On Thursday, March 27, the House of Representatives passed a proposal to delay the 24% cut to physician reimbursement for 12 months. The bill, H.R. 4302, also included several provisions that affect end-stage renal disease (ESRD) reimbursement.
There were two material proposed changes to the ESRD program. First, the bill delays the inclusion of orals into the bundle until 2024. This was rumored for some time and is not a surprise. Second, the bill changes the application of the re-base, restricting the re-base to 2014 and 2015. The final rule that was issued in late 2013 proposed phasing in the cut over three to four years. If passed, H.R. 4302 may do away with the cuts in 2016 and 2017 (expected to be a roughly 6% total cut). While the final impact may be different from what is proposed in the bill, this would be a positive for DaVita.
The news was a modest positive for DaVita. The company trades at 16.9 times our 2015 adjusted EPS target of $4.05 (up 9.5% year-over-year). Based on the company’s strong core dialysis business model and long-term positioning with the HCP acquisition, we rate the stock Outperform.
The move is not surprising, as several estimates on the Hill suggested that Congress would save more money by not implementing the program. This is a modest negative for DaVita, which has invested aggressively in DaVita Rx.
Longer term, we believe DaVita Rx will be a success. Data published in the American Journal of Kidney Diseases found that dialysis patients using DaVita Rx spent 14% fewer days (1.8 days) in the hospital and were 21% more likely to live longer than the average dialysis patient. The independent study by the Chronic Disease Research Group followed more than 50,000 DaVita patients over 2.5 years (8,800 at DaVita Rx and 43,000 using other pharmacies.
Given that the annual average cost of hospitalization for dialysis patients equals $35,000—roughly 40% of dialysis patient costs—we believe the case for the inclusion of orals into the bundle will be strong (while a small study, it suggests that 15% savings on hospitalizations across the dialysis population would equal over $1.5 billion in savings).
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