DaVita better positioned than rivals for 'draconian' Medicare cut for dialysis providers

A proposed 11.9% Medicare payment cut for dialysis providers would have a “draconian impact” on the earnings of some of the largest players in the industry, according to a report from Moody's Investors Service.

But because DaVita acquired multispecialty medical group HealthCare Partners in 2012, the blow is buffered for the combined company, DaVita HealthCare Partners, which is the largest U.S.-based dialysis provider, Moody's said.

The report examined the impact of three possible scenarios that regulators are proposing: a full 11.9% cut implemented on Jan. 1, the same cut phased in over three years, and a 9% cut phased in over two years.

Under the most extreme scenario, Moody's said, companies such as American Renal Holdings, DaVita HealthCare Partners and U.S. Renal Care would see a deep hit to their earnings before interest, taxes, depreciation and amortization.

For DaVita, a company that reported $2.3 billion in EBITDA in 2012, the impact next year would be $397 million, Moody's projected.

Yet DaVita is in a better position to weather the cut than some of its peers because of the HealthCare Partners move, the report said.

DaVita closed its acquisition in November 2012. That year, about 86% of the Denver-based company's net revenue came from dialysis and related services, according to its annual report. If HealthCare Partners had been part of the group for the full year, DaVita estimated that dialysis would have represented just 68% of its 2012 revenue.

For U.S. Renal, Plano, Texas, the impact of a full 11.9% cut would be $30 million in EBITDA, and for American Renal Holdings, Beverly, Mass., it would be $16 million, according to Moody's. Those two companies could face a credit rating downgrade, the ratings agency cautioned.

The CMS is supposed to issue a final decision on dialysis rates on or around Nov. 1. The rate cut stems from criticism that the CMS has been overpaying dialysis providers by calculating bundled payments based on 2007 data. In that time, providers have significantly curtailed their use of expensive anti-anemia drugs—one of the major cost drivers—because of safety concerns.

A payment reduction that is phased in over two or three years—regardless of the size of the cut—would have a much smaller impact on the bottom line, Moody's said, because the dialysis sector is expected to grow at about 2% to 4% a year. It also said marketbasket adjustments—projected at 2.5% in 2014, and 2% in 2015 and 2016—would help offset the cut.

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