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Edited Transcript of DVA earnings conference call or presentation 5-May-20 9:00pm GMT

Q1 2020 DaVita Inc Earnings Call

DENVER Jun 3, 2020 (Thomson StreetEvents) -- Edited Transcript of DaVita Inc earnings conference call or presentation Tuesday, May 5, 2020 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Javier J. Rodriguez

DaVita Inc. - CEO & Executive Director

* Jim Gustafson

DaVita Inc. - VP of IR

* Joel Ackerman

DaVita Inc. - CFO & Treasurer

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Conference Call Participants

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* Andrew Mok

Barclays Bank PLC, Research Division - Research Analyst

* Benjamin Whitman Mayo

UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare Facilities and Managed Care

* Elisabeth Decou Bedell Clive

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

* Gary Paul Taylor

JP Morgan Chase & Co, Research Division - Analyst

* Jeffrey Linn Gates

Gates Capital Management, Inc. - President, Managing Partner & Portfolio Manager

* Justin Lake

Wolfe Research, LLC - MD & Senior Healthcare Services Analyst

* Kevin Mark Fischbeck

BofA Merrill Lynch, Research Division - MD in Equity Research

* Matthew Richard Larew

William Blair & Company L.L.C., Research Division - Analyst

* Philip Chickering

Deutsche Bank AG, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good evening. My name is Kath, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the DaVita First Quarter 2020 Earnings Call. (Operator Instructions)

Mr. Gustafson, you may now begin your conference.

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Jim Gustafson, DaVita Inc. - VP of IR [2]

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Thank you, and welcome everyone to our first quarter conference call. We appreciate your continued interest in our company. I'm Jim Gustafson, Vice President of Investor Relations. And joining me remotely today are Javier Rodriguez, our CEO; Joel Ackerman, our CFO; and LeAnne Zumwalt, Group Vice President.

Please note that during this call, we will make forward-looking statements within the meaning of the federal securities laws. All of these statements are subject to known and unknown risks and uncertainties that could cause the actual results to differ materially from those described in the forward-looking statements. For further details concerning these risks and uncertainties, please refer to our first quarter earnings press release and our SEC filings, including our most recent annual report on Form 10-K and subsequent quarterly report for the first quarter of 2020 on Form 10-Q, which will be filed today. Our forward-looking statements are based upon information currently available to us and we do not intend and undertake no duty to update these statements.

Additionally, we'd like to remind you that during this call, we will discuss some non-GAAP financial measures. Reconciliation of these non-GAAP financial measures to comparable GAAP financial measures is included in our earnings press release submitted to the SEC and available on our website.

I will now turn the call over to Javier Rodriguez.

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Javier J. Rodriguez, DaVita Inc. - CEO & Executive Director [3]

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Thank you, Jim, and good afternoon, everyone. I hope that you and your families are healthy. Let me begin by expressing my sincere appreciation for the 65,000 nurses, patient care technicians, social workers, dietitians and other caregivers worldwide, including many nonclinical workers, who are on the front lines of care with our physician partners. These people are living up to the meaning of DaVita, which is to give life during this global crisis. Their courage and dedication to helping others is a source of energy and inspiration.

I want to extend that gratitude to all health care organizations and caregivers around the world.

For today's call, I'll discuss 3 topics: our response to the crisis; the impact of COVID on our business; and our decisions relating to the Cares Act. At Capital Markets, I talked about the strength of our platform and our ability to provide continuity of care to dialysis patients across all sites of care from the hospitals, the patients' home and in our clinic. Our response to COVID highlights the resilience and the strength of our teammates and demonstrates the power of connecting to multisite platform.

Let me give you a few examples to bring it to light. First, we're leveraging our national scale with the resources, teams and our geographic footprint to open and operate dedicated clinics and shift to dialysis patients, who are or suspected to be COVID positive, which has helped to free up precious hospital resources. The dialysis industry, in partnership with the government, has joined together to help maintain continuity of care for dialysis patients by creating isolated cohort capacity that can be accessed by other providers.

Next, our position as a national leader in home dialysis who serve our patients well by supporting continued growth of home dialysis during this crisis is helping to provide continuity of care for all of our patients as they may have moved between dialyze in home, in hospitals or in center due to the virus. In addition, we've been able to utilize our leading telehealth capabilities to allow us to expand the treatment of our patients in the safety of their home, while maintaining access to their care provider team. With the support of the government, we're now using that telehealth platform to provide further support for in-center patient care. Finally, in our over 900 hospitals where we deliver key services, we've been able to allocate resources and shift caregivers to areas that most need to help support patients and our hospital partners.

Next, let me address some of the trends we're seeing, while covering the expectations for the short and long-term business impacts of COVID. On the thread of the virus, we're experiencing similar geographic waves of COVID impact as you've read about in the news. Initially, the CDC wanted all COVID positive patients treated in the hospital. As the pandemic spread, however, the CDC quickly recognized this was not possible and turned to providers like DaVita, who've been able to focus on infection control well before COVID to alleviate the burden from the hospitals and to treat stable patients in an outpatient setting. Today, nearly 70% of DaVita patients who are either COVID positive or suspected to be COVID positive, are treated in one of our outpatient settings.

The operational task of maintaining treatment 3x a week of these COVID positive or suspected to be patients on cohort [state] and clinics has been nothing short of extraordinary, all while maintaining continuity of care to over 230,000 patients who show no symptoms of the virus but are at risk with multiple other comorbidities.

The near-term impact on our business is still dynamic and somewhat uncertain. However, we're able to affirm our guidance for 2020 at this time. This may be in contrast to what you've heard from other providers, who may be facing volume or liquidity issues due to the significant drop-off on elective procedures. As you know, dialysis is not optional, it is life sustaining treatment that our patients need multiple times each week. The long-term is where we have less visibility. We believe the economic impact of COVID on our business will lag the impact of the broader economy. The scope of the impact of COVID on our business will be based primarily on the duration of this devastating virus and its impact on unemployment generally. We expect that these factors would have the greatest impact on volume and mix. Volume, as the growth of dialysis population is more uncertain due to the potential impact from the virus on the late-stage CKD population and on the health status of our existing ESRD patients. And on commercial mix, because the insurance mix of our patients could be negatively impacted by a weakening of the broader economy.

Next, I want to nod the administration's quick response in this time of crisis. The administration collaborated with the dialysis industry by modifying certain policies and regulations to facilitate our ability to treat COVID-positive patients in cohort state or clinics were necessary. The administration also acted swiftly by distributing funds to health care providers in an effort to ensure that patients, uninsured and insured, have access to the care they need during this time of crisis. We believe that the spirit and the intent of the government's action with the relief fund was to prevent health care providers from closing their doors, not to help a company make their earnings target. DaVita has been and will be able to continue to provide care for our patients, including the uninsured, without the need for this federal funding. As a result, although we have incurred costs that fall within the parameters of the release fund under the Cares Act, DaVita has decided not to accept this government financial support at this time. We believe that it's in the best interest of our company, shareholders and our countries to allow these dollars to be redistributed to other individuals, organizations or health care providers that truly need it.

ESG has been an increased focus over the last year, and doing the right thing matters. In our opinion, the current health care crisis is an opportunity for companies to lead and contribute for the greater good of society, and we are happy to do our part.

Let me conclude with a comment on DaVita's culture. In this crisis, the fact that our frontline caregivers know that they're part of something bigger, [to feel it], has been a key part of our resilience. They are true heroes, and they know that our entire company, or as we say, our village, is doing what we can to support them. We know we still have an unpredictable future with this virus but we're thankful that we're village strong.

Now on to Joel to provide an update on our Q1 results and to discuss our financial outlook.

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [4]

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Thanks, Javier. I want to start by thanking all of our teammates who selflessly provide life sustaining dialysis care to our vulnerable patients. I am proud to be a part of the DaVita Village.

Q1 was a strong quarter with relatively little impact from COVID. The details are in the press release, and I can answer any questions during Q&A. I'll focus my remarks on financial details related to COVID. To start, the level of uncertainty that we face going forward is significantly higher than usual. The factors driving this include the severity and duration of the COVID pandemic, the impact on our patient population resulting in a potential decrease in treatment volume and the impact on unemployment and commercial health insurance coverage.

As a result of this uncertainty, financial outcomes are harder to forecast than usual, and the range of possibilities is wider than usual. Our treatment volumes have remained fairly steady so far. For the rest of 2020, we expect volumes will be impacted by any changes in mortality, transplant and/or new patient admits resulting from COVID. On expenses, we're incurring elevated costs as a result of additional compensation and reimbursement for certain of our teammates to help off some of the personal financial impacts of the crisis, enhancements to our overtime PTO and benefit policies, the creation of dedicated shifts to care for patients with confirmed or suspected COVID, redistribution of teammates, machines and supplies across the country, labor hours needed to screen patients and teammates who enter our clinics, increased purchases and pricing of personal protective equipment for patients and teammates, higher investments in and utilization of telehealth and development of educational materials for patients. Access to these expenses could include the suspension or sequestration beginning May 1, which we expect to add about $50 million to our revenue in 2020 as well as other cost reductions in our business.

At this time, we're maintaining our 2020 guidance ranges for adjusted earnings per share, revenue, operating income margins and free cash flow, but recognize the increased uncertainty given the rapidly changing dynamics related to COVID.

The longer-term impact of COVID is uncertain and difficult to quantify. We believe that the 2 main factors to consider are growth and mix. First on growth, our long-term growth could be impacted by changes in mortality in both the late-stage CKD and ESRD population due to COVID. This will depend primarily on the infection rates, base fatality rates and age and health status of the patients affected. Second, increased unemployment levels will likely lead to fewer patients having commercial insurance, which creates earnings headwinds because of the higher reimbursement rates we received from commercial insurance plans. We can't predict the net impact at this time but I will highlight 4 important dynamics.

First, when you consider the sensitivity of our business through a recession, we believe that the peak level of unemployment matters more than the shape of the recovery. But many of our patients have a preference to retain coverage in the near-term but may be slower to return to work in a recovery. Second, when estimating the peak unemployment, it's important to recognize that a large number of individuals currently included in unemployment numbers are actually furloughed and are still receiving health benefits from employers. Those furloughed patients who eventually return to work may not face any disruptions in coverage. Third, a significant number of our commercially insured patients have coverage that is not tied to their current employment. This includes patients with individual insurance as well as patients on COBRA. This should help mitigate the potential change in our mix relative to the increase in unemployment.

Finally, if our patients lose their employer-based coverage, they have several coverage options, including exchange plans where many patients can access tax credit and cost-sharing reductions, which was not available as we came out of the 2008 recession, COBRA and Medicare and/or Medicaid.

Looking at our balance sheet and cash generation, at this time, we do not see material near-term negative impact from COVID. Out of an abundance of caution, in March, we drew down $500 million from our revolving credit line, which is reflected on our first quarter ending balance sheet. Given our current cash balance and near-term outlook, we expect to repay the revolver shortly. We also suspended share repurchases in March and have not repurchased any stock subsequently. In the near term, we expect to use caution with regards to capital deployment and we'll look to preserve financial flexibility and liquidity in the face of current uncertainties. We believe that our cash flow generation and our balance sheet put us in a solid position to weather financial and operational challenges brought on by the current pandemic. This will allow us to continue to focus on what is most important, the health and safety of our teammates and delivering high-quality care to our patients.

With that, operator, please open the line for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) All right, speakers, our first question is from Justin Lake of Wolfe Research.

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Justin Lake, Wolfe Research, LLC - MD & Senior Healthcare Services Analyst [2]

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Appreciate all the detail. A few things here. One, obviously, a really good first quarter. I was hoping you can kind of walk us through what you saw relative to your own kind of internal expectations there? And maybe delineate what you think core growth was versus kind of any items we should think about?

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [3]

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Sure. So let me take that. Hello, Justin, it's Joel here. I'd call out 3 things, although I would say it was broadly a strong quarter across many dimensions in terms of what stood out. One, RPT was a bit higher than expected, although not in a way that would lead me to change any of my views about the full year. Second, costs were well-managed very broadly, I'd highlight productivity, pharma. G&A is 3 things, although it was a broad strength. And finally, international was a strong contributor. Part of that was strong fundamental growth. International just had a good quarter, but I would highlight there was about $10 million of foreign exchange gain in our -- from our Asia joint venture that is nonrecurring.

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Justin Lake, Wolfe Research, LLC - MD & Senior Healthcare Services Analyst [4]

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That's helpful. So you talked about RPT being a bit higher than expected, but not in a way to change the views on the full year. Was there something that we should think about that benefit of the quarter that doesn't reoccur? Anything particular?

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [5]

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Nothing in particular. The RPT number will bounce around a little bit from quarter-to-quarter. So nothing worth highlighting.

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Justin Lake, Wolfe Research, LLC - MD & Senior Healthcare Services Analyst [6]

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And the cost side, I mean, again, like I'm getting -- you guys have a core growth number that you kind of think about, ex moving parts? Because I'm getting something in the teens.

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [7]

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Well, I think it's a tricky quarter. Are you thinking Q1-over-Q1?

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Justin Lake, Wolfe Research, LLC - MD & Senior Healthcare Services Analyst [8]

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Yes, year-over-year.

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [9]

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Yes. Yes. Well, Q1 last year was not a particularly strong quarter and then Q2 came on well. So there is -- I'd say there was some variability there. This year, the typical quarterly seasonality is going to be a little turned on its head. Usually, Q1 is a weak quarter. This year, you've got the positive calcimimetics and then in the back half of the year, you'll see some negatives from valid initiatives and as the COVID impact grows. So I think, as you think about a full year number, the margin you're calculating there is -- or the growth rate you're calculating there is something that I would be hesitant to focus on.

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Justin Lake, Wolfe Research, LLC - MD & Senior Healthcare Services Analyst [10]

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Okay. And then before I jump back in the queue, can you give us that calcimimetics benefit in the impact in the first quarter, maybe both the RPT and to operating income? And then it looks like the number has been cut in the second quarter by CMS. So how should we think about that for the rest of the year?

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [11]

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Sure. So I'd say for the full year, I wouldn't -- I don't -- I wouldn't change anything we've said about calcimimetics, which is $40 million to $70 million of OI for the full year. The Q1 number was $35 million of OI benefit. The RPT numbers, I'm looking for those, the RPT number was $9.50 in Q1 and the cost per treatment, $4.90 and change. So $9.56 of RPT, $4.94 of cost per treatment.

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Operator [12]

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Our next question is from Andrew Mok of Barclays.

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Andrew Mok, Barclays Bank PLC, Research Division - Research Analyst [13]

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Just wanted to follow-up on the commercial rates. Looking back at the last recession, it looks like your commercial revenue mix held up better than your commercial treatment mix. Is that something that could play out again through potentially higher negotiated rates on a lower base of commercial patients? Should we see more permanent job losses?

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Javier J. Rodriguez, DaVita Inc. - CEO & Executive Director [14]

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Let me grab that one, Andrew. I think it's difficult to compare. At the end of the last recession, of course, we had a different dynamic going on. This one is very, very unique. And so we have, number one, as Joel said, we now have the exchanges. And so we don't know what's going to happen there and how many people will pick the exchanges. We still have COBRA and then we still have all of these people that have been furloughed. And so when you look at this as opposed to the last recession, where we didn't have a whole bunch of people on what appears to be pause or furloughed for a bit, we don't know how that dynamic will play out.

Last time, there was not a lot of change in the rate dynamic, meaning the rate dynamics stayed similar to what it had been in the past. And I have no information to inform that, that would change.

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Andrew Mok, Barclays Bank PLC, Research Division - Research Analyst [15]

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Okay. Great. And then just a follow-up question on...

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Javier J. Rodriguez, DaVita Inc. - CEO & Executive Director [16]

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Does that answer your question?

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Andrew Mok, Barclays Bank PLC, Research Division - Research Analyst [17]

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Yes, that's good. Just a follow-up question on home dialysis. Are you seeing any uptick in interest within your patients to pursue home therapy? And second, longer term, do you think this crisis will potentially accelerate the shift to home dialysis?

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Javier J. Rodriguez, DaVita Inc. - CEO & Executive Director [18]

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Yes. It's an interesting dynamic. Many people are asking that same question. For now, and again, it is so early in this that we don't know what the long-term implications are, but for now, we saw a slight downtick, so a little weakness. But then when you look at it, it's the placement of catheters that really impacted it. And then once the administration deem it essential, that started to pick up. In addition, as we talked about it, our platform really matters, meaning that there's a lot of patients that start in center and then through education, go home. Well, we saw that, that number went down a bit because we didn't have a lot of educators and nonessential personnel in the centers so we would not spread the virus. So therefore, we had less of our patients in-center move home. And so when you add it all together, there's still a lot of energy. We reached our 25,000-patient mark at home. And we think that over time, we will go back to the patterns that we saw pre-COVID, which is roughly 10% or so growth.

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Operator [19]

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Speakers, our next question is from Kevin from Bank of America.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [20]

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Great. I guess, I wanted to ask about the -- you guys announced kind of a big hiring push earlier in the year. And you guys obviously highlighted a bunch of potential pressures and uncertainty as the year goes on, including the impact to the economy. So just trying to understand what the purpose of that, that the large increase in hiring was and how you thought about taking on additional costs potentially heading into a recession.

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Javier J. Rodriguez, DaVita Inc. - CEO & Executive Director [21]

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Yes. Thanks, Kevin. I think when you think of hiring people, you got to put it into 2 categories. One is the G&A that gets spread out through all the clinics and then you have the frontline caregivers. And so what we announced, which was a big hiring, was for frontline caregivers. And so what you're seeing is that sometimes in times like this, where you've had a nursing shortage and you've had a robust economy that it's a great opportunity to have a stable workforce. And so that's what you really saw. We had openings across the country. And so we want to fill them now while there's a lot of people looking for jobs.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [22]

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Okay. This is more about kind of backfilling open positions than it was about trying to add to fuel growth in some segment or anything like that?

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Javier J. Rodriguez, DaVita Inc. - CEO & Executive Director [23]

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Correct.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [24]

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Okay. And then I guess there's been a lot of press about patients with COVID in the hospital needing more dialysis. Has that impacted your business in any way, either by managing the hospital outpatient dialysis clinics themselves or hospitals trying to clear out their dialysis clinics, pushing volume maybe in your direction? Is there any dynamic there?

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Javier J. Rodriguez, DaVita Inc. - CEO & Executive Director [25]

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In general, the short answer is that it is lumpy from geography to geography. And so in some geographies where the hospitals, because of all the elective procedures, have seen a big decrease in census. Our acute have seen that as well if COVID hasn't hit that area. Of course, there are other areas where COVID is quite active, where we have seen an increase. But when you net it all out, it is nothing that you would notice in the economic model, if that's what you're asking?

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [26]

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Yes. No, it's perfect. And then you mentioned a number of the headwinds around the recession. Any offsets that you can think of? I guess, you kind of mentioned labor might be easier to come by in a recession. How do you think about the cost save opportunity versus the potential revenue pressures on the recession?

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Javier J. Rodriguez, DaVita Inc. - CEO & Executive Director [27]

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Yes. Joel, you want to grab it?

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [28]

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Sure. So yes, I think there are really 2 ways to think about the cost mitigation, and it really comes in 2 buckets. One is what you would expect to naturally occur in the context of a recession, which could be higher productivity because of lower turnover, lower training costs, other things related to salary, wage and benefit. So that would be one bucket. And then second is the levers we could pull proactively to take costs out of the business, recognizing that if there is mix pressure or volume pressure that we have things we can do. We've got a resilient business model. So there are actions we could take to mitigate some of those pressures as well. So there's a natural component to it and a proactive component as well.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [29]

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I mean do we read anything in the fact that you kind of mentioned the headwinds without kind of these offsets? Would you expect that during the recession, you would grow maybe below the normal range of OI growth? Or could you still grow within that range during recession?

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [30]

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I would say it is too early to tell. There's just so much we don't know yet about how this recession is likely to play out in terms of what the peak job loss will look like, how much of that is true job loss versus just furloughs, how this will roll forward? And how much of we could mitigate when we think about mix. So I would say it's too early to tell how much of that we'd be able to mitigate from a cost standpoint.

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Operator [31]

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Speakers, our next question is from Whit Mayo of UBS.

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Benjamin Whitman Mayo, UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare Facilities and Managed Care [32]

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I just wanted to follow-up on Kevin's hospital question. I mean that's a business that you guys have had some remarkable growth in, in recent years. I don't think the number of hospitals that you provide coverage has changed, but the revenue associated with those has been double digits for many years. Can you maybe just talk a little bit about some of the factors driving that and how you contract with hospitals?

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Javier J. Rodriguez, DaVita Inc. - CEO & Executive Director [33]

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Sure. I'll try to give you a little color and see. In general, that business is a very tough business because of the cyclicality, meaning up and down in the demand of the hospitals, 24/7. So it is a very hard business to enter. And so this is a place where our platform really shines, and the hospitals see the value of having the network and having the float pools where you can actually have the team to take care of the patient. So what we've seen is that a lot of hospitals value our value proposition. And of course, that would be included in the price and the service. And so we've seen that platform grow in a significant way.

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Benjamin Whitman Mayo, UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare Facilities and Managed Care [34]

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Okay. So I mean, as I look at the number of hospitals, I mean if there's 900 and you're growing revenue 13%, I mean, is that the way to think about the organic growth of that business?

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Javier J. Rodriguez, DaVita Inc. - CEO & Executive Director [35]

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Joel, can you break down the revenue and the price? Or is that not something we want to disclose?

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [36]

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Sure. Yes. It's not something we disclose, but it has been a faster-growing business than the core business, although very small, and I would add, it tends to be a lower-margin business as well.

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Benjamin Whitman Mayo, UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare Facilities and Managed Care [37]

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Okay. I had another question on calcimimetics. And then a lot of the data is showing a progressive, I think, uptick in Parsabiv use over Sensipar, and the ASP is much higher versus Sensipar. Can you maybe refresh us just the economics between the 2 and what your split is today?

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [38]

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I don't think we've broken out that split specifically. In -- as you look at the spike that we've seen in calcimimetics profitability starting in 2 years ago and then last year and this year, it's driven largely by the oral and the gap, as you know, between how ASP declines and how our pricing declines. I think, as we think about it going forward, obviously, as we're -- as the [tobacco] period is coming to an end, the profitability of calcimimetics is going away. I think the important question for us is 2021. And the issue between the oral genetic and the IV is how does the bundling work? And how will CMS reimburse us and what -- is it by drug, by patient or some other methodology, and that's really what will drive the economics.

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Javier J. Rodriguez, DaVita Inc. - CEO & Executive Director [39]

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And a quick reminder on that, Whit, that the physicians pick whether it is IV or oral, and so at the end of the day, they might have a preference. Right now, there isn't much data, and we know that the IV is a lot more expensive. So the physicians are feeling their fiduciary responsibility to do what's clinically equivalent or appears to be equivalent -- clinical equivalent at a much cheaper price.

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Benjamin Whitman Mayo, UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare Facilities and Managed Care [40]

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Okay. No, that's helpful. And maybe just one last one back to just the comments on volumes and trying to think about what the impact of COVID will be on this patient population. And Javier, you mentioned looking at some of the CKD stage 4, 5 patients. And obviously, there's going to be an impact on your census today. I don't know maybe if you could just elaborate a little bit more on kind of how you're thinking about what the longer-term impact can be from COVID-19 on the ESRD population?

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Javier J. Rodriguez, DaVita Inc. - CEO & Executive Director [41]

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Sure. And I'll try to be as helpful as I can Whit, but as you can imagine, there's just a lot of dynamics, and it's pretty early in the game. So the first and probably the biggest disclosure is, it all depends on the duration and the severity of the virus. And of course, if we have another wave and all those sort of things. But if you assume that there isn't going to be another wave just for the argument and to be an optimist here, you have to start to look at, okay, did the virus actually impact CKD patients that would have been on dialysis? And if so, how much and what magnitude?

Two is, if you were going to look at something that could increase volumes is did the virus actually do damage to people that wouldn't have had some kidney damage. And so that is too early to tell. On the other side, of course, the preferred kidney replacement therapy would be a transplant. And if you're going to put a transplant into categories, there was the living donors and the deceased donors. And what we're seeing right now, while the virus is active, is that the living donors are coming down because of the risk of infection. And so there would be some potential changes in those numbers that would increase volume of dialysis patients. So those are some of the gives and takes that are going on. We don't know how it will all net out. And so we're keeping a close eye on it.

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Operator [42]

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Speakers, our next question is from Pito Chickering of Deutsche Bank.

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Philip Chickering, Deutsche Bank AG, Research Division - Research Analyst [43]

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A few ones here. Productivity was strong in the quarter. Can you talk about for the drivers of productivity? Was it consolidation and closing of centers from last year? It sounds like it wasn't a shift to PD or home therapies. So what other factors led to increased productivity?

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Javier J. Rodriguez, DaVita Inc. - CEO & Executive Director [44]

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Yes. Nothing specific I would highlight, other than it's obviously, labor is our largest cost item. It's something we spend a lot of time focusing on. And it's just something we need to manage well over the long-term in order to deal with the fact that our RPT increases are below inflation. So it's just blocking and tackling that we just continue to excel at.

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Philip Chickering, Deutsche Bank AG, Research Division - Research Analyst [45]

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Okay. From COBRA benefits, have there been any changes to COBRA benefits in terms of the length people to stay on COBRA versus the prior recessions?

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Javier J. Rodriguez, DaVita Inc. - CEO & Executive Director [46]

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My understanding is that, I don't know of any COBRA expansion, but our patient population can add 11 months because of disability. So there's a disability extension. And so in essence, our patient population could have coverage for 29 months. I do not know if there's a COVID exception.

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Philip Chickering, Deutsche Bank AG, Research Division - Research Analyst [47]

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Okay. There is a lot of the uncertainty from a macro perspective at this point. As we move into sort of 2021, what's the impact that a Medicare Advantage can provide to your patients who are looking to reduce out-of-pocket costs? And can sort of the uncertainty sort of add or fuel more people adopting Medicare Advantage, do you think at this point?

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Javier J. Rodriguez, DaVita Inc. - CEO & Executive Director [48]

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Well, there's a lot of different views on your question. And at the end of the day, it is just speculation because we don't know. It is a very individual and personal decision. But in general, the reason why people would pick MA is because it has a max out of pocket, and it has some additional benefits. And the reason why people would stay in Medicare is because they're used to it. It has basically almost an unlimited network, if you will, it doesn't have the restrictions. If you have secondary coverage, it really helps you in your out-of-pocket expenses. And so what we've said in the past, and we continue to say, is that we don't have any information that would lead us to conclude anything other than our population will likely mirror that of the general population. The only reason why we are so different is because this is the only population that wasn't allowed to enroll in Medicare Advantage. So the only people that are there are the ones that enrolled pre their kidneys failing. And so there's going to be open enrollment. And now the question is, what will be the environment in the fall? Will patients be able to sit with someone? Will they have a website? Will they be more nervous, more fatigued? Is the virus still with us? Or are we in a more normal situation? And the short answer is we don't know any of that. So I'm just giving you the data of how someone would pick one versus another.

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Philip Chickering, Deutsche Bank AG, Research Division - Research Analyst [49]

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Great. And then so last question here, just from a modeling perspective, you walked through a bunch of costs which will roll through for 2Q. Is there any way that there's some dollar value that you can add? And how much we should be thinking about these new cost being layered in during 2Q?

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [50]

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Yes. So Pito, it is really tough to predict, there are a lot of moving pieces. And again, the uncertainty around length and severity of the pandemic, et cetera, et cetera. I would also note that as we think about how we've modeled things in the various scenarios we've played with, we've generally assumed that we're past the peak. We're kind of at or past the peak. We've got a whole bunch -- a whole range around at what pace the pandemic begins to taper. But we haven't modeled in a second wave. So just as you think about our guidance and what we're comfortable with, I just wanted to point that out.

In terms of specific numbers, we are thinking the number for April will be somewhere in the $30 million to $40 million range. I think it's reasonable to expect May will be in the same range and then again, depending on how the pandemic plays out, we'd expect it to start tapering down.

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Philip Chickering, Deutsche Bank AG, Research Division - Research Analyst [51]

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Okay. And actually, last one, I apologize, on share repurchases. Look, you're not taking any of the government grants at this point. And because to your point, you're viewing this as sort of past the peak at this point. When do you think that you will consider doing share repurchases again? Is this more of a third quarter event? Or do you guys walk into June and things are better, you guys begin buying shares back at that point?

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [52]

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Yes. So I can't give you a date because we don't have one. We are certainly going to be cautious with capital deployment, given all the uncertainty. I think we're likely to keep a higher level of liquidity than we have in the past. So hard to say when -- how we're going to think about share repurchases going forward and when some of that caution might relax.

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Operator [53]

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Our next question is from Gary Taylor of JPMorgan.

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Gary Paul Taylor, JP Morgan Chase & Co, Research Division - Analyst [54]

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Just a few. Just to clarify on your last response, Joel, when you said $30 million to $40 million in -- was that for April and May? Was that additional expense that you were -- additional operating expense you're just saying is plausible?

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [55]

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Yes. That would be the incremental operating expense that we would expect related to COVID.

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Gary Paul Taylor, JP Morgan Chase & Co, Research Division - Analyst [56]

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And the decision to return the Cares Act funding, is that decision limited to the first $50 billion that's been distributed? Have you made a determination about the full $175 billion between the 2 provider funds? Or is that sort of TBD depending on how things would develop?

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Javier J. Rodriguez, DaVita Inc. - CEO & Executive Director [57]

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I might be getting lost in the details, so correct me if I'm wrong here, Joel, because I might be aggregating pools and I'm not, but the Cares Act relief fund is how I have it in my head. And those are the funds that we decided were the intention of the government, which everybody can interpret in different ways. But from our perspective, they were a safety net, and they were to be used for people that needed that money because the economic damage was so severe that they couldn't keep their doors open. And so while it's -- you can tell from the numbers that Joel gave you, we have big expense increases. And by the way, the numbers that you cited there, the $30 million to $40 million, is monthly. So we have had big expenses. We don't think that, that was the intention of the money, so we're going to give that back.

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Gary Paul Taylor, JP Morgan Chase & Co, Research Division - Analyst [58]

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Okay. And then I saw just a couple of numbers flip in the income statement, Joel. I wonder if you would comment on -- I know the equity investment income was almost $18 million this quarter, it's higher than usual, than the other income down by interest expense flipped to a negative $4 million and change. Both of those looked a little unusual. Anything to call out on those?

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Javier J. Rodriguez, DaVita Inc. - CEO & Executive Director [59]

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Yes. On the equity income, the biggest component of that is the $10 million of FX on the Asia joint venture that I called out. There is another component to this that relates to the deconsolidation of a few of our clinics starting 1/1/2020. The details of this will be in the 10-Q. It's got no impact on EPS, but it does take what was OI and turns it into a -- it turns -- it moves it into equity income. It used to flow through revenue and cost, and it moves it into equity income, and then there's an offset down at the NCI level. So those are the big things I'd call out there.

On the other income, there was a different FX loss associated with the international business, and that was about $9 million. So those are the big things I'd call out.

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Operator [60]

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Our next question is from Matt of William Blair.

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Matthew Richard Larew, William Blair & Company L.L.C., Research Division - Analyst [61]

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Actually, Javier, I just want to follow-up one more time on the tariff dollars. Obviously, when you announced the receipt of the grant dollars, I think it was April 13, had said you were contemplating keeping it. Just curious, was there additional guidance or regulation from the government that influenced your decision? Or was this a proactive decision by the Board and management? Just trying to understand from April 13 to today?

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Javier J. Rodriguez, DaVita Inc. - CEO & Executive Director [62]

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Yes. It was the latter, which is a proactive decision by the Board and management. And again, you could make a very good case to say, the spirit of that was to reimburse high expenses related to COVID, which we have many, including PPE, additional labor, overtime, and all the things that we've described on the call. We came on the other side, which is the government, which needs to be totally commended, just said, we've never had anything like this. And so we're going to distribute money to make sure that the well-being of Americans is taken care of. And then we'll reconcile. Well, we don't need time to reconcile. We know that we are not in that spot where we're the safety net. And so we want to be proactive so that the government gets visibility of those people that can give the money back and that money can be redeployed as soon as possible to the people that really need it. So it's really about the spirit that we made the decision.

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Matthew Richard Larew, William Blair & Company L.L.C., Research Division - Analyst [63]

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Yes. Fair enough. And then actually, this -- you had an announcement out this morning about DaVita Ventures [DaVita Venture]. And just curious what if any targets you might have for that group? And just sort of given the announcement this morning, I want to give you an opportunity to comment on that.

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Javier J. Rodriguez, DaVita Inc. - CEO & Executive Director [64]

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Yes. Thank you, Matt. We're really excited about DaVita Ventures [DaVita Venture]. And basically, we have a lot of entrepreneurs that are coming out with all kinds of great things, and they're saying, can we partner with you? And so this venture group is out there and now really generating demand. And so we want to be the partner of choice. And as we talked about capital markets, we're expanding from being a dialysis company to being a full kidney care company. And that means that we're going to need certain technologies and partners from diagnostic to pharmaceuticals, to other areas in transplant, and so we want to be out there, and we're really excited about it.

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [65]

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The only thing I'd add in there is, as you think about the magnitude of these investments, we're thinking these are likely to be single-digit millions. And if you think about it in the context of our free cash flow, it's not going to change the number at all. So relatively small.

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Operator [66]

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Our next question is from Lisa Clive of Bernstein.

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Elisabeth Decou Bedell Clive, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [67]

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Just a question on legislation in Washington. Clearly, D.C. is busy with COVID-19, and that's the main focus. But do you think the COVID-19 pandemic makes it more likely that the PATIENTS Act could get passed? Do you have any comments on sort of how live that bill is in Washington today?

And a follow-up question on COBRA, my understanding is even though there is 11-month disability extension, almost all patients drop out of COBRA at 18 months because after that point, they go from paying 102% of the premium to 150%. So is it fair to assume that the only ones who stay on COBRA are the ones that have a [cap] premium support?

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Javier J. Rodriguez, DaVita Inc. - CEO & Executive Director [68]

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Let me grab the -- Lisa, first of all, you've exceeded my knowledge of COBRA. And so Joel, I don't know if you know that technical piece. In the...

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Elisabeth Decou Bedell Clive, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [69]

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I guess the other way of asking it...

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [70]

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I do not have the answer.

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Elisabeth Decou Bedell Clive, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [71]

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Okay. I guess the other way of asking it because if we do -- given the unemployment numbers that we've been seeing across the country, if COBRA becomes a much bigger part of your -- well, if a lot more patients end up on COBRA. I'm just trying to understand how long they actually will end up on it. So if you do have any insights into that, that would be helpful.

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Javier J. Rodriguez, DaVita Inc. - CEO & Executive Director [72]

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Yes. I do not. And so -- but we could get back to you, but I do not have any more insights on that, sorry.

But you had a second part of your question, Lisa?

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Elisabeth Decou Bedell Clive, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [73]

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On the PATIENTS Act, given, yes, just whether the COVID-19 has any impact and also just general discussions in Washington around that.

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Javier J. Rodriguez, DaVita Inc. - CEO & Executive Director [74]

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Well, I'll just say, in general, I have not had the courage to ask anything because obviously, all hands have been on deck for this COVID crisis. I'm hopeful that policymakers will see the value of integrated care and that they will see the power of connecting the sites of care and having this organized fashion really help. Because if you look at DaVita as an example in how we were organized with PPE and how we were able to stand up cohorting centers, how we were able to take care of our teammates with child care and other things, we obviously saw that in other areas, but we did not see that in a lot of the smaller players. And so we're hopeful that the government sees that resource organization and capabilities around the country is also quite useful and if you connect the sites of care and the technology, that could benefit the system and the patients. So we will see post COVID.

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Operator [75]

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Our next question is from Justin Lake of Wolfe Research.

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Justin Lake, Wolfe Research, LLC - MD & Senior Healthcare Services Analyst [76]

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I've got a few more here. First, I just wanted to follow-up, Joel, to your answer to Pito's question on costs. I understand you don't want to give a specific number. But in your prepared remarks, you kind of walked through there are costs associated with COVID, and you gave us not insignificant new costs in April and May. You talked about the $50 million benefit from sequestration, and then you also mentioned other cost reductions. So I'm curious, as you bundle those together, it looks like it's a headwind, ex potentially other cost reductions. But I'm just trying to think about relative to where you were kind of in February when you gave the original guide or updated it. How should we think about the net of those impacts? Is that an additional headwind in your mind? Or can you kind of offset the incremental cost in COVID?

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [77]

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So the way I'm thinking about it is if you start with a strong performance in the core in Q1, and you offset that with the COVID costs and then add back sequestration, we kind of feel like -- and then there's some natural costs that come down, T&E is a simple example of that. We feel like net-net, we wind up with a potential headwind that we're comfortable absorbing in without changing our guidance. So if you want to think about how do we get to maintaining our guidance, strong Q1, the negative of COVID offset by the $50-ish-million from the sequestration suspension and some other cost offsets.

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Justin Lake, Wolfe Research, LLC - MD & Senior Healthcare Services Analyst [78]

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And can I pin you down in terms of how much better Q1 was versus your internal expectations when you set the guide for the year?

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [79]

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No. You cannot pin me down on that.

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Justin Lake, Wolfe Research, LLC - MD & Senior Healthcare Services Analyst [80]

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Okay. Then in your 10-Q that you just filed, there were a couple of new investigations of payments that were out there. I know this is a cost of doing business in dialysis and historically for 20 years, I've been covering the company, they haven't really amounted to much. But just wanted to ask you if there was anything new or different that we should consider? And with those and what got reported there, I guess, in New Jersey and California?

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Javier J. Rodriguez, DaVita Inc. - CEO & Executive Director [81]

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No. What I would add is, of course, we take them very, very seriously, and we have just been through our corporate integrity agreement. We've been at it for 5 years, and we continue to want to lead and show the spirit of compliance and the law of compliance. And so we're disappointed every time we get them. And of course, they can come through many different ways, including investigations, inquiries. And you hope that once they see what we're doing that they're satisfied with that. But every time we get them, I can tell you personally, I am very, very frustrated because we talk and live compliance on a daily basis. So nothing else to add to that, Justin.

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Justin Lake, Wolfe Research, LLC - MD & Senior Healthcare Services Analyst [82]

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Understood. And then just a couple of numbers questions here. You mentioned the -- that a significant portion of your commercial patients have coverage that's not tied to employment. I'm just curious if you could share even just a round number there. Is it half? A quarter? 2/3? Anything like that you can tell us?

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [83]

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Yes. So it's -- there are really 2 components to that. There's COBRA and patients who are on the exchanges. The number is in the kind of 25% to 30%, I believe.

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Justin Lake, Wolfe Research, LLC - MD & Senior Healthcare Services Analyst [84]

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Okay. So 25% to 30% aren't tied to employment?

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [85]

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Right.

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Justin Lake, Wolfe Research, LLC - MD & Senior Healthcare Services Analyst [86]

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Or tied to COBRA and exchanges, okay. And then the first quarter, what would you say the -- or can you give us a number in terms of what you think the benefit was at the extra day in the quarter for the operating results?

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [87]

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No, that -- hold on. I'll get you that number before we hang up.

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Justin Lake, Wolfe Research, LLC - MD & Senior Healthcare Services Analyst [88]

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Okay. And then just -- and then California AB 290, I know you talked about that being lower than previous, right? The $25 million to $40 million you originally gave, it's going to be lower. Should we think about that just be going to 0 now? Or do you think there still could be an impact there?

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Javier J. Rodriguez, DaVita Inc. - CEO & Executive Director [89]

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As opposed to give you a number, I think what I can tell you is that due to COVID, the injunction stayed. And so basically, what that means in layman's terms is that there's an extension of the case and so unlikely to have much of an impact unless -- because of the timing until the fourth quarter depending how the case goes, and then it might go into Q1 of 2021. So the number is still the same, the timing has shifted. And of course, the outcome is unknown.

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Justin Lake, Wolfe Research, LLC - MD & Senior Healthcare Services Analyst [90]

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Okay. And last one, payer mix in the quarter, Javier, I think you said was down. Can you give us any specificity there or what you kind of ended the quarter with in terms of commercial mix?

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Javier J. Rodriguez, DaVita Inc. - CEO & Executive Director [91]

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I believe we published it, so I can say it, right, Joel?

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [92]

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I believe that is not correct. Justin, it -- there was nothing significant in the movement for the quarter. We'll call it out on a quarterly basis if we think it's important, but there was nothing important there.

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Justin Lake, Wolfe Research, LLC - MD & Senior Healthcare Services Analyst [93]

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So still in the 10% range, give or take?

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [94]

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Yes.

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Operator [95]

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Our next question is from Jeff Gates of Gates Capital Management.

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Jeffrey Linn Gates, Gates Capital Management, Inc. - President, Managing Partner & Portfolio Manager [96]

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Yes, a couple of questions. First, I noticed the volume was the best volume quarter you've had in a few quarters. And I'm just wondering if there's -- you see any signs of an uptick in volume and what might be driving that? Number one.

And number two, is this environment going to force you to do less de novos? Or you won't be able to do as many de novos, so will your capital budget come down at all?

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Javier J. Rodriguez, DaVita Inc. - CEO & Executive Director [97]

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Do you want to grab it, Joel?

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [98]

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Yes, sure. We had a reasonable NAG quarter, no doubt. I wouldn't call out anything specific yet. I wouldn't say we're ready to declare victory on some of the efforts we've been undertaking to drive NAG back up, and there certainly was a tiny bit of noise at the end of the quarter. So nothing to call out there.

In terms of de novos, I think we're going to wait and see what happens to industry volumes and what happens on the home side, but I think there is certainly a possibility that if there is a -- an overall NAG headwind that comes out of COVID and possibly an accelerated shift to home that I think you would see a potential decline, not just in our de novos, but in industry de novos, and that would bring the capital budget down.

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Jeffrey Linn Gates, Gates Capital Management, Inc. - President, Managing Partner & Portfolio Manager [99]

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You're not having any trouble constructing centers that you had planned?

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [100]

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Well, I'd say for 2020, depending on how long the various state shutdowns last, we might see our capital spend come down a bit. There are just some projects that we physically can't get done right now, but that will depend on how long things last.

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Javier J. Rodriguez, DaVita Inc. - CEO & Executive Director [101]

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Justin, while, let me finish up by saying the impact of 1 day is somewhere in the $10 million to $15 million range.

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Operator [102]

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And yes, speakers, we don't have any questions on queue as of now.

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Javier J. Rodriguez, DaVita Inc. - CEO & Executive Director [103]

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Okay. Well, let me wrap up with a couple of closing remarks. Number one, thank you for all the support. Number two, I don't know if I can convey in words how proud I am of our team. The beauty and the dedication that I've seen over the last 60 days is just literally hard to put in to words. The fact that our government and our competitors and us put everything aside and cohorted, and worked together to take care of our patients is just beautiful, beautiful, beautiful. The clinical focus and the infection control expertise that we have has been critical in helping us through this virus. Point three, our platform, the importance of the platform in connecting the sites of care has been highlighted through this crisis. The resilience of our team and our business model has been beautiful, beautiful, beautiful. Financially, strong balance sheet and a proven track record of cost management. And lastly, I do think that philosophically, it is time to come together as a country, and we are happy to do our part. So thank you for your interest in our company, and we'll talk again next quarter.

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Operator [104]

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Thank you, speakers. Ladies and gentlemen, that concludes DaVita's First Quarter 2020 Earnings Call. You may now disconnect. Thank you for participating, and have a great day.