clarified now we just got to work the process. I also think, and we've discussed, that our verification process at admissions has helped in that we had an example of an employer group that actually did apply this, and when they found out that their employees didn't actually have a network, then they changed their benefits again and basically reverted back to a network benefit. So I think sometimes people explore ideas without really understanding the full ramifications. And in that case, it worked out well. And so we will continue to put a lot of energy on that. Your second question was around the ballot. Of course, what we liked about it is that we were spending money on making sure that our patients and our teammates didn't suffer from what we call a very dangerous disease. ballot process, but it takes a lot of money to educate the broader state on how to think about that. And so we are extremely happy that at the end of the day, instead of spending the money on that, our teammates get the benefit of that. As it relates to, is it just this election cycle? We talked about two election cycles, and that that would be a good time to hopefully iron out and revisit our relationship with labor. Great. Thanks for the clarification.

Thank you, Lisa.

And our next caller is Justin Lake with Wolf Research. You may go ahead.

Hi, this is Dean on again. For Justin, my question's on center closings. And I'm sorry if you've touched on it already, but how much more is there to do here? And could you speak or Did you parse out the impact to the P&L from the center closing? So revenue versus cost savings from lower fixed costs and efficiencies? Thank you.

Yeah, so I appreciate the question. We are thinking that the year will have roughly 50 centers either close or merge into other centers and thinking about roughly in the zip code of 20 new centers, so net Is it related to the P&L? I'm not sure I understood your question. Could you try it again?

More just the moving parts impact to the P&L. Just could you speak to how you guys, one center closing.

A good healthy way to think about it is you will have a little volume loss on patient choice But when you strip all of that, these centers tend to be inefficient. And so what you do is you consolidate the management and the leadership, and then you have some savings on fixed expense, in particular rent and medical director fees. And so at the end of the day, that's where the savings come from, an efficient center with some fixed expenses that get eliminated. Okay.

Got it. Thank you so much. Thank you.

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

Hi, guys. If you could just follow up here. To Joanna's question, what was the commercial mix in the quarter, and what are you seeing for 2024?

Commercial mix for the quarter was 10.9, and we expect it to stay flattish.

All right, great. And then pre-cash flow conversion, you know, was very strong in 23, guidance is about 54% in 24. Is there anything, you know, changing within cash flow conversion or just simply the DSOs that you got, you know, what, 12 days in 23, which will not repeat in 24?

Yeah, you've got it right. 23 was a really impressive decline in DSOs. 24... The free cash flow conversion remains well above net income, and that's really driven by two things. One is just structurally our CapEx is lower than our depreciation and amortization, and second is share-based comp, stock-based comp. And those two things should persist, and that's why the 125% of net income that we're driving in free cash flow for this year, we would expect to persist for some time.

Okay. Like, any updates on AB 290?

There is a little update. There is some activity on it. But at the end of the day, maybe the best way to summarize it is that the judge hasn't had a final ruling but gave some color. And in that color, basically, both parties won some points and both parties lost some points. And so, therefore... The odds of an appeal are quite high when there is a final ruling. And so the next question is probably if you were to say what will be the financial impact we had guided to in the past, something in the $25 to $40 million range. And as less people are on the AKF, I think that number is likely to be lower, more like a $0 to $25 million would be a good range.

Okay. Okay, great. And then last question, I'm going to ask the center closure question differently. What was center in liquidation at the end of, you know, I guess in fourth quarter of 23? And what do you assume that goes in fourth quarter of 24?

I'm sorry, Peter, did you say capacity utilization?

Yes, I mean, just thinking about a combination of centers closing and patients coming back and there's an overall center in liquidation, where do you exit the year in 23, and where do you think that can get to by the end of 24?

Yeah, so we're exiting the year at about 58%, and I would expect picking up a point maybe a little bit more over the course of the year.

And just as a point of reference, like if you want to go back, pre-COVID, I'm going to go back several years in the 2016 or so range, we would be in the 65 or so percent range. And then just so you see the impact of all of this California conversation that we've had, California, because how difficult the operating environment is, is roughly in the 70 percent range because people aren't opening centers. So all these very expensive propositions and poor conduct have had an impact that people do not want to open centers there.

And then just out of curiosity, you know, if over a multi-year period you get back to 65%, kind of, is this worth, like, 300 bps of G&A leverage a year? I mean, kind of, you know, it can size up that for me, and that would be wonderful.

Yeah, so the – The leverage you'd see would be in our patient care costs. It's not in the GNA because there's a fixed cost associated with a clinic that's in the patient care cost. So you'd see it there. I think the best I can do to help you with that math would be to think about our patient care cost per treatment number, right? So running at $255 for 2023. That is roughly two-thirds variable, one-third fixed. So if you imagine us growing that volume without building as many centers, and just to be clear, we would have to build some centers because even though capacity utilization is low, the capacity may not be exactly where in the country you need it to be. So depending on what assumption you make there, recognizing that a third of that TCC per treatment is fixed, I think that'll give you everything you need to do to do the math on what it could be worth.

Okay, great. Thanks so much, guys. Thank you, Peter.

At this time, I am showing no further questions.

Okay, thank you, Michelle, and thank you all for your interest in DaVita. Just in summary, we had a strong close to the year, and that combined with our guidance for 2024 We are now back on a path to recuperate our pre-pandemic financial trajectory. We will continue to work hard to deliver strong results, innovate, and most importantly, provide a great clinical care for our patients. Thank you all for joining the call. Be well.

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