Operator:

Good evening. My name is Michelle, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the DaVita's Second Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. [Operator Instructions] Thank you. Mr. Eliason, you may begin your conference.

Javier Rodriguez:

Thank you, Nic and thank you all for joining our call today. On behalf of all the teammates who provide lifesaving care to our patients, I am grateful for the opportunity to report another positive quarter for DaVita. We continue to enhance our clinical capabilities while optimizing our revenue, operations and cost structure. Today, I will cover the details of our second quarter performance, comment on the CMS 2025 proposal, and wrap up with our outlook for the remaining of the year. But before I dive in, let me begin, as we always do, with a clinical highlight. As you know, every day, tens of thousands of DaVita caregivers work to give life to our patients. Nurses play a central role within our interdisciplinary care teams, serving as our patient's caregiver, sounding board and familiar face they see over 100 times per year. Unfortunately, thousands of nurses left the profession during the pandemic. As a result, the healthcare system is facing a critical nursing shortage. I am proud of the programs and initiatives we've implemented to support the next generation of dialysis nurses. I'll highlight three examples. First, we're collaborating with leading nursing universities on tailored nephrology specific nursing curriculum. We're also providing financial assistance to remove barriers to entry for prospective nursing students. Second, we've created a clinical internship program immersing students with hands on experience in DaVita Dialysis Centers. We have 700 clinical interns this year, with more than 2000 individuals participating since inception of the program. Third, we've built a nurse residency program to support new nurses from student to practicing registered nurse. Our goal is to help hundreds of nurses in the program to feel more confident during their first year of practice, which, among other things, can lead to better patient safety. We're excited to do our part to alleviate some of the pressures of the nursing workforce and to help ensure access to care is not a barrier. Transitioning to the second quarter performance adjusted operating income was $506 million and adjusted earnings per share was $2.59. This outcome was ahead of our expectations for the quarter, primarily driven by favorability in patient care costs and continued strength in revenue per treatment or RPT. Offsetting this favorability was volume growth that was lower than expected. This was primarily due to elevated mistreatments related to spring storms, along with lower than expected census gain. Our second quarter adjusted results also included approximately $15 million of center closure costs. In prior periods we excluded these type of costs from adjusted operating income as non-GAAP adjustments. We'll expand on this point throughout the call today. Let me give some additional detail on RPT growth, since it continues to contribute to our strong performance and supports our 2024 guidance increase. There are many variables in RPT, but I'll highlight two primary drivers. The first and largest component is continuous improvement in our collection capabilities. This is a multiyear effort, so let me elaborate a bit more on this one. The complexity of revenue operations has increased over the last few years. Billing and collecting from health plans now more frequently involves new data and process requirements. These challenges include navigating prior authorization, payer-specific billing requirements, numerous online payer portals, and separately billable items. These layers are exacerbated by a growing list of participating health plans due to the growth of Medicare Advantage and exchanges, and by our patients more frequently updating their coverage choices. In response, we made a series of targeted investments in technology and teammates to modernize and retain top in class capabilities. These investments focus on greater automation of routine tasks, increasing rate of electronic claim submission, and more frequent benefit insurance verification, among other enhancements. This has improved our overall collection rate and enabled us to collect on claims more quickly, reducing day sales outstanding. With more comfort and experience with these capabilities over the past year, we believe these improvements are sustainable and will continue into 2020 and beyond. Second, our health plan negotiations have resulted in modestly higher rate increases as a result of higher inflationary environment over the past few years. Despite these rate increases, we are still not recouping the full impact of high inflation. We continue our track record of innovation and discipline within our cost structure to bridge this gap. The combination of these two factors, along with continued improvement in payer mix increases our expectations for RPT growth for the year. In the first quarter, we communicated our expectation to land on the top end of our range of 2.5% to 3% RPT growth in 2024. With continued progress, we now expect 2024 RPT growth within a range of 3.5% to 4%. Staying on the topic of revenue, CMS recently released its ESRD Proposed Rule to update the prospective payment system for 2025. The CMS expected rate increase of approximately 2.1% was broadly in line with our internal expectations. The methodology has become more complex with the introduction of new wage index, and while we appreciate CMS effort to innovate, the proposal falls short of reflecting the industry true cost inflation. We will provide feedback to CMS in hope of improving this methodology in the final rule and in the years ahead. Absent further edits, the proposed rule would continue to put pressure on the system. Additionally, with the proposed rule, CMS reconfirmed its intention to include oral-only drugs within the bundle as scheduled beginning next year and identified positive policy changes to aid with this transition. DaVita supports CMS position and given our experience with calcimedics, we strongly believe this will provide more patients with access to these drugs since many of our patients do not have Part D coverage. We understand that there are entities arguing for Congress to delay the implementation with stated concern around patient access and the operational ability for providers to comply. DaVita is well prepared and investing the necessary resources to implement this transition in support of our patients. Turning to full year guidance, we are raising our 2024 adjusted operating income guidance while incorporating a change in treatment of our center closure expenses. We are raising 2024 adjusted operating income guidance from the prior range of $1.875 billion to $1.975 billion to a new range of $1.91 billion to $2.01 billion. This represents a $35 million increase at the midpoint of the range. This is the result of a $95 million increase in expected operating performance offset by now including approximately $60 million of full-year center closure costs that we previously would have excluded from adjusted operating income as a non-GAAP adjustment. Joel will provide more detail about this change in our non-GAAP reporting presentation. This guidance reflects sustained momentum in our key operating metrics, including the revenue per treatment progress we highlighted today and our expectations for a strong performance in the back half of the year. I will now turn it over to Joel to discuss our financial performance and outlook in more detail.

Beryl:

Second, U.S. net census gains were weaker than expected. Although new to dialysis admits grew for the sixth consecutive quarter, mortality was above our forecast. We expect both of these factors to negatively impact the second half of the year. For the full year, we now expect treatment volume growth will likely be between 0.5% and 1%. Revenue per treatment was up approximately $6 sequentially. This increase is primarily due to typical seasonality from higher patient coinsurance and deductibles in Q1. As Javier outlined, we now anticipate full-year revenue per treatment growth of 3.5% to 4% for 2024. Patient care costs per treatment were approximately flat quarter-over-quarter. Typical seasonal declines from items like higher payroll taxes in Q1 offset higher health benefit costs and other inflationary creases in the second quarter. Depreciation and amortization declined $12 million in Q2 versus Q1, partially as a result of a decline in center closure costs. Center closure costs in D&A were approximately $50 million in 2023, compared to $10 million in 2024. Since these costs are now included in our adjusted D&A numbers, we now expect a year-over-year adjusted D&A decline of approximately $40 million to $50 million. For Integrated Kidney Care or IKC, our value based care business, operating income declined $8 million sequentially. As we have seen in the past, we expect results in the second half of the year to be significantly stronger than the first half as a result of the timing of revenue recognition. International operating income was flat quarter-over-quarter. We have closed our acquisitions in Ecuador and Chile and expect our acquisitions in Colombia to close in Q3 and in Brazil by year-end. Moving now to capital structure, in the second quarter, we repurchased 2.7 million shares and to date in Q3 we have repurchased an additional 1.1 million shares. Leverage at the end of Q2 was 3.1 times EBITDA. This was down from three months ago due to growth in trailing 12-month EBITDA and a reduction of net debt by over $200 million. As of the end of Q2, we held approximately $400 million of funding from Change Healthcare's parent UnitedHealth Group, related to the cyber event earlier this year. As of today, that balance currently sits at approximately $300 million and we expect additional repayment to align with successful collections on impacted claims. We continue to collect on Change Healthcare impacted claims and U.S. dialysis days sales outstanding have declined by 14 days quarter-over-quarter. As always, we are assessing opportunities to optimize our capital structure, which includes looking to address the remaining balance of our term loan B maturing in 2026. We continue to target leverage within our range of 3 to 3.5 times. To this end, we are also assessing opportunities to increase our debt to ensure sufficient capacity to maintain leverage within this range. To conclude, let me share some additional detail about our updated adjusted operating income and adjusted EPS guidance for 2024. As Javier said, our new adjusted OI guidance range is $1.91 billion to $2.01 billion. There are several moving pieces within this number, so let me give you the key puts and takes. First, we are now including expenses related to center closure costs in this adjusted OI range. This is an approximate $60 million of additional operating expenses that were previously not in our adjusted OI guidance. To reiterate my earlier comments, this is a change in the presentation of our adjusted results and does not impact our GAAP financials or cash flows. Second, additional RPT growth of approximately 50 to 100 basis points relative to our previous expectations represents an increase of approximately $85 million at the midpoint. Third, the range reflects improved expectations for patient care costs, mostly related to labor and productivity improvements, which is mostly offset by our revised volume expectations for the full year. Altogether, these changes represent an approximate $35 million increase in our adjusted operating income guidance at the midpoint of the range. We are also updating our 2024 adjusted earnings per share guidance to a range of $9.25 to $10.05 primarily due to the increase in adjusted OI. That concludes my prepared remarks for today. Operator, please open the call for Q&A.

Pito Chickering:

Hey. Good afternoon, guys. Nice quarter and thanks for taking the questions. On the NAG, can you give us some color on what you saw through the quarter and what you saw in July? Just looking at the high end of your revised guidance, you get to grow like 1.5%, which is a big step up versus what you saw in the first half of the year. So just want to sort of see kind of what you guys are seeing to give you confidence in the high end of that.

Pito Chickering:

Okay, fair enough. And you gave some of the moving parts, but if we exclude the $60 million of closure costs, you raised guidance by $95 million. Can you just bridge us the components of sort of how you raise guidance by $95 million versus previous guidance? I just want to understand that as I think about sort of 2025. Thanks.

Pito Chickering:

Great. Thanks so much.

Justin Lake:

Thanks. Let me just followup on Pito's question there. You said $20 million from lower volume?

Justin Lake:

And you took down volume by what, 75 bps at the midpoint?

Justin Lake:

So maybe it's 50 basis points. I'm just trying to think about the relativity here volume to OI?

Justin Lake:

So in your mind, 50 basis points of volume is about $20 million of OI on an annual basis?

Justin Lake:

[Indiscernible] it's not the same thing.

Justin Lake:

Okay. And then on center closures, did you say $20 million or $30 million for next year?

Justin Lake:

Okay.

Justin Lake:

Got it. That's what I was trying to get to. So you think you'll be back to, like 2020 center closures next year?

Justin Lake:

Okay. And then just a question before I jump off on revenue for treatment. One, I think you said in the release you had some offsets to pricing from mix pressure. What's mix in the second quarter versus Q1?

Justin Lake:

And then lastly on the exchanges, so I assume that you were at 10.9 to end the year, if I remember the fourth quarter report. But let's say you're at 11. How much of that's coming from exchanges today and how much of that came from exchanges let's say pre-COVID.

Justin Lake:

Okay, I'll take that. I appreciate it, guys. Thanks.

Operator:

Thank you. Our next caller is AJ Rice with UBS. You may go ahead, sir.

Javier Rodriguez:

Thanks for the question, AJ. You've got the numbers right, meaning we're at negative $60 million and change for the up to year-to-date, and we still expect the year to come in in that $50 million range. But it's not necessarily because there's a big change in the business, but rather revenue recognition on the back end of the year and so that's the big difference there. And as you know, this business, and we've asked you to look at it more on an annual basis, because quarter to quarter fluctuation can be a bit more dramatic, but that still holds on the range.

AJ Rice:

Okay. And obviously, it sounds like the comments on the volume are mostly around the storm impact and mistreatment, but you did sort of mention mortality. What did you see in mortality? And was that a significant contributor to your decision to adjust or that's just the normal fluctuations you see from quarter-to-quarter?

Javier Rodriguez:

Yes, I'll add one thing. First of all, at the beginning of the sentence, Joel inadvertently said 150 million, and he was talking about 150 basis points just to make sure that the record reflects that. The rest of the conversation, he was clear on the 150 basis points. But I think while he walked you through a lot of numbers, at the end of the day, the question that you and all of us are trying to ask ourselves is, is there a structural change that is going to change the growth rate? And to the best of our ability on the work that we've done the answer that we come up with is no. It appears that we are in a bit of just, let's call it a period of time where mortality is elevated, but we see through these new to dialysis patients that the volume should come back to normality over time.

Javier Rodriguez:

Thank you.

Andrew Mok:

Great, thank you. Maybe just to followup on that mortality point, I guess what's the working assumption on why mortality is elevated? Because I think the excess mortality dynamic during the early years of the pandemic would intuitively suggest there would be a tailwind in the aftermath. So what's your working assumption here on why it remains elevated? Thanks.

Andrew Mok:

Great. Okay, thank you. And then in the prepared remarks, I think you mentioned that the improvement in collections is a multiyear effort. And given the strong gains we've seen over the last six quarters, just where are we in this process and how much runway is left beyond 2024? Thanks.

Andrew Mok:

Got it. If I could just followup on one more point. I think you called out the clinic closures as being a potential drag to volume growth as well. I think given you and your competitor, one of your big competitors, are closing clinics at the same time, where do you think, how much leakage do you think there is, therefore, where are those patients going to get their dialysis treatment if not one of the two large dialysis chains? Thanks.

Joel Ackerman:

And the question on that, and we ask ourselves, is that good or bad? In general of course, you start to think of market share, and in this one, it's clinic share. And the way that we've looked at it, and of course, time will tell, is that we led the way in stopping de novos as the mortality escalated during the pandemic. So if you see DaVita build, it was very aggressively stopped, and then we led the way in right, sizing the capacity. And so if you were just going to do shorthand, you would say, we've closed roughly 200 centers. And depending on the math, you could say it's roughly $100 to $150 million of fixed expense reduction. And the loss of volume is roughly in that $50 million. So you would say that just with that math, it looks like we're making the right trade off. Of course, there's a lot of other dynamics of patient access, the local relationship with physicians, and all the normal considerations that we have to go into. But I'm just giving you the money side of it.

Javier Rodriguez:

Sure. Hey, before we take the next question, I just want to come back to an answer I gave to Justin on the exchanges. I talked about 200 basis point increase from the exchanges. I just wanted to clarify, that's 200 basis points of revenue, not 200 basis points of mix increase that came from the exchanges. So just wanted to make sure that was clear.

Kevin Fischbeck:

Great, thanks. Maybe just to follow up on that point, do you just have, like, the percent of revenue that comes from the exchanges year-to-date so far?

Kevin Fischbeck:

And then you made a comment in the prepared remarks about leverage, and I think you said that you were looking to add debt that to ensure capacity would be in this range. Are you saying that you would look to potentially lever up to deploy more capital, I guess, on share repurchase, or were you just talking about something else?

Kevin Fischbeck:

Okay. And in theory, that capacity would be used on share repurchase. Is that, or is there anything else?

Kevin Fischbeck:

Okay. And then I guess just on that point as well, the change line of credit, how do we think about that? That's going to be, I mean, in fact, I guess your free cash flow, but I guess that would be a use of free cash flow to pay that back or you just collect less from United.

Kevin Fischbeck:

Okay. And then I guess just going back to the mortality point because it is hard to understand why it's such an issue now. And, I mean, I guess it's hard to say if you don't fully know the reasons behind it. It's hard to say when it would normalize. But is there any thought about why things wouldn't get back to normal over the next couple of quarters? And I guess, what is it that you're looking for to kind of know that you're on the other side of that?

Joel Ackerman:

Well, on RPT, basically you have to think of three dynamics. You have mix, you have negotiations, and you have revenue cycle, and so you're asking about the negotiations. And I think to think about the future, you have to kind of put yourself into the future, which is what is the environment? Is it still inflationary, what contracts are up for negotiation, et cetera? As we've explained in the past, we are comprehensively contracted, and our big contracts usually come up every three to four years.

Kevin Fischbeck:

Got it. I guess maybe, just maybe, ask a little differently. If you're getting a little bit of commercial contracting, do you feel like there's a shift at all in the negotiations? Whether managed care companies realize they need you more for network reasons or they are appreciating the value, you provide more, and that's giving you a stronger negotiating power, or it's just more. Inflation's higher, and so rising tide lifts all shifts.

Kevin Fischbeck:

Great. Thanks.

Operator:

And our next caller is Ryan Langston with TD Cowen. You may go ahead.

Javier Rodriguez:

No, Ryan, we're pretty much seeing that across the board.

Javier Rodriguez:

I'm sorry, are you asking about 2025 RPT?

Javier Rodriguez:

Yes. It's early for guidance, but I would not go to 3.5% to 4% for next year. I think that would be a real stretch to perform at this level for another year.

Javier Rodriguez:

Thank you.

Pito Chickering:

Hey, guys, just some quick follow ups here. What percent of your treatments were home treatments this quarter and what was your center liquidization this quarter and how to compare versus first quarter?

Pito Chickering:

Okay. And on the international business, the margin looks about 7% range, I guess. How do you think that evolves over the next couple of years?

Pito Chickering:

Sorry for the OI margins. Like the track. Around 7% [indiscernible], I guess. How does that evolve over time?

Pito Chickering:

All right, last one, Frankie.

Pito Chickering:

So then if margin is, I guess, harder, I guess, why is that a better use of cash flow than doing share repo?

Pito Chickering:

Okay, fair enough. And the last one for IKC, you picked up about 3000 lives. This quarter was last quarter. But the medical spend per life is about half of what it was on the average the last quarter. So as you're bringing new patients on to IKC, you sort of talk about what type of patient dynamics they are versus who you have currently in there. Thanks so much.

Pito Chickering:

All right, fair enough. Thanks, guys.

Operator:

And at this time, I'm no showing no further questions.

Operator:

Thank you. This concludes today's conference call. You may go ahead and disconnect at this time.

Operator:

Good evening. My name is Michelle, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the DaVita First Quarter 2024 Earnings Call. [Operator Instructions] Thank you. Mr. Eliason, you may begin your conference.

Operator:

[Operator Instructions] Andrew Mok with Barclays. You may go ahead, sir.

Joel Ackerman:

Yes. Thanks, Andrew. So the big difference between the year-over-year number on treatments per day versus the NAG number or the treatment number is actually day mix. So Q1 in '24 had an extra Tuesday and it also had New Year's Day on a Monday and what happens then is about half the volume gets pushed to Sunday. Those 2 things combined can lead to more than 0.5 point of volume swing. So I think of Q1 year-over-year as a positive number of 40 or 50 bps of year-over-year growth, but as you highlighted, below the 1% to 2% range.

Joel Ackerman:

It has generally come down significantly since its peak. It does move around from quarter-to-quarter, and it's frankly, still a little early to know exactly where Q1 landed. As you know, we don't find out mortality until a few months after the period. So we're keeping a careful eye on it. It's -- as I said, it's come way down, but remains elevated.

Joel Ackerman:

Yes. So sequentially, it's a lot about the higher seasonality we saw in Q4 that we called out. Year-over-year, wage pressure continues, as we've said, it's offset versus Q1 of '23 by lower contract costs and also a productivity pickup in the quarter.

Pito Chickering:

So revenue per treatment, really strong in the quarter. Was that due to sort of HIX enrollment or any other one-timers in there? Usually, it goes up sort of $4 to $5 sequentially as we burn through copays and deductibles. Is that the way to think -- is that the right way to think about it for rest of the year?

Pito Chickering:

Okay. So that's sort of tracking above your guidance, like, if we move back to kind of where you guys are guiding revenue per treatment, you're basically guiding sort of almost mid-single digits. I mean sort of -- above sort of 3% range, and already and this continues, right?

Pito Chickering:

Okay. Fair enough. Was the Street mismodeling the first quarter operating income looking at the adjusted operating income beat of $39 million and the raise of $25 million. It looks [ again like you ] didn't raise the high point of the range. Just curious if you're missing it. And then is there any reason why you can't analyze the first quarter in OI sort of 23% to get to sort of $2 billion. I guess, why would that -- assuming trends don't change, why would that not be the right way to thinking about sort of where things could go if first quarter trends continue?

Joel Ackerman:

I don't have a number for you. That number typically grows with -- around the volume growth -- around our historical volume growth numbers, and I think it's right in there with that this quarter as well.

Kevin Fischbeck:

Great. I guess, it does kind of seem like going back to the RPT that like it feels more like you're raising the guidance for the outperformance in the quarter on that rather than a continuation of that higher rate sustaining? Is that true? Or you're saying the guidance now assumes that this higher rate is actually sustained throughout the rest of the year?

Kevin Fischbeck:

So why is that the case? It sounds like you're saying there is something unusual in it. So why -- Pito's question before, like why isn't it the seasonal kind of growth for the space and then therefore flow through every quarter?

Kevin Fischbeck:

Okay. So you had a higher year-end number and you're just getting there faster according to what you've seen in [ Q1 ].

Kevin Fischbeck:

Okay. And then, I guess, just on the IKC business, obviously, there's a lot of focus on cost trend within Medicare Advantage companies seem to be all over the place on in another year. Your experience is going to be a little bit different to Medicare Advantage broadly, but just love to kind of hear how you're seeing utilization play out under your managed programs there?

Kevin Fischbeck:

Yes. No, it does. I guess you're basically saying that it's coming in line, not -- it's not higher or lower than what you were predicting so far in Q1.

Kevin Fischbeck:

Okay. And then maybe just last question. International business acquisition, it sounds like you guys are really excited about it. We always just kind of wondered that sometimes like when one large-scale player exits an asset and another large-scale player comes in? Like how do you think about what you can add to those assets? Or how do you just think about what the opportunity was there, if someone else in theory had similar optionality felt like it was time to get out.

Operator:

And our next caller is Justin Lake with Wolfe Research.

Joel Ackerman:

Yes. So on wage inflation, we called out at the beginning of the year, we were expecting something around 5%, and it's tracking pretty consistent with what we were expecting. So not a lot to update on that. .

Dean Rosales:

Got it. And last one, what should we expect in terms of center consolidations for the remainder of the year?

Operator:

Gary Taylor with Cowen.

Javier Rodriguez:

That's a full year number.

Joel Ackerman:

Yes. So first, thank you, Gary, for those kind words. As we look forward, I don't think we're changing our long-term OI growth number from 3% to 7%. So I'd start with that. That said, I also don't think we're running out of opportunities to continue to run the business well and deliver high-quality clinical care to our patients and continue to improve our bottom line and potentially our margins. we've done this not just on the back of cost cutting, I would highlight, right?

Gary Taylor:

Maybe last one for me. I just want to maybe understand tender [ consolidations ] a little bit. When we look at average patients per center, certainly multi-multiyear high. And just in the last couple of years, I think, patients per center is up 9% in a couple of years and your margins improved, I think, nearly 300 basis points as that's happened. Some of that's the consolidation. Some of that is expansion of your home programs driving that. Is this still a key lever going forward or beyond the 30 centers Javier talked about.

Joel Ackerman:

Yes. And Gary, just to add one thing on to what Javier said, we can improve capacity utilization without closing any more centers. We're just absorbing treatment growth in our existing footprints.

Joel Ackerman:

Right.

Albert Rice:

Thanks, everybody. First, maybe just to ask on the trajectory on IKC, I know you were forecasting for '24 a loss of about $50 million. And I think in the first quarter, you're at $26 million. I know there's seasonal factors and a variety of things going on. But I just wonder if you would say you're on track? Are you running a little better? Or how should we put that in perspective?

Albert Rice:

Okay. And then another coming off the fourth quarter, I think we had triangulated -- I don't think it's your specific guidance but triangulate it that you're sort of expecting share repurchases to be in the $1 billion to $1.5 billion range for '24. With your comments about how the first quarter played out, do you think you'll still get to something that maybe approximates that? Or should we just assume that the first quarter share repurchase activity has gone and you'll continue in the last 3 at the previous rate.

Albert Rice:

Okay. And just lastly, a follow-on question and comments about the international acquisition. I guess, it sounds like that is, in your mind, more of an opportunistic deal that came along that allows you, like you said, to leverage in certain markets and enter some new ones. Is there anything that's happening on the international front that makes you think that the pace of activity there could step up?

Operator:

Our next caller is Lisa Clive with Bernstein.

Javier Rodriguez:

Sure. Let me take them in order. And if I miss anything, please remind me. On utilization, that number is the chronic center utilization, and the way to think about a home is, of course, it can add patients much easier and with much lower capital deployment. And so you got it right that utilization that we gave is in-center. As it relates to MIRCERA, that's pretty much the vast majority if not all are now on MIRCERA. And so that's played out.

Javier Rodriguez:

Okay. Well, thank you, Michelle, and thank you all for your questions and interest in DaVita. As we discussed on the call, we're off to a strong start of the year. And of course, we'll continue to work hard to stay on this trajectory. First and foremost, we remain vigilant in providing great clinical care for our patients. Thank you all for joining the call, and be well.

Operator:

Good evening. My name is Michelle, and I will be your conference facilitator today. At this time. I would like to welcome everyone to the DaVita Fourth Quarter 2023 Earnings Call. Today's conference is being recorded. If you have any objections, you may disconnect at this time. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [Operator Instructions] Thank you. Mr. Eliason, you may begin your conference.

Javier Rodriguez:

Thank you, Nic, and thank you all for joining the call today. As we reflect on the past year, our 2023 financial performance highlighted the resilience of our business and revealed some of the early benefits of our multi-year investment in strengthening our platform. External challenges of the past few years ultimately made us stronger, and with continued investment in our teammates, systems and capabilities, we believe that we're well-positioned for the years ahead. We began 2024 with great momentum and a reduction in the risks and uncertainties that characterize the recent years. Today, I will cover our 2023 results and our 2024 guidance, provide an annual update on integrated kidney care and briefly continue our discussion on GLP-1 drugs. First, however, I'll begin the call as we always do with the clinical highlights. More than 20 years, we have strived to be a community-first and a company-second. This means that we're committed not only to providing outstanding care, but also to give back. In 2023, our teammates logged over 42,000 hours of service to their communities, which marks our highest year ever in a step toward achieving our cumulative goal of 125,000 hours by 2025. And some of our special teammates donated their personal time to advance our goal of raising awareness for kidney disease. We recently wrapped our 2023 Health Tour, a mobile health screening and kidney care education program supporting local communities across the country. Today, 15% of our US population has kidney disease, which often goes undiagnosed and untreated until symptoms become severe. Our mobile health tour was designed to help identify risk factors that may lead to chronic kidney disease, including screening for obesity, diabetes, high blood pressure and family history of kidney disease. For two months on the road, our bus travelled 17,000 miles to offer free screenings in 48 communities across eight states. To power this tour, more than 300 of our teammates volunteered 1,200 hours in service to their local communities. This effort is a wonderful example of combining our dedication to service with our ongoing commitment to raising awareness for early detection and prevention of kidney disease. Transitioning to our performance. Full year 2023 adjusted operating income, adjusted EPS and free cash flow, all came in well-above our guidance from the beginning of the year. As context, I think it's helpful to reflect back on our progress over the year. We began 2023 in an uncertain environment and shared the assumptions in our guidance that volume and labor challenges would continue throughout 2023. We're simultaneously developing and executing on a number of initiatives focused on offsetting some of those financial headwinds we were facing. As the year progressed, we saw encouraging data points early in the year, which ultimately turned into consistent positive trends. These improved trends, combined with the strong operating performance and the positive impact on the initiatives we implemented, resulted in a 20% year-over-year growth in adjusted operating income, 28% growth in adjusted EPS and a return of our leverage ratio back to the target range. I'll share three points for additional color. First, on volume. We entered 2023 with a 2% growth headwind due to the annualization of excess mortality from prior year. Since then, successive COVID surges have been weaker in magnitude with lower mortality. At the same time, we are able to produce four consecutive quarters with year-over-year growth in new patient admits. Adding these factors together, 2023 saw increased patient census for the first time since COVID started and volume that was approximately flat year-over-year, landing at the top of our guidance range. Second, our labor performance in 2023 was better than 2022. We cut our reliance on contract labor more quickly than anticipated and improved staffing in our centers. On the other side of the ledger, teammate turnover has remained elevated in line with the strong healthcare labor markets. Looking forward, improved retention and training costs represent an opportunity for improvement in the years ahead. Third, independent of these trends, we drove strong operating performance through our differentiated platform and capabilities. Most notably, we invested in our revenue operations to achieve sustainable improvements in our collections. This resulted in an additional $3.50 in revenue per treatment for the full year while reducing more than 12 days from our US day sales outstanding. Adding to this, we executed against our cost saving initiatives related to pharmaceutical spend and further consolidated our facility footprint. Finally, we exceeded our annual profitability targets for integrated kidney care, which I will cover more in detail in a moment. To summarize, we entered 2024 with more visibility and confidence that we have had since the start of COVID in 2020. Our ability to invest in our people, process and systems, despite the operational and financial challenges of the last few years, has positioned us well for the years ahead. On that note, let me transition to our value-based care business, which we will call integrated kidney care, or IKC. We have consistently urged our investors to assess this business on an annual basis rather than focusing on our quarterly results. Now is a good time to pause and reflect on our performance and outlook of IKC. At a high level, we assess IKC performance based on three primary metrics

Operator:

Thank you, sir. [Operator Instructions] Justin Lake with Wolfe Research. You may go ahead, sir.

Javier Rodriguez:

Thanks, Dean. So, what I'd highlight on the risk side of Medicare Advantage is, I think it's important to realize that the ESRD population is different than the broader MA population. And some of the trends you might be seeing with other payers, which we certainly watch very carefully, don't necessarily apply to our population. I'd highlight three things. First, the needs of these patients and the medical costs that they bear are very different than a population given the high acuity of these patients. So that's one. Second, I would also note the reimbursement for this population runs differently, and it's a separate reimbursement rate that comes out in both the preliminary and the final rule. And third, that the coding changes that apply to the broader MA population do not apply to the ESRD population. So, with that, I think it's early for us to really have a full view on what 2023 is. That said, we're feeling pretty good about where our net savings came in, both on the SNP side and on the Medicare Advantage population within our value-based care. In terms of just some of the cleanup, we have about 3,000 members in our SNP products. And in terms of revenue, it's somewhere north of $300 million.

Operator:

Thank you. Our next caller is Pito Chickering with Deutsche. You may go ahead, sir.

Joel Ackerman:

Yeah. So, a lot in there, Pito. Let me try and take this in the logical order. So, first, on revenue accounting, what -- historically, we did not record revenue until we were comfortable that we could reasonably estimate what our share of the shared savings would be. And that was true for both our MA population and our Medicare fee-for-service population, the CKCC program. The SNP product, we've always accounted for in -- I'll use your words, in an accrual method. The change we're talking about is about the change in the timing of when we get comfortable with those estimates. And you asked why. It's really three things. One is we've made some changes to the contractual language that gives us earlier clarity on attributed lives. So that's one. Second, we're getting our data earlier, which obviously helps us do some of the calculations earlier. And then third, just with the experience we've had, we've got better actuarial models. And putting those three things together, we're comfortable now that we can reasonably predict our share of the shared savings revenue, which ultimately turns into revenue in the plan year. So that's on the change in the estimates. In terms of -- you asked about 2023. So, we're guiding to a loss of $50 million for 2024. Our non-GAAP number for 2023 is a loss of $94 million. The thing to realize about that $94 million is it includes the revenue from the value-based care products from plan year '23, which is the result of this estimate change that I mentioned as well as the revenue from that product line for 2022. So, I think the way to think about 2023 to make it a little bit more apples-to-apples with '24 would be to back out somewhere around $25 million, maybe $30 million to make it a bit more apples-to-apples. And then, what was your other question? There was a PMPM question in there.

Joel Ackerman:

Yeah. So, a few things. First, just to clarify that estimate change I referred to only is true of the Medicare Advantage business. The CKCC business is still new enough that we're not comfortable estimating the savings in the plan year. So that part hasn't changed. In terms of your question, so the cost savings we're referring to is only related to our model of care in our G&A. It's not what you'd call the MLR in a health plan business. It's not that equivalent for us. Second, there are some -- there was a significant amount of positive period development in 2023, in particular in the SNP business that we're not forecasting to recur. So that would be another adjustment, which I think would help bridge the question of why aren't we getting to profitability next year or this year in '24.

Joel Ackerman:

Yeah. So, no on the last one. If a patient moves from one clinic to another, it doesn't show up as any sort of growth anywhere. It's still our patient. In terms of the volume growth. I would point to Q4 over Q3 as effectively being flat, treatments per day were flat. And that's really a combination of a small census decline, which is not uncommon in Q4, offset by a better treatment mix day. So more Monday, Wednesday, Fridays, fewer Tuesdays, Thursdays. So, Q4 was really, I would call, a flat volume quarter-over-quarter.

Operator:

Thank you. [Operator Instructions] Kevin Fischbeck with Bank of America. You may go ahead, sir.

Joel Ackerman:

Yes. Thanks, Joanna. So, I'd start with the fact that the single biggest impact on volume year-over-year is census. And remember that census builds over the course of the year. So, if you look at the '23 growth, which was effectively flat, that was burdened by the fact that the census declined over the course of 2022 and only started building in '23. So, a lot of the zero in 2023 is the annualization of the negative impacts of 2022. As we think about '24, I'd really break it down into two components. First is new to dialysis admissions and we've watched that build over the course of 2023. And we feel comfortable that, that growth rate is back to pre-COVID levels. Where the reason we don't get back to what you'd call a 2% number pre-COVID or that would be the high end of the range is mortality continues to run higher than it did pre-COVID. It is way down off its COVID peak, but it's still running a bit higher than a typical pre-COVID year, remembering that mortality moved around in pre-COVID years, primarily as a result of the severity of the flu season. So, if you take a more normal new to dialysis admit outlook and then a slightly negative mortality outlook, that's how we get to the 1% to 2%.

Javier Rodriguez:

Great. Let me grab that, Joanna. A couple of things because I think underlying those questions, there's usually -- is there something unusual in the payer dynamics, and let me go ahead and start by no, we are in a normal period. And of course, we're trying to make sure that rates reflect the inflationary pressures that we are receiving. To you direct question on what percent of that -- what part made out of the rate, roughly two-thirds of the increase will be rate and one-third remaining. A good chunk of that is the annualization of the reimbursement operation improvements we saw in 2023 and the remaining is mix. As you have seen, our mix is trending on MA slightly above the market. So, our MA mix finished the quarter around 52%, and we expect that number to be a couple of points higher at the end of '24. So, somewhere in the 54%, 55% range, depending on open enrollment.

Javier Rodriguez:

Commercial, on the negotiations, we're not going to go into specifics. We continue to see that our commercial patients value their private insurance, and commercial mix is flattish. So, nothing to report on that. And of course, that's embedded in the guidance of the RPT that we gave you.

Javier Rodriguez:

Thank you, Joanna.

A.J. Rice:

Thanks. Hi, everybody. I can't let you get through the call without asking one GLP-1 question. So, in your prepared remarks, you're saying that for the FLOW study, you anticipate efficacy on multiple endpoints, including slowing CKD [progression] (ph). I think that's generally where the market is at. I wondered, given your analysis that you've offered and seems to have really gotten traction in the financial community, are there anything -- is there anything that could come out of the FLOW study at least in the high probability range that would make you revisit? It seems like you've covered most of what you expect in your analysis, but I wonder is it something that makes you more optimistic, less optimistic about how this will all impact your business?

A.J. Rice:

Okay. Great. Maybe if I could pivot and ask you about your assumptions around labor going into '24. I know there's the underlying what you're banking on for wages and benefits for your permanent workers. I believe you still should have a tailwind from contract labor, at least annualizing where you're ending the year. And then, there's the whole issue of the California minimum wage for low wage healthcare workers. I know you said you wouldn't be spending for election spending, but I wonder what you're factoring in for that when you anticipate it to start to have an impact.

A.J. Rice:

Okay, that's great. Thanks a lot.

Ryan Langston:

Hi. This is Ryan Langston on for Gary this evening. I think Dean touched on it earlier, but maybe just to go back, how is the higher sort of Medicare Advantage trend we saw in the back half of the year impacting the accruals, I guess, not only for '23, but sort of your guidance for '24? And Joel, can you remind us when you anticipate to have the final reconciliation with your plan partners? Thanks.

Ryan Langston:

Thanks.

Lisa Clive:

Hi. Just two questions for me. Number one, we're 18 months since the Marietta ruling, your commercial mix and pricing seems pretty stable. So just wanted to know if you have any thoughts on what that ruling has meant over the last few years and whether you're expecting any changes? And then also just a clarification in terms of the fact that you don't need to spend on ballot initiative and obviously, your wages are going up in California. So, it seems like a reasonable truce with the SEIU. Is this something that we should expect to continue, or is it really just this election cycle? Or it would be obviously nice for you guys to be out of this two-year cycle of fighting ballot initiatives? Thanks.

Lisa Clive:

Great. Thanks for the clarification.

Operator:

And our next caller is Justin Lake with Wolfe Research. You may go ahead.

Joel Ackerman:

Yeah. So, I appreciate the question. We are thinking that the year will have roughly 50 centers either closed or merged into other centers. And thinking about roughly in the ZIP code of 20 new centers, so net 30. As it relates to the P&L, I'm not sure I understood your question. Could you try it again?

Joel Ackerman:

I think a good healthy way to think about it is you will have a little volume loss on patient choice. But when you strip all of that, these centers tend to be inefficient. And so, what you do is you consolidate the management and the leadership. And then, you have some savings on fixed expense in particular, rent and medical director fees. And so, at the end of the day, that's where the savings come from, inefficient center with some fixed expenses that get eliminated.

Joel Ackerman:

Thank you.

Pito Chickering:

Hi, guys. A few follow-ups here. To Joanna's question, what was the commercial mix in the quarter? And what are you seeing for 2024?

Pito Chickering:

And then free cash flow conversion was very strong in '23, the guidance is about 54% in '24. Is there anything changing within cash flow conversion? Or is this simply the DSOs that you got, what, 12 days in '23 which won't repeat in '24?

Pito Chickering:

Okay. Like any updates on AB 290?

Pito Chickering:

Okay. Great. And then last question, I'm going to ask the center closure question differently. What was center [indiscernible] at the end of, I guess, in the fourth quarter of '23? And what do you assume that goes in fourth quarter of '24?

Pito Chickering:

Yes. I mean just thinking about a combination of centers closing and patients coming back and there's overall center [indiscernible], where do you exit the year in '23? And where do you think that can get to by the end of '24?

Javier Rodriguez:

And just as a point of reference, like if you want to go back pre-COVID, I'm going to go back several years in the 2016 or so range, we would be in the 65%-or-so range. And then just so you see the impact of all of this California conversation that we've had. California, because how difficult the operating environment is, is roughly in the 70% range because people aren't opening centers. So all these very expensive propositions and poor conduct have had an impact and the people do not want to open centers there.

Joel Ackerman:

Yeah. So, the leverage you'd see would be in our patient care costs, it's not in the G&A because there's a fixed cost associated with the clinic that's in the patient care cost. So, you'd see it there. I think the best I can do to help you with that math would be to think about our patient care cost per treatment number, right? So, running at $255 for 2023, that is roughly two-third variable, one-third fixed. So, if you imagine us growing that volume without building as many centers, and just to be clear, we would have to build some centers because even though capacity utilization is low, the capacity may not be exactly where in the country you need it to be. So, depending on what assumption you make there, recognizing that a third of that PCC per treatment is fixed, I think that will give you everything you need to do to do the math on what it could be worth.

Javier Rodriguez:

Thank you, Pito.

Javier Rodriguez:

Okay. Thank you, Michelle, and thank you all for your interest in DaVita. Just in summary, we had a strong close to the year and that, combined with our guidance 2024, we are now back on a path to recuperate our pre-pandemic financial trajectory. We will continue to work hard to deliver strong results, innovate, and most importantly, provide a great clinical care for our patients. Thank you all for joining the call. Be well.

Operator:

Good evening. My name is Jordan, and I will be your conference facilitator today. At this time, I would like to welcome everyone to DaVita's Third Quarter 2023 Earnings Call. Today's conference is being recorded. If you have any objections you may disconnect at this time. [Operator Instructions] Thank you. Mr. Eliason, you may begin your conference.

Javier Rodriguez:

Thank you Nic, and thank you all for your interest in DaVita. We delivered another strong quarter. We began the year by making progress earlier than expected across many of our key operating priorities and that momentum has continued into the third quarter. We have balanced a strong focus on near-term operating discipline, while continuing to invest for future growth. At the same time, we're creating a differentiated experience for our teammates, and of course, delivering the highest standard of care for our patients. Today, I will address our outperformance in the third quarter, share a perspective on the potential impact of GLP-1 drugs, provide an update on 2023 guidance, and then wrap up with some thoughts on next year. Before we get into third quarter details, I'd like to start as I always do with a clinical highlight. This time, I will highlight our international business, which provides care for more than 40,000 patients across 11 countries. Each country is unique in terms of health status, local methods of practice, and regulation. Over the past 5 years, we have developed universal protocols to combine our kidney care experience with local practices within each country. Since launching this proprietary framework, we have seen consistent and meaningful improvement in clinical outcomes. We now outperform the clinical benchmarks of every international market in which we operate. And at the aggregate level, all cost patient mortality across our international countries has dropped by 20% since 2020. These results energize the soul of our company, which is to extend life and improve the quality of life of our patients. Transitioning to our financial performance, we had a strong third quarter, delivering adjusted operating income of $525 million and adjusted earnings per share of $2.85. This was ahead of our expectations for the quarter. We continue to perform well across our key operating metrics, and also had additional benefit related to seasonality and timing. Now, let me go to the next level of detail and highlight three drivers including patient census, patient care costs, and integrated kidney care or IKC. First, our patient census has remained steady following the growth we saw in the first half of the year. And we expect to end the year with a census of 1,500 to 2,000 patients higher than the end of 2022. Mortality continues to decline in 2023 in line with our expectations. Assuming these trends continue, we expect to return to positive volume growth in 2024 and beyond. Second, patient care costs continue to decrease during the third quarter. Outside of the seasonal items, the conversion to Mircera for anemia management was the key driver of the decrease. That said wage growth remains above historical trends and exceeds growth in revenue per treatment, but was below our expectations for the quarter. Our experience on labor is consistent with recent macro economic trends. The tight labor market and low unemployment has continued to put pressure on retention and training, offset by slight easing in the wage environment. And finally, our IKC business had a strong quarter and is tracking ahead of our forecast for the year. We are improving patient health outcomes and reducing the total cost of care, which generates savings that is shared between DaVita and our partners. We also realized that revenue associated with these savings earlier in the year than anticipated. We continue to invest in growth while carefully managing our model of care costs and we remain on track with our multiyear plan to achieve breakeven by 2026. Transitioning to a topic of recent focus, there's been a lot of discussion on GLP-1 drugs, including speculation on their potential impact to dialysis growth rate. We are excited by the evidence that these drugs could improve the health of many people worldwide. That said, despite the evolving body of evidence about the positive impact of these drugs will have on obesity, diabetes and cardiac disease, we continue to believe that the impact on dialysis volumes will be limited. We believe this is true even if results from near-term clinical trials proved to be positive in regards to progression of chronic kidney disease or CKD. To explain our perspective, it is important to segment the population based on disease state. In the group that is upstream from CKD Stage 3, it is intuitive that lower obesity should lead to lower incidence of diabetes and hypertension, lower incidence of chronic kidney disease and ultimately fewer people on dialysis. This thesis is built on many uncertainties within a progressive disease, but the one area where we can have clarity is in regards to timing. In this population, the progression to end stage renal disease is typically 15 to 20 years or longer. Suffice to say, this scenario is beyond the horizon of our strategic plan. Now, turning at late stage CKD population. We believe that there are four key factors. First, GLP-1 adoption rate in CKD population. Second, the impact on CKD progression. Third, the offset impact of cardiac mortality benefit, and finally, the impact on payer mix due to any changes in the average patient age. For the purpose of building a conservative forecast, we assume robust adoption and long-term adherence, supported in part by the possibility of strong uptake by those who may take GLP-1s for obesity, rather than for the CKD benefit. We also looked at a wide range of possible clinical impact from current and future clinical trials. Stimulating across these assumptions, the midpoint of our model reflects a neutral impact on 10-year dialysis growth rates with a small, but immaterial impact on payer mix. We recognize this may not sound intuitive, which is why we must consider several misunderstood characteristics about kidney disease. If we look at the approximately 16 million people in the U.S today, with CKD Stage 3 and beyond, over the next 10 years, approximately 75% will pass away before reaching end stage kidney disease. This compares to less than 10% of those individuals who will ultimately progress to dialysis. Since major adverse cardiac events are the single largest cause of this mortality, the positive impact of reduced cardiac event has a much larger population to influence than the effect of timing from slower disease progression. To better quantify the downside case on dialysis growth, we also model the scenario in which efficacy is found across all kidney endpoints in each of the flow and select trials with zero offsetting cardiac mortality benefits. This scenario, which should be clear is not something we expect reflects a 0.5% annual growth headwind over the same 10-year period based on our model. This would equate to approximately $25 million of operating income headwind per year. Let me wrap up by acknowledging the disconnect between our view and what we believe is the markets perspective. To be clear, the disconnect is not related to the popularity of GLP-1 or their numerous health benefit, but specific to the impact on kidney care. Because of this, we have pressure tested our analytics with external epidemiologists and consultants with extensive review available research and across a wide band of assumptions. We are focused not on the midpoint, but on the downside scenario on volume, and incorporated possible financial headwinds from lower commercial mix. In the end, our conclusion, based on what we know today, is that strong adoption of these drugs will not prevent us from achieving our long-term operating income growth targets in the next 10 years. This is a complicated topic, and we're happy to elaborate or answer any questions on our assumptions. Transitioning topics. Looking forward to our fourth quarter, we are revising our 2023 adjusted operating income guidance range of $1.565 billion to $1.675 billion to a new range of $1.65 billion to $1.725 billion. We are also updating our adjusted earnings per share range of $7 to $7.80 per share to a new range of $7.80 to $8.30 per share. It's too early to give guidance for next year, but we expect 2024 to be a year of positive growth in volume and adjusted operating income. Despite continued cost pressures and our ongoing commitment to invest in our teammates, we expect the midpoint of our 2024 adjusted operating income guidance will fall within our long-term target growth rate of 3% to 7%, driven by continued progress on our operating initiatives. We will provide more detail during our fourth quarter call. With that, I will now turn it over to Joel to discuss our financial performance and outlook in more detail.

Operator:

Thank you. [Operator Instructions] Our first question comes from Pito Chickering with Deutsche Bank. Your line is open.

Javier Rodriguez:

Yes. Thanks for the question, Pito. So if you think about patient care costs, I think the right way to think about it is continued wage rate -- wage rate pressure, which we are seeing. As you think about SWBs that is offset by the lower contract labor. Remember, last year, that was a big pain for us and we've got that under control relatively early in the year. So you're probably seeing the better part of $100 million, maybe a little bit less than that. But of that order of magnitude, in savings year-over-year. In terms of other items, we've done a nice job here controlling our anemia costs. We've talked about that in terms of the reduction from the switch to Mircera. And then you have additional savings from us consolidating our footprint, as a result of lower patient volumes. So those are the big items year-over-year. If you think about 2024, I think we anticipate continuing to see pressure on the wage rate, relative to a pre-COVID number. I don't think we are ready to give guidance on where that will land, but it's certainly not coming back to the pre-COVID level from what we see now. We would expect some continued savings, as the savings from both Mircera and our facility closings annualize. And then as you would expect, we will continue to look for other opportunities to bring the cost down to mitigate, what ultimately will be a higher wage rate pressure than we see in our RPT growth.

Javier Rodriguez:

Well, Pito, this is Javier. And I saw your note. So you've been swimming and all the complexity here. So since there's different levels of familiarity and understanding on the call, and as you know, the variables have interplay with one another. I think it would be good to step back, get a common foundation, so that we can all take off from the same place. So to get that model, that you asked for, what I'm going to ask is, first, for our Chief Medical Officer, Dr. Gillian to provide a high-level overview of the Clinical. And then I'll hand it over to Joe, and he can give us a bit of the financial impact, so we could give you a framework, and then we can talk about assumptions. Is that fair?

Javier Rodriguez:

All right. Dr. G.

Javier Rodriguez:

Great. Thank you, Dr. Giullian. So I have had the benefit of weeks and weeks of being steeped in the clinical aspects of this with Dr. Giullian, other nephrologists, epidemiologists, both internal as well as external. So let me try and sum up what Dr. Giullian said and then I'll talk about our modeling. I would say three things. First, our assumptions are not pulled out of the air. These GLP-1 drugs have been used for at least 7 or 8 years for the management of diabetes. So there are a number of robust studies, as Jeff said. So there is a data set off of which to build some assumptions. That said, there's a lot of uncertainty still, and we wanted to be conservative. So we landed on two assumptions that are incorporated in our modeling. First, that 30% of the CKD population will be on these drugs. It's not going to happen overnight. It will play out over time. That's one of the things that makes the modeling complex. So that's assumption one, a 30% utilization rate or penetration rate among our population. Again, we think that is a conservative number. Second, a 25% efficacy rate. And what that means is for the patients, who take this drug, their progression in CKD will be slowed down by 25%. To put numbers on that, if you think of a typical CKD patient progressing from a later stage of CKD to ESRD over 10 years, that would convert that 10-year progression to 12.5 years. So those are the clinical inputs that we are using for our modeling. Now let me turn to how we modeled two different numbers. The first, I'm going to talk about is, commercial mix impact. And let me start with this because I think it's a little bit easier to understand and the financial implications could be serious. But what you'll hear is they are not and here's why. So as you would expect, we've got a very robust model around this, that we've used to simulate the impact in a number of scenarios. We use this also to create a much simplified framework, that we can use to explain to you how we are thinking about this. So let me start that framework with some known inputs. First, we have approximately 22,000 commercial patients today that we know. And second, again, most of our patients, who are 65 and over are on -- are not commercially insured. For modeling purposes, it is safe to assume that the population above 65 has a commercial mix of almost 0. And for the commercial mix of our incident patients below 65, it is pretty constant. It doesn't matter if they're 40 or 50 or 60, it's a pretty constant number and the number drops, when they hit 65. The result of that shape of the curve is that when we think about modeling the impact of a delay in progression from GLP-1s on commercial mix, all that really matters is the cohort of patients, who are just below the age of 65, who without GLP-1s would have been incident to dialysis with commercial insurance, but because of GLP-1s, their incidents will be delayed. And instead of being delayed at younger than 65, instead of being incident at younger than 65, they will be incident at older than 65. So with that framework, let me tell you our assumptions. First, we are talking about a 25% delay in progression. We talked about that already. That translates, as I said, into a 2.5-year window of incident patients that we care about. And here's an important fact. About 10% of our commercial population is incident in that 2.5-year window, before 65. Said another way, 10% of our commercial population is aged 62.5 through 64. And so here's the math. You take 22,000 patients assume 10% of them are in that incident window that we care about of 62.5 to 64 and say 30% of them will be on the GLP-1 drug, and that gets you 22,000 x 10% x 30%, that's 660 patients. That's the number of commercial patients, we would expect to lose, as a result of GLP-1 penetration getting to 30%. That 660 patients divided by our 200,000 patients is 33 basis points of commercial mix. So again, let me be clear what that 33 basis points of commercial mix means. It means the cumulative impact of the growth of GLP-1s, however, long it takes us to get to that 30% and to see that flow through our CKD population, will be a reduction of 33 basis points in total. If that happens over 10 years, that's about 3 basis points a year. It is a negligible amount. To put it in perspective, our commercial mix went up 18 basis points this quarter alone, you would never find this in our numbers. That's why we believe the commercial mix effectively will not change as a result of a delay in progression.

Pito Chickering:

So to sort of take all that and sort of reapply the models, but that was a very detailed answer. I will jump back in the queue for some more questions in a bit. Thank you so much.

Justin Lake:

Thanks. I appreciate all that detail. That was incredible. So let me just follow-up on one of those points, which is that 30%. So the 30% in a CKD population, that knows they're progressing to ESRD and dialysis. Is there -- what's the kind of grounding behind that number? I thought it might be higher, given the end state of kidney [indiscernible]

Javier Rodriguez:

And remember, Justin, it's better to think of it as 40% because 30% are neither diabetic nor obese. And so it's 30% overall, but 40% of the applicable population. And we are assuming a 100% adherence which is not a normal assumption. We are just trying to be as conservative, as we can be because, as Dr. G said, many, many people get off the medicine actually more than 50% after year 1 is a stat, that's useful.

Jeffrey Giullian:

Yes. It takes a lot of speculation to understand why patients do or don't do what they ultimately choose. Some of this has to do with access to physicians and access to medications and social determinants of health. Some of it has to do with discontinuation rates for any number of reasons, such as side effects and things along those lines. And quite frankly, our clinical research team has done research in the population of patients that ultimately progresses from CKD to end-stage renal disease. And there's just a number of social and other reasons, including behavioral health, education, et cetera, that limits the full uptake like we might expect on paper.

Joel Ackerman:

Yes. Let me take the buyback one first. In terms of pace, it is hard to put a number out there, I'd say, look, we've always been comfortable using excess cash flow as well as available leverage to buy back. What I would point out is, we have a bigger revolver than we've had historically. We used to have a $1 billion revolver. We upsized that to $1.5 billion. So if you think about the limitation of liquidity on our share buybacks, we would probably be more comfortable tapping into the revolver for buybacks now, now that we've got a bigger revolver than we did before.

Joel Ackerman:

Yes. I assume what you're really interested is in anemia there, that's been the source of the biggest savings. That number has come down dramatically to a point, where I think it's hard to bake in a lot of major savings from that going forward.

Joel Ackerman:

Thank you, Justin.

Kevin Fischbeck:

Great. Thanks. Maybe just to circle back to buyback comment. Is it safe to say that the $3 million to $3.5 million is still the gating factor then to that? Or now that you feel more comfortable about your base EBITDA, the ability to grow that you'd be okay over some period of time going above the $3.5 million that you would get back to that $3 million to $3.5 million?

Kevin Fischbeck:

Okay. That's helpful. And then, I guess, one of the things as you walk through your model about -- you talked about the slowdown in progression of the disease. You kind of started with like an advanced CKD population. Is there any potential that taking the drug earlier would start that clock earlier than that and extend the 25% slowdown? Or is this really something that really does just kind of kick in, they're all going to happen later on in that 10-year window is when the clock starts. And I think at the beginning, you talked about how you all see a volume impact for, whatever it was, 15 years or so. But then you start talking about how the drug has been used in the last 7 years. So trying to figure out when does the clock start on that volume impact?

Kevin Fischbeck:

Sorry, let me correct you said 3. You meant to say pre from …

Joel Ackerman:

Kevin, it's Joel here. Let me add one more point because we are probably not talking enough about the potential offset from a reduction in cardiac mortality. And that plays into this question of what impact are we seeing and when are we seeing it? And I think one of the reasons we are seeing -- we think we are seeing so little impact now is because the uptake in the drug has been so low. Jeff, correct me if I'm wrong, but GLP-1 uptake in CKD is low single digits today, right? So you wouldn't expect to see it at such a low uptake. The other important thing is both for GLP-1s and for SGLT2 inhibitors, there has been clear demonstration of a reduction in cardiac mortality. And the way we think about that playing through our population, is so many more CKD patients are likely to die of cardiac disease, than ultimately progress to ESKD. So if you can reduce that number, who are passing away from cardiac disease, it creates a larger population that could potentially, ultimately be incident on ESRD, and that would offset some of the impact of incident delay. And so if we are seeing the negative impact of SGLT2 inhibitors or GLP-1s today, even though the uptake of those drugs is so small, there is a good chance that we are also seeing the mitigating effect on the cardiac death.

Joel Ackerman:

Our new starts are back to where we would have expected them to be. We felt that pressure intensely last year, but we are now seeing year-over-year starts back to what we would have expected.

Joel Ackerman:

I think that’s a reasonable summation of where we are.

Kevin Fischbeck:

Okay. And so then this comment that you're making about, if this drug is adopted and the cardiology benefit is the way you think it could be, would we see more new starts then? Is that what would show up, you see that before we saw the progression? Or how does that -- how would we ever see that -- that's actually the way that that's playing out?

Kevin Fischbeck:

Okay. Makes sense. And then maybe just last question. The IKC business coming in better, but you're still kind of keeping that 2026 target, is there anything unusual or prior period in that? Or is it just not a big enough change from your projection to kind of say that the trajectory is accelerated?

Kevin Fischbeck:

Okay, great. Thanks.

Operator:

Our next question comes from Lisa Clive with Bernstein. Your line is open.

Jeffrey Giullian:

Thanks, Lisa. This is Jeff again. A couple of thoughts on that. There's been a push to diagnose patients earlier with CKD for a long time, and yet, we are not seeing epidemiologically a large increase in that. There's been a push to get the word out about kidney disease and things along those lines. When it comes to the medications available, medications like ACE inhibitors and ARBs, SGLT2 inhibitors and the GLP-1s, they've been available for a long time, and the knowledge regarding their kidney impacts have been known to the nephrology community for several years. So for us, this isn't necessarily new news, although I know it's been making headlines recently. So from that standpoint, we are not seeing a lot of change. We are continuing to work with physicians upstream to educate them about medications that are available and things like that. And as we think specifically about our role in Integrated Kidney Care and improving transitions of care for those patients that do go on to dialysis, this is something that's important to us. We work with our physician partners regularly on managing the care of patients with chronic kidney disease and reducing their risk factors.

Jeffrey Giullian:

Yes. Most of the estimated prevalence comes from physicians coding CKD, as a diagnosis, through what's called ICD-10 codes. And so as physicians focus on other things, cardiovascular risk factors and cancer type risk factors and things like that. CKD in the early stages, especially CKD 1 and 2 and early CKD Stage 3, just isn't top of priority in some cases. And so we are just not seeing at least the documented prevalence of those with CKD Stage 3 rise.

Operator:

Our next question comes from Pito Chickering with Deutsche Bank. Your line is open.

Joel Ackerman:

Yes. I don't think there's a lot to call out on G&A overall quarter-over-quarter, there's really nothing that jumps out. In terms of Q4, I would expect a modest uptick from seasonality, but nothing major.

Joel Ackerman:

Yes. The biggest impact on RPT quarter-over-quarter was continued progress on our collections efforts. We are really crowd from an operational standpoint of what our team has been able to accomplish there. We talked about it last quarter. We got a little bit more this quarter. And I would say, for the time being, we've probably gotten the vast majority of that. So I'm not anticipating a whole lot more of that in the next few quarters. We did see a commercial mix uptick in the quarter but, we also got the benefit of some just negotiated rate increases as well.

Joel Ackerman:

Sorry, what was the question?

Joel Ackerman:

As we've said in the past, our contracts are multiyear. So in any given year, you don't have that many at that. What we've seen up to now, is a lot of regional accounts and it's fair to say that the increases have reflected the environment that we're in, i.e., an inflationary environment. So they've been a bit higher than pre-pandemic. And we will see what next year brings as we have a couple of the larger ones up for renewal.

Joel Ackerman:

Yes. So, Pito, I think you misheard there. IKC has gotten a little bit better. We have lowered the loss since our prior guidance. So we continue to see improvement over the course of the year. In terms of '24, it's too early to give guidance. Javier talked about 3% to 7% as being where we think the midpoint of the range will fall. Again, too early to quantify where that will come from, I'd say, it's fair to say some of it will come from IKC, but that will not be all good.

Joel Ackerman:

Yes. So, for the quarter, volume came in right where we expected it. The new adds were consistent with kind of a pre-COVID type number, excess mortality, I'm going to peg it at 400. I think the excess mortality number is a number that we are probably going to start phasing out as a metric. It's getting so close to pre-COVID levels, it's getting kind of within the error band of what you consider as our pre-COVID number, and that number moved year-to-year pre-COVID. So for consistency with what we've called out historically, the number is 400. But I think I would expect that number to continue to decline and ultimately, like contract labor, it was something that was important for a period of time but is no longer important. So we are going to try and move away from that number going forward.

Joel Ackerman:

Thanks, Pito.

Lisa Clive:

Hi. I just wanted to squeeze in some questions on home dialysis, if I can. Do you have any statistics you could give us about what proportion of your incident private patients are still employed versus on COBRA and how that looks, if there's any difference in your home dialysis patients and how we should think about that mix going forward?

Lisa Clive:

Okay. I guess I was really just wondering for those private patients that managed to go on home dialysis, whether there is more of a -- whether more of them can stay employed because my understanding was for the patients that are on COBRA, a lot of them won't make it through the full sort 33 months. Could you just comment on whether I'm right on that and whether that -- whether greater home dialysis could mean sort of more patients employed for longer?

Javier Rodriguez:

And Lisa, one of the things that is important for the last decade or so, people assume that patient would go home, they would have more flexibility and they would keep their ability to work. But the reality is that the dropout rate on dialysis at home has continued to be incredibly high. So roughly about half of the patients that are on therapy would rather be taking care in center or have to be taken in center because of a medical condition.

Joel Ackerman:

Thank you.

Javier Rodriguez:

Okay. Well, I know that, that was a very dense conversation, unusual in that it was not so much related into the quarter, but something that is really important to have an understanding of what we are looking at and what you're looking at. So let me make a couple of closing comments. First, we had a very strong quarter, and we continue our track record of meeting our commitments. Secondly, hopefully, it became clear. We are very happy that these drugs are out there and it can improve the lives of many. But on kidney, it is more nuanced to understand the impact it will have on the population. Third, even with a robust adoption, based on what we know today, we believe that this class of drugs will not impact our plan to deliver a 3% to 7% OI growth for our long-term plan. And then lastly, but really important, we remain really diligently and focused on delivering the best care today for our patients while also building the capabilities and models of care for a healthier tomorrow. It just dawned on me that this is the last time that we're scheduled to speak for the year. So on behalf of our team, I'd like to wish you and your families a happy and healthy holidays. Be well.

Operator:

Good evening. My name is Michelle, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the DaVita Second Quarter 2023 Earnings Call. Today's conference is being recorded. If you have any objections you may disconnect at this time. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [Operator Instructions]. Thank you, Mr. Eliason, you may begin your conference.

Javier Rodriguez:

Thank you Nic, and thank you for joining our call today. I hope that everyone's having a safe and joyful summer. At DaVita, we've been focused on innovation and continuous improvement to provide the highest quality care for our patients. Hand-in-hand with these efforts, we've been driving operational improvements across our organization. Our second quarter performance reflects strong traction across those initiatives, putting us on a path to deliver strong clinical outcomes and financial results for the year. Today, I will cover the second quarter results, offer some perspective on the industry landscape and drivers of long-term performance and update our full year guidance. Before we get into the second quarter details, I would like to take a moment to celebrate a clinical and technological milestone. On our February call, we mentioned the rollout of our next generation clinical IT system, which we refer to as Center Without Walls or CWOW. I'm happy to report that after five years of development, CWOW is now alive in each of our approximately 2,700 clinics across the United States. This patient-centric cloud-based system combines and replaces four legacy systems and is designed to provide seamless flow of information across each of our centers in all modalities. This includes real-time clinical dashboards, data sharing with our physicians and integrated kidney care platforms, and notifications such as critical lab alerts. For ease of use, it features wristbands for quick teammate login, improve ability to track and reschedule mistreatment, enhance real-time documentation, and consolidate it reporting for streamlined analysis. And while we're enthuse about these immediate benefits, the most significant enhancement is the state-of-the-art data structure and platform upon which we can build further capabilities, including artificial intelligence to advance the care delivery in the years ahead. With this groundbreaking platform, our clinicians are able to access the right information at the right time in the right place. Transition to our financial performance. In the second quarter, we delivered a adjusted operating income of $432 million in adjusted earnings per share of $2.08. These results were driven by improvements across our financial trilogy of treatment volume, revenue treatment, and patient care costs. I'll touch on each of these in a bit more detail. On volume, we saw our second consecutive quarter of improvements in census and treatments per day. This is encouraging, as it's the result of better macro-environment and progress in our operating initiatives. We're turning near the top of our original volume range of down 3% to flat year-over-year, and if these trends continue, we would anticipate delivering volume growth in 2024. Shifting to revenue and revenue per treatment. Revenue per treatment was particularly strong in the quarter. This was primarily driven by typical seasonal factors from patients meeting their copays and deductibles, along with normal expected rate increases and improvement in mix, including Medicare Advantage. Adding to the RPT increase, we have seen progress from investments we've been making in our revenue cycle capabilities. These investments resulted in higher cash collections and a decline in our DSO. I'm excited about the investments we've been making in these areas, which represent a good example of how we are constantly improving operations. And finally, patient care costs improved as expected in the quarter. Although base wage increases remain well above historic pre-pandemic levels, other expenses, including contract labor and pharmaceuticals continue to decline. This benefit was partially offset by elevated training costs. While staffing level in our clinic are in a much better position compared to last year, we continue to experience above average turnover among facility teammates. As a result, we no longer expect an improvement in our training productivity during the back half of this year. Taking a step back for the most recent results, I would like to offer some reflections on the broader industry landscape and our effort to drive performance going forward. Beginning with the reimbursement rates. We are disappointed by CMS's proposal to update the ESRD perspective payment system for 2024. Specifically, the proposed rate increased false short of expected cost inflation in 2024. And it failed to adjust for the acknowledged inflation forecast miss relative to actual wage and inflation increases over the past two years. The kidney care community will continue to advocate for an adjustment mechanism to reconcile these forecasters similar to what exists today for skilled nursing facilities. In response to the persistent cost inflation, we are continuing our track record of innovation across all areas of our cost structure. Most recently, we consolidated portions of our facility footprint and reduced pharmaceutical costs through our conversion to Mircera for anemia management. These programs are proceeding in line with our expectations. Going forward, we will continue to drive cost efficiencies across the P&L. Through these efforts and continued improvement in our volume trend, we continue to target 3% to 7% long-term growth of our enterprise adjusted operating income. Looking forward to the remainder of the year, given our progress during the second quarter, we are advising our adjusted operating income range of $1.475 billion to $1.625 billion to a new range of $1.565 billion to 41.675 billion. We are also updating our adjusted earnings per share range of $6.20 to $7.30 to a new range of $7 to $7.80. Our performance relative to this guidance will continue to depend heavily on momentum and patient census trends, our ability to manage patient care costs within the broader labor environment and sustain improvement in revenue cycle management. I will now turn the call to Joel to discuss financial performance and outlook in more detail.

Operator:

Thank you. [Operator Instructions] Our first color is Kevin Fischbeck with Bank of America. You may go ahead, sir.

Javier Rodriguez:

Yes. Thank you for the question, Joanna. I'll start off and Joel, you can supplement if I miss anything of importance. Private pay mix is holding up. It picked up 20 bps and we continue to see that our private pay patients really value their insurance. As it relates to rate increases, just a reminder, most of our contracts are multi-year. So, in any given year, we don't negotiate that many contracts. There's nothing really to call out on that. Our rate per treatment increases are in line with expectations. So, is there another part of your question that I didn't answer, Joanna?

Javier Rodriguez:

Sure. Let me take a minute, and let me lend up a little to some people who are not tracking all of the Marietta, so it's probably best for me to divide it into what we know and what we don't know. So, let me start with what we do know. As we look at our claims year to date, we have not seen much change compared to prior years, so there's not a lot of volume. But we have learned more about how employers change benefits and mislead members on how it's done. And so we don't want to accommodate this poor behavior. So what we have done is we've implemented a verification process at admissions, and if an employer eliminates the network, dialysis benefit for its member, then we have the right to prevent that plan from having access to our centers. In addition, we continue to have very high interest, bipartisan interest and making sure that policy makers protect our patients. So those are the things that we do know. What we don't know is how many employer groups are considering carving out dialysis from network in the future. And we also don't know if or when members of Congress will introduce the bill and how the CBO will score it. The last part of your question was, are payers using this in one way or another? And it has not come up in one negotiation, because this is really more of a dynamic between the employer, trying to decide what to do with the plan, not what the payer does with the provider. The provider and the payer both value network. Does that help you, Joanna?

Javier Rodriguez:

Yes. There's nothing we can predict from the outside. That's left to policy makers, champions, and the dynamics of Washington, D.C.

Joel Ackerman:

Yes, Joanna, if I were to kind of give you the pieces of what drove $70 million of increased guidance, that's middle of the range to middle of the range on OI. I'd say about half is the RPT, as you called it out. The other half is volume. We saw stronger admissions this quarter and the nature of volume is it's cumulative. It'll never really kick in any one quarter in that big a way, but as it accumulates, stronger in Q1, stronger in Q2, and we see it better in the back half of the year. For the full year, we think that'll contribute about half of the $70 million. Contract labor, it continues to improve, but it's now pretty much in line with what we were expecting. And as we said in the prepared remarks, it's really back down to pre-COVID levels, and hopefully it won't be much of a topic going forward.

Operator:

Thank you. [Operator Instructions] Our next caller is Andrew Mok with UBS. Sir, you may go ahead.

Joel Ackerman:

Yes. Andrew, thanks. So on the seasonality, no, it was a little bit more than $5 per treatment, which is right in line with what we've seen historically. In terms of collections, look, we have invested in our processes and in our technology to get better information and to give better information to the health plans on everything from prior authorizations to other data required to claim submissions. And that's both the quality of the data and the timeliness of the data. And what we're seeing is we're getting paid quicker, and that's why you saw DSOs come down last quarter. And again, this quarter, and we're also seeing we're collecting more, and that's what's driving the RPT increase. And I think the most important thing from our standpoint is not a one-time thing. These are fundamental changes that we've made, that we think will persist.

Joel Ackerman:

Sure. So the big difference between OI and free cash flow is the DSOs. As we see those DSOs come down, that'll add to the free cash flow for the year. In terms of share repurchases, we're on track with what we set out to do. Our leverage levels were above our target range. I think we were quite clear with everyone. We wanted to get back down to 3.5 or below. We're making good progress on that. We're at 3.7 for the quarter, and we didn't buy back any shares. We don't expect to buy back any shares in Q3, but we feel like we've got better visibility now to get back to the 3.5 or below.

Operator:

Thank you. Our next caller is Pito Chickering with Deutsche Bank. Sir, you may go ahead.

Operator:

Pito, your line is open. We'll go to the next caller. Lisa Clive with Bernstein. You may go ahead.

Javier Rodriguez:

Yes. Thanks for the question, Lisa. It's kind of funny. I've been here for a very long time, and not many questions used to come up about the rate increase with Medicare. And so, we started to ask ourselves, why is this a new dynamic? And the reality is that the system is quite complicated, but it works relatively well in times where there's economic stability. And yet, when we're experiencing times of inflation or lack of stability, it's really showing that it doesn't work in many ways. So let me step back. If you were to spend time on trying to understand the methodology, you would really come to the conclusion that it is practically not possible to forecast, because there's just too many things that are either proprietary or use lag data or a benchmark that is not related to dialysis. It's a benchmark related to all healthcare costs, and it's all weighted and then discounted with some kind of productivity factor. And so, the short answer is, it's a big, complicated equation with some variables that we will not have visibility to. So that's the short answer. We can't forecast it. I can't believe anyone from the outside world can. Secondly, what is an appropriate one and what we are advocating for is, let's not have -- let's call it winners or losers. We understand that forecasting is difficult, but let's have a reconciliation that is actually linked to actual costs. And if you get an increase and exceeds what inflation, that there could be a decrease or vice versa. So that's what we're advocating for. As you know, it is very difficult in Washington, D.C. right now on trying to get funding, but we are trying to make our case.

Javier Rodriguez:

Yes. The process from MedPAC is a bit opaque to us. We try to educate and highlight what is really happening with our cost structure. And, again, in periods of stability, it happened to be, give or take, within reason, acceptable. And now the gap is widening, and it's widening compounded year-after-year. So, it's really starting to be significant.

Javier Rodriguez:

Yes. There's lots of go into the decision to close the clinic, in particular, we've got to really focus on patient care and make sure that our patients are being taken care of. But it is absolutely a consideration when you look at the economics, but sort of the first filter is continuity of care. The second is, is there a convenient place for that patient can be taken care of. And then after that, you get into economic factors such as reimbursement, leases, and other things, but we are aggressively looking at our footprint, and we continue to right-size to make sure that we are thoughtful about our resource allocation and capital allocation.

Javier Rodriguez:

Thank you, Lisa.

Pito Chickering :

Hey, can you guys hear me now?

Pito Chickering :

All right, sorry about that. I'm not sure happened there. Back to treatment growth here. In pre-COVID, like you're getting about 4,000 new patients a year, about two-thirds of those in the first half the year from nephrologist dropping on and obviously, the rest coming from hospitalizations and start talking to you guys. I guess, how is that tracking this year at this point relative to sort of that 4,000 times two-thirds? Is that what do you guys are seeing for new patients at this point?

Pito Chickering :

Which is a perfect segue for the next question about mortality. You talked about that sort of coming down. I guess is there any way you can give us, or what is the rate of that decline. And if it follows the path you've seen in the last three quarters, is this, so what glide path would that indicate?

Pito Chickering :

Okay. Is there something they can quantify for what excess mortality was this quarter and what is there was for the last quarter?

Pito Chickering :

Okay. And I definitely understand sort of the complexity of coming up with those for a variety of different reasons. For Medicare Advantage what percent of your MA patients are currently taking risk for one way or another?

Pito Chickering :

Okay. The next one here is, on managed care rate increase question that was asked earlier. I guess, are you seeing managed care do anything different in terms, not just in rate increases, but potentially trying to your patients? Like, if you've seen any behavior changes for managed care in the last 90 days or so, just, obviously you're seeing increase relation elsewhere, just curious that they're trying to control costs within other parts of the business?

Pito Chickering :

Okay. Got it. And then, so last one here. On the pace of consolidation for facilities, obviously, you guys do the lowest-hanging fruit, first. But as you see success of capturing those patients serve within other centers, do you get more aggressive about consolidation that maybe you had originally planned for about a year from now? And when this patients are consolidated, do you see an increase of local treatments at that point?

Pito Chickering :

Okay.

Pito Chickering :

Yes. So, I'll ask some questions in different ways. I guess, as if the patient is consolidated, do you see an increase in the utilization of home treatments? And then, the second part of the question is, to what percent of treatments today are being done in the home?

Pito Chickering :

Okay. And then, I think a last question for me here. Can we get an update on the Medtronic JV? I guess, so, how much sort of on to the drag is that on OI. And just as you look at it today, kind of what's the pathway to that becoming operating income neutral, and can you just refresh us sort of why that's good opportunity for you guys? Thanks so much.

Pito Chickering :

Perfect. And the last quickie for me. I may be missed it. Did you guys quantify what the turnover was, nurses and technicians for this quarter and how that compares versus 2019? Thanks.

Pito Chickering :

Great. I'll stop there. Thank you guys very much. Thank you

Operator:

And at this time I am showing no further questions, sir. We do have one more question. Andrew Mok from UBS. You may go ahead, sir.

Javier Rodriguez:

In general you can imagine health care is local, and so there are areas where there are literally full clinics. There's sometimes relocations. Sometimes as you called out there might be just a home center that was needed. So there's a little of all, but as you can see the number is materially smaller as we are very focused on making sure that capacity utilization is where it needs to be and that we're capital efficient.

Javier Rodriguez:

The mortality level looks, roughly a percentage or so higher than pre-pandemic. And as Joel talked about it, it's a bit cyclical and depending on the surge. There is one or sort of the front end tends to have higher mortality in the front end of the year or the back end in the year versus the middle of the year, but I think a good number is roughly one percent or give or take 2,000 patients.

Javier Rodriguez:

Thank you.

Javier Rodriguez:

Okay. Well, thank you Michelle and thank you all for your questions. As you heard through our comments today, we've continued to drive operational efficiencies and make investments to feel our performance now and to the future years as well. Some of those seeds that we planted are beginning to sprout and some will take additional time and continued effort. We look forward to keeping you updated on our continued progress in the back half of the year. Thank you for joining the call and be well.

Operator:

Good evening. My name is Michelle, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the DaVita First Quarter 2023 Earnings Call. Today's conference is being recorded. If you have any objections you may disconnect at this time. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [Operator Instructions]. Thank you, Mr. Eliason, you may begin your conference.

Javier J. Rodriguez:

Thank you, Nic, and thank you all for joining the call today. 2023 is off to a strong start for DaVita. We entered the year with a cautious balance of optimism about our ability to execute against our plan and uncertainty about treatment volume in a challenging labor market. In the first quarter, we performed well on our key metrics and our results benefited from an improving macro environment. While some external uncertainties remain, the continuation of current trends would put us on a path to deliver strong results for the full-year. Before I get into the details about the quarter, I would like to elaborate on an area of our long-term strategy, which is to connect transitions of care through solutions for our patients across each step in the kidney care continuum. That leads me to our clinical highlight around CKD education. Periodically, we have provided updates on our community education program called Kidney Smart, raising awareness through education in the kidney care community is critical, particularly given the fact that 1 in 7 American adults have chronic kidney disease and the majority of these people are not aware. Our Kidney Smart program is designed to help those patients understand and manage their kidney health and is frequently recommended by nephrologist as a go to resource for patient education. To help remove the barriers to health equity, we've offered these classes in 10 different languages. In 2022, over 33,000 CKD patients attended the Kidney Smart class, a best ever for the 12-year history of the program. Moreover, in 2022, DaVita patients who attended Kidney Smart classes were more than twice as likely to choose a home modality in consultation with our nephrologist and care team. Transitioning to our financial performance. In the first quarter, we delivered adjusted operating income of $352 million and adjusted earnings per share of $1.58. As we discussed in prior quarters, we implemented a number of initiatives in the second half of 2022 to respond to the pressures associated with lower volumes and higher costs. These plans, combined with a strong operating rigor, translated into positive results in the quarter, and we're now seeing some of the operating metrics that impacted margin in 2022 begin to normalize. I'll start with the biggest driver of Q1 outperformance, labor. We made good progress on labor costs in the quarter, which reflected a combination of operating diligence and improvement in the overall labor environment. As we have said in the past, successful labor management requires effectively managing the interplay between wage growth, contract labor and training costs. Our operators continue to improve on the permanent staffing levels within our clinic, which has enabled us to drive further reduction in contract labor costs during Q1. We're tracking ahead of plan in our efforts to cut our full year contract labor expense in half relative to last year. The increase in permanent teammates, combined with elevated turnover, resulted in training cost in the quarter above historical norms, although below the peak we saw last summer. This is in line with our expectation, and we anticipate improvement in our training productivity in the back half of the year. This will largely depend on successful teammate retention which has historically tracked closely with the health of the broader labor market. Moving on to treatment volume. Quarter-over-quarter treatments per day were up approximately 1% and better than the middle of our expected range. This was driven by net census gains due to both higher admit and lower mortality. Because of the annualization of excess mortality from 2022, we still anticipate a reduction in overall treatment volume on a year-over-year basis and we continue to assume excess mortality over the balance of this year. That said, we're encouraged by our first quarter volume results. What we saw in Q1 proves to be a trend, we would expect to finish the year in the top half of our volume forecast range of down 3% to flat relative to 2022. Transitioning to a couple of strategic topics. On April 1, DaVita and Medtronic announced the launch of Mozarc Medical, a new independent device company focused exclusively on innovative kidney health technologies. Mozarc current products and its R&D pipeline ranging from kidney access technologies to advanced home dialysis and acute therapies are intended to improve the overall patient experience and increase access to home-based care. This investment reaffirms our commitment to realizing scale transformation in kidney care and allow us to fuel innovation in partnership with Medtronic, a global leader in healthcare technology. And finally note on integrated kidney care or IKC, We continue to make progress consistent with our business plan and demonstrate that our model of care is improving the health and well-being of our patients. I will highlight two examples of this. First, across our IKC program, more than half of our patients achieve an optimal start, which means the patient initiates dialysis treatment at home or appropriate vascular access in place. Optimal starts reduce costly and difficult hospitalizations and on average lead to a reduction in the continuing cost of care in the month and year that follow. Second, recent data continues to show an encouraging differentiation in hospitalization rates from patients in our IKC program versus our overall patient population. As we continue to scale our IKC business, which is measured by the total dollars of medical spend in our program, we will continue to focus on driving our net saving rate while pursuing a cost efficient model of care. In summary, looking across our most important operating metrics, we're seeing progress at a faster rate than assumed in our initial forecast. Therefore, we are revising our adjusted operating income range of $1.4 billion to $1.6 billion to a range of $1.475 billion to $1.625 billion and revising our adjusted earnings per share range of $5.45 to $6.95 to a range of $6.20 to $7.30. Aside from the COVID disruption in the labor market, other important factors for the remaining of the year include continued progress against our cost saving initiatives, which Joe will elaborate on and, of course, our continued effort to restore patient benefit protection to our advocacy efforts. I will now turn it over to Joe to discuss our financial performance and outlook in more detail.

Operator:

Thank you, sir. [Operator Instructions]. Justin Lake with Wolfe Research. You may go ahead, sir.

Javier J. Rodriguez:

Okay. Well, there's a lot in there. So let me just pull up for a second and then Joel can answer some of your follow-up questions. Justin, this is Javier. First, on labor, we started to give a little more color when we had more volatility in some of the underlying metrics, but I think it's a good time right now to pull up as you ask, which is a bigger number, but just so we're clear on all of the metrics. When you talk about SWBs, you take into account wages, productivity, benefits, training and contract labor. Within wages, there's obviously you can double click on that. You've got over time shift differential and other things. But let's stay with those five. In the third quarter of 2022, we had a spike in training and contract labor that we called out because they were outliers to our historical numbers. But then as we fast forward to today, we worry that people aren't fast enough with the math to calculate the interplay between the five. So let me see if I get to your number and if not, you can follow-up a question. So from 2018 to 2022, we had a CAGR of roughly 2% in SWBs. In 2022, which of course had that outlier that we were just talking about, that number went to roughly 8% growth. And in 2023 over 2022, we expect that number that incorporates all those variables to be more in the 4% to 5% growth. So does that answer the question on labor or do you want to ask a follow-up on that?

Joel Ackerman:

I'd say, Justin, we're thinking we're about $25 million ahead of where we thought we would be on the total labor cost. So if you think of our guide increase at the middle of the range of $50 million, I'd say half of that is labor and half of that is volume. And that's how I get to $25 million.

Joel Ackerman:

Well, in the labor line itself, there were some items that we don't think will recur. They were good guys in lines like benefits in workers' comp that I'd strip out as you think about annualizing things. So the $25 million would be a full-year number. In terms of where we need to go from here, we're expecting continued wage pressure as the year presses on. There will be a little bit of improvement in contract labor, but we've seen most of the improvement in contract labor that we're likely to see because it just happened faster than we thought. And on the productivity side, we haven't seen much. We're off the peak that we saw in the middle of last year, but we're still well above pre-COVID levels. And what we're currently building in is some progress in the back half of the year, but ending the year still above pre-COVID levels. And that's really driven largely by the turnover that we're seeing.

Operator:

Thank you. Our next caller is Kevin Fischbeck with Bank of America. You may go ahead, sir.

Javier J. Rodriguez:

Yes. I think it was really answered a little bit with Justin. So let me make sure we're asking the same thing. So we just basically said that if you take all of the variables into account that we think that SWBs will be 4% to 5% higher, 2023 over 2022. Does that answer your question?

Operator:

Thank you. Our next caller is Andrew Mok with UBS. You may go ahead, sir. Hi.

Javier J. Rodriguez:

Sure. Thanks for the question. So I like to use the treatment per day number and you'll see that that number is up about 90 bps quarter-over-quarter. That is largely driven by census increases and that's the result of admissions increases in Q1 offset by continued excess mortality, which is way down relative to prior years, but remains higher than it was pre-COVID. In terms of mistreatment rates, it continues to trend well above the pre-COVID number. It can move around from one quarter to the next. There's a lot of seasonality and other impacts in it, but we are still seeing it running roughly 100 basis points higher than what we saw pre-COVID.

Javier J. Rodriguez:

We do not have any disclosures on it. All I can tell you is that the rollout is going as well as we expected and that from a clinical perspective, we are seeing the results that we wanted. So it's going as planned.

Javier J. Rodriguez:

Thank you.

Pito Chickering:

Good afternoon guys. So a follow-up here on Justin's question, on the $50 million operating income raise, you said half of the labor and half of better volumes. You added almost 60% new lives into IKC. I guess any changes on how that is tracking versus your previous guidance And then on the guidance raise, can you walk us through what $50 million of operating income is transitioning in $100 million of free cash flow? Is that just working capital or anything else in there?

Joel Ackerman:

Yes, Pito, on the free cash flow as you pointed out, obviously, an increase in OI helps that. The other two things are one cash taxes are trending better than we expected. And the second is working capital. You see the DSOs were down considerably. So, we think we'll get a bit of a tailwind to that as well for the year.

Joel Ackerman:

Yes, as you said, we agree. It's a little hard to say because we have so much noise and volatility because of COVID. And so there's not a lot to report what we're seeing is that the savings are coming in line to where we expect the model of care is a little less efficient than we want. We need to build more scale and we need to standardize a whole bunch of these things that right now are manual. So we're still work in progress. We're going a lot of things that we want to be and we're still expecting to be breakeven in 2026.

Joel Ackerman:

Yes. So let me walk you through some numbers, Pito, here. So the net census growth in Q1 was about 1,350 patients. If you compare that to what it was in Q1 of 2022 that was negative almost 500 patients. So an almost 2,000 patients swing, most of that is explained by the change in excess mortality although some of it is also the result of a better admit quarter this quarter than we saw last year. So on both the mortality side and the admit side, we saw progress.

Joel Ackerman:

If you were to look at this excluding excess mortality, I don't have the numbers in front of me, but I can tell you it was definitely higher this quarter than it was Q1 of 2019. That said, I would be cautious before we start extrapolating this out. This is one quarter of data, this metric historically has been variable quarter-to-quarter and I'd want to wait to see what happens for a few more months before we're ready to really declare a trend here.

Javier J. Rodriguez:

It's a little too early to call it. We've been studying and evaluating all different data sources and we're not ready to draw any conclusions. But there's a lot of movement upstream on the CKD population in particular with COVID. And so we will look because as you know there's some things that are making progression slower. On the other hand, there's things that are expanding life expectancy. And so our math is not leading to any conclusion at this point.

Javier J. Rodriguez:

Yes. So excess mortality was about 900 patients in the quarter. We have brought down slightly our expectations of excess mortality for the balance of the year but we're still looking at a number somewhere between 2,500 and 3000 patients. In terms of what's built into the middle of our guidance range.

Javier J. Rodriguez:

Thank you.

Gary Taylor:

Hi, good evening. I think just two quick numbers, once for me, Joel, you had mentioned or at least in the release, some favorable items in G&A, including advocacy refund. Just wondering if you could size that for us? And then on IKC, I know there's a ton of moving parts there, but I'm just trying to sort of foot how the revenue was down $4 million sequentially from 4Q, but you said you had better than -- or some early revenue there and some delayed expense. So just trying to sort of foot down, but still including some early revenue recognition?

Gary Taylor:

Got it. Perfect. Thank you.

Operator:

Thank you. Our next caller is Pito Chickering with Deutsche Bank. You may go ahead, sir.

Javier J. Rodriguez:

Yes. Thanks, Pito. A couple of things. We're not seeing anything to report on from the managed care negotiations and just to refresh you, we've talked about our contractor multi-year in any given year, we negotiated roughly about 20% or so of our portfolio and we're not seeing anything different in this year. What we've talked about in Q4 last year is that we said we would get a revenue per treatment increase year-over-year from 2% to 2.5%, 2023 over 2022.

Javier J. Rodriguez:

Yes. So we haven't quantified the number. We've always said it will be part of the $125 million to $175 million but not the biggest piece. The biggest piece of that is Mircera. We'll get -- so that'll be in 2023. There'll still be some amount that will rollover into 2024, but we'll get most of it in 2023.

Javier J. Rodriguez:

Yes. So I think what we said was that in the year, last year, remember contract labor was running around hundred million and we said for the year this year, we'd be half of that and now today we move that -- we are moving better -- at a better pace. So that number will be more like $35 million. But again, I would point you to the beginning of the conversation where we said the most important part is the interplay between all the variability of all those metrics because, of course, training productivity wages, benefits and contract labor are all intertwined, but that's the number.

Javier J. Rodriguez:

Yes. So here's the way I'd think about the training cost. They peaked last year as a result really of two things, higher turnover combined with the need for us to net add staff and those combined to a high training level. As we sit here today, the turnover remains elevated. It's gotten better on with some class of late birth than others. But it still remains elevated. So we're expecting continued high training levels until that comes down. We're modeling the back half of the year but we are much closer or at fully staffed. So some of the training associated with getting the staffing levels back up is now done and that will mitigate some of the training costs relative to the peak we saw in Q3 last year.

Javier J. Rodriguez:

Not a lot. The change in contract labor is a much bigger tailwind relative to 2022 in the training productivity. And that's -- it's partly because we're not going to see the training productivity improve till the back half of the year. It's also partly because in the beginning of 2022, training productivity was still low. So we saw the spike in Q3, but that was only one quarter.

Javier J. Rodriguez:

Thank you, Pito.

Javier J. Rodriguez:

Thank you, Michelle, and thank you all for the questions. As I hope you've heard today, we have some positive momentum to start the year that the results of Q1 proved to be sustainable trend. We're excited about the implications for our patients, our teammates, and our financial performance in 2023 and beyond. Thank you all for joining the call and be well.

Operator:

Good evening. My name is Michelle, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the DaVita Fourth Quarter 2022 Earnings Call. Today's conference is being recorded. [Operator Instructions]. Mr. Lien, you may begin your conference.

Javier Rodriguez:

Thank you, Nick, and thank you all for joining the call today. We start 2023 with a mix of optimism and uncertainty about the year ahead and with continued conviction in our long-term capabilities and strategy. We're grateful for getting through the winter without a surge of COVID-related mortality and like a bunch of society, wondering whether the worst of the COVID pandemic is finally behind it. I'm encouraged by the progress we've made in the recent months to improve that, which is within our control, while we continue to invest in our future. That said, we're cautious in our optimism today because we're still experiencing the impact on volume and labor. For today, I'll spend a few minutes on fourth quarter results and then focus on the future with a summary of our 2023 strategic priorities and then end with our 2023 outlook. Before I dive into these topics, I'll start, as I always do, with a clinical highlight. Our most impactful clinical initiatives are those that directly improve the quality of life and vitality of our patients. There are many measures serving that important purpose. And today, I'll take a moment to recognize the successful efforts to decrease infection rates amongst our vulnerable patient population. One way we measure success is by tracking bloodstream infection, and I'm proud to share that we achieved an all-time low blood stream infection rate for our patients as of the third quarter last year. This reflects a 20% improvement within the last year alone. These results represent just one of many efforts we have undertaken to reduce hospitalizations and mortality, which is a tremendous gift for our patients and their family. I will now pivot to our results. Our full year 2022 adjusted operating income came in at the top end of our revised guidance at $1.45 billion. Adjusted earnings per share from continuing operations for the full year 2022 was $6.60 and we generated $817 million of free cash flow. The primary driver of our fourth quarter performance coming in at the high end of our range was improvement in labor cost. The labor environment continues to be challenging across many dimensions with fourth quarter was certainly better than third quarter. One particular highlight, our focus on reducing contract labor produced results earlier than expected. We still expect contract labor will be higher than pre-COVID levels in 2023 by $20 million to $40 million, but that will be a significant improvement to 2022. We continue to make progress in hiring teammates during the quarter as we work to stabilize center staffing levels and increased retention. Of note, this increase in labor capacity will continue to drive higher than typical training and onboarding costs in 2023 until retention normalizes to historical levels. We continue to expect wage pressure above historical norms in 2023 but anticipate wage growth at levels below 2022. Despite early optimism for improvement in 2023, the labor markets remain highly dynamic and will remain a key swing factor in our performance. Our fourth quarter results give us increased confidence in achieving the improvements we discussed last quarter. On to volume, overall results for Q4 were in line with our guidance from last quarter. COVID infection and mortality rates in December and January were lower than in prior years, which is a welcome relief for our patients and our caregivers. Because the winter surge has historically occurred late in December, the lack of a surge did not result in material improvement in our treatment volumes in Q4 relative to our expectations, but has reduced our expectations for total access mortality in 2023 by approximately 1,000 patients as compared to our expectations in the range provided last quarter. Last quarter, we also highlighted that patient admissions and missed treatment rates is a key variable to our volume. We continue to see pressure on both of the metrics, but at the levels in line with our most recent expectations. For 2023, we continue to use a wide range of possible volume outcomes in our guidance given the uncertainty of the virus. We have shifted the range up to account for the lack of a meaningful winter surge so far but have not fully discounted the possibility of a COVID surge later in the year. Our 2023 volume guidance includes a treatment range of down 3% to flat relative to 2022. All else equal, the lack of a COVID event over the remainder of the year would move us towards the better end of our volume range. Looking forward to 2023, we kicked off the year with a robust and exciting set of priorities. We remain resolute in our commitment to pursue strategic goals that create a strong future for our patients and our company. I will highlight 5 of these priorities today, beginning with innovation. First, we're approaching a key milestone in our journey towards digital modernization. After years of development, this year, we're deploying our next-generation clinical IT platform. This new cloud-based system is designed to provide seamless access to patient records across locations, supporting integrated kidney care and enhancing data reporting and analytics. Rollout is well underway, and we expect the system will be alive in our centers across the country in 2023. This platform will provide a superior experience for our teammates and physician partners while enhancing clinical care for our patients. Second, on policy, the Kidney Care community remains active working with CMMI to enhance innovative model that improve care coordination and advanced initiatives around transplant, home and Health Equity. At the same time, we're advocating for an update to the industry bundle payment system to better reflect year-over-year cost increases. And finally, we continue working with the broader kidney community to restore benefit protection for our patients through legislative and regulatory efforts. Third, operationally, we remain committed to educating our patient and our position to increase adoption of home modalities were clinically appropriate. In support of our over 1,700 existing home programs, we are launching transitional care programs across the country to educate new dialysis patients on their modality options. We're also working toward a full integration of our technology platform to create a holistic informational ecosystem for better home patient management. Fourth, our Integrated Kidney Care business is expected to deliver another year of significant patient growth. With the benefit of increased scale, it will be an important year for us to continue building on our capabilities for IKC to achieve its purpose of driving better outcomes for our patients, better collaborations with physicians and an economic alignment with our payer partners, particularly within the growing Medicare Advantage segment. And finally, to fuel these initiatives, we're maintaining a disciplined approach with our cost structure. For example, this includes our ongoing transition on the ESA therapy and the ongoing consolidation of our facilities footprint to align capacity with treatment volumes. This discipline is particularly important in the context of Medicare fee-for-service rates, which, as you know, have not kept pace with our increasing patient care costs. As you can see, 2023 will be a dynamic year across many of these efforts, and we remain firmly focused on the key operating drivers I previously mentioned. Now shifting out to outlook. For 2023, we're initiating guidance for adjusted operating income of $1.4 billion to $1.6 billion and adjusted earnings per share of $5.45 to $6.95. This reflects our latest views on continued with moderating labor headwinds over the balance of the year persisting volume pressures offset by the positive impact of avoiding a winter surge and the benefit of the cost-saving initiatives we have previously outlined. Looking longer term, if we continue to see diminished impact from COVID and moderating the labor pressure, we would expect to return to a more normal adjusted OI growth trajectory of 3% to 7%. I will now turn it over to Joel to discuss our financial performance and our outlook in more detail.

Operator:

[Operator Instructions]. Our first caller is Andrew Mok with UBS.

Joel Ackerman:

Yes, Andrew, I'll take that one. So I'd say relative to the guidance we gave on the Q3 call, we've really learned 2 things. One is, as you highlighted, the quarter came out at the high end of our range, largely as a result of labor. And the second is we didn't have a winter surge. As we looked at guidance for the year, we incorporated the volume improvement from no winter surge. We looked at the labor dynamic and ultimately, we concluded to leave our labor guidance for 2023 unchanged, really for 2 reasons. One, we did see improvement in Q4, but some of that was improvement that we really anticipated in the front half of 2023. It just came in earlier than expected. So you wouldn't expect that to change '23. The second is we're in a really dynamic labor environment. And given all the moving pieces we ultimately concluded 1 quarter's worth of outperformance wasn't enough yet for us to change our views. So for that reason, we kept labor where it is and the improvement in the guide for next year is really the result of better volume because of no COVID surge in the winter.

Joel Ackerman:

Yes. Contract labor costs in Q4 was down about $14 million relative to Q3.

Javier Rodriguez:

Sure. I'll grab that one. In essence, when we think of growth, we think of it in 2 categories. One is what's within our control and the other is the macro factors. Within our control, as we said, in the fourth quarter, we've made some progress, and we will continue to make progress on being staffed and ready to accept new patients. On the macro, which is sort of the question that many are asking, what is upstream new patient looking like, there are some questions that we still can't quantify. Some variables that we still can't quantify. That said, there is nothing we've seen that leads us to conclude that there is a permanent change to new starts. And so the best assumption at this juncture is to assume that after COVID plays out, that admits would revert to the roughly 2% that we experienced historically.

Javier Rodriguez:

Yes. The cadence is obviously done very carefully with the coordination of all the physicians making their own independent decisions as to what's right for each patient. It will roll out throughout the year, and we should be done by the end of 2023.

Philip Chickering:

Sticking with the incidence for a few minutes. It's pretty delayed, but looking at the U.S. incident count the first half of 2022 is down sort of 5% versus '21. I guess, can you guys help quantify sort of what your new adds were sort of quarterly throughout 2022? You guys sort of assume that to be in 2023?

Philip Chickering:

Okay. So looking at the press release, you had added about 1,200 patients sequentially. I guess, you actually can't quantify for us the 6,000, 3,000 ads with the delta being sort of mortality. I mean, just any color just sort of you can quantify what the new ads were in the fourth quarter?

Javier Rodriguez:

Yes, if you were going to use really high-level math, and I'm just trying to help get the direction going and you say, we guide it to negative 3 to 0, but I would give you a midpoint of negative 1.5. And if you just do the math of the excess mortality starting off in 2023, that's a sort of a negative 2. There's other variables going into it, but that would get you to a plus 50 basis points for new ad mets, give or take. And there's other dynamics, but that gives you direction.

Javier Rodriguez:

Yes. So if you just look at the numbers just to make sure because there's new people to the story is in 2020, we announced like roughly 6,800-or-so excess mortality, and we're guiding roughly to 3,000 in 2023. So it is coming down quite aggressively. And I think, again, we don't have visibility exactly as to when that would revert. But as COVID unwinds, it looks like it would -- it should go with the visibility we have back to normal.

Philip Chickering:

Okay. One quick follow-up. Can you sort of talk about the nurse turnover. Has that sort of stabilized at this point? And then on the contract labor, what was contract labor running sort of in 2019? Just as we think about this normalizing out kind of where we are to expand your contract labor in pre-COVID?

Operator:

[Operator Instructions]. Our next caller is Gary Taylor with Cowen.

Joel Ackerman:

I'd say 50% is a good number to use there, Gary.

Joel Ackerman:

I think the way to think about that rough numbers is a $50 million improvement in shared savings revenue and that's really driven by the shared savings in 2023 that we get for patients that we were at risk for in 2022, and that's offset by roughly $50 million of costs associated with that growth that we're going to see in 2023.

Joel Ackerman:

I think it's tough to do that calculation. The $377 million of revenue in '22 really comes in 2 buckets. $300 million of it is from the SNPs, which is what I'll call gross revenue, think of it as accounting similar to a health plans accounting where the full medical cost comes through revenue. And then the other $76 million is shared savings revenue where we only book the actual shared savings amount. We don't book the full cost of the medical amount. And I think if you really wanted to look at a number, you take the, call it, the gross margin associated with that $377 million. It's not -- that's not an accounting gross margin. This is kind of a financial calculation we would do. It wouldn't comply with GAAP. And you divide that number, which is, call it, $100 million by the prior year medical spend or the dollars under management from the prior year because that shared savings revenue is associated with the prior year, and that ratio would get you what I'd call a net savings number.

Joel Ackerman:

Gary, I'm sorry, just a quick correction. I think you said that '23 would be flat to slightly better than '22, and I agreed with that. What I said in the prepared remarks, it would be flat to slightly worse. So I just wanted to clean that up.

Javier Rodriguez:

Yes. Thanks for the question, Gary. Won't speculate as to how it will come or if or when it will come. But we continue to work very diligently with the kidney community and disability groups to restore our protection for our patients. As it relates to what are we seeing, we have not seen any significant uptick, but we wouldn't expect it given the time of the year we're in because there's a lag in claims and payment. So right now, it's going as expected. But one of the things that we're working with the congressional champions is that they've asked that we produce examples because they're very interested in protecting patients. So that's all we have at this juncture.

Unidentified Analyst:

This is Austin on for Justin. Appreciate the question here. Joe, I guess I wanted to start real quick just on sort of the leverage outlook in that 3.6 to 3.9 that you were speaking to. And just kind of curious what sort of needs to happen to reach both ends of that range? And then off of that on the share repo thinking, is there any timing or outlook embedded in the '23 guidance when that might resume? Or like alternatively, what do you guys kind of need to see on the debt side to start to reserve resume the repurchase activity?

Unidentified Analyst:

Okay. Great. And then on the follow-up kind of on the clinic closures, you guys did 44 last quarter, 58 this quarter. I guess we think ahead to '23, is there kind of like a point-in-time number that you guys are kind of targeting in terms of further clinic consolidation. And then off of that, just kind of an update on how the patient retention is tracking off of that.

Unidentified Analyst:

Great. And then just one last one for me kind of on an IKC follow-up, the number of Ares patients bounces around a little bit during the year. I'm just wondering what are the drivers of that in terms of attribution to you guys? And then is there an expectation like patient mortality in a certain sense, is sort of showing up there? And then on the med cost under management, just I guess what are the expectations for cadence and how that moves through 2023?

Unidentified Analyst:

Great. And then sorry, let me squeeze in just 1 more here. You guys mentioned the commercial mix in MA. Just wondering kind of where that tracked in 4Q and then what's kind of embedded for year-end '23, just on the mix side.

Operator:

Our next caller is Kevin Fischbeck with Bank of America.

Javier Rodriguez:

Kevin, on the missed treatments, we just highlighted that it was trending higher than it had historically by 1 percentage point. We also said that this is a dynamic that's going to take some time to, a, understand and then, b, fixed. And so in our guidance, we do not have any significant progress in there until we can really understand the dynamic and lower it. So it came in line in the sense that it wasn't modeled to improve in any dramatic way.

Javier Rodriguez:

Correct.

Joel Ackerman:

Yes, I'd say ratable to 2026 is a reasonable estimate.

Joel Ackerman:

I think it's a little early to speculate, but we certainly want to retain the optionality to start the share repurchase program before we get there. I'm not saying we will, but we'd want to know that we've got a clear path to getting there.

Javier Rodriguez:

Well, let me grab the private pay mix and the recession impact. It will be, of course, very specific to what segments get impacted and how long the recession lasts because our patients have shown that they would like to get COBRA and maintain coverage. In addition, they've also kind of have had great success in their coverage in the exchanges. And so that would make it more resilient. And then, of course, if the recession is long-lasting, then who knows what the impact would be. But assuming that it is a normal recession and time length, I think that our patients have shown a tendency to want to keep their private insurance. On your second question, which I think was MA mix, we ended the year at 47.3%. What we continue to see is now we're into normal open enrollment and we have a little more of a tick now every quarter. And so it will continue to increase. And if you had to put a leveling place over the long term, I think it would be slightly below 50 or around 50 if you push me to speculate into the future.

Javier Rodriguez:

No. I think Joel said it well, we are doing what we said we would in Q3 along all the dimensions than we anticipated. The rest of the stuff remains.

Andrew Mok:

Great. Just a few numbers questions to follow up. Your D&A increased about $20 million sequentially. Is that from the new clinical IT investments? Or is there something else driving that DNA higher in the quarter? Is that a good number to think about for 2023 from a run rate perspective?

Andrew Mok:

So D&A will be flat even though it ticked up in the fourth quarter is what you're saying on a full year basis?

Andrew Mok:

And what's driving the decrease? And is that from lower clinics?

Andrew Mok:

Okay. Got it. And then maybe just a quick update on home dialysis initiatives. Where is that tracking relative to long-term goals? And as you shut down clinics, should we expect that number to trend higher over time?

Kevin Fischbeck:

Got it. And maybe on that point, I think you touched on this briefly, but what exactly are you doing to ensure that you're retaining patients in the clinics that you do close? What are you doing to prevent any sort of leakage there?

Operator:

And at this time, I am showing no further questions.

Operator:

Thank you. This concludes today's conference call. You may go ahead and disconnect at this time.

Operator:

Good morning. My name is Amanda, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the DaVita Third Quarter 2022 Earnings Call. [Operator Instructions] Thank you. Mr. Ackerman, you may begin your conference.

Javier Rodriguez:

Thank you, Joel. Good morning, everyone, and thank you for joining our call today. Q3 was a challenging quarter for us. While natural COVID statistics have been declining, the cumulative impact of COVID on the ESKD patient community continues to grow. Despite the economic challenges, we continue to deliver high-quality clinical care for our patients. We remain incredibly grateful for the amazing work of our frontline teammates who are unrelenting in their focus on caring for our patients. While our commitment to patients is a constant, it is particularly highlighted when a community is in need. As you know, on September 28, Hurricane Ian made landfall in Southwest Florida, subjecting the community to sustain 100-plus mile per hour wind and significant flooding. This led to many health and safety issues for the people in the area, especially people who require life-sustaining dialysis treatment. DaVita operates 230 dialysis centers in Florida with approximately 14,000 patients and 3,250 teammates. Through our comprehensive preparedness planning, I'm grateful that 100% of our patients were accounted for and all had received dialysis within days of landfall of the hurricane. We deployed water tankers, generators, fuel tankers to quickly restore operations in affected areas as well as to provide dialysis to patients from across the kidney care community. Now turning to our financial results. As I mentioned, it was a challenging quarter. For Q3, our adjusted operating income was $351 million, and adjusted earnings per share was $1.45. Adjusted operating income was down sequentially by $88 million from Q2 and was below our expectations for the quarter. The headwinds in volumes have persisted longer than we assumed and contract labor costs and productivity did not begin to improve in the quarter as we had expected. We are now assuming these pressures will continue longer than previously anticipated. As a result, and given the continued uncertainty from COVID and the labor market, we are lowering our guidance for the year and our outlook for 2023 as well. We are reducing our 2022 adjusted operating income guidance to a range of $1.375 billion to $1.45 billion and our 2022 adjusted EPS guidance to $6.20 to $6.70 per share. For 2023, we're updating our outlook for year-over-year adjusted operating income growth to negative $50 million to positive $150 million as outlined in our press release for this quarter. As we have said in the past, volume and labor continue to be the biggest drivers of uncertainty in our results. Let me walk you through the details on what we have seen on each of these and what we're assuming going forward. Let's start with the three main drivers of volume. Census growth before excess mortality, net treatment rates and excess mortality. I will cover each of these individually. First, on census growth, excluding excess mortality, we have seen a decline in patient admissions during each COVID surge, followed by a rebound after each surge. The decline we saw earlier in the year was attributed to Omicron search which we anticipated would rebound in the second half of the year as it has in prior surges. We did not see the expected rebound in Q3 and are assuming continued pressure on admissions in Q4 and through 2023. Next, net treatment rates. As we discussed during our Q1 earnings call, as a result of Ominicon search, mid-treatment rates had increased and we're having a meaningful impact on the change in our treatment volume. We anticipated these increases would return to seasonal norms after the win in search and they have not. As a result, we are now assuming these will remain elevated through the end of this year and through 2023. Finally, on excess mortality. While COVID mortality rates in 2022 are down from prior years, access mortality remains a challenge for us. We expect this to persist in Q4 and into 2023. The magnitude of the impact will depend on the size and the severity of COVID surges this winter and through the rest of 2023. Taking these three metrics together, volume remains the biggest source of uncertainty in our forecast for Q4 2022 and 2023. Moving on to labor. I will cover three drivers

Q - Andrew Mok:

Hi, good morning. I’ appreciate all the color on the headwinds. When I look at the guide to it implies a Q4 range of about $240 million to $320 million of OI which is a pretty material step down from recent quarters. Can you maybe help rank order the headwinds you laid out for us in terms of what's driving the sequential decline? And what are you assuming with respect to COVID and its impact on treatment and labor in Q4? Thanks.

Andrew Mok:

Got it. Okay.

Andrew Mok:

Got it. Okay. That's helpful. Any color on how much higher the mistreatment rate is in 2022 versus historical levels?

Andrew Mok:

Got it. And then you mentioned contract labor costs increased sequentially, which is a somewhat surprising trend. Was that driven by higher utilization or higher rates? And were there specific markets driving that sequential increase?

Andrew Mok:

Got it. It's helpful. And then you mentioned..

Andrew Mok:

Okay. That's helpful. Last question for me, and I'll hop back in the queue. You mentioned that you plan switching your ESA regimen from Epogen to Mircera [ph] in 2023. Can you help us understand the pace of that transition?

Andrew Mok:

Okay. Thank you.

Operator:

Thank you. Our next question comes from Kevin Fischbeck with Bank of America. Your line is open.

Javier Rodriguez:

Yes, Kevin, thanks for the question. Miss treatments are common at certain volumes because just life happened transportation vacations, et cetera, where you missed one treatment. I think you are right in assessing that there's not what I'd call a chronic miss that you can go too long without dialysis. But when we studied the data, we found that it is consolidated, meaning roughly 15% of the patients are causing 70% of the miss treatment. And so when we started to look into that, we found that roughly half of the miss treatments are hospitalizations. And the other half is a popery of things from the patient, him or herself being ill with covet or something else, so stay in home, transportation issues, either due to staffing or other things and then scheduling scheduling either due to the patient or our center. And so there's a lot of things that go into the mistreatment -- and what we're trying to do right now is make sure that we double down on our processes to reschedule the patients, but this is where it's all connected. If you have a tight labor market and staffing is tight, sometimes it's harder to get that rescheduled - so we're working on it. And basically, we had never really talked about this treatment because it was pretty flat year-over-year. And then with the COVID sort of introduction, if you will, that number started to move, and we thought it would revert back to normal, and we're now seeing it stay elevated.

Javier Rodriguez:

Yeah. No. Commercial mix was flattish, and it was down. It was down in what I'd call normal material way on the commercial side. And you got to remember that mix is a numerator denominator and because of excess mortality and particularly in our older population, which is Medicare that number is moving a little unusually as well. But there's nothing to report on that.

Javier Rodriguez:

No. On pricing, I remember, our contracts are set for an extended period of time -- and so if you were going to say the negative of our long-term pricing is that, of course, they didn't incorporate the inflation that we're experiencing. If you're going to look at the positive and we've talked about this, is that we have very predictable and stable relationships with our payers. And therefore, you're not susceptible to the bumps of everyday life, you can plan with with a 3-, 4-year time horizon.

Operator:

Thank you. Our next question comes from Pito Chickering with Deutsche Bank. Your line is open.

Javier Rodriguez:

Yeah. Let me grab the high level, and I think I'll be a little repetitive -- the main thing, Peter, is the philosophical change in guidance. And so if you start to think we had this rebound that we thought a lot of these numbers that were high would revert to normal. We've spoken of a couple, in particular, training and miss treatments already - and so when you grab all those numbers and you say they're going to revert to normal. And instead of that, it actually goes to an all-time high, meaning it goes the opposite way. then that starts to open up a big gap -- and then instead of assuming, well, maybe the rebound is going to happen a quarter from now, we just said, we don't have any data that would make us any smarter on on really predicting where this will change. And so we had conversations internally and we had a couple of options. We had 3 options, right? The first one is you just don't give guidance at all. because it is just too much to predict for 2023. The second is you try to predict the unpredictable. -- and really try to make an educated prediction about when COVID and labor markets regulate. And then the last one is you assume the current environment doesn't change until there's clear data. And so we used to take something closer to Option 2, which is we had assumptions of COVID in volume, and we thought they would get better at the back end of '22 and improving into 2023. And now, we're taking closer adoption 3, which is we assume these dynamics that are strange in COVID volumes and the labor markets continue until we have further data.

Pito Chickering:

Okay. On the treatment assumptions or actually on treatment, I guess, during 3Q, sort of ignoring the mistreatments for a second. If I should breakout for the three key drivers here, it's instance rate of new ESRD patients, patient mortality and excess patient mortality from COVID. I guess can you just break down what you saw this quarter in these 3 buckets? And is there a slower incidence rate, which could be leading to lower promotional mix in the quarter, back half of the year?

Pito Chickering:

Okay. Got it. I know you don't give revenue guidance for 2023, but after so this pretty large decrease of OI guidance. Can you help guide us to what revenue growth you assume in 2023 over 2022 with all these changes that we're making?

Pito Chickering:

Great, thanks so much.

Justin Lake:

Thanks, good morning. Just a quick follow-up first on the volume question. So volumes down 2% for next year is what you're assuming, guys, just to be clear?

Justin Lake:

That mix treatments?

Justin Lake:

Got it. So this is 100% coming from new admits below mortality?

Justin Lake:

Okay. And then you talked about the clinic closures in the third quarter. Can you tell us how many clinics are closed in the third quarter? And then how many do you expect to close for the full year this year? And any insight into how many you closed in 2023?

Joel Ackerman:

Justin the number was 44.

Javier Rodriguez:

We don't retain 100%, but we retain the vast majority. So it shouldn't have much of an impact on volume.

Javier Rodriguez:

I don't want to get into the specifics. But I think if you're asking about leverage, where we round up to 3.9% this quarter. it is above our target range of 3 to 3.5x. And we are -- we would like to get the leverage down over the course of next year. Obviously, what happens to EBITDA year-over-year will be an important driver of that. But to further that effort, we are certainly going to rethink how much of our free cash flow we're deploying to share buybacks and lean more heavily to debt pay down. So the revolver was down from 450 last quarter to a drag of $2.75 this quarter. And I think it's fair to say that our share buyback pace will come down over the next year and our leverage level should come down as well -- I'm sorry, our total leverage should come down as well.

Javier Rodriguez:

Yes. So I'd start with a higher EBITDA number for next year. if you take, I think, in the middle of our range, you get somewhere a little north of $1.45 billion. I think it's 1.46% on OI, add back $700 million of depreciation and amortization, you'd get to an EBITDA number that's more in the 21% to 22% range. And then in terms of how much of the free cash flow we deploy, I would think it would be a higher percentage to debt pay down than the kind of 75%, 25%. I don't want to give a specific number, but I think we're going to cut way back on share buyback.

Operator:

Thank you. Our next question comes from Pito Chickering with Deutsche Bank. Your line is open.

Javier Rodriguez:

Sure. So let me try and build that bridge up of Q4 annualized to the 2023 guide. I think you wind up with about a $350 million gap that we would need to bridge. And here's how I do it. First, volume will be a headwind from Q4 to the full year, call that $100 million will be a tail will be a tailwind north of $200 million. I think important to realize there, again, RPT, we think, will run stronger next year, year-over-year than historically.\ One of the big drivers of that will be Medicare fee-for-service, where the final rule is not out we're expecting it imminently. We are anticipating that the final rule will be better than the preliminary rule. So that will help RPT and then just all the normal RPT increases, so call that north of $200 million. I would add in $150 million of cost savings, which is in the table that we called out in the press release -- and then there is a bit of negative seasonality on Q4 that's probably worth $50 million to $75 million. So if you were to add that all up, you get somewhere around 350. The one thing that wasn't on my list, I just want to highlight was labor relative to Q4 we could see 2023 as being relatively flat. Labor being flat in 2023 relative to Q4. And what you see there is higher wage rates offset by the lower training costs, which we see coming down in the back half of the year as well as contract labor coming down over time.

Javier Rodriguez:

I'm sorry, Pito, I missed that. Could you repeat the question? I apologize.

Javier Rodriguez:

Yes. Sorry about that. So if I look at 23 for IKC, I think there are really 2 factors at play here on the bridging it from 22 to 23. One is 22% is coming in a lot better than we expected. So you're comping to a to a much smaller loss. The second thing is we now expect growth in 2023 again. And as we've called out in the past, IC growth is a headwind in year 1 to OI. So your - the overall result hasn't changed much. It's that 22 has gotten better and to some extent, some of the benefit we're seeing in '22 is going to get offset by the impact of growth in '23.

Javier Rodriguez:

There's a little mix of that, but the bulk of it is we are opening a lot more of the CKCC program. So we had 11 this year, and we're doing 11% more next year. There will be a little more MA, but the predictable large volume will be government.

Javier Rodriguez:

I would say the business is performing better than we expected. But in the short term, growth has a negative impact on NOI.

Javier Rodriguez:

Thank you.

Andrew Mok:

Hi. First, do you have the excess mortality number in the quarter that you can give to us? And then you noted that the annualization of excess mortality is a negative for next year. When you look at the patient population, are you seeing any evidence of reduced mortality rates for the current population such that when you finish annualizing this excess impact treatment should start to accelerate?

Andrew Mok:

Okay. I think I understand. And then on the hurricane, you noted that you're able to get all the patients down in Florida access to dialysis throughout the hurricane impact. Can you quantify what impact that had on your P&L this quarter? And is there any lingering impact of the hurricane into the fourth quarter?

Andrew Mok:

Okay. And then on the Medicare rate, I think you said you're already assuming better Medicare rates. Is that 100 basis points better? Can you give us some color on what you're assuming there?

Operator:

Thank you. And we did have another question come through Justin Lake with Wolfe Research. Your line is open.

Javier Rodriguez:

We can hear you fine, Justin.

Javier Rodriguez:

Yes. So first, I think you're thinking about things directionally correctly, that the front half of the year will be tougher than the back half of the year. And for -- I put it into 3 buckets. One is Q1 is always seasonally tough because of revenue per treatment. And that's just how we account for the nonpayment or the bad debt associated with deductibles and co-pays. Second is a combination of the savings from Mircera and some of the other initiatives building over the course of the year, combined with some of the pressures associated with contract labor and training declining over the course of the year. And then finally, IKC is a business that we have generally assumed will have a better Q4 than other quarters because of how revenue recognition works. We saw -- we're seeing less of that pattern in 2022. We've seen more of the revenue that we expected to recognize in Q4 earlier in the year. But again, I think we're anticipating a better Q4 for ITC, although that's not something you could annualize. So those are the things in terms of how to quantify some of this stuff Contract labor for Q3 is running at about 30 -- a little bit north of $30 million for the quarter. We're looking at that to come down a bit in Q4 and Q1 and then really start declining starting Q2 of next year. although we're assuming it will remain elevated relative to our historical rate, which was almost insignificant. That's contract labor. In terms of quantifying the magnitude of the cost savings. So we've called out $150 million for next year at the middle of the range. Mircera is the biggest component of that. The the realignment of the footprint is number 2 and the G&A is number three. So we're not going to give specific numbers on those things, but I think that can help you get in the right ballpark on those three numbers.

Justin Lake:

Okay. And then last question for me is on revenue per treatment. So you talked about there were some kind of moving parts there that benefited revenue for treatment First, can you put a number around that in terms of how much dollars in revenue per treatment, you saw a benefit? Just trying to understand, one, how much that benefit is the quarter and two, was a reasonable run rate to think about going into the fourth quarter? And then lastly, maybe you could give us a number on that commercial treatment that commercial mix decline. Yes. So I think you can think of the quarter as having benefited by $2 to $3 of normal fluctuation. We see that all the time. if you want a good exit run rate, I think $365 RPT is a reasonable exit run rate for Q4 and for the full year of 2022 off of which to build your '23 number. In terms of commercial mix, it was a few basis points down for the quarter. So really not significant. I think it was 10.4% last quarter and it rounds to 10.3% this quarter, but it was pretty small.

Javier Rodriguez:

Thank you, Aman. As you can see from all the conversation we have guidance is harder with the COVID uncertainty on volume and the labor dynamics that we have spoken of. We, of course, are working very hard to give you our best estimate and now are assuming that they will stay elevated for a period of time. Let me just close with a couple of comments. One is these are very challenging times for DaVita and they are challenging times for the broader kidney care community and all health care providers. But as I separate myself from this moment in time and I look further out, I can't help but to say, we are incredibly well positioned to differentiate and outperform given the experience of our team, the clarity of our strategy and the strength of our balance sheet. I appreciate your time today. Have a good day. Take care.

Operator:

Good evening. My name is Michelle, and I’ll be your conference facilitator today. At this time, I’d like to welcome everyone to the DaVita Second Quarter 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. [Operator Instructions] Thank you. Mr. Ackerman, you may begin your conference.

Javier Rodriguez:

Thank you, Joel, and thank you for joining the call. Today I will cover five topics health equity and Supreme Court case, second quarter performance, an update on our Integrated Kidney Care or IKC business and I will conclude my remarks with our current thinking for 2023. Before we discuss business matters, let me start with a clinical topics that is critical for society. Health Equity. Given the disproportionate impact kidney disease has on patients of color, health equity is of utmost importance. Across the key dimensions of access to care, access to information and clinical outcome DaVita in the kidney care community have achieved unparalleled equity relative to the vast majority of other disease states. We have used the focus of our scale to provide consistent equitable access to care and education. Our leading clinical outcomes and protocols have reduced variability across all patient populations, regardless of race, or socioeconomic status. Our black and Hispanic patients, are at parity when it comes to dialysis adequacy, phosphorus, and calcium lab values, as well as hospitalizations and mortality. As another example of our efforts to drive health equity, our Kidney SMART program is now available in 10 languages and we're participating in a pilot to develop culturally tailored education to underrepresented and underserved patient communities. As it relates to access, dialysis services are available to most patients within 10 miles of their home. We are proud of these results, and now have set our ambitions to improve access to transplant and home dialysis. Now, moving on to SCOTUS, the ruling in the Marietta Memorial Hospital matter opened a loophole for plans to circumvent the historic protections for our patients in the Medicare Secondary Payer Act, or MSPA. We continue to believe that this narrow interpretation is not only contrary to Congress's intent when enacting these provisions, but could also result in harm to this vulnerable patient population and set health equity efforts back. We're working with the community on several initiatives to not only close this loophole but apply other anti-discrimination provisions to protect these patients right to be able to choose the insurance option that works best for them. The first step in the process is supporting legislative efforts of members of Congress who are passionate about protecting not only dialysis patient rights, but also the Medicare trust fund. We're excited last Friday, bipartisan legislation was introduced to allow Congress to do just that amended the text of the MSPA to close the loophole opened by the Marietta decision. The proposed legislation clarifies the benefit plan seeking to limit or impair benefits based on the need for renal dialysis services, like the Marietta plan would be considered a violation of the MSPA. While getting any legislation pass will be difficult in election year. We believe the restoration of the MSPA is non-controversial and we will work with the Congressional Budget Office to ensure that it will be scored as a saver, which should help with passage. The community is also working with regulators to ensure other anti-discrimination protection would apply to address the type of discrimination implemented with the Marietta Memorial Hospital employee group. The proposed revisions to the anti-discrimination provisions of the Affordable Care Act that were released last week demonstrate that HHS is serious about protecting against insurance benefits designed to discriminate based on a variety of things, including disability. Should we start to see efforts by employer groups to modify benefit plans to take advantage of the workaround of the MSPA created by the Marietta decision, there could be legal actions based on these anti-discrimination provisions. Now moving on to financial results. For Q2, we delivered operating income of 433 million in earnings per share of $2.30. Operating income was up sequentially by 95 million and seasonal impacts of Q1 abetted and treatments per day increased quarter-over-quarter by approximately 1%. COVID infections and mortality in our patient population declined after the Omicron surge in Q1 through May but increased in June and again in July. The treatment rates were also down significantly from the highs in Q1, but above the seasonal norms in Q2, the impact of COVID on mortality mid-treatment, and treatment volumes remain difficult to forecast and is the biggest swing factor for our performance in the second half of 2022 and into 2023. Labor costs remain a challenge in Q2 with higher contracted labor utilization and base wage increases similar to what we experienced in Q1. We're managing other patient care costs and G&A to help offset the impact of wage and other inflationary increases. With all these challenges, we continued to believe it's more likely that our performance will fall within the bottom half of our guidance range of 1.525 billion to 1.675 billion for 2022. Turning to an update on our IKC business. Operating losses in our IKT business were better than expected in Q2. This was a result of timing within 2022 with our recognition of some shared savings revenue earlier in the year than anticipated. We also benefited from positive prior period development in our special need plan. For the full year, we're anticipating overall performance in IKC to be better than initially expected. Looking forward, we're gaining confidence in our model of care given the early results of our 2021 Share Saving Trust. For 2023, we're also expecting significantly higher growth in our membership and dollars under management in both [indiscernible] and [CKCD] [ph] program. As a result of the better performance in 2022 and the first-year costs associated with significant growth, we are now expecting improvement in IKC operating income in 2023 to be lower than previously expected. Last, I want to provide an update on our thinking about 2023 overall. To help our investors and analysts with these updates. I refer you to a table in the outlook section in our press release that lays out our views on the primary drivers of operating income growth from 2022 to 2023. We continue to believe that we will deliver a significant rebound next year although the challenges and uncertainties around treatment volume growth and the healthcare labor market have led us to lower the improvement range to 200 million to 300 million. Let me walk you through the updated thinking. First, back in November of 2021, we expected the volume headwinds from COVID to be over in 2023 and we're anticipating benefits from a pull forward of mortality from COVID. These factors would have resulted in a higher than normal volume growth in the middle of our range and a tailwind from volume in 2023 compared to our historical results, based on what we have learned from Omicron surge in the winter and the continued evolution of the pandemic, we now expect COVID to remain a headwind to growth in 2023. Uncertainty around treatment volume intensive growth continues to be the single largest source of variability in our year-over-year profit forecasts. Second, our confidence in the likelihood and the magnitude of the cost saving initiatives we've been working on has increased. We have plans in a way to reduce our procurement costs, or our fixed cost structure and shrink our G&A. This will result in some non-recurring expenses in 2022 and 2023 but it's expected to lower our cost structure for the long-term. Third, relative to what we knew at Capital Markets Day, we're now anticipating higher revenue per treatment growth next year. This is a result of higher rate increases and lower patient bad debt. To summarize for 2023, we still expect to deliver a meaningful [indiscernible] increase of 200 million to 300 million, but based on volume and wage pressure, we are lowering that range. I will now turn it over to Joel to discuss our financial performance and outlook in greater detail.

Operator:

Thank you. [Operator Instructions]. Kevin Fischbeck from Bank of America. You may go ahead, sir.

Joel Ackerman:

Yes, Kevin, there are really three components to it. One is the Medicare rate as you referenced. The second is some operational and systems changes that we're going to make internally that we think can drive higher yield or higher cash collections, which ultimately results in a higher RPT. And the third are some benefit changes that will impact the patient component and improve our bad debt because the lower the patient component comes back related to out of pocket costs, the lower that goes, the higher we will ultimately collect. None of this is about our expectation of higher rates on commercial or MA.

Javier Rodriguez:

Kevin is Javier, the short answer is it's too early to tell. And so we continue to watch it. And we will let you know if we see anything. As we said last time, there's a segment that's more likely than not, which is that small employer but these things take time. And so we don't have anything new to report on it.

Joel Ackerman:

I think it's more about what will happen going forward than what we've seen so far. Volume is a little bit below where we were expecting. But this is more about our expectations for excess mortality going forward, rather than what we've seen so far.

Kevin Fischbeck:

Okay, so the total OI number has not changed. It's just the timing is too difficult to predict. So you're just taking some of that out next year.

Kevin Fischbeck:

I guess I thought that you guys talked about, like 150 to 200 OI from the COVID normalization on the volumes over time. Is that still the right way to think about, is that number hasn't changed?

Kevin Fischbeck:

Excellent, thank you.

Justin Lake:

Thanks. A couple of follow ups from Kevin's question there. First, you talked about some benefit changes that are going to help reduce patient out pockets, you might give us a little more color.

Justin Lake:

How is that going to impact that half of the revenue for treatment, if we're thinking about next year in dollar terms?

Justin Lake:

Got it. And is that just effectively show profitability in terms of that falls right to the bottom-line in terms of price.

Justin Lake:

Got it. And then, thinking about the mix for next year. I know it's possible to say what employers are going to do with this Marietta stuff at this point. But have you built into that range that you've updated any assumption around deteriorating payer mix? Or are you assuming that stays constant?