The DaVita Second Quarter 2023 Earnings Call has begun, with Michelle as the conference facilitator. Nic Eliason, Group Vice President of Investor Relations, and Javier Rodriguez, CEO, and Joel Ackerman, CFO, are present. During the call, the team may make forward-looking statements, which are subject to known and unknown risks and uncertainties. Additionally, non-GAAP financial measures may be discussed, with a reconciliation available in the earnings press release and on the website. Javier Rodriguez will now take the call.

Javier Rodriguez celebrates the rollout of DaVita's next generation clinical IT system, Center Without Walls, which is now live in 2,700 clinics across the US. It features wristbands for quick teammate login, improved ability to track and reschedule mistreatment, enhanced real-time documentation, and consolidated it reporting. The system also has the potential to use artificial intelligence to advance care delivery in the future.

In the second quarter, the company reported an adjusted operating income of $432 million and adjusted earnings per share of $2.08, driven primarily by improvements in treatment volume, revenue per treatment, and patient care costs. Volume saw its second consecutive quarter of improvement, revenue per treatment was driven by seasonal factors and rate increases, and patient care costs improved as expected, partially offset by elevated training costs. The company is also investing in its revenue cycle capabilities, resulting in higher cash collections and a decline in its DSO.

CMS proposed a rate increase for 2024 that fell short of expected cost inflation, leading the kidney care community to advocate for an adjustment mechanism. The company is continuing to drive cost efficiencies across the P&L and is targeting 3-7% growth in adjusted operating income. They have updated their adjusted operating income and earnings per share range and their performance will depend on momentum and patient census trends, cost management, and revenue cycle management.

Joel Ackerman discussed the factors driving strong performance in the second quarter, such as treatment volume, revenue per treatment, and patient care cost per treatment. Treatment volume was up 0.3% sequentially, with mortality lower than Q1 and mistreatment rate elevated. Revenue per treatment was up $10.59, with half of this increase due to seasonality and the other half from rate increases and cash collections. Patient care cost per treatment decreased 1.5%, with base wage increases high but temporary compensation measures reduced. Operating income from integrated kidney care business was approximately flat with Q1, with positive prior period developments and delayed expenses.

Javier Rodriguez answered a question from Joanna Gajuk about the revenue per treatment, citing better payer mix as one of the drivers. He also discussed commercial pricing and rate increases for the year and indications for the following year, noting that Medicare rates are lower than cost inflation. The capital allocation strategy remains focused on capital efficient growth, a target leverage ratio of 3-3.5 times EBITDA, and returning excess cash flow to investors through share buybacks.

Private pay mix has been holding up, with an increase of 20 bps, and rate per treatment increases are in line with expectations. In terms of the Marietta case, there has not been much change in terms of claims volume, but it has been learned that employers are changing benefits and misleading members on how it is done. To counter this, a verification process has been implemented at admissions, and if an employer eliminates the network, dialysis benefit for its member, then they have the right to prevent that plan from having access to their centers. There is also high interest from both sides of the aisle to protect patients.

Javier Rodriguez and Joel Ackerman discussed the potential implications of Congress introducing a bill regarding dialysis networks and how the Congressional Budget Office would score it. They also discussed the guidance phase of $70 million of the operating income, which is attributed to RPT and volume, with half of the increased guidance being RPT and the other half being volume, as well as contract labor being in line with expectations.

Joel Ackerman discussed the seasonality of the patient benefit design and what is driving the better cash collections. They have invested in their processes and technology to improve the quality and timeliness of data, resulting in quicker payments and higher RPT. The guidance for OI is up 5%, while the free cash flow is up 10%, indicating improved cash conversion.

Javier Rodriguez discusses the CMS rate increase and the potential for improvement. He states that the system usually works well in times of economic stability, but that there are often questions about the rate increase now. He wonders why this is a new dynamic and suggests that the system is complicated.

Javier Rodriguez explains that forecasting the rate of dialysis is practically not possible due to variables that are not visible to the public. He advocates for a reconciliation linked to actual costs rather than winners and losers. Lisa Clive then discusses MedPAC's role as an economic advisor to Medicare, noting that while their recommendation is often useful, the process is opaque to them.

Javier Rodriguez and Lisa Clive are discussing the decision to close some clinics and the effects of the rate increase on the decision. Rodriguez explains that patient care is the first priority and then economic factors such as reimbursement and leases are taken into consideration. Pito Chickering then asks about the pre-COVID growth rate of 4,000 new patients per year, two-thirds of which were from nephrologists dropping on.

Javier Rodriguez and Pito Chickering discuss the current rate of new patients, which is tracking to pre-COVID levels. However, excess mortality remains elevated and is not yet back to pre-COVID levels. The rate of decline in mortality is difficult to predict, but in Q2 it was estimated to be between 500 and 600 lives.

Javier Rodriguez and Pito Chickering discuss the pace of consolidation for facilities, with Rodriguez emphasizing the importance of being close to patients' homes and taking health equity issues seriously. They also discuss managed care rate increases and whether or not managed care is trying to control costs within other parts of the business. Rodriguez states that they have not seen any changes in the last 90 days. Lastly, they discuss the possibility of being more aggressive with consolidating facilities, but Rodriguez stresses the need to be thoughtful and balanced in order to ensure the best care for their patients.

Joel Ackerman provides an update on the Medtronic JV, which does not impact operating income but does affect EPS. The JV is worth about $15 million pre-tax per quarter and this quarter there was a positive gain. It is expected to reach breakeven in two to three years and the company is interested in it because it provides a good opportunity.

Joel Ackerman answered a question about labor turnover in the quarter and compared it to 2019. Pito Chickering then asked about the clinic closures, to which Andrew Mok followed up with a question about the new dialysis clinics and what was driving them.

Javier Rodriguez discussed the health care system, noting that there are full clinics as well as home centers, and that capacity utilization is important. He also gave an estimate of the mortality rate, which is roughly one percent higher than pre-pandemic levels. He concluded by expressing his appreciation for the questions and his optimism for the future, noting that some of the investments they have made are beginning to show results.

This summary was generated with AI and may contain some inaccuracies.