START­ING ANEW LINE

Davita’s deal with a large physi­cian-man­age­ment group shows the lines are no longer clear in health­care

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In what’s viewed as a bell­wether trans­ac­tion, Davita di­ver­si­fies into pri­mary care and be­comes part of ACO pro­gram

Davita, the na­tion’s sec­ond largest provider of dial­y­sis ser­vices, is wa­ger­ing that in­te­grated care will change the way it takes care of kid­ney-care pa­tients and even what kind of com­pany Davita will be­come. The Den­ver-based com­pany said it will pay $4.42 bil­lion in cash and stock to merge with Health­care Part­ners, a pri­vately held op­er­a­tor of med­i­cal groups and physi­cian net­works in South­ern Cal­i­for­nia, cen­tral Florida and Las Ve­gas.

The deal is an­other sig­nal—per­haps the big­gest so far—that health­care com­pa­nies of all kinds will in­creas­ingly merge with or ac­quire un­likely part­ners in an ef­fort to gain a foothold with key providers as in­sur­ers and gov­ern­ment health­care pro­grams move for­ward with new pay­ment and care mod­els in the wake of the Pa­tient Pro­tec­tion and Af­ford­able Care Act.

“The Davita trans­ac­tion is but one ex­am­ple of many that are sure to come,” David Cyganowski, a man­ag­ing di­rec­tor at Kaufman Hall & As­so­ciates, said in an e-mail. “There is a real blur­ring of the lines hap­pen­ing right be­fore our eyes. What is clear, how­ever, is that mar­ket-driven health­care re­form is oc­cur­ring at a faster pace than even PPACA dic­tates—so it re­ally doesn’t mat­ter how the Supreme Court of the United States rules in the com­ing weeks.”

In most of these deals un­til now, in­sur­ers have been the ones to ac­quire providers. Last year, Unit­edhealth Group bought Monarch Health­care, an Irvine, Calif.-based in­de­pen­dent physi­cian group, and Highmark, a Blue Cross and Blue Shield li­censee in Penn­syl­va­nia, en­tered an agree­ment to ac­quire West Penn Al­legheny Health Sys­tem, a fi­nan­cially trou­bled hospi­tal sys­tem in Pitts­burgh. In 2010, Hu­mana ac­quired Con­cen­tra, an ur­gent- and oc­cu­pa­tional-care provider.

“Davita cur­rently ex­e­cutes on its in­te­grated-care mis­sion with thou­sands of physi­cian part­ners across the coun­try for spe­cial­ized kid­ney-care ser­vices,” Davita Chair­man and CEO Kent Thiry said in a news re­lease an­nounc­ing the merger. “Health­care Part­ners ex­e­cutes on that same mis­sion across a full and deep ar­ray of health­care ser­vices in three ge­o­graphic mar­kets.”

The trans­ac­tion will bring a much broader net­work of providers and tra­di­tional health­care ser­vices un­der Davita’s man­age­ment and may help sup­port the com­pany as it and other dial­y­sis providers lobby the CMS to al­low the de­vel­op­ment of re­nal-dis­ease ac­count­able care or­ga­ni­za­tions.

“We think that by com­bin­ing with Health­Care Part­ners the data be­comes ever more com­pelling that all of Amer­ica’s dial­y­sis pa­tients need to be taken care of on an in­te­grated bun­dled ba­sis, not with the frag­mented fee-for-ser­vice that still ex­ists,” Thiry said in an in­ter­view.

How­ever, the long-term out­look for DaVita does not limit the com­pany to dial­y­sis.

Thiry said the com­bined com­pany, to be called Davita Health­care Part­ners, is still work­ing on how it will be de­fined, but noted that its core busi­ness will be as an in­te­grated-care provider. “Be­cause the seg­ment that Health­care Part­ners com­petes in is much, much larger than the kid­ney-care mar­ket, we would there­fore ex­pect over the long term for Health­care Part­ners to be­come the largest part of the en­ter­prise,” Thiry said. The Tor­rance, Calif.-based physi­cian group, which re­ported op­er­at­ing in­come of $488 mil­lion and rev­enue of $2.4 bil­lion in 2011, pro­vides pri­mary- and spe­cialty-care ser­vices as well as co­or­di­na­tion of hospi­tal care and other ser­vices for its pa­tients. It op­er­ates three of the 32 CMS Pioneer ACOS.

The move po­si­tions Davita “to ac­cept more fi­nan­cial risk from pay­ers and ap­pears to be a play on physi­cians as the gate­keeper of health­care costs and uti­liza­tion in fu­ture pay­ment mod­els,” Gary Tay­lor, an an­a­lyst with Cit­i­group, said in a re­search note.

Davita cur­rently pro­vides dial­y­sis ser­vices to about 145,000, or 36%, of the na­tion’s 400,000 dial­y­sis pa­tients. The deal, Tay­lor noted in an in­ter­view, has “al­most noth­ing to with dial­y­sis.”

While Davita can cur­rently grow about 5% to 7% in rev­enue each year, in­tro­duc­ing a much

broader net­work of providers un­der Davita’s man­age­ment, es­pe­cially one with the po­ten­tial to rapidly ex­pand, could al­low the Health­care Part­ners side of the busi­ness to grow by up to 20% each year, Tay­lor said. “Health­care Part­ners is ex­actly the kind of as­set you’d want to have,” he said. “It’s a smart, strate­gic move.”

Both Thiry and Health­care Part­ners CEO Dr. Robert Mar­go­lis, who will serve as co-chair­men of the com­bined com­pany, say that de­vel­op­ing in­te­grated care for dial­y­sis pa­tients is im­por­tant.

Davita and other in­dus­try groups, such as Kid­ney Care Providers, have been push­ing the CMS to al­low the for­ma­tion of ACOS specif­i­cally for end-stage re­nal dis­ease pa­tients. “We think there’s good op­por­tu­nity to have spe­cific re­nal ACOS and do the same thing that DaVita’s been do­ing for years with a broader swath of kid­ney-care pa­tients,” Mar­go­lis said.

In a June 2011 com­ment let­ter on the pro­posed rule for the Medi­care Shared Sav­ings Pro­gram for ACOS, Davita said a “re­nal-fo­cused co­or­di­nated-care pi­lot would not only im­prove the lives of pa­tients suf­fer­ing with ESRD, but could also pre­vent thou­sands of Amer­i­cans from need­ing dial­y­sis.” The com­pany went on to say the CMS’ reg­u­la­tions could neg­a­tively af­fect end-stage re­nal dis­ease pa­tients by shift­ing the pa­tient’s “ac­count­able” provider from a nephrol­o­gist to a pri­mary-care physi­cian.

Ac­cord­ing to Davita, about 85% of dial­y­sis pa­tients visit dial­y­sis cen­ters three times a week for four-hour ses­sions, a sched­ule that sets up the dial­y­sis cen­ters to serve as a place to pro­vide other types of care. “We’re hopeful that we’re able to find a model that works for both par­ties,” said Leanne Zumwalt, group vice pres­i­dent of gov­ern­ment af­fairs for Davita. “We’re ad­vo­cat­ing to the CMS to move for­ward a re­nal-dis­ease care model.”

Af­ter some­thing larger

Cit­i­group’s Tay­lor said he ex­pects the CMS to is­sue a pro­posed rule on some form of a re­nal dis­ease ACO or in­te­grated-care model some­time this year. Nev­er­the­less, he said that while Health­Care Part­ners’ ex­per­tise with the CMS and its ACOS could help Davita, the com­pany wouldn’t have needed to spend $4 bil­lion for that kind of ex­per­tise. “They’re go­ing af­ter some­thing much, much larger than this,” Tay­lor said.

Davita and Health­care Part­ners have been ac­quis­i­tive play­ers in their re­spec­tive mar­kets. In re­cent years, Davita has snapped up both U.s.-based and in­ter­na­tional dial­y­sis providers, while the ac­qui­si­tion of JSA Health­care Corp. in 2006 in­tro­duced Health­care Part­ners to the Ne­vada and Florida mar­kets.

Sum­mit Part­ners, a Bos­ton-based pri­va­tee­quity firm, be­came an in­vestor in Health­care Part­ners in 2005. Mar­go­lis said the “size, re­sources and the scope” of Davita would al­low Health­care Part­ners, which was founded about 20 years ago, to con­tinue its ex­pan­sion ef­forts. Merger talks be­tween the com­pa­nies be­gan about nine months ago.

“There are clearly no other large na­tional clin­i­cally cen­tric, de­liv­ery-cen­tric mod­els and we be­lieve that’s a sig­nif­i­cant dif­fer­en­tia­tor and a ter­rific ad­van­tage,” Mar­go­lis said.

John Ran­som and Ni­cholas Jansen, an­a­lysts with Ray­mond James Fi­nan­cial, said in a re­search note that they do not be­lieve Davita will ini­tially bring “much strate­gic value” to Health­care Part­ners. “What Davita does of­fer is the prom­ise of cap­i­tal (prob­a­bly for beach­head ac­qui­si­tions in new mar­kets), ex­pe­ri­ence with physi­cian re­la­tions, and a deep bench of man­age­ment tal­ent. While these as­sets are not triv­ial, they are not ex­actly scarce,” they said. “What Davita may bring to the ta­ble is a de­fault as­set—its own­er­ship does not bring any ob­vi­ous con­flicts to HCP, as it seeks to part­ner with new pay­ers and en­ter new mar­kets.”

If Health­care Part­ners had sold to a man­aged­care plan, its ex­pan­sion would have been limited to the plan’s mem­ber­ship base, ac­cord­ing to Ran­som and Jansen. “That said, we be­lieve that the real test for this deal is this—can Davita help the com­pany grow in new mar­kets? Can it nur­ture this growth in a cap­i­tal-ef­fi­cient way?”

Ex­pand­ing the pa­tient-cen­tric in­te­grated provider net­work that the merged com­pany is seek­ing to cre­ate is also a chal­lenge Thiry raised.

“It is our job to fig­ure out how to re­spon­si­bly repli­cate that in as many places as we can, ei­ther through our own ac­tions or through stim­u­lat­ing oth­ers,” Thiry said. TAKE­AWAY: Davita’s ac­qui­si­tion of Health­care Part­ners fur­ther sig­nals an in­dus­try­wide move to­ward con­sol­i­da­tion and at­ten­tion to changes in pay­ment and care mod­els.

GETTY IMAGES

The deal po­si­tions the new Davita Health­care Part­ners to move be­yond dial­y­sis and of­fer in­te­grated care.

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