CMS released a proposed rule for 2021 ESRD PPS which included a 1.8% rate increase, better than the 2019/2020 proposed increases of 1.5%/1.7% respectively. More importantly, calcimimetics was added to the bundle as expected, with an initial proposed addition of $12.06 per treatment based on Q2’20 ASP, above expectations. That said there are two things to consider here. First, DVA will only get this payment on ~70% of treatments that are Medicare and Med Adv. which would leave the reimbursement on all treatments at $8.44 per treatment and comparable to most recent cost per treatment of $4.94. Second, CMS noted that the final rule will include a rate that is based on Q4’20 ASP. Using Q3’20 ASP we est. the addition drops to $10.31 per Medicare/Med Adv treatment or $7.22 per overall. This would leave the estimated OI benefit at $72M by our math – see exhibit 1 on page 2 with potential for further change depending on Q4’20 ASP and where DVAs costs migrate into 2021.
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We hosted 2 days of meetings w/DVA CFO Joel Ackerman and VP of IR Jim Gustafson — Management’s tone was cautiously optimistic on their ability to execute through current uncertainties, pointing out natural hedges to unemployment / mix in terms of lower employee costs / turnover and a continued view that margins are achievable over time, allowing for sustainable core growth. Key swing factors for 2021 include Med Adv penetration and rates, upcoming CMS rulemaking on calcimimetics and the pace of unemployment through the current recession. Overall, while headwinds and tailwinds remain, we were most intrigued by CFO Ackerman’s confidence in DVA’s ability to control costs in an uncertain rate environment as any improvement in visibility around core growth would be well received given mgmt. has already illustrated a shareholder friendly cap deployment strategy.
The CA ballot measure filed by the SEIU-UHW in Oct. last year has collected enough qualified signatures and will be added to the November ballot. Recall that the measure focuses on physician staffing and quality of care at dialysis clinics. There are three parts of the ballot measure, 1) a physician must be on site during all operating hours, 2) dialysis clinics must report infection rate data, and 3) providers must obtain permission to close and/or reduce services provided at a chronic dialysis clinic – see exhibit 1-3 on page 2 for exact verbiage. While DVA has not provided estimated impact of the measure, the California Medical Association opposed the initiatives quoting the expected incremental state-wide annual costs of $320M based on assumption industry would need to add ~1000 physicians to facility staff. We note that based on the latest CMS data (see exhibit 4 on page 3), DVA’s market share (in terms of # of centers) in CA is ~50% and $160M of incremental costs translate to ~10% of FY20 Cons OI.
CMS recently released calcimimetics reimbursement for 3Q with Sensipar ASP down another 31.6% q/q, followed by -48.2% and -41.7% q/q in 2Q and 1Q20. Meanwhile, Parsabiv ASP for the quarter declined 3.8% q/q, vs. -4.7% and -11.3% q/q in 2Q and 1Q, respectively. Recall that on the Q1 earnings call, DVA reiterated that they expect calcimimetics to have a $40M-$70M OI benefit for the year with 1Q benefit of $35M. Given the continued steep cuts in ASP, we expect any upside above the range could be limited.
On Friday (5/22/20), CMS released a FY2021 final rule for Medicare Advantage and part D (link to the final rule here). Most notably, the final rule removed outpatient dialysis facilities from the list of specialty facility types, which also removes any network adequacy standards. Instead, the standards have been replaced with an attestation that plans are providing an adequate network of providers to their members. We view this as a win for Med Adv plans as it may provide additional flexibility and leverage in terms of network costs, helping to offset the headwind from expected ~30% increase in ESRD members in 2021 (more below). The final rule also included sections codifying the Cares Act, adjusting the Star rating system, and changing the numerator in the MLR calculation—more below. Overall, we see the network requirements and MLR calc changes as positives for MCOs with the Star rating changes a modest negative.
Yesterday (05/12/20), House Democrats unveiled a new $3T COVID-19 relief package which includes provisions to aid state fiscal budgets, support for providers, as well as significant COBRA subsidies. While many COVID-19 related provisions were built upon the provisions from the previous $2T stimulus package, the new package adds more health insurance protections, including full COBRA premium subsidies until Jan 31, given the continuing surge in the unemployment rate. According to Politico, the House is expected to vote as soon as this Friday, but the White House and Senate Republicans expressed there hasn’t been enough time since the last package to determine whether new legislation is necessary. Senate Majority Leader Mitch McConnell has said there is no “urgency” likely pushing any actions until after Memorial Day. Overall, while we expect there will absolutely be further stimulus, we expect there will be a robust debate on components and thus would not be investing on the assumption that the House bill in its entirety is what will eventually pass.
DVA Q1’20 OI of $465M came in well above WR/Cons $397M/$389M, and adj. EPS of $1.83 beat WR/Cons $1.49/$1.48 – the OI beat vs. our model was driven by lower patient care costs as well as other items including (i) a one-time FX gain of $10M from the co.’s Asia JV; (ii) a one-extra day benefit of $10-15M (vs. our $7M est.); and (iii) a calcimimetics benefit of $35M (vs. our $29M est / and guide of ~$27.5M at the mid-point). Adjusting for the items, OI was still ~$40M or 10% above our est. – see our 1Q20 earnings bridge in exhibit 1 on page 2. Despite the strong beat, DVA maintained all aspects of its FY20 guidance as 1Q outperformance is expected to be offset by incremental COVID-19 related costs throughout the year – discussed more below. Mgmt. has sent back $240m of CARES $ received, a thoughtful move in our view and likely indicative of management’s confidence in continued strong performance.
While DVA doesn’t expect a significant impact from COVID-19 in 1Q results, the co. is expecting a short-term financial impact from higher wages, increase in supply costs as well as lower treatment volumes due to hospitalizations, missed treatments, or deaths. However, we expect this short-term impact will likely be offset in 2020 by the CARES Act payment of $240M (more below) received by the company.
Following the initial infusion of $30B earlier in the month, the administration has now laid out a plan for how to distribute the remaining $70B to providers. Same as the $30B initial infusion, $20B out of the $70B is general funding which will be distributed to all facilities & providers but importantly this time the fund will be allocated “so that the whole $50 billion general distribution is allocated proportional to providers' share of 2018 net patient revenue”. Recall that in order to quickly distribute the fund, HHS distributed the initial $30B based on 2019 Medicare FFS revs. This means that during this second round, providers with smaller % of revs from Medicare FFS (like children’s hospitals) will receive a greater proportion of the additional distribution compared to the last round. It is unclear at this point how the allocation methodology will impact the distribution to hospitals vs. the initial distribution but we plan to follow-up as we get more clarity here – see exhibit 1 on page 2 for our est. (HCA / DVA are actual) of $ providers received from the initial $30B distribution.
On Friday HHS announced the eligibility criteria and distribution methodology of the initial $30B in relief funds to providers, which is part of the larger $100B package from the CARES Act. These funds will go to all facilities & providers (including physician groups like OptumCare) that received Medicare FFS reimbursements in 2019 – see below for more details. Providers have been distributed the initial $30B based on their share of total FFS reimbursements in 2019, which totaled ~$484B leaving payments at 6.2% of FFS. For the remaining $70B, HHS notes it will prioritize distributions to “providers in areas particularly impacted by the COVID-19 outbreak, rural providers, providers of services with lower shares of Medicare reimbursement or who predominantly serve the Medicaid population, and providers requesting reimbursement for the treatment of uninsured.”
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