Healthcare Business News
Kent Thiry, DaVita HealthCare Partners co-chairman and CEO

DaVita lowers earnings forecast as medical group unit underperforms

By Beth Kutscher
Posted: May 1, 2014 - 7:15 pm ET

DaVita HealthCare Partners lowered its earnings forecast for 2014 as its multispecialty medical group division continued to underperform expectations.

“Q1 was a miss, it was a big miss, and it was another in a series of misses,” said Kent Thiry, co-chairman and CEO, on a call with analysts. “This is embarrassing for us and probably worrisome for you.”

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Denver-based DaVita closed its merger with HealthCare Partners in 2012 and is working to transform itself from a pure-play dialysis provider to an integrated delivery company that is experimenting with new payment and care-coordination models. On the call, Thiry said the company is still delivering on those fronts and its struggles are not related to those efforts.

“The news on those scores is positive,” Thiry said. “The stuff that was done wrong is easily fixed and we’re already there.”

Thiry attributed the poor showing to failed deals that HealthCare Partners made in underperforming markets. In New Mexico, where HealthCare Partners acquired ABQ Health Partners in 2012, the company is waiting for the government to approve Blue Cross and Blue Shield of New Mexico’s acquisition of Lovelace Health Plan—which is negatively affecting revenue.

ABQ Health Partners has been out-of-network for Lovelace beneficiaries since 2012 after contract talks broke down that year. The Blues merger promises to give those members access to ABQ providers.

The company also overestimated Medicare Advantage rates by 0.8%, which was another factor that contributed to its poorer financial results, Thiry said.

Finally, DaVita incurred startup costs associated with Tandigm Health, a joint venture formed with Philadelphia-based Independence Blue Cross on April 8. But this was not a misstep, Thiry stressed, and the company is optimistic that this sort of care coordination deal is in line with the company’s business strategy.

“This is the type of arrangement we may end up doing in other markets,” Thiry said.

DaVita lowered the upper end of its guidance for 2014 operating income by $20 million. While it expects higher operating income in its Kidney Care division, HealthCare Partners earnings are expected to be $50 million lower than previously forecast.

Its Kidney Care division received a reprieve from the CMS last year when the agency’s final rule on rate rebasing offered the best-case scenario of a phased-in cut over three to four years. Rates for 2014 were left unchanged. However, the CMS continues to reimburse below cost, executives said on the call, forcing it to pursue growth only in markets where commercial insurers make up the shortfall.

For the first quarter, DaVita reported $441 million in operating income on $3 billion in net revenue, compared with $467 million in operating income on $2.8 billion in revenue during the prior-year period.

Operating income for the Kidney Care division was $387 million in the first quarter, compared with $59 million last year. For HealthCare Partners, operating income fell to $54 million from $108 million in the first quarter of 2013.

Follow Beth Kutscher on Twitter: @MHbkutscher

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