DaVita Q2 2021 Earnings Report

DaVita EPS Results

• Actual EPS: $2.64
• Consensus EPS: $2.14
• Beat/Miss: Beat by +$0.50
• One Year Ago EPS: N/A

DaVita Revenue Results

• Actual Revenue: $2.92 billion
• Expected Revenue: $2.88 billion
• Beat/Miss: Beat by +$39.53 million
• YoY Revenue Growth: N/A

DaVita Announcement Details

• Quarter: Q2 2021
• Date: 8/3/2021
• Time: After Market Closes
• Conference Call Date: Tuesday, August 3, 2021
• Conference Call Time: 7:31AM ET

DaVita (NYSE:DVA) (NYSE: DVA) is a healthcare company focused primarily on kidney care. Through its DaVita Kidney Care business, the company provides outpatient dialysis services for people with chronic kidney failure, including in-center hemodialysis and home-based dialysis options. Its services also include clinical care, education, nutrition support and other resources intended to help patients manage kidney disease.

DaVita also provides broader kidney-care services, including chronic kidney disease management, care coordination and support for patients who may be candidates for kidney transplantation. The company operates dialysis centers and related care programs primarily in the United States, with additional operations in selected international markets.

The company traces its history to 1979, when it was established as Medical Ambulatory Care, and adopted the DaVita name in 2000. Javier Rodriguez serves as DaVita’s chief executive officer. The company’s operations are centered on its kidney-care platform and its network of clinicians, physicians and other healthcare professionals.

DaVita Q2 2021 Earnings Call Transcript

Key Takeaways

• DaVita reported 6% year-over-year growth in adjusted operating income and 35% year-over-year growth in adjusted EPS for Q2, driven by cost management and margin expansion.
• The company raised its full-year 2021 guidance to $8.80–$9.40 adjusted EPS, $1.8B–$1.875B adjusted operating income and $1.0B–$1.2B free cash flow, with an expected effective tax rate of 24%–26%.
• COVID-related headwinds persisted, with a net Q2 impact of ~$35M and an anticipated ~$30M in H2, due to excess mortality, elevated PPE costs and potential Delta variant risks.
• Investment in Integrated Kidney Care now covers ~10% of U.S. dialysis patients (~$2B medical costs under management) and will incur ancillary losses of $120M in 2021 and an incremental $50M in 2022 before expected profitability in 2023.
• Free cash flow remained particularly strong in Q2, supporting ongoing shareholder returns through the company’s stock buyback program.

Presentation

[Operator]

Good evening. My name is Missy, and I'll be your conference facilitator today. At this time, I'd like to welcome everyone to the DaVita Second Quarter 2021 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period. If you'd like to ask a question during this time, simply press star and then the number one on your telephone keypad. If you'd like to withdraw your question, press star, then the number two. Thank you, Mr. Gustafson. You may begin your conference.

[Jim Gustafson, VP of Investor Relations at DaVita]

Thank you. Welcome everyone to our second quarter conference call. We appreciate your continued interest in our company. I am Jim Gustafson, Vice President of Investor Relations, and joining me today are Javier Rodriguez, our CEO, and Joel Ackerman, our CFO. Please note that during this call, we may make forward-looking statements within the meaning of the federal securities laws. These statements are subject to known and unknown risks and uncertainties that could cause 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 reports on Form 10-Q and any subsequent filings that we make with the SEC.

[Jim Gustafson, VP of Investor Relations at DaVita]

Our forward-looking statements are based upon the information currently available to us, and we do not intend and undertake no duty to update these statements except as may be required by law. Additionally, we'd like to remind you that during this call, we will discuss some non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most 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.

[Javier Rodriguez, CEO at DaVita]

Thank you, Jim. Good afternoon. We are excited to talk to you today about our strong Q2 performance, our 2021 financial outlook, and recent developments on our efforts to transform kidney care. First, let me start the conversation with a clinical highlight. A kidney transplant is the best treatment option for eligible patients with kidney failure. DaVita has worked hard over the years to help our patients gain access to transplants through education and direct support for patients to get on and stay on the transplantation wait list. The cumulative impact is meaningful. Last December, we announced a milestone of 100,000 DaVita patients who have received a transplant since the year of 2000. To further advance the cause of transplantation, DaVita and the National Kidney Foundation are collaborating on a year-long pilot aimed at improving health equity in kidney transplantation, with a focus on living donors.

[Javier Rodriguez, CEO at DaVita]

Increasing living donor transplants expands access to transplantation by increasing the availability of organs, which has been the limiting factor in the number of transplants performed annually. This pilot provides high touch and customized information to patients and families seeking a kidney transplantation from a living donor. We look forward to learning more from this pilot, improving the health equity of kidney transplants, and continuing to be the leader in supporting our patients to receive kidney transplants. Shifting to the latest update on COVID-19. We have made incredible progress in our efforts to combat the COVID-19 pandemic over the past several months. New COVID-19 infections among our patients continue to drop significantly through the last week of June, down more than 95% from the peak in early January. However, similar to the rest of the country, we have started to see an uptick over the last few weeks.

[Javier Rodriguez, CEO at DaVita]

As of last week, on a rolling seven-day average basis, new infections are still down more than 90% from the peak. Thus far, our mortality continues to remain low on an absolute basis as we believe that our vaccinated patients are more protected from severe cases of COVID. We continue to educate our patients about the benefits of vaccine to reduce vaccine hesitancy and we remain confident in our policies and procedures designed to keep our patients and our teammates safe while they're in our care. Now, let me turn to our financial performance in the second quarter. We delivered strong results in both operating income and earnings per share. Our margins expanded as we continue to manage costs while delivering quality care. As a result, we delivered 6% year-over-year growth in adjusted operating income and 35% year-over-year growth in our adjusted earnings per share.

[Javier Rodriguez, CEO at DaVita]

Our free cash flow was particularly strong this quarter. We continue to return cash to our shareholders through our stock buyback. With the first half of the year behind us, we are now increasing the midpoint of guidance for the full year. Let me transition to update our progress in our Integrated Kidney Care efforts, otherwise known as IKC. Value-based care for our patients with kidney disease is gaining momentum and appears to have reached an inflection point. We have always believed that coordinating dialysis care with the broader healthcare needs of CKD and ESKD patients could simultaneously improve outcomes and reduce total healthcare costs. For years, we've been participating in a variety of small programs and pilots to build our integrated care capabilities and better understand the economics.

[Javier Rodriguez, CEO at DaVita]

We believe we are at that point now where we are ready to shift to the next stage of the evolution of integrated care. You might be wondering why now? The trend towards value-based care is not new, either in kidney care or other segments of healthcare. What's changed to make the developments of scale business viable today? There's a couple of reasons. First, with the growth of Medicare Advantage, payers are looking for innovative ways to manage the increasing number of ESKD patients choosing MA plans. These patients tend to be more complex than most MA patients and should benefit from tailored care management. Second, CMS recently initiated the payment models in kidney care. We're preparing to partner with nephrologists in up to 12 markets beginning in January of next year to participate in CKCC voluntary programs.

[Javier Rodriguez, CEO at DaVita]

Our participation in CKCC model will also provide us with operational scale and more geographies to enter into other value-based arrangements. Lastly, we've increased our confidence in our capability to deliver clinical and economic value at scale and have leaned in on our willingness to take risks. We believe we're well-positioned to win in integrated care because of our strong partnership with nephrologists, our regular and consistent interactions with patients, a broad kidney care platform that spans various modalities and care settings, and a clinical data set and analytics that we use to create, develop clinical interventions to support our patients holistically. We have a demonstrated track record of improving patient outcomes, coordinating care, and lowering costs for patients in risk arrangements.

[Javier Rodriguez, CEO at DaVita]

For example, in our ESCOs, we were able to generate non-dialysis cost savings in the high single digits, which translated into more than double the average savings rates compared to the rest of the industry over the life of the program. With our special needs plan, we have been able to lower mortality by 23% relative to other patients within the same center and county. To give you a better sense of the scale of the business, as of today, approximately 10% of our U.S. dialysis patients are in value-based care arrangements in which DaVita is responsible for managing the total cost of care. This represents almost $2 billion of annual medical costs under management. In addition, we have various other forms of value-based care arrangements with payers in which we have economic incentives for improving quality and lowering costs.

[Javier Rodriguez, CEO at DaVita]

In 2022, we expect our Integrated Kidney Care business to double in size, both the number of patients in risk arrangements and the dollars under management. We also expect to see a dramatic increase in the number of CKD lives we have under risk in 2022. To prepare for this growth, we are currently scaling up our clinical teams and furthering building out our support functions. Because of the investment as well as the delays in cost savings impacts of our model of care and revenue recognition, we expect to incur a net operating loss of $120 million in 2021 in our U.S. ancillary segment. This outcome is consistent with the OI headwinds from IKC growth we called out at the beginning of the year and is, of course, included in our full-year guidance.

[Javier Rodriguez, CEO at DaVita]

The doubling of the business next year could result in an incremental operating loss in our ancillary segment of $50 million in 2022. We expect significant improvements in our financial performance beginning in 2023 as we begin to recognize savings from the new contract that we entered in 2021 and 2022. Over the 5+ year horizon, we believe that our IKC business could become a sustainable driver of significant operating income growth. Currently, we serve approximately 200,000 dialysis patients across the country who utilize over $12 billion in healthcare services outside of the dialysis facility, including the cost of hospitalization, outpatient procedures, and physician services. In addition, we see an opportunity to manage the care of upstream CKD patients who currently do not dialyze in our centers.

[Javier Rodriguez, CEO at DaVita]

Assuming that we are managing the total cost of care for more than half of our dialysis patients, as well as other CKD patients at low-to-single-digit margin, we believe that this could be meaningful financial opportunity. In summary, all of healthcare has been talking about value-based for years. We are excited for DaVita to lead the way. With that, I will turn the call over to Joel.

[Joel Ackerman, CFO and Treasurer at DaVita]

Thanks, Javier. We had a strong quarter despite the continuing operational challenges presented by COVID, primarily as a result of strong RPT performance and continued discipline on cost. For the quarter, operating income was $490 million, and earnings per share were $2.64. Our Q2 results include a net COVID headwind of approximately $35 million, similar to what we saw in Q1. Primarily, the impact of excess mortality on volume and elevated PPE costs, partially offset by sequestration relief and reduced travel and meeting expenses. Turning to volume. In Q2, treatments per day increased by 0.4% compared to Q1. Excess mortality declined significantly in Q2 from approximately 3,000 in Q1 to fewer than 500 in Q2. At this point, we are cautiously optimistic that the worst is behind us, but we're closely monitoring the potential impact of the Delta variant, especially within pockets of the country that have lower vaccination rates.

[Joel Ackerman, CFO and Treasurer at DaVita]

Longer term, we continue to believe that we will return to pre-pandemic treatment growth levels with an additional tailwind from lower than normal mortality rates. Our U.S. dialysis revenue per treatment grew sequentially by almost $6 this quarter, primarily due to normal seasonal improvements from patients meeting their co-insurance and deductible obligations. We also saw favorable changes in government rate mix, including the continued growth in the percentage of patients enrolled in Medicare Advantage. Patient care costs and G&A expense per treatment in total were relatively flat quarter-over-quarter. Our patient care costs decreased sequentially, primarily due to reductions in labor costs. Our G&A increased slightly, primarily due to charitable contributions and increases in personnel costs.

[Joel Ackerman, CFO and Treasurer at DaVita]

As expected, our U.S. dialysis and lab DSO decreased by approximately six days in Q2 versus Q1, primarily due to collections on the temporary billing holds related to the winter storms in the first quarter. The majority of the impact of the storms on DSO and cash flow were reversed in Q2, but we may see an ongoing smaller benefit through the balance of the year. During the second quarter, we generated a gain of approximately $9 million on one of our DaVita Venture Group investments, which hit the other income line on our P&L. We have a small investment in NeuroMatrix Medical that recently went public. The value of this investment at quarter-end was $23 million. Going forward, we will market-to-market every quarter. Now, turning to some updates on the rest of this year and some initial thoughts on 2022.

[Joel Ackerman, CFO and Treasurer at DaVita]

As Javier mentioned, we are raising our guidance ranges for 2021 as follows. Adjusted earnings per share of $8.80-$9.40, adjusted operating income of $1.8 billion-$1.875 billion, and free cash flow of $1 billion-$1.2 billion. Also, we now expect our 2021 effective tax rate on income attributable to DaVita to be between 24% and 26%, lower than the 26%-28% range that we had communicated at the beginning of the year. These new guidance ranges exclude the potential impact of a significant fourth COVID surge later this year. I'll call out two notable potential headwinds during the second half of the year. First is COVID. We continue to expect the impact of excess mortality will be higher in the back half of the year than in the first half of the year due to the compounding impact of mortality through 2021.

[Joel Ackerman, CFO and Treasurer at DaVita]

We're also expecting an uptick on costs related to testing, vaccinations, and teammate support as a result of the Delta variant. As a result, we are increasing the middle of the range of COVID impact for the full year to $170 million from $150 million. That implies a $30 million headwind from COVID in the second half of the year compared to the first half of the year. As a reminder, this is the middle of what is a wide range of possible impacts depending on the impact of the Delta or other variants and any additional COVID mandate. Second, we expect to experience losses in our U.S. ancillary segment of approximately $70 million in the second half of the year compared to $50 million in the first half of the year.

[Joel Ackerman, CFO and Treasurer at DaVita]

This incremental loss is due primarily to new value-based care arrangements and start-up costs associated with the CKCC program that launches in 2022. Looking forward to 2022, we do not expect anything unusual among the primary drivers of the business, including RPT, cost per treatment, or capital expenditures. However, we expect pressure on OI growth from the increased spend on growing our IKC business, the possibility of union activity in 2022 that we did not face in 2021, and the first year of depreciation expense associated with our new clinical IT platform that we have been developing for the past several years. We will provide more specific 2022 guidance on a future earnings call. Operator, let's open the lines for questions.

[Operator]

Yes, sir. It is now time for the question-and-answer session of today's call. Again, if you would like to ask a question over the phone, please press star followed by one on your telephone keypad. If you wish to withdraw your question, you can press star, two. Please make sure that your phone is unmuted, and record your name when prompted. Our first question comes from Pito Chickering from Deutsche Bank. Sir, your line is open.

[Pito Chickering, Analyst at Deutsche Bank]

Hey, guys. Good afternoon. Thanks for taking my questions. Lead off here on the IKC that you're talking about, that you disclosed in script $2 billion of gross revenues and seeing that double in 2022. Can you remind us how that flows through the P&L in both the dialysis segments and other ancillary services? When will you begin to disclose these revenues and costs on the P&L so you can model it? In five years, where do you think this can go? Is it a $12 billion number you referenced in the script? From a margin perspective after year one, should we put a high-single-digit margin on the $2 billion for next year and then additional drag from the $2 billion in new capitated arrangements? Thanks.

[Joel Ackerman, CFO and Treasurer at DaVita]

Thanks, Pito. I hope I got all that, but please jump in if I didn't catch it. Starting off, in terms of where it is on the P&L, we've got a segment, our strategic initiatives, which breaks down between U.S. and international. The U.S. component of strategic initiatives is an excellent proxy for our IKC P&L. We've simplified what exists in that segment over the last few years as we've exited some of the strategic initiatives. And other than a couple of small things, it's everything related to IKC through that line. I think as you think about both revenue and operating income, using the U.S. component of SIs as a proxy for our IKC business is a really good way to look at it. That's number one.

[Joel Ackerman, CFO and Treasurer at DaVita]

In terms of where this can go over time, look, there are a lot of questions around how many members we can enroll here, what our savings rate can be, how much of that we'll ultimately capture. I think a reasonably simple way to model it would be to start with something like a third of our ESKD population in this. Use a spend per patient, especially if you're looking out a few years, of $100,000 per patient, and that'll give you a medical cost under management. The question is, what % of medical cost under management do we think can turn into OI? And I would say a reasonable number would be something in the low-single-digit, something equivalent to what a typical MA plan would drive as margin.

[Joel Ackerman, CFO and Treasurer at DaVita]

1%, 2%, 3%, maybe 4% in that range as a percentage of medical cost under management, I think is the right way to think about what the potential for this is in the out years.

[Pito Chickering, Analyst at Deutsche Bank]

Okay.

[Joel Ackerman, CFO and Treasurer at DaVita]

I'm sorry, Pito, I think you had a third question, which I didn't catch.

[Pito Chickering, Analyst at Deutsche Bank]

Yeah. There's a few questions buried in there. I guess, will you guys begin disclosing what those gross revenues are as all the patients under management, just to help us model this going forward as well?

[Joel Ackerman, CFO and Treasurer at DaVita]

Yeah, so, I don't think, we're not going to disclose a number that we would call gross revenue. I think the number that we will disclose would be what the revenue would be if we used gross revenue accounting, which would be the medical cost under management. We've seen this before. Under DMG, there were components of the business that were gross accounting, and some were net, and we would disclose a medical cost under management or something like that, and that's the $2 billion number that Javier talked about in the script.

[Pito Chickering, Analyst at Deutsche Bank]

Okay. A sort of quick follow-up here on just the treatment growth. Can you guys disclose the number of patients you had at the end of 1Q and 2Q? I'm trying to understand what treatment growth is in the back half of the year as the excess mortality from COVID hopefully is behind us. If we assume it remains at these current levels, is it fair to model treatment growth going positive in the fourth quarter?

[Joel Ackerman, CFO and Treasurer at DaVita]

Yeah. Look, I think, the right number to look at is not patients, but treatments per day. The good news, let me try and walk you through. First, the good news is treatments per day grew in Q2 over Q1, and I think a sequential view of it will get you a better model than a year-over-year view. Sequentially, treatments per day grew in Q2 over Q1, about 400 treatments per day. There's a bunch of things going on in there. Let me try and break it down for you. First, the good news is the new-to-dialysis treatment starts remain strong. The question that we've gotten in the past about what has happened within the CKD population as a result of COVID, we continue to see strong new-to-dialysis treatment admissions, so we don't feel any pressure there right now.

[Joel Ackerman, CFO and Treasurer at DaVita]

In terms of Q2 over Q1, Q2 did benefit from the storms in Q1. You'll remember, the storms from Uri led to lower treatment volume in Q1, and so the comparison in Q2 was a positive there. That said, there are a few things weighing on the quarter. First, acute volumes are down as you would expect with the pandemic getting better in Q2 over Q1. Second, excess mortality remained above normal. It was well below what we saw in Q1. It came down from 3,000 approximately to less than 500, but it still remained above normal. Finally, the mix of treatment days in Q2 was unfavorable. We do fewer treatments on Tuesday, Thursday, Saturdays than we do on Monday, Wednesdays, and Fridays, and that was about a 50 basis point headwind in Q2 over Q1.

[Joel Ackerman, CFO and Treasurer at DaVita]

Just to summarize, the good news is we're back to a situation where treatments are growing quarter-over-quarter. The, the new-to-dialysis admissions remain strong. That said, there continues to be a bit of noise in the numbers.

[Pito Chickering, Analyst at Deutsche Bank]

Great. Thanks so much. I'll just jump back in the queue.

[Operator]

Thank you. Our next question comes from Justin Lake from Wolfe Research. Your line is open, sir.

[Justin Lake, Analyst at Wolfe Research]

Thanks. I wanted to follow up on the value-based care. To Pito's question, it'd be great if you could give us those numbers. Is that going to be just for the government programs, or are you going to also put any kind of MA value-based contracting, commercial value-based contracting that you have in there that's above and beyond the dialysis side?

[Joel Ackerman, CFO and Treasurer at DaVita]

Yeah, that would include all of that, Justin. It would include MA, it would include traditional Medicare, as well as anything on the commercial side.

[Justin Lake, Analyst at Wolfe Research]

That number will be all profitability, I assume. Does that include or exclude the spending on dialysis? When you talk about a margin, are you talking about the $60,000 that's ex-dialysis, or are you talking about the 90, 95 that includes dialysis when you gross up for the $2 billion?

[Joel Ackerman, CFO and Treasurer at DaVita]

It includes the dialysis number.

[Justin Lake, Analyst at Wolfe Research]

Okay.

[Joel Ackerman, CFO and Treasurer at DaVita]

The per-patient number would be more like $100,000 or $90,000, depending on what time period.

[Justin Lake, Analyst at Wolfe Research]

Perfect. And in terms, you mentioned on the call, in the press release, I should say, that your payer mix changed a little bit to the positive. Can you talk a little bit about commercial volume versus government?

[Javier Rodriguez, CEO at DaVita]

Justin, the reality is there's not a lot to say. This is a bit of a numerator/denominator issue. You had more mortality on the Medicare side, and the commercial side held strong as people really valued their income and their insurance. It was a lot more resilient than we anticipated, so that's the dynamic that we're discussing here. A couple other things, Justin, while you were asking about the value-based care and how do we calculate it with dialysis and non-dialysis, I think it's important to do the math you're doing. You subtract the dialysis, and then you have to put in there that the payer slash government have a participation in the savings. The nephrologist then has a participation in the savings, and that's how you trickle down to the percentages, the 1, 2 or 3 percentage, roughly, that Joel talked about.

[Justin Lake, Analyst at Wolfe Research]

Okay, thanks for that. Can you help me with the commercial treatment growth on the quarter?

[Joel Ackerman, CFO and Treasurer at DaVita]

I can tell you commercial mix was up about 20 bps in Q2 over Q1.

[Justin Lake, Analyst at Wolfe Research]

Okay, great. And then, in terms of-

[Joel Ackerman, CFO and Treasurer at DaVita]

As a reminder, you don't get as much from that in COVID when your Medicare patients are passing away as you would in a normal time.

[Justin Lake, Analyst at Wolfe Research]

Okay. And then, just last question on, you mentioned 2022. I apologize if I missed this, but the tax rate change for this year, do you expect that to continue in 2022? Is this a reasonable new tax rate to assume, or should we go back to the original guidance and assume that's the tax rate for 2022?

[Joel Ackerman, CFO and Treasurer at DaVita]

There's still a lot we don't know about how it will play out. I think it is reasonable to assume some, if not all of the benefit we're seeing this year will continue for another year, but not in perpetuity. For 2022, yes. 2023, I'd say no.

[Justin Lake, Analyst at Wolfe Research]

Okay. Thanks for that. I'll jump back in. Thanks, guys.

[Javier Rodriguez, CEO at DaVita]

Thank you.

[Operator]

Thank you. Next question comes from Kevin Fischbeck from Bank of America. Your line is open, sir.

[Kevin Fischbeck, Analyst at Bank of America]

All right, great. Thanks. I wanted to dig into this, the investments that you're making around this value-based care. I just want to make sure I have the numbers right. I think you said $120 million this year, and then it sounded like you said $50 million. Did you say $50 million incremental, so like $170 million, or did you mean the $120 million goes to $50 million?

[Javier Rodriguez, CEO at DaVita]

Incremental.

[Kevin Fischbeck, Analyst at Bank of America]

Incremental. Okay. I guess as we think about that number, is that a net number? If you start to make a 2% margin on the value-based care, is that an offset to that, or is that kind of inclusive of any potential profitability?

[Javier Rodriguez, CEO at DaVita]

It's a net number.

[Kevin Fischbeck, Analyst at Bank of America]

Net number. Okay. It sounded like you were saying that the $120 million included the CKCC as well. Is that true? Does that number, I guess, just trying to think about the $120 million to $170 million and the roll-off there, is that all included?

[Javier Rodriguez, CEO at DaVita]

Yeah. Kevin, CKCC doesn't start till the beginning of 2022, but we will start investing in the back half of the year in anticipation of that growth. It's not, you know, it's expense that we are building in anticipation of growth related to CKCC.

[Kevin Fischbeck, Analyst at Bank of America]

Yeah. Okay. And then, as far as the sequential enrollment or treatment growth, I guess it does look like Although that's a better way to look at it's a lot of puts and takes into that number. I guess, once you get back to normal, what should that number look like? I guess like 0.4, I'm thinking that means 1.6% annualized. What do you think when this all normalizes, what is the growth rate in volume? Is it a 2% number? Is it a 3% number? What would it ultimately annualize to?

[Javier Rodriguez, CEO at DaVita]

I think at the end of the day, Kevin, one of the things is, you heard from Joel, there's a lot of different dynamics in interplay. For us, the positive is that we're seeing, let's call it the new admit stabilize pre-COVID. The best data we have right now is it will revert to the pre-COVID numbers. I think that's the best assumption, and we'll keep you posted if that changes.

[Kevin Fischbeck, Analyst at Bank of America]

Okay. It sounds like you're not really seeing anything on the labor side. A number of companies are complaining about labor pressure. I guess, could you talk a little bit about what you're doing there? Then, it sounded like you talked about union issues, but I think you meant ballot initiatives, right? Not actually labor costs, but more ballot initiatives that might be a pressure next year.

[Javier Rodriguez, CEO at DaVita]

Yeah. Let me grab a couple. We're not gonna complain about the pressure, it's absolutely there. It is a very dynamic and competitive marketplace. We continue to invest in a differentiated workplace and find that our teammates find great fulfillment in the purpose of the work that we do. That said, again, the marketplace is quite dynamic. As it relates to the second question, yes, we're talking about the union might come up with another ballot, we've now, unfortunately, every other year, have had to deal with it. We hope that they're a little more empathetic to the fact that we're in a pandemic and that it is not a good use of the resources, we just want to continue to talk about it so no one's surprised.

[Kevin Fischbeck, Analyst at Bank of America]

Yeah. Okay, last question. I guess as we think about the kind of growth in the value-based care opportunity, is what you're doing differentiated? Do you think that there's going to be share shifts as a result of this? Are other smaller players or mid-size players going to struggle to do what you're doing and you're resonating with the payers, and so do you actually see a volume lift from this? Is this kind of where the industry is going, and your push into this is largely the same, so that you wouldn't expect? Is this really more about the revenue and the margin than it is about gaining share?

[Javier Rodriguez, CEO at DaVita]

It's an interesting play. From our perspective, we believe that we're really well-positioned, of course, there's a lot of dynamics on volume and mix, how a patient gets to us all the way from a patient choice to a payer choice to physician. That dynamic has got a lot going on. Can the whole chain there really see the value that we create? I think that over time, the answer will be yes, because the clinical outcomes will show it, and there'll be transparency where people say, "Gosh, if I can live there longer, if I can get more transplants, if I can get my CKD and not be hospitalized, I want to go there." But as you know, that takes time.

[Javier Rodriguez, CEO at DaVita]

From my perspective right now, I'm not assuming a change in sort of shift in decision making until this plays out a bit more.

[Kevin Fischbeck, Analyst at Bank of America]

All right. Great. Thanks.

[Javier Rodriguez, CEO at DaVita]

Thank you.

[Operator]

Thank you. And again, if you would like to ask a question, please press star followed by one. Please make sure your phone is unmuted. Thank you. Our next question comes from Lisa Clive from Bernstein. Your line is open, ma'am.

[Lisa Clive, Analyst at Bernstein]

Hi. Thanks very much. Apologies if I missed it in the prepared remarks, what did you say your vaccination rate was for your patients, and also what is it for your teammates? Second question, have you been giving third doses for selected patients given that the immunocompromised seem to not respond as well to the vaccines in terms of the efficacy? And then lastly, are you still testing patients and teammates before every session? I'm just wondering how that is going to evolve in the coming quarters.

[Javier Rodriguez, CEO at DaVita]

All right. Well, let me grab them, and then if I miss any one of them, please come back at me. The patient vaccinated complete with two doses is around 72% or so. Teammates is in the 68%. We're starting to tracking those people that intend to get a vaccine, and we're tracking somewhere in the 1% or 2% that are either thinking of getting it or in their first cycle. To my knowledge, there's nothing of significance in the third dosage yet in our population. I know that the physician community is discussing it. I don't have any major numbers on that. What was your last question?

[Lisa Clive, Analyst at Bernstein]

Just in terms of the-

[Javier Rodriguez, CEO at DaVita]

On the testing, we didn't test all the patients. I think that was in the assumed question. What we do is we of course test anyone that has any symptoms. Then of course our patients get tested a lot more because they're using so much healthcare that when they go to other physician offices or hospitals or other things, they get tested. They're disproportionately tested, but we just test when there's symptoms.

[Lisa Clive, Analyst at Bernstein]

Okay. Thanks very much.

[Javier Rodriguez, CEO at DaVita]

Thank you, Lisa.

[Operator]

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

[Pito Chickering, Analyst at Deutsche Bank]

Hey, guys. Just taking some follow-ups here. Let me go back to the IKC piece. Investors are a bit confused on these disclosures, my understanding today is you collect $2 billion of sort of gross revenues. About half of that is located in the dialysis costs, and the other half are in medical costs or other medical costs. When you reference a 1%-4% margin, that's on the full $2 billion. Should we think about instead as a 2%-8% margin on the $1 billion of non-dialysis costs?

[Joel Ackerman, CFO and Treasurer at DaVita]

Either way works. We've decided to standardize on the full cost, but either way is perfectly fine way to do the math.

[Pito Chickering, Analyst at Deutsche Bank]

Okay, perfect. Let me actually hit one on patient care costs. There obviously is a lot of investor concern around labor inflation sort of during 2Q. Obviously, your cost of treatment were down sequentially, driven by a number of areas. As I think about sort of patient care costs over the next couple of years, can you give us additional color on what can drive further in the efficiencies here, specifically around center occupancy increasing and shift in home dialysis? Thanks so much.

[Javier Rodriguez, CEO at DaVita]

Let me grab it. As it relates to the inflation, of course, we've been very good over time. If you do our CAGR over the last five years or so, I believe we're right at 1% or so, slightly below. We've used the levers quite thoughtfully over time. In there, we're managing, in essence, pharmaceuticals. We're managing productivity and, of course, wage rate. There's other things like supplies and other miscellaneous items, which we are very diligent on. We don't think those dynamics will change much other than during COVID, of course. The PPE has gone up dramatically, and we hope that that stabilizes over time. As it relates to the wage inflation, we have nothing really particular to say about it. We are another player in this really dynamic marketplace, and it feels like it's shifting quite aggressively right now.

[Javier Rodriguez, CEO at DaVita]

Is that a short period, or does that sustain itself? I don't think I can comment on the multi-year. It is fair to say that we are aggressively looking at all the pharmaceutical and all the options to make sure that our physicians have the choice of their pharmaceutical but at the best price possible. I don't know if that got to all of your question. I think the last part of it was around capacity utilization. Of course, we are watching it very aggressively. We went from a time where we were very aggressive on the de novo build to, as you can see, we really tapered that back, and we're building a lot more home centers, which are a lot more capital efficient.

[Javier Rodriguez, CEO at DaVita]

We will keep that sort of balance in check because we know the patients need the interplay between the home and the center, and so there needs to be that capacity available. As we lost here roughly 5% of our patients during COVID-19, we are aggressively taking a look at our portfolio to make sure that our patients have access and that we are not having centers that are not at the right capacity.

[Pito Chickering, Analyst at Deutsche Bank]

Okay. Sort of last follow-up question for you on the IKC, at least for now. Is it fair to think about the operating income in the dialysis segment being unchanged as you increase your penetration with IKC patients?

[Javier Rodriguez, CEO at DaVita]

Yeah, I think that's fair. We are trying to present this in a way that represents the fact that the businesses, they're not independent insofar as they are intricately linked, and that's why we think, and we're excited about our opportunity to win in IKC, but trying to present them as separate income statements, if you will, so you can assess how's the core historical dialysis business doing, and how's the new IKC business doing.

[Pito Chickering, Analyst at Deutsche Bank]

And then last one here. Is it fair to think that kind of as you roll into sort of third quarter results, that you'll be able to give us additional disclosures in the press release around this sort of new segment or division?

[Javier Rodriguez, CEO at DaVita]

We're taking a careful look about what's the right level of disclosure as the IKC business grows and making sure the shareholders have a good understanding of the economics of the business, the progress, the investment, the spending, et cetera. More to come on where we land on that.

[Pito Chickering, Analyst at Deutsche Bank]

Great. Thanks so much, guys.

[Javier Rodriguez, CEO at DaVita]

Thank you.

[Operator]

Thank you. There are no further questions in queue at this time.

[Javier Rodriguez, CEO at DaVita]

Okay. Well, thank you, Missy. Let me make a couple of closing comments. Number one, our core business is strong. Number two, we are entering an exciting and dynamic time with an opportunity to deliver a lot of value for our patients by connecting and coordinating their care with payers, nephrologists, and providers. Point three, the clinical and the economic prizes are absolutely meaningful, and like most valuable prizes, there is a lot to do to make the plan a reality. Point four, if for whatever reason we cannot accomplish the desired outcomes, the economic risk is limited structurally because there are termination rights and off-ramps. In summary, there's a big prize with limited downside. Hopefully, that helps you think of how we're thinking about, sorry, that lets you understand a little of how we're thinking about it.

[Javier Rodriguez, CEO at DaVita]

We thank you for your support, and we enter this new chapter together. Be well, everyone.

[Operator]

That does conclude today's conference. You may disconnect at this time, and thank you for joining.

Participants

Executives

• Javier Rodriguez, CEO
• Jim Gustafson, VP of Investor Relations
• Joel Ackerman, CFO and Treasurer

Analysts

• Justin Lake, Analyst at Wolfe Research
• Kevin Fischbeck, Analyst at Bank of America
• Lisa Clive, Analyst at Bernstein
• Pito Chickering, Analyst at Deutsche Bank