DVA | IMPACT FROM COMMERCIAL MIX HEADWINDS AND POLICY LESS THAN EXPECTED
Round Trip from December 2018
We originally added DVA to our active shorts on December 7, 2018 at $58 per share. Commercial mix shift has had less of an impact on revenue and cost per treatment than we expected through 3Q19. Despite wage pressures hitting Health Care Services in 2019, the impact at DVA has been well controlled. The result is our short call now relies more heavily on policy headwinds, such as AB290, and the spread of similar initiatives across the United States that we expect will put pressure on commercial rates. Unfortunately for our short, these headwinds won't become more apparent until later in 2020.
While we believe further upside may be unlikely from here, we no longer have a clear downside catalyst and we are moving DVA to the short bench.
3Q19 Results better
Guidance Better - DVA guided 2019 higher on the continued benefit of calcimimetics where revenue per treatment received a $14 tailwind against cost per treatment of $4 which widened sequentially. The tailwind is lasting longer, but the company continues to forecast the contribution to drop to zero in the coming quarters. Net of the $220M benefit from calcimimetics "core" guidance is unchanged. Management raised 2020 guidance range by $0.25 to $5.25-$5.75 from $5.00-$5.50 and consensus of $5.50.
Revenue per treatment Better - Net of the impact of calcimimetics, revenue per treatment has not been under pressure the last 2 quarters after declining -1.8% in 1Q19. We have been expecting a continuing decline in the mix of commercial patients driven by demographics. Management did made a comment that commercial mix was weaker in 3Q19, but in line with normal seasonal patterns. We will update our model with data from the 10-Q when that is available.
Cost per treatment Better - The pace of year over year decline in 3Q19 was evident in 2Q19, despite management guiding to moderating expense control. We believe the savings, adjusting for calcimimetic cost reductions, may be related to the deceleration in de novo facility activity and the margin headwind of new centers. Anecdotally, we have heard a new center will be seeded with commercially insured patients from other sites, which offset some of the start up costs of a new center, but negatively impacted same store margins. As we've seen across health care services this quarter, Health Care labor demand remains strong and wage rates and agency staffing have been trending higher.
Policy Headwinds Inline - With less impact from shifting demographics evident in results, the role of AB290 and other political and policy initiatives to curtail premium support and limit commercial rates and mix, take on a more important role in the forecast. For AB290 we assume the impact in CA is ~$30M more costly to DVA than their current forecast of $25- $40M. While there are additional initiatives moving in OR and IL which could further what we are seeing in CA, we have yet to size the impact. Additionally, there is a federal rule pending on third party support which we believe may closely resemble AB290, but as of today we have no indication of a release date.
Share repurchase Inline - Net of buybacks totaling ~37M shares and 22% of the company.
AKF Impact
Management’s estimated impact of $25 to $40 million implies a reimbursement rate far below the commercial rate of $650 to $850/treatment. They reach this number by assuming most patients will retain their commercial insurance. Since the anti-steering provisions go into effect in January, it may be difficult to meet that goal. COBRA is especially difficult to navigate and because it does not provide continuous coverage beyond 18 months, can limit transplant options. Limiting transplant options is inconsistent with federal public health goals.
If you apply a commercial rate to the 1,750 people total on commercial insurance (COBRA or ESI or Exchanges) in California, you get a higher impact than that reported by DVA. FMS reports that their commercial rate in California is twice Medicare. The average Medicare payment in California is $325/treatment. DVA disclosures suggest a commercial rate of about $862. These reimbursement rates imply a total industry impact of $90 to $147 million.
The street has been applying a 38% market share to DVA in CA – which reflects their national market. However, if you compare Medicare treatments at DVA facilities in California to all others, it appears their share is closer to 50% of all treatments. That suggests a total DVA impact of $45-$70 million.
Because AKF and the industry advocacy group have sued, we expect the company will listen to their lawyers and not prejudice their case with public statements about impacts, loss of commercial coverage and loss of revenue. For that reason, we expect assumptions about retaining commercial coverage will be as optimistic as possible, perhaps even unrealistic.
Thomas Tobin
Managing Director
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Emily Evans
Managing Director – Health Policy
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