The largely consolidated dialysis sector has been quiet on the M&A front of late, but the transition to value-based payment models could be renewing the drive for scale.
Two large kidney-care providers announced transactions Monday that will increase their footprints, provide more leverage with payers and allow them to gain access to additional patient data. The deals are expected to close by the end of 2015.
Denver-based DaVita HealthCare Partners announced that it has entered into an agreement to acquire Colorado-based Renal Ventures for $415 million. Texas-based U.S. Renal Care and DSI Renal of Nashville also announced that they have entered into a definitive merger agreement, which would include service to approximately 23,000 patients across 33 states.
Much of the consolidation has already swallowed up the dialysis industry and the sector is dominated by two large companies, DaVita and Fresenius Medical Care. Monday's announcements reflect a broader trend throughout the healthcare industry.
“We're starting to see the large players get larger,” said Ron Neysmith, a senior analyst with Moody's Investors Service. “You really need to scale to gain efficiency,” he said.
Additionally, dialysis providers remain under pressure as the CMS focuses on the high-cost end-stage renal disease population. The federal agency announced in June its prospective payment system for Medicare beneficiaries. It expects to pay $9 billion to approximately 6,000 dialysis facilities for ESRD services given on or after Jan. 1, 2016.
The deals, therefore, provide additional scale to manage a larger patient population as the CMS transitions to value-based payment models for late-stage kidney disease, said Farzan Bharucha, a partner in the healthcare practice at Kurt Salmon.“The DaVitas of this world are thinking about this in the right way,” Bharucha said. “They're now able to spread their risk over a larger patient population.”
Though kidney care is DaVita's largest and most profitable business, volume growth has been slowing. In the second quarter, the number of same-facility dialysis treatments increased just 3.7% year over year, the lowest rate “in quite some time,” interim CFO James Hilger said on an earnings call. One reason he cited is that DaVita is trying to improve profitability in its acute-care business, and has been ending contracts with hospitals that refuse to pay what it considers sustainable rates.
DaVita's kidney-care division, which accounts for about 72% of the company's total revenue, posted $438 million in income on $2.2 billion in revenue in the second quarter. In the year-ago period, it saw $408 million in income on $2 billion in revenue.
The addition of Renal Ventures will increase DaVita's scale and provide additional contracting leverage with commercial payers, according to analysts at Moody's Investors Service. The deal, which is expected to be funded in cash, adds 36 dialysis centers in six states, including Arkansas, Iowa, New Jersey, Pennsylvania, Texas and West Virginia. The company also operates infusion and vascular centers in three states through its Multispecialty Physician Partners and Physician Venture Partners divisions.
While the deal gives DaVita additional negotiating clout, it also allows the provider to operate more cost-effectively, Bharucha said. And it gives DaVita access to Renal Ventures' administrative services, such as information technology and billing and collections, according to the Moody's report. “There's more and more value in the data now,” Bharucha said.
Earlier this year the CMS began publicly posting one- to five-star ratings for dialysis providers on its Dialysis Facility Compare website. The ratings track performance data across a suite of quality measures.
DaVita and Fresenius each has about a third of the market, though DaVita received significantly higher ratings than its competitor, a Modern Healthcare analysis found. The company plans to implement standards and best practices in acquired facilities to also boost clinical outcomes in those locations.
“You're always trying to grab the best of both organizations,” said Javier Rodriguez, CEO of DaVita Kidney Care. “But we have a proven track record of putting processes in place and bringing up results.”