Market meld

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 Da-Vita 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 Da-Vita'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.”

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 private-equity 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 managed-care 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.