Takeaway: Downside from commercial enrollment and reimbursement mix, high fixed costs, and few opportunities for margin expansion

If DaVita (DVA) wasn't buying back their stock at an excessive pace, would you want to own it?  The bull case for DVA marries the durable upward trend in ESRD patients from the twin drivers of obesity and aging with the sale of DaVita Medical Group to UNH, resulting debt reduction, and substantial stock repurchases.   This compelling narrative has some significant holes in it, though, chief among them....well all of it except the stock repurchases.  First and foremost, we think the trend in commercial patient volume, reimbursement, and margins are coming under pressure alongside regulatory problems. We see significant downside in the next 12 months as the company has little flexibility and apparently no plan except for repurchasing stock. Please join us for a review of our thesis:

Thursday, December 13, 2018

10:00 ET

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We are skeptical that when DVA's closes its sale of DMG to UNH's Optum unit, the plan for "significant stock repurchases" and debt repayment can overcome secular headwinds including:

  • Flat to slow growth in commercially insured individuals including ACA exchange plan enrollees
  • Third party payments and premium subsidies from non-profits under threat of legislative and regulatory intervention
  • Demographics of rising Medicare mix at 0% margins with declining share of lucrative commercial patients 
  • A substantially consolidated industry with little room for meaningful acquisitions 
  • High fixed costs associated with in-clinic delivery model
  • Labor market constraints and wage inflation
  • Structural problems with Medicare reimbursement that allow little flexibility to reduce fixed costs
  • Relentless union pressures from the SEIU
  • Little hope for positive legislative action

Dial-in instructions and presentation materials will be available shortly before the call. Contact Sales@hedgeye.com for more information.

Thomas Tobin
Managing Director


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Emily Evans
Managing Director – Health Policy

 

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Andrew Freedman, CFA
Managing Director


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