Fresenius, DaVita report strong earnings but are watchful of ballot initiatives
Executives from the two largest kidney care services companies in the country reported strong 2018 second-quarter earnings this week, but expressed concern about future revenues if ballot measures in Ohio and California aimed at controlling dialysis company profits find favor with voters in November.
“We are working with a broad coalition of over 100 health care providers and patient groups to oppose these measures and intend to do whatever is necessary to educate voters on why these measures are flawed. Unfortunately, educating voters on regulations around a complex and lifesaving therapy such as dialysis will be expensive,” said DaVita Kidney Care CEO Javier Rodriquez during a call with investors on Aug. 1. Costs for fighting the initiative, which have been borne by DaVita and Fresenius Medical Care through the No Prop 8: Stop the Dangerous Dialysis Proposition coalition in California, are now a line item for DaVita.
“We still expect our kidney care adjusted consolidated operating income for 2018 to be in the range of $1.5 billion to $1.6 billion, although our guidance now includes expected costs associated with countering the union policy efforts, including ballot initiatives, which had previously been excluded from our guidance,” the company said in a press release.
The initiatives in California and Ohio have been backed by the union SEIU-United Healthcare Workers West; it recently withdrew efforts to start a similar ballot campaign in Arizona. If passed, the proposals call for state authorities to regulate and monitor dialysis facilities and their earnings, requiring that profits more than 115% of the cost of providing care goes back in the form of rebates to commercial health plans. That could clearly impact company revenue from commercial payers, where dialysis providers get higher payments for treatment.
“But if the ballot initiative passes in California, you'll instantly have approximately 66,000 patients that are being treated in centers that mostly will be unsustainable,” said DaVita Inc. CEO Kent Thiry during the earnings call in response to a question about the potential impact of the ballot measures, if passed, on the company’s bottom line. “And so, to assume that there's going to be some kind of a plan, a backup for that is just unrealistic ... is there going to be some intervention by policy makers to avoid a crisis and if there are some regulatory things or some legal challenges we could do ... But the answer to your question is we’re not going to give a number. It’s too hard to do so.”
Increase in treatments
Both companies told investors – Fresenius held its earnings call on Aug. 31 – that revenue from treatments had improved during the first quarter. Thiry called it a “strong quarter for kidney care operations.” With the selling of its management group division for $4.9 billion earlier this year and most recently its Paladina Health primary care clinics in June, the company has returned to its roots as being a dialysis-focused company. The Paladina Health sale and an international business sale netted the company $34 million.
Fresenius reported it had “healthy organic growth across the board” with strong growth in its North American products business. “In the second quarter, we have seen solid growth resulting in a strong net income increase of 22% at constant currency – excluding the positive impact of the successful and efficient closing of the Sound Inpatient Physicians divestment. On the back of the strong development of our products business and continued growth of our services business, we expect growth to further accelerate in the second half of 2018,” said Rice Powell, CEO of Fresenius Medical Care. The company opened more dialysis clinics in the second quarter, equating to a 3% growth in treatments and patients. Fresenius also announced that its divestiture of Sound Inpatient Physicians Holdings, sold for $2.15 billion, had successfully closed, but the company, according to its 8-K filings, was taking the option to extend the final agreement to acquire NxStage Medical to November.
Improvements in CMS payments
Rodriquez said he was encouraged by a proposed rule from CMS to increase the bundled payment for dialysis care in 2019.
“After 5 years of practically no increase, we are encouraged to be back in an environment where Medicare fee-for-service rates will be growing again and help offset inflationary reality,” he told investors.
On the quality front, Thiry said the company made a major improvement in reducing the number of infections in the company’s 2,833 dialysis clinics.
“In the second quarter, we delivered the lowest infection rate since we started tracking these rates,” said Thiry. “For our in-center patients, the bloodstream infection rate actually decreased by 9% year over year, outpatients even better as the peritonitis improved – decreased by 19% year over year. This is not only an unambiguous example of quality improvement on the clinical side, it also leads to a dramatic improvement in quality of life and lower costs for the system.”
DaVita continues to experience heavy losses with its pharmacy program, and Rodriquez said the company would outsource some of the tasks to save money.
“As we talked about in the past, changes in the oral pharmacy space, including reimbursement reductions, have hurt the economics of DaVita Rx. As such, we will be outsourcing the customer service and fulfillment functions of DaVita Rx. We will maintain our renal-related medication management capabilities in-house, which will help us provide differentiated integrated care to dialysis patients.” – by Mark E. Neumann