The operator, Michelle, welcomes everyone to the DaVita's Second Quarter 2024 Earnings Call and introduces the speakers, Nic Eliason, Javier Rodriguez, and Joel Ackerman. She mentions that the call may include forward-looking statements and non-GAAP financial measures, and provides information on where to find additional details. Nic Eliason then begins the call by thanking listeners for their interest and introducing the other speakers.

The speaker is grateful for the positive quarter for DaVita and highlights their clinical capabilities and initiatives to support the next generation of dialysis nurses. These initiatives include collaborating with nursing universities, providing financial assistance, offering a clinical internship program, and creating a nurse residency program. The goal is to alleviate the nursing shortage and ensure access to care is not a barrier.

In the second quarter, the company exceeded expectations with adjusted operating income of $506 million and adjusted earnings per share of $2.59. This was due to lower patient care costs and strong revenue per treatment, although there was lower volume growth than expected. The results also included $15 million in center closure costs, which were previously excluded from adjusted operating income. The company's strong revenue per treatment growth is driven by continuous improvement in collection capabilities, which has been a multiyear effort. This is necessary due to the increasing complexity of billing and collecting from health plans, including prior authorization, payer-specific requirements, and a growing list of participating health plans. The company has made targeted investments in technology and employees to improve these capabilities.

The company has made investments in automation and negotiations with health plans to improve their collection rate and increase revenue. They expect RPT growth to be between 3.5% to 4% in 2024, and have provided feedback to CMS on their proposed rule for 2025. However, they believe the proposed rule does not accurately reflect industry cost inflation and could put pressure on the system.

In this paragraph, it is mentioned that CMS plans to include oral-only drugs in the bundle as scheduled next year and DaVita supports this decision. They also mention their increased adjusted operating income guidance for 2024 and the change in treatment of center closure expenses. They attribute the increase to improved operating performance, but also mention including center closure costs in their non-GAAP reporting. The paragraph ends with Joel Ackerman discussing the financial performance and outlook for the second quarter, including adjusted operating income, EPS, and free cash flow.

The company has changed its reporting presentation for non-GAAP results, and center closure costs will now be included in the adjusted OI and EPS for Q2 and the full year. These costs are expected to total around $60 million for the year. In Q2, treatments per day increased by 1.1%, primarily due to census gains and a seasonal improvement in mistreatment rate. However, U.S. net census gains were weaker than expected, which is expected to have a negative impact on the second half of the year. For the full year, treatment volume growth is now expected to be between 0.5% and 1%. Revenue per treatment also increased by $6 sequentially.

The increase in revenue for the second quarter was mainly due to seasonal factors such as higher patient coinsurance and deductibles. Full-year revenue per treatment growth is expected to be 3.5% to 4% for 2024. Patient care costs per treatment remained flat. Depreciation and amortization declined due to a decrease in center closure costs. Operating income for Integrated Kidney Care declined, but is expected to improve in the second half of the year. International operating income remained flat. The company repurchased shares and reduced its leverage. The company also received funding from UnitedHealth Group related to a cyber event, with a balance of $300 million remaining as of today.

The company is focusing on collecting on Change Healthcare impacted claims and reducing U.S. dialysis days sales outstanding. They are also looking to optimize their capital structure and maintain leverage within a certain range. The adjusted operating income and earnings per share guidance for 2024 have been updated, with an increase in adjusted operating income due to several factors. The call is now open for questions.

Pito Chickering from Deutsche Bank asks for more information about the company's NAG and the factors that led to the raised guidance. Javier Rodriguez explains that mistreatments were higher than expected and census growth was lower, but new dialysis admits and mortality remain strong. The company is confident in the high end of their revised guidance due to an extra treatment day in the second half of the year. Joel Ackerman breaks down the components of the raised guidance, excluding $60 million in closure costs.

The company has increased its revenue per treatment by 3.5% to 4%, which is worth $85 million. This is due to improved revenue operations, stronger contracting, and better productivity. However, there is a $20 million headwind from lower volume. Overall, there is a $95 million increase before accounting for $60 million in center closure costs.

In this paragraph, Justin Lake asks Javier Rodriguez about the impact of 50 basis points of volume on revenue, and Rodriguez clarifies that it is worth around $50-60 million. They also discuss the expected costs of center closures in 2025, with Rodriguez stating that the number will be around $20-30 million. He also mentions that while the clinic closure rate should return to pre-COVID levels next year, some costs will be a holdover from 2024 closures. Lastly, they briefly touch on the mix pressure in the second quarter, with Rodriguez stating that it was down slightly from the first quarter.

The company's commercial mix has remained stable between the first and second quarters, with no significant financial impact. The number of exchanges has increased by 200 basis points, and the IKC business has incurred a loss of $60 million year-to-date, but is expected to reach the target of $50 million by the end of the year due to revenue recognition in the back half of the year. The company advises to look at the IKC business on an annual basis rather than quarterly due to potential fluctuations.

The speaker discusses the quarterly spread between Q3 and Q4 and predicts Q3 to be a loss-making quarter and Q4 to be much stronger, with potential for some Q4 revenue to be pulled forward to Q3. They also mention that mortality is higher than expected and is a significant contributor to the decision to adjust. They estimate that the $150 million gap in volume growth is made up of 50-100 bps due to mortality and the rest due to a capital efficient approach to managing clinics.

The company recognized a decline in volume and implemented measures to increase capacity utilization, resulting in the closure of 200 clinics and a decline in clinic share. This, combined with a higher mortality rate and strong new dialysis admits, explains the majority of the 150 basis point gap. There is no evidence of a structural change affecting the growth rate.

The speaker discusses the current state of mortality rates and the uncertainty surrounding the reasons for the elevated levels. They also mention the potential for improvements in managing kidney disease and new drugs to have an impact. The speaker also mentions that the improvement in collections is a multiyear effort and it is unclear how much more progress can be made beyond 2024.

Javier Rodriguez, CEO of a large dialysis chain, predicts that there will be more improvements and growth in 2025, but the benefits will decline over time. He also mentions that clinic closures may have a negative impact on volume growth, but smaller dialysis operators have gained share in the market. The company has stopped opening new clinics due to the pandemic.

DaVita has aggressively stopped building new centers and has closed roughly 200 centers in order to right-size their capacity. This has resulted in a fixed expense reduction of $100 to $150 million and a loss of volume of around $50 million. While there are other considerations, the trade-off appears to be financially beneficial. In regards to the exchanges, there has been a 200 basis point increase in revenue, not mix. The company is looking to maintain a leverage range of three to 3.5 times.

The speaker explains that their goal is to maintain a leverage range of three to 3.5 times as their EBITDA grows. They plan to use excess debt capacity for capital efficient growth or share repurchases. The change in line of credit will not affect their leverage ratio or free cash flow. The speaker also discusses the issue of mortality and why it has become a concern.

The speaker is discussing when things will return to normal and mentions that predicting it is difficult. They believe that the current situation is not permanent and that things will eventually improve. They mention improvements that can happen in terms of mortality. The speaker is then asked about commercial contracting and how it will impact revenue in the future. They explain that there are three dynamics to consider: mix, negotiations, and revenue cycle. They are comprehensively contracted and big contracts come up every three to four years.

The speaker, Javier Rodriguez, discusses the current state of negotiations in commercial contracting and how they are focused on containing costs and adding value for patients. They also mention that the lower census growth is not isolated to any specific geographic region. When asked about the RPT improvement, Rodriguez clarifies that they are still working through it and some of it will annualize into 2025, potentially resulting in a growth rate closer to 3.5% to 4%.

The speaker, Javier Rodriguez, discusses the company's performance and future projections, stating that a 3.5-4% growth for next year is unlikely. He also mentions that home utilization is around 15% and capacity utilization is between 58.5-59%. The international business has a margin of around 7%, but it is difficult to predict how it will evolve due to varying dynamics in different countries. The company's recent acquisition in Latin America is expected to drive growth in the international sector. Joel Ackerman adds that international margins are influenced by different factors and are harder to predict, making it a better use of cash flow than share repurchases.

In this paragraph, Joel Ackerman and Pito Chickering discuss the performance of DaVita in terms of adjusted return and margin increases. They also mention the increase in lives at IKC and the medical costs per life, but Javier Rodriguez cautions against using this calculation. They conclude by stating that DaVita's investments have led to a strong quarter and a sustainable foundation for future growth.

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