Dialysis giant DaVita defends itself in court and at the polls
It’s been a year of playing defense for DaVita Inc., one of the country’s largest dialysis providers.
A federal jury in Colorado this past summer awarded $383.5 million to the families of three of its dialysis patients in wrongful-death lawsuits. Then this month, the Denver-based company said it would pay $270 million to settle a whistleblower’s allegation that one of its subsidiaries cheated the government on Medicare payments.
But its biggest financial threat is a ballot initiative in California that one Wall Street firm says could cost DaVita $450 million a year in business if the measure succeeds.
Despite these recent setbacks, the company continues to rake in profits and receive favorable ratings from stock analysts. Its shares are trading at about $65 a share, about 19 percent below a 52week high set in January. That’s largely because DaVita controls about one-third of a growing market, health experts say.
“They don’t really have many rivals, and they perform a necessary, lifesaving service,” said Leemore Dafny, a professor of business administration at Harvard Business School. “If you’re producing something people want to buy and you’re the only one making it, people are going to buy it.”
Patients with chronic kidney failure often need dialysis to filter the impurities from their blood when their kidneys can no longer do that job.
And as Americans live longer and get heavier, more people become diagnosed with kidney disease and possibly need dialysis. In 2015, 124,114 new patients received dialysis, up from 94,702 in 2000, according to the U.S. Renal Data System.
DaVita is one of the largest dialysis providers in the country, operating more than 2,500 clinics nationwide.
Its parent company, DaVita Inc., reported $10.9 billion in revenue last year and $1.8 billion in profit, almost all of which came from its dialysis business.
This year, company officials project that the dialysis group will bring in $1.5 billion to $1.6 billion in profit. It’s a big turnaround for a corporation that could barely make payroll in 1999, when it was under review by the Securities and Exchange Commission for questionable accounting practices. Its success has largely been credited to CEO Kent Thiry, who has dressed up as a Musketeer and ridden a horse into corporate meetings to rally workers.
Now those big profits — generated from treating sick patients — have put a target on the company’s back and that of its biggest competitor, Fresenius Kidney Care.
The Service Employees International Union succeeded this year in putting Proposition 8 on California’s Nov. 6 ballot. It would limit dialysis center commercial revenue to 115 percent of patient care costs. The ballot fight pits a well-funded industry against labor and the California Democratic Party.
DaVita declined to make anyone available for this story. In a statement, the company said Proposition 8 “will limit patients’ access to life-saving dialysis treatments, jeopardizing their care.”
Last year, roughly twothirds of DaVita’s dialysis revenue came from government programs, such as Medicare and Medicaid. But that isn’t enough to cover its costs, according to the company’s 2017 annual report, which says DaVita loses money on each Medicare treatment it provides. (Medicare covers dialysis for people 65 and older, and for younger patients after private insurance has provided coverage for 30 months.)
Instead, DaVita’s profit comes from commercial health plans, which it acknowledges pay “significantly higher” rates than government programs. The ballot measure targets those higher rates, which Dafny describes as “their bread and butter.”
The prospect of the measure passing led DaVita to delay or cancel plans to open new clinics in California despite growing patient demand, Javier Rodriguez, chief executive officer of DaVita Kidney Care, told investors on a call in May, according to the online equity research website Seeking Alpha.
A few months later, Rodriguez declined to provide a dollar amount when asked how the initiative would impact the company. Rather, he warned investors that it would become “unsustainable” for the industry to treat the estimated 66,000 dialysis patients in California, should the measure succeed.
Wall Street analysts agree that Proposition 8 would wipe out DaVita’s earnings in California, according to recent reports issued by investment firms J.P. Morgan and Baird. Passing the initiative “would be so devastating,” around $450 million a year, that DaVita “would likely walk away from the state altogether,” according to a March Baird report.
DaVita spent $66.6 million on the opposition campaign as of Oct. 25, and rival Fresenius has contributed $33.6 million. That dwarfs $17.3 million in union contributions in support of the measure, according to campaign records filed with the California secretary of state.
The company’s legal troubles don’t worry stock analysts. Baird’s October report on DaVita’s financial performance dedicates just two sentences to them. It notes that DaVita “is subject to numerous ongoing government investigations and inquiries, similar to most large-scale, high-profile Medicare providers.”
There are no specific references to the Colorado jury award, which the company is appealing, over three patients who died of cardiac arrest after treatment at DaVita clinics. Nor was there concern about this month’s $270 million settlement over Medicare billing.
That’s because those incidents are seen by investors as the cost of doing business — one-time hits that don’t affect a company’s earnings power in the future, said Matthew Gillmor, a senior research analyst at Baird.
“Almost all companies I follow, at some point, have had to pay a fine to the government,” Gillmor said.