Dialysis Giant DaVita Defends Itself In the court And also at The Polls

It's been annually of playing defense for DaVita Inc., among the country's largest dialysis providers.

A federal jury in Colorado this summer awarded $383.5 million to the families of three of their dialysis patients in wrongful death lawsuits. Then this month, the Denver-based company announced it might pay $270 million to settle a whistleblower's allegation that one of its subsidiaries cheated the federal government on Medicare payments.

But its biggest financial threat is a ballot initiative in California that certain Wall Street firm says might cost DaVita $450 million annually in business when the measure succeeds.

Despite these recent hits, the company continues to rake in profits and receive favorable ratings from stock analysts. Its shares are trading at about $65 a share, only about 19 percent below a 52-week high occur January. That's largely because DaVita controls about one-third of the growing market, health experts say.

“They don't really have many rivals, plus they execute a necessary, lifesaving service,” said Leemore Dafny, a professor of economic administration at Harvard Business School. “If you're producing something people are interested and you are the only person making it, individuals are going to buy it.”

Patients with chronic kidney failure often need dialysis to filter the impurities using their blood when their kidneys can't do this job.

And as Americans live longer and get heavier, more and more people become identified as having kidney disease and possibly need dialysis. In 2021, 124,114 new patients received dialysis, up from 94,702 in 2000, a 31 percent increase, according to the U.S. Renal Data System.

DaVita is one of the largest dialysis providers in the country, operating a lot more than 2,500 clinics nationwide. In California, the organization operates 292 clinics, half of all chronic dialysis clinics in the state.

Its parent company, DaVita Inc., reported $10.9 billion in revenue last year and $1.8 billion in profits, the majority of which originated from its dialysis business.

This year, company officials project the dialysis group will bring in $1.5 billion to $1.6 billion in profits. It's a big turnaround for any corporation that could barely make payroll in 1999, if this was under review by the Filing for questionable accounting practices. Its success has largely been credited to CEO Kent Thiry, a colorful personality that has dressed up as a Musketeer and ridden a horse into corporate meetings to rally workers.

Now those big profits – produced by treating sick patients – has put a target around the company's back, as well as that of their biggest competitor, Fresenius Kidney Care.

The Service Employees International Union succeeded this year in placing Proposition 8 on California's Nov. 6 ballot, which would limit dialysis center commercial revenues 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 create anyone available for this article, however in an argument said Proposition 8 “will limit patients' access to life-saving dialysis treatments, jeopardizing their care.”

Last year, roughly two-thirds of DaVita's dialysis revenue came from government-based programs, for example Medicare and Medicaid. But that's not enough to cover its costs, based on the company's 2021 annual report, which states that DaVita loses money on each Medicare treatment it provides. (Medicare covers dialysis for people 65 and older, and for younger patients after private insurance provides coverage for 30 months.)

Instead, DaVita generates profits from commercial health plans, so 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, ceo of DaVita Kidney Care, told investors on a call in May, based on the online equity research website Seeking Alpha.

A couple of months later, Rodriguez declined to provide a dollar amount when asked how the initiative would impact the company. Rather, he warned investors 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 surveys issued by investment firms J.P. Morgan and Baird. Passing the initiative “would be so devastating,” to the tune of $450 million a year, that DaVita “would likely walk away from the state altogether,” based on a March Baird report.

DaVita has poured $66.Six million in to the opposition campaign as of Oct. 25, and rival Fresenius has contributed $33.Six million. That dwarfs $17.3 million in union contributions in support of the measure, based on campaign records filed with California's secretary of state office.

Both Wall Street firms conclude that Proposition 8 will probably fail, citing the industry's massive spending and also the union's record of failure at the polls on other issues.

The company's legal troubles don't worry stock analysts, either; Baird's October report on DaVita's financial performance dedicates just two sentences to them. It notes that DaVita “is susceptible to numerous ongoing government investigations and inquiries, similar to most large-scale, high-profile Medicare providers.”

There aren't any specific references to the Colorado jury award come july 1st, that the company is appealing, within the death of three patients who died of cardiac event 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 price of conducting business – one-time hits that do not 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 experienced to pay for a fine towards the government,” Gillmor said.

Thiry, DaVita's CEO, acknowledged that settlements, which are not good public relations, are a reality for big corporations, when The Denver Post asked him this past year about the company's previous legal battles.

“If, inside a trial, you're found to be wrong on a small part of the case, it might imply that you are excluded from Medicare, which typically means bankruptcy for your company,” Thiry said. “So, you're essentially forced to settle.”