DaVita Inc. told analysts during its fourth quarter earnings call last week that the losses tied to the third-party payer policy changes for dialysis patients enrolled in Affordable Care Act health plans will take a major bite out of the company’s bottom line for 2017––likely the largest drop in one-year revenue in the company’s 17-year history.
The company’s fourth quarter adjusted operating income was $423 million on “relatively flat” U.S. dialysis revenue and patient care costs per treatment, resulting in an adjusted operating income of $1.715 billion for the year 2016, said DaVita Kidney Care CEO Javier J. Rodriguez during the Feb. 16 call.
Total U.S. dialysis treatments for the fourth quarter of 2016 were 6,889,069, or 87,203 treatments per day, representing a per day increase of 3.7% over the fourth quarter of 2015.
But the company said the decision to end premium assistance for Medicaid eligible patients enrolled in Affordable Care Act health plans would have an earning impact from the overall loss of enrollment of approximately $230 million for 2017, leading to an adjusted operating income guidance of $1.525 billion to $1.625 billion for this year.
That decision, bundled with the ongoing uncertainty of the political climate in Washington, could lead to higher losses this year. “The early results from open enrollment indicate that the number of dialysis patients covered in ACA plans for 2017 will be down significantly year-over-year, consistent with what we have previously disclosed,” said Rodriguez.
“This decline appears to be driven by changes in plan design, loss of plan choices in certain markets, and disruption generally in the market, including the impact of the interim final rule.”
He was referring to a decision by a Texas judge earlier this month to issue a preliminary injunction barring the Centers for Medicare & Medicaid Services from releasing an interim final rule that would have required dialysis providers to provide more details to patients and to health plans when premium assistance is paid for by dialysis companies.
Before the ruling was issued, however, DaVita along with American Renal Associates Holdings announced they would suspend premium assistance payments for Medicaid patients to the American Kidney Fund, which pays the premiums to health plans.
Although the injunction was a victory for dialysis providers, DaVita Inc. CEO Kent Thiry said the company’s income guidance for 2017, first provided to analysts in January, is clearly being impacted by the future of the ACA.
“In kidney care, we are in a period of greater policy uncertainties…while we expect a continuation of the positive operating performances we have had for several years, given the policy uncertainty, we could in fact do better or worse than the outlook that we’ve discussed today and earlier this year,” Thiry said.
“…We do know that despite the immensely favorable Federal Court ruling on the [interim final rule], the debate over what will happen with charitable premium assistance, not just in kidney care but in all spheres of American health care, will continue.”
DaVita pharmacy business facing challenges
Aside from potential losses due to fewer commercial health plan patients, the company also shared some concerns during the earnings call about DaVitaRX, founded in 2005 as a kidney care pharmacy but since expanded to other specialties.
“We expect significant decreases in operational income in our pharmacy business in 2017,” said Rodriguez, “as a result of several factors impacting rates, volume and cost.” DaVita Inc. CFO James K. Hilger said
“It’s conceivable that through the course of the year, we might actually even move into a loss situation for the first time in a long time.”
Rodriguez said the company is also experiencing wage inflation and turnover that “is higher than our historical rates…The labor markets are getting tight, it’s a competitive landscape, and workers are demanding higher wages.”
Thiry noted some upsides for the company for 2017, including the potential for legislation to increase the Medicare secondary payer provision’s time period and the PATIENTS Act that would allow the company to employ global capitation in centers throughout the country.
Thiry also lauded his company’s clinical efforts, pointing out that performance in CMS’ Quality Incentive Program and the Star Rating System were DaVita’s best to date. “Our penalty percentage [in the QIP] was about 50% less than the rest of the industry, so a very large difference,” Thiry said.
The company also repurchased 6.7 million shares of stock in the fourth quarter for $416 million, part of a $1.1 billion spend last year to repurchase more than 16.6 million shares.