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Analysis

As DaVita Sale Nears, Moody's Questions Dialysis Growth

By Jack O'Brien  
   December 11, 2018

Optum's purchase of DaVita Medical Group is still on track to close next year but growth opportunities for DaVita Inc. may lie beyond the dialysis market, according to a new Moody's report.

The pending sale of DaVita Medical Group (DMG) to OptumHealth, a subsidiary of UnitedHealth Group, is likely to present DaVita Inc. with numerous opportunities and risks in the quarters and years ahead, according to a Moody's report released Monday.

The proposed $4.7 billion acquisition is set to close in 2019, at which point DaVita will have several options available to either continue its current business strategy or expand to diversify beyond dialysis services. 

The Denver-based company will be limited in the short-term after the deal closes due to using part of the DMG sale to pay down outstanding debts, but have elasticity in the long-term to pursue options outside of the traditional dialysis sphere. 

"The loss of scale and business diversification provided by DMG will be offset by DaVita's shedding of a chronically underperforming asset," the report stated. "Further, the significant proceeds from this asset sale will increase financial flexibility."

Jonathan Kanarek, lead author of the report, told HealthLeaders that DaVita has created a strong dialysis footprint and maintains sizable scale to its operations, but could pursue an "endless" amount of possibilities outside of dialysis following the sale of DMG. 

Kanarek said DaVita is not expected to produce dramatic changes to its credit standing after the deal closes, adding that the company is likely to remain aggressive in its next steps. Should DaVita decide to look for growth opportunities outside of dialysis, the company would face increased risk given the expansion into areas outside of its core competency and a "mixed track record," according to the Moody's report.  

He said DaVita still has the option to deleverage and seek growth in the domestic dialysis market through acquiring regional providers like American Renal or U.S. Renal, though the company would likely have to divest some assets to ease antitrust concerns for state and federal regulators.

Additional notes on DaVita:

  • Medicare reimbursement rate increases for dialysis services will return to more normalized, historical levels in 2019 and 2020. 
  • The Moody's report states that DaVita will likely experience an increase in revenue per treatment compared to 2013, before Medicare reimbursement rates rise again in 2020.
  • Several states are expected to limit dialysis profits from commercial insurers, a development that will increase business costs for DaVita.
  • During this year's election cycle, the company had to contend with California Proposition 8, a ballot intitiative that would have caused the company to lose $450 million per year if it had been approved by voters.  
  • DaVita has also experienced its share of court ordered payments in 2018, including $383.5 million to three families in a wrongful death suit and $270 million settlement over claims it provided inaccurate information to Medicare Advantage patients that subsequently led to overpayments from the government to private insurers.  

Related: Dialysis Giant DaVita Defends Itself in Court and at the Polls  

Related: DaVita Unit to Pay $270 Million to Resolve Medicare Payments Probe

Jack O'Brien is the finance editor at HealthLeaders, a Simplify Compliance brand.


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