DaVita investors look at The Everett Clinic’s under performance

DaVita HealthCare Partners (NYSE: DVA) met with investors today to discuss 2016 second quarter earnings and the recommendation to lower its financial guidance for the remainder of the year based, in part, on poor performance of fee for service revenue growth.

“Unfortunately, year-to-date, we have financially under performed relative to plan, and we expect this gap to increase in the second half of the year,” said Vijay Kotte, Chief Financial Officer of DaVita Medical Group.

Kotte explains that DaVita Medical Group had targeted 6 percent year-over-year growth in fee for service revenue. However, actual FFS growth has been closer to 3 percent.

When asked by investors how significant a role The Everett Clinic played in this quarter’s shortfall, Javier J. Rodriguez, Chief Executive Officer of Kidney Care, commented that while the company’s FFS revenues have been “soft across the board,” one could certainly view The Everett Clinic as the “biggest single source” of under performance.

“The good news or bad news, depending on how you look at it, is that we can operate some parts of that much better outside of the Everett Clinic. And within the Everett Clinic, which operates so excellently, [this is] an uncharacteristic stumble,” said Rodriguez.

In addition to poor FFS revenue growth, this quarter’s earnings were impacted by the following factors:

1. Prior year revenue reconciliation: DaVita HealthCare Partners made a mistake in forecasting 2016 operating profits, by overestimating reconciliation payments for prior year MA revenue.
2. Slow Medicare Advantage growth: While MA growth has been in line with broader MA trends in geographies, it is still lower than expected.
3. Rebranding efforts: Transition from Health Care Partners to the DaVita Medical Group comes with a $5-10 million price tag this year (not accounted for in the second quarter report). It also requires the acceleration of non cash amortization of $110 million in existing trademark intangibles associated with the Legacy Health Partners brand.

Operating income for DaVita Medical Group was a modest $44 million compared to Kidney Care’s operating income of $431 million.

Kent Thiry, CEO of DaVita HealthCare Partners, said that despite the disproportionate performances, the company remains committed to its mix.

“There are pockets of profitability in health care and there are pockets of loss. For us about 80% of our patients are Medicare fee for service and we lose money on every one of them. It really doesn’t make any sense. So you really have to think of it as an ecosystem and see if any one part of it is getting out of balance because it’s hard to get each individual part of it exactly right,” said Thiry.

Thiry says that DaVita will continue to focus on contracting discussions with health plans and the development of value-based care capabilities in its newer markets to drive fee for service to value conversion.

update: Jim Gustafson, Vice President of Investor Relations, contacted State of Reform to let us know that the DaVita Medical Group remains “as excited as ever about the group, the quality of care provided by The Everett Clinic and its long term prospects.”