Author Topic: DVA DaVita HealthCare Partners  (Read 216027 times)

crastogi

  • Full Member
  • ***
  • Posts: 151
  • RTNL
Re: DVA DaVita HealthCare Partners
« Reply #160 on: August 09, 2017, 06:04:51 PM »
I'll just give you my view. Valuation-wise, if we are selling below 10X FCF and DVA continues to buy back 10% of their stock each year with their FCF - then 5 yrs from now, we are at 112M shares outstanding, doing maybe $1600M+ in operating income without
trying to grow, which DVA still does. So I get $14/share at that point. Does the stock still remain at $60?

DVA is still growing around 5% organically and rolling up other clinics too.  Growth is not even factored in.

You have to be fearful of re-imbursement rates - since this stuff is expensive. But we don't let people die in this country, and unless
we want many thousands more dying every year or flooding the emergency rooms - someone needs to perform this service.
I see no alternative to DaVita or Fresenius, who now control 70% of the business. The demand is predictable, the uncertainty of the future pricing keeps lots away.  DVA gets high marks for quality of care - and that is crucial to their success.

If someone can come up with reasonable alternatives about how this ESRD is going away - I might see it differently.

I guess my biggest concern is the HCP acquisition - and if this turns sharply positive, which Thiry says it does next year.
Then things look even better.

I don't understand this logic. If government programs and the major insurers decide to reimburse 10% less than the current rate will people just stop coming and die?! Of course not, Davita would adjust to the new market dynamics and eat the lower profit margins because it still makes good profits, just less than before. and THAT'S the bear case.

I said the risk is in the re-imbursement rates. No kidding that's the bear case.
But of course, you likely see many clinics close and that creates chaos until the market adjustments are made.

Thanks everyone for your inputs.  I am concerned about reimbursement rates too.  Looks like they break even/loose little on medicare reimbursements and make money on private insurance. 

However, if things get really bad they have the option to close/ turn away/meter medicaid/medicare patients. 
Does anyone know who has a lower cost structure, Fresenius or DVA? 



Rasputin

  • Full Member
  • ***
  • Posts: 237
Re: DVA DaVita HealthCare Partners
« Reply #161 on: August 09, 2017, 06:42:54 PM »
I'll just give you my view. Valuation-wise, if we are selling below 10X FCF and DVA continues to buy back 10% of their stock each year with their FCF - then 5 yrs from now, we are at 112M shares outstanding, doing maybe $1600M+ in operating income without
trying to grow, which DVA still does. So I get $14/share at that point. Does the stock still remain at $60?

DVA is still growing around 5% organically and rolling up other clinics too.  Growth is not even factored in.

You have to be fearful of re-imbursement rates - since this stuff is expensive. But we don't let people die in this country, and unless
we want many thousands more dying every year or flooding the emergency rooms - someone needs to perform this service.
I see no alternative to DaVita or Fresenius, who now control 70% of the business. The demand is predictable, the uncertainty of the future pricing keeps lots away.  DVA gets high marks for quality of care - and that is crucial to their success.

If someone can come up with reasonable alternatives about how this ESRD is going away - I might see it differently.

I guess my biggest concern is the HCP acquisition - and if this turns sharply positive, which Thiry says it does next year.
Then things look even better.

I don't understand this logic. If government programs and the major insurers decide to reimburse 10% less than the current rate will people just stop coming and die?! Of course not, Davita would adjust to the new market dynamics and eat the lower profit margins because it still makes good profits, just less than before. and THAT'S the bear case.

For me, 10% drop in rev/treatment (from $347 to $312) is so disruptive that average OI/center will be so low that nobody will open new centers, with possibility of significant # of dialysis center closures.  It will cause MLR to be around 92 for both Davita and Fresenius.

MLR of 85 (similar to California AB 251), though, is a reasonable downside.  That will cause roughly 2.7% drop in DVA Kidney Care OI margin or around $300 million in annual EBIT.  I think DVA will make up this $300 million over the next 3 years from improvement in DMG (roughly $100 million), International (roughly $50 million), and continuing opening de novo (3.5% growth in # of treatments, EBIT improvement of $150 million).  By 2020, DVA EBIT will be equal to 2017.  It wil also have 20% less shares outstanding (assuming it can buy back 7% of its shares outstanding annually for $900 million) with roughly $900 million more net debt.  If everybody is happy with 85% MLR and 10 yr treasury remains around 2.5%, I think 12 times EBIT valuation is pretty reasonable (8.5% pretax return for stable, slightly growing business).  That's EV of $20.4 Billion.  Subtract $9.4 Billion of net debt, equity valuation should be roughly $11 Billion.  Divide that by 155 million shares outstanding = $70 per share in 2020.  Not a great return, but not a permanent loss. 

sleepydragon

  • Hero Member
  • *****
  • Posts: 781
Re: DVA DaVita HealthCare Partners
« Reply #162 on: August 09, 2017, 07:09:25 PM »
- A couple years ago,  the govt wanted to lower the payment rate by something like 10%. They proposed it and asked public for opinions. DVA stock tanked. About 3 months later, government withdrew their proposal. It's very hard to cut the payment. Whenever they do that, DVA's customers call congressman. Their life depend on it. DVA is already losing money on each medicare treatment.
- In fact, the government is on the same team with DVA. In the past, the government pay for all the treatments. Now, the government require private insurers pay for 30 months. I will not be surprised that in a few years private insurers will have to pay for 40, 60 months instead of currently 30 months. The portion that private insurers pay will only get higher in the future. The government encouraged/turned a blind eye on the consolidations in this industry because they want DVA to have negotiation power to extract more money from private insurers.
- Recession will actually hurt DVA, because less people employed means less private insurance payment. But as economy getting better, DVA shall benefit.
- 90% of the profits are from a small number of payers. But, that means this small number could grow to a big number in certain cases (i.e. when everyone has private insurance) , and that means a lot of profits.
- HCP is at least break even for now.
- The only worry is private insurer want to lower the rate. But I don't think they have much say. DVA/FMS will just say no, and Government is behind them.


sleepydragon

  • Hero Member
  • *****
  • Posts: 781
Re: DVA DaVita HealthCare Partners
« Reply #163 on: August 09, 2017, 08:03:40 PM »
I'll just give you my view. Valuation-wise, if we are selling below 10X FCF and DVA continues to buy back 10% of their stock each year with their FCF - then 5 yrs from now, we are at 112M shares outstanding, doing maybe $1600M+ in operating income without
trying to grow, which DVA still does. So I get $14/share at that point. Does the stock still remain at $60?

DVA is still growing around 5% organically and rolling up other clinics too.  Growth is not even factored in.

You have to be fearful of re-imbursement rates - since this stuff is expensive. But we don't let people die in this country, and unless
we want many thousands more dying every year or flooding the emergency rooms - someone needs to perform this service.
I see no alternative to DaVita or Fresenius, who now control 70% of the business. The demand is predictable, the uncertainty of the future pricing keeps lots away.  DVA gets high marks for quality of care - and that is crucial to their success.

If someone can come up with reasonable alternatives about how this ESRD is going away - I might see it differently.

I guess my biggest concern is the HCP acquisition - and if this turns sharply positive, which Thiry says it does next year.
Then things look even better.

I don't understand this logic. If government programs and the major insurers decide to reimburse 10% less than the current rate will people just stop coming and die?! Of course not, Davita would adjust to the new market dynamics and eat the lower profit margins because it still makes good profits, just less than before. and THAT'S the bear case.

I said the risk is in the re-imbursement rates. No kidding that's the bear case.
But of course, you likely see many clinics close and that creates chaos until the market adjustments are made.

Thanks everyone for your inputs.  I am concerned about reimbursement rates too.  Looks like they break even/loose little on medicare reimbursements and make money on private insurance. 

However, if things get really bad they have the option to close/ turn away/meter medicaid/medicare patients. 
Does anyone know who has a lower cost structure, Fresenius or DVA?

This happened before. Govt have tried to lower the rate a couple years ago. Didn't work. Too many phone calls from congressman and patients i guess.
A lot of none-profit and smaller places will have to close if they lower the rate.
if people can't get the service from DVA, even just for a few days, they likely will end up going to ERs.. A hospital stay can run up to $5000-15000/night.  Neither medicare nor private insurer want that.

DooDiligence

  • Hero Member
  • *****
  • Posts: 2135
  • ♪ 🎶 ♫ ♪ 🎶 ♫
Re: DVA DaVita HealthCare Partners
« Reply #164 on: August 09, 2017, 08:25:35 PM »
I'll just give you my view. Valuation-wise, if we are selling below 10X FCF and DVA continues to buy back 10% of their stock each year with their FCF - then 5 yrs from now, we are at 112M shares outstanding, doing maybe $1600M+ in operating income without
trying to grow, which DVA still does. So I get $14/share at that point. Does the stock still remain at $60?

DVA is still growing around 5% organically and rolling up other clinics too.  Growth is not even factored in.

You have to be fearful of re-imbursement rates - since this stuff is expensive. But we don't let people die in this country, and unless
we want many thousands more dying every year or flooding the emergency rooms - someone needs to perform this service.
I see no alternative to DaVita or Fresenius, who now control 70% of the business. The demand is predictable, the uncertainty of the future pricing keeps lots away.  DVA gets high marks for quality of care - and that is crucial to their success.

If someone can come up with reasonable alternatives about how this ESRD is going away - I might see it differently.

I guess my biggest concern is the HCP acquisition - and if this turns sharply positive, which Thiry says it does next year.
Then things look even better.

I don't understand this logic. If government programs and the major insurers decide to reimburse 10% less than the current rate will people just stop coming and die?! Of course not, Davita would adjust to the new market dynamics and eat the lower profit margins because it still makes good profits, just less than before. and THAT'S the bear case.

I said the risk is in the re-imbursement rates. No kidding that's the bear case.
But of course, you likely see many clinics close and that creates chaos until the market adjustments are made.

Thanks everyone for your inputs.  I am concerned about reimbursement rates too.  Looks like they break even/loose little on medicare reimbursements and make money on private insurance. 

However, if things get really bad they have the option to close/ turn away/meter medicaid/medicare patients. 
Does anyone know who has a lower cost structure, Fresenius or DVA?

This happened before. Govt have tried to lower the rate a couple years ago. Didn't work. Too many phone calls from congressman and patients i guess.
A lot of none-profit and smaller places will have to close if they lower the rate.
if people can't get the service from DVA, even just for a few days, they likely will end up going to ERs.. A hospital stay can run up to $5000-15000/night.  Neither medicare nor private insurer want that.

Yep...

BRK.B - 24.9% // Healthcare 22.5% - EW NVO // Auto's & Oil 18.4% - CLB GPC PSX VDE

Banking 9.4% - WFC // Entertainment 4.7% - DIS // Drinkers & Smokers 6.4% - MO

Retail 9.0% - ULTA VLGEA

---

%'s held @ MV 2/25/20 fully invested
18 months of $

i trumpet my ignorance

https://twitter.com/tunawis

skanjete

  • Sr. Member
  • ****
  • Posts: 260
Re: DVA DaVita HealthCare Partners
« Reply #165 on: August 10, 2017, 01:27:17 AM »
I guess it tells something that everyone is talking about the bear case these days...

Government could indeed lower reimbursements.
But government could likewise also lower corporate taxes, of which DVA pays roughly 35%.

Actually, I thing in the long term DVA performs a service that's essential to the community and will be appropriately rewarded for it, the one way or the other. That is, as long there won't be any competing (better) treatment for dialysis.

Spekulatius

  • Hero Member
  • *****
  • Posts: 4344
Re: DVA – DaVita HealthCare Partners
« Reply #166 on: August 10, 2017, 04:19:49 AM »
The biggest risk are not the Medicaid or Medicare reimbursement rates, but that the private insurers wake up and start to negotiate rates down closer to Medicare levels, which are roughly 1/3 of what they pay now.
The Government business fills the rooms, but the private insurance business fills the coffers. I also think that LT, the trend will go to home dialysis, since 3 treatments a week does not cut it for the medical outcome. That said, DVA does look very cheap and a lot if not all of the above is already somewhat discounted in the stock price.

Also, DVA will Not be able to buy back 10% of their stock every year, unless they are willing to lever up their balance sheet significantly.
« Last Edit: August 10, 2017, 04:21:59 AM by Spekulatius »
Life is too short for cheap beer and wine.

Rasputin

  • Full Member
  • ***
  • Posts: 237
Re: DVA DaVita HealthCare Partners
« Reply #167 on: August 10, 2017, 04:44:14 AM »
The biggest risk are not the Medicaid or Medicare reimbursement rates, but that the private insurers wake up and start to negotiate rates down closer to Medicare levels, which are roughly 1/3 of what they pay now.
The Government business fills the rooms, but the private insurance business fills the coffers. I also think that LT, the trend will go to home dialysis, since 3 treatments a week does not cut it for the medical outcome. That said, DVA does look very cheap and a lot if not all of the above is already somewhat discounted in the stock price.

Also, DVA will Not be able to buy back 10% of their stock every year, unless they are willing to lever up their balance sheet significantly.

Private insurers were never asleep.  They are not stupid. 

CMS ESRD PPS (government rate) is published annually.  Dialysis is very transparent, CMS gets all the data.  The reason why private rates are around 4 to 5 times CMS rate is because private insurers only pay for 33 months.  Medicare becomes the primary payor for all dialysis patients the day after 33 month ends.  It's called MSP period (Medicare as Secondary Payor) period.  John Oliver show, Chanos don't mention this.  The MSP period is also the reason why dialysis companies are being punished for lowering mortality rate.  The longer a person live on dialysis beyond 33 months, the more losses that patient inflict on the dialysis center. 

The MSP period started at 21 months in 1981, extended to current 33 months in 1997.  It maybe time to extend this MSP period if private payor started to try to avoid this costly group of patients. 

sleepydragon

  • Hero Member
  • *****
  • Posts: 781
Re: DVA DaVita HealthCare Partners
« Reply #168 on: August 10, 2017, 05:58:46 AM »
I think this stock is undervalued and mispriced because most investors think of the govt and private insurers as two separate groups of clients of dva.
They failed to evaluate them as a group, and the dynamic and interplay of the two groups.
It's also wrong to say govt clients are not profitable. DVA's profit model is like a pyramid, similar to amazon's model, where most customers are not profitable (but cash flow helped building up infacstructure) and a small group of customers are very profitable.

DooDiligence

  • Hero Member
  • *****
  • Posts: 2135
  • ♪ 🎶 ♫ ♪ 🎶 ♫
Re: DVA – DaVita HealthCare Partners
« Reply #169 on: August 10, 2017, 06:15:41 AM »
The biggest risk are not the Medicaid or Medicare reimbursement rates, but that the private insurers wake up and start to negotiate rates down closer to Medicare levels, which are roughly 1/3 of what they pay now.
The Government business fills the rooms, but the private insurance business fills the coffers. I also think that LT, the trend will go to home dialysis, since 3 treatments a week does not cut it for the medical outcome. That said, DVA does look very cheap and a lot if not all of the above is already somewhat discounted in the stock price.

Also, DVA will Not be able to buy back 10% of their stock every year, unless they are willing to lever up their balance sheet significantly.

Private insurers were never asleep.  They are not stupid. 

CMS ESRD PPS (government rate) is published annually.  Dialysis is very transparent, CMS gets all the data.  The reason why private rates are around 4 to 5 times CMS rate is because private insurers only pay for 33 months.  Medicare becomes the primary payor for all dialysis patients the day after 33 month ends.  It's called MSP period (Medicare as Secondary Payor) period.  John Oliver show, Chanos don't mention this.  The MSP period is also the reason why dialysis companies are being punished for lowering mortality rate.  The longer a person live on dialysis beyond 33 months, the more losses that patient inflict on the dialysis center. 

The MSP period started at 21 months in 1981, extended to current 33 months in 1997.  It maybe time to extend this MSP period if private payor started to try to avoid this costly group of patients.

Thanks for pointing this out.

I was thinking that the improved mortality meant that DVA was truly aligned with patient values & benefited from this alliance but it turns out they'd be better off if the figures weren't so good.

Tough way to look at churn but...



John Oliver's bear case seems valid & Thiry might be a bit of a loon but ultimately, Davita seems to do a pretty fair job of keeping people alive.

As an aside, shouldn't CMS rates improve from 2018 forward due to this?

« Last Edit: August 10, 2017, 06:17:21 AM by DooDiligence »
BRK.B - 24.9% // Healthcare 22.5% - EW NVO // Auto's & Oil 18.4% - CLB GPC PSX VDE

Banking 9.4% - WFC // Entertainment 4.7% - DIS // Drinkers & Smokers 6.4% - MO

Retail 9.0% - ULTA VLGEA

---

%'s held @ MV 2/25/20 fully invested
18 months of $

i trumpet my ignorance

https://twitter.com/tunawis