Slide 1: Capital Markets Day June 7, 2012
Capital Markets Day June 7, 2012 ©2012 DaVita Inc. All rights reserved.
Slide 2: Forward-looking statements
Certain statements in today’s presentation contain forward-looking statements within the meaning of the federal securities laws. All statements that do not concern historical facts are forward-looking statements and include, among other things, statements about our expectations, beliefs, intentions
Slide 3: Deal Summary
Deal Summary About HealthCare Partners Integrated Care Model HealthCare Partners Outlook Dialysis Outlook Summary
Slide 4: Deal Summary
Deal Summary About HealthCare Partners Integrated Care Model HealthCare Partners Outlook Dialysis Outlook Summary
Slide 5: Strategic Rationale
Strategic Rationale • $100B+ fragmented market • Good space • “Where the puck is headed” • 20 year track record • Good asset • Clinical leadership • Scale • Attractive multiple • Good deal • Attractive risk/reward profile • Earnings/cash flow foundation • Good combination • Growth leg on top of dial
Slide 6: Fundamental Forces of Change
Fundamental Forces of Change Strain of FFS healthcare Increased incentives for transparent quality & cost Healthcare becoming more “consumer-likelike” Physician consolidation Increased comfort with managed care
Slide 7: Why Now?
Why Now? First of all… …but importantly • Not an optimal time • Unique opportunity to buy ? Hot for a legitimate, ? Segment is hot long-term reason ? Peak margin phase ? HCP one of the best ? MA rate pressure positioned
Slide 8: A Clear Leader
A Clear Leader ©2012 DaVita Inc. All rights reserved.
Slide 9: Clinical strength, track record, scale; Deal Terms
Clinical strength 20 year track record, steady growth Significant scale in 3 markets Reputation with physicians, payors, and government Employer/Partner of choice Deal Terms(1) Purchase Price • $4.42 billion • $3.66 billion cash Components • 9.38 million DaVita shares • Earn out up to $275M • 8.4x 2
Slide 10: Good Deal
Good Deal Attractive price Consistent cash flow Low capital intensity Substantial long-term shareholder upside Distinctively attractive risk-reward profile
Slide 11: Great Combination: Shared Core Competencies
Great Combination: Shared Core Competencies • Payor negotiations • Physician partnering • Leading clinical quality • Multi-site management • Disciplined growth • Continuous innovation • Mission & values
Slide 12: About HealthCare Partners
Deal Summary About HealthCare Integrated Care Partners Model HealthCare Partners Outlook Dialysis Outlook Summary
Slide 13: HealthCare Partners At a Glance
HealthCare Partners At a Glance Operates in 3 states: California, Florida, Nevada Senior patients: 180,000 Commercial patients: 461,000 Medicaid patients: 26,000 Group primary care physicians: 395 Affiliated primary care physicians: 1,190 Group specialists: 320 Affiliated specialists: 6,180 Affiliat
Slide 14: Revenue and Managed Dollars
Revenue and Managed Dollars $ in Billions Total care dollars under management Managed dollars Reported $3.3 $2.8 $2.4 $2.2 $2.1 $2.4 $1.6 $1.8 2008 2009 2010 2011
Slide 15: Adjusted EBITDA
Adjusted EBITDA(1) $ in Millions $527 $414 $278 $293 2008 2009 2010 2011 (1) EBITDA excluding stock-based compensation expense; see Non-GAAP reconciliation
Slide 16: Physician-led integrated care teams helping and empowering patients
Physician-led integrated care teams helping and empowering patients!
Slide 17: What Does HealthCare Partners Do?
What Does HealthCare Partners Do? Improves care, outcomes, and eliminates waste Manages a global payment Clinically/financially accountable for all healthcare needs of a population Manages risk through clinical pathways and analytics
Slide 18: Physician Descriptions of HealthCare Partners
Physician Descriptions of HealthCare Partners
Slide 19: Management Overview
Management Overview Name Role Robert Margolis, Chairman of the Board, MD CEO, Managing Partner Sherif Abdou, MD NV Market President Sherri Allen NV Chief Operating Officer Amir Bacchus, MD NV Medical Director Zan Calhoun Chief Operating Officer William Chin, MD Executive Medical Director Lorie Gliss
Slide 20: HCP Management Team
HCP Management Team Committed to success of DaVita HealthCare Partners Employment contracts for top management Up to 33% equity consideration with lock-ups for up to 4 years Robert Margolis, MD Remains CEO of HealthCare Partners Joins DaVita HealthCare Partners BOD as Co-Chairman
Slide 21: Integrated Care Model
Deal Summary About HealthCare Integrated Care Partners Model HealthCare Partners Outlook Dialysis Outlook Summary
Slide 22: Clinical Utilization – CA Example
Clinical Utilization – CA Example • Inpatient Acute Bed Days/1000 pts (2010) 2,000 1,706 1,600 50% 1,200 Improvement HCP Seniors Medicare FFS
Slide 23: Clinical Utilization – CA Example
Clinical Utilization – CA Example 30 day all cause re-admit rate 25% 21% 20% 15% 14% 10% 5% 0% HCP Seniors Medicare FFS ©2012 DaVita Inc. All rights reserved.
Slide 24: Proactive Population Management
Proactive Population Management Continuously improve: Care Quality Efficiency Patient Experience
Slide 25: Medical Risk Management
Medical Risk Management Integrated and data-driven management tools: Disease management Comprehensive data analysis Same day access and urgent care centers reduce ER visits and admissions Hospital risk management ©2012 DaVita Inc. All rights reserved.
Slide 26: Programs Overlap
Programs Overlap Health Support Care Support Outcome No or Low Claims Intense & Frequent Claims Risk Low High Healthy Lifestyle Issues Chronic Catastrophic Terminal Palliative Catastrophic Care Complex Care Management Disease Management Screening and Secondary Prevention Education and Information Sh
Slide 27: The HCP Care Team Approach
The HCP Care Team Approach ©2012 DaVita Inc. All rights reserved.
Slide 28: Clinical Data, Clinical Tools
Clinical Data, Clinical Tools Disease registries for every physician to understand patient panel composition Web-based, self-serve, disease registries: Diabetes COPD CHF CKD Dementia CAD Asthma Depression ©2012 DaVita Inc. All rights reserved.
Slide 29: Custom Registries Based on Specific Interventions
Custom Registries Based on Specific Interventions
Slide 30: Screenshot of list of patients needing interventions
Screenshot of list of patients needing interventions
Slide 31: Point of Care Reminders
Point of Care Reminders ©2012 DaVita Inc. All rights reserved.
Slide 32: Integrated Care Team
Integrated Care Team Nurse case managers Care coordinators Social workers Nurses Hospitalists Extenders
Slide 33: Alignment
Alignment Physician compensation Panel size Clinical outcomes Patient satisfaction Group/regional resource management ©2012 DaVita Inc. All rights reserved.
Slide 34: Example: COPD Program
Example: COPD Program PCP visits Drug cost est. Total admits Total bed days Total ED visits Cost of care (all paid-pmpm) % Change 3% 30% 39% 23% 34%
Slide 35: Not the Only One
Not the Only One Kaiser Permanente Mayo Clinic Geisinger Health System Sharp Rees-Stealy Group Health Others . . . ©2012 DaVita Inc. All rights reserved.
Slide 36: Results
Results Payors physicians HealthCare Partners Patients
Slide 37: Results
Results Payors physicians HealthCare Partners Patients
Slide 38: Through the Eyes of a Patient
Through the Eyes of a Patient Same-day appointments Unhurried doctor visits 24 hour access to patient phone support I know my physician and care team I don’t have to repeatedly provide the same information in different settings Differentiated Healthcare Partners physician in the hospital Coordinatio
Slide 39: ~90% would recommend their HCP physician
~90% would recommend their HCP physician
Slide 40: Sample Clinical Results
Sample Clinical Results ©2012 DaVita Inc. All rights reserved.
Slide 41: Clinical Focus
Clinical Focus Percentage of Patients Colorectal Cancer Screening 100 80 60 40 20 0 CA 2010 Percentiles HCP 2010 Group 50.78 65.78 72.14 74.12 50th Pctl 75th Pctl 90th Pctl
Slide 42: Clinical Focus
Clinical Focus Percentage of Patients Diabetic Blood Pressure Control <14 CA 2010 Percentiles HCP 2010 Group 100 80 60 40 20 0 9.79 50.99 65.70 68.11 50th Pctl 75th Pctl 90th Pctl
Slide 43: Clinical Focus
Clinical Focus Percentage of Patients Diabetes LDL Control <100 CA 2010 Percentiles HCP 2010 Group 100 80 60 40 20 0 42.75 51.82 56.23 56.08 50th Pctl 75th Pctl 90th Pctl
Slide 44: Results
Results Payors physicians HealthCare Partners Patients
Slide 45: Largest Payors
6 Largest Payors Payor State Length of Relationship (Years)(1) A B C D E F CA CA CA FL CA NV 20 20 20 19 15 5 (1) Excludes years with predecessor organizations
Slide 46: HCP's Strength
HCP’s Strength CALIFORNIA FLORIDA NEVADA Share of key 30-40% 50%+ ~100% payors’ MA lives Physicians A leading physician group Payor relations Strong, long-term relationships & hospitals
Slide 47: Why Payors Stay with HCP
Why Payors Stay with HCP Performance Structural Care Patient satisfaction/ retention Administrative costs Star rating Network Patient/physician bond
Slide 48: Results
Results Payors physicians HealthCare Partners Patients
Slide 49: Attractive Alternative for Physicians
Attractive Alternative for Physicians Good practice environment Compensation/work/life balance Professional development Culture of physician leadership > 95% physician retention
Slide 50: Awards and Accolades
Awards and Accolades Best Places to Work in Florida (2011) -Florida Trend’s Magazine Sole “Pioneer” in CA, FL, NV -CMS Innovation Center’ Top Places to Work (2010) -St. Petersburg Times Best Places to Work (2011) -Modern Healthcare Best Places to Work in Tampa (2011) -Tampa Bay Business Journal Fina
Slide 51: HealthCare Partners Outlook
Deal Summary About HealthCare Partners Integrated Care Model HealthCare Partners Outlook Dialysis Outlook Summary
Slide 52: Business Model
Business Model Commercial Medicare Medicaid ©2012 DaVita Inc. All rights reserved.
Slide 53: Business Model
Business Model Commercial Medicare Medicaid Multi-year capitated contracts and shared savings pool contracts
Slide 54: Business Model
Business Model Commercial Medicare Medicaid Multi-year capitated contracts and shared savings pool contracts Superior quality Eliminate waste Downstream rates ©2012 DaVita Inc. All rights reserved.
Slide 55: Business Model
Business Model Commercial Medicare Medicaid Multi-year capitated contracts and shared savings pool contracts Superior Eliminate Downstream quality waste rates Patients: Great access and service yield loyalty and attraction Physicians: Great working environment yields great 55 recruiting and retentio
Slide 56: How HCP Contracts with Health Plans
How HCP Contracts with Health Plans Illustrative Medicare Advantage 10,000 lives $1,000 PMPM Health Plan
Slide 57: How HCP Contracts with Health Plans
How HCP Contracts with Health Plans Illustrative Medicare Advantage 10,000 lives $1,000 PMPM Health Plan $150 PMPM Marketing & Overhead Profit 10,000 lives $850 PMPM HealthCare Partners (Globally Managed Risk)
Slide 58: How HCP Contracts with Health Plans
How HCP Contracts with Health Plans Illustrative Medicare Advantage 10,000 lives $1,000 PMPM Health Plan $150 PMPM Marketing & Overhead Profit 10,000 lives $850 PMPM HealthCare Partners (Globally Managed Risk) Overhead Profit All Patient Care Needs
Slide 59: ( All rights reserved.
(©2012 DaVita Inc. All rights reserved.
Slide 60: Enrollment
Enrollment X Rate Cost Organic growth Tuck-in acquisitions New geographies Emerging products
Slide 61: Medicare Advantage Market
Medicare Advantage Market Large Highly Fragmented Growing ©2012 DaVita Inc. All rights reserved.
Slide 62: Large
Large Total Medicare Spend $550B $425B $125B Total Medicare Enrollment 48M 36M 12M FFS Medicare Advantage ©2012 DaVita Inc. All rights reserved.
Slide 63: Growing
Growing In Millions CAGR (‘85-’11): 9% Medicare Advantage Enrollment Balanced Budget Act Medicare Modernization Act 2003 Affordable Care Act 2010 14 12 10 8 6 4 2 0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Slide 64: Why Seniors Choose MA
Why Seniors Choose MA Medicare Advantage Basic Coverage One plan covers Part A, B & D components Reduced cost sharing Enhanced benefits Annual Cost (LA county) $2,000-$3,000 less out of pocket
Slide 65: Organic Growth
Organic Growth Aging and growth of population Medicare Advantage penetration Performance of HCP MA payors in markets Strength of HCP within payors
Slide 66: Growth Through IPA
Growth Through IPA Physicians Contract access/ conversions IT & integrated care resources Maintain practice independence HealthCare Partners Broader provider network No capital commitment ©2012 DaVita Inc. All rights reserved.
Slide 67: Acquisition Opportunities
Acquisition Opportunities Post-close improvements Accretive in-market tuck-ins Disciplined new market entry
Slide 68: Duals Opportunity
Duals Opportunity Dual Eligible Population 9 million nationally 1.2 million in CA 440K in LA and Orange counties $11B Market 80% higher cost than Medicare 4x diabetes 45% > 10 clinical conditions States moving to managed care CA launching in > 4 counties in 2013
Slide 69: California Duals Opportunity
California Duals Opportunity 440k in LA and OC HCP works w/ all 3 expected payors Even at 5% market, w/ $2,000 PMPM, $500M+ revenue opportunity Upside: Higher Share Other States Challenges: Program undefined Harder population Incremental services Incremental geography
Slide 70: Upside
Upside Future Emerging Current Commercial Medicare Advantage New geographies Duals Exchanges ACOs ©2012 DaVita Inc. All rights reserved.
Slide 71: Enrollment
Enrollment ©2012 DaVita Inc. All rights reserved. Cost 7
Slide 72: Medicare Advantage Headwinds
Medicare Advantage Headwinds Scheduled decreases to MA payments ACA eliminates MA premium to FFS Medicare by 2016 Sequestration cut in 2013 Coding intensity adjustment increases in 2014
Slide 73: Offsetting MA Rate Cuts
Offsetting MA Rate Cuts Shared impact partially offset: Benefit changes Pass through to providers Star ratings Payor
Slide 74: Cost
©2012 DaVita Inc. All rights reserved. : ss . Cost 74
Slide 75: HCP Costs Composition
HCP Costs Composition 100% 80% 60% 40% 20% 0% Hospital Expense Physician and Clinical Cost Support Mid- to high-single digits Low single digits Highly leveraged investments
Slide 76: Enrollment, Rate, Cost
Enrollment X Rate - Cost Margin compression balanced by volume growth & new opportunities
Slide 77: Business Outlook
3 Year Business Outlook Enrollment X Rate - Cost Organic growth MA: 3-5% Commercial: Flat + 5% tuck-in acquisitions + New geographies + Emerging products 2.5 to 4.5% growth 3.5 to 5.5% growth 0-3% organic OI growth 3-6% with tuck-in acquisitions + opportunities
Slide 78: 2012-2013 EBITDA Outlook
2012-2013 EBITDA Outlook 2012: $525—$560 million 2013: $550—$600 million
Slide 79: Adjusted EBITDA: A Great Run
Adjusted EBITDA(1) $ in Millions A Great Run $278 $293 $414 $527 $525-$560 $550-$600 2008 2009 2010 2011 2012P 2013P (1) EBITDA excluding stock-based compensation expense; see Non-GAAP reconciliation ©2012 DaVita Inc. All rights reserved.
Slide 80: What Changes Are Coming?
What Changes Are Coming? Headwinds start to fade after 2014 Emerging products? Intend to do significant acquisitions OI expected to accelerate post 2014
Slide 81: 2013 EPS Impact
2013 EPS Impact Dependent on: Earnings trajectory Interest rates Annual amortization expense Neutral to modestly accretive on a GAAP basis Includes $0.70—$0.90 of amortization expense
Slide 82: Near Term Swing Factors
Near Term Swing Factors Organic growth Acquisition pipeline Duals opportunity MA rates Hospital and other provider rates Cost efficiency
Slide 83: Indicative 2013 Net Cash Generation
Indicative 2013 Net Cash Generation $ in Millions Midpoint EBITDA Guidance $575 Implied Taxes on OI($210) After Tax Interest($132) Tax Step-Up Benefit $60 $243
Slide 84: HCP Downside Scenario
HCP Downside Scenario MA rate & commercial enrollment pressure + Increasing expenses = Flat EBITDA
Slide 85: HCP Downside Scenario
HCP Downside Scenario MA rate & commercial enrollment pressure + Increasing expenses = Flat EBITDA We can Pay interest ~$200M FCF/yr De-lever After-tax cash-on-cash return of 8% Still
Slide 86: HCP Downside Scenario
HCP Downside Scenario MA rate & commercial enrollment pressure + Increasing expenses = Flat EBITDA Still We can Pay interest ~$200M FCF/yr De-lever After-tax cash-on-cash return of 8% AND EPS remains neutral to slightly dilutive on a GAAP basis 10% accretive excluding amortization
Slide 87: HCP Summary
HCP Summary Cash flows Strong, stable Capital requirements Very low OI growth scenario 3-6%; accelerating post 2014 Industry Low consolidation Growth opportunity Huge Growth options Duals, ACOs, exchanges
Slide 88: Dialysis Outlook
Deal Summary About HealthCare Partners Integrated Care Model HealthCare Partners Outlook Dialysis Outlook Summary
Slide 89: DaVita at a Glance
DaVita at a Glance As of Q1’12 LTM Revenue $7.1B LTM OI $1.2B U.S. Facilities 1,841 (43 states) International Facilities 15 (3 countries) Patients ~145,000
Slide 90: Key Investment Highlights
Key Investment Highlights Industry Stable demand growth Steady cash flows Significant government accountability Unusual transparency Reasonable credibility/coherence in DC DaVita Strong clinical outcomes Scale provider Strong compliance record Operating track record Experienced management team Integ
Slide 91: Favorable Industry – Stable Demand Growth
Favorable Industry – Stable Demand Growth • Steady and resilient industry demand • No clinical controversy U.S. Dialysis Patients (000’s) 450 400 350 300 250 200 2000 2002 2004 2006 2008 ‘00-’09 CAGR: 3.9%
Slide 92: Leading Provider with Scale
Leading Provider with Scale As of 2010* • Serving nearly one-third of U.S. dialysis patients As of 2010* Other, 26% DaVita, 33% Investor-Owned, 5% Fresenius, 36% ©2012 *Data DaVita as Inc. of All 2010, rights with reserved. DaVita post-DSI Acquisition and Fresenius post-Liberty Acquisition
Slide 93: Strong Clinical Outcomes
Strong Clinical Outcomes Kt/V < 1.2 97% % Fistulas Placed 69% Ca 10.2 98% Phos 5.5 80% CVC use (Day 90) 15% As of Q1’12 A Quality Leader
Slide 94: Strong Operating Track Record
Strong Operating Track Record OI We Said (1) We Did (2)(3)(6) In or Above Range • 2003: $292-312M $355M ? • 2004: $356-380M $402M ? • 2005: $410-435M (4) $462M ? • 2006: $575-645M (5) $701M ? • 2007: $680-750M $800M ? • 2008: $790-850M $822M ? • 2009: $870-930M (6) $940M ? • 2010: $950-1,020M $997M
Slide 95: # of Treatments
# of Treatments Revenue / Tx Expense / Tx
Slide 96: Non-Acquired Growth (NAG)
Non-Acquired Growth (NAG) 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Q4’10 Q1’11 Q2’11 Q3’11 Q4’11 Q1’12 4.4% 4.0% 4.6% 5.0% 4.4% 5.5%
Slide 97: Normalized Non-Acquired Growth (NAG)
Normalized Non-Acquired Growth (NAG) 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Q4’10 Q1’11 Q2’11 Q3’11 Q4’11 Q1’12 4.2% 4.2% 4.6% 4.6% 4.8% 5.3%
Slide 98: Total U.S. Tx/Day Growth (YoY)
Total U.S. Tx/Day Growth (YoY) 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Q4’10 Q1’11 Q2’11 Q3’11 Q4’11 Q1’12 DSI closed 09.2011 5.5% 4.6% 5.0% 4.4% 4.0% 4.4% 6.8% 7.2% 7.1% 9.6% 14.2% Total Tx/Day 12.4% ©2012 DaVita Inc. All rights reserved.
Slide 99: # of Treatments
# of Treatments Revenue / Tx Expense / Tx
Slide 100: Profit Concentration
Profit Concentration 100% 80% 60% 40% 20% 0% -20% (10%-15) Gov’t Treatments Revenue Profit 11% Private 89% Gov’t 34% Private 66% Gov’t 110%-115% Private
Slide 101: Private Revenue Takeaways
Private Revenue Takeaways • Multi-year contracting • Bundled contracting • Mix ? • Dialysis patient equal rights ? • Uncertainty of exchanges
Slide 102: Government Revenue
Government Revenue Medicare ~50% of dialysis revenue Market basket QIP Periodic rebasing 2% cut in 2013 Case mix ad ustorj Bigger bundles M Adv, VA, Medicaid • ~15% of dialysis revenue ??State budget issues
Slide 103: # of Treatments
# of Treatments Revenue / Tx—Expense / Tx
Slide 104: Cost per Treatment
Cost per Treatment Component • Teammate Costs • Pharma and supplies • Other center-level costs • G&A Historical • 1 – 2 %/yr • Rate & productivity • Dynamic • 1 – 2 %/yr • In line with Tx growth (over time)
Slide 105: Orals in 2014 – Big Swing Factor
Orals in 2014 ??Big Swing Factor Good News Bad News • Adherence = improved • Uncertainty health • CMS data • DaVita is a leader ??Limited ??Retrospective ??Out of date A potential win/win
Slide 106: Integrated Care
Integrated Care • Improve quality of care • Lower total ESRD costs • Public policy advocacy ©2012 DaVita Inc. All rights reserved.
Slide 107: Dialysis EPS Growth Scenario
Dialysis EPS Growth Scenario • Demand Growth 4% + DeNovos & Acquisitions • Total Volume Growth 5%—6% + Fixed Cost Leverage • Operating Income Growth 6%—7% + Financial Leverage • Net Income/EPS Growth 7%—9% + Share Repurchase EPS Growth 9%—11%
Slide 108: Dialysis Summary
Dialysis Summary Cash flows Strong, stable Capital requirements Low OI growth scenario 5-7% Industry High consolidation Growth opportunity Solid International, integrated kidney Growth options care
Slide 109: Summary
About HealthCare Integrated Care Deal Summary Partners Model HealthCare Dialysis Outlook Summary Partners Outlook
Slide 110: Summary
Summary Dialysis HealthCare Partners Cash flows Strong, stable Strong, stable Capital requirements Low Very low 3-6%; accelerating OI growth scenario 5-7% post 2014 Industry High Low consolidation Growth opportunity Solid Huge International, Duals, ACOs, Growth options integrated kidney care exchang
Slide 111: Capital Markets Day June 7, 2012
Capital Markets Day June 7, 2012 ©2012 DaVita Inc. All rights reserved.
Slide 112: Reconciliations for Non-GAAP Measures
Reconciliations for Non-GAAP Measures Reconciliation for Non-GAAP measures (unaudited) Reconciliation of HealthCare Partners’ Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization and excluding stock-based compensation expense) We believe that adjusted EBITDA enhances a use
Slide 113: Reconciliations for Non-GAAP Measures
Reconciliations for Non-GAAP Measures Reconciliations for Non-GAAP Measures (dollars in millions) Reconciliation of operating income and operating income margin We believe that operating income and operating income margin excluding Medicare lab recoveries related to prior years’ services, gains from