UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| |
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 20182019
or
|
| |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to ___________
Commission File Number: 1-14106
DAVITA INC.
(Exact name of registrant as specified in charter)
|
| | |
| Delaware | | 51-0354549 |
| (State of incorporation) | | (I.R.S. Employer Identification No.) |
Denver, CO |
| | |
| 2000 16th Street |
| Denver, | CO | 80202 |
Telephone number (720) (720) 631-2100
Securities registered pursuant to Section 12(b) of the Act:
|
| | | | |
| Title of each class: | | Trading symbol(s): | | Name of each exchange on which registered: |
| Common Stock, $0.001 par value | | DVA | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):Act:
|
| | | | | |
| Large accelerated filer | ☒ | | | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
| | | | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of June 29, 2018,28, 2019, the aggregate market value of the Registrant's common stock outstanding held by non-affiliates based upon the closing price on the New York Stock Exchange was approximately $11.9$9.3 billion.
As of January 31, 2019,2020, the number of shares of the Registrant’s common stock outstanding was approximately 166.4125.6 million shares.
Documents incorporated by reference
Portions of the Registrant’s proxy statement for its 20192020 annual meeting of stockholders are incorporated by reference in Part III of this Form 10-K.
DAVITA INC.
INDEX
|
| | | | |
| | | | Page No. |
| | PART I. | | |
| Item 1. | | | | |
| Item 1A. | | | | |
| Item 1B. | | | | |
| Item 2. | | | | |
| Item 3. | | | | |
| Item 4. | | | | |
| | | | |
| | PART II. | | |
| Item 5. | | | | |
| Item 6. | | | | |
| Item 7. | | | | |
| Item 7A. | | | | |
| Item 8. | | | | |
| Item 9. | | | | |
| Item 9A. | | | | |
| Item 9B. | | | | |
| | | | |
| | PART III. | | |
| Item 10. | | | | |
| Item 11. | | | | |
| Item 12. | | | | |
| Item 13. | | | | |
| Item 14. | | | | |
| | | | |
| | PART IV. | | |
| Item 15. | | | | |
| Item 16. | | | | |
| | | | |
| | | | |
| | | | |
PART I
Item 1. Business
We were incorporated as a Delaware corporationUnless otherwise indicated in 1994.this Annual Report on Form 10-K “DaVita”, “the Company” “we”, “us”, “our” and other similar terms refer to DaVita Inc. and its consolidated subsidiaries. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are made available free of charge through our website, located at http://www.davita.com, as soon as reasonably practicable after the reports are filed with or furnished to the Securities and Exchange Commission (SEC). The SEC also maintains a website at http://www.sec.gov where these reports and other information about us can be obtained. The contents of our website are not incorporated by reference into this report.
Overview of DaVita Inc.
The Company consists of two major divisions, DaVita Kidney Care (Kidney Care) and DaVita Medical Group (DMG). Kidney Care is comprised of our U.S. dialysis and related lab services, our ancillary services and strategic initiatives, including our international operations, and our corporate administrative support. Our U.S. dialysis and related lab services business is our largest line of business and is a leading healthcare provider focused on transforming care delivery to improve quality of life for patients globally. Incorporated as a Delaware corporation in 1994, we are one of the largest providers of kidney dialysiscare services in the U.S. and have been a leader in clinical quality and innovation for over 20 years. DaVita is committed to bold, patient-centric care models, implementing the latest technologies and moving toward integrated care offerings. Over the years, we have established a value-based culture with a philosophy of caring that is focused on both our patients suffering from chronic kidney failure, also known as end stage renal disease (ESRD). DMG is a patient- and physician-focused integratedteammates. This culture and philosophy fuel our continuous drive towards achieving our mission to be the provider, partner and employer of choice and fulfilling our vision to "build the greatest healthcare delivery and management company with over two decades of providing coordinated, outcomes-based medical care in a cost-effective manner.
In December 2017, we entered into an equity purchase agreement to sell our DMG division to Collaborative Care Holdings, LLC (Optum), a subsidiary of UnitedHealth Group Inc., subject to receipt of required regulatory approvals and other customary closing conditions. As a result,community the DMG businessworld has been classified as held for sale and its results of operations are reported as discontinued operations for all periods presented in the consolidated financial statements included in this report.
For financial information about our DMG business see Note 22 to the consolidated financial statements included in this report.
Kidney Care Division
U.S. dialysis and related lab services business overview
Our U.S. dialysis and related lab services business is a leading provider of kidney dialysis services for patients suffering from ESRD. As of December 31, 2018, we provided dialysis and administrative services in the U.S. through a network of 2,664 outpatient dialysis centers in 46 states and the District of Columbia, serving a total of approximately 202,700 patients. We also provide acute inpatient dialysis services in approximately 900 hospitals and related laboratory services throughout the U.S.ever seen."
The loss of kidney function is normally irreversible. Kidney failure is typically caused by Type I and Type II diabetes, high blood pressure,hypertension, polycystic kidney disease, long-term autoimmune attack on the kidneykidneys and prolonged urinary tract obstruction. ESRDEnd stage renal disease or end stage kidney disease (ESRD or ESKD) is the stage of advanced kidney impairment that requires continued dialysis treatments or a kidney transplant to sustain life. Dialysis is the removal of toxins, fluids and salt from the blood of patients by artificial means. Patients suffering from ESRD generally require dialysis at least three times a week for the rest of their lives.
Our U.S. dialysis and related lab services (U.S. dialysis) business treats patients with chronic kidney failure and ESRD in the United States, and is our largest line of business. As of December 31, 2019, we provided dialysis and administrative services and related laboratory services throughout the U.S. via a network of 2,753 outpatient dialysis centers in 46 states and the District of Columbia, serving a total of approximately 206,900 patients and provided acute inpatient dialysis services in approximately 900 hospitals. Our robust platform to deliver kidney care services also includes established nephrology and payor relationships as well as home programs. In addition, as of December 31, 2019, we provided dialysis and administrative services to a total of 259 outpatient dialysis centers located in ten countries outside of the U.S., serving approximately 28,700 patients. The Company also consists of our ancillary services and strategic initiatives, which include the aforementioned international operations (collectively, our ancillary services), as well as our corporate administrative support.
Our patient-centric care model leverages our platform of kidney care services to maximize patient choice in both models and modalities of care. We believe that the flexibility we offer coupled with a focus on comprehensive kidney care supports our commitments to help improve clinical outcomes and quality of life for our patients. For the seventh consecutive year, we are an industry leader in the Centers for Medicare & Medicaid Services’ (CMS) Quality Incentive Program (QIP), which promotes high quality services in outpatient dialysis facilities treating patients with ESRD. We are also an industry leader for the sixth consecutive year under CMS’ Five-Star Quality Rating system, which rates eligible dialysis centers based on the quality of outcomes to help patients, their families, and caregivers make more informed decisions about where patients receive care. In addition, we are an industry leader for the total number of patients in home-based dialysis services.
Our quality clinical outcomes are driven by our experienced and knowledgeable teammates. We employ registered nurses, licensed practical or vocational nurses, patient care technicians, social workers, registered dietitians, biomedical technicians and other administrative and support teammates who strive to achieve superior clinical outcomes at our dialysis facilities. In addition to our teammates at our dialysis facilities, as of December 31, 2019, our Chief Medical Officer leads a team of 15 senior nephrologists in our physician leadership team as part of our Office of the Chief Medical Officer (OCMO). This team represents a variety of academic, clinical practice, and clinical research backgrounds. We also have a Physician Counsel that serves as an advisory body to senior management, which is composed of nine physicians with extensive experience in clinical practice, as well as eight Group Medical Directors as of December 31, 2019.
On June 19, 2019, we completed the sale of our DaVita Medical Group (DMG) business, a patient and physician-focused integrated healthcare delivery and management company, to Collaborative Care Holdings, LLC (Optum), a subsidiary of UnitedHealth Group Inc. As a result, the DMG business has been classified as discontinued operations and its results of
operations are reported as discontinued operations for all periods presented in the consolidated financial statements included in this report.
For financial information about DMG, see Note 22 to the consolidated financial statements included in this report.
U.S. dialysis business
Our U.S. dialysis business is a leading provider of kidney dialysis services for patients suffering from ESRD. As of December 31, 2019, we provided dialysis and administrative services in the U.S. through a network of 2,753 outpatient dialysis centers in 46 states and the District of Columbia, serving a total of approximately 206,900 patients. We also provide acute inpatient dialysis services in approximately 900 hospitals and related laboratory services throughout the U.S.
According to the United States Renal Data System (USRDS), there were over 511,000523,000 ESRD dialysis patients in the U.S. in 2016.2017. Based on the most recent 20182019 annual data report from the USRDS, the underlying ESRD dialysis patient population has grown at an approximate compound rate of 3.8%3.6% from 20002007 to 2016. However, more recent preliminary data2017 and a compound rate of 3.3% from the USRDS suggest2012 to 2017, which suggests that the rate of growth of the ESRD patient population may beis declining. A number of factors may impact ESRD growth rates, including, among others, the aging of the U.S. population, increasing transplant rates, incidence rates for diseases that cause kidney failure such as diabetes and hypertension, mortality rates for dialysis patients and growth rates of minority populations with higher than average incidence rates of ESRD.
Since 1972, the federal government has provided healthcare coverage for ESRD patients under the Medicare ESRD program regardless of age or financial circumstances. ESRD is the first and only disease state eligible for Medicare coverage both for dialysis and dialysis-related services and for all benefits available under the Medicare program. For patients with Medicare coverage, all ESRD payments for dialysis treatments are made under a single bundled payment rate. See page 65 for further details.
Although Medicare reimbursement limits the allowable charge per treatment, it provides industry participants with a relatively predictable and recurring revenue stream for dialysis services provided to patients without commercial insurance. For the year ended December 31, 2018,2019, approximately 89.6%90% of our total dialysis patients were covered under some form of
government-based program, with approximately 74.8%74% of our dialysis patients covered under Medicare and Medicare-assigned plans.
Treatment options for ESRD
Treatment options for ESRD are dialysis and kidney transplantation.
Dialysis options
Hemodialysis
Hemodialysis, the most common form of ESRD treatment, is usually performed at a freestanding outpatient dialysis center, at a hospital-based outpatient center, or at the patient’s home. The hemodialysis machine uses an artificial kidney, called a dialyzer, to remove toxins, fluids and salt from the patient’s blood. The dialysis process occurs across a semi-permeable membrane that divides the dialyzer into two distinct chambers. While blood is circulated through one chamber, a pre-mixed fluid is circulated through the other chamber. The toxins, salt and excess fluids from the blood cross the membrane into the fluid, allowing cleansed blood to return back into the patient’s body. Each hemodialysis treatment that occurs in the outpatient dialysis centers typically lasts approximately three and one-half hours and is usually performed three times per week.
Hospital inpatient hemodialysis services are required for patients with acute kidney failure primarily resulting from trauma, patients in early stages of ESRD and ESRD patients who require hospitalization for other reasons. Hospital inpatient hemodialysis is generally performed at the patient’s bedside or in a dedicated treatment room in the hospital, as needed.
Some ESRD patients who are healthier and more independent may perform home-basedhome hemodialysis in their home or residence through the use of a hemodialysis machine designed specifically for home therapy that is portable, smaller and easier to use. Patients receive training, support and monitoring from registered nurses, usually in our outpatient dialysis centers, in connection with their home-basedhome hemodialysis treatment. Home-basedHome hemodialysis is typically performed with greater frequency than dialysis treatments performed in outpatient dialysis centers and on varying schedules.
Peritoneal dialysis
Peritoneal dialysis uses the patient’s peritoneal or abdominal cavity to eliminate fluid and toxins and is typically performed at home. The most common methods of peritoneal dialysis are continuous ambulatory peritoneal dialysis (CAPD)
and continuous cycling peritoneal dialysis (CCPD). Because it does not involve going to an outpatient dialysis center three times a week for treatment, peritoneal dialysis is generally an alternative to hemodialysis for patients who are healthier, more independent and desire more flexibility in their lifestyle.
CAPD introduces dialysis solution into the patient’s peritoneal cavity through a surgically placed catheter. Toxins in the blood continuously cross the peritoneal membrane into the dialysis solution. After several hours, the patient drains the used dialysis solution and replaces it with fresh solution. This procedure is usually repeated four times per day.
CCPD is performed in a manner similar to CAPD, but uses a mechanical device to cycle dialysis solution through the patient’s peritoneal cavity while the patient is sleeping or at rest.
Kidney transplantation
Although kidney transplantation, when successful, is generally the most desirable form of therapeutic intervention, the shortage of suitable donors, side effects of immunosuppressive pharmaceuticals given to transplant recipients and dangers associated with transplant surgery for some patient populations limithave generally limited the use of this treatment option. An executive order signed in July 2019 (the 2019 Executive Order) directed the Department of Health and Human Services (HHS) to develop policies addressing, among other things, the goal of making more kidneys available for transplant. As directed by the 2019 Executive Order, the CMS, through its Center for Medicare and Medicaid Innovation (CMMI), subsequently released the framework for certain proposed voluntary payment models that would adjust payment incentives to encourage kidney transplants. For more information regarding the 2019 Executive Order and these payment models, please see the discussion below under the heading “-New models of care and Medicare and Medicaid program reforms.”
U.S. Dialysis and related labdialysis services we provide
Outpatient hemodialysis services
As of December 31, 2018,2019, we operated or provided administrative services through a network of 2,6642,753 outpatient dialysis centers in the U.S. that are designed specifically for outpatient hemodialysis. In 2018,2019, our overall network of U.S. outpatient dialysis centers increased by 15489 primarily as a result of the opening of new dialysis centers and acquisitions, net of center closures, and divestitures, representing a total increase of approximately 6.1%3.3% from 2017.2018.
As a condition of our enrollment in Medicare for the provision of dialysis services, we contract with a nephrologist or a group of associated nephrologists to provide medical director services at each of our dialysis centers. In addition, other
nephrologists may apply for practice privileges to treat their patients at our centers. Each center has an administrator, typically a registered nurse, who supervises the day-to-day operations of the center and its staff. The staff of each center typically consists of registered nurses, licensed practical or vocational nurses, patient care technicians, a social worker, a registered dietician, biomedical technician support and other administrative and support personnel.
Under Medicare regulations, we cannot promote, develop or maintain any kind of contractual relationship with our patients that would directly or indirectly obligate a patient to use or continue to use our dialysis services, or that would give us any preferential rights other than those related to collecting payments for our dialysis services. Our total patient turnover, which is based upon all causes, averaged approximately 24% in 2018both 2019 and 26% in 2017.2018. However, in 2018,2019, the overall number of patients to whom we provided services in the U.S. increased by approximately 2.5%2.1% from 2017,2018, primarily from the opening of new dialysis centers and acquisitions, and continued growth within the industry.
Hospital inpatient hemodialysis services
As of December 31, 2018,2019, we provided hospital inpatient hemodialysis services, excluding physician services, to patients in approximately 900 hospitals throughout the U.S. We render these services based on a contracted per-treatment fee that is individually negotiated with each hospital. When a hospital requests our services, we typically administer the dialysis treatment at the patient’s bedside or in a dedicated treatment room in the hospital, as needed. In 2018, hospital inpatient hemodialysis services accounted for approximately 5.4% of our U.S. dialysis and related lab services revenues and 4.2% of our total U.S. dialysis treatments.
Home-based dialysis services
Home-based dialysis services includes home hemodialysis and peritoneal dialysis. Many of our outpatient dialysis centers offer certain support services for dialysis patients who prefer and are able to perform either home hemodialysis or peritoneal dialysis in their homes. Home-based hemodialysis support services consist of providing equipment and supplies, training, patient monitoring, on-call support services and follow-up assistance. Registered nurses train patients and their families or other caregivers to perform either home hemodialysis or peritoneal dialysis. The 2019 Executive Order and related HHS guidance described above also included a stated goal of increasing the relative number of new ESRD patients that receive dialysis at home as compared to those receiving dialysis in center or at a hospital.
According to the most recent 2019 annual data report from the USRDS, in 2017 approximately 12% of ESRD dialysis patients in the U.S. perform home-based dialysis.
The following graph summarizes our U.S. dialysis treatments by modality and U.S. dialysis patient services revenues by modality for the year ended December 31, 2019.
Treatments and revenues by modality:
Other
ESRD laboratory services
Our ESRD laboratory services have consisted of twoWe operate one separately licensed and highly automated clinical laboratorieslaboratory which specializespecializes in ESRD patient testing. TheseThis specialized laboratories providelaboratory provides routine laboratory tests for dialysis and other physician-prescribed laboratory tests for ESRD patients which are integral components of the overall dialysis services that we provide. Our laboratories providelaboratory provides these tests predominantly for our network of ESRD patients throughout the U.S. These tests are performed to monitor a patient’s ESRD condition, including the adequacy of dialysis, as well as other medical conditions of the patient. Our laboratories utilizelaboratory utilizes information systems which provide information to certain members of the dialysis centers’ staff and medical directors regarding critical outcome indicators. In 2018, we ceased operations at our prior laboratory locations, and consolidated our laboratory services operations into a single, new geographic location.
Management services
We currently operate or provide management and administrative services pursuant to management and administrative services agreements to 3444 outpatient dialysis centers located in the U.S. in which we either own a noncontrolling interest or which are wholly-owned by third parties. Management fees are established by contract and are recognized as earned typically based on a percentage of revenues or cash collections generated by the outpatient dialysis centers.
Quality care
Centers for Medicare and Medicaid Services (CMS) promotes high quality services in outpatient dialysis facilities treating patients with ESRD through its Quality Incentive Program (QIP). QIP associates a portion of Medicare reimbursement directly with a facility’s performance on quality of care measures. Reductions in Medicare reimbursement result when a facility’s overall score on applicable measures does not meet established standards. For the sixth year in a row, we are an industry leader in QIP, including the industry leader for catheter rates and the total number of our patients in home-based hemodialysis services.
In addition, CMS' Five-Star Quality Rating system, is a rating system that assigns one to five stars to rate the quality of outcomes for dialysis facilities. The rating system provides patients reported information about any given dialysis facility and identifies differences in quality between facilities so that patients can make more informed decisions about where to receive treatment. For the last five years, we have been an industry leader under the CMS Five-Star Quality Rating system.
Our facilities employ registered nurses, licensed practical or vocational nurses, patient care technicians, social workers, registered dieticians, biomedical technicians and other administrative and support teammates who aim to achieve superior clinical outcomes at our centers.
As of December 31, 2018, our physician leadership in the Office of the Chief Medical Officer (OCMO) for our U.S. dialysis and related lab services business included 16 senior nephrologists, led by our Chief Medical Officer, with a variety of academic, clinical practice, and clinical research backgrounds. Our Physician Council is an advisory body to senior management composed of ten physicians with extensive experience in clinical practice. In addition, we also had eight Group Medical Directors as of December 31, 2018.Sources of revenue—concentrations and risks
Our U.S. dialysis and related lab services business net revenues represent approximately 90%92% of our consolidated net revenues for the year ended December 31, 2018.2019. Our U.S. dialysis and related lab services revenues are derived primarily from our core business of providing dialysis services and related laboratory services and, to a lesser extent, the administration of pharmaceuticals and management fees generated from providing management and administrative services to certain outpatient dialysis centers, as discussed above.
The sources of our U.S. dialysis and related lab services revenues are principally from government-based programs, including Medicare and Medicare-assigned plans and Medicaid and managed Medicaid plans and commercial insurance plans. The following graphs summarizeOur largest source of revenue is from Medicare and Medicare-assigned plans which accounted for 59% of our overall U.S. dialysis and related lab patient services revenues by source and our U.S dialysis patient services revenues by modality for the year ended December 31, 2018.
Revenues by source:
Revenues by modality:
Medicare revenue
Government dialysis related payment rates in the U.S. are principally determined by federal Medicare and state Medicaid policy. For patients with Medicare coverage, all ESRD payments for dialysis treatments are made under a single
bundled payment rate which provides a fixed payment rate to encompass all goods and services provided during the dialysis treatment that are related to the dialysis treatment, including certain pharmaceuticals, such as Epogen® (EPO), vitamin D analogs and iron supplements, irrespective of the level of pharmaceuticals administered to the patient or additional services performed except for calcimimetics, which area drug class taken by many patients with ESRD to treat mineral bone disorder. As of
January 1, 2018, calcimimetics became part of the Medicare Part B ESRD payment, subject to a transitional drug add-on payment adjustment for the Medicare Part B ESRD payment.(TDAPA). Most lab services are also included in the bundled payment. Under the ESRD Prospective Payment System (PPS), the bundled payments to a dialysis facility may be reduced by as much as 2% based on the facility’s performance in specified quality measures set annually by CMS through its Quality Incentive Program (QIP). CMS established QIP which was established bythrough the Medicare Improvements for Patients and Providers Act of 2008.2008 to promote high quality services in outpatient dialysis facilities treating patients with ESRD. QIP associates a portion of Medicare reimbursement directly with a facility’s performance on quality of care measures. Reductions in Medicare reimbursement result when a facility’s overall score on applicable measures does not meet established standards. The bundled payment rate is also adjusted for certain patient characteristics, a geographic usage index and certain other factors.
Uncertainty about future payment rates remains a material risk to our business, as well as the potential implementation of or changes in coverage determinations or other rules or regulations by CMS or Medicare Administrative Contractors (MACs) that may impact reimbursement. An important provision in the Medicare ESRD statute is an annual adjustment, or market basket update, to the ESRD PPS base rate. Absent action by Congress, the ESRD PPS base rate is automatically updated annually by a formulaic inflation adjustment.
In November 2018,2019, CMS issued a final rule to update the Medicare ESRD PPS payment rate and policies. Among other things, the final rule expands the transitional drug add-on payment to certain new renal dialysis drugs and biological products and amends the reporting measures in the ESRD QIP. We estimate thatCMS estimates the overall impact of the final rule will increase Medicare reimbursement to our ESRD facilities by 1.2%1.7% in 2019.2020.
As a result of the Budget Control Act of 2011 (BCA) and subsequent activity in Congress, a $1.2 trillion sequester (across-the-board spending cuts) in discretionary programs took effect in 2013 reducing Medicare payments by 2%, which was subsequently extended through fiscal year 2027. These across-the-board spending cuts have affected and will continue to adversely affect our business, results of operations, financial condition and cash flows. Although the Bipartisan Budget Act (BBA) of 2018 passed in February 2018 enacted a two-year federal spending agreement and raised the federal spending cap on non-defense spending for fiscal years 2018 and 2019, the Medicare program is frequently mentioned as a target for spending cuts.
The CMS Innovation Center (Innovation Center) is currently working with various healthcare providers to develop, refine and implement Accountable Care Organizations (ACOs) and other innovative models of care for Medicare and Medicaid beneficiaries. We are uncertain of the extent to which the long-term operation and evolution of these models of care, including ACOs, the Comprehensive ESRD Care (CEC) Model (which includes the development of ESRD Seamless Care Organizations (ESCOs)), the Duals Demonstration, or other models, will impact the healthcare market over time. Our U.S. dialysis business may choose to participate in one or several of these models either as a partner with other providers or independently. We currently participate in the CEC Model with the Innovation Center, including the ESCO organizations in the Phoenix-Tucson, Arizona, South Florida, Philadelphia, Pennsylvania-Camden, and New Jersey markets. In areas where our U.S. dialysis business is not directly participating in this or other Innovation Center models, some of our patients may be assigned to an ACO, another ESRD Care Model, or another program, in which case the quality and cost of care that we furnish will be included in an ACO’s, another ESRD Care Model’s or other program’s calculations. In addition to the aforementioned new models of care, federal bipartisan legislation in the form of the Dialysis Patient Access to Integrated-care, Empowerment, Nephrologists, Treatment and Services Demonstration Act of 2017 (PATIENTS Act) has been proposed. The PATIENTS Act builds on prior coordinated care models, such as the CEC Model, and would establish a demonstration program for the provision of integrated care to Medicare ESRD patients. We have made and continue to make investments in building our integrated care capabilities to prepare for integrated care initiatives such as the PATIENTS Act, but there can be no assurances that the PATIENTS Act or similar legislation will be passed. If such legislation is passed, there can be no assurances that we will be able to successfully provide integrated care on the broader scale contemplated by this legislation, and our costs of care could exceed our associated reimbursement rates. In general, if we are unable to efficiently adjust to these and other new models of care, it may erode our patient base or reimbursement rates, which could have a material adverse impact on our business.
The Department of Health and Human Services (HHS) targeted to tie 40% and 50% of Medicare Fee-for-Service (FFS) payments to quality or alternate payment models by the end of 2017 and 2018, respectively. The Health Care Payment Learning & Action Network reported Medicare FFS had 38.3% of health care dollars tied to alternate payment models for 2017 and results of this target are still pending for 2018. As new models of care emerge and evolve, we may be at risk for losing our Medicare patient base, which would have a material adverse effect on our business, results of operations, financial condition and cash flows. Other initiatives in the government or private sector may also arise, including the development of models similar to ACOs, independent practice associations (IPAs) and integrated delivery systems or evolutions of those concepts which could adversely impact our business.
ESRD patients receiving dialysis services become eligible for primary Medicare coverage at various times, depending on their age or disability status, as well as whether they are covered by a commercial insurance plan. Generally, for a patient not covered by a commercial insurance plan, Medicare becomes the primary payor for ESRD patients receiving dialysis services either immediately or after a three-month waiting period. For a patient covered by a commercial insurance plan, Medicare generally becomes the primary payor after 33 months, which includes the three-month waiting period, or earlier if the patient’s commercial insurance plan coverage terminates. When Medicare becomes the primary payor, the payment rates we receive for that patient shift from the commercial insurance plan rates to Medicare payment rates, which are on average significantly lower than commercial insurance rates.
Medicare pays 80% of the amount set by the Medicare system for each covered dialysis treatment. The patient is responsible for the remaining 20%. In most cases, a secondary payor, such as Medicare supplemental insurance, a state Medicaid program or a commercial health plan, covers all or part of these balances. Some patients who do not qualify for Medicaid, but otherwise cannot afford secondary insurance in the form of a Medicare Supplement Plan, can apply for premium payment assistance from charitable organizations to obtain secondary coverage. If a patient does not have secondary insurance coverage, we are generally unsuccessful in our efforts to collect from the patient the remaining 20% portion of the ESRD composite rate that Medicare does not pay. However, we are able to recover some portion of this unpaid patient balance from Medicare through an established cost reporting process by identifying these Medicare bad debts on each center’s Medicare cost report.
The 21st Century Cures Act, enactedIn recent years, federal legislative and executive action has been focused on developing new models of kidney care for Medicare beneficiaries. For example, CMMI is working with various healthcare providers to develop, refine and implement Accountable Care Organizations (ACOs) and other innovative models of care for Medicare and Medicaid beneficiaries, including ACOs, the Comprehensive ESRD Care (CEC) Model (which includes the development of ESRD Seamless Care Organizations (ESCOs)) and the Duals Demonstration. In addition, federal bipartisan legislation related to full capitation demonstration for ESRD was proposed in December 2016, includeslate 2017. Legislation, which has yet to secure introduction to the 116th Congress, would build on prior coordinated care models, such as the CEC Model, and would establish a demonstration program for the provision that will allow Medicare beneficiaries with ESRD to choose to obtain coverage under a Medicare Advantage plan, which could broaden access to certain enhanced benefits offered by Medicare Advantage plans. Until the effective date of this law, this choice is available onlyintegrated care to Medicare beneficiaries without ESRD. The ESRD related provisionspatients. More recently, the 2019 Executive Order directed CMS to create payment models to evaluate the effects of creating payment incentives for the 21st Century Cures Act are scheduled to take effectgreater use of home dialysis and kidney transplants for those already on dialysis. For additional detail on these and other developments in 2021.models of care, see the discussion below under the heading “—New models of care and Medicare and Medicaid program reforms.”
Medicaid revenue
Medicaid programs are state-administered programs partially funded by the federal government. These programs are intended to provide health coverage for patients whose income and assets fall below state-defined levels and who are otherwise uninsured. These programs also serve as supplemental insurance programs for co-insurance payments due from Medicaid-eligible patients with primary coverage under the Medicare program. Some Medicaid programs also pay for additional services, including some oral medications that are not covered by Medicare. We are enrolled in the Medicaid programs in the states in which we conduct our business.
Commercial revenue
Before a patient becomes eligible to elect to have Medicare as their primary payor for dialysis services, a patient’s commercial insurance plan, if any, is generally responsible for payment of such dialysis services for up to the first 33 months, as discussed above. Although commercial payment rates vary, average commercial payment rates established under commercial contracts are generally significantly higher than Medicare rates. The payments we receive from commercial payors generate nearly all of our profits.profits and all of our nonacute dialysis profits come from commercial payors. Payment methods from commercial payors can include a single lump-sum per treatment, referred to as bundled rates, or in other cases separate payments for dialysis treatments and pharmaceuticals, if used as part of the treatment, referred to as FFS rates. Commercial payment rates are the result of negotiations between us and insurers or third-party administrators. Our out-of-network payment rates are on average higher than in-network commercial contract payment rates. Some of our commercial contracts pay us under a single bundled payment rate for all dialysis services provided to covered patients. However, some of our commercial contracts also pay us for certain other services and pharmaceuticals in addition to the bundled payment. Our commercial contracts typically contain annual price escalator provisions. We are continuously in the process of negotiating agreements with our commercial payors and if our negotiations result in overall commercial contract payment rate reductions in excess of our commercial contract payment rate increases, or if commercial payors implement plans that restrict access to coverage or the duration or breadth of benefits or impose restrictions or limitations on patient access to non-contracted or out-of-network providers, it could have a material adverse effect on our business, results of operations, financial condition and cash flows. In addition, if there is an increase in job losses in the U.S., or depending upon changes to the healthcare regulatory system by CMS and/or the impact of healthcare insurance exchanges, we could experience a decrease in the number of patients covered under commercial insurance plans and/or an increase in uninsured or underinsured patients. Patients with commercial insurance who cannot otherwise maintain coverage frequently rely on financial assistance from charitable organizations, such as the American Kidney Fund. If these patients are unable to obtain or continue to receive or receive for a limited duration such financial assistance, or if our assumptions about how patients will respond to any change in such financial assistance are incorrect, it could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Approximately 25% of our U.S. dialysis and related lab patient services revenues and approximately 10.4%10% of our U.S. dialysis patients are associated with non-acute commercial payors for the year ended December 31, 2018.2019. Non-acute commercial patients as a percentage of our total U.S. dialysis patients for 20182019 were relatively flat as compared to 2017.2018. Less than 1% of our U.S. dialysis and related lab services revenues are due directly from patients. There is no single commercial payor that accounted for more than 10% of total U.S. dialysis and related lab services revenues for the year ended December 31, 2018.2019. See Note 2 to the consolidated financial statements included in this report for disclosure on our concentration related to our commercial payors on a total consolidated net revenue basis.
TheBoth the number of our patients under commercial plans and the rates under these commercial plans are subject to change based on a number of factors. These factors include, among others, a highly competitive rate environment that shapes our ongoing negotiations with commercial payors; changes in commercial plan design; and the health of the U.S. economy. In addition, changes in state and federal legislation, regulations, rules, laws, guidance or other requirements may impact the availability and scope of commercial insurance, including, among others, developments that impact the healthcare reform legislation enacted inexchanges introduced by the Patient Protection and Affordable Care Act of 2010, introduced healthcare insurance exchanges which provide a marketplace for eligible individualsas amended by the Health Care and small employers to purchase healthcare insurance. The businessEducation Reconciliation Act of 2010 (Affordable Care Act (ACA)) and regulatory environment continues to evolve as the exchanges mature, and statutes and regulations are challenged, changed and enforced. Commercial payor participation in the exchanges has decreased and may continue to decrease. If commercial payor participation in that marketplace as well as developments that impact the exchanges continues to decrease, it could have a material adverse effectavailability of charitable premium assistance. For additional detail on our business, results of operations, financial condition and cash flows. Although we cannot predict the short- or long-term effectspotential impact of these factors we believe future market changes could result in a reduction in ESRD patients covered by traditional commercial insurance policies and an increase in the number of patients covered through the exchanges under more restrictive commercial plans with lower reimbursement rates or higher deductibles and co-payments that patients may not be able to pay. To the extent that changes in statutes, regulations or related guidance or changes in other market conditions result in a reduction in reimbursement rates for our services from commercial and/or government payors, it could have a material adverse effect on our business, results of operations, financial condition and cash flows.
In December 2016, CMS published an interim final rule that questionedcommercial revenue, see the use of charitable premium assistance for ESRD patients and would have established new conditions for coverage standards for dialysis facilities. In January 2017, a federal court issued a preliminary injunction on CMS’ interim final rule and in June 2017, at the request of CMS, the court stayed the proceedings while CMS pursues new rulemaking options. CMS has not issued any new rulemaking related to charitable premium assistance yet, but that does not preclude CMS or another regulatory agency or legislative authority from issuing a new rule or guidance that challenges charitable premium assistance. Additionally, any other law, rule, or guidance, proposed or issued by CMS or other federal or state regulatory or legislative authorities, including any ballot or other initiatives, restricting or prohibiting the ability of patients with access to alternative coverage from selecting a marketplace plan on or off exchange, limiting the amount of revenue dialysis providers can retain for caring for patients with commercial insurance by, among other things, requiring rebates to insurers and taking into account only a portion of the costs incurred by dialysis providers, affecting payments made to providers for services provided to patients who receive charitable premium assistance, and/or otherwise restricting or prohibiting the use of charitable premium assistance, could cause us to incur substantial costs to oppose any such proposed measures, impact our dialysis center development plans, and if passed and/or implemented, could adversely impact dialysis centers across the U.S. making certain centers economically unviable, lead to the closure of certain centers, restrict the ability of dialysis patients to obtain and maintain optimal insurance coverage, and in some cases have a material adverse effect on our business, results of operations, financial condition and cash flows. For a discussion of recent state legislative and ballot initiatives and related risks, see our Risk Factorrisk factors in Item 1A Risk Factors under the heading "Changesheadings “Changes in federal and state healthcare legislation or regulations could have a material adverse effect on our business, results of operations, financial condition and cash flows”; “If the average rates that commercial payors pay us decline significantly or if patients in commercial plans are subject to restriction in plan designs, it would have a material adverse effect on our business, results of operations, financial condition and cash flows”; and “If the number of patients with higher-paying commercial insurance declines, it could have a material adverse effect on our business, results of operations, financial condition and cash flows."”
Revenue from other pharmaceuticals
The impact of physician-prescribed pharmaceuticals on our overall revenues that are separately billable has significantly decreased since Medicare’s single bundled payment system went into effect beginning in January 2011, and as a result of commercial contracts that pay us a single bundled payment rate.
Effective January 1, 2018, both oral and IVintravenous forms of calcimimetics, a drug class taken by many patients with ESRD to treat mineral bone disorder, became the financial responsibility of our U.S. dialysis and lab services business for our Medicare patients and are now reimbursed under Medicare Part B. Previously, calcimimetics were reimbursed for Medicare patients through Part D and dispensed through traditional pharmacies. Currently, the oral and intravenous forms of calcimimetics remain separately reimbursed and therefore are not part of the ESRD PPS bundled payment. During anthe initial pass-through period, Medicare paymentpayments for calcimimetics will beare based on a pass-through rate of the average sales price plus approximately 6% before sequestration (or 4%. adjusted for sequestration), however, in 2020 they will be reimbursed at average sales price plus 0%, before sequestration. CMS has stated intentions to enter calcimimetics into the ESRD bundle two years after transitioning to Part B. Previously, calcimimetics were reimbursed for Medicare patients through Part D once dispensed from traditional pharmacies.bundled payment as of January 1, 2021.
Approximately 7%
Physician relationships
Joint Venture Partners
We own and 2%operate certain of our total U.S. dialysis and related labcenters through entities that are structured as joint ventures. We generally hold controlling interests in these joint ventures, with certain nephrologists, hospitals, management services net patient services revenues for the years ended December 31, 2018 and 2017,organizations, and/or other healthcare providers holding minority equity interests. These joint ventures are associated with the administration of separately-billable physician-prescribed pharmaceuticals of which the administration of calcimimetics and EPO accounted for approximately 5% and 1% of our total U.S. dialysis and related lab services net revenues, respectively, fortypically formed as limited liability companies. For the year ended December 31, 2018. The administration of EPO accounted for2019, revenues from joint ventures in which we have a controlling interest represented approximately 1%26% of our totalnet U.S. dialysis and related lab services net revenues for the year ended December 31, 2017.
Currently, EPO and both the oral and IV forms of calcimimetics are produced by a single manufacturer, Amgen USA Inc. (Amgen). In 2017, we enteredrevenues. We expect to continue to enter into a Sourcing and Supply Agreement with Amgen for both the oral and IV versions of calcimimetics that expires on December 31, 2022. Our business, results of operations, financial condition and cash flows could be materially impacted by certain factors relating to calcimimetics, including physician prescribing patterns, vendor contracts with Amgen and other suppliers, the availabilitynew U.S. dialysis-related joint ventures in the marketordinary course of a generic oral equivalent, whether the drug becomes part of the ESRD PPS bundled payment and, if so, at what rate, and how commercial payors will treat reimbursement of the drug. If payors do not pay as anticipated, if we are not adequately reimbursed for the cost of the drug, or the processes we have implemented to provide the drug do not perform as anticipated, then we could be subject to both financial and operational risk, among other things. In addition, in 2017, we also entered into a separate Sourcing and Supply Agreement with Amgen for EPO that expires on December 31, 2022. Under the terms of the agreement, we will purchase EPO in amounts necessary to meet no less than 90% of our requirements for erythropoiesis-stimulating agents (ESAs) through the expiration of the contract. The actual amount of EPO that we will purchase from Amgen will depend upon the amount of EPO administered during dialysis treatments as prescribed by physicians and the overall number of patients that we serve. Any interruption in the supply of EPO, calcimimetics, or product cost increases for which we are not appropriately reimbursed or that we are unable to mitigate could materially impact our operations, among other things.business.
Physician relationships
Community Physicians
An ESRD patient generally seeks treatment at an outpatient dialysis center near his or hertheir home where his or hertheir treating nephrologist has practice privileges. Our relationships with local nephrologists and our ability to provide quality dialysis services and to meet the needs of their patients are key factors in the success of our dialysis operations. Over 5,3005,600 nephrologists currently refer patients to our outpatient dialysis centers. As is typical in the dialysis industry, one or a few physicians, usually account for all or a significant portion of an outpatient dialysis center’s patient base. If a significant number of physicians cease referring patients to our outpatient dialysis centers, it would have a material adverse effect on our business, results of operations, financial condition and cash flows.
Medical Directors
Participation in the Medicare ESRD program requires that dialysis services at an outpatient dialysis center be under the general supervision of a medical director. Per these requirements, this individual is usually a board certified nephrologist. We have engaged physicians or groups of physicians to serve as medical directors for each of our outpatient dialysis centers. At some outpatient dialysis centers, we also separately contract with one or more other physicians or groups to serve as assistant or associate medical directors over other modalities such as home dialysis. We have over 1,000 individual physicians and physician groups under contract to provide medical director services.
Medical directors for our dialysis centers enter into written contracts with us that specify their duties and fix their compensation generally for periods of ten years. The compensation of our medical directors is the result of arm’s length negotiations, consistent with fair market value, and generally depends upon an analysis of various factors such as the physician’s duties, responsibilities, professional qualifications and experience.
Our medical director contracts and joint venture operating agreements and dialysis center purchase agreements generally include covenants not to compete or own interests in other competing outpatient dialysis centers within a defined geographic area for various time periods, as applicable. These non-compete agreements do not restrict or limit the physicians from practicing medicine or prohibit the physicians from referring patients to any outpatient dialysis center, including competing centers.
As part of our Corporate Integrity Agreement, (CIA), as described below, we have agreed not to enforce investment non-compete restrictions relating to dialysis clinics or programs that were established pursuant to a partial divestiture joint venture transaction. Therefore, to the extent a joint venture partner or medical director has a contract(s) with us covering dialysis clinics or programs that were established pursuant to a partial divestiture, we will not enforce the investment non-compete provision relating to those clinics and/or programs.
Capacity and location of our U.S. dialysis centers
Typically we are able to increase our capacity by extending hours at our existing dialysis centers, expanding our existing dialysis centers, relocating our dialysis centers, developing new dialysis centers and by acquiring dialysis centers. The development of a typical outpatient dialysis center by us generally requires approximately $2.4 million for leasehold improvements and other capital expenditures. Based on our experience, a new outpatient dialysis center typically opens within a year after the property lease is signed, normally achieves operating profitability in the second year after Medicare certification and normally reaches maturity within three to five years. Acquiring an existing outpatient dialysis center requires a substantially greater initial investment, but profitability and cash flows are generally accelerated and more predictable. To a limited extent, we enter into agreements to provide management and administrative services to outpatient dialysis centers in which we own a noncontrolling interest or which are wholly-owned by third parties in return for management fees.
As of December 31, 2019, we operated or provided administrative services to a total of 2,753 U.S. outpatient dialysis centers. A total of 2,709 of such centers are consolidated in our financial statements. Of the remaining 44 non-consolidated U.S. outpatient dialysis centers, we own a noncontrolling interest in 41 centers and provide management and administrative services to three centers that are wholly-owned by third parties. The locations of the 2,709 U.S. outpatient dialysis centers consolidated in our financial statements at December 31, 2019, were as follows:
Ancillary services and strategic initiatives businesses, including our international operations
As of December 31, 2019, our ancillary services and strategic initiatives consisted primarily of disease management services, physician services, ESRD seamless care organizations, comprehensive care, vascular access services and clinical research programs, and our international operations and relate primarily to our core business of providing kidney care services.
Ancillary Services and Strategic Business Initiatives
Integrated Care and Chronic Kidney Care. We have made and continue to make investments in building our integrated care capabilities, including the operation of certain strategic business initiatives that are intended to integrate care amongst healthcare participants across the renal care continuum from chronic kidney disease (CKD) to ESRD to kidney transplant. Through improved technology and data sharing, as well as an increasing focus on value based contracting and care, these initiatives seek to bring together physicians, nurses, dieticians, pharmacists, hospitals, dialysis clinics, transplant centers and payors with a view towards improving clinical outcomes for our patients and reducing the overall cost of comprehensive kidney care.
| |
| • | Disease management services. VillageHealth DM, LLC doing business as DaVita Integrated Kidney Care (DaVita IKC) provides advanced integrated care management services to health plans and government programs for members/beneficiaries diagnosed with ESRD, chronic kidney failure, and/or poly-comorbid conditions. Through a combination of clinical coordination, innovative interventions, medical claims analysis and information technology, we endeavor to assist our customers and patients in obtaining superior renal healthcare and improved clinical outcomes, as well as helping to reduce overall medical costs. Integrated kidney care management revenues from commercial and Medicare Advantage insurers can be based upon either an established contract fee recognized as earned over the contract period, or related to the operation of value-based programs, including pay for performance, shared savings, and capitation contracts. DaVita IKC also contracts with payors to operate Medicare Advantage ESRD Special Needs Plans to provide ESRD patients full service healthcare. We are at risk for all medical costs of the program in excess of the capitation payments. Furthermore, in October 2015, DaVita IKC entered into |
management service agreements to support three ESCO joint ventures in which we are an investor through certain wholly- or majority-owned dialysis clinics.
| |
| • | Physician services. Nephrology Practice Solutions (NPS) is an independent business that partners with physicians committed to providing outstanding clinical and integrated care to patients. NPS provides nephrologist recruitment and staffing services in select markets which are billed on a per search basis. NPS also offers physician practice management services to nephrologists under administrative services agreements. These services include physician practice management, billing and collections, credentialing, coding, and other support services that enable physician practices to increase efficiency and manage their administrative needs. Additionally, NPS owns and operates nephrology practices in multiple states. Fees generated from these services are recognized as earned typically based upon flat fees or cash collections generated by the physician practice. |
| |
| • | ESRD Seamless Care Organization joint ventures (ESCO JVs). In October 2015, certain of our dialysis clinics entered into partnerships with various nephrology practices, health systems, and other providers to establish three ESCO JVs in Phoenix-Tucson Arizona, South Florida, and Philadelphia Pennsylvania-Camden, New Jersey. The ESCO JVs were formed under the CMS Innovation Center’s Comprehensive ESRD Care (CEC) Model, a demonstration to assess the impact of care coordination for ESRD patients in a dialysis-center oriented ACO setting. Each ESCO JV has a shared risk arrangement with CMS and the programs are evaluated on a performance year basis. The delivery of improved quality outcomes for patients and program savings depend on the contributions of the dialysis center teammates, nephrologists, health system and hospital partners, pharmacy providers, other primary care and specialty care providers and facilities, and integrated care management support from DaVita IKC, which is also the manager of the ESCO JVs. In 2019, CMS published the results for the 2017 performance year, and all three ESCO JVs earned shared savings payments. Results for 2018 and 2019 performance years are anticipated to be released in 2020. |
| |
| • | Comprehensive care. Vively Health (formerly known as DaVita Health Solutions) was created to provide comprehensive care through house calls and post-acute care programs to help chronically ill patients through use of community based, physician- and nurse practitioner-led care teams to deliver medical, behavioral, social and palliative care within the patient's home or skilled nursing facility. |
Other Strategic Business Initiatives
| |
| • | Clinical research programs. DaVita Clinical Research (DCR) is a provider-based specialty clinical research organization with a full spectrum of services for clinical drug research and device development. DCR uses its extensive, applied database and real-world healthcare experience to assist in the design, recruitment and completion of retrospective and prospective pragmatic and clinical trials. Revenues are based upon an established fee per study, as determined by contract with drug companies and other sponsors and are recognized as earned according to the contract terms. |
| |
| • | Vascular access services. Lifeline provides management and administrative services to physician-owned vascular access clinics that provide vascular services for dialysis and other patients. Lifeline is also the majority-owner of three vascular access clinics. Management fees generated from providing management and administrative services are recognized as earned typically based on a percentage of revenues or cash collections generated by the clinics. Revenues associated with the vascular access clinics that are majority-owned are recognized in the period when the services are provided. |
During 2018, we transitioned the customer service and fulfillment functions of our pharmacy business, DaVita Rx, to third parties and ceased our related distribution operations. DaVita Rx was a pharmacy that specialized in providing oral medications and medication management services to patients with ESRD. In addition, effective June 1, 2018, we sold 100% of the stock of Paladina Health, our direct primary care business. For additional discussion of our ancillary services and strategic initiatives businesses, see Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations.
International dialysis operations
As of December 31, 2019, we operated or provided administrative services to a total of 259 outpatient dialysis centers, which includes consolidated and nonconsolidated centers located in ten countries outside of the U.S., serving approximately 28,700 patients. Our international dialysis operations have continued to grow steadily and expand as a result of acquiring and developing outpatient dialysis centers in various strategic markets. Our international operations are included as part of our ancillary services and strategic initiatives.
The locations of our international outpatient dialysis centers are as follows:
|
| | |
| Germany | 59 |
|
| Poland | 50 |
|
| Brazil | 46 |
|
Malaysia(1) | 39 |
|
| Saudi Arabia | 23 |
|
| Colombia | 22 |
|
| Portugal | 9 |
|
Taiwan(1) | 7 |
|
China(1) | 2 |
|
Singapore(1) | 2 |
|
| 259 |
|
| |
| (1) | Includes centers that are operated or managed by our Asia Pacific Joint Venture (APAC JV). |
Corporate Administrative Support
Corporate administrative support consists primarily of labor, benefits and long-term incentive compensation costs for departments which provide support to all of our different operating lines of business. These expenses are included in our consolidated general and administrative expenses and are partially offset by the allocation of management fees.
Government regulation
Our dialysis operationsWe operate in a complex regulatory environment and are subject to an extensive and evolving set of federal, state and local governmentalgovernment laws, regulations and regulations.requirements. These laws and regulations require us to meet various standards relating to, among other things, government payment programs, dialysis facilities and equipment, management of centers, personnel qualifications, maintenance of proper records, and quality assurance programs and patient care.
If any of our personnel, representatives or operations are found to violate applicable laws, regulations or regulations,other requirements, we could suffer severe consequences that would have a material adverse effect on our business, results of operations, financial condition, cash flows, reputation and stock price, including:including, among others:
SuspensionLoss of required certifications, suspension or exclusion from, or termination of our participation in government payment programs;
Refunds of amounts received in violation of law or applicable payment program requirements dating back to the applicable statute of limitation periods;
Loss of required government certifications or exclusion from government payment programs;
Loss of licenses required to operate healthcare facilities or administer pharmaceuticals in the states in which we operate;
Reductions in payment rates or coverage for dialysis and ancillary services and pharmaceuticals;
CivilCriminal or criminalcivil liability, fines, damages or monetary penalties, for violations of healthcare fraud and abuse laws, including the federal Anti-Kickback Statute contained in the Social Security Act of 1935, as amended (Anti-Kickback Statute), Civil Monetary Penalties Statute, Stark Law and False Claims Act (FCA), or other failures to meet regulatory requirements;which could be material;
Enforcement actions, investigations, or audits by governmental agencies and/or state law claims for monetary damages fromby patients who believe their protected health information (PHI) has been used, disclosed or not properly safeguarded in violation of federal or state patient privacy laws, including, among others, the Health Insurance Portability and Accountability Act of 1996 (HIPAA) and the Privacy Act of 1974;
Mandated changes to our practices or procedures that significantly increase operating expenses;
Imposition of and compliance with corporate integrity agreementsexpenses or that could subject us to ongoing audits and reporting requirements as well as increased scrutiny of our billing and business practices;practices, any of which could lead to potential fines, among other things;
Termination of various relationships and/or contracts related to our business, includingsuch as joint venture arrangements, medical director agreements, real estate leases and consulting agreements with physicians; and
Harm to our reputation which could negatively impact our business relationships and stock price, affect our ability to attract and retain patients, physicians and physicians,teammates, affect our ability to obtain financing and decrease access to new business opportunities, among other things.
We expect that our industry will continue to be subject to substantialextensive and complex regulation, the scope and effect of which are difficult to predict. We are currently subject to ongoingvarious legal proceedings, such as lawsuits, investigations, audits and inquiries by various government and regulatory agencies, all as further described in Note 1716 to the consolidated financial statements. Our operations and activities could be reviewed or challenged by regulatory authorities at any time in the future, as further describedfuture. For additional detail on risks related to each of the foregoing, see the discussion in Item 1A. Risk Factors under the heading,headings, "If we fail to adhere to all of the complex government laws, regulations and requirements that apply to our business, we could suffer severe consequences that could have a material adverse effect on our business, results of operations, financial condition and cash flows, and could materially harm our reputation and stock price."; "Changes in federal and state healthcare legislation or regulations could have a material adverse effect on our business, results of operations, financial condition and cash flows"; and "We are, and may in the future be, a party to various lawsuits, demands, claims, qui tam suits, governmental investigations and audits (including, without limitation, investigations or other actions resulting from our obligation to self-report suspected violations of law) and other legal matters, any of which could result in, among other things, substantial financial penalties or awards against us, mandated refunds, substantial payments made by us, required changes to our business practices, exclusion from future participation in Medicare, Medicaid and other healthcare programs and possible criminal penalties, any of which could have a material adverse effect on our business, results of operations, financial condition, cash flows, reputation and materially harm our reputation". This regulation and scrutiny could have a material adverse impact on us.stock price."
Licensure and certification
Our dialysis centers are certified by CMS, as is required for the receipt of Medicare payments. Certain of our payor contracts also condition payment on Medicare certification. In some states, our outpatient dialysis centers also are required to secure additional state licenses and permits. Governmental authorities, primarily state departments of health, periodically inspect our centers to determine if we satisfy applicable federal and state standards and requirements, including the conditions of participation in the Medicare ESRD program.
We have experienced some delays in obtaining Medicare certifications from CMS. However,CMS, though recent changes by CMS in the prioritizing of dialysis providers as well as recent legislation allowing private entities to perform initial dialysis facilities certifications may helphas helped to decrease or limit certain delays. The number of companies who will enter the market
In addition, in November 2019, CMS finalized a Provider Enrollment Rule creating new onerous disclosure obligations for all providers enrolled in Medicare, Medicaid and the costChildren’s Health Insurance Plan (CHIP). The final rule imposes a stronger revocation authority and increases the bar for re-enrollment for providers who submit incomplete or inaccurate information or who have affiliations with other providers that CMS has determined pose undue risk of surveys they might perform is unclear.
Federal Anti-Kickback Statute
The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration, directly or indirectly, in cash or kind, to induce or reward either the referral of an individual for, or the purchase, or order or recommendation of, any good or service, for which payment may be made under federal and state healthcare programs such as Medicare and Medicaid.
Federal criminal penalties for the violation of the federal Anti-Kickback Statute include imprisonment, fines and exclusion of the provider from future participation in the federal healthcare programs, including Medicare and Medicaid. Violations of the federal Anti-Kickback Statute are punishable by imprisonment for up to ten years and fines of up to $100,000 or both. Larger fines can be imposed upon corporations under the provisions of the U.S. Sentencing Guidelines and the Alternate Fines Statute. Individuals and entities convicted of violating the federal Anti-Kickback Statute are subject to mandatory exclusion from participation in Medicare, Medicaid and other federal healthcare programs for a minimum of five years. Civil penalties for violation of this law include up to $100,000 in monetary penalties per violation, repayments of up to three times the total payments between the parties to the arrangement and suspension from future participation in Medicare and Medicaid. Court decisions have held that the statute may be violated even if only one purpose of remuneration is to induce referrals. The Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010 (Affordable Care Act (ACA)),ACA amended the federal Anti-Kickback Statute to clarify the intent that is required to prove a violation. Under the statute as amended, the defendant doesmay not need to have actual knowledge of the federal Anti-Kickback Statute or have the specific intent to violate it. In addition, the ACA amended the federal Anti-Kickback Statute to provide that any claims for
items or services resulting from a violation of the federal Anti-Kickback Statute are considered false or fraudulent for purposes of the FCA.False Claims Act (FCA).
The federal Anti-Kickback Statute includes statutory exceptions and regulatory safe harbors that protect certain arrangements. Business transactions and arrangements that are structured to comply fully with an applicable safe harbor do not violate the federal Anti-Kickback Statute. However, transactionsTransactions and arrangements that do not satisfy all elements of a relevant safe harbor do not necessarily violate the law. When an arrangement does not satisfy a safe harbor, the arrangement must be evaluated on a case-by-case basis in light of the parties’ intent and the arrangement’s potential for abuse. Arrangements that do not satisfy a safe harbor may be subject to greater scrutiny by enforcement agencies.
WeDaVita and its subsidiaries enter into several arrangements with physicians and other potential referral sources, that potentially implicate the Anti-Kickback Statute, such as:
Medical Director Agreements. Because our medical directors may refer patients to our dialysis centers, our arrangements with these physicians are designed to substantially comply with the safe harbor for personal service arrangements. Although we endeavor to structure the Medical Director Agreements we enter into with physicians to substantially comply with the safe harbor for personal service arrangements, including the requirement that compensation be consistent with fair market value, the safe harbor requires that when services are provided on a part-time basis, the agreement must specify the schedule of intervals of services, and their precise length and the exact charge for such services. Because of the nature of our medical directors’ duties, it is impossible to fully satisfy this technical element of the safe harbor. As a result, these arrangements could be subject to scrutiny since they do not expressly describe the schedule of part-time services to be provided under the arrangement.
Joint Ventures. WeAs noted above, we own a controlling interest in numerous U.S. dialysis related joint ventures. ForOur internal policies, procedures, and template agreements were developed and are utilized for compliance with the year ended December 31, 2018, these joint ventures represented approximately 25% of our net U.S. dialysis and related lab services revenues. We expect to continue to enter into new U.S. dialysis related joint ventures in the ordinary course of business while maintaining over time most of our existing joint ventures, which would increase the total number of our Kidney Care joint ventures. Our relationships with physicians and other referral sources relating toAnti-Kickback Statute. However, we recognize that at times these joint ventures do not fully satisfy all of the requirements of the safe harbor for investments in small entities. Although failure to comply with a safe harbor does not render an arrangement illegal under the federal Anti-Kickback Statute, an arrangement that does not operate within a safe harbor may be subject to scrutiny by both federal and state government enforcement agencies including the Department of Health and Human Services’ Office of Inspector General (OIG) has warned inand the past that certain joint venture relationships have a potential for abuse. Physician jointDepartment of Justice (DOJ). Joint ventures that fall outside the safe harbors are evaluated on a case-by-case basis under the federal Anti-Kickback Statute.
In this regard, we have endeavored to structure our joint ventures to satisfy as many elements of the safe harbor for investments in small entities as we believe are commercially reasonable. For example, we believe that these investments are offered and made by us on a fair market value basis and provide returns to the investors in proportion to their actual investment in the venture. However, since the arrangements do not satisfy all of the requirements of an applicable safe harbor, these arrangements could be subject to scrutiny on the ground that they are intended to induce patient referrals.
We were subject to investigation by the United States Attorney’s Office for the District of Colorado, the Civil Division of the United States Department of Justice (DOJ) and the OIG related to our then-existing relationships with physicians,
including our joint ventures, and whether those relationships and joint ventures comply with the federal Anti-Kickback Statute and the FCA. In October 2014, we entered into a Settlement Agreement with the United States and relator David Barbetta to resolve the then pending 2010 and 2011 U.S. Attorney physician relationship investigations. In connection with the resolution of this matter, and in exchange for the OIG’s agreement not to exclude us from participating in the federal healthcare programs, we entered into a five-year CIA with the OIG. The CIA (i) requires that we maintain certain elements of our compliance programs; (ii) imposes certain expanded compliance-related requirements during the term of the CIA; (iii) requires ongoing monitoring and reporting by an independent monitor, imposes certain reporting, certification, records retention and training obligations, allocates certain oversight responsibility to the Board’s Compliance Committee, and necessitates the creation of a Management Compliance Committee and the retention of an independent compliance advisor to the Board; and (iv) contains certain business restrictions related to a subset of our joint venture arrangements. For additional information regarding our CIA, see Item 1 Business under the heading “Corporate Compliance Program."
Lease Arrangements. We lease space for numerous dialysis centers from entities in which physicians, hospitals or medical groups hold ownership interests, and we sublease space to referring physicians at approximately 240 of our dialysis centers as of December 31, 2018.physicians. We endeavor to structure these arrangements to comply with the federal Anti-Kickback Statute safe harbor for space rentals in all material respects.
Consulting Agreements. From time to time, we enter into consulting agreements with physicians. Engaged physicians provide services including providing input on processes, services and protocols as well as providing education on assorted topics. We endeavor to structure these arrangements to comply with the federal Anti-Kickback Statute safe harbor for personal services in all material respects.
Employment Agreements. Our subsidiary Nephrology Practice Solutions employs physicians to provide administrative and clinical services. We endeavor to structure these arrangements to comply with the federal Anti-Kickback Statute safe harbor for employment in all material respects.
Common Stock. Some medical directors and other referring physicians may own our common stock. We believe that these interests materially satisfy the requirements of the Anti-Kickback Statute safe harbor for investments in large publicly traded companies.
Discounts. Our dialysis centers and subsidiaries sometimes acquire certain items and services at a discount that may be reimbursed by a federal healthcare program. We endeavor to structure our vendor contracts that include discount or rebate provisions to comply with the federal Anti-Kickback Statute safe harbor for discounts.
If any of our business transactions or arrangements, including those described above, were found to violate the federal Anti-Kickback Statute, we, among other things, could face criminal, civil or administrative sanctions, including possible exclusion from participation in Medicare, Medicaid and other state and federal healthcare programs. Any findings that we have violated these laws could have a material adverse impact on our business, results of operations, financial condition, cash flows, reputation and stock price.
As part of HHS’sthe Department of Health and Human Services (HHS) Regulatory Sprint to Coordinated Care (Regulatory Sprint), in October 2019, OIG issued a request for information (RFI) in August 2018 seeking input on regulatory provisions that may act as barriersproposed modifications to coordinated care or value-based care. Specifically, OIG sought to identify ways in which it might modify or add new safe harbors to thecertain of its Anti-Kickback Statute (as well as exceptions to the definition of “remuneration” in the beneficiary inducements provision of theand Civil Monetary Penalty statute) in order to foster arrangements that promote care coordination and advance the delivery of value-based care, while also protecting against harms caused by fraud and abuse. Comments were due in October 2018, butPenalties regulations. OIG has yetnot issued final rules at this time so the impact on future modifications is unknown, but we will continue to issue any proposed rules or take other regulatory action relatedmonitor to assess the RFI.anticipated impact on our business, results of operations and financial condition.
Stark Law
The Stark Law prohibits a physician who has a financial relationship, or who has an immediate family member who has a financial relationship, with entities providing Designated Health Services (DHS), from referring Medicare and Medicaid patients to such entities for the furnishing of DHS, unless an exception applies. DHS is defined to mean any of the following enumerated items or services; clinical laboratory services; physical therapy services; occupational therapy services; radiology services, including magnetic resonance imaging, computerized axial tomography scans, and ultrasound services; radiation therapy services and supplies; durable medical equipment and supplies; parenteral and enteral nutrients, equipment, and supplies; prosthetics, orthotics and prosthetic devices and supplies; home health services; outpatient prescription drugs; inpatient and outpatient hospital services; and outpatient speech-language pathology services. The types of financial arrangements between a physician and a DHS entity that trigger the self-referral prohibitions of the Stark Law are broad and include direct and indirect ownership and investment interests and compensation arrangements. The Stark Law also prohibits the DHS entity receiving a prohibited referral from presenting, or causing to be presented, a claim or billing for the services arising out of the prohibited referral. The prohibition applies regardless of the reasons for the financial relationship and the referral; unlike the federal Anti-Kickback Statute, intent to induce referrals is not required. If the Stark Law is implicated, the financial relationship must fully satisfy a Stark Law exception. If an exception is not satisfied, then the parties to the arrangement could be subject to sanctions. Sanctions for violation of the Stark Law include denial of payment for claims for services provided in violation of the prohibition, refunds of amounts collected in violation of the prohibition, a civil penalty of up to $15,000 for each service arising out of the prohibited referral, a civil penalty of up to $100,000 against parties that enter into a scheme to circumvent the Stark Law prohibition, civil assessment of up to three times the amount claimed, and potential exclusion from the federal healthcare programs, including Medicare and Medicaid. Amounts collected for prohibited claims
must be reported and refunded generally within 60 days after the date on which the overpayment was identified. Furthermore, Stark Law violations and failure to return overpayments timely can form the basis for FCA liability as discussed below.
The definition of DHS under the Stark Law excludes services paid under a composite rate, even if some of the components bundled in the composite rate are DHS. Although the ESRD bundled payment system is no longer titled a composite rate, we believe that the former composite rate payment system and the current bundled system are both composite systems excluded from the Stark Law. Since most services furnished to Medicare beneficiaries provided in our dialysis centers are reimbursed through a bundled rate, the services performed in our facilities generally are not DHS, and the Stark Law referral prohibition does not apply to those services. Certain separately billable drugs (drugs furnished to an ESRD patient that are not for the treatment of ESRD that CMS allows our centers to bill for using the so-called AY modifier) may be considered DHS. However, we have implemented certain billing controls designed to limit DHS being billed out of our dialysis clinics. Likewise, the definition of inpatient hospital services, for purposes of the Stark Law, also excludes inpatient dialysis performed in hospitals that are not certified to provide ESRD services. Consequently, our arrangements with such hospitals for the provision of dialysis services to hospital inpatients do not trigger the Stark Law referral prohibition.
In addition, although prescription drugs are DHS, there is an exception in the Stark Law for calcimimetics, EPO and other specifically enumerated dialysis drugs when furnished in or by an ESRD facility such that the arrangement for the furnishing of the drugs does not violate the Stark Law. The exception is available only for drugs included on a list of Current Procedural Terminology/Healthcare Common Procedure Coding System (CPT/HCPCS) codes published by CMS, and for calcimimetics, EPO, Aranesp® and equivalent drugs dispensed by the ESRD facility for use at home. While we believe that most drugs furnished by our dialysis centers are covered by the exception, dialysis centers may administer drugs that are not on the list of CPT/HCPCS codes and therefore do not meet this exception. In order for a physician who has a financial relationship with a dialysis center to order one of these drugs from the center and for the center to obtain Medicare reimbursement, another exception must apply.
We have entered into several types of financial relationships with referring physicians, including compensation arrangements. If our dialysis centers were to bill for a non-exempted drug and the financial relationships with the referring physician did not satisfy an exception, we could be required to change our practices, face civil penalties, pay substantial fines, return certain payments received from Medicare and beneficiaries or otherwise experience a material adverse effect as a result of a challenge to payments made pursuant to referrals from these physicians under the Stark Law. Additionally, certain of our subsidiaries, were they to bill DHS, would implicate the Stark Law. As such we endeavor to structure arrangements with relevant physicians to fit within the existing exceptions to the Stark Law. If we were to fail to satisfy an applicable exception, we could similarly be required to change practices, face penalties and fines, return certain payments or otherwise face adverse consequences.
Medical Director Agreements. We endeavor to structure our medical director agreements to satisfy the personal services arrangement exception to the Stark Law. While we believe that the compensation provisions included in our medical director agreements are the result of arm’s length negotiations and result in fair market value payments for medical director services, an enforcement agency could nevertheless challenge the level of compensation that we pay our medical directors.
Lease Agreements. Some of our dialysis centers are leasedWe lease space from entities in which referring physicians hold interests and we sublease space to referring physicians at some of our dialysis centers. The Stark Law provides an exception for lease arrangements if specific requirements are met. We endeavor to structure our leases and subleases with referring physicians to satisfy the requirements for this exception.
Consulting Agreements. From time to time, we enter into consulting agreements with physicians. Engaged physicians provide services including providing input on processes, services and protocols as well as providing education on assorted topics. We endeavor to structure these arrangements to comply with the Stark Law exception for personal services.
Employment Agreements. We employ physicians to provide administrative and clinical services. We endeavor to structure these arrangements to comply with the relevant Stark Law exceptions.
Common Stock. Some medical directors and other referring physicians may own our common stock. We believe that these interests satisfy the Stark Law exception for investments in large publicly traded companies.
Joint Ventures. Some of our referring physicians also own equity interests in entities that operate our dialysis centers.centers and subsidiaries. We believe that none of the Stark Law exceptions applicable to physician ownership interests in entities to which they make DHS referrals apply to the kinds of ownership arrangements that referring physicians hold in several of our subsidiaries that operate dialysis centers. Accordingly, these dialysis centers do not bill Medicare for DHS referrals from physician owners. If the dialysis centers bill for DHS referred by physician owners, the dialysis centers or subsidiaries would be subject to the Stark Law penalties described above.
Ancillary Services. The operations of our ancillary and subsidiary businesses are also subject to compliance with the Stark Law, and any failure to comply with these requirements, particularly in light of the strict liability nature of the Stark Law, could subject these operations to the Stark Law penalties and sanctions described above.
If CMS or other regulatory or enforcement authorities determined that we have submitted claims in violation of the Stark Law, or otherwise violated the Stark Law, we would be subject to the penalties described above. In addition, it might be necessary to restructure existing compensation agreements with our medical directors and to repurchase or to request the sale of ownership interests in subsidiaries and partnerships held by referring physicians or, alternatively, to refuse to accept referrals
for DHS from these physicians, or take other actions to modify our operations. Any such penalties and restructuring or other required actions could have a material adverse effect on our business, results of operations, financial condition, cash flows, stock price and cash flows.
In June 2018, CMS issued an RFI seeking input on how to address any undue regulatory impact and burden of the Stark Law. CMS placed the RFI in the context of HHS's Regulatory Sprint and stated that it identified aspects of the Stark Law that pose potential barriers to coordinated care. CMS thus sought comments on the impact and burden of the Stark Law, including whether it prevents or inhibits care coordination. Comments closed on August 24, 2018 and CMS has not yet issued proposed or final regulations based on the RFI.reputation.
Fraud and abuse under state law
Some states in which we operate dialysis centers have laws prohibiting physicians from holding financial interests in various types of medical facilities to which they refer patients. Some of these laws could potentially be interpreted broadly as prohibiting physicians who hold shares of our publicly traded stock or are physician owners from referring patients to our dialysis centers if the centers use our laboratory subsidiary to perform laboratory services for their patients or do not otherwise satisfy an exception to the law. States also have laws similar to or stricter than the federal Anti-Kickback Statute that may affect our ability to receive referrals from physicians with whom we have financial relationships, such as our medical directors. Some state anti-kickback laws also include civil and criminal penalties. Some of these laws include exemptions that may be applicable to our medical directors and other physician relationships or for financial interests limited to shares of publicly traded stock. Some, however, may include no explicit exemption for certain types of agreements and/or relationships entered into with physicians. If these laws are interpreted to apply to referring physicians with whom we contract for medical director and similar services, to referring physicians with whom we hold joint ownership interests or to referring physicians who hold interests in DaVita Inc. limited solely to our publicly traded stock, and for which no applicable exception exists, we may be required to terminate or restructure our relationships with or refuse referrals from these referring physicians and could be subject to criminal, civil and administrative sanctions, refund requirements and exclusions from government healthcare programs, including Medicare and Medicaid, which could have a material adverse effect on our business, results of operations, financial condition, cash flows, reputation and stock price.
Corporate Practice of Medicine and Fee-Splitting
There are states in which we provide management services to nephrology physician practicesoperate that have laws that prohibit business entities, such as our Company and our subsidiaries, from practicing medicine, employing physicians to practice medicine or exercising control over medical decisions by physicians (known collectively as the corporate practice of medicine). These states also prohibit entities from engaging in certain financial arrangements, such as fee-splitting, with physicians. In some states these prohibitions are expressly stated in a statute or regulation, while in other states the prohibition is a matter of judicial or regulatory interpretation. Violations of the corporate practice of medicine vary by state and may result in physicians being subject to disciplinary action, as well as to forfeiture of revenues from payors for services rendered. For lay entities, violations may also bring both civil and, in more extreme cases, criminal liability for engaging in medical practice without a license. Some of the relevant laws, regulations, and agency interpretations in states with corporate practice of medicine restrictions have been subject to limited judicial and regulatory interpretation. Moreover, state laws are subject to change.
The
False Claims Act
The federal FCA is a means of policing false bills or false requests for payment in the healthcare delivery system. In part, the FCA authorizes the imposition of up to three times the government’s damages and civil penalties on any person who, among other acts:
Knowingly presents or causes to be presented to the federal government, a false or fraudulent claim for payment or approval;
Knowingly makes, uses or causes to be made or used, a false record or statement material to a false or fraudulent claim;
Knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay the government, or knowingly conceals or knowingly and improperly, avoids or decreases an obligation to pay or transmit money or property to the federal government; or
Conspires to commit the above acts.
In addition, amendments to the FCA impose severe penalties for the knowing and improper retention of overpayments collected from government payors. Under these provisions, within 60 days of identifying and quantifying an overpayment, a provider is required to notify CMS or the Medicare Administrative Contractor of the overpaymentfollow certain notification and the reason for it and return the overpayment.repayment processes. An overpayment impermissibly retained could subject us to liability under the FCA, exclusion from government healthcare programs, and penalties under the federal Civil Monetary Penalty statute. As a result of these provisions, our procedures for identifying and processing overpayments may be subject to greater scrutiny.
TheOn February 1, 2019, the DOJ issued a final rule announcing penalties for a violation of the FCA range from $5,500$11,463 to $11,000 (adjusted for inflation)$22,927 for each false claim, plus up to three times the amount of damages caused by each false claim, which can be as much as the amounts received directly or indirectly from the government for each such false claim. On January 29, 2018, the DOJ issued a final rule announcing adjustments to FCA penalties, under which the per claim penalty range increased to a range from $11,181 to $22,363 for penalties assessed after January 29, 2018, so long as the underlying conduct occurred after November 2, 2015. The federal government has used the FCA to prosecute a wide variety of alleged false claims and fraud allegedly perpetrated against Medicare and state healthcare programs, including coding errors, billing for services not rendered, the submission of false cost reports, billing for services at a higher payment rate than appropriate, billing under a comprehensive code as well as under one or more component codes included in the comprehensive code and billing for care that is not considered medically necessary. The ACA provides that claims tainted by a violation of the federal Anti-Kickback Statute are false for purposes of the FCA. Some courts have held that filing claims or failing to refund amounts collected in violation of the Stark Law can form the basis for liability under the FCA. In addition to the provisions of the FCA, which provide for civil enforcement, the federal government can use several criminal statutes to prosecute persons who are alleged to have submitted false or fraudulent claims for payment to the federal government.
Civil Monetary Penalties Statute
The Civil Monetary Penalties Statute, 42 U.S.C. § 1320a-7a, authorizes the imposition of civil money penalties, assessments, and exclusion against an individual or entity based on a variety of prohibited conduct, including, but not limited to:
Presenting, or causing to be presented, claims for payment to Medicare, Medicaid, or other third-party payors that the individual or entity knows or should know are for an item or service that was not provided as claimed or is false or fraudulent;
Offering remuneration to a Federal health carehealthcare program beneficiary that the individual or entity knows or should know is likely to influence the beneficiary to order or receive health carehealthcare items or services form a particular provider;
Arranging contracts with an entity or individual excluded from participation in the Federal health carehealthcare programs;
Violating the federal Anti-Kickback Statute;
Making, using, or causing to be made or used, a false record or statement material to a false or fraudulent claim for payment for items and services furnished under a Federal health carehealthcare program;
Making, using, or causing to be made any false statement, omission, or misrepresentation of a material fact in any application, bid, or contract to participate or enroll as a provider of services or a supplier under a Federal health carehealthcare program; and
Failing to report and return an overpayment owed to the federal government.
Substantial civil monetary penalties may be imposed under the federal Civil Monetary Penalty Statute and vary, depending on the underlying violation. In addition, an assessment of not more than three times the total amount claimed for each item or service may also apply, and a violator may be subject to exclusion from Federal and state health carehealthcare programs.
Foreign Corrupt Practices Act
We are subject to regulations imposed by the Foreign Corrupt Practices Act (FCPA) in the United States and similar laws in other countries, which generally prohibit companies and those acting on their behalf from making improper payments to foreign government officials for the purpose of obtaining or retaining business. A violation of specific laws and regulations by us and/or our agents or representatives could result in, among other things, the imposition of fines and penalties on us, changes to our business practices, the termination of our contracts or debarment from bidding on contracts, or harm to our reputation, any of which could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Privacy and Security
The Health Insurance Portability and Accountability Act of 1996 and its implementing privacy and security regulations, as amended by the federal Health Information Technology for Economic and Clinical Health Act (HITECH Act), (collectively referred to as HIPAA), require us to provide certain protections to patients and their health information. The HIPAA privacy and security regulations extensively regulate the use and disclosure of PHI and require covered entities, which include healthcare providers, to implement and maintain administrative, physical and technical safeguards to protect the security of such information. Additional security requirements apply to electronic PHI. These regulations also provide patients with substantive rights with respect to their health information.
The HIPAA privacy and security regulations also require us to enter into written agreements with certain contractors, known as business associates, to whom we disclose PHI. Covered entities may be subject to penalties for, among other activities, failing to enter into a business associate agreement where required by law or as a result of a business associate violating HIPAA if the business associate is found to be an agent of the covered entity and acting within the scope of the agency. Business associates are also directly subject to liability under the HIPAA privacy and security regulations. In instances where we act as a business associate to a covered entity, there is the potential for additional liability beyond our status as a covered entity.
Covered entities must report breaches of unsecured PHI to affected individuals without unreasonable delay but not to exceed 60 days of discovery of the breach by a covered entity or its agents. Notification must also be made to the HHS, and, for breaches of unsecured PHI involving more than 500 residents of a state or jurisdiction, to the media. All non-permitted uses or disclosures of unsecured PHI are presumed to be breaches unless the covered entity or business associate establishes that there is a low probability the information has been compromised. Various state laws and regulations may also require us to notify affected individuals in the event of a data breach involving individually identifiable information without regard to whether there is a low probability of the information being compromised.
Penalties for impermissible use or disclosure of PHI were increased by the HITECH Act by imposing tiered penalties of more than $50,000 per violation and up to $1.5 million per year for identical violations. In addition, HIPAA provides for criminal penalties of up to $250,000 and ten years in prison, with the severest penalties for obtaining and disclosing PHI with the intent to sell, transfer or use such information for commercial advantage, personal gain or malicious harm. Further, state attorneys general may bring civil actions seeking either injunction or damages in response to violations of the HIPAA privacy and security regulations that threaten the privacy of state residents.
In addition to the protection of PHI, healthcare companies must meet privacy and security requirements applicable to other categories of personal information. Companies may process consumer information in conjunction with website and corporate operations. They may also handle employee information, including Social Security Numbers, payroll information, and other categories of sensitive information, to further their employment practices. In processing this additional information, companies must comply with the privacy and security requirements of consumer protection laws, labor and employment laws, and its publicly-available notices.
Data protection laws are evolving globally, and may add additional compliance costs and legal risks to our international operations. In Europe, the General Data Protection Regulation (GDPR) became effective on May 25, 2018. The GDPR applies to entities that are established in the European Union (EU), as well as extends the scope of EU data protection laws to foreign companies processing data of individuals in the EU. The GDPR imposes a comprehensive data protection regime with the potential for regulatory fines as well as data breach litigation by impacted data subjects. Under GDPR, regulatory penalties may be passed by data protection authorities for up to the greater of 4% of worldwide turnover or €20 million. The costs of compliance with, and other burdens imposed by, the GDPR and other new laws, regulations and policies implementing the
GDPR may impact our European operations and/or limit the ways in which we can provide services or use personal data collected while providing services. If we fail to comply with the requirements of GDPR, we could be subject to penalties that would have a material adverse impact on our business, results of operations, financial condition and cash flows.
Data protection laws are also evolving nationally, and may add additional compliance costs and legal risks to our U.S. operations. For example, the California legislature recently passed the California Consumer Protection Act (CCPA), which is scheduled to becomebecame effective January 1, 2020. The CCPA is a privacy billlaw that requires certain companies doing business in California to disclose informationenhance privacy disclosures regarding the collection, use and usesharing of a consumer's personal data and to delete a consumer's data upon request.data. The ActCCPA grants consumers additional privacy rights that are broader than current Federal privacy rights. The CCPA also permits the imposition of civil penalties, grants enforcement authority to the state Attorney General and expands existing state security laws by providingprovides a private right of action for consumers where certain personal information is breached due to unreasonable information security practices. Several other states, including Nevada and Maine, have passed data protection laws similar to CCPA. These laws would impose organizational requirements and grant individual rights that are comparable to those established in certain circumstances where consumer data isthe CCPA, and other states may pass similar legislation in the future.
In addition to the breach reporting requirements under HIPAA, companies are subject to state breach notification laws. Each state enforces a breach. Welaw requiring companies to provide notice of a breach of certain categories of sensitive personal information, e.g. Social Security Number, financial account information, or username and password. A company impacted by a breach must notify affected individuals, attorney’s general or other agencies within a certain time frame. If a company does not provide timely notice with the required content, it may be subject to civil penalties brought by attorney’s generals or affected individuals.
Companies must also safeguard personal information in accordance with federal and state data security laws and requirements. These requirements are still evaluating whether and how this rule will impact our U.S.akin to the HIPAA requirements to safeguard PHI, described above. The Federal Trade Commission, for example, requires companies to implement reasonable data security measures relative to its operations and /or limit the waysvolume and complexity of the information it processes. Also, various state data security laws require companies to safeguard data with technical security controls and underlying policies and processes. Due to the constant changes in which we can provide servicesthe data security space, companies must continuously review and update data security practices to mitigate any potential operational or use personallegal liabilities stemming from data collected while providing services.security risks.
Healthcare reform
In March 2010, broad healthcare reform legislation was enacted in the U.S. through the ACA. Although manyACA, but the ACA’s regulatory framework and other related healthcare reforms continue to evolve as a result of executive, legislative, regulatory and administrative developments and judicial proceedings. As such, there remains considerable uncertainty surrounding the provisionscontinued implementation of the ACA did not take effect immediately and continuewhat similar healthcare reform measures or other changes might be enacted at the federal and/or state level. While legislative attempts to be implemented, and somecompletely repeal the ACA have been unsuccessful to date, there have been multiple attempts to repeal or amend the ACA through legislative action and may be modified before or during their implementation,legal challenges. As a result, any specific changes to the ACA and related regulatory framework, as well as the timing of any such changes, are not possible to predict. Nevertheless, previously enacted reforms and future changes could continue to have an impacta material adverse effect on our business, in a numberresults of ways. We cannot predict how employers, private payors or persons buying insurance might react to federaloperations, financial condition and state healthcare reform legislation or what form many of these regulations will take before implementation.
The ACA introduced healthcarecash flows. For example, the ACA's health insurance exchanges, which provide a marketplace for eligible individuals and small employers to purchase healthcarehealth insurance, initially increased the accessibility and availability of commercial insurance. The business and regulatory environment continues to evolveHowever, certain legislative developments, such as the repeal of the individual mandate under the Tax Cuts and Jobs Act of 2017, have adversely impacted the risk pool in certain exchange markets, and the nature and extent of commercial payor participation in the exchanges mature,has fluctuated as a result. Other proposed legislative developments or administrative decisions, such as moving to a universal health insurance or “single payor” system whereby health insurance is provided to all Americans by the government under government programs, or lowering or eliminating the cost-sharing reduction subsidies under the ACA, could impact the percentage of our patients with higher-paying commercial health insurance, impact the scope of coverage under commercial health plans and statutes and regulations are challenged, changed and enforced.increase our expenses, among other things.
The ACA also requires that all non-grandfathered individual and small group health plans sold in a state, including plans sold through the state-based exchanges created pursuant to the healthcare reform laws, cover essential health benefits (EHBs) in ten general categories. The scope of the benefits is intended to equal the scope of benefits under a typical employer plan.
On February 25, 2013, HHS issued the final rule governing the standards applicable to EHB benchmark plans, including new definitions and actuarial value requirements and methodology, and published a list of plan benchmark options that states can use to develop EHBs. The rule describes specific coverage requirements that (i) prohibit discrimination against individuals because of pre-existing or chronic conditions, (ii) ensure network adequacy of essential health providers, and (iii) prohibit benefit designs that limit enrollment and that prohibit access to care for enrollees. Subsequent regulations relevant to the EHB have continued the benchmark plan approach for 2016 and future years and have implemented clarifications and modifications
to the existing EHB regulations, including the prohibition on discrimination, network adequacy standards and other requirements. In recent years, CMS has issued an annual Notice of Benefit and Payment Parameters rulemaking and related guidance setting forth standards for insurance plans provided through the exchanges.
Other aspects of the 2010 healthcare reform lawsACA may affect our business as well, including provisions that impact the Medicare and Medicaid programs. These and other provisions ofFor example, the ACA remain subject to ongoing uncertainty due to developing regulations and clarifications, including those described above, as well as continuing political and legal challenges at bothbroadened the federal and state levels. Republicans control the Executive branch and Senate, and since 2016 have implemented both administrative and legislative initiatives that have had adverse impacts on the ACA and its programs. For example, in October 2017, the federal government announced that cost-sharing reduction payments to insurers would end, effective immediately, unless Congress appropriated the funds, and, in December 2017, Congress passed the Tax Cuts and Jobs Act, which includes a provision that eliminates the penaltypotential for penalties under the ACA’s individual mandateFCA for individuals who failthe knowing and improper retention of overpayments collected from government payors and reduced the timeline to obtain a qualifying health insurance plan and could impactfile Medicare claims. Nevertheless, as an example of how the future statehealthcare regulatory environment continues to change in the wake of the exchanges. Moreover,ACA, in February 2018 Congress passed the BBA, which among other things,included a provision that repealed thean Independent Payment Advisory Board that wasinitially established by the ACA and intended to reduce the rate of growth in Medicare spending by extending sequestration cuts to Medicare payments through fiscal year 2027.ACA. While certain provisions of the BBA may increase the scope of benefits available for certain chronically ill federal health carehealthcare program beneficiaries beginning in 2020, the ultimate impact of such changes cannot be predicted. While there
New models of care and Medicare and Medicaid program reforms
CMMI is working with various healthcare providers to develop, refine and implement ACOs and other innovative models of care for Medicare and Medicaid beneficiaries. We are uncertain of the extent to which the long-term operation and evolution of these models of care, including ACOs, the CEC Model (which includes the development of ESCOs), the Duals Demonstration, or other models, will impact the healthcare market over time. We may choose to participate in one or several of these models either as a partner with other providers or independently. We are currently participating in the CEC Model with CMMI, including with organizations in Arizona, Florida, and adjacent markets in New Jersey and Pennsylvania. We may choose to participate in additional models either as a partner with other providers or independently. Even in areas where we are not directly participating in these or other CMMI models, some of our patients may be significant changesassigned to an ACO, another ESRD Care Model, or another program, in which case the quality and cost of care that we furnish will be included in an ACO's, another ESRD Care Model's, or other program's calculations.
In addition, as noted above, federal bipartisan legislation related to full capitation demonstration for ESRD was proposed in late 2017. Legislation, which has yet to secure introduction to the healthcare environment116th Congress, would build on prior coordinated care models, such as the CEC Model, and would establish a demonstration program for the provision of integrated care to Medicare ESRD patients. We have made and continue to make investments in the future, the specific changes and their timing are not yet apparent. As a result,building our integrated care capabilities, but there can be no assurances that initiatives such as this or similar legislation will be introduced or passed into law. If such legislation is considerable uncertainty regarding the future with respect to the exchanges, and, indeed, many core aspects of the current health care marketplace. While specific changes and their timing are not yet apparent, such changes could lower our reimbursement rates or increase our expenses. Any failurepassed, there can be no assurances that we will be able to successfully implementexecute on the required strategic initiatives that respondwould allow us to future legislative, regulatory,provide a competitive and executive changessuccessful integrated care program on the broader scale contemplated by this legislation, and in the desired time frame. Additionally, the ultimate terms and conditions of any such potential legislation remain unclear-for example, our costs of care could exceed our associated reimbursement rates under such legislation.
More recently, the 2019 Executive Order directed CMS to create payment models to evaluate the effects of creating payment incentives for the greater use of home dialysis and kidney transplants for those already on dialysis. CMS subsequently announced in a proposed rule the ESRD Treatment Choices (ETC) mandatory payment model, which will be administered through the CMMI and is proposed to launch in 50% of dialysis clinics across the country in 2020. Under the proposed rule, which was subject to a comment period that ended in September 2019, CMS would select ESRD facilities and clinicians to participate in the model according to their location in randomly selected geographic areas and would require participation to minimize the potential for selection effect. We support the administration's emphasis on and move towards home dialysis and kidney transplant; however, we believe that if launched as proposed, the ETC model would negatively impact patient clinical care, Medicare coverage and/or payment for ESRD claims and, depending on the final requirements of the ETC model, ultimately could have a material adverse effect on our business, results of operations, financial condition and cash flows.
In connection with the 2019 Executive Order, CMS also announced the implementation of four voluntary payment models with the stated goal of helping healthcare providers reduce the cost and improve the quality of care for patients with late-stage chronic kidney disease and ESRD. CMS has stated these payment models are aimed to prevent or delay the need for dialysis and encourage kidney transplantation. These payment models are scheduled to run from 2020 through December 2023. In October 2019, CMS released initial guidance around the voluntary payment models, and we expect additional guidance in the coming months. The details and specifics of these voluntary models have not yet been provided, and we anticipate that such details will be released in the second half of 2020. We continue to assess these models and their viability for us and the industry, and our assessment will continue to develop as additional details become available.
The 21st Century Cures Act, enacted in December 2016, includes a provision that will allow Medicare beneficiaries with ESRD to choose to obtain coverage under a Medicare Advantage (MA) plan, which could broaden access to certain enhanced benefits offered by MA plans. We continue to evaluate the potential impact of this change in benefit eligibility, as there is significant uncertainty as to how many or which newly eligible ESRD patients will seek to enroll in MA plans for their ESRD
benefits and how quickly any such changes would occur. Until the effective date of this law, January 1, 2021, this choice is available only to Medicare beneficiaries without ESRD.
For additional discussion on the risks associated with the evolving payment and regulatory landscape for kidney care, see the discussion in Item 1A Risk Factors, including the discussion under the heading, “Changes in federal and state healthcare legislation or regulations could have a material adverse effect on our business, results of operations, financial condition and cash flows.”
Other regulations
Our U.S. dialysis and related lab services operations are subject to various state hazardous waste and non-hazardous medical waste disposal laws. These laws do not classify as hazardous most of the waste produced from dialysis services. Occupational Safety and Health Administration regulations require employers to provide workers who are occupationally subject to blood or other potentially infectious materials with prescribed protections. These regulatory requirements apply to all healthcare facilities, including dialysis centers, and require employers to make a determination as to which employees may be exposed to blood or other potentially infectious materials and to have in effect a written exposure control plan. In addition, employers are required to provide or employ hepatitis B vaccinations, personal protective equipment and other safety devices, infection control training, post-exposure evaluation and follow-up, waste disposal techniques and procedures and work practice controls. Employers are also required to comply with various record-keeping requirements.
In addition, a few states in which we do business have certificate of need programs regulating the establishment or expansion of healthcare facilities, including dialysis centers.
Corporate compliance program
Our businesses are subject to extensive regulations. Management has designed and locationimplemented a corporate compliance program as part of our U.S. dialysis centerscommitment to comply fully with applicable criminal, civil and administrative laws and regulations and to maintain the high standards of conduct we expect from all of our teammates. We continuously review this program and enhance it as appropriate. The primary purposes of the program include:
TypicallyAssessing and identifying risks for existing and new businesses;
Training and educating our teammates and affiliated professionals to promote awareness of legal and regulatory requirements, a culture of compliance, and the necessity of complying with all these laws;
Developing and implementing compliance policies and procedures and creating controls to support compliance with these laws and our policies and procedures;
Auditing and monitoring the activities of our operating units and business support functions to identify and mitigate risks and potential instances of noncompliance in a timely manner; and
Ensuring that we promptly take steps to resolve any instances of noncompliance and address areas of weakness or potential noncompliance.
We have a code of conduct that each of our teammates, members of our Board of Directors, affiliated professionals and certain third parties must follow, and we have an anonymous compliance hotline for teammates and patients to report potential instances of noncompliance that is managed by a third party. Our Chief Compliance Officer administers the compliance program. The Chief Compliance Officer reports directly to our Chief Executive Officer and the Chair of the Compliance Committee of our Board of Directors (Board Compliance Committee).
On October 22, 2014, DaVita entered into a Corporate Integrity Agreement (CIA) with HHS and the OIG. The term of the CIA expired on October 22, 2019, and the independent monitor is completing both her annual review and annual report. We are ablein the process of preparing our final annual report, which we will submit to increaseHHA-OIG by March 11, 2020. The CIA (i) required that we maintain certain elements of our capacitycompliance programs; (ii) imposed certain expanded compliance-related requirements during the term of the CIA; (iii) required ongoing monitoring and reporting by extending hours at our existing dialysis centers, expanding our existing dialysis centers, relocating our dialysis centers, developing new dialysis centersan independent monitor, imposed certain reporting, certification, records retention and by acquiring dialysis centers. The developmenttraining obligations, allocated certain oversight responsibility to the Board’s Compliance Committee, and necessitated the creation of a typical outpatient dialysis center by us generally requires approximately $2.2 million for leasehold improvementsManagement Compliance Committee and other capital expenditures. Based onthe retention of an independent compliance advisor to the Board; and (iv) contained certain business restrictions related to a subset of our experience, a new outpatient dialysis center typically opens within a year after the property lease is signed, normally achieves operating profitability in the second year after Medicare certification and normally reaches maturity within three to five years. Acquiring an existing outpatient dialysis center requires a substantially greater initial investment, but profitability and cash flows are generally accelerated and more predictable. To a limited extent, we enter into agreements to provide management and administrative services to outpatient dialysis centers in which we own a noncontrolling equity investment or which are wholly-owned by third parties in return for management fees, which are typically based on a percentage of revenues or cash collections of the managed center’s operations.joint venture arrangements.
The table below showsUntil OIG closes out the growth of our U.S. dialysis operations by number of dialysis centers.
|
| | | | | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| Number of centers at beginning of year | 2,510 |
| | 2,350 |
| | 2,251 |
| | 2,179 |
| | 2,074 |
|
| Acquired centers | 18 |
| | 66 |
| | 8 |
| | 6 |
| | 18 |
|
| Developed centers | 152 |
| | 121 |
| | 100 |
| | 72 |
| | 105 |
|
Net change in centers with management and administrative
services agreements(1) | (5 | ) | | (2 | ) | | — |
| | 2 |
| | — |
|
Sold and closed centers(2)(3) | (9 | ) | | (15 | ) | | (4 | ) | | (3 | ) | | (2 | ) |
Closed centers(4) | (2 | ) | | (10 | ) | | (5 | ) | | (5 | ) | | (16 | ) |
| Number of centers at end of year | 2,664 |
| | 2,510 |
| | 2,350 |
| | 2,251 |
| | 2,179 |
|
| |
(1) | Represents dialysis centers in which we own a noncontrolling equity investment or which are wholly-owned by third parties, and also includes dialysis centers we deconsolidated and transferred to management services agreements. |
| |
(2) | Includes centers that were divested as a part of our Renal Ventures acquisition in 2017. |
| |
(3) | Represents dialysis centers that were sold and/or closed for which patients were not retained. |
| |
(4) | Represents dialysis centers that were closed for which the majority of patients were retained and transferred to one of our other existing outpatient dialysis centers. |
As of December 31, 2018, we operated or provided administrative services to a total of 2,664 U.S. outpatient dialysis centers. A total of 2,630 of such centers are consolidated in our financial statements. Of the remaining 34 unconsolidated U.S. outpatient dialysis centers, we own a noncontrolling interest in 30 centers and provide management and administrative services to four centers that are wholly-owned by third parties. The locationsCIA following review of the 2,630 U.S. outpatient dialysis centers consolidatedaforementioned final annual reports, OIG retains the right to impose penalties, sanctions and other consequences on us under the CIA, including, without limitation, potential exclusion from federal healthcare programs.
Any future penalties, sanctions or other consequences under the CIA or otherwise could be more severe in our financial statements at December 31, 2018 were as follows:
Ancillary services and strategic initiatives businesses, including our international operations
As of December 31, 2018, our ancillary services and strategic initiatives consisted primarily of disease management services, vascular access services, clinical research programs, physician services, ESRD seamless care organizations, comprehensive care, and our international operations and relate primarilycircumstances in which OIG or a similar regulatory authority determines that we have repeatedly failed to comply with applicable laws, regulations or requirements that apply to our core business, of providing kidney care services.
Ancillary servicesincluding substantial penalties and strategic initiatives consist primarily of the following:
| |
• | Disease management services. VillageHealth DM, LLC doing business as DaVita Integrated Kidney Care (DaVita IKC) provides advanced integrated care management services to health plans and governmentexclusion from participation in federal healthcare programs for members/beneficiaries diagnosed with ESRD, chronic kidney failure, and/or poly-comorbid conditions. Through a combination of clinical coordination, innovative interventions, medical claims analysis and information technology, we endeavor to assist our customers and patients in obtaining superior renal healthcare and improved clinical outcomes, as well as helping to reduce overall medical costs. Integrated kidney care management revenues from commercial and Medicare Advantage insurers can be based upon either an established contract fee recognized as earned over the contract period, or related to the operation of value-based programs, including pay for performance, shared savings, and capitation contracts. DaVita IKC also operates Medicare Advantage ESRD Special Needs Plans in partnership with payors that work with CMS to provide ESRD patients full service healthcare. We are at risk for all medical costs of the program in excess of the capitation payments. Furthermore, in October 2015, DaVita IKC entered into management service agreements to support three ESCO joint ventures in which we are an investor through certain wholly- or majority-owned dialysis clinics.
|
| |
• | Vascular access services. Lifeline provides management and administrative services to physician-owned vascular access clinics that provide vascular services for dialysis and other patients. Lifeline is also the majority-owner of three vascular access clinics. Management fees generated from providing management and administrative services are recognized as earned typically based on a percentage of revenues or cash collections generated by the clinics. Revenues associated with the vascular access clinics that are majority-owned are recognized in the period when the services are provided.
|
| |
• | Clinical research programs. DaVita Clinical Research (DCR) is a provider-based specialty clinical research organization with a full spectrum of services for clinical drug research and device development. DCR uses its extensive, applied database and real-world healthcare experience to assist in the design, recruitment and completion of retrospective and prospective pragmatic and clinical trials. Revenues are based upon an established fee per study, as determined by contract with drug companies and other sponsors and are recognized as earned according to the contract terms.
|
| |
• | Physician services. Nephrology Practice Solutions (NPS) is an independent business that partners with physicians committed to providing outstanding clinical and integrated care to patients. NPS provides nephrologist recruitment and staffing services in select markets which are billed on a per search basis. NPS also offers physician practice management services to nephrologists under administrative services agreements. These services include physician practice management, billing and collections, credentialing, coding, and other support services that enable physician practices to increase efficiency and manage their administrative needs. Additionally, NPS owns and operates nephrology practices in multiple states. Fees generated from these services are recognized as earned typically based upon flat fees or cash collections generated by the physician practice.
|
| |
• | ESRD Seamless Care Organization joint ventures (ESCO JVs). In October 2015, certain of our dialysis clinics entered into partnerships with various nephrology practices, health systems, and other providers to establish three ESCO JVs in Phoenix-Tucson Arizona, South Florida, and Philadelphia Pennsylvania-Camden, New Jersey. The ESCO JVs were formed under the CMS Innovation Center’s Comprehensive ESRD Care (CEC) Model, a demonstration to assess the impact of care coordination for ESRD patients in a dialysis-center oriented ACO setting. Each ESCO JV has a shared risk arrangement with CMS and the programs are evaluated on a performance year basis. The delivery of improved quality outcomes for patients and program savings depend on the contributions of the dialysis center teammates, nephrologists, health system and hospital partners, pharmacy providers, other primary care and specialty care providers and facilities, and integrated care management support from DaVita IKC, which is also the manager of the ESCO JVs. In October 2017, CMS published the results for the first performance year, covering the period from October 2015 to December 2016, and all three ESCO JVs earned shared savings payments. Results for 2017 and 2018 performance years are anticipated to be released in 2019.
|
| |
• | Comprehensive care. DaVita Health Solutions was created to provide comprehensive care through house calls and post-acute care programs to help chronically ill patients through use of community based, physician- and nurse practitioner-led care teams to deliver medical, behavioral, social and palliative care within the patient's home or skilled nursing facility.
|
During 2018, we transitioned the customer service and fulfillment functions of our pharmacy business, DaVita Rx, to third parties and ceased our related distribution operations. DaVita Rx was a pharmacy that specialized in providing oral medications and medication management services to patients with ESRD. In addition, effective June 1, 2018, we sold 100% of the stock of Paladina Health, our direct primary care business. For additional discussion of our ancillary services and strategic initiatives businesses, see Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations.
International dialysis operations
As of December 31, 2018, we operated or provided administrative services to a total of 241 outpatient dialysis centers, which includes consolidated and nonconsolidated centers located in nine countries outside of the U.S., serving approximately 25,000 patients. Our international dialysis operations have continued to grow steadily and expand as a result of developing and acquiring outpatient dialysis centers in various strategic markets. Our international operations are included as part of our ancillary services and strategic initiatives. The table below summarizes the number of locations of our international outpatient dialysis centers.
|
| | | | | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| Number of centers at beginning of year | 237 |
| | 154 |
| | 118 |
| | 91 |
| | 73 |
|
| Acquired centers | 28 |
| | 68 |
| | 21 |
| | 21 |
| | 9 |
|
| Developed and hospital operated centers | 3 |
| | 8 |
| | 12 |
| | 7 |
| | 11 |
|
| Managed centers, net | — |
| | — |
| | — |
| | (1 | ) | | — |
|
| Closed centers | (2 | ) | | (1 | ) | | — |
| | — |
| | (2 | ) |
Net change in Asia Pacific Joint Venture (APAC JV) operated centers(1) | (25 | ) | | 8 |
| | 3 |
| | — |
| | — |
|
| Number of centers at end of year | 241 |
| | 237 |
| | 154 |
| | 118 |
| | 91 |
|
| |
(1) | In 2016 we deconsolidated the APAC JV. |
The locations of our international outpatient dialysis centers are as follows:
|
| | |
Germany | 56 |
|
Poland | 51 |
|
Malaysia(1)
| 40 |
|
Brazil | 33 |
|
Saudi Arabia | 23 |
|
Colombia | 20 |
|
Portugal | 9 |
|
Taiwan(1)
| 7 |
|
China(1)
| 2 |
|
| 241 |
|
| |
(1) | Includes centers that are operated or managed by our APAC JV. |
Corporate Administrative Support
Corporate administrative support consists primarily of labor, benefits and long-term incentive compensation costs for departments which provide support to all of our different operating lines of business. These expenses are included in our consolidated general and administrative expenses and are partially offset by the allocation of management fees.
DaVita Medical Group (DMG) Division
In December 2017, we entered into an agreement to sell our DMG division to Optum, a subsidiary of UnitedHealth Group Inc., subject to receipt of required regulatory approvals and other customary closing conditions. As a result, the DMG business has been classified as held for sale and its results of operations are reported as discontinued operations.
DMG business overview
DMG is a patient- and physician-focused integrated healthcare delivery and management company with over two decades of experience providing coordinated, outcomes-based medical care in a cost-effective manner. As of December 31, 2018, DMG served approximately 753,800 members under its care in southern California, central and south Florida, southern Nevada and central New Mexico through capitation contracts with some of the nation’s leading health plans. Of these members, approximately 321,500 individuals were patients enrolled in Medicare and Medicare Advantage, and the remaining approximately 432,300 individuals were managed care members whose health coverage is provided through their employer or who have individually acquired health coverage directly from a health plan or as a result of their eligibility for Medicaid benefits. In addition to its managed care business, during the year ended December 31, 2018, DMG provided care across all markets to approximately 932,700 patients whose health coverage is structured on a FFS basis, including patients enrolled through traditional Medicare and Medicaid programs, preferred provider organizations and other third party payors.
DMG patients as well as the patients of DMG’s associated physicians, physician groups and IPAs benefit from an integrated approach to medical care that places the physician at the center of patient care. As of December 31, 2018, DMG delivered services to its members via a network of approximately 750 primary care physicians, over 3,200 associated group and other network primary care physicians, approximately 185 network hospitals, and several thousand associated group and network specialists. Together with hundreds of case managers, registered nurses and other care coordinators, these medical professionals utilize a comprehensive information technology system, sophisticated risk management techniques and clinical protocols to provide high-quality, cost-effective care to DMG’s members.
U.S. healthcare spending has increased steadily over the past twenty years. These increases have been driven, in part, by the aging of the baby boomer generation, unhealthy behavioral and lifestyle choices in terms of exercise and diet, rapidly increasing costs in medical technology and pharmaceutical research, and provider reimbursement structures that may promote volume over quality in a FFS environment. These factors, as well as the steady growth of the U.S. population, have made the healthcare industry a growing market. CMS reported that in 2017 healthcare accounted for 17.9% of the U.S. gross domestic product and that healthcare spending increased 3.9% to reach $3.5 trillion. Medicare spending grew 4.2% to $706 billion in 2017 or 20% of National Health Expenditures, according to CMS. Medicare’s share of the federal budget was approximately 17.1% in 2018 according to the Congressional Budget Office (CBO). Medicare is frequently the focus of discussions on how to moderate the growth of both federal spending and healthcare spending in the U.S.
Growth in Medicare spending is expected to continue due to demographic changes. According to the U.S. Census Bureau, the U.S. population aged 65 and over is expected to be 83.7 million in 2050 — almost double its estimated population of 43.1 million in 2012.
Medicare Advantage is an alternative to the traditional FFS Medicare program, which permits Medicare beneficiaries to receive benefits from a managed care health plan. Medicare Advantage plans contract with CMS to provide benefits that are at least comparable to those offered under the traditional FFS Medicare program in exchange for a fixed per-member monthly premium payment from CMS. The monthly premium varies based on the county in which the member resides, further adjusted to reflect the plan members’ expected medical cost risk. Individuals who elect to participate in the Medicare Advantage program typically receive greater benefits than traditional FFS Medicare Part B beneficiaries, including additional preventive services, vision, dental and prescription drug benefits, and often have lower deductibles and co-payments than traditional FFS Medicare.
CMS pays Medicare Advantage health plans under a bidding process. Plans bid against county-level benchmarks. If a plan’s bid is higher than the benchmark, enrollees pay the difference in the form of a monthly premium. If the bid is lower than the benchmark, the plan receives the difference between its payment amount and its bid as a rebate, which must be returned to enrollees in the form of additional benefits, reduced premiums, or lower cost sharing.
Managed care health plans were developed, primarily during the 1980s, in an attempt to mitigate the rising cost of providing healthcare benefits to populations covered by traditional health insurance. These managed care health plans often enroll members through their employers. As a result of the prevalence of these health plans, many seniors now becoming eligible for Medicare have been interacting with managed care companies through their employers for the last 30 years. Individuals turning 65 now are likely to be far more familiar with the managed care setting than previous Medicare
populations. According to Kaiser Family Foundation, in 2018, Medicare Advantage represented 34% of total Medicare members, creating a significant opportunity for additional Medicare Advantage penetration of newly eligible seniors.
In an effort to reduce the number of uninsured and to begin to control healthcare expenditures, President Obama signed the ACA into law in March 2010, which was affirmed, in substantial part, by the U.S. Supreme Court in June 2012. As of the end of 2017, the number of uninsured nonelderly Americans was 28.5 million, a decrease of over 13 million since 2013. These previously uninsured Americans and potentially newly eligible Medicaid beneficiaries represent a significant new market opportunity for health plans. We believe that health plans looking to cover these newly eligible individuals under fixed premium arrangements will seek provider arrangements that can effectively manage the cost and quality of the care being provided to these newly eligible individuals, although the 2016 Presidential and Congressional elections and subsequent developments, including recent federal tax reform legislation and legal challenges to the law, have caused the future state of the ACA to become less clear.
One of the primary ways in which the ACA funded expanded health insurance coverage is through cuts in Medicare Advantage reimbursement. County benchmarks have transitioned to a system in which each county’s benchmark is a certain percentage (ranging from 95% to 115%) of FFS Medicare. In a March 2018 report to Congress, the Medicare Payment Advisory Commission (MedPAC) estimated that 2018 Medicare Advantage benchmarks (including quality bonuses), bids, and payments would average 107%, 90%, and 101% of FFS spending, respectively.
Despite the fact that the plan bids average less than FFS spending, payments for enrollees in these plans usually exceed FFS spending because the benchmarks are high relative to FFS spending. For example, health maintenance organizations (HMOs) as a group bid an average of 88% of FFS spending, yet 2018 payments for HMO enrollees are estimated to average 100% of FFS spending (including the quality bonuses).
Nonetheless, changes in benchmarks and/or bids that lower payments to Medicare Advantage plans could adversely affect DMG’s business, results of operations, financial condition and cash flows.
Many health plans recognize both the opportunity for growth from senior members as well as the potential risks and costs associated with managing additional senior members. In regions operated by DMG and numerous other markets, many health plans subcontract a significant portion of the responsibility for managing patient care to integrated medical networks such as DMG. These integrated healthcare networks, whether medical groups or IPAs, offer a comprehensive medical delivery system and sophisticated care management knowledge and infrastructure to more efficiently provide for the healthcare needs of the population enrolled with that health plan. While reimbursement models for these arrangements vary around the country, health plans in California, Florida, Nevada and New Mexico often prospectively pay the integrated healthcare network a fixed Per Member Per Month (PMPM) amount, or capitation payment, which is often based on a percentage of the amount received by the health plan. The capitation payment is for much-and sometimes virtually all-of the care needs of the applicable membership. Capitation payments to integrated healthcare networks, in aggregate, represent a prospective budget from which the network manages care-related expenses on behalf of the population enrolled with that network. To the extent that these networks manage care-related expenses below the capitated levels, the network realizes an operating profit. On the other hand, if care-related expenses exceed projected levels, the network will realize an operating deficit. Since premiums paid represent a significant amount per person, there is a significant revenue opportunity for an integrated medical network like DMG that is able to effectively manage its costs under a capitated arrangement.
Integrated medical networks, such as DMG, that have scale are positioned to spread an individual member’s cost exposure across a wider population and realize the benefits of pooling medical risk among large numbers of patients. In addition, integrated medical networks with years of managed care experience can utilize their sizeable medical experience data to identify specific medical care and quality management strategies and interventions for potential high cost cases and aggressively manage them to improve the health of its population base and, thus, lower cost. Many integrated medical networks, like DMG, also have established physician performance metrics that allow them to monitor quality and service outcomes achieved by participating physicians in order to reward efficient, high quality care delivered to members and initiate improvement efforts for physicians whose results can be enhanced.
Healthcare reform
The U.S. healthcare system, including the Medicare Advantage program, is subject to a broad array of new laws and regulations as a result of the ACA. This legislation made significant changes to the Medicare program and to the health insurance market overall. The ACA is considered by some to be the most dramatic change to the U.S. healthcare system in decades. The U.S. Supreme Court found that the individual mandate to obtain health insurance coverage under this legislation is constitutional and also found that the expanded Medicaid benefit included in the legislation is constitutional if states can opt out of the expanded Medicaid benefit without losing their funding under the pre-reform Medicaid program. In a separate,
subsequent case, the U.S. Supreme Court also upheld the use of subsidies to individuals in federally-facilitated healthcare exchanges, rejecting an argument that such subsidies would apply only in the state-run healthcare exchanges.
The ACA reflects sweeping legislation that, if fully implemented, may have a significant impact on the U.S. healthcare system generally and the operations of DMG’s business. There are numerous steps required to implement the ACA, and implementation remains ongoing and uncertain. Congress also has enacted, and may continue to seek, legislative changes that alter, delay, or eliminate some of the ACA's provisions. For example, under the 2016 omnibus budget agreement, Congress voted to delay certain new taxes that the ACA had enacted, including the excise tax on certain high-cost health plans, the medical device tax, and the tax on health insurers. In addition, the 2016 Presidential and Congressional elections and subsequent developments have caused the future state of the ACA to be unclear. In October 2017, the federal government announced that cost-sharing reduction payments to insurers would end, effective immediately, unless Congress appropriated the funds, and, in December 2017, Congress passed the Tax Cuts and Jobs Act, which includes a provision that eliminates the penalty under the ACA’s individual mandate for individuals who fail to obtain a qualifying health insurance plan and could impact the future state of the exchanges. Further, in February 2018, Congress passed the BBA, which, among other things, repealed the Independent Payment Advisory Board that was established by the ACA and intended to reduce the rate of growth in Medicare spending by extending sequestration cuts to Medicare payments through fiscal year 2027. While certain provisions of the BBA may increase the scope of benefits available for certain chronically ill federal health care program beneficiaries beginning in 2020, the ultimate impact of such changes cannot be predicted. While specific changes and their timing are not yet apparent, the enacted reforms as well as future legislative, regulatory, judicial or executive changes could have a material adverse effect on our business, results of operations, financial condition and cash flows, including lowering our reimbursement rates and increasing our expenses.
One provision of the ACA required CMS to establish a Medicare Shared Savings Program (MSSP) that promotes accountability and coordination of care through the creation of ACOs. The program allows certain providers and suppliers (including hospitals, physicians and other designated professionals) to voluntarily form ACOs and work together along with other ACO participants to invest in infrastructure and redesign delivery processes to achieve high quality and efficient delivery of services. In 2017, HCP ACO California, LLC (formerly DaVita Medical ACO California, LLC) doing business as HealthCare Partners ACO participated in its first year of the CMS Innovation Center's Next Generation ACO model and achieved $11.8 million in savings. HealthCare Partners ACO will continue to participate in the Next Generation program for both 2018 and 2019. Results for 2018 participation will be available in 2019. In December 2018, CMS issued a final rule for the MSSP, which among other things, requires ACOs to accept a two-sided risk model (as opposed to a one-sided model), wherein ACOs need to share in the financial risk of their patients' healthcare spending (i.e., shared losses) in addition to shared savings. This rule could negatively impact the revenue and profitability of DMG's MSSP ACO.
Payor environment
Government programs
DMG derives a significant portion of its revenues from services rendered to beneficiaries of Medicare (including Medicare Advantage), Medicaid, and other governmental healthcare programs.
Medicare. The Medicare program was established in 1965 and became effective in 1967 as a federally funded U.S. health insurance program for persons aged 65 and older, and it was later expanded to include individuals with ESRD and certain disabled persons, regardless of income or age. Since its formation, Medicare has grown to an approximately $706 billion program in 2017, covering approximately 60 million Americans and, based on the growing number of eligible beneficiaries and increases in the cost of healthcare, CBO projects that net Medicare spending will increase from $585 billion in 2018 to $1.2 trillion in 2028.
Initially, Medicare was offered only on a FFS basis. Under the Medicare FFS payment system, an individual can choose any licensed physician enrolled in Medicare and use the services of any hospital, healthcare provider or facility certified by Medicare. CMS reimburses providers for covered services if CMS considers them medically necessary.
FFS Medicare pays for physician services according to a physician fee schedule (PFS) set each year by CMS in accordance with formulas mandated by Congress. Historically, CMS annually adjusted the Medicare Physician Fee Schedule (Medicare PFS) payment rates based on an updated formula that included application of the Sustainable Growth Rate (SGR). On April 16, 2015, President Obama signed and enacted into law H.R. 2, the Medicare Access and CHIP Reauthorization Act of 2015, which, among other things, repealed the SGR and instituted a 0% update to the single conversion factor under the Medicare PFS from January 1 through June 30, 2015, a 0.5% update for July 2015 through the end of 2019, and a 0% update for 2020 through 2025. For 2026 and subsequent years, the update will be either 0.75% or 0.25%, depending on the Alternate Payment Model (APM) in which the physician participates. On October 14, 2016, CMS released a final rule implementing,
among other changes, the Advanced APM incentive applicable to the physician fee schedule, under which physicians may receive bonus payments for participating in an Advanced APM. Among other things, the final rule identifies the criteria an APM must satisfy to be considered an Advanced APM, which could include some MSSP ACOs or providers participating in the CEC Model. Whether DMG’s subsidiary ACO or dialysis providers participating in CEC are considered to be Advanced APMs could potentially affect physicians’ willingness to participate in such entities, which may indirectly impact the operations of DMG’s subsidiary ACO or its providers participating in the CEC Model. In addition, under the final rule, DMG’s subsidiary ACO may also be required to submit certain quality data to CMS on behalf of its Merit-Based Incentive Payment System (MIPS) eligible clinicians, which could result in an increase in operational costs. Given that the payment updates for APMs have yet to take effect, we cannot determine the impact of such payment models on our business at this time.
In addition, in recent years, Congress has enacted various laws seeking to reduce the federal debt level and contain healthcare expenditures. For example, the BCA called for the establishment of a Joint Select Committee (the Committee) on Deficit Reduction, tasked with reducing the federal debt level. However, because the Committee did not draft a proposal by the BCA’s deadline, President Obama issued an initial sequestration order that imposed automatic spending cuts on various federal programs. In particular, a 2% reduction to Medicare payments took effect on April 1, 2013, which was subsequently extended through 2027.
The instability of the federal budget may lead to legislation that could result in further cuts in Medicare and Medicaid payments to providers. In recent years, the government has enacted a patchwork of appropriations legislation to temporarily suspend the debt ceiling and continue government operations. Although the BBA passed in February 2018 enacted a two-year federal spending agreement and raised the federal spending cap on non-defense spending for fiscal years 2018 and 2019, the Medicare program is frequently mentioned as a target for spending cuts. Spending cuts to the Medicare program could adversely affect our business, results of operations, financial condition and cash flows.
Medicare Advantage. Medicare Advantage is a Medicare health plan program developed and administered by CMS as an alternative to the original FFS Medicare program. Under the Medicare Advantage program, Medicare beneficiaries may choose to receive benefits under a managed care health plan that provides benefits at least comparable to those offered under the original Medicare FFS payment system in exchange for which the health plan receives a monthly per patient premium payment from CMS. The Medicare Advantage monthly premium varies based on the county in which the member resides, and is adjusted to reflect the demographics and estimated risk profile of the members that enroll. Once a person is authorized by CMS to participate in Medicare Advantage, health plans compete for enrollment based on benefit design differences such as copayments or deductibles, availability of preventive care, attractiveness of and access to a network of hospitals, physicians and ancillary providers and enrollee premium contribution or, most often in Medicare Advantage plans, the absence of any monthly premium. In certain parts of the country, many health plans that provide Medicare Advantage benefits subcontract with integrated medicalnetworkssuch as DMG to transfer the responsibility for managing patient care.
In 2004, CMS adopted a risk adjustment payment system for Medicare Advantage health plans in which the participating health plans’ premiums are adjusted based on the actual illness burden of the members that enroll. The model bases a portion of the total CMS reimbursement payments on various clinical and demographic factors, including hospital inpatient diagnoses, additional diagnosis data from ambulatory treatment settings, hospital outpatient department and physician visits, gender, age and Medicaid eligibility. CMS requires that all managed care companies capture, collect and submit the necessary diagnosis code information to CMS twice a year for reconciliation with CMS’s internal database. Medical providers, such as DMG, provide this diagnosis code information to health plan customers for submission to CMS. Under this system, the risk-adjusted portion of the total CMS payment to the Medicare Advantage plans will equal the local rate set forth in the traditional demographic rate book, adjusted to reflect the plan members’ gender, age and morbidity.
Most Medicare beneficiaries have the option to enroll in private health insurance plans that contract with Medicare under the Medicare Advantage program. According to the Kaiser Family Foundation, the share of Medicare beneficiaries in such plans has risen rapidly in recent years; it reached approximately 34% in 2018 from approximately 13% in 2004. Plan costs for the standard benefit package can be significantly lower or higher than the corresponding cost for beneficiaries in the traditional Medicare FFS payment program. Prior to the ACA, private plans were generally paid a higher average amount, and they used the additional payments to reduce enrollee cost-sharing requirements, provide extra benefits, and/or reduce Medicare premiums. These enhancements were valuable to enrollees, but also resulted in higher Medicare costs overall and higher premiums for all Medicare Part B beneficiaries and not just those enrolled in Medicare Advantage plans. The ACA requires that future payments to plans be based on benchmarks in a range of 95% to 115% of local FFS Medicare costs, with bonus amounts payable to plans meeting high quality-of-care standards. In addition, health plans offering Medicare Advantage are required to spend at least 85% of their premium dollars on medical care, the so-called medical loss ratio (MLR). Since DMG is not a health plan, except for DaVita Health Plan of California, Inc. (DHPC), it is not subject to the 85% MLR requirement. See “DaVita Medical Group Division (DMG)—Knox-Keene” below. However, payments that health plans make to DMG will apply in full
towards the health plans’ 85% MLR requirement. If a health plan does not meet the 85% MLR requirement, it must provide a rebate to its customers. Any such shortfalls would not impact amounts paid by health plans to DMG.
Medicaid. Medicaid is a federal entitlement program administered by the states that provides healthcare and long-term care services and support to low-income Americans. Medicaid is funded jointly by the states and the federal government. The federal government guarantees matching funds to states for qualifying Medicaid expenditures based on each state’s federal medical assistance percentage, which is calculated annually and varies inversely with average personal income in the state. Subject to federal rules, each state establishes its own eligibility standards, benefit packages, payment rates and program administration within broad federal statutory and regulatory guidelines. Every state Medicaid program must balance a number of potentially competing demands, including the need for quality care, adequate provider access, and cost-effectiveness. In an effort to improve quality and provide more uniform and cost-effective care, many states have implemented Medicaid managed care programs to improve access to coordinated healthcare services, including preventative care, and to control healthcare costs. Under Medicaid managed care programs, a health plan receives capitation payments from the state. The health plan, in turn, arranges for the provision of healthcare services by contracting with a network of medical providers, such as DMG. DMG has entered into capitation agreements with health plans to manage approximately 90,800 Medicaid managed care members in its southern California market.
Commercial payors
According to the 2018 Annual Survey conducted by the Kaiser Family Foundation, approximately 152 million nonelderly people in the U.S. received their health insurance through their employers, which contracted with health plans to administer these healthcare benefits. Patients enrolled in health plans offered through an employment setting are generally referred to as commercial members. According to the survey, the percentage of workers covered was 53% in 2018 and 55% in 2017. Under the ACA, many uninsured individuals and many individuals who receive their health insurance benefits through small employers may purchase their healthcare benefits through insurance exchanges in which health plans compete directly for individual or small group members’ enrollment. DMG derives a significant amount of its enrollment from commercial members; however, these members represent a disproportionately small share of DMG’s operating profits.
Whether in the Medicare Advantage, commercial or Medicaid market, managed care health plans seek to provide a coordinated and efficient approach to managing the healthcare needs of their enrolled populations. By negotiating with providers, such as pharmacies, hospitals and physicians, and implementing various quality programs, managed care companies attempt to enhance their profitability by limiting their medical costs. These health plans have shown success in mitigating certain components of medical cost, but we believe the plans are limited by their indirect relationship with physicians, who in the aggregate direct most of their patients’ healthcare costs. We believe that physician-led and professionally-managed integrated medical networks such as DMG’s have a greater opportunity to influence cost and improve quality due to the close coordination of care at the most effective point of contact with the patient—the primary care physician.
Capitation and FFS revenue
There are a number of different models under which an integrated medical network receives payment for managing and providing healthcare services to its members.
Fee-for-service structure. Under traditional FFS reimbursement, physicians are paid a specified amount for each service or procedure that they provide during a patient visit. Under this structure, physician compensation is based on the volume of patient visits and procedures performed, thus offering limited financial incentive to focus on cost containment and preventative care. FFS revenues are derived primarily from DMG’s physician services.
Capitation structure. Under capitation, payors pay a fixed amount per enrolled member, thereby subcontracting a significant portion of the responsibility and risks for managing patient care to physicians. Global capitation represents a prospective budget from which the provider network then manages care-related expenses including payments to associated providers outside the group, such as hospitals and specialists. Compared to traditional FFS models, we believe that capitation arrangements better align provider incentives with both quality and efficiency of care. We believe that this approach improves the quality of the experience for patients and the potential profitability for efficient care providers.
Since premiums paid represent a significant amount per person, the revenue and, when costs are effectively managed, profit opportunity available to an integrated medical network under a capitated arrangement can be significant. This is particularly the case for senior members and members with multiple diseases. We believe that the advantages, savings and efficiencies made possible by the capitated model are most pronounced when the care demands of the population are the most severe and require the most coordination, such as for the senior population or patients with chronic, complex and follow-on diseases. While organized coordination of care is central to the capitated model, it is also well suited to the implementation of
preventative care and disease management over the long-term since physicians have a financial incentive to improve the overall health of their patient population.
The inherent risk in assumption of global care risk relates to potential losses if a number of individual patients’ medical costs exceed the expected amount. This risk is especially significant to individual practitioners or smaller physician groups who lack the scale required to spread the risk over a broad population. DMG has the scale, comprehensive medical delivery resources, significant infrastructure to support practicing physicians, and demonstrated care management knowledge to spread the risk of losses over a large patient population.
Global model.In Florida, DMG may contract directly with health plans under global capitation arrangements that include hospital services, because state law permits DMG to assume financial responsibility for both professional and institutional services. In New Mexico, DMG has assumed financial responsibility for professional services only.
In Nevada, DMG enters into global capitation arrangements to assume financial responsibility for both professional and institutional services. However, the Nevada Division of Insurance (NDI) has not opined on whether it is appropriate for an entity like DMG to enter into global capitation arrangements and assume financial responsibility for the provision of both professional and institutional services to either Medicare Advantage enrollees or enrollees of commercial health plans. In order to avoid an adverse finding by the NDI with respect to DMG’s global capitation arrangements in Nevada, DMG applied for an insurance license from the NDI and obtained the license in 2015. DMG is currently evaluating its ability to assign any of its existing contracts to the NDI license holder. Because of the current global capitation to DMG, and DMG’s assumption of nearly the entire professional and institutional risk in Nevada and Florida, DMG’s health plan customers function primarily to support DMG in undertaking marketing and sales efforts to enroll members and processing claims in these states.
In California, entities that maintain full or restricted licenses under the California Knox-Keene Health Care Service Plan Act of 1975 (Knox-Keene) are permitted to assume financial responsibility for both professional and institutional services. As described below, in December 2013, DMG obtained a restricted Knox-Keene license and therefore may enter into global capitation arrangements with health plans through which DMG will assume financial responsibility for both professional and institutional services.
Risk-sharing model.In California, DMG currently utilizes a capitation model in several different forms. While there are variations specific to each arrangement, HealthCare Partners Affiliates Medical Group and HealthCare Partners Associates Medical Group, P.C. (collectively AMG), which are medical groups that have entered into management services agreements with DMG, have historically contracted with health plans to receive a PMPM or percentage of premium (POP) capitation payment for professional (such as physician) services and assumed the financial responsibility for professional services. In some cases, the health plans separately enter into capitation contracts with third parties (typically hospitals) who directly receive a capitation payment and assume contractual financial responsibility for institutional (such as hospital) services. In the case of institutional services and as a result of its managed care-related administrative services agreements with hospitals, AMG has recognized a percentage of the surplus of institutional revenues less institutional expense as AMG net revenues and has also been responsible for some percentage of any short-fall in the event that institutional expenses exceed institutional revenues. We refer to these arrangements as “dual risk arrangements.” In other cases, the health plan does not pay a capitation payment to the hospital, but rather administers and pays fee-for-service claims for hospital expenses. We refer to these arrangements as “shared risk arrangements.” In both cases, AMG has been responsible under its health plan agreements for managing the care dollars associated with both the professional and institutional services provided for in the AMG capitation payment. In total, approximately 29% of DMG’s total membership was covered under dual risk arrangements as of December 31, 2018.
In connection with DMG’s obtaining a restricted Knox-Keene license in California, substantially all of the California health plan contracts, along with the revenues received under such contracts, have been assigned from AMG to DHPC. In addition, DMG now has the legal authority to transition these health plan contracts to global capitation or “global risk” arrangements in which DMG is responsible for arranging professional and institutional services in exchange for capitation payments directly from the health plan. DMG evaluates its various payor arrangements on an ongoing basis, and based on this evaluation, may work with the California Department of Managed Health Care and certain selected health plans to convert to global risk arrangements. DMG converted two contracts to global risk in 2017 and one additional contract to global risk effective January 2019. In total, approximately 21% of DMG’s total membership was covered under global risk arrangements as of December 31, 2018 and approximately 28% of its total membership is now covered under global risk arrangements as of January 2019.
Government regulation
In addition to the laws and regulations to which our U.S. dialysis and related lab services business are subject to, the internal operations of DMG and its contractual relationships with healthcare providers such as hospitals, other healthcare facilities, and healthcare professionals are subject to extensive and increasing regulation by numerous federal, state, and local government entities. These laws and regulations often are interpreted broadly and enforced aggressively by multiple government agencies, including the OIG, the DOJ, and various state authorities. Many of these laws and regulations are the same as those that impact our U.S. dialysis and related lab services business. For example:
DMG’s financial relationships with healthcare providers including physicians and hospitals could subject DMG to criminal and civil sanctions and penalties under the federal Anti-Kickback Statute;
The referral of Medicare patients by DMG-associated physicians for the provision of DHS may subject the parties to sanctions and penalties under the Stark Law;
DMG’s financial relationships and those of its associated physicians may subject the parties to penalties and sanctions under state fraud and abuse laws;
DMG’s submission of claims to governmental payors such as the Medicare and Medicaid programs for services provided by its associated physicians and clinical personnel may subject DMG to sanction and penalties under the FCA; and
DMG’s handling of PHI may subject DMG to sanctions and penalties under HIPAA and its implementing privacy and security regulations, as amended by the HITECH Act, and state medical privacy laws which can include penalties and restrictions that are more severe than those which arise under HIPAA.
A finding that claims for services were not covered or not payable because services were not rendered or because claims otherwise were submitted in violation of the applicable healthcare laws and regulations, or the imposition of sanctions associated with a violation of any of these healthcare laws and regulations, could result in criminal and/or civil penalties and exclusion from participation in Medicare, Medicaid and other federal and state healthcare programs and could have a material adverse effect on DMG’s business, results of operations, financial condition and cash flows. We cannot guarantee that the arrangements or business practices of DMG will not be subject to government scrutiny or be found to violate certain healthcare laws. Government audits, investigations and prosecutions, even if we are ultimately found to be without fault, can be costly and disruptive to DMG’s business. Moreover, changes in healthcare legislation or government regulation may restrict DMG’s existing operations, limit their expansion or impose additional compliance requirements and costs, any of which could have a material adverse effect on DMG’s business, results of operations, financial condition and cash flows.
The following includes brief descriptions of some, but not all, of the laws and regulations that, in addition to those described in relation to our U.S. dialysis and related lab services business, affect DMG. DMG is also subject to the laws and regulations that apply to our U.S. dialysis and related lab services business. See “Kidney Care Division—Government regulation” above.
Licensing, certification, accreditation and related laws and guidelines. DMG clinical personnel are subject to numerous federal, state and local laws and regulations, relating to, among other things, licensing, professional credentialing and professional ethics. Since DMG clinical personnel perform services in medical office settings, hospitals and other types of healthcare facilities, DMG may indirectly be subject to laws applicable to those entities as well as ethical guidelines and operating standards of professional trade associations and private accreditation commissions, such as the American Medical Association and the Joint Commission. There are penalties for non-compliance with these laws, including discipline or loss of professional license, civil and/or criminal fines and penalties, loss of hospital admitting privileges, federal healthcare program disenrollment, loss of billing privileges, and exclusion from participation in various governmental and other third-party healthcare programs.
Professional licensing requirements. DMG’s clinical personnel, including physicians, must satisfy and maintain their professional licensing in the states where they practice medicine. Activities that qualify as professional misconduct under state law may subject them to sanctions, including the loss of their licenses, and could subject DMG to sanctions as well. Many state boards of medicine impose reciprocal discipline, that is, if a physician is disciplined for having committed professional misconduct in one state where he or she is licensed, another state where he or she is also licensed may impose the same discipline even though the conduct did not occur in that state. Therefore, if a DMG-associated physician is licensed in multiple states, sanctions or loss of licensure in one state may result in sanction or the loss of licensure in other states. Professional
licensing sanctions may also result in exclusion from participation in governmental healthcare programs, such as Medicare and Medicaid, as well as other third-party programs.
Corporate practice of medicine and fee splitting. California, Colorado, Nevada, and Washington are states in which DMG operates that have laws that prohibit business entities, such as our Company and our subsidiaries, from practicing medicine, employing physicians to practice medicine or exercising control over medical decisions by physicians (known collectively as the corporate practice of medicine). These states also prohibit entities from engaging in certain financial arrangements, such as fee-splitting, with physicians. In some states these prohibitions are expressly stated in a statute or regulation, while in other states the prohibition is a matter of judicial or regulatory interpretation.
Violations of the corporate practice of medicine vary by state and may result in physicians being subject to disciplinary action, as well as to forfeiture of revenues from payors for services rendered. For lay entities, violations may also bring both civil and, in more extreme cases, criminal liability for engaging in medical practice without a license.
In California, a violation of the corporate practice of medicine prohibition constitutes the unlawful practice of medicine, which is a public offense punishable by fines and other criminal penalties. In addition, any person who conspires with or aids and abets another in the unlawful practice of medicine is similarly guilty of a public offense and may be subject to comparable fines and criminal penalties. In Nevada, engaging in the corporate practice of medicine where not provided by a specific statute may also constitute the unlawful practice of medicine. This violation is a felony punishable by fines and other civil and criminal penalties. Physicians in Nevada can similarly be punished for aiding or assisting in the unlicensed practice of medicine.
In Colorado, any physician found to have abetted or assisted or conspired to engage in unprofessional conduct with respect to the practice of medicine is subject to disciplinary action, including the loss of licensure. Corporate entities or lay persons who are found to have engaged in the unauthorized practice of medicine may be subject to injunctive action and other criminal penalties. In Washington, the Secretary of Health is responsible for investigating complaints concerning the unlicensed practice of medicine and violations may be subject to a cease and desist order, civil fines, injunctive action, and other criminal penalties.
In our markets where the corporate practice of medicine is prohibited, DMG has historically operated by maintaining long-term management contracts with multiple associated professional organizations which, in turn, employ or contract with physicians to provide those professional medical services required by the enrollees of the payors with which the professional organizations contract. Under these management agreements, DMG performs only non-medical administrative services, does not represent that it offers medical services, and does not exercise influence or control over the practice of medicine by the physicians or the associated physician groups with which it contracts. For example, in California, DMG has full-service management contracts with AMG. The AMG entities are owned by California-licensed physicians and professional medical corporations and contract with physicians to provide professional medical services. In Nevada and Washington, DMG’s Nevada and Washington subsidiaries have similar management agreements with Nevada and Washington professional corporations, as applicable, that employ and contract with physicians to provide professional medical services. In Colorado, the physician groups contract through a provider network to include a pharmacy and ambulatory surgery center.
Some of the relevant laws, regulations, and agency interpretations in states with corporate practice of medicine restrictions have been subject to limited judicial and regulatory interpretation. Moreover, state laws are subject to change. Regulatory authorities and other parties, including DMG’s associated physicians, may assert that, despite the management agreements and other arrangements through which DMG operates, we are engaged in the prohibited corporate practice of medicine or that DMG’s arrangements constitute unlawful fee-splitting. If this were to occur, we could be subject to civil and/or criminal penalties, DMG’s agreements could be found legally invalid and unenforceable (in whole or in part), or we could be required to restructure DMG's contractual arrangements.
If we were required to restructure DMG’s operating structures in our markets due to determination that a corporate practice of medicine violation existed, such a restructuring might include revisions of the California, Colorado, Nevada or Washington management services agreements, which might include a modification of the management fee, and/or establishing an alternative structure. For example, our subsidiaries in those states might have to obtain the equivalent of a California Knox-Keene license in such state in order to comply with the corporate practice of medicine rules while contracting directly with payors and, in turn, physicians, to provide physician services to the payors’ enrollees. In California, DMG’s restricted Knox-Keene license has created potential flexibility for DMG in the event regulatory authorities seek to enforce corporate practice of medicine or fee splitting laws based upon current management services relationships with AMG. DMG’s restricted Knox-Keene license allows DHPC to contract with or employ physicians as a result of an exemption from California’s corporate practice of medicine laws applicable to Knox-Keene licensees.
Knox-Keene. The California Department of Managed Health Care (DMHC) licenses and regulates Health Care Service Plans (HCSPs) pursuant to Knox-Keene, as amended. In addition to regulating Knox-Keene’s various patient’s rights protections for HCSP-enrolled individuals, the DMHC is responsible for ensuring the financial sustainability over time of licensed HCSPs and other regulated entities. As such, the DMHC is charged with continually monitoring the financial health of regulated entities. The DMHC’s Division of Financial Oversight monitors and evaluates the financial viability of health plans to ensure continued access to health care services. Financial examination reviews include examinations of financial statements and financial arrangements, both by routine and non-routine examinations. The examination also ensures that there is adequate tangible net equity (TNE), as determined according to calculations included in Knox-Keene. The TNE regulations for organizations holding a Knox-Keene license, like DHPC, vary depending on circumstances, but generally require any licensee to have on hand in cash or cash equivalents a minimum of the greater of (i) $1 million, (ii) the sum of 2% of the first $150 million of annualized premium revenues plus 1% of annualized premium revenues in excess of $150 million, or (iii) the sum of 8% of the first $150 million of annualized healthcare expenditures (except those paid on a capitated basis or managed hospital payment basis) plus 4% of the annualized healthcare expenditures (except those paid on a capitated basis or managed hospital payment basis) which are in excess of $150 million; plus 4% of annualized hospital expenditures paid on a managed hospital payment basis. In its sole discretion, the DMHC may require, as a condition to obtaining or maintaining an HCSP license, that a licensee accept certain contractual undertakings such that the licensee is obligated to maintain TNE in amounts greater than the minimum amount described above. Additionally, a licensed HCSP is subject to additional DMHC reporting requirements and financial oversight if the HCSP fails to maintain at least 130% of its required minimum TNE. During the 2016 financial examination, DHPC was required to provide evidence of exclusive fidelity bond coverage in the amount of at least $2 million, with a deductible amount not in excess of $100,000 with a requirement to notify the Director of DMHC 30 days prior to cancellation.
The DMHC interprets Knox-Keene HCSP licensing requirements to apply to both full-service HCSPs and downstream restricted HCSP contracting entities, including provider groups that enter into global risk contracts with licensed HCSPs. A global risk contract is a healthcare services contract in which a downstream contracting entity agrees to provide both professional (physician) services and institutional (hospital) services subject to an at-risk or capitated reimbursement methodology. According to the DMHC, entities that accept global risk must obtain a restricted Knox-Keene license. Under a restricted Knox-Keene license, entities may enter into global risk contracts with other licensed HCSPs. Holders of restricted Knox-Keene licenses must comply with the same financial requirements as HCSPs with full licenses, including demonstrating specific levels of TNE, but are not required to meet Knox-Keene requirements for functions they are not delegated such as marketing. The consequences of operating without a license include civil penalties, criminal penalties and the issuance of cease and desist orders.
DHPC holds a restricted Knox-Keene license, which allows DHPC to contract directly with full service HCSPs to simplify DMG's historic contractual and financial structure and to facilitate expansion into new markets in California. However, this also subjects DMG and DHPC to additional regulatory obligations, including (i) regulatory oversight of operations, (ii) the need to seek approval for all material business changes, (iii) significant requirements to maintain certain TNE levels, and (iv) other operating limitations imposed by Knox-Keene and its regulations. Under its restricted Knox-Keene license, DHPC is prohibited from declaring or paying any dividends or making any distribution of cash or property to its parent, affiliates, or shareholders, if such a distribution would cause it to fail to maintain the minimum applicable TNE, have insufficient working capital or cash flow as required by DMHC regulation or otherwise be unable to provide or arrange healthcare services. In addition, DHPC is subject to DMHC oversight and must seek approval before incurring any debt or guaranteeing any debt relating to its parent, affiliates, or shareholders. DHPC must also submit proposed global capitation contracts to the DMHC for approval.
DMG services
Approximately 84% of DMG’s operating revenues for the year ended December 31, 2018 were derived from capitation contracts with health plans. Under these contracts, DMG’s health plan customers delegate full responsibility for member care to physicians and healthcare facilities that are part of DMG’s provider network. In return, DMG receives a PMPM fee for each DMG member. As a result, DMG has financial and clinical accountability for a population of members. In California, DMG does not assume direct financial risk for institutional (hospital) services in some cases, but is responsible for managing the care dollars associated with both the professional (physician) and institutional services being provided for the PMPM fee attributable to both professional and institutional services. In those cases and as a result of its managed care-related administrative services agreements with hospitals, DMG recognizes the surplus of institutional revenues less institutional expense as DMG net revenues and is also responsible for any short-fall in the event that institutional expenses exceed institutional revenues.
DMG provides comprehensive and quality medical care through a network of participating physicians and other healthcare professionals. Through its group model, DMG employs, directly (where permitted by state law) and through its associated physician groups, approximately 750 primary care physicians. Through its IPA model, DMG contracts with a network of approximately 3,200 associated groups and other network primary care physicians who provide care for DMG’s members in an independent office setting. These physicians are complemented by several thousand network specialists and approximately 185 network hospitals that provide specialty or institutional care to the patients of DMG’s associated physicians, physician groups and IPAs.
In order to comply with local regulations prohibiting the corporate practice of medicine, many of DMG’s group physicians are employed by associated medical groups with which DMG has entered into long-term management agreements. The largest of these DMG managed medical groups is AMG, which employs, directly or indirectly, approximately 750 primary care physicians, specialists and hospitalists. See “Government Regulation—Corporate practice of medicine and fee splitting” above.
DMG does not own hospitals, although hospitals are an essential part of its provider network. In most cases, DMG contracts or otherwise aligns with hospitals to manage the utilization, readmission and cost of hospital services. Most DMG patients receive specialty care through DMG’s network based on referrals made by their primary care physician. These specialists may be reimbursed based on capitation, case rates or on a discounted FFS rate.
DMG group physicians typically see 18 to 22 patients per day, which we believe is an appropriate benchmark to ensure there is sufficient time to understand all of the patients’ clinical needs. DMG care teams, including nurses, engage in outreach to patients in order to help monitor fragile and high risk patients, and help improve adherence to physicians’ care plans. During these visits, DMG’s physicians, nurses and educators use the time to educate patients and manage their healthcare needs. The goal of this preventative care delivery model is to keep patients healthy. Education improves self-management and compliance which allows the patient to recognize early signs of their disease and seek appropriate care. We believe this translates into earlier intervention, which in turn leads to fewer emergency room visits, fewer hospital admissions and fewer hospital bed days (the most expensive location for healthcare). This clinical model seeks to provide early diagnosis of disease or deterioration in a chronic and complex condition and provide preventive care to maintain optimal health and avert unnecessary hospitalization. Clinic-based case managers and hospitalists coordinate with the primary care physicians to ensure that patients are receiving proper care whether they are in the clinic, in the hospital or are not regularly accessing healthcare. Physicians and case managers encourage patients to regularly visit the clinics in order to enhance their day-to-day health and diagnose any illness or deterioration in condition as early as possible.
DMG’s information technology system, including DMG’s electronic health record and data warehouse, is designed to support the DMG delivery model with data-driven opportunities to improve the quality and cost effectiveness of the care received by its members. Using informatics technology, DMG has created disease registries that track large numbers of patients with defined medical conditions. DMG applies the data from these registries to manage the care for patients with similar medical conditions which we believe leads to a better medical outcome. We believe this approach to using data is effective because the information is communicated by the patient’s physician rather than the health plan or disease management companies.
DMG employs a wide variety of other information applications to service IPA and network providers using web connectivity. The HCP Connect! on-line portal provides web-based eligibility, referrals, electronic claims submission and explanation of benefits, and other communication vehicles for individual physician offices. The success of this suite of applications has enhanced DMG’s ability to manage its IPA networks, and has resulted in significant back-office efficiencies for DMG and its associated physician groups. DMG has further expanded its ability to share key utilization and clinical data with its internal and contracted physicians and specialists through the Physician Information Portal and the Clinical Viewer. Through these secure web portals, a physician is able to obtain web-based, point of care information regarding a patient, including diagnosis history, quality indicators, historical risk-adjustment coding information, pharmacy medication history, and other key information. In addition to its web-portals geared towards physicians, DMG has recently introduced a patient on-line portal to enable DMG’s patients to securely view their own clinical information, schedule physician appointments and interact electronically with their physicians. DMG believes these tools help lead to high quality clinical outcomes, create internal efficiencies, and enhance the satisfaction of its associated physicians and patients.
In addition, DMG uses its data to carefully track high utilizing patients through robust data warehousing and data mining technologies. DMG filters the data warehouse to identify and reach out to patients with high-utilization patterns who are inefficiently using resources, such as visiting an emergency room when either a same-day appointment or urgent care center would be more appropriate and satisfactory for the member. High utilizing patients are identified and tracked as part of DMG’s electronic health record by their physician and DMG’s care management staff. Specific care plans are attached to each of these patients and tracked carefully for full compliance. The objective is to proactively manage their care at times when these patients
are either not compliant with the care plan or when changing circumstances require care managers to develop new and more suitable care plans. By using these resources, DMG has achieved improvements in quality of care, satisfaction and cost.
We believe DMG is well positioned to effectively leverage marketplace demands for greater provider accountability, measurable quality results and cost efficient medical care. We believe that DMG’s business model is likely to continue to be an attractive alternative for health plans looking for high quality, cost effective delivery networks, physicians seeking an attractive practice environment and patients interested in a highly integrated approach to managing their medical care. Additionally, we believe that the scale of DMG’s business allows it to spread capitation risk over a large population of members, invest in comprehensive analytic and healthcare information tools as well as clinical and quality measurement infrastructure, and recognize administrative and operating efficiencies. For these reasons, we believe that DMG offers patients, physicians and health plans a proven platform for addressing many of the most pressing challenges facing the U.S. healthcare system, including rising medical costs.
We also believe DMG has the ability to demonstrably improve medical outcomes and patient satisfaction while effectively managing costs through the following unique competitive strategies and internal progress and systems:
DMG’s clinical leadership and associated group and network physicians devote significant efforts to ensure that DMG’s members receive the most appropriate care in the most appropriate manner.
DMG is committed to maximizing its patients’ satisfaction levels.
DMG has the scale which, combined with its strong reputation and high quality patient care, makes it an attractive partner for health plans, compared to smaller provider groups that may have a higher risk of default and may not have the same resources to devote and develop the same level of patient care.stock price.
DMG has over two decades of experience in managing complex disease cases for its population of patients. As a result, DMG has developed a rich dataset of patient care experiences and outcomes which permits DMG to proactively monitor and intervene in improving the care of its members.
DMG’s senior management team possesses substantial experience with the healthcare industry with average experience of approximately 21 years, as of December 31, 2018.
Locations of DMG clinics
As of December 31, 2018, DMG managed a total of 277 medical clinics, of which 72 clinics were located in California, 25 clinics were located in Colorado, 86 clinics were located in Florida, 56 clinics were located in Nevada, 13 clinics were located in New Mexico, and 25 clinics were located in Washington.Competition
U.S. and International dialysis competition
The U.S. dialysis industry has experienced some consolidation over the last few years, but still remains highly competitive, particularly in termscompetitive. Patient retention and the continued referrals of patients from referral sources such as hospitals and nephrologists, as well as acquiring existingor developing new outpatient dialysis centers. Wecenters are some of the important parts of our growth strategy. In our U.S. dialysis business, we continue to face a high degree ofintense competition in the U.S. dialysis industry from large and medium-sized providers, among others, whowhich compete directly with us for limited acquisition targets, for individual patients who may choose to dialyze with us and for physicians qualified to provide required medical director services. Competition for growth in existing and expanding geographies or areas is intense and is not limited to large competitors with substantial financial resources or established participants in the acquisition of dialysis businesses, relationshipsspace. We also compete with physicians to act asindividual nephrologists, former medical directors and skilled clinical personnel, as well as for individual patients. In addition,or physicians that have opened their own dialysis units or facilities. Moreover, as we continue our international dialysis expansion into various international markets, we face competition from large and medium-sized providers, among others, for acquisition targets as well as physician relationships. Because of the ease of entry into the dialysis business and the ability of physicians to own dialysis centers and/orWe also be medical directors for their own centers, competition for growth in existing and expanding markets is not limited to large competitors with substantial financial resources. There have also been increasing indications of interestexperience competitive pressures from non-traditionalother dialysis providers in recruiting and others to enter theretaining qualified skilled clinical personnel as well as in connection with negotiating contracts with commercial healthcare payors and inpatient dialysis space and/or develop innovative technologies or business activities that could be disruptive to the industry.service agreements with hospitals. Acquisitions, developing new outpatient dialysis centers, patient retention and physician relationships are a critical componentsignificant components of our growth strategy and our business could be adversely affected if we are not able to continue to make dialysis acquisitions on reasonable and acceptable terms, continue to develop new outpatient dialysis centers, maintain or establish new relationships with physicians or if we experience significant patient attrition relative to our competitors. Competition for qualified physicians to act as medical directors and for inpatient dialysis services agreements with hospitals is also intense. Occasionally, we have also experienced competition from former medical directors or referring physicians who have opened their own outpatient dialysis centers. We also experience competitive pressures from other dialysis providers in connection with negotiating contracts with commercial healthcare payors and in recruiting and retaining qualified skilled clinical personnel.
Together with our largest competitor, Fresenius Medical CareGroup (FMC), we account for approximately 74%73% of outpatient dialysis patientscenters in the U.S. with our Company serving approximately 37% of the total outpatient dialysis patients. Approximately 44%Many of the centers not owned by us, FMC or FMCother large for profit dialysis providers are owned or controlled by hospitals or non-profit organizations. Hospital-based and non-profit dialysis units typically are more difficult to acquire than physician-owned dialysis centers.
FMC also manufactures a full line of dialysis supplies and equipment in addition to owning and operating outpatient dialysis centers worldwide. This may give FMC cost advantages over us because of its ability to manufacture its own products or prevent us from accessing existing or new technology on a cost-effective basis. Additionally, FMC has been one of our largest suppliers of dialysis products and equipment over the last several years. In 2018, we entered into and subsequently extended an agreement with FMC to purchase a certain amount of dialysis equipment, parts and supplies from FMC through December 31, 2020. The amount of purchases in future years from FMC over the remaining term of this agreement will depend upon a number of factors, including the operating requirements of our centers, the number of centers we acquire, and growth of our existing centers.
DMG’s competition
DMG’sThere have been a number of announcements by non-traditional dialysis providers and others, which relate to entry into the dialysis and pre-dialysis space, the development of innovative technologies, or the commencement of new business is highly competitive. DMG competes with managed care organizations, hospitals, medical groups and individual physicians in its markets. DMG competes with other primary care physician groups or physicians who contract with health plans for membership. Health plans contract with care providers on the basis of costs, reputation, scope, efficiency and stability. Individual members select a primary care physician at the time of membership with the health plan. Location, name recognition, quality indicators and other factors go intoactivities that decision. For example, in California, DMG's competitors include Permanente Medical Group, which is the exclusive provider for Kaiser, and Heritage Provider Network. However, DMG’s principal competitors for members and health plan contracts vary considerably in type and identity by region.
Corporate compliance program
Our businesses are subject to extensive federal, state and local government laws and regulations. Management has designed and implemented a corporate compliance program as part of our commitment to comply fully with applicable criminal, civil and administrative laws and regulations and to maintain the high standards of conduct we expect from all of our teammates. We continuously review this program and enhance it as appropriate. The primary purposes of the program include:
Assessing and identifying risks for existing and new businesses;
Training and educating our teammates and affiliated professionals to promote awareness of legal and regulatory requirements and the necessity of complying with all these laws;
Developing and implementing compliance policies and procedures and creating controls to support compliance with these laws and our policies and procedures;
Auditing and monitoring the activities of our operating units and business support functions on a regular basis to identify risks and potential instances of noncompliance in a timely manner; and
Ensuring that we promptly take steps to resolve instances of noncompliance and address areas of weakness or potential noncompliance.
We have a code of conduct that each of our teammates, members of our Board of Directors, affiliated professionals and certain third parties must follow, and we have an anonymous compliance hotline for teammates and patients to report potential instances of noncompliance. Our Chief Compliance Officer administers the compliance program. The Chief Compliance Officer reports directly to our Chief Executive Officer, our Chief Executive Officer of Kidney Care and the Chair of the Compliance Committee of our Board of Directors (Board Compliance Committee).
On October 22, 2014, DaVita entered into a Corporate Integrity Agreement (CIA) with HHS and the OIG. The CIA:
requires that we maintain certain elements of our compliance programs;
imposes certain expanded compliance-related requirements during the term of the CIA, including increased training for teammates, physician partners and members of our Board of Directors, implementing a series of procedures prior to entering into arrangements with referrals sources, execution of annual certifications by senior executives of compliance with federal healthcare laws and regulations, internal compliance policies and the CIA, imposition of an executive recoupment program and quarterly and annual reportscould be disruptive to the OIG;
requiresindustry. These developments over time may shift the formal allocation of certain oversight responsibility tocompetitive landscape in which we operate. For additional discussion on these developments and associated risks, see the Board Compliance Committee and a resolution from that committee that it has made reasonable inquiry intorisk factor in Item 1A Risk Factors under the operations of the compliance program, the creation of a Management Compliance Committee and the retention of an independent compliance advisor during years three through five of the CIA;
contains certain business restrictions related to a subset of our joint venture arrangements, including our agreeing to not enter into certain types of partial divestiture joint venture transactions with nephrologists during the term of the CIA, among other restrictions; and
requires that we engage an Independent Monitor who will provide additional oversight and reporting to the OIG for the term of the CIA.
The costs associated with compliance with the CIA are substantial. In addition, in the event of a breach of the CIA, we may become liable for payment of certain stipulated penalties, and/or be excluded from participation in federal healthcare programs. In April 2015, the OIG notified us that it considered us to be in breach of the CIA because of three implementation deficiencies. We remediated the deficiencies and paid certain stipulated penalties. heading, “If we failare unable to comply withcompete successfully, including, without limitation, implementing our CIA growth strategy and/or adhereretaining patients and physicians willing to all of the complex governmental laws and regulations that apply to our business, weserve as medical directors, it could suffer severe consequences, including substantial penalties and exclusion from participation in federal healthcare programs that could have a material adverse effect onmaterially adversely affect our business, results of operations, financial condition and cash flows reputation and stock price..”
Insurance
We are predominantly self-insured with respect to professional and general liability and workers' compensation risks through wholly-owned captive insurance companies. We are also predominantly self-insured with respect to employee medical and other health benefits. We also maintain insurance, excess coverage, or reinsurance for property and general liability, professional liability, directors’ and officers’ liability, workers' compensation, cybersecurity and other coverage in amounts and on terms deemed adequate by management, based on our actual claims experience and expectations for future claims. Future claims could, however, exceed our applicable insurance coverage. Physicians practicing at our dialysis centers are required to maintain their own malpractice insurance, and our medical directors are required to maintain coverage for their individual
private medical practices. Our liability policies cover our medical directors for the performance of their duties as medical directors at our outpatient dialysis centers. DMG also maintains general and professional liability insurance through various independent and related parties. DMG has purchased its primary general and professional liability insurance from California Medical Group Insurance (CMGI) in which DMG owns a 67% equity interest.
Teammates
As of December 31, 2018,2019, we employed approximately 77,70065,000 teammates, including our international teammates: teammates.
|
| | | |
● | Licensed professional staff (physicians, nurses and other healthcare professionals) | 26,500 |
|
● | Other patient care and center support staff and laboratory personnel | 29,200 |
|
● | Corporate, billing and regional administrative staff | 9,400 |
|
● | DMG | 12,600 |
|
Our businesses require skilled healthcare professionals with specialized training for treating patients with complex care needs. Recruitment and retention of nurses are continuing concerns for healthcare providers due to short supply. We have an active program of investing in our professional healthcare teammates to help ensure we meet our recruitment and retention targets, including expanded training opportunities, tuition reimbursements and other incentives.incentives, but there can be no assurances that we will meet our goals in this regard. For additional information, see the risk factor in Item 1A Risk Factors under the heading, "If our labor costs continue to rise, including due to shortages, changes in certification requirements and higher than normal turnover rates in skilled clinical personnel; or currently pending or future rules, regulations, legislation or initiatives impose additional requirements or limitations on our operations or profitability; or, if we are unable to attract and retain key leadership talent, we may experience disruptions in our business operations and increases in operating expenses, among other things, which could have a material adverse effect on our business, results of operations, financial condition and cash flows."
Item 1A. Risk Factors
This Annual Report on Form 10-K contains statements that are forward-looking statements within the meaning of the federal securities laws. These statements involve known and unknown risks and uncertainties including those discussed below. The risks and uncertainties discussed below are not the only ones facing our business. In addition, please read the cautionary notice regarding forward-looking statements in Item 7 of Part II of this Annual Report on Form 10-K under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Risk factors related to our overall business:
If we fail to adhere to all of the complex governmentgovernmental laws, regulations and regulationsrequirements that apply to our business, we could suffer severe consequences that could have a material adverse effect on our business, results of operations, financial condition and cash flows, and could materially harm our reputation and stock price.
Our operations are subject toWe operate in a complex regulatory environment with an extensive and evolving set of federal, state and local governmentgovernmental laws, regulations and requirements. These laws, regulations and requirements are promulgated and overseen by a number of different legislative, administrative, regulatory, and quasi-regulatory bodies, each of which may have varying interpretations, judgments or related guidance. As such, as we utilize considerable resources on an ongoing basis to monitor, assess and respond to applicable legislative, regulatory and administrative requirements, but there is no guarantee that we will be successful in our efforts to adhere to all of these requirements. Laws, regulations and requirements that apply to or impact our business include, but are not limited to:
Medicare and Medicaid reimbursement statutes, rules and regulations (including, but not limited to, manual provisions, local coverage determinations, national coverage determinations, payment schedules and agency guidance);
federal and state anti-kickback laws, including, without limitation, any applicable exceptions or regulatory safe harbors thereunder;
the Physician Self-Referral Law (the Stark LawLaw) and analogous state self-referral prohibition statutes, laws;
the 21st21st Century Cures Act, Act;
Federal Acquisition Regulations, Regulations;
the False Claims Act (FCA) and associated regulations, regulations;
the Civil Monetary Penalty statute (CMP) and associated regulations, regulations;
the Foreign Corrupt Practices Act (FCPA),;
Medicare and Medicaid provider requirements, including requirements associated with providing and updating certain information about the Medicare or Medicaid entity, as applicable, and its direct and indirect affiliates;
antitrust and competition laws and regulations; and
federal and state laws regarding the collection, use and disclosure of patient health information (e.g., Health Insurance Portability and Accountability Act of 1996 (HIPAA)) and the storage, handling, shipment, disposal and/or dispensing of pharmaceuticals and blood products and other biological materials and many other applicable state and federal laws and requirements. Medicare and Medicaid regulations, manual provisions, local coverage determinations, national coverage determinations and agency guidance impose complex and extensive requirements upon healthcare providers as well. Moreover, the various laws and regulations that apply to our operations are often subject to varying interpretations and additional laws and regulations potentially affecting providers continue to be promulgated that may impact us. A violation or departure from any of the legal requirements implicated by our business may result in, among other things, government audits, lower reimbursements, significant fines and penalties, the potential loss of certification, recoupment efforts or voluntary repayments. These legal requirements are civil, criminal and administrative in nature depending on the law or requirement.
We endeavor to comply with all legal requirements. We further endeavor to structure all of our relationships with physicians and providers to comply with state and federal anti-kickback physician and self-referral laws and other applicable healthcare laws. We utilize considerable resources to monitor laws and regulations and implement necessary changes. However, the laws and regulations in these areas are complex, changing and often subject to varying interpretations. As a result, there is no guarantee that we will be able to adhere to all of the laws and regulations that apply to our business, and any failure to do so could have a material adverse impact on our business, results of operations, financial condition, cash flows and reputation. For example, if an enforcement agency were to challenge the level of compensation that we pay our medical directors or the number of medical directors whom we engage, or otherwise challenge these arrangements, we could be required to change our practices, face criminal or civil penalties, pay substantial fines or otherwise experience a material adverse impact on our business, results of operations, financial condition, cash flows and reputation as a result. Similarly, we may face penalties under the FCA, the federal Civil Monetary Penalty statute or otherwise related to failure to report and return overpayments within 60 days of when the overpayment is identified and quantified. These obligations to report and return overpayments could subject our procedures for identifying and processing overpayments to greater scrutiny. We have made investments in resources to decrease the time it takes to identify, quantify and process overpayments, and may be required to make additional investments in the future.
Additionally, the federal government has used the FCA to prosecute a wide variety of alleged false claims and fraud allegedly perpetrated against Medicare, Medicaid and other federally funded health care programs. Moreover, amendments to the federal Anti-Kickback Statute in the 2010 Affordable Care Act (ACA) make claims tainted by anti-kickback violations potentially subject to liability under the FCA, including qui tam or whistleblower suits. The penalties for a violation of the FCA range from $5,500 to $11,000 (adjusted for inflation) for each false claim plus three times the amount of damages caused by each such claim which generally means the amount received directly or indirectly from the government. On January 29, 2018, the Department of Justice (DOJ) issued a final rule announcing adjustments to FCA penalties, under which the per claim penalty range increases to a range from $11,181 to $22,363 for penalties assessed after January 29, 2018, so long as the underlying conduct occurred after November 2, 2015. Given the high volume of claims processed by our various operating units, the potential is high for substantial penalties in connection with any alleged FCA violations.materials.
In addition, on October 9, 2019, the U.S. Department of Health and Human Services, Office of Inspector General (OIG) and the Centers for Medicare & Medicaid Services (CMS) released a pair of proposed rules that, if adopted, would change the Federal Anti-Kickback Statute (AKS), CMP and Stark Law regulations to promote certain value-based and coordinated care arrangements. The proposed rules were subject to a comment period ending in December 2019 and remain subject to change until the publication of any final rules, the date and content of which are currently unknown.
We have historically been subject to a five-year Corporate Integrity Agreement (CIA) with OIG. The term of the CIA expired on October 22, 2019, and the Company is in the process of working with the independent monitor and OIG to close out the review of the final annual reports by the independent monitor and the Company. The CIA (i) required that we maintain certain elements of our compliance programs; (ii) imposed certain expanded compliance-related requirements during the term of the CIA; (iii) required ongoing monitoring and reporting by an independent monitor, imposed certain reporting, certification, records retention and training obligations, allocated certain oversight responsibility to the provisionsBoard's Compliance Committee, and necessitated the creation of a Management Compliance Committee and the retention of an independent compliance advisor to the Board; and (iv) contained certain business restrictions related to a subset of our joint venture arrangements. Until OIG closes out the CIA following review of the FCA, which provide for civil enforcement,aforementioned final annual reports, OIG retains the federal government can use several criminal statutesright to prosecute persons who are alleged to have submitted false or fraudulent claims for payment to the federal government.impose penalties,
Certain subpoenassanctions and civil investigative demands received byother consequences on us under the CIA, including, without limitation, potential exclusion from federal healthcare programs. Any future penalties, sanctions or our subsidiaries specifically reference that they areother consequences under the CIA or otherwise could be more severe in connection with FCA investigations alleging, among other things,circumstances in which OIG or a similar regulatory authority determines that we or our subsidiaries presented or caused to be presented false claims for payment to the government. See Note 17 to the consolidated financial statements included in this report for further details.
We are subject to a Corporate Integrity Agreement (CIA) which, for our domestic dialysis business, requires us to report probable violations of criminal, civil or administrative laws applicable to any federal health care program for which penalties or exclusions may be authorized under applicable healthcare laws and regulations. See "If we failhave repeatedly failed to comply with our Corporate Integrity Agreement, we could be subject to substantial penalties and exclusion from participation in federal healthcare programs that could have a material adverse effect on our business, results of operations, financial condition, cash flows and reputation."applicable laws, regulations or requirements.
If any of our personnel, representatives or operations are found to violate these or other government laws, regulations or regulations,requirements, we could suffer severe consequences that would have a material adverse effect on our business, results of operations, financial condition and cash flows, and could materially harm our reputation and stock price, including:including, among others:
SuspensionLoss of required certifications or suspension or exclusion from or termination of our participation in government payment programs;
Refunds of amounts received in violation of law or applicable payment program requirements dating back to the applicable statute of limitation periods;
Loss of required government certifications or exclusion from government payment programs;
Loss of licenses required to operate healthcare facilities or administer pharmaceuticals in the states in which we operate;
Reductions in payment rates or coverage for dialysis and ancillary services and pharmaceuticals;
Criminal or civil liability, fines, damages or monetary penalties, for violations of healthcare fraud and abuse laws, including the federal Anti-Kickback Statute, Civil Monetary Penalties Law, Stark Law and FCA, or other failures to meet regulatory requirements;which could be material;
Enforcement actions, investigations, or audits by governmental agencies and/or state law claims for monetary damages by patients who believe their protected health information (PHI) has been used, disclosed or not properly safeguarded in violation of federal or state patient privacy laws, including, among others, HIPAA and the Privacy Act of 1974;
Mandated changes to our practices or procedures that significantly increase operating expenses;
Imposition of and compliance with corporate integrity agreementsexpenses that could subject us to ongoing audits and reporting requirements as well as increased scrutiny of our billing and business practices which could lead to potential fines, among other things;
Termination of various relationships and/or contracts related to our business, includingsuch as joint venture arrangements, medical director agreements, real estate leases and consulting agreements with physicians; and
Harm to our reputation which could negatively impact our business relationships and stock price, affect our ability to attract and retain patients, physicians and physicians,teammates, affect our ability to obtain financing and decrease access to new business opportunities, among other things.
Additionally, the healthcare sector, including the dialysis industry, is regularly subject to negative publicity, including as a result of governmental investigations, adverse media coverage and political debate surrounding industry regulation. Negative publicity, regardless of merit, regarding the dialysis industry generally, the U.S. healthcare system or DaVita in particular may adversely affect us.
See Note 16 to the consolidated financial statements included in this report for further details regarding the pending legal proceedings and regulatory matters to which we are or may be subject from time to time, any of which may include allegations of violations of applicable laws, regulations and requirements.
We are, and may in the future be, a party to various lawsuits, demands, claims, qui tam suits, governmental investigations and audits (including, without limitation, investigations or other actions resulting from our obligation to self-report suspected violations of law) and other legal matters, any of which could result in, among other things, substantial financial penalties or awards against us, mandated refunds, substantial payments made by us, required changes to our business practices, exclusion from future participation in Medicare, Medicaid and other healthcare programs and possible criminal penalties, any of which could have a material adverse effect on our business, results of operations, financial condition, cash flows, reputation and materially harm our reputation.stock price.
We are the subject of a number of investigations and audits by governmental agencies. In addition, we are, and may in the future be, subject to other investigations and audits by state or federal governmental agencies and/or private civil qui tam complaints filed by relators and other lawsuits, demands, claims and legal proceedings, including, without limitation, investigations or other actions resulting from our obligation to self-report suspected violations of law.
Responding to subpoenas, investigations and other lawsuits, claims and legal proceedings as well as defending ourselves in such matters will continue to require management's attention and cause us to incur significant legal expense. Negative
findings or terms and conditions that we might agree to accept as part of a negotiated resolution of pending or future legal or regulatory matters could result in, among other things, substantial financial penalties or awards against us, substantial payments made by us, harm to our reputation, required changes to our business practices, exclusion from future participation in the Medicare, Medicaid and other healthcare programs and, in certain cases, criminal penalties, any of which could have a material adverse effect on us. It is possible that criminal proceedings may be initiated against us and/or individuals in our business in connection with investigations by the federal government.governmental investigations. Other than as may be described in Note 1716 to the consolidated financial statements included in this report, we cannot predict the ultimate outcomes of the various legal proceedings and regulatory matters to which we are or may be subject from time to time, including those described in the aforementioned sections of this report, or the timing of their resolution or the ultimate losses or impact of developments in those matters, which could have a material adverse effect on our business, results of operations, financial condition, cash flows, reputation and materially harm our reputation.stock price. See Note 1716 to the consolidated financial statements included in this report for further details regarding these and other legal proceedings and regulatory matters.
Changes in federal and state healthcare legislation or regulations could have a material adverse effect on our business, results of operations, financial condition and cash flows.
We cannot predict how employers, private payors or persons buying insurance might react to the changes brought on byThe extensive federal and state healthcare reform, includinglaws, regulations and requirements that govern our business may continue to change over time, and there is no assurance that we will be able to accurately predict the ACA and any subsequent legislation, regulationnature, timing or guidance,extent of such changes or what form manythe impact of these regulations will take before implementation.such changes on the markets in which we conduct business or on the other participants that operate in those markets.
For example, the ACA introducedregulatory framework of the Patient Protection and Affordable Care Act and the Health Care Reconciliation Act of 2010, as amended (ACA), and other healthcare insurance exchanges, which provide a marketplace for eligible individuals and small employers to purchase healthcare insurance. The business and regulatory environmentreforms continues to evolve as a result of executive, legislative, regulatory and administrative developments and judicial proceedings. As such, there remains considerable uncertainty surrounding the exchanges mature,continued implementation of the ACA and statuteswhat similar healthcare reform measures or other changes might be enacted at the federal and/or state level. While legislative attempts to completely repeal the ACA have been unsuccessful to date, there have been multiple attempts to repeal or amend the ACA through legislative action and regulations are challenged, changedlegal challenges. For example, in December 2017, the Tax Cuts and enforced. If commercial payor participationJobs Act of 2017 was signed into law which, among other things, repealed the penalty under ACA's individual mandate, which had required individuals to pay a fee if they failed to obtain a qualifying health insurance plan. In December 2018, a federal district court in Texas ruled the individual mandate was unconstitutional and inseverable from the ACA. As a result, the court ruled the remaining provisions of the ACA were also invalid, though the court declined to issue a preliminary injunction with respect to the ACA. In December 2019, the Fifth Circuit Court of Appeals agreed that the individual mandate was unconstitutional, but remanded the case back to the district court to reassess how much of the ACA would be damaged without the individual mandate provision, and if the individual mandate could indeed be severed from the ACA. This litigation is still ongoing, but places great uncertainty upon the longevity and nature of the ACA moving forward.
While there may be significant changes to the healthcare environment in the exchanges continuesfuture, including, without limitation, as a result of potential changes to decrease, itthe political environment in connection with the current election year or otherwise, the specific changes and their timing are not yet apparent. Nevertheless, previously enacted reforms and future changes, including among others, any changes in legislation, regulation or market conditions in connection with or resulting from the upcoming elections, could have a material adverse effect on our business, results of operations, financial condition and cash flows. For example, our revenue levels are sensitive to the percentage of our patients with higher-paying commercial health insurance, and as such, legislative, regulatory or other changes that decrease the accessibility and availability, including the duration, of commercial insurance may have a material adverse impact on our business. The ACA's health insurance exchanges, which provide a marketplace for eligible individuals and small employers to purchase health insurance, initially increased the accessibility and availability of commercial insurance. However, certain legislative developments, such as the repeal of the individual mandate described above, have adversely impacted the risk pool in certain exchange markets, and the nature and extent of commercial payor participation in the exchanges has fluctuated as a result. Other proposed legislative developments or administrative decisions, such as moving to a universal health insurance or "single payor" system whereby health insurance is provided to all Americans by the government under government programs, or lowering or eliminating the cost-sharing reduction subsidies under the ACA, could impact the percentage of our patients with higher-paying commercial health insurance, impact the scope of coverage under commercial health plans and increase our expenses, among other things. Although we cannot predict the short- or long-term effects of legislative or regulatory changes or the potential outcome or impact of the upcoming elections, we believe that future market changes could result in more restrictive commercial plans with lower reimbursement rates or higher deductibles and co-payments that patients may not be able to pay. To the extent that changes in statutes, regulations or related guidance or changes in other market conditions result in a reduction in the percentage of our patients with commercial insurance, limit the scope or nature of coverage through the exchanges or other health insurance programs or otherwise reduce reimbursement rates for our services from commercial and/or government payors, it could have a material adverse effect on our business, results of operations, financial condition and cash flows. For additional information on the impact of legislative or regulatory changes on the percentage of our patients with commercial insurance, see the risk factor under the heading "If the
number of patients with higher-paying commercial insurance declines, it could have a material adverse effect on our business, results of operations, financial condition and cash flows."
The ACA also added several new tax provisions that, among other things, impose various fees and excise taxes, and limit compensation deductions for health insurance providers and their affiliates. These rules could negatively impact our cash flow and tax liabilities. In addition, the ACA broadened the potential for penalties under the FCA for the knowing and improper retention of overpayments collected from government payors and reduced the timeline to file Medicare claims. Failure to timely identify, quantify and return overpayments may result in significant penalties, which could have a material adverse effect on our business, results of operations, financial condition, cash flows and reputation. Failure to file a claim within the one year window could result in paymentpayments denials, adversely affecting our business, results of operations, financial condition and cash flows.
NewIn addition to the ACA, changing legislation and other regulatory and executive developments have led to the emergence of new models of care emerge and evolve and other initiatives in both the government orand private sector may arise, and anysector. Any failure on our part to adequately implement strategic initiatives to adjust to these marketplace developments could have a material adverse impact on our business. For example, as noted above, the CentersJuly 10, 2019 executive order (the 2019 Executive Order) related to kidney care directed CMS to create payment models to evaluate the effects of creating payment incentives for the greater use of home dialysis and kidney transplants for those already on dialysis. CMS subsequently announced in a proposed rule the ETC mandatory payment model, which will be administered through the CMMI and is proposed to launch in 50% of dialysis clinics across the country beginning in 2020. Under the proposed rule, which was subject to a comment period that ended in September 2019, CMS would select ESRD facilities and clinicians to participate in the model according to their location in randomly selected geographic areas and would require participation to minimize the potential for selection effect. We support the administration’s emphasis on and move towards home dialysis and kidney transplant; however, we believe that if launched as proposed, the ETC model would negatively impact patient clinical care, Medicare coverage and/or payment for ESRD claims and, Medicaid Services (CMS Innovation Center (Innovation Center)depending on the final requirements of the ETC model, ultimately could have a material adverse effect on our business, results of operations, financial condition and cash flows. With home dialysis as a focus of the ETC model and the industry generally, any failure to successfully implement our strategy or build on our abilities to offer home dialysis options could have a material adverse impact on our business, results of operation, financial condition and cash flows. For additional detail on the risks related to our home dialysis services, see the discussion under the heading "If we are not able to successfully implement our strategy with respect to home-based dialysis, including maintaining and further developing our capabilities in a complex and highly regulated environment, it could have a material adverse effect on our business, results of operations, financial condition and cash flows, and could materially harm our reputation."
In connection with the 2019 Executive Order, CMS also announced the implementation of four voluntary payment models with the stated goal of helping healthcare providers reduce the cost and improve the quality of care for patients with late-stage chronic kidney disease and ESRD. CMS has stated these payment models are aimed to prevent or delay the need for dialysis and encourage kidney transplantation. These payment models were initially proposed to run from 2020 through December 2023. The details and specifics of these voluntary models have not yet been provided, and we anticipate that such details will be released in the second half of 2020. We continue to assess these models and their viability for us and the industry, and our assessment will continue to develop as additional details become available.
In addition, CMMI is currently working with various healthcare providers to develop, refine and implement Accountable Care Organizations (ACOs) and other innovative models of care for Medicare and Medicaid beneficiaries, including, without limitation, the Comprehensive ESRD Care Model (CEC Model) (which includes the development of end stage renal disease (ESRD) Seamless Care Organizations), the Duals Demonstration, and other models. We are currently participating in the CEC Model with the Innovation Center,CMMI, including with organizations in Arizona, Florida, and adjacent markets in New Jersey and Pennsylvania. Our U.S. dialysis businessWe may choose to participate in additional models either as a partner with other providers or independently. Even in areas where we are not directly participating in these or other Innovation CenterCMMI models, some of our patients may be assigned to an ACO, another ESRD Care Model, or another program, in which case the quality and cost of care that we furnish will be included in an ACO's, another ESRD Care Model's, or other program's calculations.
In addition to the aforementioned new models of care, federal bipartisan legislation related to full capitation demonstration for ESRD was proposed in late 2017. Legislation, which has yet to secure introduction to the form of the Dialysis Patient Access to Integrated-care, Empowerment, Nephrologists, Treatment and Services Demonstration Act of 2017 (PATIENTS Act) has been proposed. The PATIENTS Act builds116th Congress, would build on prior coordinated care models, such as the CEC Model, and would establish a demonstration program for the provision of integrated care to Medicare ESRD patients. We have made and continue to make investments in building our integrated care capabilities, but there can be no assurances that initiatives such as the PATIENTS Actthis or similar legislation
will be passed.introduced or passed into law. If such legislation is passed, there can be no assurances that we will be able to successfully execute on the required strategic initiatives that would allow us to provide a competitive and successful integrated care program on the broader scale contemplated by this legislation, and in the desired time frame. Additionally, the ultimate terms and conditions of any such potential legislation remain unclear—for example, our costs of care could exceed our associated reimbursement rates. rates
under such legislation. The new and evolving landscape for integrated kidney care also has led to opportunities with relative ease of entry for certain smaller and/or non-traditional providers, and we may be competing with them for patients in an asymmetrical environment with respect to data and/or regulatory requirements given our status as an ESRD service provider. For additional detail on our evolving competitive environment, see the risk factor under the heading "If we are unable to compete successfully, including, without limitation, implementing our growth strategy and/or retaining patients and physicians willing to serve as medical directors, it could materially adversely affect our business, results of operations, financial condition and cash flows." In general, if we are unable to efficiently adjust to these and other new models of care, it may, among other things, erode our patient base or reimbursement rates, which could have a material adverse impact on our business.
There is also a considerable amount of uncertainty as to the continued implementation of the ACA and what similar measures or other changes might be enacted at the federal and/or state level. There have been multiple attempts through legislative action and legal challenges to repeal or amend the ACA. In December 2017, the Tax Cuts and Jobs Act of 2017 was signed into law which, among other things, repealed the penalty under ACA’s individual mandate, which had required individuals to pay a fee if they failed to obtain a qualifying health insurance plan. In December 2018, a federal district court in Texas ruled the individual mandate was unconstitutional and inseverable from the ACA. As a result, the court ruled the remaining provisions of the ACA were also invalid, though the court declined to issue a preliminary injunction with respect to the ACA. However, it remains unclear whether the court’s ruling will be upheld by appellate courts. In addition, the 2016 Presidential and Congressional elections and subsequent developments in 2017 and 2018 have caused the future state of the exchanges and other ACA reforms to be unclear. However, legislative attempts to completely repeal the ACA have been unsuccessful to date. While there may be significant changes to the healthcare environment in the future, including as a result of potential changes to the political environment, the specific changes and their timing are not yet apparent. Previously enacted reforms and future changes could have a material adverse effect on our business, results of operations,operation, financial condition and cash flows, including, for example, by limiting the scope of coverage or the number of patients who are able to obtain coverage through the exchanges and other health insurance programs, lowering or eliminating the cost-sharing reduction subsidies under the ACA, lowering our reimbursement rates, and/or increasing our expenses.
There have also been several state initiatives to limit payments to dialysis providers.providers or impose other burdensome operational requirements, which, if passed, could have a material adverse impact on our business, results of operation, financial condition and cash flow. For example, Proposition 8, a California statewide ballot initiative, was proposed byon October 24, 2019, the Service Employees International Union - United Healthcare Workers West and sought to limit the amount of revenue dialysis providers can retain from caring(SEIU) proposed a California statewide ballot initiative for patients with commercial insurance by requiring rebates to insurers and taking into account only a portion of the costs incurred by dialysis providers. While Proposition 8 was not approved in the November 20182020 election we incurred substantialthat seeks to impose certain regulatory requirements on dialysis clinics, including requirements related to physician staffing levels, clinical reporting, clinical treatment options and the ability to make decisions on closing or reducing services for dialysis clinics. We expect to incur costs in our efforts to oppose Proposition 8. Ballotconnection with this new proposal, should it become eligible for the November 2020 election, and other potential legislative or ballot initiatives, similar to Proposition 8and these costs may be substantial. Similar initiatives were also proposed in Ohio and Arizona;Arizona in the 2018 election cycle; however, neither of these initiatives met the applicable requirements for inclusion on the state ballot for the November 2018 elections. Although Proposition 8 and the Ohio and Arizona initiatives did not pass, we expect thatWe may face similar ballot initiatives or other legislation might be proposed in the future in these or other states.
There hashave also been potential rule making and/orand legislative efforts at both the federal and state level concerning charitable premium assistance. In December 2016, CMS published an interim final rule that questioned the use of charitable premium assistance for ESRD patients and would have established new conditions for coverage standards for dialysis facilities. In January 2017, a federal district court in Texas issued a preliminary injunction on CMS' interim final rule and in June 2017, at the request of CMS, the court stayed the proceedings while CMS pursues new rulemaking options. In June 2019, CMS hassent to the White House Office of Management and Budget a proposed rule entitled "Conditions for Coverage for End-Stage Renal Disease Facilities-Third Party Payments." We do not issued any new rulemaking related to charitable premium assistance yet, but that does not preclude CMSknow if or another regulatory agency or legislative authority from issuing a newwhen this proposed rule or guidance that challenges charitable premium assistance.will be released. In addition, during the third quarter of 2018,on October 13, 2019 a bill (SB 1156) was passed by the California legislature that would have imposed restrictions and obligations related to the use by patients on commercial plans of charitable premium assistance in the state of California and would have limited the amounts paid to a provider for services provided to those patients, if that provider has a financial relationship with the organization providing charitable premium assistance. SB 1156 was subsequently vetoed by the Governor of California, and the California legislature did not subsequently vote to overturn the Governor's veto. However, we expect that similar legislative or other initiatives might be proposed in the future in these and other states. For example, in January 2019, a bill (AB 290) was introduced in the California legislaturesigned into law that is similar to SB 1156 and would, among other things, limitlimits the amount of reimbursement paid to certain providers for services provided to patients with commercial insurance who receive charitable premium assistance. If passedAB 290 was expected to become effective in January 2020. The American Kidney Fund (AKF), an organization that provides charitable premium assistance, announced that it would be withdrawing from California as a result of AB 290. On November 1, 2019, AKF filed a lawsuit in federal court challenging the law on several grounds. A group of providers, including DaVita, also filed a lawsuit challenging the law in federal court on November 5, 2019. The parties to each suit also filed motions for preliminary injunctions shortly after filing the lawsuits, seeking to prevent AB 290’s implementation during litigation. On December 30, 2019, the district court granted a preliminary injunction. The preliminary injunction will remain in place until a final judgment is made in the case, which is expected to occur in 2020.
In the event AB 290 becomes effective and implemented,the AKF withdraws from California, we expect that this bill would havean adverse impact on the ability of patients to afford Medicare premiums and Medicare supplemental (Medigap) and commercial coverage, which we expect will in turn result in an adverse impact on our business, results of operations, financial condition and cash flows. In addition, bills similar to AB 290 were introduced in Illinois (SB 650) and Oregon (SB 900), but have not been successfully passed to date. If these or similar bills are introduced and implemented in other jurisdictions, and organizations that provide charitable premium assistance in those jurisdictions are similarly impacted, it could in the aggregate have a material adverse impact on our business, results of operations, financial condition and cash flows. For additional information on the impact of decreases to the percentage of our patients with commercial insurance, see the risk factor under the heading "If the number of patients with higher-paying commercial insurance declines, it could have a material adverse effect on our business, results of operations, financial condition and cash flows".
Any law, rule or guidance proposed or issued by CMS or other federal or state regulatory or legislative authorities or others, including, without limitation, any initiatives similar to Proposition 8, SB 1156 or AB 290,the proposed legislation and ballot initiatives described above, or other future ballot or other initiatives restricting or prohibiting the ability of patients with access to alternative coverage from selecting a marketplace plan on or off exchange, limiting the amount of revenue that a dialysis provider can retain for caring for patients with commercial insurance, by, among other things, requiring rebates to insurers and taking into account only a portion of the costs incurred by dialysis providers,imposing burdensome operational requirements, affecting payments made to providers for services provided to patients who receive charitable premium assistance and/or otherwise restricting or prohibiting the use of charitable premium assistance, could cause us to incur substantial costs to oppose any such proposed measures, impact our dialysis center development plans, and if passed and/or implemented, could adversely impact dialysis centers across the U.S. making certain centers economically unviable, lead to the closure of certain
centers, restrict the ability of dialysis patients to
obtain and maintain optimal insurance coverage, and in some cases, have a material adverse effect on our business, results of operations, financial condition and cash flows.
Privacy and information security laws are complex, and if we fail to comply with applicable laws, regulations and standards, including with respect to third-party service providers that utilize sensitive personal information on our behalf, or if we fail to properly maintain the integrity of our data, protect our proprietary rights to our systems or defend against cybersecurity attacks, we may be subject to government or private actions due to privacy and security breaches, any of which could have a material adverse effect on our business, results of operations, financial condition and cash flows or materially harm our reputation.
We must comply with numerous federal and state laws and regulations in both the U.S. and the foreign jurisdictions in which we operate governing the collection, dissemination, access, use, security and privacy of PHI, including, without limitation, HIPAA and its implementing privacy, security, and related regulations, as amended by the federal Health Information Technology for Economic and Clinical Health Act (HITECH) and collectively referred to as HIPAA. We are also required to report known breaches of PHI consistent with applicable breach reporting requirements set forth in applicable laws and regulations. From time to time, we may be subject to both federal and state inquiries or audits related to HIPAA, HITECH and related state laws associated with complaints, desk audits, and self-reported breaches. If we fail to comply with applicable privacy and security laws, regulations and standards, including with respect to third-party service providers that utilize sensitive personal information, including PHI, on our behalf, properly maintain the integrity of our data, protect our proprietary rights, or defend against cybersecurity attacks, it could materially harm our reputation or have a material adverse effect on our business, results of operations, financial condition and cash flows. These risks may be intensified to the extent that the laws change or to the extent that we increase our use of third-party service providers that utilize sensitive personal information, including PHI, on our behalf.
Data protection laws are evolving globally, and may continue to add additional compliance costs and legal risks to our international operations. In Europe, the General Data Protection Regulation (GDPR) became effective on May 25, 2018. The GDPR applies to entities that are established in the European Union (EU), as well as extends the scope of EU data protection laws to foreign companies processing data of individuals in the EU. The GDPR imposes a comprehensive data protection regime with the potential for regulatory fines as well as data breach litigation by impacted data subjects. Under the GDPR, regulatory penalties may be assessed by data protection authorities for up to the greater of 4% of worldwide turnover or €20 million. The costs of compliance with, and other burdens imposed by, the GDPR and other new laws, regulations and policies implementing the GDPR may impact our European operations and/or limit the ways in which we can provide services or use personal data collected while providing services. If we fail to comply with the requirements of GDPR, we could be subject to penalties that would have a material adverse impact on our business, results of operations, financial condition and cash flows.
Data protection laws are also evolving nationally, and may add additional compliance costs and legal risks to our U.S. operations. For example, the California legislature recently passed the California Consumer Protection Act (CCPA), which is scheduled to becomebecame effective January 1, 2020. The CCPA is a privacy billlaw that requires certain companies doing business in California to disclose informationenhance privacy disclosures regarding the collection, use and usesharing of a consumer's personal data and to delete a consumer's data upon request.data. The ActCCPA grants consumers additional privacy rights that are broader than current Federal privacy rights. The CCPA also permits the imposition of civil penalties, grants enforcement authority to the state Attorney General and expands existing state security laws by providingprovides a private right of action for consumers where certain personal information is breached due to unreasonable information security practices. Several other states, including Nevada and Maine, have passed data protection laws similar to CCPA. These laws would impose organizational requirements and grant individual rights that are comparable to those established in certain circumstances where consumer data is subject to a breach. We are still evaluating whetherthe CCPA, and how this rule will impact our U.S. operations and /or limitother states may pass similar legislation in the ways in which we can provide services or use personal data collected while providing services.future. In addition, in December 2018,particular, the U.S. Department of Health and Human Services (HHS) Office for Civil Rights, (OCR) published a requestin partnership with the Healthcare and Public Health Sector Coordinating Council (HSCC), recently issued cybersecurity guidelines for information (RFI) seeking public input on a broad rangehealthcare organizations that reflect consensus-based, voluntary practices to cost-effectively reduce cybersecurity risks for organizations of potential reformsvarying sizes. Although these HHS-backed guidelines, entitled "Health Industry Cybersecurity Practices: Managing Threats and Protecting Patients," are voluntary, they are likely to HIPAA regulations with a focus on enhancing care coordination. Though only a preliminary step toward potential regulatory reform,serve as an important reference point for the RFI’s scope is significanthealthcare industry, and may cause us to invest additional resources in technology, personnel and programmatic cybersecurity controls as OCR seeks potential modificationsthe cybersecurity risks we face continue to the HIPAA regulations that would facilitate efficient care coordination while preserving the privacy and security of PHI.evolve.
Information security risks have significantly increased in recent years in part because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct our operations, and the increased sophistication and activities of organized crime, hackers, terrorists and other external parties, including, among others, foreign state agents. Our business and operations rely on the secure processing, transmission and storage of confidential, proprietary and other information in our computer systems and networks, including sensitive personal information, including PHI, social security numbers, and credit card information of our patients, teammates, physicians, business partners and others.
We continuously are implementingregularly review, monitor and implement multiple layers of security measures through technology, processes and our people. We utilize security technologies designed to protect and maintain the integrity of our information systems and data, and our defenses are monitored and routinely tested internally and by external parties. Despite these efforts, our facilities and systems and those of our third-party service providers may be vulnerable to privacy and security incidents; security attacks and breaches; acts of vandalism or theft; computer viruses and other malicious code; coordinated attacks by a variety of actors,
including, among others, activist entities or state sponsored cyberattacks; emerging cybersecurity risks; cyber risk related to connected devices; misplaced or lost data; programming and/or human errors; or other similar events that could impact the security, reliability and availability of our systems. Internal or external parties may attempt to circumvent our security systems, and we have in the past, and expect that we will in the future, experience external attacks on our network including, without limitation, reconnaissance probes, denial of service attempts, malicious software attacks including ransomware or other attacks intended to render our internal operating systems or data unavailable, and phishing attacks or business email compromise. Cybersecurity requires ongoing investment and diligence against evolving threats. Emerging and advanced security threats, including, without limitation, coordinated attacks, require additional layers of security which may disrupt or impact efficiency of operations. As with any security program, there always exists the risk that employees will violate our policies despite our compliance efforts or that certain attacks may be beyond the ability of our security and other systems to detect. There can be no assurance that investments, diligence and/or our internal controls will be sufficient to prevent or timely discover an attack.
Any security breach involving the misappropriation, loss or other unauthorized disclosure or use of confidential information, including, among others, PHI, financial data, competitively sensitive information, or other proprietary data, whether by us or a third party, could have a material adverse effect on our business, results of operations, financial condition, cash flows and materially harm our reputation. We may be required to expend significant additional resources to modify our protective measures, to investigate and remediate vulnerabilities or other exposures, or to make required notifications. The occurrence of any of these events could, among other things, result in interruptions, delays, the loss or corruption of data, cessations in the availability of systems and liability under privacy and security laws, all of which could have a material adverse effect on our business, results of operations, financial condition and cash flows, or materially harm our reputation and trigger regulatory actions and private party litigation. If we are unable to protect the physical and electronic security and privacy of our databases and transactions, we could be subject to potential liability and regulatory action, our reputation and relationships with our patients, physicians, vendors and other business partners would be harmed, and our business, results of operations, financial condition and cash flows could be materially and adversely affected. Failure to adequately protect and maintain the integrity of our information systems (including our networks) and data, or to defend against cybersecurity attacks, could subject us to monetary fines, civil suits, civil penalties or criminal sanctions and requirements to disclose the breach publicly, and could further result in a material adverse effect on our business, results of operations, financial condition and cash flows or harm our reputation. As malicious cyber activity escalates, including activity that originates outside of the U.S., the risks we face relating to transmission of data and our use of service providers outside of our network, as well as the storing or processing of data within our network, intensify. There have been increased international, federal and state and other privacy, data protection and security enforcement efforts and we expect this trend to continue. While we intend to maintain cyber liability insurance, this insurance may not cover us for all types of losses and may not be sufficient to protect us against the amount of all losses.
We may engageIf the average rates that commercial payors pay us decline significantly or if patients in acquisitions, mergers, joint ventures or dispositions, which may affectcommercial plans are subject to restriction in plan designs, it would have a material adverse effect on our business, results of operations, debt-to-capital ratio, capital expendituresfinancial condition and cash flows.
Approximately 31% of our U.S. dialysis net patient services revenues for the year ended December 31, 2019, were generated from patients who have commercial payors (including hospital dialysis services) as their primary payor. The majority of these patients have insurance policies that pay us on terms and at rates that are generally significantly higher than Medicare rates. The payments we receive from commercial payors generate nearly all of our profit and all of our nonacute dialysis profits come from commercial payors. We continue to experience downward pressure on some of our commercial payment rates as a result of general conditions in the market, including as employers shift to less expensive options for medical services, recent and future consolidations among commercial payors, increased focus on dialysis services and other factors. Commercial payment rates could be materially lower in the future due to these or other aspectsfactors.
We continuously are in the process of negotiating existing and potential new agreements with commercial payors who aggressively negotiate terms with us, and we can make no assurances about the ultimate results of these negotiations or the timing of any potential rate changes resulting from these negotiations. Sometimes many significant agreements are being renegotiated at the same time. In the event that our continual negotiations result in overall commercial rate reductions in excess of overall commercial rate increases, the cumulative effect could have a material adverse effect on our business, results of operations, financial condition and cash flows. We believe payor consolidations have significantly increased the negotiating leverage of commercial payors, and ongoing consolidations may continue to increase this leverage in the future. Our negotiations with payors are also influenced by competitive pressures, and we may experience decreased contracted rates with
commercial payors or experience decreases in patient volume, including if we turn away new patients in instances where we are unable to come to agreement with commercial payors on rates, as our negotiations with commercial payors continue.
Certain payors have also been attempting to design and implement plans that restrict access to ESRD coverage both in the commercial and individual market. Among other things, these restrictive plan designs seek to limit the duration and/or the breadth of ESRD benefits, limit the number of in-network providers, set arbitrary provider reimbursement rates, or otherwise restrict access to care, all of which may result in a decrease in the number of patients covered by commercial insurance. Payors may also dispute the scope and duration of ESRD benefit coverage under their plans. Any of the foregoing, including developments in plan design or new business activities of commercial payors, may lead to a significant decrease in the number of patients with commercial plans, the duration of benefits for patients under commercial plans and/or a significant decrease in the payment rates we receive, which would have a material adverse effect on our business, results of operations, financial condition and cash flows.
In addition, some commercial payors are pursuing or have incorporated policies into their provider manuals limiting or refusing to accept charitable premium assistance from non-profit organizations, such as the American Kidney Fund, which may impact the number of patients who are able to afford commercial plans. Paying for coverage is a significant financial burden for many patients, and ESRD disproportionately affects the low-income population. Charitable premium assistance supports continuity of coverage and access to care for patients, many of whom are unable to continue working full-time as a result of their severe condition. A material restriction in patients' ability to access charitable premium assistance may restrict the ability of dialysis patients to obtain and maintain optimal insurance coverage, and may adversely impact a large number of dialysis centers across the U.S. by making certain centers economically unviable, and may have a material adverse effect on our business, results of operations, financial condition and cash flows.
For additional details regarding the impact of a decline in our patients under commercial plans, see the risk factor under the heading "If the number of patients with higher-paying commercial insurance declines, it could have a material adverse effect on our business, results of operations, financial condition and cash flows." For additional details regarding specific risks we face regarding potential legislative or regulatory changes that, among other things, could result in fewer patients covered under commercial plans or an increase of patients covered under more restrictive commercial plans with lower reimbursement rates, see the discussion in the risk factor under the heading "Changes in federal and state healthcare legislation or regulations could have a material adverse effect on our business, results of operations, financial condition and cash flows."
If the number of patients with higher-paying commercial insurance declines, it could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Our revenue levels are sensitive to the percentage of our patients with higher-paying commercial insurance coverage. A patient's insurance coverage may change for a number of reasons, including changes in the patient's or a family member's employment status. A material portion of our commercial revenue is concentrated with a limited number of commercial payors, and any changes impacting our highest paying commercial payors will have a disproportionate impact on us. In addition, many patients with commercial and government insurance rely on financial assistance from charitable organizations, such as the American Kidney Fund. Certain payors have challenged our patients' and other providers' patients' ability to utilize assistance from charitable organizations for the payment of premiums, including, without limitation, through litigation and other legal proceedings. The use of charitable premium assistance for ESRD patients has also faced challenges and inquiries from legislators, regulators and other governmental authorities, and this may continue. In addition, CMS or another regulatory agency or legislative authority may issue a new rule or guidance that challenges or restricts charitable premium assistance. For additional details, see the discussion under the heading "Changes in federal and state healthcare legislation or regulations could have a material adverse effect on our business, results of operations, financial condition and cash flows." If any of these challenges to kidney patients' use of premium assistance are successful or restrictions are imposed on the use of financial assistance from such charitable organizations or if businessesorganizations providing such assistance are no longer available such that kidney patients are unable to obtain, or continue to receive or receive for a limited duration, such financial assistance, it could have a material adverse effect on our business, results of operations, financial condition and cash flows. In addition, if our assumptions about how kidney patients will respond to any change in financial assistance from charitable organizations are incorrect, it could have a material adverse effect on our business, results of operations, financial condition and cash flows.
When Medicare becomes the primary payor, the payment rate we acquirereceive for that patient decreases from the employer group health plan or commercial plan rate to the lower Medicare payment rate. If the number of our patients who have liabilitiesMedicare or another government-based program as their primary payor increases, it could negatively impact the percentage of our patients covered under commercial insurance plans. There are a number of factors that could drive a decline in the percentage of our patients covered under commercial insurance plans, including, among others, a continued decline in the rate of growth of the ESRD patient population, continued improved mortality or the reduced availability of commercial health plans or reduced coverage by such plans through the ACA exchanges or otherwise due to changes to the marketplace, healthcare
regulatory system or otherwise. Commercial payors could also cease paying in the primary position after providing 30 months of coverage resulting in potentially material reductions in payment as the patient moves to Medicare primary. Moreover, declining macroeconomic conditions could also negatively impact the percentage of our patients covered under commercial insurance plans. To the extent there are sustained or increased job losses in the U.S., we could experience a decrease in the number of patients covered under commercial plans and/or an increase in uninsured and underinsured patients independent of whether general economic conditions improve. We could also experience higher numbers of uninsured and underinsured patients, which would result in an increase in uncollectible accounts.
Finally, the ultimate results of our continual negotiations with commercial payors under existing and potential new agreements cannot be predicted and, among other things, could result in a decrease in the number of our patients covered by commercial plans to the extent that we cannot reach agreement with commercial payors on rates and other terms, resulting in termination or non-renewals of existing agreements and our inability to enter into new agreements. Our agreements and rates with commercial payors may be impacted by new business activities of these commercial payors as well as steps that these commercial payors have taken and may continue to take to control the cost of and/or the eligibility for access to the services that we provide, including, without limitation, relative to products on and off the healthcare exchanges. These efforts could impact the number of our patients who are eligible to enroll in commercial insurance plans, and remain on the plans, including plans offered through healthcare exchanges. For additional detail on the risks related to commercial payor activity, including restrictive plan design, see the discussion under the heading "If the average rates that commercial payors pay us decline significantly or if patients in commercial plans are subject to restriction in plan designs, it would have a material adverse effect on our business, results of operations, financial condition and cash flows." We could also experience a further decrease in the payments we receive for services if changes to the marketplace or the healthcare regulatory system result in fewer patients covered under commercial plans or an increase of patients covered under more restrictive commercial plans with lower reimbursement rates, among other things.
If there is a significant reduction in the number of patients under higher-paying commercial plans relative to government-based programs that pay at lower rates or a significant increase in the number of patients that are uninsured and underinsured, it would have a material adverse effect on our business, results of operations, financial condition and cash flows.
If we are not aware of or are not adequately addressed, weable to successfully implement our strategy with respect to home-based dialysis, including maintaining our existing business and further developing our capabilities in a complex and highly regulated environment, it could suffer severe consequences that would have a material adverse effect on our business, results of operations, financial condition and cash flows, and could materially harm our reputation.
Our home-based dialysis services, which include home hemodialysis and peritoneal dialysis (PD), represented approximately 16% of our U.S. dialysis patient services revenues for the year ended December 31, 2019, and have increasingly become an important part of our overall strategy. In addition, home-based dialysis recently has been the subject of increased political and industry focus. For example, in connection with the 2019 Executive Order, HHS set out specific goals related to home dialysis and CMMI announced a proposed mandatory model that included new incentives to encourage dialysis at home. We are a leader in home-based dialysis and have made investments in processes and infrastructure to continue to grow this modality. There are, however, risks associated with this growth, including, among other things, financial, legal and operational risks related to our ability to design and develop infrastructure and to plan for capacity in a modality that is part of an evolving marketplace. We may also be subject to associated risks related to our ability to successfully manage related operational initiatives, find, train and retain appropriate staff, contract with payors for appropriate reimbursement, and maintain processes to adhere to the complex regulatory and legal requirements, including without limitation those associated with billing Medicare. For additional detail on risks associated with operating in a highly regulated environment, see "If we fail to adhere to all of the complex governmental laws, regulations and requirements that apply to our business, we could suffer severe consequences that could have a material adverse effect on our business, results of operations, financial condition and cash flows, and could materially harm our reputation and stock price." In addition to the above risks, certain risks inherent to home-based dialysis will increase as we expand our home-based dialysis offerings, including risks related to managing transitions between in-center and home-based dialysis, billing and telehealth systems, among others. For additional detail on risks associated with information systems and new technology generally, see the discussion under the heading "Failing to effectively maintain, operate or upgrade our information systems or those of third-party service providers upon which we rely, including, without limitation, our clinical, billing and collections systems could materially adversely affect our business, results of operations, financial condition and cash flows."
An increased focus on home-based dialysis is also indicative of the generally evolving market for kidney care. This developing market may create additional opportunities for competition with relative ease of entry, and if we are unable to successfully adapt to these marketplace developments in a timely and compliant manner, we may see a reduction in our overall number of patients, among other things. For additional detail on the competitive landscape in kidney care, see the discussion under the heading “If we are unable to compete successfully, including, without limitation, implementing our growth strategy
and/or retaining patients and physicians willing to serve as medical directors, it could materially adversely affect our business, results of operations, financial condition and cash flows.” If we are not able to successfully implement our strategy with respect to home-based dialysis, including maintaining our existing business and further developing our capabilities in a complex and highly regulated environment, it could have a material adverse effect on our business, results of operations, financial condition and cash flows, and could materially harm our reputation.
Changes in the structure of and payment rates under the Medicare ESRD program could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Approximately 42% of our U.S. dialysis net patient services revenues for the year ended December 31, 2019, were generated from patients who have Medicare as their primary payor. For patients with Medicare coverage, all ESRD payments for dialysis treatments are currently made under a single bundled payment rate which provides a fixed payment rate to encompass all goods and services provided during the dialysis treatment that are related to the treatment of dialysis, including pharmaceuticals that were historically separately reimbursed to the dialysis providers, such as erythropoietin (EPO), vitamin D analogs and iron supplements, irrespective of the level of pharmaceuticals administered or additional services performed, except in the case of calcimimetics, which are subject to a transitional drug add-on payment adjustment for the Medicare Part B ESRD payment. Most lab services are also included in the bundled payment. Under the ESRD Prospective Payment System (PPS), the bundled payments to a dialysis facility may be reduced by as much as 2% based on the facility's performance in specified quality measures set annually by CMS through the ESRD Quality Incentive Program, which was established by the Medicare Improvements for Patients and Providers Act of 2008. The bundled payment rate is also adjusted for certain patient characteristics, a geographic usage index and certain other factors. In addition, the ESRD PPS is subject to rebasing, which can have a positive financial effect, or a negative one if the government fails to rebase in a manner that adequately addresses the costs borne by dialysis facilities. Similarly, as new drugs, services or labs are added to the ESRD bundle, CMS' failure to adequately calculate the costs associated with the drugs, services or labs could have a material adverse effect on our business, results of operations, financial condition and cash flows.
The current bundled payment system presents certain operating, clinical and financial risks, which include, without limitation:
Risk that our rates are reduced by CMS. Uncertainty about future payment rates remains a material risk to our business. CMS publishes a final rule for the ESRD PPS each year; the final rule for 2020 was issued on October 31, 2019.
Risk that CMS, on its own or through its contracted Medicare Administrative Contractors (MACs) or otherwise, implements Local Coverage Determinations (LCDs) or implements payment provisions, policy or regulatory mandates, including changes to the existing or future PPS, that limit our ability to either be paid for covered dialysis services or bill for treatments or other drugs and services or other rules that may impact reimbursement. Such payment rules and regulations and coverage determinations or related decisions could have an adverse impact on our operations and revenue. There is also risk commercial insurers could seek to incorporate the requirements or limitations associated with such LCDs or CMS guidance into their contracted terms with dialysis providers, which could have an adverse impact on our revenue.
Risk that a MAC, or multiple MACs, change their interpretations of existing regulations, manual provisions and/or guidance, or seek to implement or enforce new interpretations that are inconsistent with how we have interpreted existing regulations, manual provisions and/or guidance.
Risk that increases in our operating costs will outpace the Medicare rate increases we receive. We expect operating costs to continue to increase due to inflationary factors, such as increases in labor and supply costs, including, without limitation, increases in maintenance costs and capital expenditures to improve, renovate and maintain our facilities, equipment and information technology to meet changing regulatory requirements and business needs, regardless of whether there is a compensating inflation-based increase in Medicare payment rates or in payments under the bundled payment rate system.
Risk of continued federal budget sequestration cuts. As a result of the Budget Control Act of 2011 and the BBA, an annual 2% reduction to Medicare payments took effect on April 1, 2013, and has been extended through 2027. These across-the-board spending cuts have affected and will continue to adversely affect our business, results of operations, financial condition and cash flows.
Risk that failure to adequately develop and maintain our clinical systems or failure of our clinical systems to operate effectively could have a material adverse effect on our business, results of operations, financial condition and cash flows. For example, in connection with claims for which at least part of the government's payments to us is based on clinical performance or patient outcomes or co-morbidities, if our clinical systems fail to accurately capture the data we report to CMS or we otherwise have data integrity issues with respect to the reported information, we might be over-reimbursed by the government, which could subject us to liability. For example, CMS published a final rule that implemented a provision of the ACA, requiring providers to report and return Medicare and Medicaid overpayments within the later of (a) 60 days after the overpayment is identified and quantified, or (b) the date any corresponding cost report is due, if applicable. An overpayment impermissibly retained under this statute could, among other things, subject us to liability under the FCA, exclusion from participation in the federal healthcare programs, and penalties under the federal Civil Monetary Penalty statute and could adversely impact our reputation.
We are subject to similar risks for services billed separately from the ESRD bundled payment, including, without limitation, the risk that a MAC, or multiple MACs, change their interpretations of existing regulations, manual provisions and/or guidance; or seek to implement or enforce new interpretations that are inconsistent with how we have interpreted existing regulations, manual provisions and/or guidance. For additional details regarding the risks we face for failing to adhere to our Medicare and Medicaid regulatory compliance obligations, see the risk factor above under the heading "If we fail to adhere to all of the complex governmental laws, regulations and requirements that apply to our business, we could suffer severe consequences that could have a material adverse effect on our business, results of operations, financial condition and cash flows, and could materially harm our reputation and stock price."
In addition, changing legislation and other regulatory and executive developments have led and may continue to lead to the emergence of new models of care and other initiatives in both the government and private sector that, among other things, impact the structure of, and payment rates under, the Medicare ESRD program. For additional details regarding the risks we face for failing to adequately implement strategic initiatives to adjust to these marketplace developments, see the risk factor above under the heading “Changes in federal and state healthcare legislation or regulations could have a material adverse effect on our business, results of operations, financial condition and cash flows.”
Moreover, the number of our patients with primary Medicare coverage may be subject to change, particularly with the upcoming January 1, 2021 effective date under the 21st Century Cures Act, which will allow Medicare-eligible individuals with ESRD to enroll in Medicare Part C Medicare Advantage (MA) managed care plans. We continue to evaluate the potential impact of this change in benefit eligibility, as there is significant uncertainty as to how many or which newly eligible ESRD patients will seek to enroll in MA plans for their ESRD benefits and how quickly any such changes would occur. If we fail to maintain contracts with MA payors with competitive rates, if our assumptions about how kidney patients will respond to the 21st Century Cures Act are incorrect or if we fail to provide education to kidney patients in the manner specified by CMS, we could be subject to certain clinical, operational, financial and legal risks, which could be material.
Changes in state Medicaid or other non-Medicare government-based programs or payment rates could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Approximately 27% of our U.S. dialysis net patient services revenues for the year ended December 31, 2019, were generated from patients who have state Medicaid or other non-Medicare government-based programs, such as coverage through the Department of Veterans Affairs (VA), as their primary coverage. As state governments and other governmental organizations face increasing budgetary pressure, we may in turn face reductions in payment rates, delays in the receipt of payments, limitations on enrollee eligibility or other changes to the applicable programs. For example, certain state Medicaid programs and the VA have recently considered, proposed or implemented payment rate reductions.
The VA adopted Medicare's bundled PPS pricing methodology for any veterans receiving treatment from non-VA providers under a national contracting initiative. Since we are a non-VA provider, these reimbursements are tied to a percentage of Medicare reimbursement, and we have exposure to any dialysis reimbursement changes made by CMS. Approximately 3% of our U.S. dialysis net patient services revenues for the year ended December 31, 2019 were generated by the VA.
In 2019, we entered into a Nationwide Dialysis Services contract with the VA that includes five separate one-year renewal periods throughout the term of the contract. The term structure is similar to our prior five-year agreement with the VA, and is consistent with VA practice for similar provider agreements. With this contract award, the VA has agreed to keep our percentage of Medicare reimbursement consistent with that under our prior agreement with the VA during the term of the contract. As with that prior agreement, this agreement provides the VA with the right to terminate the agreements without cause on short notice. Should the VA renegotiate, or not renew or cancel these agreements for any reason, we may cease accepting patients under this program and may be forced to close centers or experience lower reimbursement rates, which could have a material adverse effect on our business, results of operations, financial condition and cash flows.
State Medicaid programs are increasingly adopting Medicare-like bundled payment systems, but sometimes these payment systems are poorly defined and are implemented without any claims processing infrastructure, or patient or facility adjusters. If these payment systems are implemented without any adjusters and claims processing infrastructure, Medicaid payments will be substantially reduced and the costs to submit such claims may increase, which will have a negative impact on our business, results of operations, financial condition and cash flows. In addition, some state Medicaid program eligibility requirements mandate that citizen enrollees in such programs provide documented proof of citizenship. If our patients cannot meet these proof of citizenship documentation requirements, they may be denied coverage under these programs, resulting in decreased patient volumes and revenue. These Medicaid payment and enrollment changes, along with similar changes to other non-Medicare government programs could reduce the rates paid by these programs for dialysis and related services, delay the receipt of payment for services provided and further limit eligibility for coverage which could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Changes in clinical practices, payment rates or regulations impacting pharmaceuticals could have a material adverse effect on our business, results of operations, financial condition, and cash flows and negatively impact our ability to care for patients.
Medicare bundles certain pharmaceuticals into the ESRD PPS payment rate at industry average doses and prices. Variations above the industry average may be subject to partial reimbursement through the PPS outlier reimbursement policy.
Changes to industry averages, which can be caused by, among other things, changes in physician prescribing practices, including in response to the introduction of new drugs, treatments or technologies, changes in best and/or accepted clinical practice, changes in private or governmental payment criteria regarding pharmaceuticals, or the introduction of administration policies may negatively impact our ability to obtain sufficient reimbursement levels for the care we provide, and all of these factors could have a material adverse effect on our business, results of operations, financial condition and cash flows. Physician practice patterns, including their independent determinations as to appropriate pharmaceuticals and dosing, are subject to change, including, for example, as a result of changes in labeling of pharmaceuticals or the introduction of new pharmaceuticals. Additionally, commercial payors have increasingly examined their administration policies for pharmaceuticals and, in some cases, have modified those policies. If such policy and practice trends or other changes to private and governmental payment criteria make it more difficult to preserve our margins per treatment, it could have a material adverse effect on our business, results of operations, financial condition and cash flows. Further, increased utilization of certain pharmaceuticals whose costs are included in a bundled reimbursement rate, or decreases in reimbursement for pharmaceuticals whose costs are not included in a bundled reimbursement rate, could also have a material adverse effect on our business, results of operation, financial condition and cash flows.
Changes in regulations impacting pharmaceuticals could similarly affect our operating results. For example, as of January 1, 2018, calcimimetics became part of the Medicare Part B ESRD payment, subject to a transitional drug add-on payment adjustment (TDAPA). We implemented operational and clinical processes designed to provide the drug as required under the applicable regulations and as prescribed by physicians, and also worked to contract with payors and manufacturers to provide for access to and distribution of the drug. If the government or other payors implement new requirements for patients to receive the drug, if we are not adequately reimbursed for the cost of the drug, or the processes we have implemented to provide the drug do not perform as anticipated, then we could be subject to both financial and operational risk, among other things. During this transitional period, the wider availability of generic supplies of oral calcimimetics has driven the acquisition cost of that drug down, which will in turn continue to lower associated reimbursement rates. CMS intends to add calcimimetics into the bundle as of January 1, 2021, but at this time we cannot predict the specifics of how CMS will incorporate oral and intravenous calcimimetics into the Medicare bundle. Each of these factors could lead to significant fluctuations in our associated levels of operating income, among other things.
Similar operating and clinical rigor and processes will be needed for other potential new drugs, treatments or technologies that are approved and come onto the market. Any failure to successfully contract with manufacturers for competitive pricing, failure to successfully contract with the government or other payors for appropriate reimbursement, or failure to prepare, develop and implement processes that provide for appropriate availability and use in our clinics could have a material adverse impact on our business, results of operations, financial condition and cash flows. Additionally, as new kidney care drugs, treatments or technologies are introduced over time, we expect that the use of transitional payment adjustments to incorporate certain of these new drugs, treatments or technologies as defined by the CMS policy into the bundled Medicare Part B ESRD payment may lead to fluctuations in associated levels of operating income and risk that the reimbursement levels of such drugs, treatments or technologies may not adequately cover our cost to obtain the drug or other associated costs due to, among other things, the risk that CMS may not provide adequate funding in the Medicare Part B ESRD payment in the post-transitional period or such items are not covered by transitional add on pricing, in which case there may be less clarity on the reimbursement, either of which may in turn adversely impact our business, results of operations, financial condition and cash flows.
We may also be subject to increased inquiries or audits from a variety of governmental bodies or claims by third parties related to pharmaceuticals, which would require management's attention and could result in significant legal expense. Any negative findings could result in, among other things, substantial financial penalties or repayment obligations, the imposition of certain obligations on and changes to our practices and procedures as well as the attendant financial burden on us to comply with the obligations, or exclusion from future participation in the Medicare and Medicaid programs, and could have a material adverse effect on our business, results of operations, financial condition, cash flows and reputation. For additional details, see the risk factor under the heading "If we fail to adhere to all of the complex governmental laws, regulations and requirements that apply to our business, we could suffer severe consequences that could have a material adverse effect on our business, results of operations, financial condition and cash flows, and could materially harm our reputation and stock price."
If we are unable to compete successfully, including, without limitation, implementing our growth strategy and/or retaining patients and physicians willing to serve as medical directors, it could materially adversely affect our business, results of operations, financial condition and cash flows.
Patient retention and the continued referrals of patients from referral sources such as hospitals and nephrologists, as well as acquisitions are some of the important parts of our growth strategy. In our U.S. dialysis business, we continue to face intense competition from large and medium-sized providers, among others, which compete directly with us for the limited acquisition targets as well as for individual patients and physicians qualified to serve as medical directors. U.S. regulations require medical directors for each center. As we and our competitors continue to grow and open new dialysis centers, we may not be able to retain an adequate number of nephrologists to serve as medical directors. Competition in existing and expanding geographies or areas is intense, and is not limited to large competitors with substantial financial resources or to established participants in the dialysis space. We also compete with individual nephrologists who have opened their own dialysis units or facilities. Moreover, as we continue our expansion into various international markets, we will continue to face competition from large and medium-sized providers, among others, for acquisition targets.
In addition, Fresenius USA, our largest competitor, manufactures a full line of dialysis supplies and equipment in addition to owning and operating dialysis centers. This may give it cost advantages over us because of its ability to manufacture its own products or prevent us from accessing existing or new technology on a cost-effective basis. See further discussion regarding risks associated with our suppliers and new technologies under the heading "If certain of our suppliers do not meet our needs, if there are material price increases on supplies, if we are not reimbursed or adequately reimbursed for drugs we purchase or if we are unable to effectively access new technology or superior products, it could negatively impact our ability to effectively provide the services we offer and could have a material adverse effect on our business, results of operations, financial condition and cash flows."
In addition to traditional dialysis providers, there have been a number of announcements by non-traditional dialysis providers and others, which relate to entry into the dialysis and pre-dialysis space, the development of innovative technologies, or the commencement of new business activities that could be disruptive to the industry. Some of these new entrants have considerable financial resources. Although these and other potential competitors may face operational or financial challenges, the highly-competitive and evolving dialysis and pre-dialysis marketplaces have presented some opportunities for relative ease of entry for these and other potential competitors. As a result, we may compete with these smaller or non-traditional providers or others in an asymmetrical environment with respect to data and regulatory requirements that we face as an ESRD service provider, thereby negatively impacting our ability to effectively compete. These and other factors have continued to drive change in the dialysis and pre-dialysis space, and if we are unable to successfully adapt to these dynamics, it could have a material adverse impact on our business, results of operations, financial condition and cash flows.
Furthermore, each of the aforementioned competitive pressures and related risks may be impacted by a continued decline in the rate of growth of the ESRD patient population or other reductions in demand for dialysis treatments. Based on the recent 2019 annual data report from the United States Renal Data System (USRDS), the underlying ESRD dialysis patient population has grown at an approximate compound rate of 3.6% from 2007 to 2017 and a compound rate of 3.3% from 2012 to 2017, which suggests that the rate of growth of the ESRD patient population is declining. A number of factors may impact ESRD growth rates, including, without limitation, the aging of the U.S. population, incidence rates for diseases that cause kidney failure such as diabetes and hypertension, mortality rates for dialysis patients and growth rates of minority populations with higher than average incidence rates of ESRD. In addition, the number of kidney transplants has been increasing in recent years and the historical improvement in the mortality rate of patients with ESRD appears to be plateauing, each of which may impact ESRD growth rates. This transplant rate may continue to increase in future years, particularly in light of the recent 2019 Executive Order and CMMI's proposed new goals and measures to increase access to kidney transplants. In addition, one of the stated goals of the 2019 Executive Order and CMMI's proposed rule is to reduce ESRD. For additional information, see the discussion under the heading "Changes in the structure of and payment rates under the Medicare ESRD program could have a material adverse effect on our business, results of operations, financial condition and cash flows."
If we are not able to effectively implement our growth strategy, including by making acquisitions at the desired pace or at all; if we are not able to continue to maintain the expected or desired level of non-acquired growth; or if we experience significant patient attrition either as a result of new business activities in the dialysis or pre-dialysis space by our existing competitors, other market participants, new entrants, new technology or other forms of competition, or as a result of reductions in demand for dialysis treatments, including, without limitation, reduced prevalence of ESRD or an increase in the number of kidney transplants, it could materially adversely affect our business, results of operations, financial condition and cash flows.
We may engage in acquisitions, mergers, joint ventures or dispositions, which may materially affect our results of operations, debt-to-capital ratio, capital expenditures or other aspects of our business, and, under certain circumstances, could have a material adverse effect on our business, results of operations, financial condition and cash flows and could materially harm our reputation.
Our business strategy includes growth through acquisitions of dialysis centers and other businesses, as well as through entry into joint ventures. We may engage in acquisitions, mergers, joint ventures or dispositions or expand into new business lines or models, which may affect our results of operations, debt-to-capital ratio, capital expenditures or other aspects of our business. There can be no assurance that we will be able to identify suitable acquisition targets or merger partners or buyers for dispositions or that, if identified, we will be able to agree to terms with merger partners, acquire these targets or make these dispositions on acceptable terms or on the desired timetable. There can also be no assurance that we will be successful in completing any acquisitions, mergers or dispositions that we announce, executing new business lines or models or integrating any acquired business into our overall operations. There is no guarantee that we will be able to operate acquired businesses successfully as stand-alone businesses, or that any such acquired business will operate profitably or will not otherwise have a material adverse effect on our business, results of operations, financial condition and cash flows or materially harm our reputation. In addition, acquisition, merger or joint venture activity conducted as part of our overall growth strategy is subject to antitrust and competition laws, and antitrust regulators can investigate future (or pending) and consummated transactions. These laws could impact our ability to pursue these transactions, and under certain circumstances, could result in mandated divestitures, among other things. If a proposed transaction or series of transactions is subject to challenge under antitrust or competition laws, we may incur substantial legal costs, management’s attention and resources may be diverted, and if we are found to have violated these or other related laws, regulations or requirements, we could suffer severe consequences that could have a material adverse effect on our business, results of operations, financial condition and cash flows and could materially harm our reputation and stock price. For additional detail, see the discussion under the heading "If we fail to adhere to all of the complex governmental laws, regulations and requirements that apply to our business, we could suffer severe consequences that could have a material adverse effect on our business, results of operations, financial condition and cash flows, and could materially harm our reputation and stock price." Further, we cannot be certain that key talented individuals at the business being acquired will continue to work for us after the acquisition or that they will be able to continue to successfully manage or have adequate resources to successfully operate any acquired business. In addition, certain of our newly and previously acquired dialysis centers and facilities have been in service for many years, which may result in a higher level of maintenance costs. Further, our facilities, equipment and information technology may need to be improved or renovated to maintain or increase operational efficiency, compete for patients and medical directors, or meet changing regulatory requirements. Increases in maintenance costs and any continued increases in capital expenditures could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Businesses we acquire may have unknown or contingent liabilities or liabilities that are in excess of the amounts that we originally estimated, and may have other issues, including, without limitation, those related to internal controls over financial reporting or issues
that could affect our ability to comply with healthcare laws and regulations and other laws applicable to our expanded business, which could harm our reputation. As a result, we cannot make any assurances that the acquisitions we consummate will be successful. Although we generally seek indemnification from the sellers of businesses we acquire for matters that are not properly disclosed to us, we are not always successful. In addition, even in cases where we are able to obtain indemnification, we may discover liabilities greater than the contractual limits, the amounts held in escrow for our benefit (if any), or the financial resources of the indemnifying party. In the event that we are responsible for liabilities substantially in excess of any amounts recovered through rights to indemnification or alternative remedies that might be available to us, or any applicable insurance, we could suffer severe consequences that couldwould have a material adverse effect on our business, results of operations, financial condition and cash flows.flows and could materially harm our reputation.
We have in the past decided, and may in the future decide, to dispose of certain assets or businesses, such as the disposition of our DMG business, which we completed in June 2019. The sale of DMG results in a less diversified portfolio of businesses, and we have a greater dependency on the performance of our kidney care business for our financial results, which makes us more susceptible to market fluctuations and other adverse events than if we had retained the DMG business.
In addition, under the terms of the equity purchase agreement in connection with the DMG sale agreement, as amended (the DMG sale agreement) (and subject to the limitations therein), we agreed to certain indemnification obligations. As a result,
we may become obligated to make payments to the buyer relating to our previous ownership and operation of the DMG business. Claims giving rise to these potential payments include, without limitation, claims related to breaches of our representations and warranties and covenants, including claims for breaches of our representations and warranties regarding compliance with law, litigation, absence of undisclosed liabilities, employee benefit matters, labor matters, or taxes, among others, and other claims for which we provided the buyer with a special indemnity. Any such post-closing liabilities and required payments under the DMG sale agreement, or otherwise, or in connection with any other past or future disposition of material assets or businesses could individually or in the aggregate have a material adverse effect on our business, results of operations, financial condition and cash flows and could materially harm our reputation. Further, the purchase price in the DMG sale agreement is subject to customary post-closing adjustments, including, without limitation, as a result of certain net working capital adjustments. We are currently engaged with Optum concerning what, if any, net working capital adjustment or other potential adjustments to the purchase price are appropriate, via the process set forth in the DMG sale agreement. Any negative adjustments to the purchase price, including, without limitation, as a result of this ongoing engagement with Optum, could result in a material adverse change in the amount of consideration that we are able to retain.
Additionally, joint ventures, including, without limitation, our Asia Pacific joint venture, and minority investments inherently involve a lesser degree of control over business operations, thereby potentially increasing the financial, legal, operational and/or compliance risks associated with the joint venture or minority investment. In addition, we may be dependent on joint venture partners, controlling shareholders or management who may have business interests, strategies or goals that are inconsistent with ours. Business decisions or other actions or omissions of the joint venture partner, controlling shareholders or management may require us to make capital contributions or necessitate other payments, result in litigation or regulatory action against us, result in reputational harm to us or adversely affect the value of our investment or partnership.partnership, among other things. In addition, we have potential obligations to purchase the interests held by third parties in many of our joint ventures as a result of put provisions that are exercisable at the third party's discretion within specified time periods, pursuant to the applicable agreement. If these put provisions were exercised, we would be required to purchase the third party owner's equity interest, generally at the appraised market value. There can be no assurances that these joint ventures and/or minority investments, including, without limitation, our Asia Pacific joint venture, ultimately will be successful.
If we are unable to compete successfully, including implementing our growth strategy and/or retaining our physicians and patients, it could materially adversely affect our business, results of operations, financial condition and cash flows.
Acquisitions, patient retention and medical director and physician retention are important parts of our growth strategy. We face intense competition from other companies for acquisition targets. In our U.S. dialysis business, we continue to face increased competition from large and medium-sized providers, among others, which compete directly with us for the limited acquisition targets as well as for individual patients and medical directors. In addition, we compete for individual patients, physicians and medical directors based in part on the quality of our facilities. Moreover, as we continue our international expansion into various international markets, we will continue to face competition from large and medium-sized providers, among others, for these acquisition targets as well. As we and our competitors continue to grow and open new dialysis centers, each center in the U.S. is required by applicable regulations to have a medical director, and we may not be able to retain an adequate number of nephrologists to serve as medical directors. Because of the ease of entry into the dialysis business and the ability of physicians to be medical directors for their own centers, competition in existing and expanding markets is not limited to large competitors with substantial financial resources. Individual nephrologists have opened their own dialysis units or facilities. There also has been increasing indications of interest from non-traditional dialysis providers and others to enter the dialysis space and/or develop innovative technologies or business activities that could be disruptive to the industry. Although these potential new competitors and others may face operational and/or financial challenges, if their efforts to offer dialysis services and/or develop innovative technology or business activities in the dialysis or pre-dialysis space are successful and we are unable to effectively compete, it could have a material adverse impact on our business, results of operations, financial condition and cash flows. Further, competitive pressures and the related risks may be impacted by a continued decline in the rate of growth of the ESRD patient population or other reductions in demand for dialysis treatments.
In addition, Fresenius USA, our largest competitor, manufactures a full line of dialysis supplies and equipment in addition to owning and operating dialysis centers. This may give it cost advantages over us because of its ability to manufacture its own products or prevent us from accessing existing or new technology on a cost-effective basis. See further discussion regarding risks associated with our suppliers under the heading below, "If certain of our suppliers do not meet our needs, if there are material price increases on supplies, if we are not reimbursed or adequately reimbursed for drugs we purchase or if we are unable to effectively access new technology or superior products, it could negatively impact our ability to effectively provide the services we offer and could have a material adverse effect on our business, results of operations, financial condition and cash flows."
If we are not able to effectively implement our growth strategy, including by making acquisitions at the desired pace or at all; if we are not able to continue to maintain the expected or desired level of non-acquired growth; if we experience significant patient attrition as a result of new business activities, new technology or other forms of competition, reduced prevalence of ESRD or other reductions in demand for dialysis treatments; or if physicians choose not to refer to our clinics, it could materially adversely affect our business, results of operations, financial condition and cash flows.
If certain of our suppliers do not meet our needs, if there are material price increases on supplies, if we are not reimbursed or adequately reimbursed for drugs we purchase or if we are unable to effectively access new technology or superior products, it could negatively impact our ability to effectively provide the services we offer and could have a material adverse effect on our business, results of operations, financial condition and cash flows.
We have significant suppliers, with a substantial portion of our total vendor spend concentrated with a limited number of third party suppliers. These third party suppliers include, without limitation, suppliers of pharmaceuticals that may be the sole or primary source of products critical to the services we provide, or to which we have committed obligations to make purchases, sometimes at particular prices. If any of these suppliers do not meet our needs for the products they supply, including, without limitation, in the event of a product recall, shortage or dispute, and we are not able to find adequate alternative sources, if we experience material price increases from these suppliers that we are unable to mitigate, or if some of the drugs that we purchase from our suppliers are not reimbursed or not adequately reimbursed by commercial or government payors, or if we are unable to secure products, including pharmaceuticals at competitive rates and within the desired time frame, it could have a material adverse impact on our business, results of operations, financial condition and cash flows. In addition, the technology related to the products critical to the services we provide is subject to new developments which may result in superior products. If we are not able to access superior products on a cost-effective basis or if suppliers are not able to fulfill our requirements for such products, we could face patient attrition and other negative consequences which could have a material adverse effect on our business, results of operations, financial condition and cash flows.
DMG operates in a different line of business from our historical business, and we may not realize anticipated benefits from DMG.
DaVita Medical Group (DMG) operates in a different line of business from our historical business. We may not have the expertise, experience and resources to profitably pursue all of our businesses at once, and we may be unable to successfully and profitably operate all businesses in the combined company. The administration of DMG requires implementation of appropriate operations, management, forecasting, and financial reporting systems and controls, all of which pose challenges. The management of DMG requires and will continue to require the focused attention of our management team, including a significant commitment of its time and resources. The need for management to focus on these matters could have a material adverse effect on our business, results of operations, financial condition and cash flows. If the DMG operations continue to be less profitable than we currently anticipate or we do not have the experience, the appropriate expertise or the resources to profitably pursue all businesses in the combined company, our results of operations, financial condition and cash flows may be materially and adversely affected.
Laws regulating the corporate practice of medicine could restrict the manner in which DMG and our other subsidiaries are permitted to conduct their respective business, and the failure to comply with such laws could subject these entities to penalties or require a restructuring of these businesses.
Some states have laws that prohibit business entities, such as DMG and our other subsidiaries, including but not limited to, Nephrology Practice Solutions, DaVita Health Solutions, DaVita IKC, and Lifeline, from practicing medicine, employing physicians to practice medicine, exercising control over medical decisions by physicians (also known collectively as the corporate practice of medicine) or engaging in certain arrangements, such as fee-splitting, with physicians. In some states these prohibitions are expressly stated in a statute or regulation, while in other states the prohibition is a matter of judicial or regulatory interpretation. Of the states in which DMG currently operates, California, Colorado, Nevada and Washington generally prohibit the corporate practice of medicine, and other states may as well.
DMG and other DaVita entities operate in those states by maintaining long-term contracts with their associated physician groups which are each owned and operated by physicians and which employ or contract with additional physicians to provide physician services. Under these arrangements, DMG and such other DaVita entities provide non-medical management services and receive a management fee for providing these services; however, DMG and such other DaVita entities do not represent that they offer medical services, and do not exercise influence or control over the practice of medicine by the physicians or the associated physician groups.
In addition to the above management arrangements, DMG has certain contractual rights relating to the orderly transfer of equity interests in certain of its associated physician groups through succession agreements and other arrangements with their physician equity holders. However, such equity interests cannot be transferred to or held by DMG or by any non-professional organization. Accordingly, neither DMG nor DMG's subsidiaries directly own any equity interests in any physician groups in California, Colorado, Nevada and Washington. The other DaVita entities operating in these and multiple other states have similar agreements and arrangements. In the event that any of these associated physician groups fail to comply with the management arrangement or any management arrangement is terminated and/or DMG or any of the other DaVita entities is unable to enforce its contractual rights over the orderly transfer of equity interests in its associated physician groups, such events could have a material adverse effect on the business, results of operations, financial condition and cash flows of DMG or such other DaVita entities.
It is possible that a state regulatory agency or a court could determine that DMG's agreements with physician equity holders of certain managed California, Colorado, Nevada and Washington associated physician groups and the way DMG carries out these arrangements as described above, either independently or coupled with the management services agreements with such associated physician groups, are in violation of the corporate practice of medicine doctrine. As a result, these arrangements could be deemed invalid, potentially resulting in a loss of revenues and an adverse effect on results of operations derived from such associated physician groups. Such a determination could force a restructuring of DMG's management arrangements with associated physician groups in California, Colorado, Nevada and/or Washington, which might include revisions of the management services agreements, including a modification of the management fee and/or establishing an alternative structure that would permit DMG to contract with a physician network without violating the corporate practice of medicine prohibition. There can be no assurance that such a restructuring would be feasible, or that it could be accomplished within a reasonable time frame without a material adverse effect on DMG's business, results of operations, financial condition and cash flows. These same risks exist for the other DaVita entities utilizing similar structures.
In December 2013, DaVita Health Plan of California, Inc. (DHPC) obtained a restricted Knox-Keene license in California, which, among other things, permits DHPC to contract with health plans in California and to arrange health care services through a network of employed or contracting physicians and other providerswithout violating the corporate practice of medicine prohibition. However, DHPC continues to subcontract with DMG associated physician groups in California to arrange physician services. DMG and DMG's California, Colorado, Nevada and Washington associated physician groups, as well as those physician equity holders of associated physician groups who are subject to succession agreements with DMG, could be subject to criminal or civil penalties or an injunction if, for non-physicians, they are found to be practicing medicine without a license or, for licensed physicians, they are found to be aiding and abetting the unlicensed practice of medicine.
The level of our current and future debt could have an adverse impact on our business, and our ability to generate cash to service our indebtedness and for other intended purposes depends on many factors beyond our control.
We have substantial debt outstanding, we incurred a substantial amount of additional debt in connection with our entry into the Increase Joinder Agreement in March 2018,indebtedness outstanding and we may continue to incur substantial additional indebtedness in the future. future, including indebtedness incurred to finance repurchases of our common stock pursuant to our share repurchase authorization discussed under "Stock Repurchases" in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." As described in Note 13 to the consolidated financial statements included in this report, we are party to a $5.5 billion senior secured credit agreement (the Credit Agreement), which consists of a secured term loan A facility in the aggregate principal amount of $1.75 billion with a delayed draw feature, a secured term loan B facility in the aggregate principal amount of approximately $2.75 billion and a secured revolving line of credit in the aggregate principal amount of $1 billion. Our long-term indebtedness also includes $3.25 billion aggregate principal amount of senior notes.
If we are unable to generate sufficient cash to service our substantial indebtedness and for other intended purposes, it could, for example:
make it difficult for us to make payments on our debt securities;debt;
increase our vulnerability to general adverse economic and industry conditions;
require us to dedicate a substantial portion of our cash flows from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and investments, repurchases of stock at the levels intended or announced, or at all, and other general corporate purposes;
limit our flexibility in planning for, or reacting to, changes in our business and the markets in which we operate;
expose us to interest rate volatility that could adversely affect our business, results of operations, financial condition and cash flows, and our ability to service our indebtedness;
place us at a competitive disadvantage compared to our competitors that have less debt; and
limit our ability to borrow additional funds, or to refinance existing debt on favorable terms when otherwise available.available or at all.
In addition, we may continue to incur additional indebtedness in the future, and the amount of that additional indebtedness may be substantial. Although the indentures governing our senior notes and the agreement governing our senior secured credit facilitiesCredit Agreement include covenants that could limit our indebtedness, we currently have, and expect to continue to have, the ability to incur substantial additional debt. The related risks described in this risk factor could intensify in particular, if there is a delay in closing the sale of DMG or the sale of DMG does not close, or ifas new debt is added to current debt levels. Further,
Our senior secured credit facilities bear, and other indebtedness we may incur in the future may bear, interest at a variable rate. As a result, at any given time interest rates on the senior secured credit facilities and any other variable rate debt could be higher or lower than current levels. If interest rates increase, our debt service obligations on our variable rate indebtedness will increase even though the amount borrowed remains the same, and therefore net income and associated cash flows, including cash available for servicing our indebtedness, will correspondingly decrease.
Our indebtedness levels and the required payments on such indebtedness may also be impacted by expected reforms related to LIBOR. The variable interest rates payable under our senior secured credit facilities are linked to LIBOR as the benchmark for establishing thesuch rates. LIBOR is the subject of recentRecent national, international and other regulatory guidance and reform proposals for reform. These reformsregarding LIBOR are expected to ultimately cause LIBOR to be discontinued or become unavailable as a rate benchmark. This resultant uncertainty may cause LIBOR to disappear entirely or to perform differently than in the past. The consequences of these developments with respect to LIBOR cannot be entirely predicted, but could disrupt the financial and credit markets or adversely affect the variable interest rates payable underassociated with our current or future indebtedness. Our senior secured credit facilities.
Our ability to make payments on our indebtedness, to fund planned capital expenditures and expansion efforts, including, without limitation, any strategic acquisitions we may make in the future, to repurchase our stock at the levels intended or announced and to meet our other liquidity needs, will depend on our ability to generate cash. This depends not only on the success of our business but to a certain extent, is also subject to general economic, financial, competitive, regulatory and other factors that are beyond our control.
If With the pendingclosing of the sale of DMG, closes, our cash flows will behave been reduced accordingly. We cannot provide assurances that our business will generate sufficient cash flows from operations in the future or that future borrowings will be available to us in an amountamounts sufficient to enable us to service our indebtedness or to fund our working capital and other liquidity needs, including those described above. In that regard, approximately $1.845 billion of indebtedness under secured credit facilities will become due and payable in June 2019 at its stated maturity. Although we plan to seek replacement secured credit facilities to refinance that indebtedness as it becomes due, there can be no assurance that we will be able to do so on terms we consider acceptable or at all. If we are unable to generate sufficient funds to service our outstanding indebtedness or to meet our working capital or other liquidity needs, including the intended purposesthose described above, we would be required to refinance, restructure, or otherwise amend some or all of such indebtedness, sell assets, change or reduce our intended or announced uses or strategy for capital deployment, including, without limitation, for stock repurchases, reduce capital expenditures, or planned expansions or other strategic initiatives, or raise additional cash through the sale of our equity. In addition, if we are unable to refinanceequity or repay our indebtedness as it becomes due and payable from time to time (including the approximate $1.845 billion of secured credit facilities indebtedness that becomes due in June 2019), we may seek waivers or extensions from the applicable lenders but there can be no assurance that those would be granted, in which case we would have to seek other sources of financing to repay that indebtedness, which might include sales of assets or equity securities or some of the other strategies discussed above.equity-related securities. We cannot make any assurances that any such refinancing, restructurings, amendments, sales of assets, or issuances of equity or equity-related securities can be accomplished that any such waivers or extensions from lenders can be obtained or, if accomplished, or obtained, will be on favorable terms or would raise sufficient funds to meet these obligations or our other liquidity needs. Any failure to pay any of our indebtedness when due including if we are unable to refinance the approximately $1.845 billion of indebtedness under our senior secured credit facilities that becomes due in June 2019, could have a material adverse effect on our business, results of operations, financial condition and cash flows, and could trigger cross default or cross
acceleration provisions in our other debt instruments, thereby permitting the holders of that other indebtedness to demand immediate repayment, and, in the case of secured indebtedness, would generally permit the holdersto take possession of that indebtedness to possess and sell the collateral securing such indebtedness to satisfy our obligations.
The borrowings under our current senior secured credit facilities and senior indentures are guaranteed by a substantial portioncertain of our direct and indirect wholly owned domestic subsidiaries, including certain of DMG's subsidiaries, and borrowings under our senior secured credit facilities are secured by a substantial portionsubstantially all of our and our subsidiaries' assets, including those of certain of DMG's subsidiaries. Ifour domestic subsidiaries' assets. Such guarantees and the pending sale of DMG closes, we will have fewer subsidiary guarantors of, and fewer assets with which to secure existing and future debt or refinance or restructure existing debt. This will likely reduce the total amount of secured debtfact that we will be ablehave pledged such assets may make it more difficult and expensive for us to incur and may increase the interest rate we are required to pay on our existing secured debt and any secured debt we issue in the future. In addition, by reducing the amount of assets available to meet the claims of ourmake, or under certain circumstances could effectively prevent us from making, additional secured and other creditors and the number of subsidiary guarantors, it may also adversely affect the interest rates on our existing unsecured debt and any unsecured debt we issue in the future and may adversely affect our ability to incur additional unsecured debt.
For additional details regarding specific risks we face regarding the pending sale of DMG, see the discussion in the risk factors under the heading “Risk factors related to the sale of DMG.”borrowings.
We may be subject to liability claims for damages and other expenses that are not covered by insurance or exceed our existing insurance coverage that could have a material adverse effect on our business, results of operations, financial condition, cash flows and reputation.
Our operations and how we manage our business may subject us, as well as our officers and directors to whom we owe certain defense and indemnity obligations, to litigation and liability for damages. Our business, profitability and growth prospects could suffer if we face negative publicity or we pay damages or defense costs in connection with a claim that is outside the scope or limits of coverage of any applicable insurance coverage, including, without limitation, claims related to adverse patient events, cybersecurity incidents, contractual disputes, antitrust and competition laws and regulations, professional and general liability and directors' and officers' duties. In addition, we have received notices of claims from commercial payors and other third parties, as well as subpoenas and CIDs from the federal government, related to our business practices, including, without limitation, our historical billing practices and the historical billing practices of acquired businesses. Although the ultimate outcome of these claims cannot be predicted, an adverse result with respect to one or more of these claims could have a material adverse effect on our business, results of operations, financial condition and cash flows. We maintain insurance coverage for those risks we deem are appropriate to insure against and make determinations about whether to self-insure as to other risks or layers of coverage. However, a successful claim, including, without limitation, a
professional liability, malpractice or negligence claim or a claim related to a cybersecurity incident, which is in excess of any applicable insurance coverage, or that is subject to our self-insurance retentions, could have a material adverse effect on our business, results of operations, financial condition, cash flows and reputation. Additionally, as a result of the broad scope of our DMG division's medical practice, we are exposed to medical malpractice claims, as well as claims for damages and other expenses, that may not be covered by insurance or for which adequate limits of insurance coverage may not be available.
In addition, if our costs of insurance and claims increase, then our earnings could decline. Market rates for insurance premiums and deductibles have been steadily increasing. Our business, results of operations, financial condition and cash flows could be materially and adversely affected by any of the following:
the collapse or insolvency of our insurance carriers;
further increases in premiums and deductibles;
increases in the number of liability claims against us or the cost of settling or trying cases related to those claims; or
an inability to obtain one or more types of insurance on acceptable terms, if at all.
If we fail to successfully maintain an effective internal control over financial reporting, the integrityExpansion of our financial reporting could be compromised, whichoperations to and offering our services in markets outside of the U.S. subjects us to political, economic, legal, operational and other risks that could have a material adverse effect on our business, results of operations, financial condition, cash flows and reputation.
We are continuing to expand our operations by offering our services and entering new lines of business in certain markets outside of the U.S., which increases our exposure to the inherent risks of doing business in international markets. Depending on the market, these risks include those relating to:
changes in the local economic environment;
political instability, armed conflicts or terrorism;
public health crises, such as pandemics or epidemics;
social changes;
intellectual property legal protections and remedies;
trade regulations;
procedures and actions affecting approval, production, pricing, reimbursement and marketing of products and services;
foreign currency;
additional U.S. and foreign taxes;
export controls;
antitrust and competition laws and regulations;
lack of reliable legal systems which may affect our ability to accurately reportenforce contractual rights;
changes in local laws or regulations, or interpretation or enforcement thereof;
potentially longer ramp-up times for starting up new operations and for payment and collection cycles;
financial and operational, and information technology systems integration;
failure to comply with U.S. laws, such as the FCPA, or local laws that prohibit us, our financial results,partners, or our stock pricepartners' or our agents or intermediaries from making improper payments to foreign officials or any third party for the purpose of obtaining or retaining business; and
data and privacy restrictions.
Issues relating to the market's perceptionfailure to comply with applicable non-U.S. laws, requirements or restrictions may also impact our domestic business and/or raise scrutiny on our domestic practices.
Additionally, some factors that will be critical to the success of our business.
The integration of acquisitionsinternational business and addition ofoperations will be different than those affecting our domestic business and operations. For example, conducting international operations requires us to devote significant management resources to implement our controls and systems in new business lines into our internal control overmarkets, to comply with local laws and regulations, including to fulfill financial reporting has requiredrequirements, and will continue to requireovercome the numerous new challenges inherent in managing international operations, including, without limitation, challenges based on differing languages and cultures, challenges related to establishing clinical operations in differing regulatory and compliance environments, and challenges related to the timely hiring, integration and retention of a sufficient number of skilled personnel to carry out operations in an environment with which we are not familiar.
Any expansion of our international operations through acquisitions or through organic growth could increase these risks. Additionally, while we may invest material amounts of capital and incur significant timecosts in connection with the growth and resources fromdevelopment of our management and other personnel and has increased and will continueinternational operations, including to increase our compliance costs. Failurestart up or acquire new operations, we may not be able to maintain an effective internal control environmentoperate them profitably on the anticipated timeline, or at all.
These risks could have a material adverse effect on our business, results of operations, financial condition, cash flows and could materially harm our reputation.
Delays in state Medicare and Medicaid certification, changes to other enrollment/provider requirements and/or anything impacting the licensing of our dialysis centers could adversely affect our business, results of operations, financial condition, cash flows and reputation.
Before we can begin billing for patients treated in our outpatient dialysis centers who are enrolled in government-based programs, we are required to obtain state and federal certification for participation in the Medicare and Medicaid programs. As state agencies responsible for surveying dialysis centers on behalf of the state and Medicare program face increasing budgetary pressure, certain states are having difficulty keeping up with certifying dialysis centers in the normal course resulting in significant delays in certification. If state governments continue to have difficulty keeping up with certifying new centers in the normal course and we continue to experience significant delays in our ability to accurately reporttreat and bill for services provided to patients covered under government programs, it could cause us to incur write-offs of investments in the event we have to close centers or our centers' operating performance deteriorates, and it could have an adverse effect on our business, results of operations, financial condition and cash flows. The BBA passed in February 2018 allows organizations approved by the HHS to accredit dialysis facilities and imposes certain timing requirements regarding the initiation of initial surveys to determine if certain conditions and requirements for payment have been satisfied. While we have made use of these HHS-approved parties for accreditation on a case-by-case basis, there can be no assurance that such changes will significantly reduce or eliminate certification and licensure delays over the long term. In addition to certifications for Medicare and Medicaid, some states have
licensing requirements for ESRD facilities. Delays in licensure, denials of licensure, or withdrawal of licensure could also adversely affect our business, results our stock priceof operations, financial condition and cash flows.
In addition, in November 2019, CMS finalized a Provider Enrollment Rule creating new onerous disclosure obligations for all providers enrolled in Medicare, Medicaid and the market's perceptionChildren’s Health Insurance Plan (CHIP). The final rule imposes a stronger revocation authority and increases the bar for re-enrollment for providers who submit incomplete or inaccurate information or who have affiliations with other providers that CMS has determined pose undue risk of fraud, waste or abuse. If we fail to comply with these and other applicable requirements on our licensure and certification programs, particularly in light of increased penalties that include a 10-year ban to re-enrollment, under certain circumstances it could have a material adverse on our business, results of operations, financial condition, cash flows and reputation.
If our joint ventures were found to violate the law, we could suffer severe consequences that would have a material adverse effect on our business, results of operations, financial condition and cash flows.
As of December 31, 2019, we owned a controlling interest in numerous dialysis-related joint ventures, which represented approximately 26% of our U.S. dialysis revenues for the year ended December 31, 2019. In addition, we also owned noncontrolling equity investments in several other dialysis related joint ventures. We expect to continue to increase the number of our joint ventures. Many of our joint ventures with physicians or physician groups also have certain physician owners providing medical director services to centers we own and operate. Because our relationships with physicians are governed by the federal and state anti-kickback statutes, we have sought to structure our joint venture arrangements to satisfy as many federal safe harbor requirements as we believe are commercially reasonable. Our joint venture arrangements do not satisfy all of the elements of any safe harbor under the federal Anti-Kickback Statute, however, and therefore are susceptible to government scrutiny. For example, in October 2014, we entered into a settlement agreement to resolve the then pending 2010 and 2011 U.S. Attorney physician relationship investigations regarding certain of our joint ventures and paid $406 million in settlement amounts, civil forfeiture, and interest to the U.S. and certain states. For further details on the settlement agreement, see the risk factor under the heading "If we fail to adhere to all of the complex governmental laws, regulations and requirements that apply to our business, we could suffer severe consequences that could have a material adverse effect on our business, results of operations, financial condition and cash flows, and could materially harm our reputation and stock price."
There are significant risks associated with estimating the amount of dialysis revenues and related refund liabilities that we recognize, and if our estimates of revenues and related refund liabilities are materially inaccurate, it could impact the timing and the amount of our revenues recognition or have a material adverse effect on our business,resultsof operations, financial condition and cash flows.
There are significant risks associated with estimating the amount of U.S. dialysis net patient services revenues and related refund liabilities that we recognize in a reporting period. The billing and collection process is complex due to ongoing insurance coverage changes, geographic coverage differences, differing interpretations of contract coverage and other payor issues, such as ensuring appropriate documentation. Determining applicable primary and secondary coverage for approximately 206,900U.S. patients at any point in time, together with the changes in patient coverage that occur each month, requires complex, resource-intensive processes. Errors in determining the correct coordination of benefits may result in refunds to payors. Revenues associated with Medicare and Medicaid programs are also subject to estimating risk related to the amounts not paid by the primary government payor that will ultimately be collectible from other government programs paying secondary coverage, the patient's commercial health plan secondary coverage or the patient. Collections, refunds and payor retractions typically continue to occur for up to three years and longer after services are provided. We generally expect our range of U.S. dialysis net patient services revenues estimating risk to be within 1% of net revenues for the segment. If our estimates of U.S. dialysis net patient services revenues and related refund liabilities are materially inaccurate, it could impact the timing and the amount of our revenues recognition and have a material adverse impact on our business, results of operations, financial condition and cash flows.
Our ancillary services and strategic initiatives, including, without limitation, our international operations, that we operate or invest in now or in the future may generate losses and may ultimately be unsuccessful. In the event that one or more of these activities is unsuccessful, our business, results of operations, financial condition and cash flows may be negatively impacted and we may have to write off our investment and incur other exit costs.
Our ancillary services and strategic initiatives are subject to many of the same risks, regulations and laws, as described in the risk factors related to our dialysis business set forth in this Part II, Item 1A, and are also subject to additional risks, regulations and laws specific to the nature of the particular strategic initiative. We expect to add additional service offerings to our business and pursue additional strategic initiatives in the future as circumstances warrant, which could include healthcare services not related to dialysis. Many of these initiatives require or would require investments of both management and financial resources and can generate significant losses for a substantial period of time and may not become profitable in the
expected timeframe or at all. There can be no assurance that any such strategic initiative will ultimately be successful. Any significant change in market conditions, or business performance, or in the political, legislative or regulatory environment, may impact the economic viability of any of these strategic initiatives. For example, changes in the oral pharmacy space, including reimbursement rate pressures, negatively impacted the economics of our pharmacy services business. As a result, in the second half of 2018 we transitioned the customer service and fulfillment functions of this business to third parties and wound down our distribution operation, which resulted in a decrease in revenues and costs. In 2018, we recognized restructuring charges of $11 million and incurred asset impairment charges of $17 million related to the restructuring of our pharmacy business.
If any of our ancillary services or strategic initiatives, including our international operations, are unsuccessful, it would have a negative impact on our business, results of operations, financial condition and cash flows, and we may determine to exit that line of business. We could incur significant termination costs if we were to exit certain of these lines of business. In addition, we may incur a material write-off or an impairment of our investment, including, without limitation, goodwill or other assets, in one or more of our ancillary services or strategic initiatives. In that regard, we have taken, and may in the future take, impairment and restructuring charges in addition to those described above related to our ancillary services and strategic initiatives, including, without limitation, in our international and pharmacy businesses.
If a significant number of physicians were to cease referring patients to our dialysis centers, whether due to law, rule or regulation, new competition, a perceived decrease in the quality of service levels at our centers or other reasons, it would have a material adverse effect on our business, results of operations, financial condition and cash flows.
Physicians, including medical directors, choose where they refer their patients. Some physicians prefer to have their patients treated at dialysis centers where they or other members of their practice supervise the overall care provided as medical director of the center. As a result, referral sources for many of our centers include the physician or physician group providing medical director services to the center.
Our medical director contracts are for fixed periods, generally ten years, and at any given time a large number of them could be requiredup for renewal at the same time. Medical directors have no obligation to restateextend their agreements with us and, under certain circumstances, our financial resultsformer medical directors may choose to provide medical director services for competing providers or establish their own dialysis centers in competition with ours. Neither our current nor former medical directors have an obligation to refer their patients to our centers. In addition, there are a number of new entrants into the dialysis space, and physicians, including medical directors, may refer patients to these new entrants rather than the Company.
The aging of the nephrologist population and opportunities presented by our competitors may negatively impact a medical director's decision to enter into or extend his or her agreement with us. Moreover, a perceived decrease in the eventquality of service levels at our centers or different affiliation models in the changing healthcare environment that limit a nephrologist's choice in where he or she can refer patients, such as an increase in the number of physicians becoming employed by hospitals, may limit a nephrologist's ability or desire to refer patients to our centers or otherwise negatively impact treatment volumes.
In addition, if the terms of any existing agreement are found to violate applicable laws, there can be no assurances that we would be successful in restructuring the relationship, which would lead to the early termination of the agreement. If we are unable to obtain qualified medical directors to provide supervision of the operations and care provided at our dialysis centers, it could affect physicians' desire to refer patients to our dialysis centers. If a significant failurenumber of physicians were to cease referring patients to our internal control overdialysis centers, it would have a material adverse effect on our business, results of operations, financial reportingcondition and cash flows.
If our labor costs continue to rise, including due to shortages, changes in certification requirements and higher than normal turnover rates in skilled clinical personnel; or in the event of inappropriate application of accounting principles.
Deterioration in economic conditions,currently pending or future rules, regulations, legislation or initiatives impose additional requirements or limitations on our operations or profitability; or, if we are unable to attract and retain key leadership talent, we may experience disruptions in the financial markets or the effects of natural orour business operations and increases in operating expenses, among other disasters or adverse weather events such as hurricanes, earthquakes, fires or floodingthings, which could have a material adverse effect on our business, results of operations, financial condition and cash flows.
DeteriorationWe face increasing labor costs generally, and in economic conditionsparticular, we continue to face increased labor costs and difficulties in hiring nurses due to a nationwide shortage of skilled clinical personnel. We compete for nurses with hospitals and other healthcare providers. This nursing shortage may limit our ability to expand our operations. Furthermore, changes in certification requirements can impact our ability to maintain sufficient staff levels, including to the extent our teammates are not able to meet new requirements, among other things. In addition, if we experience a higher than normal turnover rate for our skilled clinical personnel, our operations and treatment growth may be negatively impacted, which could have a material adverse effect onadversely affect our business, results of operations, financial condition and cash flows. Among other things, the potential declineWe also face competition in federalattracting and state revenues that may result from such conditions may create additional pressuresretaining talent for key leadership positions. If we are unable to contain or reduce reimbursements for our services from Medicare, Medicaidattract and other government sponsored programs. Increases in job losses in the U.S. as a result of adverse economic conditions has and may continue to result in a smaller percentage of our patients being covered by an employer group health plan and a larger percentage being covered by lower paying Medicare and Medicaid programs. Employers may also select more restrictive commercial plans with lower reimbursement rates. To the extent that payors are negatively impacted by a decline in the economy,retain qualified individuals, we may experience further pressure on commercial rates, a further slowdowndisruptions in collections and a reduction in the amounts we expect to collect. In addition, uncertainty in the financial markets could adversely affect the variable interest rates payable under our credit facilities or could make it more difficult to obtain or renew such facilities or to obtain other forms of financing in the future, if at all. For additional information regarding the risks related to our indebtedness, see the discussion in the risk factor above under the heading "The level of our current and future debt could have an adverse impact on our
business andoperations, including, without limitation, our ability to generate cash to service our indebtedness and for other intended purposes depends on many factors beyond our control."
Further, some of our operations, including our clinical laboratory, dialysis centers and other facilities, may be adversely impacted by the effects of natural or other disasters or adverse weather events such as hurricanes, earthquakes, fires or flooding. For example, our clinical laboratory is located in Florida, a state that has in the past experienced and may in the future experience hurricanes. Natural or other disasters or adverse weather events could significantly damage or destroy our facilities, disrupt operations, increase our costs to maintain operations and require substantial expenditures and recovery time to fully resume operations.
Any or all of these factors, as well as other consequences of these events, none ofachieve strategic goals, which we can currently predict, could have a material adverse effect on our business, results of operations, financial condition and cash flows.
In addition, proposed ballot initiatives or referendums, legislation, regulations or policy changes could cause us to incur substantial costs to challenge and prepare for and, if implemented, impose additional requirements on our operations, including, without limitation, increases in the required staffing levels or staffing ratios for clinical personnel, minimum transition times between treatments, limits on how much patients may be charged for care, limitations as to the amount that can be spent on certain medical costs, and limitations on the amount of revenue that providers can retain. Changes such as those mandated by proposed ballot initiatives or referendums, legislation, regulations or policy changes could materially reduce our revenues and increase our operating and other costs, require us to close or consolidate existing dialysis centers, postpone or not build new dialysis centers, reduce shifts or negatively impact employee relations, treatment growth and productivity, and could have a material adverse effect on our business, results of operations, financial condition and cash flows. Additionally, there can be no assurances that we would be successful in staffing our clinics to any new, elevated staffing levels, in particular given the ongoing nationwide shortage of healthcare workers, especially nurses. For additional information on these risks, see the risk factor under the heading "Changes in federal and state healthcare legislation or regulations could have a material adverse effect on our business, results of operations, financial condition and cash flows."
Our business is labor intensive and could be materially adversely affected if we are unable to attract and retain employees or if union organizing activities or legislative or other changes result in significant increases in our operating costs or decreases in productivity.
Our business is labor intensive, and our financial and operating results have been and continue to be subject to variations in labor-related costs, productivity and the number of pending or potential claims against us related to labor and employment practices. Political or other efforts at the national or local level could result in actions or proposals that increase the likelihood of success of union organizing activities at our facilities and ongoing union organizing activities at our facilities could continue or increase for other reasons. We could experience an upward trend in wages and benefits and labor and employment claims, including, without limitation, the filing of class action suits, or adverse outcomes of such claims, or face work stoppages. In addition, we are and may continue to be subject to targeted corporate campaigns by union organizers in response to which we have been and may continue to be required to expend substantial resources, both time and financial. Any of these events or circumstances could have a material adverse effect on our employee relations, treatment growth, productivity, business, results of operations, financial condition and cash flows.
Failing to effectively maintain, operate or upgrade our information systems or those of third-party service providers upon which we rely, including, without limitation, our clinical, billing and collections systems could materially adversely affect our business, results of operations, financial condition and cash flows.
Our business depends significantly on effective information systems. Our information systems require an ongoing commitment of significant resources to maintain and enhance existing systems and develop or contract for new systems in order to keep pace with continuing changes in information processing technology, emerging cybersecurity risks and threats, evolving industry, legal and regulatory standards and requirements, and new models of care, and other changes in our business, among other things. There can be no assurances that we will ultimately realize anticipated benefits from investments in new or existing information systems. In addition, we may from time to time obtain significant portions of our systems-related support, technology or other services from independent third parties, which may make our operations vulnerable if such third parties fail to perform adequately.
Failure to successfully implement, operate and maintain effective and efficient information systems with adequate technological capabilities, deficiencies or defects in the systems and related technology, or our failure to efficiently and effectively consolidate our information systems to eliminate redundant or obsolete applications, could result in competitive disadvantages, which could have a material adverse effect on our business, financial condition and results of operations. For additional information on the risks we face in a highly competitive market, see the risk factor under the heading, "If we are unable to compete successfully, including, without limitation, implementing our growth strategy and/or retaining patients and physicians willing to serve as medical directors, it could materially adversely affect our business, results of operations, financial condition and cash flows." If the information we rely upon to run our business were found to be inaccurate or unreliable or if we or third parties on which we rely fail to adequately maintain our information systems and data integrity effectively, whether due to software deficiencies, human coding or implementation error or otherwise, we could experience difficulty meeting clinical outcome goals, face regulatory problems, including sanctions and penalties, incur increases in operating expenses or suffer other adverse consequences, any of which could be material. Moreover, failure to adequately protect and maintain the integrity of our information systems (including our networks) and data, or information systems and data hosted by third parties upon which we rely, could subject us to severe consequences as described in the risk factor under the heading "Privacy and information security laws are complex, and if we fail to comply with applicable laws, regulations and
standards, including with respect to third-party service providers that utilize sensitive personal information on our behalf, or if we fail to properly maintain the integrity of our data, protect our proprietary rights to our systems or defend against cybersecurity attacks, we may be subject to government or private actions due to privacy and security breaches, any of which could have a material adverse effect on our business, results of operations, financial condition and cash flows or materially harm our reputation."
Our billing system, among others, is critical to our billing operations. If there are defects in the billing system, or billing systems or services of third parties upon which we rely, we may experience difficulties in our ability to successfully bill and collect for services rendered, including, without limitation, a delay in collections, a reduction in the amounts collected, increased risk of retractions from and refunds to commercial and government payors, an increase in our provision for uncollectible accounts receivable and noncompliance with reimbursement laws and related requirements, any or all of which could materially adversely affect our results of operations.
In the clinical environment, a failure of our clinical systems, or the systems of our third-party service providers, to operate effectively could have a material adverse effect on our business, the clinical care provided to patients, results of operations, financial condition and cash flows. For example, in connection with claims for which at least part of the government's payments to us is based on clinical performance or patient outcomes or co-morbidities, if relevant clinical systems fail to accurately capture the data we report to CMS or we otherwise have data integrity issues with respect to the reported information, this could impact our payments from government payors as well as our ability to retain funds paid to us based on the inaccurate information.
Additionally, we expect the highly competitive environment in which we operate to become increasingly more competitive as the market evolves and new technologies are introduced. This dynamic environment requires continuous investment in new technologies and clinical applications. Machine learning and artificial intelligence are increasingly driving innovations in technology, and parts of our operations may employ robotics. If these technologies or applications fail to operate as anticipated or do not perform as specified, including due to potential design defects and defects in the development of algorithms or other technologies, human error or otherwise, our clinical operations, business and reputation may be harmed. If we are unable to successfully maintain, operate or implement such technologies or applications in our clinical operations and laboratory, we may be, among other things, unable to efficiently adapt to evolving laws and requirements, unable to remain competitive with others who successfully implement and advance this technology, subject to increased risk under existing laws, regulations and requirements that apply to our business, and our patients' safety may be adversely impacted, any of which could have a material adverse impact on our business, results of operations and financial condition and could materially harm our reputation. For additional detail, see the discussion in the risk factor under the heading "If we fail to adhere to all of the complex governmental laws, regulations and requirements that apply to our business, we could suffer severe consequences that could have a material adverse effect on our business, results of operations, financial condition and cash flows, and could materially harm our reputation and stock price."
Disruptions in federal government operations and funding create uncertainty in our industry and could have a material adverse effect on our business, results of operations, financial condition and cash flows.
A substantial portion of our revenues is dependent on federal healthcare program reimbursement, and any disruptions in federal government operations could have a material adverse effect on our business, results of operations, financial condition and cash flows. If the U.S. government defaults on its debt, there could be broad macroeconomic effects that could raise our cost of borrowing funds, and delay or prevent our future growth and expansion. Any future federal government shutdown, U.S. government default on its debt and/or failure of the U.S. government to enact annual appropriations could have a material adverse effect on our business, results of operations, financial condition and cash flows. Additionally, disruptions in federal government operations may negatively impact regulatory approvals and guidance that are important to our operations, and create uncertainty about the pace of upcoming regulatory developments.
We could be subject to adverse changes in tax laws, regulations and interpretations or challenges to our tax positions.
We are subject to tax laws and regulations of the U.S. federal, state and local governments as well as various foreign jurisdictions. We compute our income tax provision based on enacted tax rates in the jurisdictions in which we operate. As the tax rates vary among jurisdictions, a change in earnings attributable to the various jurisdictions in which we operate could result in an unfavorable or favorable change in our overall tax provision.
From time to time, changes in tax laws or regulations may be proposed or enacted that could adversely affect our overall tax liability. For example, the recent U.S. tax legislation enacted on December 22, 2017, represented a significant overhaul of the U.S. federal tax code. We have completed our analysis of the initial impact of the 2017 federal tax law changes. However, it is possible that future guidance in connection with the law and/or the issuance of detailed regulations could impact our tax provision and cash taxes in future periods. Additionally, the legislation made significant changes to the tax rules applicable to insurance companies and other entities with which we do business. There can be no assurance that changes in tax laws or regulations, both within the U.S. and the other jurisdictions in which we operate, will not materially and adversely affect our effective tax rate, tax payments, results of operations, financial condition and cash flows. Similarly, changes in tax laws and regulations that impact our patients, business partners and counterparties or the economy generally may also impact our results of operations, financial condition and cash flows.
In addition, tax laws and regulations are complex and subject to varying interpretations, and any significant failure to comply with applicable tax laws and regulations in all relevant jurisdictions could give rise to substantial penalties and liabilities. We are regularly subject to audits by tax authorities. For example, we are currently under audit by the Internal Revenue Service for the years 2014-2016.2014–2017, among other things. Although we believe our tax estimates and related reporting are appropriate, the final determination of this and other tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. Any changes in enacted tax laws (such as the recent U.S. tax legislation), rules or regulatory or judicial interpretations; any adverse development or outcome in connection with tax audits in any jurisdiction; or any change in the pronouncements relating to accounting for income taxes could materially and adversely impact our effective tax rate, tax payments, results of operations, financial condition and cash flows.
Laws regulating the corporate practice of medicine could restrict the manner in which our subsidiaries are permitted to conduct their business, and the failure to comply with such laws could subject these entities to penalties or require a restructuring of these businesses.
Some states have laws that prohibit business entities, such as certain of our subsidiaries, including but not limited to, Nephrology Practice Solutions, Vively, VillageHealth DM (DaVita IKC), and Lifeline Vascular Access, from practicing medicine, employing physicians to practice medicine, exercising control over medical decisions by physicians (also known collectively as the corporate practice of medicine) or engaging in certain arrangements, such as fee-splitting, with physicians. In some states these prohibitions are expressly stated in a statute or regulation, while in other states the prohibition is a matter of judicial or regulatory interpretation. Some of the states in which DaVita entities currently operate, generally prohibit the corporate practice of medicine, and other states may do so in the future as well. DaVita believes it has structured its entities appropriately; however, it is possible that a state regulatory agency or a court could determine DaVita and/or associated physician entities are in violation of the corporate practice of medicine doctrine. As a result, these arrangements could be deemed invalid, potentially resulting in a loss of revenues and an adverse effect on results of operations derived from these entities.
If we fail to successfully maintain an effective internal control over financial reporting, the integrity of our financial reporting could be compromised, which could have a material adverse effect on our ability to accurately report our financial results, the market's perception of our business and our stock price.
The integration of acquisitions and addition of new business lines into our internal control over financial reporting has required and will continue to require significant time and resources from our management and other personnel and has increased and will continue to, increase our compliance costs. Failure to maintain an effective internal control environment could have a material adverse effect on our ability to accurately report our financial results, the market's perception of our business and our stock price. In addition, we could be required to restate our financial results in the event of a significant failure of our internal control over financial reporting or in the event of inappropriate application of accounting principles.
Deterioration in economic conditions, disruptions in the financial markets or the effects of natural or other disasters, political instability, public health crises or adverse weather events such as hurricanes, earthquakes, fires or flooding could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Deterioration in economic conditions could have a material adverse effect on our business, results of operations, financial condition and cash flows. Among other things, the potential decline in federal and state revenues that may result from such conditions may create additional pressures to contain or reduce reimbursements for our services from Medicare, Medicaid and other government sponsored programs. Increases in job losses in the U.S. as a result of adverse economic conditions has and may continue to result in a smaller percentage of our patients being covered by an employer group health plan and a larger percentage being covered by lower paying Medicare and Medicaid programs. Employers may also select more restrictive commercial plans with lower reimbursement rates. To the extent that payors are negatively impacted by a decline in the economy, we may experience further pressure on commercial rates, a further slowdown in collections and a reduction in the amounts we expect to collect. In addition, uncertainty in the financial markets could adversely affect the variable interest rates payable under our credit facilities or could make it more difficult to obtain or renew such facilities or to obtain other forms of financing in the future, if at all. For additional information regarding the risks related to our indebtedness, see the discussion in the risk factor under the heading "The level of our current and future debt could have an adverse impact on our business, and our ability to generate cash to service our indebtedness and for other intended purposes depends on many factors beyond our control."
Moreover, as of December 31, 2019, we had approximately $6.788 billion of goodwill recorded on our consolidated balance sheet. We account for impairments of goodwill in accordance with the provisions of applicable accounting guidance, and record impairment charges when and to the extent a reporting unit's carrying amount is determined to exceed its estimated fair value. We use a variety of factors to assess changes in the financial condition, future prospects and other circumstances
concerning our businesses and to estimate their fair value when applicable. These assessments and the related valuations can involve significant uncertainties and require significant judgment on various matters, some of which could be subject to reasonable disagreement.
Should our revenues and financial results be materially, unfavorably impacted due to, among other things, a worsening of the economic and employment conditions in the United States that negatively impacts reimbursement rates or the availability of insurance coverage for our patients, we may incur future charges to recognize impairment in the carrying amount of our goodwill and other intangible assets, which could have a material adverse effect on our business, results of operation and financial condition.
Further, some of our operations, including our clinical laboratory, dialysis centers and other facilities, may be adversely impacted by the effects of natural or other disasters, political instability, public health crises such as global pandemics or epidemics, or adverse weather events such as hurricanes, earthquakes, fires or flooding. Patients with chronic illness may be more susceptible to epidemics or other public health crises. Any such event or other occurrence that results in a failure of the fitness of our clinical laboratory, dialysis centers and related operations and/or other facilities or otherwise adversely impacts the safety of our teammates or patients at any of those locations could lead us to face adverse consequences, including, without limitation, compliance or regulatory investigations, any of which could materially impact our business, results of operation and financial condition, and could materially harm our reputation. For example, our clinical laboratory is located in Florida, a state that has in the past experienced and may in the future experience hurricanes. Natural or other disasters or adverse weather events could significantly damage or destroy our facilities, disrupt operations, increase our costs to maintain operations and require substantial expenditures and recovery time to fully resume operations. In addition, our presence in markets outside the U.S. may increase our exposure to certain risks related to such natural disasters, public health crises, political instability or other catastrophic event outside our control. For additional information regarding the risks related to our international business, see the discussion in the risk factor under the heading "Expansion of our operations to and offering our services in markets outside of the U.S. subjects us to political, economic, legal, operational and other risks that could have a material adverse effect on our business, results of operations, financial condition, cash flows and reputation."
We are continuing to expand our operations by offering our services and entering new linesAny or all of business in certain markets outsidethese factors, as well as other consequences of the U.S., which increases our exposure to the inherent risksthese events, none of doing business in international markets. Depending on the market, these risks include those relating to:
changes in the local economic environment;
political instability, armed conflicts or terrorism;
social changes;
intellectual property legal protections and remedies;
trade regulations;
procedures and actions affecting approval, production, pricing, reimbursement and marketing of products and services;
foreign currency;
repatriating or moving to other countries cash generated or held abroad, including considerations relating to tax-efficiencies and changes in tax laws;
export controls;
lack of reliable legal systems which may affect our ability to enforce contractual rights;
changes in local laws or regulations, or interpretation or enforcement thereof;
potentially longer ramp-up times for starting up new operations and for payment and collection cycles;
financial and operational, and information technology systems integration;
failure to comply with U.S. laws, such as the FCPA, or local laws that prohibit us, our partners, or our partners' or our agents or intermediaries from making improper payments to foreign officials or any third party for the purpose of obtaining or retaining business; and
data and privacy restrictions.
Issues relating to the failure to comply with applicable non-U.S. laws, requirements or restrictions may also impact our domestic business and/or raise scrutiny on our domestic practices.
Additionally, some factors that will be critical to the success of our international business and operations will be different than those affecting our domestic business and operations. For example, conducting international operations requires us to devote significant management resources to implement our controls and systems in new markets, to comply with local laws and regulations, including to fulfill financial reporting requirements, and to overcome the numerous new challenges inherent in managing international operations, including those based on differing languages, cultures and regulatory environments, and those related to the timely hiring, integration and retention of a sufficient number of skilled personnel to carry out operations in an environment with which we are not familiar.
Any expansion of our international operations through acquisitions or through organic growth could increase these risks. Additionally, while we may invest material amounts of capital and incur significant costs in connection with the growth and development of our international operations, including to start up or acquire new operations, we may not be able to operate them profitably on the anticipated timeline, or at all.
These risks could have a material adverse effect on our business, results of operations, financial condition, cash flows and reputation.
Risk factors related to the sale of DMG:
The announcement and pendency of the sale of DMG may continue to adversely affect our business, results of operations, financial condition and cash flows.
The announcement and pending sale of DMG may continue to be disruptive to our business and may continue to adversely affect our relationships with current and prospective teammates, patients, physicians, payors, suppliers and other business partners. Uncertainties related to the pending sale of DMG may continue to impair our ability to attract, retain and motivate key personnel and could continue to cause suppliers and other business partners to defer entering into contracts with us or seek to change existing business relationships with us. The loss or deterioration of significant business and operational relationships could have an adverse effect on our business, results of operations, financial condition and cash flows. In addition, activities relating to the pending sale and related uncertainties could continue to divert the attention of our management and other teammates from our day-to-day business or disrupt our operations in preparation for and during the post-closing separation of DMG. Following the closing of the DMG sale, we will enter into a transition services agreement with Optum, whereby we and Optum will provide various transition services to one another for specified periods beginning on the closing date. In the course of performing our obligations under the transition services agreement, we will allocate certain of our resources, including assets, facilities, equipment and the time and attention of our management and other teammates, for the benefit of the DMG business and not ours, which may negatively impact our business, results of operations, financial condition and cash flows. In addition, it is possible that we could have stranded costs following the closing of the pending sale, which could be material. If we are unable to effectively manage these risks, our business, results of operations, financial condition and cash flows may be adversely affected.
Any continued delay in completing the sale of DMG or any additional modifications to the terms of the sale under the equity purchase agreement may materially adversely affect our business, results of operations, financial condition, cash flows and stock price.
The completion of the proposed sale of DMG is subject to customary closing conditions, including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”). On March 12, 2018, we received a request for additional information and documentary materials (commonly referred to as a “second request”) from the U.S. Federal Trade Commission (“FTC”) under the HSR Act in connection with the FTC’s review of the proposed sale of DMG. In connection with its approval of the proposed sale of DMG, the FTC may impose material conditions, terms and obligations, including making its approval subject to the disposition of certain assets, which could further delay completion of the transaction, or the FTC may impose conditions that would require an adverse modification to the equity purchase agreement. If further delays continue in completing the sale of DMG, or if the terms set forth in the equity purchase agreement are further amended, our business, results of operations, financial condition, cash flows and stock price may be materially adversely affected.
If we fail to complete the proposed sale of DMG, our business, results of operations, financial condition, cash flows and stock price may be materially adversely affected.
The completion of the proposed sale of DMG is subject to customary closing conditions, including FTC approval, and if any condition to the closing of the sale of DMG is neither satisfied nor, where permissible, waived, we may be unable to complete the disposition or complete the disposition on the terms set forth in the equity purchase agreement. In addition, either we or Optum may terminate the equity purchase agreement if, among other things, the sale has not been consummated prior to June 30, 2019. If the equity purchase agreement is terminated and our Board of Directors seeks an alternative transaction or another acquiror for the sale of the DMG business, we may not be able to negotiate a transaction with another party on terms comparable to, or better than, the terms of the equity purchase agreement with Optum, or at all. In the third and fourth quarters of 2018, we recognized valuation adjustments with respect to the DMG business based on an updated assessment of fair value, which includes inputs such as the transaction itself, risks and timing, and performance of the business, and we recorded associated goodwill impairment charges in the fourth quarter of 2018. We may recognize additional valuation adjustments related to DMG in the future.
If the sale of DMG is not completed for any reason, investor confidence could decline. A failed transaction may result in negative publicity, protracted litigation, and may affect our relationships with teammates, patients, physicians, payors, suppliers, regulators and other business partners. In addition, in the event of a failed transaction, we will have expended significant management resources in an effort to complete the sale, and we will have incurred significant transaction costs, including legal fees, financial advisor fees and other related costs, without any commensurate benefit. Furthermore, we have incurred additional debt in anticipation of receiving the sale proceeds but there can be no assurances that we will receive the anticipated sale proceeds to repay such debt. Accordingly, if the proposed sale of DMG is not completed on the terms set forth in the equity purchase agreement or at all, our business, results of operations, financial condition, cash flows and stock price may be materially adversely affected.
Our liquidity following the close of our pending sale of DMG and our planned subsequent entry into new external financing arrangements may be less than we anticipate, and we may use the proceeds from the pending sale of DMG and other available funds, including external financing and cash flow from operations, in ways that may not improve our results of operations, financial condition, cash flows or enhance the value of our common stock.
The purchase price for the sale of the DMG business is subject to customary adjustments, both upward and downward,which could be significant. Following the closing of the pending DMG sale, we plan to use sale proceeds and other available funds, including from external financing and cash flow from operations, to repay debt, make significant stockrepurchases and for general corporate purposes, which may include growth investments. A number of factors may impact our ability torepurchase stock and the timing of any such stock repurchases, including market conditions, the price of our common stock, our results of operations, financial condition, cash flows, available financing, leverage ratios, and legal, regulatory and contractual requirements and restrictions. Accordingly, the actual amount of common stock we repurchase may be less, perhaps substantially, and the period of time over which we make any stock repurchases may be substantially longer, than we currently anticipate. In addition, we may identify investments or other uses for our available funds (other than the DMG sale proceeds that we plan to use to repay debt) that we believe are more attractive than our current intended uses. Further, there can be no assurance that any investment will yield a favorable return.
Under the terms of the equity purchase agreement, we are subject to certain contractual restrictions while the sale of DMG is pending that, in some cases,predict, could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Under the terms of the equity purchase agreement, we are subject to certain restrictions on the conduct of the DMG business prior to completing the sale of DMG, which have adversely affected and may continue to adversely affect our ability to execute certain of our business strategies, including the ability in certain cases to enter intoflows or amend contracts, acquire or dispose of assets, incur indebtedness or incur capital expenditures. Such limitations have negatively affected and could continue to negatively affect our business and operations prior to the completion of the sale of DMG. Each of these risks may be exacerbated by delays or other adverse developments with respect to the completion of the sale of DMG.
Risk factors related to our U.S. dialysis and related lab services, ancillary services and strategic initiatives:
If patients in commercial plans are subject to restriction in plan designs or the average rates that commercial payors pay us decline significantly, it would have a material adverse effect on our business, results of operations, financial condition and cash flows.
Approximately 31% of our U.S. dialysis and related lab services net revenues for the year ended December 31, 2018, were generated from patients who have commercial payors (including hospital dialysis services) as their primary payor. The majority of these patients have insurance policies that pay us on terms and at rates that are generally significantly higher than Medicare rates. The payments we receive from commercial payors generate nearly all of our profit and all of our nonacute dialysis profits come from commercial payors. We continue to experience downward pressure on some of our commercial payment rates as a result of general conditions in the market, including as employers shift to less expensive options for medical services, recent and future consolidations among commercial payors, increased focus on dialysis services and other factors. In addition, many commercial payors that sell individual plans both on and off exchange have publicly announced losses in the marketplace. These payors may seek discounts on rates for marketplace plans on and off exchange. Commercial payment rates could be materially lower in the future.
We continuously are in the process of negotiating existing and potential new agreements with commercial payors who aggressively negotiate terms with us. Sometimes many significant agreements are being renegotiated at the same time. In the event that our continual negotiations result in overall commercial rate reductions in excess of overall commercial rate increases, the cumulative effect could have a material adverse effect on our business, results of operations, financial condition and cash flows. Consolidations have significantly increased the negotiating leverage of commercial payors. Our negotiations with payors are also influenced by competitive pressures, and we may experience decreased contracted rates with commercial payors or experience decreases in patient volume as our negotiations with commercial payors continue. In addition to downward pressure on contracted commercial payor rates, payors have been attempting to design and implement plans to restrict access to coverage, and the duration and/or the breadth of benefits, which may result in decreased payments. In addition, payors have been attempting to impose restrictions and limitations on patient access to commercial exchange plans and non-contracted or out-of-network providers, and in some circumstances designate our centers as out-of-network providers. Rates for commercial exchange products and out-of-network providers are on average higher than rates for government products and in-network providers, respectively.
A number of commercial payors have incorporated policies into their provider manuals limiting or refusing to accept charitable premium assistance from non-profit organizations, such as the American Kidney Fund, which may impact the number of patients who are able to afford commercial plans. Paying for coverage is a significant financial burden for many patients, and ESRD disproportionately affects the low-income population. Charitable premium assistance supports continuity of coverage and access to care for patients, many of whom are unable to continue working full-time as a result of their severe condition. A material restriction in patients' ability to access charitable premium assistance may restrict the ability of dialysis patients to obtain and maintain optimal insurance coverage, and may adversely impact a large number of dialysis centers across the U.S. by making certain centers economically unviable, and may have a material adverse effect on our business, results of operations, financial condition and cash flows.
We also believe commercial payors have or will begin to restructure their benefits to create disincentives for patients to stay with commercial insurance or to select or remain with out-of-network providers. In addition, payors may seek to decrease payment rates for out-of-network providers. Decreases in the number of patients with commercial plans, decreases in out-of-network rates and restrictions on out-of-network access, our turning away new patients in instances where we are unable to come to agreement with commercial payors on rates, new business activities of commercial payors, or decreases in contracted rates could result in a significant decrease in our overall revenues derived from commercial payors. If the average rates that commercial payors pay us decline significantly, or if we see a decline in commercial patients, it would have a material adverse effect on our business, results of operations, financial condition and cash flows. For additional details regarding specific risks
we face regarding regulatory changes that could result in fewer patients covered under commercial plans or an increase of patients covered under more restrictive commercial plans with lower reimbursement rates, see the discussion in the risk factor under the heading "Changes in federal and state healthcare regulations could have a material adverse effect on our business, results of operations, financial condition and cash flows."
If the number of patients with higher-paying commercial insurance declines, it could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Our revenue levels are sensitive to the percentage of our patients with higher-paying commercial insurance coverage. A patient's insurance coverage may change for a number of reasons, including changes in the patient's or a family member's employment status. Any changes impacting our highest paying commercial payors will have a disproportionate impact on us. In addition, many patients with commercial and government insurance rely on financial assistance from charitable organizations, such as the American Kidney Fund. Certain payors have challenged our patients' and other providers' patients' ability to utilize assistance from charitable organizations for the payment of premiums, including through litigation and other legal proceedings. Regulators have also questioned the use of charitable premium assistance for ESRD patients. CMS or another regulatory agency or legislative authority may issue a new rule or guidance that challenges or restricts charitable premium assistance. If any of these challenges to kidney patients' use of premium assistance are successful or restrictions are imposed on the use of financial assistance from such charitable organizations such that kidney patients are unable to obtain, or continue to receive or receive for a limited duration, such financial assistance, it could have a material adverse effect on our business, results of operations, financial condition and cash flows. In addition, if our assumptions about how kidney patients will respond to any change in financial assistance from charitable organizations are incorrect, it could have a material adverse effect on our business, results of operations, financial condition and cash flows.
When Medicare becomes the primary payor, the payment rate we receive for that patient decreases from the employer group health plan or commercial plan rate to the lower Medicare payment rate. The number of our patients who have government-based programs as their primary payors could increase and the percentage of our patients covered under commercial insurance plans could be negatively impacted as a result of improved mortality or declining macroeconomic conditions. To the extent there are sustained or increased job losses in the U.S., independent of whether general economic conditions improve, we could experience a decrease in the number of patients covered under commercial plans and/or an increase in uninsured and underinsured patients. The percentage of our patients covered under commercial insurance plans could also be negatively impacted by a decline in the rate of growth of the ESRD patient population. We could also experience a further decrease in the payments we receive for services if changes to the healthcare regulatory system result in fewer patients covered under commercial plans or an increase of patients covered under more restrictive commercial plans with lower reimbursement rates. In addition, our continual negotiations with commercial payors under existing and potential new agreements could result in a decrease in the number of our patients covered by commercial plans to the extent that we cannot reach agreement with commercial payors on rates and other terms, resulting in termination or non-renewals of existing agreements and our inability to enter into new agreements. Commercial payors have taken and may continue to take steps to control the cost of and/or the eligibility for access to healthcare services, including relative to products on and off the healthcare exchanges. These efforts could impact the number of our patients who are eligible to enroll in commercial insurance plans, and remain on the plans, including plans offered through healthcare exchanges. Additionally, we continue to experience higher amounts of write-offs due to uninsured and underinsured patients, which has resulted in an increase in uncollectible accounts. Commercial payors could also cease paying in the primary position after providing 30 months of coverage resulting in a material reduction in payment as the patient moves to Medicare primary. If there is a significant reduction in the number of patients under higher-paying commercial plans relative to government-based programs that pay at lower rates or a significant increase in the number of patients that are uninsured and underinsured, it would have a material adverse effect on our business, results of operations, financial condition and cash flows.
Changes in the structure of and payment rates under the Medicare ESRD program could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Approximately 44% of our U.S. dialysis and related lab services net revenues for the year ended December 31, 2018, were generated from patients who have Medicare as their primary payor. For patients with Medicare coverage, all ESRD payments for dialysis treatments are made under a single bundled payment rate which provides a fixed payment rate to encompass all goods and services provided during the dialysis treatment that are related to the treatment of dialysis, including pharmaceuticals that were historically separately reimbursed to the dialysis providers, such as erythropoietin (EPO), vitamin D analogs and iron supplements, irrespective of the level of pharmaceuticals administered or additional services performed, except in the case of calcimimetics, which are subject to a transitional drug add-on payment adjustment for the Medicare Part B ESRD payment. Most lab services are also included in the bundled payment. Under the ESRD PPS, the bundled payments to a dialysis facility may be reduced by as much as 2% based on the facility's performance in specified quality measures set
annually by CMS through the ESRD Quality Incentive Program, which was established by the Medicare Improvements for Patients and Providers Act of 2008. The bundled payment rate is also adjusted for certain patient characteristics, a geographic usage index and certain other factors. In addition, the ESRD PPS is subject to rebasing, which can have a positive financial effect, or a negative one if the government fails to rebase in a manner that adequately addresses the costs borne by dialysis facilities. Similarly, as new drugs, services or labs are added to the ESRD bundle, CMS' failure to adequately calculate the costs associated with the drugs, services or labs could have a material adverse effect on our business, results of operations, financial condition and cash flows.
The current bundled payment system presents certain operating, clinical and financial risks, which include:
Risk that our rates are reduced by CMS. Uncertainty about future payment rates remains a material risk to our business.
Risk that CMS, through its contracted Medicare Administrative Contractors (MACs) or otherwise, implements Local Coverage Determinations (LCDs) or other decisions that limit our ability to bill for treatments or other drugs and services or other rules that may impact reimbursement. Such coverage determinations could have an adverse impact on our revenue. There is also risk commercial insurers could seek to incorporate the requirements or limitations associated with such LCDs into their contracted terms with dialysis providers, which could have an adverse impact on our revenue.
Risk that a MAC, or multiple MACs, change their interpretations of existing regulations, manual provisions and/or guidance; or seek to implement or enforce new interpretations that are inconsistent with how we have interpreted existing regulations, manual provisions and/or guidance.
Risk that increases in our operating costs will outpace the Medicare rate increases we receive. We expect operating costs to continue to increase due to inflationary factors, such as increases in labor and supply costs, including increases in maintenance costs and capital expenditures to improve, renovate and maintain our facilities, equipment and information technology to meet changing regulatory requirements and business needs, regardless of whether there is a compensating inflation-based increase in Medicare payment rates or in payments under the bundled payment rate system.
Risk of federal budget sequestration cuts. As a result of the Budget Control Act of 2011 and the BBA, an annual 2% reduction to Medicare payments took effect on April 1, 2013, and has been extended through 2027. These across-the-board spending cuts have affected and will continue to adversely affect our business, results of operations, financial condition and cash flows.
Risk that failure to adequately develop and maintain our clinical systems or failure of our clinical systems to operate effectively could have a material adverse effect on our business, results of operations, financial condition and cash flows. For example, in connection with claims for which at least part of the government's payments to us is based on clinical performance or patient outcomes or co-morbidities, if our clinical systems fail to accurately capture the data we report to CMS or we otherwise have data integrity issues with respect to the reported information, we might be over-reimbursed by the government, which could subject us to liability. For example, CMS published a final rule that implemented a provision of the ACA, requiring providers to report and return Medicare and Medicaid overpayments within the later of (a) 60 days after the overpayment is identified and quantified, or (b) the date any corresponding cost report is due, if applicable. An overpayment impermissibly retained under this statute could, among other things, subject us to liability under the FCA, exclusion from participation in the federal healthcare programs, and penalties under the federal Civil Monetary Penalty statute and could adversely impact our reputation.
We are subject to similar risks for services billed separately from the ESRD bundled payment, including the risk that a MAC, or multiple MACs, change their interpretations of existing regulations, manual provisions and/or guidance; or seek to implement or enforce new interpretations that are inconsistent with how we have interpreted existing regulations, manual provisions and/or guidance. For additional details regarding the risks we face for failing to adhere to our Medicare and Medicaid regulatory compliance obligations, see the risk factor above under the heading "If we fail to adhere to all of the complex government laws and regulations that apply to our business, we could suffer severe consequences that could have a material adverse effect on our business, results of operations, financial condition, cash flows, reputation and stock price."
Changes in state Medicaid or other non-Medicare government-based programs or payment rates could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Approximately 25% of our U.S. dialysis and related lab services net revenues for the year ended December 31, 2018, were generated from patients who have state Medicaid or other non-Medicare government-based programs, such as coverage through the Department of Veterans Affairs (VA), as their primary coverage. As state governments and other governmental organizations face increasing budgetary pressure, we may in turn face reductions in payment rates, delays in the receipt of payments, limitations on enrollee eligibility or other changes to the applicable programs. For example, certain state Medicaid programs and the VA have recently considered, proposed or implemented payment rate reductions.
The VA adopted Medicare's bundled PPS pricing methodology for any veterans receiving treatment from non-VA providers under a national contracting initiative. Since we are a non-VA provider, these reimbursements are tied to a percentage of Medicare reimbursement, and we have exposure to any dialysis reimbursement changes made by CMS. Approximately 3% of our dialysis services revenues for the year ended December 31, 2018 were generated by the VA.
In 2013, we entered into a five-year Nationwide Dialysis Services contract with the VA which is subject to one-year renewal periods, consistent with all provider agreements with the VA under this contract. During the length of the contract, the VA has elected not to make adjustments to reimbursement percentages that are tied to a percentage of Medicare reimbursement rates. These agreements provide the VA with the right to terminate the agreements without cause on short notice. Should the VA renegotiate, or not renew or cancel these agreements for any reason, we may cease accepting patients under this program and may be forced to close centers or experience lower reimbursement rates, which could have a material adverse effect on our business, results of operations, financial condition and cash flows.
State Medicaid programs are increasingly adopting Medicare-like bundled payment systems, but sometimes these payment systems are poorly defined and are implemented without any claims processing infrastructure, or patient or facility adjusters. If these payment systems are implemented without any adjusters and claims processing infrastructure, Medicaid payments will be substantially reduced and the costs to submit such claims may increase, which will have a negative impact on our business, results of operations, financial condition and cash flows. In addition, some state Medicaid program eligibility requirements mandate that citizen enrollees in such programs provide documented proof of citizenship. If our patients cannot meet these proof of citizenship documentation requirements, they may be denied coverage under these programs, resulting in decreased patient volumes and revenue. These Medicaid payment and enrollment changes, along with similar changes to other non-Medicare government programs could reduce the rates paid by these programs for dialysis and related services, delay the receipt of payment for services provided and further limit eligibility for coverage which could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Changes in clinical practices, payment rates or regulations impacting pharmaceuticals could have a material adverse effect on our business, results of operations, financial condition, cash flows and negatively impact our ability to care for patients.
Medicare bundles certain pharmaceuticals into the PPS at industry average doses and prices. Any variation above the industry average may be subject to partial reimbursement through the PPS outlier reimbursement policy.
Commercial payors have increasingly examined their administration policies for pharmaceuticals and, in some cases, have modified those policies. Changes in labeling of pharmaceuticals in a manner that alters physician practice patterns, including their independent determinations as to appropriate dosing, or accepted clinical practices, and/or changes in private and governmental payment criteria, including the introduction of administration policies could have a material adverse effect on our business, results of operations, financial condition and cash flows. Further increased utilization of certain pharmaceuticals for patients for whom the cost of which is included in a bundled reimbursement rate, or further decreases in reimbursement for pharmaceuticals that are not included in a bundled reimbursement rate, could also have a material adverse effect on our business, results of operations, financial condition and cash flows.
Additionally, as of January 1, 2018, calcimimetics became part of the Medicare Part B ESRD payment, but subject to a transitional drug add-on payment adjustment. We implemented processes designed to provide the drug as required under the applicable regulations and prescribed by physicians and have entered into agreements to provide for access to and distribution of the drug. If payors do not pay as anticipated, if we are not adequately reimbursed for the cost of the drug, or the processes we have implemented to provide the drug do not perform as anticipated, then we could be subject to both financial and operational risk, among other things.
We may be subject to increased inquiries or audits from a variety of governmental bodies or claims by third parties related to pharmaceuticals, which would require management's attention and could result in significant legal expense. Any
negative findings could result in substantial financial penalties or repayment obligations, the imposition of certain obligations on and changes to our practices and procedures as well as the attendant financial burden on us to comply with the obligations, or exclusion from future participation in the Medicare and Medicaid programs, and could have a material adverse effect on our business, results of operations, financial condition and cash flows.
If we fail to comply with our Corporate Integrity Agreement, we could be subject to substantial penalties and exclusion from participation in federal healthcare programs that could have a material adverse effect on our business, results of operations, financial condition, cash flows and reputation.
In October 2014, we entered into a Settlement Agreement with the U.S. and relator David Barbetta to resolve the then pending 2010 and 2011 U.S. Attorney physician relationship investigations and paid $406 million in settlement amounts, civil forfeiture, and interest to the U.S. and certain states. In connection with the resolution of these matters, and in exchange for the OIG's agreement not to exclude us from participating in the federal healthcare programs, we have entered into a five-year CIA with the OIG. The CIA (i) requires that we maintain certain elements of our compliance programs; (ii) imposes certain expanded compliance-related requirements during the term of the CIA; (iii) requires ongoing monitoring and reporting by an independent monitor, imposes certain reporting, certification, records retention and training obligations, allocates certain oversight responsibility to the Board's Compliance Committee, and necessitates the creation of a Management Compliance Committee and the retention of an independent compliance advisor to the Board; and (iv) contains certain business restrictions related to a subset of our joint venture arrangements, including our agreeing to (1) unwind 11 joint venture transactions that were created through partial divestitures to, or partial acquisitions from, nephrologists, and that cover 26 of our 2,119 clinics that existed at the time we entered into the Settlement Agreement, all of which have been completed, (2) not enter into certain types of partial divestiture joint venture transactions with nephrologists during the term of the CIA, (3) non-enforcement of certain patient-related non-solicitation restrictions, and (4) certain other restrictions. The costs associated with compliance with the CIA are substantial and may be greater than we currently anticipate. In addition, in the event of a breach of the CIA, we could become liable for payment of certain stipulated penalties, and could be excluded from participation in federal healthcare programs. The OIG has notified us in the past that it considered us to be in breach of the CIA, and we cannot provide any assurances that we may not be found in breach of the CIA in the future. In general, the costs associated with compliance with the CIA, or any liability or consequences associated with a breach, could have a material adverse effect on our business, results of operations, financial condition and cash flows. For our domestic dialysis business, we are required under the CIA to report to the OIG (i) probable violations of criminal, civil or administrative laws applicable to any federal health care program for which penalties or exclusions may be authorized under applicable laws and regulations; (ii) substantial overpayments of amounts of money we have received in excess of the amounts due and payable under the federal healthcare program requirements; and (iii) employment of or contracting with individuals ineligible from participating in the federal healthcare programs (we refer to these collectively as Reportable Events). We have provided the OIG notice of Reportable Events, and we may identify and report additional events in the future. If any of our operations are found to violate government laws and regulations, we could suffer severe consequences that could have a material adverse effect on our business, results of operations, financial condition, cash flows, reputation and stock price, including those consequences described under the risk factor "If we fail to adhere to all of the complex government laws and regulations that apply to our business, we could suffer severe consequences that could have a material adverse effect on our business, results of operations, financial condition, cash flows, reputation and stock price."
Delays in state Medicare and Medicaid certification or other licensing and/or anything impacting the licensing of our dialysis centers could adversely affect our business, results of operations, financial condition and cash flows.
Before we can begin billing for patients treated in our outpatient dialysis centers who are enrolled in government-based programs, we are required to obtain state and federal certification for participation in the Medicare and Medicaid programs. As state agencies responsible for surveying dialysis centers on behalf of the state and Medicare program face increasing budgetary pressure, certain states are having difficulty keeping up with certifying dialysis centers in the normal course resulting in significant delays in certification. If state governments continue to have difficulty keeping up with certifying new centers in the normal course and we continue to experience significant delays in our ability to treat and bill for services provided to patients covered under government programs, it could cause us to incur write-offs of investments or accelerate the recognition of lease obligations in the event we have to close centers or our centers' operating performance deteriorates, and it could have an adverse effect on our business, results of operations, financial condition and cash flows. Although the BBA passed in February 2018 allows organizations approved by the Department of Health and Human Services (HHS) to accredit dialysis facilities and imposes certain timing requirements regarding the initiation of initial surveys to determine if certain conditions and requirements for payment have been satisfied, we cannot predict the ultimate impact of these changes. In addition to certifications for Medicare and Medicaid, some states have licensing requirements for ESRD facilities. Delays in licensure, denials of licensure, or withdrawal of licensure could also adversely affect our business, results of operations, financial condition and cash flows.
If our joint ventures were found to violate the law, we could suffer severe consequences that would have a material adverse effect on our business, results of operations, financial condition and cash flows.
As of December 31, 2018, we owned a controlling interest in numerous dialysis-related joint ventures, which represented approximately 25% of our net U.S. dialysis and related lab services net revenues for the year ended December 31, 2018. In addition, we also owned noncontrolling equity investments in several other dialysis related joint ventures. We expect to continue to increase the number of our joint ventures. Many of our joint ventures with physicians or physician groups also have certain physician owners providing medical director services to centers we own and operate. Because our relationships with physicians are governed by the federal and state anti-kickback statutes, we have sought to structure our joint venture arrangements to satisfy as many federal safe harbor requirements as we believe are commercially reasonable. Our joint venture arrangements do not satisfy all of the elements of any safe harbor under the federal Anti-Kickback Statute, however, and therefore are susceptible to government scrutiny. For example, in October 2014, we entered into a settlement agreement to resolve the then pending 2010 and 2011 U.S. Attorney physician relationship investigations regarding certain of our joint ventures and paid $406 million in settlement amounts, civil forfeiture, and interest to the U.S. and certain states. For further details on the settlement agreement, see "If we fail to comply with our Corporate Integrity Agreement, we could be subject to substantial penalties and exclusion from participation in federal healthcare programs that could have a material adverse effect on our business, results of operations, financial condition, cash flows, and reputation".
There are significant risks associated with estimating the amount of dialysis revenues and related refund liabilities that we recognize, and if our estimates of revenues and related refund liabilities are materially inaccurate, it could impact the timing and the amount of our revenues recognition or have a material adverse effect on our business,resultsof operations, financial condition and cash flows.
There are significant risks associated with estimating the amount of U.S. dialysis and related lab services revenues and related refund liabilities that we recognize in a reporting period. The billing and collection process is complex due to ongoing insurance coverage changes, geographic coverage differences, differing interpretations of contract coverage and other payor issues, such as ensuring appropriate documentation. Determining applicable primary and secondary coverage for approximately 202,700U.S. patients at any point in time, together with the changes in patient coverage that occur each month, requires complex, resource-intensive processes. Errors in determining the correct coordination of benefits may result in refunds to payors. Revenues associated with Medicare and Medicaid programs are also subject to estimating risk related to the amounts not paid by the primary government payor that will ultimately be collectible from other government programs paying secondary coverage, the patient's commercial health plan secondary coverage or the patient. Collections, refunds and payor retractions typically continue to occur for up to three years and longer after services are provided. We generally expect our range of U.S. dialysis and related lab services revenues estimating risk to be within 1% of net revenues for the segment. If our estimates of U.S. dialysis and related lab services revenues and related refund liabilities are materially inaccurate, it could impact the timing and the amount of our revenues recognition and have a material adverse impact on our business, results of operations, financial condition and cash flows.
Our ancillary services and strategic initiatives, including our international operations, that we operate or invest in now or in the future may generate losses and may ultimately be unsuccessful. In the event that one or more of these activities is unsuccessful, our business, results of operations, financial condition and cash flows may be negatively impacted and we may have to write off our investment and incur other exit costs.
Our ancillary services and strategic initiatives are subject to many of the same risks, regulations and laws, as described in the risk factors related to our dialysis business set forth in this Part I, Item 1A, and are also subject to additional risks, regulations and laws specific to the nature of the particular strategic initiative. We expect to add additional service offerings to our business and pursue additional strategic initiatives in the future as circumstances warrant, which could include healthcare services not related to dialysis. Many of these initiatives require or would require investments of both management and financial resources and can generate significant losses for a substantial period of time and may not become profitable in the expected timeframe or at all. There can be no assurance that any such strategic initiative will ultimately be successful. Any significant change in market conditions, or business performance, or in the political, legislative or regulatory environment, may impact the economic viability of any of these strategic initiatives. For example, changes in the oral pharmacy space, including reimbursement rate pressures, negatively impacted the economics of our pharmacy services business. As a result, in the second half of 2018 we transitioned the customer service and fulfillment functions of this business to third parties and wound down our distribution operation, which resulted in a decrease in revenues and costs. In the year ended December 31, 2018, we recognized restructuring charges of $11 million and incurred asset impairment charges of $17 million related to the restructuring of our pharmacy business.
If any of our ancillary services or strategic initiatives, including our international operations, are unsuccessful, it would have a negative impact on our business, results of operations, financial condition and cash flows, and we may determine to exit
that line of business. We could incur significant termination costs if we were to exit certain of these lines of business. In addition, we may incur a material write-off or an impairment of our investment, including goodwill, in one or more of our ancillary services or strategic initiatives. In that regard, we have taken, and may in the future take, impairment and restructuring charges in addition to those described above related to our ancillary services and strategic initiatives, including in our international and pharmacy businesses.
If a significant number of physicians were to cease referring patients to our dialysis centers, whether due to regulatory or other reasons, it would have a material adverse effect on our business, results of operations, financial condition and cash flows.
Physicians, including medical directors, choose where they refer their patients. Some physicians prefer to have their patients treated at dialysis centers where they or other members of their practice supervise the overall care provided as medical director of the center. As a result, referral sources for many of our centers include the physician or physician group providing medical director services to the center.
Our medical director contracts are for fixed periods, generally ten years, and at any given time a large number of them could be up for renewal at the same time. Medical directors have no obligation to extend their agreements with us and, under certain circumstances, our former medical directors may choose to provide medical director services for competing providers or establish their own dialysis centers in competition with ours. Neither our current nor former medical directors have an obligation to refer their patients to our centers.
The aging of the nephrologist population and opportunities presented by our competitors may negatively impact a medical director's decision to enter into or extend his or her agreement with us. Moreover, different affiliation models in the changing healthcare environment that limit a nephrologist's choice in where he or she can refer patients, such as an increase in the number of physicians becoming employed by hospitals or a perceived decrease in the quality of service levels at our centers, may limit a nephrologist's ability or desire to refer patients to our centers or otherwise negatively impact treatment volumes.
In addition, if the terms of any existing agreement are found to violate applicable laws, we may not be successful in restructuring the relationship, which would lead to the early termination of the agreement. If we are unable to obtain qualified medical directors to provide supervision of the operations and care provided at our dialysis centers, it could affect physicians' desire to refer patients to our dialysis centers. If a significant number of physicians were to cease referring patients to our dialysis centers, it would have a material adverse effect on our business, results of operations, financial condition and cash flows.
If our labor costs continue to rise, including due to shortages, changes in certification requirements and higher than normal turnover rates in skilled clinical personnel; or currently pending or future rules, regulations or initiatives impose additional requirements or limitations on our operations or profitability; or, if we are unable to attract and retain key leadership talent, we may experience disruptions in our business operations and increases in operating expenses, among other things, which could have a material adverse effect on our business, results of operations, financial condition and cash flows.
We face increasing labor costs generally, and in particular, we face increased labor costs and difficulties in hiring nurses due to a nationwide shortage of skilled clinical personnel. We compete for nurses with hospitals and other healthcare providers. This nursing shortage may limit our ability to expand our operations. Furthermore, changes in certification requirements can impact our ability to maintain sufficient staff levels, including to the extent our teammates are not able to meet new requirements, among other things. In addition, if we experience a higher than normal turnover rate for our skilled clinical personnel, our operations and treatment growth may be negatively impacted, which could adversely affect our business, results of operations, financial condition and cash flows. We also face competition in attracting and retaining talent for key leadership positions. If we are unable to attract and retain qualified individuals, we may experience disruptions in our business operations, including our ability to achieve strategic goals, which could have a material adverse affect on our business, results of operations, financial condition and cash flows.
In addition, proposed ballot initiatives or referendums, legislation, regulations or policy changes could cause us to incur substantial costs to challenge and prepare for and, if implemented, impose additional requirements on our operations, including increases in the required staffing levels or staffing ratios for clinical personnel, minimum transition times between treatments, limits on how much patients may be charged for care, limitations as to the amount that can be spent on certain medical costs, and limitations on the amount of revenue that providers can retain. Changes such as those mandated by proposed ballot initiatives or referendums, legislation, regulations or policy changes could materially reduce our revenues and increase our operating expense and impact our ability to staff our clinics to any new, elevated staffing levels, in particular given the ongoing
nationwide shortage of healthcare workers, especially nurses. Any of these events or circumstances could materially reduce our revenues and increase our operating and other costs, require us to close or consolidate existing dialysis centers, postpone or not build new dialysis centers, reduce shifts or negatively impact employee relations, treatment growth and productivity, and could have a material adverse effect on our business, results of operations, financial condition and cash flows. For additional information on these risks, see "Changes in federal and state health regulations could have a material adverse effect on our business, results of operations, financial condition and cash flows."
Our business is labor intensive and could be materially adversely affected if we are unable to attract and retain employees or if union organizing activities or legislative or other changes result in significant increases in our operating costs or decreases in productivity.
Our business is labor intensive, and our financial and operating results have been and continue to be subject to variations in labor-related costs, productivity and the number of pending or potential claims against us related to labor and employment practices. Political or other efforts at the national or local level could result in actions or proposals that increase the likelihood or success of union organizing activities at our facilities and ongoing union organizing activities at our facilities could continue or increase for other reasons. We could experience an upward trend in wages and benefits and labor and employment claims, including the filing of class action suits, or adverse outcomes of such claims, or face work stoppages. In addition, we are and may continue to be subject to targeted corporate campaigns by union organizers in response to which we have been and may continue to be required to expend substantial resources, both time and financial. Any of these events or circumstances could have a material adverse effect on our employee relations, treatment growth, productivity, business, results of operations, financial condition and cash flows.
Complications associated with our billing and collections system could materially adversely affect our business, results of operations, financial condition and cash flows.
Our billing system is critical to our billing operations. If there are defects in the billing system, we may experience difficulties in our ability to successfully bill and collect for services rendered, including a delay in collections, a reduction in the amounts collected, increased risk of retractions from and refunds to commercial and government payors, an increase in our provision for uncollectible accounts receivable and noncompliance with reimbursement regulations, any or all of which could materially adversely affect our results of operations.
Risk factors primarily related to DMG:
DMG is subject to many of the same risks to which our dialysis business is subject.
As a participant in the healthcare industry, DMG is subject to many of the same risks as our dialysis business is, as described in the risk factors set forth above in this Part I, Item 1A, many of which could have a material adverse effect on DMG's business, results of operations, financial condition and cash flows.
Under most of DMG's agreements with health plans, DMG assumes some or all of the risk that the cost of providing services will exceed its compensation.
Approximately 84% of DMG's revenue for the year ended December 31, 2018, is derived from fixed per member per month (PMPM) fees paid by health plans under capitation agreements with DMG or its associated physician groups. While there are variations specific to each arrangement, DMG, through DHPC, a subsidiary of HealthCare Partners Holdings, LLC and a restricted Knox-Keene licensed entity, and, in certain instances, DMG's associated physician groups, generally contract with health plans to receive a PMPM fee for professional services and assume the financial responsibility for professional services only. In some cases, the health plans separately enter into capitation contracts with third parties (typically hospitals) who receive directly a PMPM fee and assume contractual financial responsibility for hospital services. In other cases, the health plan does not pay any portion of the PMPM fee to the hospital, but rather administers claims for hospital expenses itself. In both scenarios, DMG enters into managed care-related administrative services agreements or similar arrangements with those third parties (typically hospitals) under which DMG agrees to be responsible for utilization review, quality assurance, and other managed care-related administrative functions. As compensation for such administrative services, DMG is entitled to receive a percentage of the amount by which the institutional capitation revenue received from health plans exceeds institutional expenses; any such risk-share amount to which DMG is entitled is recorded as medical revenues, and DMG is also responsible for a percentage of any short-fall in the event that institutional expenses exceed institutional revenues. To the extent that members require more care than is anticipated and/or the cost of care increases, aggregate fixed PMPM amounts, or capitation payments, may be insufficient to cover the costs associated with treatment. If medical costs and expenses exceed estimates, except in very limited circumstances, DMG will not be able to increase the PMPM fee received under these risk
agreements during their then-current terms and could, directly or indirectly through its contracts with its associated physician groups, suffer losses with respect to such agreements.
Changes in DMG's or its associated physician groups' anticipated ratio of medical expense to revenue can significantly impact DMG's financial results. Accordingly, the failure to adequately predict and control medical costs and expenses and to make reasonable estimates and maintain adequate accruals for incurred but not reported claims, could have a material adverse effect on DMG's business, results of operations, financial condition and cash flows.
Historically, DMG's and its associated physician groups' medical costs and expenses as a percentage of revenue have fluctuated. Factors that may cause medical expenses to exceed estimates include:
the health status of members;
higher than expected utilization of new or existing healthcare services or technologies;
an increase in the cost of healthcare services and supplies, including pharmaceuticals, whether as a result of inflation or otherwise;
changes to mandated benefits or other changes in healthcare laws, regulations and practices;
periodic renegotiation of provider contracts with specialist physicians, hospitals and ancillary providers;
periodic renegotiation of contracts with DMG's affiliated primary care physicians and specialists;
changes in the demographics of the participating members and medical trends;
contractual or claims disputes with providers, hospitals or other service providers within and outside of a health plan's network;
the occurrence of catastrophes, major epidemics or acts of terrorism; and
the reduction of health plan premiums.
Risk-sharing arrangements that DMG and its associated physician groups have with health plans and hospitals could result in their costs exceeding the corresponding revenues, which could reduce or eliminate any shared risk profitability.
Most of the agreements between health plans and DMG and its associated physician groups contain risk-sharing arrangements under which the physician groups can earn additional compensation from the health plans by coordinating the provision of quality, cost-effective healthcare to members. However, such arrangements may require the physician group to assume a portion of any loss sustained from these arrangements, thereby reducing DMG's net income. Under these risk-sharing arrangements, DMG and its associated physician groups are responsible for a portion of the cost of hospital services or other services that are not capitated. The terms of the particular risk-sharing arrangement allocate responsibility to the respective parties when the cost of services exceeds the related revenue, which results in a deficit, or permit the parties to share in any surplus amounts when actual costs are less than the related revenue. The amount of non-capitated medical and hospital costs in any period could be affected by factors beyond the control of DMG, such as changes in treatment protocols, new technologies, longer lengths of stay by the patient and inflation. Certain of DMG's agreements with health plans stipulate that risk-sharing pool deficit amounts are carried forward to offset any future years' surplus amounts DMG would otherwise be entitled to receive. DMG accrues for any such risk-sharing deficits. To the extent that such non-capitated medical and hospital costs are higher than anticipated, revenue may not be sufficient to cover the risk-sharing deficits DMG and its associated physician groups are responsible for, which could have a material adverse effect on DMG's business, results of operations, financial condition and cash flows.
Renegotiation, renewal or termination of capitation agreements with health plans could have a material adverse effect on DMG's business, results operations, financial condition and cash flows.
Under most of DMG's and its associated physician groups' capitation agreements with health plans, the health plan is generally permitted to modify the benefit and risk obligations and compensation rights from time to time during the terms of the agreements. If a health plan exercises its right to amend its benefit and risk obligations and compensation rights, DMG and its associated physician groups are generally allowed a period of time to object to such amendment. If DMG or its associated physician group so objects, under some of the risk agreements, the relevant health plan may terminate the applicable agreement upon 90 to 180 days written notice. If DMG or its associated physician groups enter into capitation contracts or other risk
sharing arrangements with unfavorable economic terms, or a capitation contract is amended to include unfavorable terms, DMG could, directly or indirectly through its contracts with its associated physician groups, suffer losses with respect to such contract. Since DMG does not negotiate with CMS or any health plan regarding the benefits to be provided under their Medicare Advantage plans, DMG often has just a few months to familiarize itself with each new annual package of benefits it is expected to offer. Depending on the health plan at issue and the amount of revenue associated with the health plan's risk agreement, the renegotiated terms or termination could have a material adverse effect on DMG's business, results of operations, financial condition and cash flows.
If DMG's agreements or arrangements with any physician equity holder(s) of associated physicians, physician groups or independent practice associations (IPAs) are deemed invalid under state law, including laws against the corporate practice of medicine, or federal law, or are terminated as a result of changes in state law, or if there is a change in accounting standards by the Financial Accounting Standards Board (FASB) or the interpretation thereof affecting consolidation of entities, it could have a material adverse effect on DMG's consolidation of total revenues derived from such associated physician groups.
DMG's financial statements are consolidated in accordance with applicable accounting standards and include the accounts of its majority-owned subsidiaries and certain non-owned DMG-associated and managed physician groups. Such consolidation for accounting and/or tax purposes does not, is not intended to, and should not be deemed to, imply or provide to DMG any control over the medical or clinical affairs of such physician groups. In the event of a change in accounting standards promulgated by FASB or in interpretation of its standards, or if there is an adverse determination by a regulatory agency or a court, or a change in state or federal law relating to the ability to maintain present agreements or arrangements with such physician groups, DMG may not be permitted to continue to consolidate the total revenues of such organizations. A change in accounting for consolidation with respect to DMG's present agreements or arrangements would diminish DMG's reported revenues but would not be expected to materially and adversely affect its reported results of operations, while regulatory or legal rulings or changes in law interfering with DMG's ability to maintain its present agreements or arrangements could materially diminish both revenues and results of operations.
If DHPC is not able to satisfy financial solvency or other regulatory requirements, wecould become subject to sanctions and its license to do business in California could be limited, suspended or terminated, which could have a material adverse effect on DMG's business, results of operations, financial condition and cash flows.
Knox-Keene requires healthcare service plans operating in California to comply with financial solvency and other requirements overseen by the California Department of Managed HealthCare (DMHC). Under Knox-Keene, DHPC is required to, among other things:
Maintain, at all times, a minimum tangible net equity (TNE);
Submit periodic financial solvency reports to the DMHC containing various data regarding performance and financial solvency;
Comply with extensive regulatory requirements; and
Submit to periodic regulatory audits and reviews concerning DHPC operations and compliance with Knox-Keene.
In the event that DHPC is not in compliance with the provisions of Knox-Keene, we could be subject to sanctions, or limitations on, or suspension of its license to do business in California, which could have a material adverse effect on DMG's business, results of operations, financial condition and cash flows.
If DMG's associated physician group is not able to satisfy the California DMHC's financial solvency requirements, DMG's associated physician group could become subject to sanctions and DMG's ability to do business in California could be limited or terminated, which could have a material adverse effect on DMG's business, results of operations, financial condition and cash flows.
The California DMHC has instituted financial solvency regulations to monitor the financial solvency of capitated physician groups. Under these regulations, DMG's associated physician group is required to, among other things:
Maintain, at all times, a minimum cash-to-claims ratio (where cash-to-claims ratio means the organization's cash, marketable securities and certain qualified receivables, divided by the organization's total unpaid claims liability). The regulation currently requires a cash-to-claims ratio of 0.75.
Submit periodic reports to the California DMHC containing various data and attestations regarding performance and financial solvency, including incurred but not reported calculations and documentation, and attestations as to whether or not the organization was in compliance with Knox-Keene requirements related to claims payment timeliness, had maintained positive TNE (i.e., at least $1.00) and had maintained positive working capital (i.e., at least $1.00).
In the event that DMG's associated physician group is not in compliance with any of the above criteria, DMG's associated physician group could be subject to sanctions, or limitations on, or termination of, its ability to do business in California, which could have a material adverse effect on DMG's business, results of operations, financial condition and cash flows.
Reductions in Medicare Advantage health plan reimbursement rates stemming from healthcare reforms and any future related regulations could have a material adverse effect on DMG's business, results of operations, financial condition and cash flows.
A significant portion of DMG's revenue is directly or indirectly derived from the monthly premium payments paid by CMS to health plans for medical services provided to Medicare Advantage enrollees. As a result, DMG's results of operations are, in part, dependent on government funding levels for Medicare Advantage programs. Any changes that limit or reduce Medicare Advantage reimbursement levels, such as reductions in or limitations of reimbursement amounts or rates under programs, reductions in funding of programs, expansion of benefits without adequate funding, elimination of coverage for certain benefits, or elimination of coverage for certain individuals or treatments under programs, could have a material adverse effect on DMG's business, results of operations, financial condition and cash flows.
Each year, CMS issues a final rule to establish the Medicare Advantage benchmark payment rates for the following calendar year. Any reduction to Medicare Advantage rates impacting DMG that is greater compared to the industry average rate may have a material adverse effect on DMG's business, results of operations, financial condition and cash flows. The final impact of the Medicare Advantage rates can vary from any estimate we may have and may be further impacted by the relative growth of DMG's Medicare Advantage patient volumes across markets as well as by the benefit plan designs submitted. It is possible that we may underestimate the impact of the Medicare Advantage rates on our business, which could have a material adverse effect on DMG's business, results of operations, financial condition and cash flows.
Before DMG was reclassified as held for sale, we took impairment charges against the goodwill of several of our DMG reporting units based on continuing developments in our DMG business, including recent annual updates to Medicare Advantage benchmark reimbursement rates, changes in our expectations concerning future government reimbursement rates and our expected ability to mitigate them, medical cost and utilization trends, commercial pricing pressures, commercial membership rates, underperformance of certain at-risk reporting units and other market factors. Depending on the impact of continuing developments on the value of our DMG business, for example if DMG's fair value less the costs incurred in the sale of DMG falls below its carrying amount, we may need to recognize additional impairment charges on this business, and the amount of such charges, if any, could be significant. Our estimates of the fair value of this business rely on certain estimates and assumptions, including the terms and pricing agreed for the sale of this business, as well as applicable market multiples, discount and long-term growth rates, market data and future reimbursement rates, as applicable. Our estimates of the fair value of the DMG business could differ from the actual value that a market participant would pay for this business, and as a result, we may recognize valuation adjustments or record other related charges on our DMG business in the future. For example, in the third and fourth quarters of 2018, we recognized valuation adjustments with respect to DMG based on an updated assessment of fair value, which includes inputs such as the transaction itself, risks and timing, and performance of the business, and we recorded associated goodwill impairment charges in the fourth quarter of 2018. For additional information regarding the risks we face related to the pending sale of DMG, see the discussion in the risk factors under the heading "Risk factors related to the sale of DMG."
DMG's Medicare Advantage revenues may continue to be volatile in the future, which could have a material adverse impact on DMG's business, results of operations, financial condition and cash flows.
The ACA contains a number of provisions that negatively impact Medicare Advantage plans, each of which could have a material adverse effect on DMG's business, results of operations, financial condition and cash flows. These provisions include the following:
Medicare Advantage benchmarks for 2011 were frozen at 2010 levels. From 2012 through 2016, Medicare Advantage benchmark rates were phased down from prior levels. The new benchmarks were fully phased-in in 2017 and range between 95% and 115% of the Medicare Fee-for-Service (Medicare FFS) costs, depending on a plan's geographic area. If our costs escalate faster than can be absorbed by the level of revenues implied by these benchmark rates, then it could have a material adverse effect on DMG's business and results of operations.
Rebates received by Medicare Advantage plans that were reduced, with larger reductions for plans failing to receive certain quality ratings.
The Secretary of the HHS has been granted the explicit authority to deny Medicare Advantage plan bids that propose significant increases in cost sharing or decreases in benefits. If the bids submitted by plans contracted with DMG are denied, this could have a material adverse effect on DMG's business and results of operations.
Medicare Advantage plans with medical loss ratios below 85% are required to pay a rebate to the Secretary of HHS. The rebate amount is the total revenue under the contract year multiplied by the difference between 85% and the plan's actual medical loss ratio. The Secretary of HHS will halt enrollment in any plan failing to meet this ratio for three consecutive years, and terminate any plan failing to meet the ratio for five consecutive years. If a DMG-contracting Medicare Advantage plan experiences a limitation on enrollment or is otherwise terminated from the Medicare Advantage program, it could have a material adverse effect on DMG's business and results of operations.
Prescription drug plans are required to provide coverage of certain drug categories on a list developed by the Secretary of HHS, which could increase the cost of providing care to Medicare Advantage enrollees, and thereby reduce DMG's revenues and earnings. The Medicare Part D premium amount subsidized for high-income beneficiaries has been reduced, which could lower the number of Medicare Advantage enrollees, which would have a negative impact on DMG's business and results of operations.
CMS increased coding intensity adjustments for Medicare Advantage plans beginning in 2014 and continuing through 2019, which reduces CMS payments to Medicare Advantage plans, which in turn will likely reduce the amounts payable to DMG and its associated physicians, physician groups, and IPAs under its capitation agreements.
Recent legislative, judicial and executive efforts to enact further healthcare reform legislation have caused the future state of the exchanges, other ACA reforms, and many core aspects of the current U.S. health care system to be unclear. While specific changes and their timing are not yet apparent, enacted reforms and future legislative, regulatory, judicial, or executive changes could have a material adverse effect on DMG's business, results of operations, financial condition and cash flows.
There is also uncertainty regarding both Medicare Advantage payment rates and beneficiary enrollment, which, if reduced, would reduce DMG's overall revenues and net income. For example, although the Congressional Budget Office (CBO) predicted in 2010 that Medicare Advantage participation would drop substantially by 2020, the CBO has more recently predicted, without taking into account potential future reforms, that enrollment in Medicare Advantage (and other contracts covering Medicare Parts A and B) could reach 31 million by 2027. Although Medicare Advantage enrollment increased by approximately 5.6 million, or by 50%, between the enactment of the ACA in 2010 and 2015, there can be no assurance that this trend will continue. Further, fluctuation in Medicare Advantage payment rates are evidenced by CMS's annual announcement of the expected average change in revenue from the prior year: for 2018, CMS announced an average increase of 0.45%; and for 2019, 3.4%. Uncertainty over Medicare Advantage enrollment and payment rates present a continuing risk to DMG's business.
According to the Kaiser Family Foundation (KFF), Medicare Advantage enrollment continues to be highly concentrated among a few payors, both nationally and in local regions. In 2018, the KFF reported that three payors together accounted for more than half of Medicare Advantage enrollment and seven firms accounted for approximately 75% of the lives. Consolidation among Medicare Advantage plans in certain regions, or the Medicare program's failure to attract additional plans to participate in the Medicare Advantage program, could have a material adverse effect on DMG's business, results of operations, financial condition and cash flows.
DMG's operations are dependent on competing health plans and, at times, a health plan's and DMG's economic interests may diverge.
For the year ended December 31, 2018, 69% of DMG's consolidated capitated medical revenues were earned through contracts with three health plans.
DMG expects that, going forward, substantially all of its revenue will continue to be derived from its contracts with health plans. Each health plan may immediately terminate any of DMG's contracts and/or any individual credentialed physician upon the occurrence of certain events. They may also amend the material terms of the contracts under certain circumstances. Failure to maintain the contracts on favorable terms, for any reason, would materially and adversely affect DMG's results of operations, financial condition and cash flows. A material decline in the number of members could also have a material adverse effect on DMG's results of operations.
Notwithstanding each health plan's and DMG's current shared interest in providing service to DMG's members who are enrolled in the subject health plans, the health plans may have different and, at times, opposing economic interests from those of DMG. The health plans provide a wide range of health insurance services across a wide range of geographic regions, utilizing a vast network of providers. As a result, they and DMG may have different views regarding the proper pricing of services and/or the proper pricing of the various service providers in their provider networks, the cost of which DMG bears to the extent that the services of such service providers are utilized. These health plans may also have different views than DMG regarding the efforts and expenditures that they, DMG, and/or other service providers should make to achieve and/or maintain various quality ratings. In addition, several health plans have acquired or announced their intent to acquire provider organizations. If health plans with which DMG contracts acquire a significant number of provider organizations, they may not continue to contract with DMG or contract on less favorable terms or seek to prevent DMG from acquiring or entering into arrangements with certain providers. Similarly, as a result of changes in laws, regulations, consumer preferences, or other factors, the health plans may find it in their best interest to provide health insurance services pursuant to another payment or reimbursement structure. In the event DMG's interests diverge from the interests of the health plans, DMG may have limited recourse or alternative options in light of its dependence on these health plans. There can be no assurances that DMG will continue to find it mutually beneficial to work with these health plans. As a result of various restrictive provisions that appear in some of the managed care agreements with health plans, DMG may at times have limitations on its ability to cancel an agreement with a particular health plan and immediately thereafter contract with a competing health plan with respect to the same service area.
DMG and its associated physicians, physician groups and IPAs and other physicians may be required to continue providing services following termination of certain agreements with health plans.
There are circumstances under federal and state law pursuant to which DMG and its associated physician groups, IPAs and other physicians could be obligated to continue to provide medical services to DMG members in their care following a termination of their applicable risk agreement with health plans and termination of the receipt of payments thereunder. In certain cases, this obligation could require the physician group or IPA to provide care to such member following the bankruptcy or insolvency of a health plan. Accordingly, the obligations to provide medical services to DMG members (and the associated costs) may not terminate at the time the applicable agreement with the health plan terminates, and DMG may not be able to recover its cost of providing those services from the health plan, which could have a material adverse effect on DMG's business, results of operations, financial condition and cash flows.
DMG operates primarily in California, Florida, Nevada, New Mexico, Washington and Colorado and may not be able to successfully establish a presence in new geographic regions.
DMG derives substantially all of its revenue from operations in California, Florida, Nevada, New Mexico, Washington and Colorado (which we refer to as the Existing Geographic Regions). As a result, DMG's exposure to many of the risks described herein is not mitigated by a greater diversification of geographic focus. Furthermore, due to the concentration of DMG's operations in the Existing Geographic Regions, it may be adversely affected by economic conditions, natural disasters (such as earthquakes or hurricanes), or acts of war or terrorism that disproportionately affect the Existing Geographic Regions as compared to other states and geographic markets.
To expand the operations of its network outside of the Existing Geographic Regions, DMG must devote resources to identify and explore perceived opportunities. Thereafter, DMG must, among other things, recruit and retain qualified personnel, develop new offices, establish potential new relationships with one or more health plans, and establish new relationships with physicians and other healthcare providers. The ability to establish such new relationships may be significantly inhibited by competition for such relationships and personnel in the healthcare marketplace in the targeted new geographic regions. Additionally, DMG may face the risk that a substantial portion of the patients served in a new geographic area may be enrolled
in a Medicare FFS program and will not desire to transition to a Medicare Advantage program, such as those offered through the health plans that DMG serves, or they may enroll with other health plans with which DMG does not contract to receive services, which could reduce substantially DMG's perceived opportunity in such geographic area. In addition, if DMG were to seek to expand outside of the Existing Geographic Regions, DMG would be required to comply with laws and regulations of states that may differ from the ones in which it currently operates, and could face competitors with greater knowledge of such local markets. DMG anticipates that any geographic expansion may require it to make a substantial investment of management time, capital and/or other resources. There can be no assurance that DMG will be able to establish profitable operations or relationships in any new geographic markets.
Reductions in the quality ratings of the health plans DMG serves could have a material adverse effect on its business, results of operations, financial condition and cash flows.
As a result of the ACA, the level of reimbursement each health plan receives from CMS is dependent, in part, upon the quality rating of the Medicare plan. Such ratings impact the percentage of any cost savings rebate and any bonuses earned by such health plan. Since a significant portion of DMG's revenue is expected to be calculated as a percentage of CMS reimbursements received by these health plans with respect to DMG members, reductions in the quality ratings of a health plan that DMG serves could have a material adverse effect on its business, results of operations, financial condition and cash flows.
Given each health plan's control of its plans and the many other providers that serve such plans, DMG believes that it will have limited ability to influence the overall quality rating of any such plan. The BBA passed in February 2018 implements certain changes to prevent artificial inflation of star ratings for Medicare Advantage plans offered by the same organization. In addition, CMS has terminated plans that have had a rating of less than three stars for three consecutive years, whereas Medicare Advantage plans with five stars are permitted to conduct enrollment throughout almost the entire year. Because low quality ratings can potentially lead to the termination of a plan that DMG serves, DMG may not be able to prevent the potential termination of a contracting plan or a shift of patients to other plans based upon quality issues which could, in turn, have a material adverse effect on DMG's business, results of operations, financial condition and cash flows.
DMG's records and submissions to a health plan may contain inaccurate or unsupportable information regarding risk adjustment scores of members, which could cause DMG to overstate or understate its revenue and subject it to various penalties.
DMG, on behalf of itself and its associated physicians, physician groups and IPAs, submits to health plans claims and encounter data that support the Medicare Risk Adjustment Factor (RAF) scores attributable to members. These RAF scores determine, in part, the revenue to which the health plans and, in turn, DMG is entitled for the provision of medical care to such members. The data submitted to CMS by each health plan is based, in part, on medical charts and diagnosis codes prepared and submitted by DMG. Each health plan generally relies on DMG and its employed or affiliated physicians to appropriately document and support such RAF data in DMG's medical records. Each health plan also relies on DMG and its employed or affiliated physicians to appropriately code claims for medical services provided to members. Erroneous claims and erroneous encounter records and submissions could result in inaccurate PMPM fee revenue and risk adjustment payments, which may be subject to correction or retroactive adjustment in later periods. This corrected or adjusted information may be reflected in financial statements for periods subsequent to the period in which the revenue was recorded. DMG might also need to refund a portion of the revenue that it received, which refund, depending on its magnitude, could damage its relationship with the applicable health plan and could have a material adverse effect on DMG's business, results of operations, financial condition and cash flows.
In September 2018, we entered into a settlement agreement with the DOJ and OIG to resolve matters related to our and our subsidiaries' (including DMG and its subsidiary JSA) provision of services to Medicare Advantage plans and related patient diagnosis coding and risk adjustment submissions and payments. See Note 17 to the consolidated financial statements included in this report for further details and discussions of legal proceedings elsewhere in these Risk Factors.
Additionally, CMS audits Medicare Advantage plans for documentation to support RAF-related payments for members chosen at random. The Medicare Advantage plans ask providers to submit the underlying documentation for members that they serve. It is possible that claims associated with members with higher RAF scores could be subject to more scrutiny in a CMS or plan audit. There is a possibility that a Medicare Advantage plan may seek repayment from DMG should CMS make any payment adjustments to the Medicare Advantage plan as a result of its audits. The plans also may hold DMG liable for any penalties owed to CMS for inaccurate or unsupportable RAF scores provided by DMG. In addition, DMG could be liable for penalties to the government under the FCA that range from $5,500 to $11,000 (adjusted for inflation) for each false claim, plus up to three times the amount of damages caused by each false claim, which can be as much as the amounts received directly or indirectly from the government for each such false claim. On January 29, 2018, the DOJ issued a final rule announcing
adjustments to FCA penalties, under which the per claim penalty range increases to a range from $11,181 to $22,363 for penalties assessed after January 29, 2018, so long as the underlying conduct occurred after November 2, 2015.
CMS has indicated that payment adjustments will not be limited to RAF scores for the specific Medicare Advantage enrollees for which errors are found but may also be extrapolated to the entire Medicare Advantage plan subject to a particular CMS contract. CMS has described its audit process as plan-year specific and stated that it will not extrapolate audit results for plan years prior to 2011. Because CMS has not stated otherwise, there is a risk that payment adjustments made as a result of one plan year's audit would be extrapolated to prior plan years after 2011.
There can be no assurance that a health plan will not be randomly selected or targeted for review by CMS or that the outcome of such a review will not result in a material adjustment in DMG's revenue and profitability, even if the information DMG submitted to the plan is accurate and supportable.
A failure to accurately estimate incurred but not reported medical expense could adversely affect DMG's results of operations.
Patient care costs include estimates of future medical claims that have been incurred by the patient but for which the provider has not yet billed DMG. These claim estimates are made utilizing actuarial methods and are continually evaluated and adjusted by management, based upon DMG's historical claims experience and other factors, including an independent assessment by a nationally recognized actuarial firm. Adjustments, if necessary, are made to medical claims expense and capitated revenues when the assumptions used to determine DMG's claims liability change and when actual claim costs are ultimately determined.
Due to the inherent uncertainties associated with the factors used in these estimates and changes in the patterns and rates of medical utilization, materially different amounts could be reported in DMG's financial statements for a particular period under different conditions or using different, but still reasonable, assumptions. It is possible that DMG's estimates of this type of claim may be inadequate in the future. In such event, DMG's results of operations could be adversely impacted. Further, the inability to estimate these claims accurately may also affect DMG's ability to take timely corrective actions, further exacerbating the extent of any adverse effect on DMG's results of operations.
DMG faces certain competitive threats which could reduce DMG's profitability and increase competition for patients.
DMG faces certain competitive threats based on certain features of the Medicare programs, including the following:
As a result of the direct and indirect impacts of the ACA, many Medicare beneficiaries may decide that an original Medicare FFS program is more attractive than a Medicare Advantage plan. As a result, enrollment in the health plans DMG serves may decrease.
Managed care companies offer alternative products such as regional preferred provider organizations (PPOs) and private FFS plans. Medicare PPOs and private FFS plans allow their patients more flexibility in selecting physicians than Medicare Advantage health plans, which typically require patients to coordinate care with a primary care physician. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 has encouraged the creation of regional PPOs through various incentives, including certain risk corridors, or cost reimbursement provisions, a stabilization fund for incentive payments, and special payments to hospitals not otherwise contracted with a Medicare Advantage plan that treat regional plan enrollees. The formation of regional Medicare PPOs and private FFS plans may affect DMG's relative attractiveness to existing and potential Medicare patients in their service areas.
The payments for the local and regional Medicare Advantage plans are based on a competitive bidding process that may indirectly cause a decrease in the amount of the PMPM fee or result in an increase in benefits offered.
The annual enrollment process and subsequent lock-in provisions of the ACA may adversely affect DMG's level of revenue growth as it will limit the ability of a health plan to market to and enroll new Medicare beneficiaries in its established service areas outside of the annual enrollment period.
CMS allows Medicare beneficiaries who are enrolled in a Medicare Advantage plan with a quality rating of 4.5 stars or less to enroll in a 5-star rated Medicare Advantage plan at any time during the benefit year. Therefore, DMG may face a competitive disadvantage in recruiting and retaining Medicare beneficiaries.
In addition to the competitive threats intrinsic to the Medicare programs, competition among health plans and among healthcare providers may also have a negative impact on DMG's profitability. For example, due to the large population of
Medicare beneficiaries, DMG's Existing Geographic Regions have become increasingly attractive to health plans that may compete with DMG. DMG may not be able to continue to compete profitably in the healthcare industry if additional competitors enter the same market. If DMG cannot compete profitably, the ability of DMG to compete with other service providers that contract with competing health plans may be substantially impaired. Furthermore, if DMG is unable to obtain new members or experiences a loss of existing members to competitors during the open enrollment period for Medicare it could have a material adverse effect on DMG's business, results of operations, financial condition and cash flows.
DMG competes directly with various regional and local companies that provide similar services in DMG's Existing Geographic Regions. DMG's competitors vary in size and scope and in terms of products and services offered. DMG believes that some of its competitors and potential competitors may be significantly larger than DMG and have greater financial, sales, marketing and other resources. Furthermore, it is DMG's belief that some of its competitors may make strategic acquisitions or establish cooperative relationships among themselves.
A disruption in DMG's healthcare provider networks could have a material adverse effect on DMG's operations and profitability.
In any particular service area, healthcare providers or provider networks could refuse to contract with DMG, demand higher payments, or take other actions that could result in higher healthcare costs, disruption of benefits to DMG's members, or difficulty in meeting applicable regulatory or accreditation requirements. In some service areas, healthcare providers or provider networks may have significant market positions. If healthcare providers or provider networks refuse to contract with DMG, use their market position to negotiate favorable contracts, or place DMG at a competitive disadvantage, then DMG's ability to market or to be profitable in those service areas could be adversely affected. DMG's provider networks could also be disrupted by the financial insolvency of a large provider group. Any disruption in DMG's provider networks could result in a loss of members or higher healthcare costs.
DMG's revenues and profits could be diminished if DMG fails to retain and attract the services of key primary care physicians.
Key primary care physicians with large patient enrollment could retire, become disabled, terminate their provider contracts, get lured away by a competing independent physician association or medical group, or otherwise become unable or unwilling to continue practicing medicine or continue contracting with DMG or its associated physicians, physician groups or IPAs. In addition, DMG's associated physicians, physician groups and IPAs could view the business model as unfavorable or unattractive to such providers, which could cause such associated physicians, physician groups or IPAs to terminate their relationships with DMG. Moreover, given limitations relating to the enforcement of post-termination noncompetition covenants in California, it would be difficult to restrict a primary care physician from competing with DMG's associated physicians, physician groups or IPAs. As a result, members who have been served by such physicians could choose to enroll with competitors' physician organizations or could seek medical care elsewhere, which could reduce DMG's revenues and profits. Moreover, DMG may not be able to attract new physicians to replace the services of terminating physicians or to service its growing membership.
Participation in ACO programs is subject to federal regulation, supervision, and evolving regulatory developments that may result in financial liability.
The ACA established the Medicare Shared Savings Program (MSSP) for ACOs, which took effect in January 2012. Under the MSSP, eligible organizations are accountable for the quality, cost and overall care of Medicare beneficiaries assigned to an ACO and may be eligible to share in any savings below a specified benchmark amount. The Secretary of HHS is also authorized, but not required, to use capitation payment models with ACOs. CMS has also implemented the Next Generation ACO model, which allows the ACO to assume higher levels of financial risk and reward than under the MSSP program. DMG has formed an MSSP ACO through a subsidiary in New Mexico and a Next Generation ACO (previously an MSSP ACO) through a subsidiary in California, and is evaluating whether to participate in more ACOs in the future. The continued development and expansion of ACOs, and potential changes to the participation requirements in ACOs, will have an uncertain impact on DMG's revenue and profitability. DaVita Kidney Care is also participating as a dialysis provider in Arizona, Florida, New Jersey, and Pennsylvania for the Innovation Center's CEC Model. Further, in December 2018, CMS issued a final rule for the MSSP, which among other things, requires ACOs to accept a two-sided risk model (as opposed to a one-sided model), wherein ACOs need to share in the financial risk of their patients' healthcare spending (i.e., shared losses) in addition to shared savings. This rule could negatively impact the revenue and profitability of DMG's MSSP ACO.
The ACO programs are relatively new and therefore operational and regulatory guidance is limited. It is possible that the operations of DMG's subsidiary ACOs may not fully comply with current or future regulations and guidelines applicable to ACOs, may not achieve quality targets or cost savings, or may not attract or retain sufficient physicians or patients to allow
DMG to meet its objectives. Additionally, poor performance could put the DMG ACOs at financial risk with a potential obligation to CMS. Traditionally, other than fee-for-service billing by the medical clinics and healthcare facilities offered by DMG, DMG has not directly contracted with CMS and has not operated any health plans or provider sponsored networks. Therefore, DMG may not have the necessary experience, systems or compliance to successfully achieve a positive return on its investment in the ACOs or to avoid financial or regulatory liability. DMG believes that its historical experience with fully delegated managed care will be applicable to operation of its subsidiary ACOs, but there can be no such assurance.
California hospitals may terminate their agreements with HealthCare Partners Affiliates Medical Group and DaVita Health Plan of California, Inc. (formerly HealthCare Partners Plan, Inc., and, together with HealthCare Partners Affiliates Medical Group (AMG)) or reduce the fees they pay to DMG.
In California, AMG maintains significant hospital arrangements designed to facilitate the provision of coordinated hospital care with those services provided to members by AMG and its associated physicians, physician groups and IPAs. Through contractual arrangements with certain key hospitals, AMG provides utilization review, quality assurance and other management services related to the provision of patient care services to members by the contracted hospitals and downstream hospital contractors. In the event that any one of these key hospital agreements is amended in a financially unfavorable manner or is otherwise terminated, such events could have a significant adverse effect on DMG's business, results of operations, financial condition and cash flows.
DMG's professional liability and other insurance coverage may not be adequate to cover DMG's potential liabilities.
DMG maintains primary professional liability insurance and other insurance coverage through California Medical Group Insurance Company, Risk Retention Group, an Arizona corporation in which DMG is the majority owner, and through excess coverage contracted through third-party insurers. DMG believes such insurance is adequate based on its review of what it believes to be all applicable factors, including industry standards. Nonetheless, potential liabilities may not be covered by insurance, insurers may dispute coverage or may be unable to meet their obligations, the amount of insurance coverage and/or related reserves may be inadequate, or the amount of any DMG self-insured retention may be substantial. There can be no assurances that DMG will be able to obtain insurance coverage in the future, or that insurance will continue to be available on a cost-effective basis, if at all. Moreover, even if claims brought against DMG are unsuccessful or without merit, DMG would have to defend itself against such claims. The defense of any such actions may be time-consuming and costly and may distract DMG management's attention. As a result, DMG may incur significant expenses and may be unable to effectively operate its business.
Changes in the rates or methods of third-party reimbursements may materially adversely affect DMG's business, results of operations, financial condition and cash flows.
Any negative changes in governmental capitation or FFS rates or methods of reimbursement for the services DMG provides could have a material adverse effect on DMG's business, results of operations, financial condition and cash flows. Since governmental healthcare programs generally reimburse on a fee schedule basis rather than on a charge-related basis, DMG generally cannot increase its revenues from these programs by increasing the amount it charges for its services. Moreover, if DMG's costs increase, DMG may not be able to recover its increased costs from these programs. Government and private payors have taken and may continue to take steps to control the cost, eligibility for, use, and delivery of healthcare services due to budgetary constraints, and cost containment pressures as well as other financial issues. DMG believes that these trends in cost containment will continue. These cost containment measures, and other market changes in non-governmental insurance plans have generally restricted DMG's ability to recover, or shift to non-governmental payors, any increased costs that DMG experiences. DMG's business, results of operations, financial condition and cash flows may be materially adversely affected by these cost containment measures, and other market changes.
DMG's business model depends on numerous complex management information systems and any failure to successfully maintain these systems or implement new systems could materially harm DMG's operations and result in potential violations of healthcare laws and regulations.
DMG depends on a complex, specialized, and integrated management information system and standardized procedures for operational and financial information, as well as for DMG's billing operations. DMG may experience unanticipated delays, complications or expenses in implementing, integrating, and operating these integrated systems. Moreover, DMG may be unable to enhance its existing management information system or implement new management information systems where necessary. DMG's management information system may require modifications, improvements or replacements that may require both substantial expenditures as well as interruptions in operations. DMG's ability to implement and operate its integrated systems is subject to the availability of information technology and skilled personnel to assist DMG in creating and maintaining these systems.
DMG's failure to successfully implement and maintain all of its systems could have a material adverse effect on its business, results of operations, financial condition and cash flows. For example, DMG's failure to successfully operate its billing systems could lead to potential violations of healthcare laws and regulations. If DMG is unable to handle its claims volume, or if DMG is unable to pay claims timely, DMG may become subject to a health plan's corrective action plan or de-delegation until the problem is corrected, and/or termination of the health plan's agreement with DMG. This could have a material adverse effect on DMG's operations and profitability. In addition, if DMG's claims processing system is unable to process claims accurately, the data DMG uses for its incurred but not reported estimates could be incomplete and DMG's ability to accurately estimate claims liabilities and establish adequate reserves could be adversely affected. Finally, if DMG's management information systems are unable to function in compliance with applicable state or federal rules and regulations, including medical information confidentiality laws such as HIPAA, possible penalties and fines due to this lack of compliance could have a material adverse effect on DMG's results of operations, financial condition and cash flows.
DMG may be impacted by eligibility changes to government and private insurance programs.
Due to potential decreased availability of healthcare through private employers, the number of patients who are uninsured or participate in governmental programs may increase. The ACA has increased the participation of individuals in the Medicaid program in states that elected to participate in the expanded Medicaid coverage. A shift in payor mix from managed care and other private payors to government payors as well as an increase in the number of uninsured patients may result in a reduction in the rates of reimbursement to DMG or an increase in uncollectible receivables or uncompensated care, with a corresponding decrease in net revenue. Changes in the eligibility requirements for governmental programs such as the Medicaid program under the ACA and state decisions on whether to participate in the expansion of such programs also could increase the number of patients who participate in such programs and the number of uninsured patients. Even for those patients who remain in private insurance plans, changes to those plans could increase patient financial responsibility, resulting in a greater risk of uncollectible receivables. These factors and events could have a material adverse effect on DMG's business, results of operations, financial condition and cash flows.
Negative publicity regarding the managed healthcare industry generally or DMG in particular could adversely affect DMG's results of operations or business.
Negative publicity regarding the managed healthcare industry generally, the Medicare Advantage program or DMG in particular, may result in increased regulation and legislative review of industry practices that further increase DMG's costs of doing business and adversely affect DMG's results of operations or business by:
requiring DMG to change its products and services;
increasing the regulatory, including compliance, burdens under which DMG operates, which, in turn, may negatively impact the manner in which DMG provides services and increase DMG's costs of providing services;
adversely affecting DMG's ability to market its products or services through the imposition of further regulatory restrictions regarding the manner in which plans and providers market to Medicare Advantage enrollees; or
adversely affecting DMG's ability to attract and retain members.
Risk factors related to ownership of our common stock:reputation.
Provisions in our charter documents, compensation programs and Delaware law may deter a change of control that our stockholders would otherwise determine to be in their best interests.
Our charter documents include provisions that may deter hostile takeovers, delay or prevent changes of control or changes in our management, or limit the ability of our stockholders to approve transactions that they may otherwise determine to be in their best interests. These include provisions prohibiting our stockholders from acting by written consent; requiring 90 days advance notice of stockholder proposals or nominations to our Board of Directors (or 120 days for nominations made using proxy access); and granting our Board of Directors the authority to issue preferred stock and to determine the rights and preferences of the preferred stock without the need for further stockholder approval.
Most of our outstanding employee stock-based compensation awards include a provision accelerating the vesting of the awards in the event of a change of control. We also maintain a change of control protection program for our employees who do not have a significant number of stock awards, which has been in place since 2001, and which provides for cash bonuses to the employees in the event of a change of control. Based on the market price of our common stock and shares outstanding on December 31, 2018, these cash bonuses under the program would total approximately $337 million if a change of control
transaction occurred at that price and our Board of Directors did not modify this program. These and any other change of control provisions may affect the price an acquirer would be willing to pay for our Company.
We are also subject to Section 203 of the Delaware General Corporation Law that, subject to exceptions, would prohibit us from engaging in any business combinations with any interested stockholder, as defined in that section, for a period of three years following the date on which that stockholder became an interested stockholder.
These provisions may discourage, delay or prevent an acquisition of our Company at a price that our stockholders may find attractive. These provisions could also make it more difficult for our stockholders to elect directors and take other corporate actions and could limit the price that investors might be willing to pay for shares of our common stock.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our corporate headquarters are located in Denver, Colorado, consisting of one owned 240,000 square foot building and one leased location consisting of 345,900 square feet.foot location. Our headquarters are occupied by teammates engaged in management, finance, marketing, strategy, legal, compliance and other administrative functions. We lease sevensix business offices located in California, Colorado,
Pennsylvania, Tennessee and Washington for our U.S. dialysis services business. For our DMG business we lease 11 business offices located in California, Colorado, Nevada, New Mexico, Florida and Washington. Our laboratory is based in Florida where we operate our lab services out of one leased building. We also own fourlease other administrative offices in the U.S. and lease administrative offices worldwide. Our leases on the properties listed above expire at various dates through the year 2037 for Kidney Care and through the year 2033 for DMG.
For our U.S. dialysis and related lab services business we own the land and buildings for 12 of ourseven outpatient dialysis centers. We also own 15 separate land22 properties for development, including operating outpatient dialysis centers and buildings and 15 land parcelsproperties we hold for development. Wesale. In addition, we lease a total of four owned properties to third-party tenants. Our remaining outpatient dialysis centers are located on premises that we lease.
For DMG, we own the land and buildings for 16 of our clinics. We also own one separate land parcel. Our remaining clinics are located on premises that we lease.
The majority of our leases for our U.S. dialysis and related lab services and for DMGbusiness cover periods from five years to 15 years and typically contain renewal options of five years to ten years at the fair rental value at the time of renewal. Our leases are generally subject to periodic consumer price index increases, or contain fixed escalation clauses. Our outpatient dialysis centers range in size from approximately 900 to 33,000 square feet, with an average size of approximately 7,800 square feet. DMG’s clinics range in size from approximately 1,000 to 192,000 square feet, with an average size of approximately 10,4007,700 square feet. Our international leases generally range from one to ten years.
Some of our outpatient dialysis centers are operating at or near capacity. However, we believe that we have adequate capacity within most of our existing dialysis centers to accommodate additional patient volume through increased hours and/or days of operation, or, if additional space is available within an existing facility, by adding dialysis stations. We can usually relocate existing centers to larger facilities or open new centers if existing centers reach capacity. With respect to relocating centers or building new centers, we believe that we can generally lease space at economically reasonable rates in the areas planned for each of these centers, although there can be no assurances in this regard. Expansion of existing centers or relocation of our dialysis centers is subject to review for compliance with conditions relating to participation in the Medicare ESRD program. In states that require a certificate of need or center license, additional approvals would generally be necessary for expansion or relocation.
Item 3. Legal Proceedings.
The information required by this Part I, Item 3 is incorporated herein by reference to the information set forth under the caption “Contingencies” in Note 1716 to the consolidated financial statements included in this report.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is traded on the New York Stock Exchange under the symbol DVA. The closing price of our common stock on January 31, 20192020 was $56.13$79.87 per share. According to Computershare, our registrar and transfer agent, as of January 31, 2019,2020, there were 8,8438,070 holders of record of our common stock. This figure does not include the indeterminate number of beneficial holders whose shares are held of record by brokerage firms and clearing agencies.
We have not declared or paid cash dividends to holders of our common stock since 1994. We have no current plans to pay cash dividends and we are restricted from paying dividends under the terms of our senior secured credit facilities and the indentures governing our senior notes. See “Liquidity and capital resources” under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the notes to the consolidated financial statements.
Stock Repurchases
We repurchased a total of 16,844,067 shares for $1,154 million, or an average price of $68.48, during the year ended December 31, 2018. No repurchases were made during the fourth quarter of 2018.
The following tablestable summarizes our repurchases of our common stock during 2018:the fourth quarter of 2019:
|
| | | | | | | | | | | | | |
| Period | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number
of Shares Purchased as
Part of Publicly
Announced Plans or Programs | | Approximate Dollar Value
of Shares that May Yet Be
Purchased Under the Plans or Programs
(in millions) |
| January 1 - March 31, 2018 | 4,197,304 |
| | $ | 71.09 |
| | 4,197,304 |
| | $ | 820.7 |
|
| April 1 - June 30, 2018 | 7,797,712 |
| | $ | 65.60 |
| | 7,797,712 |
| | $ | 309.2 |
|
| July 1 - September 30, 2018 | 4,849,051 |
| | $ | 70.86 |
| | 4,849,051 |
| | $ | 1,355.6 |
|
| October 1 - December 31, 2018 | — |
| | $ | — |
| | — |
| | $ | 1,355.6 |
|
| Total | 16,844,067 |
| | $ | 68.48 |
| | 16,844,067 |
| |
|
|
|
| | | | | | | | | | | | | |
| Period | Total number
of shares
purchased | | Average price
paid per share | | Total number of shares purchased as part of publicly announced plans or programs | | Approximate dollar value
of shares that may yet be purchased under the plans or programs |
| | (dollars and shares in thousands, except for per share data) |
| October 1-31, 2019 | 4,028 |
| | $ | 57.13 |
| | 4,028 |
| | $ | 261,792 |
|
| November 1-30, 2019 | 1,407 |
| | 69.41 |
| | 1,407 |
| | $ | 1,918,055 |
|
| December 1-31, 2019 | 2,934 |
| | 73.13 |
| | 2,934 |
| | $ | 1,703,495 |
|
| Total | 8,369 |
| | $ | 64.80 |
| | 8,369 |
| | |
The following table summarizes our repurchases of our common stock during 2019:
|
| | | | | | | | | | | | | |
| Period | Total number
of shares
purchased | | Average price
paid per share | | Total number of shares purchased as part of publicly announced plans or programs | | Approximate dollar value
of shares that may yet be purchased under the plans or programs |
| | (dollars and shares in thousands, except for per share data) |
| January 1 - March 31, 2019 | — |
| | $ | — |
| | — |
| | $ | 1,355,605 |
|
| April 1 - June 30, 2019 | 2,060 |
| | 54.46 |
| | 2,060 |
| | $ | 1,243,416 |
|
| July 1 - September 30, 2019 | 30,592 |
| | 57.14 |
| | 30,592 |
| | $ | 491,917 |
|
| October 1 - December 31, 2019 | 8,369 |
| | 64.80 |
| | 8,369 |
| | $ | 1,703,495 |
|
| Total | 41,020 |
| | $ | 58.57 |
| | 41,020 |
| | |
On July 11, 2018, our Board of Directors approved an additional share repurchase authorization in the amount of $1,390 million.approximately $1.39 billion. This share repurchase authorization was in addition to the approximately $110 million remaining at that time under our Board of Directors’ prior share repurchase authorization approved in October 2017.
Effective July 17, 2019, the Board terminated all remaining prior share repurchase authorizations available to the Company at that time and approved a new share repurchase authorization of $2.0 billion.
Effective as of the close of business on November 4, 2019, the Board terminated all remaining prior share repurchase authorizations available to us under the aforementioned July 17, 2019 authorization and approved a new share repurchase authorization of $2.0 billion. We are authorized to make purchases from time to time in the open market or in privately negotiated transactions, including without limitations,limitation, through accelerated share repurchase transactions, derivative transactions, tender offers, Rule 10b5-1 plans or any combination of the foregoing, depending upon market conditions and other considerations.
During the quarter ended December 31, 2018, we did not repurchase any shares of our common stock. As of February 22, 2019,20, 2020, we have a total of $1,356 million remaining in Board authorizations$1.68 billion available under the current repurchase authorization for additional share repurchases under our repurchase programs.repurchases. Although thesethis share repurchase authorizationsauthorization does not have noan expiration dates,date, we areremain subject to share repurchase limitations, including under the terms of our senior secured credit facilities and the indentures governing our senior notes.
Item 6. Selected Financial Data.
The following financial and operating data should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements filed as part of this report. The following table presents selected consolidated financial and operating data for the periods indicated.indicated:
| | | | Year ended December 31, | Year ended December 31, |
| | 2018 | | 2017 | | 2016 | | 2015 | | 2014 | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| | (in thousands, except share data) | (dollars and shares in thousands, except per share data) |
| Income statement data: | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
|
Net revenues(1) | $ | 11,404,851 |
| | $ | 10,876,634 |
| | $ | 10,707,467 |
| | $ | 9,982,245 |
| | $ | 9,312,049 |
| |
Total revenues(1) | | $ | 11,388,479 |
| | $ | 11,404,851 |
| | $ | 10,876,634 |
| | $ | 10,707,467 |
| | $ | 9,982,245 |
|
Operating expenses and charges(2) | 9,879,027 |
| | 9,063,879 |
| | 8,677,757 |
| | 8,845,479 |
| | 7,711,891 |
| 9,745,162 |
| | 9,879,027 |
| | 9,063,879 |
| | 8,677,757 |
| | 8,845,479 |
|
| Operating income | 1,525,824 |
| | 1,812,755 |
| | 2,029,710 |
| | 1,136,766 |
| | 1,600,158 |
| 1,643,317 |
| | 1,525,824 |
| | 1,812,755 |
| | 2,029,710 |
| | 1,136,766 |
|
| Debt expense | (487,435 | ) | | (430,634 | ) | | (414,116 | ) | | (408,380 | ) | | (410,223 | ) | (443,824 | ) | | (487,435 | ) | | (430,634 | ) | | (414,116 | ) | | (408,380 | ) |
| Debt refinancing and redemption charges | — |
| | — |
| | — |
| | (48,072 | ) | | (97,548 | ) | |
| Debt prepayment, refinancing and redemption charges | | (33,402 | ) | | — |
| | — |
| | — |
| | (48,072 | ) |
| Other income, net | 10,089 |
| | 17,665 |
| | 7,511 |
| | 8,073 |
| | 1,935 |
| 29,348 |
| | 10,089 |
| | 17,665 |
| | 7,511 |
| | 8,073 |
|
| Income from continuing operations before income taxes | 1,048,478 |
| | 1,399,786 |
| | 1,623,105 |
| | 688,387 |
| | 1,094,322 |
| 1,195,439 |
| | 1,048,478 |
| | 1,399,786 |
| | 1,623,105 |
| | 688,387 |
|
Income tax expense(3) | 258,400 |
| | 323,859 |
| | 431,761 |
| | 207,510 |
| | 366,894 |
| 279,628 |
| | 258,400 |
| | 323,859 |
| | 431,761 |
| | 207,510 |
|
| Net income from continuing operations | 790,078 |
| | 1,075,927 |
| | 1,191,344 |
| | 480,877 |
| | 727,428 |
| 915,811 |
| | 790,078 |
| | 1,075,927 |
| | 1,191,344 |
| | 480,877 |
|
Net (loss) income from discontinued operations, net
of tax(4) | (457,038 | ) | | (245,372 | ) | | (158,262 | ) | | (53,467 | ) | | 135,902 |
| 105,483 |
| | (457,038 | ) | | (245,372 | ) | | (158,262 | ) | | (53,467 | ) |
| Net income | 333,040 |
| | 830,555 |
| | 1,033,082 |
| | 427,410 |
| | 863,330 |
| 1,021,294 |
| | 333,040 |
| | 830,555 |
| | 1,033,082 |
| | 427,410 |
|
| Less: Net income attributable to noncontrolling interests | (173,646 | ) | | (166,937 | ) | | (153,208 | ) | | (157,678 | ) | | (140,216 | ) | (210,313 | ) | | (173,646 | ) | | (166,937 | ) | | (153,208 | ) | | (157,678 | ) |
| Net income attributable to DaVita Inc. | $ | 159,394 |
| | $ | 663,618 |
| | $ | 879,874 |
| | $ | 269,732 |
| | $ | 723,114 |
| $ | 810,981 |
| | $ | 159,394 |
| | $ | 663,618 |
| | $ | 879,874 |
| | $ | 269,732 |
|
Basic income from continuing operations per share
attributable to DaVita Inc.(5) | $ | 3.66 |
| | $ | 4.78 |
| | $ | 5.12 |
| | $ | 1.53 |
| | $ | 2.77 |
| $ | 4.61 |
| | $ | 3.66 |
| | $ | 4.78 |
| | $ | 5.12 |
| | $ | 1.53 |
|
Diluted income from continuing operations per share
attributable to DaVita Inc.(5) | $ | 3.62 |
| | $ | 4.71 |
| | $ | 5.04 |
| | $ | 1.49 |
| | $ | 2.71 |
| $ | 4.60 |
| | $ | 3.62 |
| | $ | 4.71 |
| | $ | 5.04 |
| | $ | 1.49 |
|
Weighted average shares outstanding:(5) | |
| | |
| | |
| | |
| | |
| | | | | | | | | |
| Basic | 170,785,999 |
| | 188,625,559 |
| | 201,641,173 |
| | 211,867,714 |
| | 212,301,827 |
| 153,181 |
| | 170,786 |
| | 188,626 |
| | 201,641 |
| | 211,868 |
|
| Diluted | 172,364,581 |
| | 191,348,533 |
| | 204,904,656 |
| | 216,251,807 |
| | 216,927,681 |
| 153,812 |
| | 172,365 |
| | 191,349 |
| | 204,905 |
| | 216,252 |
|
| Balance sheet data: | |
| | |
| | |
| | |
| | |
| |
| Balance sheet data (as of period end): | | |
| | |
| | |
| | |
| | |
Working capital(6) | $ | 3,532,998 |
| | $ | 5,703,181 |
| | $ | 1,283,784 |
| | $ | 2,104,143 |
| | $ | 1,547,518 |
| $ | 1,318,072 |
| | $ | 3,532,998 |
| | $ | 5,703,181 |
| | $ | 1,283,784 |
| | $ | 2,104,143 |
|
Total assets(6) | $ | 19,110,252 |
| | $ | 18,974,536 |
| | $ | 18,755,776 |
| | $ | 18,524,224 |
| | $ | 17,624,137 |
| $ | 17,311,394 |
| | $ | 19,110,252 |
| | $ | 18,974,536 |
| | $ | 18,755,776 |
| | $ | 18,524,224 |
|
Long-term debt(6) | $ | 8,172,847 |
| | $ | 9,158,018 |
| | $ | 8,944,676 |
| | $ | 12,972,282 |
| | $ | 8,298,624 |
| $ | 7,977,526 |
| | $ | 8,172,847 |
| | $ | 9,158,018 |
| | $ | 8,944,676 |
| | $ | 9,000,482 |
|
Total DaVita Inc. shareholders' equity(5) | $ | 3,703,442 |
| | $ | 4,690,029 |
| | $ | 4,648,047 |
| | $ | 4,870,781 |
| | $ | 5,170,513 |
| $ | 2,133,409 |
| | $ | 3,703,442 |
| | $ | 4,690,029 |
| | $ | 4,648,047 |
| | $ | 4,870,781 |
|
| |
| (1) | On January 1, 2018, we adopted Revenue from Contracts with Customers (Topic 606) using the cumulative effect method for those contracts that were not substantially completed as of January 1, 2018. Results related to performance obligations satisfied beginning on and after January 1, 2018 are presented under Topic 606, while results related to the satisfaction of performance obligations in prior periods continue to be reported in accordance with our historical accounting under Revenue Recognition (Topic 605). See Notes 1 and 2 of the consolidated financial statements for disclosure onfurther discussion of our adoption of Topic 606. |
| |
| (2) | Operating expenses andThe following table summarizes impairment charges, in 2018 included a net gain on changes in ownership interests of $60,603; other asset impairmentinterest, legal matters accrual and settlement charges, of $17,338 and restructuring charges of $11,366 related to our pharmacy business; an equity investment loss due to the sale of India in our APAC JV of $8,715; an equity investment loss related to impairments at our APAC JV of $7,525; and a goodwill impairment charge of $3,106. Operating expenses and charges for 2017 included goodwill impairment charges of $34,696 related to our vascular access reporting unit; an equity investment loss of $6,293 for goodwill impairments at our APAC JV; an impairment of $280,066 on our investment in the APAC JV; an asset impairment of $15,168 related to the restructuring of our pharmacy business; restructuring charges in our international business of $2,700; a net gain on settlement of $529,504; and a gain adjustment on the 2016 ownership change of our APAC JV of $6,273. Operatingincluded in operating expenses and charges in 2016 included goodwill impairment charges of $28,415 related to our vascular access reporting unit; an impairment of an investment of $14,993; an estimated gain on the ownership change of our APAC JV of $374,374; and estimated accruals for certain legal matters of $15,770. Operating expenses and charges for 2015 included a settlement charge of $495,000 related to a private civil suit; goodwill impairment charges of $4,066 related to our international business; and an estimated accrual for certain legal matters of $22,530. Operating expenses and charges in 2014 included an additional $17,000 loss contingency accrual related to the settlement of the 2010 and 2011 U.S. Attorney physician relationship investigations.charges: |
|
| | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| | (in thousands) |
| Certain operating expenses and charges: | |
| | |
| | |
| | |
| | |
|
| Impairment charges | $ | 124,892 |
| | $ | 27,969 |
| | $ | 336,223 |
| | $ | 43,408 |
| | $ | 4,066 |
|
| Gain on changes in ownership interests, net | | | $ | (51,888 | ) | | $ | (6,273 | ) | | $ | (374,374 | ) | | |
| Legal matters accrual and settlement charges | | | | | | | $ | 15,770 |
| | $ | 517,530 |
|
| Restructuring charges | | | $ | 11,366 |
| | $ | 2,700 |
| | | | |
| Gain on settlement | | | | | $ | (529,504 | ) | | | | |
| |
| (3) | Tax expense for 2017 included a net tax benefit of $251,510 related to U.S. tax legislation passed in December 2017. |
| |
| (4) | In December 2017,On June 19, 2019, we entered into an equity purchase agreement to sellcompleted the sale of our DMG divisionbusiness to Collaborative Care Holdings, LLC (Optum), a subsidiary of UnitedHealth Group Inc. As a result of this pending transaction, the DMG business has been classified as held for sale and itsAccordingly, DMG's results of operations are reported as net income (loss) income from discontinued operations, net of tax for all periods presented. Net (loss) income from discontinued operations, net of tax, in 2018 included a $468,005 charge on our DMG business which included a $316,840 valuation adjustment, a $41,537 goodwill impairment chargepresented and $109,628 in related tax expense on thisits assets and liabilities were classified as held for sale business based on an updated assessmentfor the periods reported prior to close of fair value, as well as a gain on changes in ownership interests of $25,096. Net (loss) income from discontinued operations, net of tax, in 2017 includes estimated goodwill impairment charges of $651,659 related to certain DMG reporting units, a net tax benefit of $163,555 due to a remeasurement of deferred taxes resulting from DMG's reclassification to held for sale; a non-cash gain associated with our Magan acquisition of $17,129; restructuring charges of $9,569; and a reduction in estimated accruals for legal matters of $14,700. Net (loss) income from discontinued operations, net of tax, in 2016 included goodwill impairment charges of $253,000 related to certain DMG reporting units; a gain related to the partial sale of our interest in Tandigm of $40,280; a loss on the DMG Arizona sale of $10,489; an adjustment to reduce receivables associated with the DMG acquisition escrow provision relating to income tax items of $30,934; and estimated accruals for legal matters of $16,000. Net (loss) income from discontinued operations, net of tax, in 2015 included estimated goodwill and other intangible asset impairment charges of $206,169 related to certain DMG reporting units.transaction. |
| |
| (5) | Share repurchases consisted of 16,844,06741,020 shares of common stock for $2,402,475 in 2019, 16,844 shares of common stock for $1,153,511 in 2018, 12,966,67212,967 shares of common stock for $810,949 in 2017, 16,649,09016,649 shares of common stock for $1,072,377 in 2016, and 7,779,9587,780 shares of common stock for $575,380 in 2015. No repurchases of common stock were made in 2014. Shares issued in connection with stock awards were 371,347161 in 2019, 371 in 2018, 514,091514 in 2017, 1,011,3281,011 in 2016, 1,479,217and 1,479 in 2015, and 2,179,766 in 2014. |
| |
(6) | In 2015, we retrospectively adopted ASU 2015-03 related to simplification of debt issuance costs as well as ASU 2015-17 related to classification of deferred taxes. All periods prior to 2015 have been recast to conform to the revised presentation.2015. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-looking statements
This Annual Report on Form 10-K, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements that are forward-looking statements within the meaning of the federal securities laws. All statements that do not concernin this report, other than statements of historical factsfact, are forward-looking statements. Without limiting the foregoing, statements including the words "expect," "intend," "will," "plan," "anticipate," "believe," "forecast," "guidance," "outlook," "goals," and include, among other things, statements about our expectations, beliefs, intentions and/or strategies for the future.similar expressions are intended to identify forward-looking statements. These forward-looking statements may include but are not limited to statements regarding our future operations, financial condition and prospects, such as expectations for treatment growth rates, revenue per treatment, expense growth, levels of the provision for uncollectible accounts receivable, operating income, cash flow, operating cash flow, earnings per share, estimated tax rates, estimated charges and accruals, capital expenditures, the development of new dialysis centers and dialysis center acquisitions or other new service offerings, government and commercial payment rates, revenue estimating risk, the impact of our level of indebtedness on our financial performance,and our stock repurchase program, our advocacy costs,program. Our actual results and the pending DMG sale transaction. Theseother events could differ materially from any forward-looking statements due to numerous factors that involve substantial known and unknown risks and uncertainties. These risks and uncertainties that could cause our actual results to differ materially from those described in the forward-looking statements, including risks resulting from include, among other things:
the concentration of profits generated by higher-paying commercial payor plans for which there is continued downward pressure on average realized payment rates, and a reduction in the number of patients under such plans, including as a result of restrictions or prohibitions on the use and/or availability of charitable premium assistance, which may result in the loss of revenues or patients, or our making incorrect assumptions about how our patients will respond to any change in financial assistance from charitable organizations;
the extent to which the ongoing implementation of healthcare exchangesreform, or changes in or new legislation, regulations or guidance, or enforcement thereof including among other things those regarding the exchanges, resultsor related litigation result in a reduction in coverage or reimbursement rates for our services, from and/ora reduction in the number of patients enrolled in higher-paying commercial plans; plans, or other material impacts to our business; or our making incorrect assumptions about how our patients will respond to any such developments;
a reduction in government payment rates under the Medicare End Stage Renal Disease program or other government-based programs;programs and the impact of the Medicare Advantage benchmark structure;
risks arising from potential and proposed federal and/or state legislation, regulation, or ballot, executive action or other initiatives, including healthcare-related and labor-related legislation, regulation such initiatives related to healthcare and/or ballot or other initiatives; labor matters;
the impact of the changing political environment and related developments on the current health carehealthcare marketplace and on our business, including with respect to the future of the Affordable Care Act, the exchanges and many other core aspects of the current health carehealthcare marketplace; uncertainties related
our ability to the impact of federal tax reform legislation; successfully implement our strategy with respect to home-based dialysis, including maintaining our existing business and further developing our capabilities in a complex and highly regulated environment;
changes in pharmaceutical practice patterns, reimbursement and payment policies and processes, or pharmaceutical pricing, including with respect to calcimimetics;
legal and compliance risks, such as our continued compliance with complex government regulations and the provisions of our current Corporate Integrity Agreement (CIA) and current or potential investigations by various government entities and related government or private party proceedings, and restrictions on our business and operations required by our CIA and other current or potential settlement terms and the financial impact thereof and our ability to recover any losses related to such legal matters from third parties; regulations;
continued increased competition from dialysis providers and others, and other potential marketplace changes; our ability to reduce administrative expenses while maintaining targeted levels of service and operating performance, including our ability to achieve anticipated savings from our recent restructurings;
our ability to maintain contracts with physician medical directors, changing affiliation models for physicians, and the emergence of new models of care introduced by the government or private sector that may erode our patient base and reimbursement rates, such as accountable care organizations, (ACOs), independent practice associations (IPAs) and integrated delivery systems;
our ability to complete acquisitions, mergers or dispositions that we might announce or be considering, on terms favorable to us or at all, or to integrate and successfully operate any business we may acquire or have acquired, or to successfully expand our operations and services in markets outside the United States, or to businesses outside of dialysis;
uncertainties related to potential payments and/or adjustments under certain provisions of the equity purchase agreement for the sale of our DaVita Medical Group (DMG) business, such as post-closing adjustments and indemnification obligations;
noncompliance by us or our business associates with any privacy or security laws or any security breach by us or a third party involving the misappropriation, loss or other unauthorized use or disclosure of confidential information;
the variability of our cash flows; the risk that we may not be able to generate sufficient cash in the future to service our indebtedness or to fund our other liquidity needs,needs; and the risk that we may not be able to refinance our indebtedness as it becomes due, on terms favorable to us or at all;
factors that may impact our ability to repurchase stock under our stock repurchase program and the timing of any such stock repurchases, including market conditions, the priceas well as our use of our common stock, our cash flow position, borrowing capacity and leverage ratios, and legal, regulatory and contractual requirements; the risk that we might invest material amountsa considerable amount of capital and incur significant costs in connection with the growth and development of our international operations, yet we might not be ableavailable funds to consistently operate them profitably anytime soon, if at all; repurchase stock;
risks arising from the use of accounting estimates, judgments and interpretations in our financial statements;
impairment of our goodwill, investments or other assets; the risks and uncertainties associated with the timing, conditions and receipt of regulatory approvals and satisfaction of other closing conditions of the DMG sale transaction and continued disruption in connection with the DMG sale transaction making it more difficult to maintain business and operational relationships; risks and uncertainties related to our ability to complete the DMG sale transaction on the timetable expected, and on the terms set forth in the equity purchase agreement or at all; uncertainties related to our liquidity following the close of the DMG sale transaction and our planned subsequent entry into new external financing arrangements, which may be less than we anticipate;
uncertainties related to our use of the proceeds from the DMG sale transaction and other available
funds, including external financing and cash flow from operations, which may be or have been used in ways that may notwe cannot assure will improve our results of operations or enhance the value of our common stock; risks related to certain contractual restrictions on the conduct of DMG's business while the DMG sale transaction is pending; the risk that we may recognize additional valuation adjustments or goodwill impairment related to DMG; the risk that laws regulating the corporate practice of medicine could restrict the manner in which DMG conducts its business; the risk that the cost of providing services under DMG’s agreements may exceed our compensation; the risk that any reductions in reimbursement rates, including Medicare Advantage rates, and future regulations may negatively impact DMG’s business, revenue and profitability; the risk that DMG may not be able to successfully establish a presence in new geographic regions or successfully address competitive threats that could reduce its profitability; the risk that a disruption in DMG’s healthcare provider networks could have an adverse effect on DMG’s business operations and profitability; the risk that reductions in the quality ratings of health plans DMG serves or healthcare services that DMG provides could have an adverse effect on DMG’s business; the risk that health plans that acquire health maintenance organizations may not be willing to contract
uncertainties associated with DMG or may be willing to contract only on less favorable terms; and the other risk factors set forth in Part I, Item 1A. of this Annual Report on Form 10-K. We base our10-K, and the other risks and uncertainties discussed in any subsequent reports that we file or furnish with the SEC from time to time.
The forward-looking statements should be considered in light of these risks and uncertainties. All forward-looking statements in this report are based solely on information currently available to us and weon the date of this report. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of changes in underlying factors,changed circumstances, new information, future events or otherwise.otherwise, except as required by law.
The following should be read in conjunction with our consolidated financial statements.
Company overview
The Company consists of two major divisions, DaVita Kidney Care (Kidney Care) and DaVita Medical Group (DMG). Kidney CareOur principal business is comprised of our U.S.to provide dialysis and related lab services to patients in the United States, which we refer to as our U.S. dialysis business. We also operate various ancillary services and strategic initiatives including our international operations, andwhich we collectively refer to as our ancillary services, as well as our corporate administrative support. Our U.S. dialysis and related lab services business is our largest line of business and is a leading provider of kidney dialysis services in the U.S. for patients suffering from chronic kidney failure, also known as end stage renal disease (ESRD). DMG is a patient- and physician-focused integrated healthcare delivery and management company with over two decades
On June 19, 2019, we completed the sale of providing coordinated, outcomes-based medical care in a cost-effective manner.
In December 2017, we entered into an equity purchase agreementour DaVita Medical Group (DMG) business to sell our DMG division to Optum,Collaborative Care Holdings, LLC (Optum), a subsidiary of UnitedHealth Group Inc., subject to receipt of required regulatory approvals and other customary closing conditions. As a result the DMG business has been classified as held for sale and itsof this transaction, DMG's results of operations arehave been reported as discontinued operations for all periods presented and DMG is not included below in ourthis Management's Discussion and Analysis below.Analysis.
Our overall financial performance in 20182019 benefited from the administration of calcimimetics, increased treatment volume from acquired and non-acquired growth in both our U.S. dialysis and related lab services and our international businesses and a corresponding increase in revenue.revenue, as well as improved operating margins due to a decrease in the cost of calcimimetics from the introduction of lower cost oral generics, a decrease in other pharmaceutical unit costs, and a decrease in advocacy costs as compared to the prior year. This was partially offset by increases in labor and benefits costs, benefit costs due to the implementation of a 401(k) matching program, pharmaceutical costs due to the administration of calcimimetics, other center related costs, and advocacy costs to counter certain union policy initiatives.
Somea decrease in revenues from the closure of our major accomplishments and financial operating performance indicatorspharmaceutical business in 2018. The year-over-year comparison was also adversely impacted by $36 million of additional Medicare bad debt revenue recognized in 2018 and year over year were as follows:due to a policy election on adoption of the new revenue recognition accounting standard.
Drivers of our financial performance in 2019 included the following:
improved key clinical outcomes in our U.S. dialysis operations,business, including that we wereour recognition as an industry leader for the sixthseventh consecutive year in CMS’ Quality Incentive Program and for the last fivesix years under the CMS Five-Star Quality Rating system;
consolidated netU.S. dialysis revenue growth of 4.9%, which included 10.4% net revenue growth in our U.S. dialysis segment, an increase of $20 in average dialysis net patient service revenue per treatment2.2% and international revenue growth of 36%, partially offset by 13.6%;
a decrease in revenue of 41% in our U.S. ancillary services and strategic initiatives segment due to the restructuring of DaVita Rx;
solid performanceyear-over-year increase in our normalized non-acquired U.S. dialysis treatment growth of 3.2%2.2%, which contributed to an increase of approximately 4.1%2.5% in theour overall number of U.S. dialysis treatments;treatment count for 2019;
a net increase of 15489 U.S. dialysis centers and a net increase of 418 international dialysis centers;
an increaseoperating cash flows of $2.0 billion from continuing operations;
a $174 million or 19.3% reduction in the overall numberroutine maintenance and development capital expenditures from continuing operations, consistent with our capital efficient growth strategies;
repurchase of patients we serve of approximately 2.5% in the U.S. and 9.3% internationally in 2018;
repurchased 16,844,06741,020,232 shares of our common stock for $1.2 billion;
Proposition 8, a California state-wide ballot initiative that sought to limit the amountaggregate consideration of revenue dialysis providers could retain from caring for patients with commercial insurance, was defeated in California;$2.4 billion and reduction of our share count by approximately 24.4% year-over-year; and
consolidated operating cash flowsentry into a new $5.5 billion senior secured credit agreement and redemption of $1.8 billion, or $1.5 billion from continuing operations.our 5.75% senior notes.
We believe
In 2020, we will face challenges in 2019expect the fundamentals of our U.S. dialysis business to generally be similar to thosethe dynamics that we faced in 2018.2019. On treatment volume, we continue to face pressure due to slowing industry growth as well as competitive activity. On reimbursement rate, we expect modest growth in aggregate, primarily due to the expected net market basket update for Medicare treatments. On cost, we continue to expect inflationary pressure on wage rates and other costs, offset by continued savings on drug costs. We expect to see an increasecontinue making investments to grow our home-based dialysis services in dialysis treatment volume and expect U.S. dialysis revenue per treatment to be up slightly from 2018.2020. We expect revenue per treatment to be favorably impacted by an increaseanticipate two notable differences in Medicare ESRD rates of approximately 1.2%, offset by anticipated downward pressure on commercial payor rates due to a shift of out-of-network patients to in-network. We expect patient care costs to increase due to inflation and a tight labor market and do not foresee an opportunity to fully offset these pressures with productivity or pharmaceutical cost improvements. In addition,2020 versus 2019 - we expect to continuegenerate significantly less income on calcimimetics due to expected decreases in Medicare reimbursement throughout 2020, and we plan to incur advocacy costs in connection with union policy initiatives, such2020, which could be significant, to counter a proposed union-backed ballot initiative in California.
The discussion below includes analysis of our financial condition and results of operations for the years ended December 31, 2019 compared to December 31, 2018. Our Annual Report on Form 10-K for the year ended December 31, 2018, includes a discussion and analysis of our financial condition and results of operations for the year ended December 31, 2017, in Part II Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations".
References to the "Notes" in the discussion below refer to the notes to the Company's consolidated financial statements included in this Annual Report on Form 10-K at Item 15, "Exhibits, Financial Statement Schedules" as AB 290 in Californiareferred from Part II Item 8, "Financial Statements and other potential ballot or other legislative initiatives. As a result of expected costs continuing to outpace our expected revenue increases, we anticipate that margins will continue to experience pressure. We remain committed to our plans for international expansion in certain regions, which will continue to require investment.Supplementary Data."
Following is a summaryConsolidated results of operations
The following table summarizes our revenues, operating income and adjusted operating income by line of business. See the discussion of our consolidated operating results for reference in the discussion that follows. each line of business following this table.
|
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | (dollars in millions) |
Revenues(1): | |
| | | | |
| | | | |
| | |
| Dialysis and related lab patient service revenues | $ | 10,710 |
| | | | $ | 10,094 |
| | | | $ | 9,727 |
| | |
| Less: Provision for uncollectible accounts | (50 | ) | | | | (485 | ) | | | | (431 | ) | | |
| Net dialysis and related lab patient service revenues | 10,660 |
| | | | 9,608 |
| | | | 9,296 |
| | |
| Other revenues | 744 |
| | | | 1,268 |
| | | | 1,411 |
| | |
| Total consolidated revenues | 11,405 |
| | 100 | % | | 10,877 |
| | 100 | % | | 10,707 |
| | 100 | % |
| Operating expenses and charges: | |
| | |
| | | | |
| | | | |
|
| Patient care costs | 8,196 |
| | 72 | % | | 7,640 |
| | 70 | % | | 7,432 |
| | 69 | % |
| General and administrative | 1,135 |
| | 10 | % | | 1,064 |
| | 10 | % | | 1,073 |
| | 10 | % |
| Depreciation and amortization | 591 |
| | 5 | % | | 560 |
| | 5 | % | | 509 |
| | 5 | % |
| Provision for uncollectible accounts | (7 | ) | | — | % | | (7 | ) | | — | % | | 12 |
| | — | % |
| Equity investment loss (income) | 4 |
| | — | % | | 9 |
| | — | % | | (17 | ) | | — | % |
| Investment and other asset impairments | 17 |
| | — | % | | 295 |
| | 3 | % | | 15 |
| | — | % |
| Goodwill impairment charges | 3 |
| | — | % | | 36 |
| | — | % | | 28 |
| | — | % |
| Gain on changes in ownership interests | (61 | ) | | (1 | )% | | (6 | ) | | — | % | | (374 | ) | | (3 | )% |
| Gain on settlement, net | — |
| | — | % | | (527 | ) | | (5 | )% | | — |
| | — | % |
| Total operating expenses and charges | 9,879 |
| | 87 | % | | 9,064 |
| | 83 | % | | 8,678 |
| | 81 | % |
| Operating income | $ | 1,526 |
| | 13 | % | | $ | 1,813 |
| | 17 | % | | $ | 2,030 |
| | 19 | % |
|
| | | | | | | | | | | | | | |
| | Year ended December 31, | | Annual change |
| | 2019 | | 2018 | | Amount | | Percent |
| | (dollars in millions) | | | | |
| Revenues: | |
| | |
| | | | |
|
| U.S. dialysis | $ | 10,563 |
| | $ | 10,336 |
| | $ | 227 |
| | 2.2 | % |
| Other - ancillary services | 972 |
| | 1,196 |
| | (224 | ) | | (18.7 | )% |
| Elimination of intersegment revenues | (146 | ) | | (127 | ) | | (19 | ) | | (15.0 | )% |
| Total consolidated revenues | $ | 11,388 |
| | $ | 11,405 |
| | $ | (17 | ) | | (0.1 | )% |
| | | | | | | | |
| Operating income (loss): | | | | | | | |
| U.S. dialysis | $ | 1,925 |
| | $ | 1,710 |
| | $ | 215 |
| | 12.6 | % |
| Other - Ancillary services | (189 | ) | | (94 | ) | | (95 | ) | | (101.1 | )% |
| Corporate administrative support | (92 | ) | | (90 | ) | | (2 | ) | | (2.2 | )% |
| Operating income | $ | 1,643 |
| | $ | 1,526 |
| | $ | 117 |
| | 7.7 | % |
| | | | | | | | |
Adjusted operating income (loss):(1) | | | | | | | |
| U.S. dialysis | $ | 1,925 |
| | $ | 1,682 |
| | $ | 243 |
| | 14.4 | % |
| Other - Ancillary services | (64 | ) | | (78 | ) | | 14 |
| | 17.9 | % |
| Corporate administrative support | (92 | ) | | (90 | ) | | (2 | ) | | (2.2 | )% |
Adjusted operating income(1) | $ | 1,768 |
| | $ | 1,513 |
| | $ | 255 |
| | 16.9 | % |
Certain columns, rows or percentages may not sum or recalculate due to the use of rounded numbers.
| |
| (1) | On January 1, 2018, we adopted Revenue from Contracts with Customers (Topic 606) using the cumulative effect method for those contracts that were not substantially completed asFor a reconciliation of January 1, 2018. Results related to performance obligations satisfied beginning on and after January 1, 2018 are presented under Topic 606, while results related to the satisfaction of performance obligations in prior periods continue to be reported in accordance with our historical accounting under Revenue Recognition (Topic 605). See Notes 1 and 2 of the consolidated financial statements for further discussion of our adoption of Topic 606.
|
The following table summarizes our consolidated revenues among our reportable segments:
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | (dollars in millions) |
Revenues(1): | |
| | |
| | |
|
| U.S. dialysis and related lab patient service revenues | $ | 10,367 |
| | $ | 9,822 |
| | $ | 9,551 |
|
| Provision for uncollectible accounts | (51 | ) | | (482 | ) | | (430 | ) |
| U.S. dialysis and related lab net patient service revenues | 10,316 |
| | 9,340 |
| | 9,121 |
|
| Other revenues | 20 |
| | 20 |
| | 17 |
|
| Total net U.S. dialysis and related lab services revenues | 10,336 |
| | 9,360 |
| | 9,138 |
|
| Other-ancillary services and strategic initiatives other revenues | 759 |
| | 1,273 |
| | 1,420 |
|
| Other-ancillary services and strategic initiatives patient service revenues, net | 437 |
| | 323 |
| | 202 |
|
| Total net other-ancillary services and strategic initiatives revenues | 1,196 |
| | 1,596 |
| | 1,621 |
|
| Total net segment revenues | 11,532 |
| | 10,956 |
| | 10,759 |
|
| Elimination of intersegment revenues | (127 | ) | | (80 | ) | | (52 | ) |
| Consolidated revenues | $ | 11,405 |
| | $ | 10,877 |
| | $ | 10,707 |
|
Certain columns, rows or percentages may not sum or recalculate due to the use of rounded numbers.
| |
(1) | On January 1, 2018, we adopted Revenue from Contracts with Customers (Topic 606) using the cumulative effect method for those contracts that were not substantially completed as of January 1, 2018. Results related to performance obligations satisfied beginning on
|
and after January 1, 2018 are presented under Topic 606, while results related to the satisfaction of performance obligations in prior periods continue to be reported in accordance with our historical accounting under Revenue Recognition (Topic 605). See Notes 1 and 2 of the consolidated financial statements for further discussion of our adoption of Topic 606.
The following table summarizes our consolidated operating income and adjusted consolidated operating income:
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | (dollars in millions) |
| Operating income (loss): | | | | | |
| U.S. dialysis and related lab services | $ | 1,710 |
| | $ | 2,297 |
| | $ | 1,777 |
|
| Other — ancillary services and strategic initiatives | (94 | ) | | (439 | ) | | 267 |
|
| Corporate administrative support | (90 | ) | | (45 | ) | | (14 | ) |
| Operating income | $ | 1,526 |
| | $ | 1,813 |
| | $ | 2,030 |
|
| Reconciliation of non-GAAP measure: | | | |
| | |
|
| Operating expenses: | | | | | |
| Goodwill impairment charges | $ | 3 |
| | $ | 35 |
| | $ | 28 |
|
| Impairment of assets | 17 |
| | 15 |
| | — |
|
| Impairment of investment | — |
| | 280 |
| | 15 |
|
| Gain on changes in ownership interests, net | (61 | ) | | (6 | ) | | (374 | ) |
| Gain on settlement, net | — |
| | (527 | ) | | — |
|
| Equity investment loss (income): | | | | | |
| Loss due to business sale in APAC JV | 9 |
| | — |
| | — |
|
| Loss due to impairments in APAC JV | 8 |
| | 6 |
| | — |
|
| Loss related to restructuring charges | — |
| | 1 |
| | — |
|
| Income related to gain on settlement | — |
| | (3 | ) | | — |
|
| General and administrative expenses: | | | | | |
| Restructuring charges | 11 |
| | 2 |
| | — |
|
| Accruals for legal matters | — |
| | — |
| | 16 |
|
Adjusted operating income(1) | $ | 1,513 |
| | $ | 1,616 |
| | $ | 1,715 |
|
Certain columns, rows or percentages may not sum or recalculate due to the use of rounded numbers.
| |
(1) | For the periods presented in the table above adjusted operating income is defined as operating income before certain items which we do not believe are indicative(loss) by reportable segment, see "Reconciliations of ordinary results, including goodwill impairment charges, investment and other asset impairments, restructuring charges, a net settlement gain, net gain (loss) on changes in ownership interests and estimated accruals for certain legal matters. Adjusted operating income as so defined is a non-GAAP measure and is not intended as a substitute for GAAP operating income. We have presented these adjusted amounts because management believes that these presentations enhance a user’s understanding of our normal consolidated operating income by excluding certain items which we do not believe are indicative of our ordinary results of operations. As a result, adjusting for these amounts allows for comparison to our normalized prior period results.measures" section below. |
Consolidated revenues
Consolidated revenues for 2018 increased by approximately $528 million, or 4.9%, from 2017. This increase in consolidated revenues was due to an increase in U.S. dialysis and related lab services revenues of approximately $976 million, principally due to the administration of calcimimetics, an increase in Medicare bad debt revenue, and volume growth from additional treatments in 2018, as discussed below. Revenue for 2018 was negatively impacted by a decrease of approximately $400 million from 2017 in our ancillary services and strategic initiatives driven primarily from decreases in revenue from our pharmacy business due to changes in reimbursement for calcimimetics, as well as restructuring of our pharmacy business, partially offset by an increase in revenues from expansion in our international business and an increase in revenues in DaVita IKC, as described below.
Effective January 1, 2018, both oral and IV forms of calcimimetics, a drug class taken by many patients with ESRD to treat mineral bone disorder, became the financial responsibility of our U.S. dialysis and lab services business for our Medicare
patients and are now reimbursed under Medicare Part B. During an initial pass-through period, Medicare payment for calcimimetics will be based on a pass-through rate of the average sales price plus approximately 4%. CMS has stated intentions to enter calcimimetics into the ESRD bundle two years after transitioning to Part B. Previously, calcimimetics were reimbursed for Medicare patients through Part D once dispensed from traditional pharmacies, including DaVita Rx.
Consolidated revenues for 2017 increased by approximately $170 million, or 1.6%, from 2016. This increase in consolidated revenues was due to an increase in U.S. dialysis and related lab services revenues of approximately $222 million, principally resulting from solid volume growth from additional treatments, partially offset by a decrease of approximately $5 in average dialysis net patient service revenue per treatment and by one less treatment day in 2017, as discussed below. Revenue for 2017 was negatively impacted by a decrease of approximately $25 million from 2016 in our ancillary services and strategic initiatives driven primarily from decreases in revenue from our pharmacy business, partially offset by an increase in revenues from expansion in our international business and increases in DaVita IKC revenues, as described below.
Consolidated operating income
Consolidated operating income of $1.526 billion for 2018, which included a net gain on changes in ownership interests of $61 million, other asset impairment charges of $17 million and restructuring charges of $11 million related to our pharmacy business, an equity investment loss due to the sale of our India business in our APAC JV of $9 million, an equity investment loss related to impairments at our APAC JV of $8 million and a goodwill impairment charge of $3 million, as discussed below, decreased by $287 million as compared to 2017, which included goodwill impairment charges of $35 million related to our vascular access reporting unit, an equity investment loss of $6 million for goodwill impairments at our APAC JV, an impairment of $280 million on our investment in the APAC JV, an asset impairment of $15 million related to the restructuring of our pharmacy business, restructuring charges in our international business of $3 million, a net gain on settlement of $530 million, and a gain adjustment on the 2016 ownership change of our APAC JV of $6 million. Excluding these items from their respective periods, adjusted consolidated operating income for 2018 decreased by approximately $103 million as compared to 2017 due to a decrease in adjusted operating income in U.S. dialysis and related lab services of $86 million, an increase in expenses in our corporate administrative support of $45 million, partially offset by a decrease in adjusted operating losses in our ancillary and strategic initiatives of $29 million, as described below.
Consolidated operating income of $1.813 billion for 2017, which included goodwill impairment charges of $35 million related to our vascular access reporting unit, an equity investment loss of $6 million for goodwill impairments at our APAC JV, an impairment of $280 million on our investment in the APAC JV, an asset impairment of $15 million related to the restructuring of our pharmacy business, restructuring charges in our international business of $3 million, a net gain on settlement of $530 million, and a gain adjustment on the 2016 ownership change of our APAC JV of $6 million, as discussed below, decreased by approximately $217 million from 2016, which included goodwill impairment charges of $28 million, an investment impairment of $15 million, an estimated gain on the ownership change of our APAC JV of $374 million and estimated accruals for legal matters of $16 million. Excluding these items from their respective periods, adjusted consolidated operating income for 2017 decreased by approximately $99 million due to an increase in adjusted operating losses in our ancillary and strategic initiatives of $59 million, an increase in expenses in our corporate administrative support of $31 million, and a decrease in adjusted operating income in U.S. dialysis and related lab services of $9 million, as described below.
U.S. dialysis and related lab services business
Our U.S. dialysis and related lab services business is a leading provider of kidney dialysis services, through a network of 2,664operating 2,753 outpatient dialysis centers, which we own and manage through management services agreements, in 46 states and the District of Columbia, serving a total of approximately 202,700206,900 patients. We also provide acute inpatient dialysis services in approximately 900 hospitals. We estimate that we have approximately a 37%38% share of the U.S. dialysis market based upon the number of patients we serve. In 2018, our overall network of U.S. outpatient dialysis centers increased by 154 dialysis centers, primarily as a result of opening new dialysis centers and from acquisitions of existing dialysis centers. The overall number of patients that we serve in the U.S. increased by approximately 2.5% in 2018 as compared to 2017.
The stated missionApproximately 92% of our U.S. dialysis and related lab services business is to be the provider, partner and employer of choice. We believe our attention to these three stakeholders—our patients, our business partners, and our teammates—represents a major driver of our long-term performance, although we are subject to the impact of external factors such as government policy, physician practice patterns, commercial payor payment rates and the mix of commercial and government patients, as further described in Item 1A Risk Factors. Two principal non-financial metrics we track are quality clinical outcomes and teammate turnover. We have developed our own composite index for measuring improvements in our clinical outcomes, which we refer to as the DaVita Quality Index. Our key measures for clinical outcomes have improved over each of the past several years. In addition, our patient mortality percentages have decreased from 19.0% in 2001 to 14.0% in 2017. For the sixth year in a row, we were an industry leader in QIP standards and for the last five years, we have been a leader under the
CMS Five-Star Quality Rating system. Over the last two years our clinical teammate turnover has increased slightly due to increased competition for skilled clinical personnel. We will continue to focus on these three stakeholders and our clinical outcomes as we believe these are fundamental long-term value drivers.
We believe our national scale and commitment to our patients, among other things, allows us to provide industry-leading quality care with superior clinical outcomes that attracts patients, referring physicians, and qualified medical directors to our network, which in turn provides our dialysis patient base with a large number of outpatient dialysis centers to choose from with convenient locations and access to a full range of other integrated services, which in turn provides us the ability to effectively and efficiently manage a patient’s care and certain costs.
The following graph summarizes our U.S. dialysis patient services revenues by modality for the year ended December 31, 2018:
Approximately 90% of our 20182019 consolidated revenues were derived directly from our U.S. dialysis and related lab services business. Approximately 79% of our 2018 dialysis patient services revenues were derived from outpatient hemodialysis services in our 2,630 consolidated U.S. dialysis centers. Other dialysis services, which are operationally integrated with our dialysis operations, are peritoneal dialysis, home-based hemodialysis, hospital inpatient hemodialysis and management and administrative services provided to dialysis centers in which we own a noncontrolling interest or which are wholly owned by third parties. These services collectively accounted for the balance of our 2018 U.S. dialysis and related lab services revenues.
The principal drivers of our U.S. dialysis and related lab services revenues are:include :
the number of treatments, which is primarily a function of the number of chronic patients requiring approximately three treatments per week, as well as, to a lesser extent, the number of treatments for peritoneal dialysis, and home-basedhome dialysis and hospital inpatient dialysis; and
average dialysis net patient service revenue per treatment, including the mix of commercial and government patients.
Based on the most recent 2018 annual data report from the USRDS, the U.S. ESRD dialysis patient population has grown at an approximate compound rate of 3.8% from 2000 to 2016. The ESRD dialysis patient base has been a relatively stable and growing factor; however, more recent preliminary data from the USRDS suggest that the rate of growth of the ESRD patient population may be declining.
We believeWithin our ability to maintain a stable or growing share of the U.S. dialysis patient base is influenced by the qualitybusiness, our home-based dialysis and hospital inpatient dialysis services are operationally integrated with our outpatient dialysis centers and related laboratory services. Our outpatient, home-based, and hospital inpatient dialysis services comprise approximately 78%, 16% and 6% of our clinical care, which can lead to reduced patient mortality rates, as described above, our patient, medical director and physician retention, as well as our ability to open and acquire new dialysis centers, among other things. If we experience significant patient attrition as a result of new business activities, new technology or other forms of competition, reduced prevalence of ESRD or other reductions in demand for dialysis treatments, it could have a material adverse effect on our business, results of operations, financial condition and cash flows. For further discussion regarding the competitive pressures we face and related risks, see the risk factor in Item 1A Risk Factors under the heading “If we are unable to compete
successfully, including implementing our growth strategy and/or retaining our physicians and patients, it could materially adversely affect our business, results of operations, financial condition and cash flows.”
Our average U.S. dialysis and related lab services net patient service revenue per treatment can be significantly impacted by several major factors, including our commercial payment rates;revenues, respectively.
In the U.S., government payment policies regarding reimbursement amounts for dialysis treatments covered under Medicare’s bundled payment rate system, including our ability to capture certain patient characteristics; and changes in the mix of government and commercial patients and the number of commercial patients that are either covered under commercial contracts or are out-of-network.
Government dialysis-related payment rates in the U.S. are principally determined by federal Medicare and state Medicaid policy. For 2019, approximately 69% of our total U.S. dialysis patient services revenues were generated from government-based programs for services to approximately 90% of our total patients. These government-based programs are principally Medicare and Medicare-assigned, Medicaid and managed Medicaid plans, and other government plans, representing approximately 59%, 6% and 4% of our U.S. dialysis patient services revenues, respectively.
Dialysis payment rates from commercial payors vary and a major portion of our commercial rates are set at contracted amounts with payors and are subject to intense negotiation pressure. On average, dialysis-related payment rates from contracted commercial payors are significantly higher than Medicare, Medicaid and other government program payment rates, and therefore the percentage of commercial patients in relation to total patients represents a major driver of our total average dialysis net patient service revenue per treatment. Commercial payors (including hospital dialysis services) represent approximately 31% of U.S. dialysis patient services revenues. Over the last two years, we have seen a slight decline in the growth of our commercial patients, which has been outpaced by the growth of our government-based patients.
For further discussion of government reimbursement, and the Medicare ESRD bundled payment system including QIP,and commercial reimbursement, see the discussion in Item 1. Business under the heading “Kidney Care Division-Sources“U.S. dialysis business – Sources of revenue-concentrations and risks.” For a discussion of operational, clinical and financial risks and uncertainties that we face in connection with the Medicare ESRD bundled payment system, see the risk factor in Item 1A. Risk Factors under the heading “Changes in the structure of and payment rates under the Medicare ESRD program could have a material adverse effect on our business, results of operations, financial condition and cash flows.”
The CMS Innovation Center is currently working with various healthcare providers to develop, refine For a discussion of operational, clinical and implement ACOsfinancial risks and other innovative models of care for Medicare and Medicaid beneficiaries. We are uncertain of the extent to which the long-term operation and evolution of these models of care, including ACOs, the CEC Model (which includes the development of ESCOs), the Duals Demonstration and other models, will impact the healthcare market over time. We are currently participating in the CEC Model with the Innovation Center in certain geographies, and our U.S. dialysis business may choose to participate in additional models either as a partner with other providers or independently. Even in areas where we are not directly participating in these or other Innovation Center models, some of our patients may be assigned to an ACO, another ESRD Care Model or another program, in which case the quality and cost of careuncertainties that we furnish will be includedface in an ACO’s, another ESRD Care Model’s or other program’s calculations. In addition to the aforementioned new models of care, federal bipartisan legislation in the form of the PATIENTS Act has been proposed. The PATIENTS Act builds on prior coordinated care models, such as the CEC Model, and would establish a demonstration program for the provision of integrated care to Medicare ESRD patients. We have made and continue to make investments in building our integrated care capabilities, but there can be no assurances that initiatives such as the PATIENTS Act or similar legislation will be passed. If such legislation is passed, there can be no assurances that we will be able to successfully provide integrated care on the broader scale contemplated by this legislation.
On average, dialysis-related payment rates from contractedconnection with commercial payors, aresee the risk factors in Item 1A. Risk Factors under the headings "If the average rates that commercial payors pay us decline significantly higher than Medicare, Medicaid and other government program payment rates, and therefore the percentage of commercialor if patients in relation to total patients represents a major driver of our total average dialysis net patient service revenue per treatment. The percentage of commercial patients covered under contracted plans as compared to commercial patients with out-of-network providers has continued to increase, which can significantly affect our average dialysis net patient service revenue per treatment since commercial payment rates for patients with out-of-network providers are on average higher than in-network payment rates that are covered under commercial contracted plans.
Dialysis payment rates from commercial payors vary and a major portion of our commercial rates are set at contracted amounts with payors and are subject to intense negotiation pressure. As discussed above,restriction in plan designs, it would have a material adverse effect on our business, results of operations, financial condition and cash flows"; and "If the number of patients with higher-paying commercial insurance declines, it could have a material adverse effect on our business, results of operations, financial condition and cash flows."
The impact of physician-prescribed pharmaceuticals on our overall revenues that are separately billable has significantly decreased since Medicare’s single bundled payment rates also include payments for out-of-network patients that on average are higher than our in-network commercial contract rates. Somesystem went into effect beginning in January 2011, and as a result of our commercial contracts that pay us a single bundled payment rate for all dialysis services providedrate.
Effective January 1, 2018, both oral and intravenous forms of calcimimetics, a drug class taken by many patients with ESRD to covered patients. However, sometreat mineral bone disorder, became the financial responsibility of our commercial contracts also pay usU.S. dialysis business for certain other servicesour Medicare patients and pharmaceuticals in addition toare now reimbursed under Medicare Part B. Previously, calcimimetics were reimbursed for Medicare patients through Part D once dispensed from traditional pharmacies. Currently, the oral and intravenous forms of calcimimetics remain separately reimbursed and therefore are not part of the ESRD Prospective Payment System (PPS) bundled payment. During the initial pass-through period, Medicare payment for calcimimetics was based on a pass-through rate of the average sales price plus approximately 6% before sequestration (or 4% adjusted for sequestration), however, in 2020 calcimimetics are reimbursed at average sales price plus 0% before sequestration. CMS has stated intentions to enter calcimimetics into the ESRD bundled payment as of January 1, 2021. We are continuously indo not know the processrate at which CMS will include calcimimetics into the bundle. If there is a reduction from the current amount of negotiating agreements with our commercial payors, and if our negotiations result in overall commercial contract payment rate reductions in excess of our commercial contract payment rate increases,reimbursement or if commercial payors implement plans that restrict accessCMS fails to coverage orincrease the duration or breadth of benefits or impose restrictions or limitations on patient accessbundle in a sufficient manner to non-contracted or out-of-network providers,appropriately and adequately reimburse for the drug, it could have a material adverse effect on our business, results of operations, financial condition and cash flows. In addition, if there is an increaseduring the period in job losses in the U.S., or depending upon changes to the healthcare regulatory system by CMS and/or the impact of healthcare insurance exchanges,which we could experience a decrease in the number of patients covered under commercial insurance plans and/or an increase in uninsured or underinsured patients. Patients with commercial insurance who cannot otherwise maintain coverage frequently rely on financial assistance from charitable organizations, such as the American Kidney Fund. If these patients are unable to obtain or continue to receive or receiveseparately reimbursed for a limited duration such financial assistance, or ifcalcimimetics, we expect our assumptions about how patients will respond to any change in such financial assistance are incorrect, it could have a material adverse effect on our business, results of operations, financial condition and cash flows. For further details, see the risk factor in Item 1A Risk Factors under the heading “If patients in commercial plans are subject to restriction in plan designs or the average
rates that commercial payors pay us decline significantly, it would have a material adverse effect on our business, results of operations, financial condition and cash flows.”
Our operating performance with respect to dialysis services billing and collection can also be a significant factor in the average U.S. dialysis and related lab services net patient service revenue per treatment we recognize and are ablerelated to collect. For example,these pharmaceuticals to decline in future periods as payors changeCMS adjusts the reimbursement amount to more closely match the cost of these pharmaceuticals in accordance with their systems and requirements, such as changesrules. We therefore expect to what is includedrealize significantly reduced levels of operating income from calcimimetics in the bundled payment from Medicare, we could experience a negative impactfuture as compared to 2019.
Approximately 6% and 7% of our cash collection performance, which would affect our averagetotal U.S. dialysis and related lab services net patient service revenue per treatment.
Our U.S. dialysisservices revenues for the years 2019 and related lab services revenue recognition involves significant estimation risks. Our estimates2018, respectively, are developed based onassociated with the best information available to usadministration of separately-billable physician-prescribed pharmaceuticals, of which approximately 4% and our best judgment as to the reasonably assured collectability of our billings as of the reporting date based upon our actual historical collection experience. Changes in estimates are reflected in the then-current period financial statements based upon on-going actual experience and trends, or subsequent settlements and realizations depending on the nature and predictability of the estimates and contingencies.
Our annual average U.S. dialysis and related lab services net patient service revenue per treatment was approximately $350, $330 and $336 for 2018, 2017 and 2016, respectively. In 2018, our average U.S. dialysis and related lab services net patient service revenue per treatment increased by approximately $20 per treatment primarily related5% relate to the administration of calcimimetics, as discussed above, as well as an increase in Medicare bad debt revenue due to a policy election made under the new revenue recognition accounting standards. In 2017, our average U.S. dialysis and related lab services net patient service revenue per treatment decreased by approximately $5 per treatment due to a decrease in our commercial treatment volume, a decline in our commercial payor mix, including exchange patients, and an increase in our provision for uncollectible accounts.respectively.
We anticipate that we will continue to experience increases in our operating costs in 20192020 that may outpace any net Medicare rate increases that we may receive, which could significantly impact our operating results. In particular, we expect to continue experiencing increases in operating costs that are subject to inflation, such as labor and supply costs, including increases in maintenance costs, regardless of whether there is a compensating inflation-based increase in Medicare payment rates or in payments under the ESRD bundled payment rate system. We also expect to continue to incur capital expenditures to improve, renovate and maintain our facilities, equipment and information technology to meet changingevolving regulatory requirements.requirements and otherwise.
U.S. dialysis patient care costs are those costs directly associated with operating and supporting our dialysis centers, home-based programs and hospital inpatient programs, and consist principally of labor, benefits, pharmaceuticals, medical supplies and other operating costs of the dialysis centers.
The principal drivers of our U.S. dialysis and related lab services patient care costs are include:
clinical hours per treatment, labor rates and benefit costs;
vendor pricing of pharmaceuticals,and utilization levels of pharmaceuticals, pharmaceuticals;
business infrastructure costs, which include the operating costs of our dialysis centers,centers; and
certain professional fees. However, other
Other cost categories that can also present significant cost variability such asinclude employee benefit costs, payroll taxes, insurance costs and medical supply costs. In addition, proposed ballot initiatives or referendums, legislation, regulations or policy changes could cause us to incur substantial costs for related advocacy or to challenge and prepare for, and, if implemented, impose additional requirements on our operations, includingor implement changes required. Any such changes could result in, among other things, increases in the required staffing levelsour labor costs or staffing ratios for clinical personnel, minimum transition times between treatments, limits on how much patients may be charged for care, limitations as to the amount that can be spent on certain medical costs, and limitations on the amount of revenue that providerswe can retain. For additional detail on risks associated with potential and proposed ballot initiatives, referendums, legislation, regulations or policy changes, see the risk factor in Item 1A. Risk Factors under the heading, "Changes such as thesein federal and state healthcare legislation or regulations could materially reducehave a material adverse effect on our revenuesbusiness, results of operations, financial condition and increase our operating expenses and impact our ability to staff our clinics to any new, elevated staffing levels, in particular given the ongoing nationwide shortage of healthcare workers, especially nurses.cash flows."
Our average clinical hours per treatment increaseddecreased in 20182019 compared to 2017.2018. We are always striving for improved productivity levels, however, changes in things such as federal and state policies or regulatory billing requirements can lead to increased labor costs in order to implement these new requirements, which can adversely impact our ability to achieve optimal productivity levels. In addition, improvementscosts. Improvements in the U.S. economy have stimulated additional competition for skilled clinical personnel resulting in slightly higher clinical teammate turnover in 2018,over the last few years, which we believe has negatively affected productivity levels. In 2018both 2019 and 2017,2018, we experienced an increase in our clinical labor rates of approximately 3.0%2.0% and 4.0%3.0%, respectively, consistent with general industry trends, mainly due to the high demand for and nationwide shortage of skilled clinical personnel, along with general inflation increases. In 2018, we experienced an increase in benefit costs due to the implementation of a 401(k) matching program that went into effect January 1, 2018.trends. We also continue to experience increases in the infrastructure and operating costs of our dialysis centers, primarily due to the number of new dialysis centers opened, and general increases in rent, utilities and repairs and maintenance. In 2018,2019, we continued to implement certain cost control initiatives to help manage our overall operating costs, including labor productivity.
Our U.S. dialysis and related lab services general and administrative expenses represented 8.1% of our U.S. dialysis and related lab services revenues in both 20182019 and 2017.2018. Increases in general and administrative expenses over the last several years were primarily related to strengthening our dialysis business by improving our regulatoryand related compliance and other operational processes, responding to certain legal and compliance matters, professional fees associated with enhancing our
information technology systems and more recent costs to counter union policy efforts. We expect that these levels of general and administrative expenses will continue in 20192020 and could possibly increase as we seek out new business opportunities within the dialysis industry and continue to invest in improving our information technology infrastructure and maintaining the level of support required formaintain our regulatory compliance and legal matters.program, among other things. In addition, our general administrative expenses could increase in 2020 as compared to the prior year due to additional anticipated advocacy costs to challenge ballot initiatives, which could be significant.
Results of Operations
The following table reflects theU.S. dialysis results of operations for our U.S. dialysis and related lab services business:
Revenues:
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2018 | 2017 | 2016 |
| | (dollars in millions, except treatment data) |
Revenues:(1) | | | | | |
| U.S. dialysis and related lab patient service revenues | $ | 10,367 |
| | $ | 9,822 |
| | $ | 9,551 |
|
| Provision for uncollectible accounts | (51 | ) | | (482 | ) | | (430 | ) |
| U.S. dialysis and related lab net patient service revenues | 10,316 |
| | 9,340 |
| | 9,121 |
|
| Other revenues | 20 |
| | 20 |
| | 17 |
|
| Total U.S. dialysis and related lab net services revenues | 10,336 |
| | 9,360 |
| | 9,138 |
|
| Operating expenses and charges: | | | |
| | |
|
| Patient care costs | 7,280 |
| | 6,334 |
| | 6,145 |
|
| General and administrative | 836 |
| | 760 |
| | 751 |
|
| Depreciation and amortization | 559 |
| | 521 |
| | 483 |
|
| Equity investment income | (20 | ) | | (25 | ) | | (18 | ) |
| Gain on changes in ownership interests | (28 | ) | | — |
| | — |
|
| Gain on settlement | — |
| | (527 | ) | | — |
|
| Total operating expenses and charges | 8,626 |
| | 7,063 |
| | 7,361 |
|
| Operating income | $ | 1,710 |
| | $ | 2,297 |
| | $ | 1,777 |
|
| Reconciliation of non-GAAP measures: | | | |
| | |
|
| Gain on changes in ownership interests | (28 | ) | | — |
| | — |
|
| Gain on settlement, net | — |
| | (527 | ) | | — |
|
| Equity investment income related to gain on settlement | — |
| | (3 | ) | | — |
|
Adjusted operating income(2) | $ | 1,682 |
| | $ | 1,768 |
| | $ | 1,777 |
|
| Dialysis treatments | 29,435,304 |
| | 28,271,113 |
| | 27,162,545 |
|
| Average dialysis treatments per treatment day | 94,073 |
| | 90,468 |
| | 86,532 |
|
Average U.S. dialysis and related lab services net patient service revenue
per treatment | $ | 350.47 |
| | $ | 330.38 |
| | $ | 335.81 |
|
|
| | | | | | | | | | | | | | |
| | Year ended December 31, | | Annual change |
| | 2019 | | 2018 | | Amount | | Percent |
| | (dollars in millions, except per treatment data) | | |
| Total revenues | $ | 10,563 |
| | $ | 10,336 |
| | $ | 227 |
| | 2.2 | % |
| Dialysis treatments | 30,172,699 |
| | 29,435,304 |
| | 737,395 |
| | 2.5 | % |
| Average treatments per day | 96,398 |
| | 94,073 |
| | 2,325 |
| | 2.5 | % |
| Treatment days | 313.0 |
| | 312.9 |
| | 0.1 |
| | — | % |
| Average net patient service revenue per treatment | $ | 349.02 |
| | $ | 350.47 |
| | $ | (1.45 | ) | | (0.4 | )% |
| Normalized non acquired treatment growth | 2.2% | | 3.2% | | | | (1.0 | )% |
U.S. dialysis revenues increased primarily due to volume growth from additional treatments of 2.5% due to an increase in acquired and non-acquired treatments. Our U.S. dialysis revenues were negatively impacted by a decrease in our average net patient service revenue per treatment due to a rate decline related to calcimimetics which was partially offset by an increase in Medicare rates in 2019. In addition, 2018 was favorably impacted by $36 million of additional Medicare bad debt revenue due to a policy election made in 2018 under the new revenue recognition accounting standards.
Operating expenses and charges:
|
| | | | | | | | | | | | | | |
| | Year ended December 31, | | Annual change |
| | 2019 | | 2018 | | Amount | | Percent |
| | (dollars in millions, except per treatment data) | | |
| Patient care costs | $ | 7,219 |
| | $ | 7,280 |
| | $ | (61 | ) | | (0.8 | )% |
| General and administrative | 857 |
| | 836 |
| | 21 |
| | 2.5 | % |
| Depreciation and amortization | 583 |
| | 559 |
| | 24 |
| | 4.3 | % |
| Equity investment income | (22 | ) | | (20 | ) | | (2 | ) | | (10.0 | )% |
| Gain on changes in ownership interests | — |
| | (28 | ) | | 28 |
| | |
| Total operating expenses and charges | $ | 8,638 |
| | $ | 8,626 |
| | $ | 12 |
| | 0.1 | % |
| Patient care costs per treatment | $ | 239.27 |
| | $ | 247.32 |
| | $ | (8.05 | ) | | (3.3 | )% |
Certain columns, rows or percentages may not sum or recalculate due to the use of rounded numbers.
| |
(1) | On January 1, 2018, we adopted Revenue from Contracts with Customers (Topic 606) using the cumulative effect method for those contracts that were not substantially completed as of January 1, 2018. Results related to performance obligations satisfied beginning on and after January 1, 2018 are presented under Topic 606, while results related to the satisfaction of performance obligations in prior periods continue to be reported in accordance with our historical accounting under Revenue Recognition (Topic 605). See Notes 1 and 2 of the consolidated financial statements for further discussion of our adoption of Topic 606.
|
| |
(2) | For the periods presented in the table above, adjusted operating income is defined as operating income before certain items which we do not believe are indicative of ordinary results, including a non-cash gain on changes in ownership interests and a net settlement gain. Adjusted operating income as so defined is a non-GAAP measure and is not intended as a substitute for GAAP operating income. We have presented these adjusted amounts because management believes that these presentations enhance a user’s understanding of our normal consolidated operating income by excluding certain items which we do not believe are indicative of our ordinary results of operations. As a result, adjusting for these amounts allows for comparison to our normalized prior period results. |
Revenues
U.S. dialysis and related lab services revenues for 2018 increased by approximately $976 million, or 10.4%, from 2017. This increase in revenues was primarily driven by an increase of approximately $20 in average dialysis net patient service
revenue per treatment due to the administration of calcimimetics, as discussed above, an increase in Medicare bad debt revenue of $36 million due to a policy election made under the new revenue recognition accounting standards and volume growth from additional treatments of approximately 4.1% due to an increase in acquired and non-acquired treatments.
U.S. dialysis and related lab services revenues for 2017 increased by approximately $222 million, or 2.4%, from 2016. This increase in revenues was primarily driven by solid volume growth from additional treatments of approximately 4.1% due to an increase in acquired and non-acquired treatments, including the acquisition of Renal Ventures. U.S. dialysis and related lab services’ revenues was negatively impacted by approximately one less treatment day in 2017 as compared to 2016, and a decrease in the average dialysis net patient service revenue per treatment of approximately $5, primarily due to a decrease in our commercial payor mix, including exchange patients. In addition, our provision for uncollectible accounts increased by $52 million in 2017.
The following table summarizes our U.S. dialysis and related lab patient services revenues by source:
|
| | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Medicare and Medicare-assigned plans | 59 | % | | 56 | % | | 58 | % |
| Medicaid and managed Medicaid plans | 6 |
| | 7 |
| | 3 |
|
| Other government-based programs | 4 |
| | 4 |
| | 2 |
|
| Total government-based programs | 69 |
| | 67 |
| | 63 |
|
| Commercial (including hospital dialysis services) | 31 |
| | 33 |
| | 37 |
|
| Total U.S. dialysis and related lab services revenues | 100 | % | | 100 | % | | 100 | % |
Approximately 69% of our total U.S. dialysis and related lab patient services revenues for the year ended December 31, 2018 were from government-based programs, principally Medicare, Medicaid, Medicare-assigned and managed Medicaid plans, representing approximately 89.6% of our total patients. Over the last year, we have seen a decline in the growth of our commercial patients, which has been outpaced by the growth of our government-based patients. Less than 1% of our U.S. dialysis and related lab services revenues are due directly from patients. There is no single commercial payor that accounted for more than 10% of total U.S. dialysis and related lab services revenues for the year ended December 31, 2018.
On average, dialysis-related payment rates from contracted commercial payors are significantly higher than Medicare, Medicaid and other government program payment rates, and therefore the percentage of commercial patients as a relationship to total patients represents a major driver of our total average dialysis net patient service revenue per treatment. For a patient covered by a commercial insurance plan, Medicare generally becomes the primary payor after 33 months, which includes the three month waiting period, or earlier if the patient’s commercial insurance plan coverage terminates. When Medicare becomes the primary payor, the payment rates we receive for that patient shift from the commercial insurance plan rates to Medicare payment rates, which on average are significantly lower than commercial insurance rates. Medicare payment rates are insufficient to cover our costs associated with providing dialysis services, and we therefore lose money on each Medicare treatment that we provide.
Nearly all of our net earnings from our U.S. dialysis and related lab services are derived from commercial payors, some of which pay at established contract rates and others of which pay negotiated payment rates based on an established fee schedule for out-of-network patients, which are typically higher than commercial contracted rates. If we experience an overall net reduction in our contracted and non-contracted commercial payment rates as a result of negotiations, restrictions or changes to the healthcare regulatory system, including the potential impact of healthcare insurance exchanges, it could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Operating expenses and charges
Patient care costs. U.S. dialysis and related lab services patient care costs are those costs directly associated with operating and supporting our dialysis centers and consist principally of labor, benefits, pharmaceuticals, medical supplies and other operating costs of the dialysis centers.
U.S. dialysis and related lab services patient care costs on a per treatment basis were $247 and $224 for 2018 and 2017, respectively. The $23 increase in per treatment costs in 2018 as compared to 2017 wasdecreased primarily related to the administration of calcimimetics, an increase in labor and benefits costs due to an increasea decrease in teammate headcount andcalcimimetics unit costs as oral generic products have entered the transition tomarket lowering the 401(k) matching program, as described above,cost of products we acquire, as well as an increasedecreases in other pharmaceutical unit costs. These decreases were partially offset by increases in benefits costs and other direct operating expenses associated with our dialysis centers.
General and administrative expenses. U.S. dialysis general and administrative expenses in 2019 increased primarily due to increases in labor and benefit costs, and long-term incentive compensation expense driven by compensation plans based on operating income performance. These increases were partially offset by a decrease in other pharmaceutical costs.
U.S. dialysis and related lab services patient care costs on a per treatment basis were $224 and $226 for 2017 and 2016, respectively. The $2 decrease in per treatment costs in 2017 as compared to 2016 was primarily attributable to a decrease in
pharmaceutical unit costs due to a net price reduction as well as a decrease in profit sharing expense. These decreases were partially offset by an increase in labor and benefit costs due to an increase in teammates and clinical labor rates, and an increase in other direct operating expenses associated with our dialysis centers, including the impact of the hurricanes during the third quarter of 2017.
General and administrative expenses. U.S. dialysis and related lab services general and administrative expenses in 2018 increased by approximately $76 million as compared to 2017. This increase was primarily due to increases in advocacy costs benefit costs related to the 401(k) matching program that began in 2018, occupancy costs and consulting fees, partially offset by a decrease in labor costs. The increase in advocacy spending was primarily due to our efforts to oppose certain legislative and ballot initiatives as well as a decline in asset impairments related to expected center closures.
Depreciation and amortization. Depreciation and amortization expense is directly impacted by the number of dialysis centers we develop and acquire. U.S. dialysis depreciation and amortization expenses increased primarily due to growth in the number of dialysis centers we operate, as well as additional informational technology initiatives.
Equity investment income. U.S. dialysis and related lab services general and administrative expenses in 2017equity investment income increased by approximately $9 million as compared to 2016. This increase was primarily due to an increase in our labor and benefit costs and occupancy costs, partially offset by a decrease in long-term incentive compensation, profit sharing and travel expenses.
Depreciation and amortization. U.S. dialysis and related lab services depreciation and amortization expenses increased by approximately $38 million for both 2018 as compared to 2017 and 2017 as compared to 2016. The increases were primarily due to growth through new dialysis center developments and acquisitions,the profitability at certain joint ventures, as well as additional informational technology initiatives.an increase in the number of our nonconsolidated dialysis joint ventures.
Gain on changes in ownership interests, net. During 2018, we acquired a controlling interest in a previously nonconsolidated dialysis partnership. As a result of this transaction, we consolidated this partnership and recognized a non-cash gain of $28 million on our previously held ownership interest in the partnership.
Gain on settlement, net. During 2017, we reached an agreement with the government for amounts owed to us for dialysis services provided from 2005 through 2011 to patients covered by the Department of Veterans Affairs (VA). As a result of this settlement we recognized a one-time net gain of $527 million as well as equity investmentOperating income of $3 million for our share of the settlement recognized by our nonconsolidated joint ventures. As such, the total effect of this settlement on ourand adjusted operating income
|
| | | | | | | | | | | | | | |
| | Year ended December 31, | | Annual change |
| | 2019 | | 2018 | | Amount | | Percent |
| | (dollars in millions) |
| Operating income | $ | 1,925 |
| | $ | 1,710 |
| | $ | 215 |
| | 12.6 | % |
Adjusted operating income(1) | $ | 1,925 |
| | $ | 1,682 |
| | $ | 243 |
| | 14.4 | % |
| |
| (1) | For a reconciliation of adjusted operating income by reportable segment, see "Reconciliations of non-GAAP measures" section below. |
U.S. dialysis operating income was an increase of $530 million.
Equity investment income. Equity investment income was approximately $20 million, $25 million and $18 million in 2018, 2017 and 2016, respectively. The decrease in equity investmentadjusted operating income in 20182019 increased as compared to 2017 was primarily due to our receipt in 2017 of equity investment income related to the VA settlement of $3 million. The increase in equity investment income in 2017 compared to 2016 was primarily due to the increase in the number of our nonconsolidated dialysis joint ventures and an increase in profitability at some of these joint ventures.
Segment operating income
U.S. dialysis and related lab services operating income for 2018, which includes a gain on ownership changes of $28 million, decreased by approximately $587 million as compared to 2017, which includes a net gain on the VA settlement of $530 million. Excluding these items from their respective periods, U.S. dialysis and related lab services adjusted operating income decreased by approximately $86 million from 2017. This decrease in adjusted operating income was primarilyprior year due to an increase in laborour margin on calcimimetics, treatment growth and benefitsMedicare rates, as described above, as well as decreases in advocacy costs an increaseand other pharmaceutical unit costs. These increases were partially offset by increases in other direct operating expenses associated with our dialysis centers, labor and increases in advocacy costs, occupancybenefits costs and consulting fees, as described above. This decrease was partially offset by a net increase related to the administration of calcimimetics and additional treatment growth, as described above.
U.S. dialysis and related lab services operating income for 2017, which includes a net gain on the VA settlement of $530 million, increased by approximately $520 million as compared to 2016. Excluding this item from 2017, U.S. dialysis and related lab services adjusted operating income decreased by approximately $9 million from 2016. This decrease in adjusted operating income was primarily due to a decrease in the average dialysis net patient service revenue per treatment of approximately $5, one less treatment day, partially offset by treatment growth, as described above. Adjusted operating income also decreased due to an increase in general and administrative expenses, partially offset by lower patient care costs, as described above.long-term compensation expense.
Other—
Other - Ancillary services and strategic initiatives business
Our other operations include ancillary services and strategic initiatives which are primarily aligned with our core business of providing dialysis services to our network of patients. As of December 31, 2018,2019, these consisted primarily of integrated care and disease management services, vascular access services, clinical research programs, physician services,(DaVita IKC), ESRD seamless care organizations (ESCOs), clinical research programs (DaVita Clinical Research), vascular access services, physician services, and comprehensive kidney care (Vively Health formerly known as DaVita Health Solutions), as well as our international operations. These ancillary services, and strategic initiatives,
including our international operations, and our pharmacy business, generated approximately $1.196 billion$972 million of revenues in 2018,2019, representing approximately 10%8% of our consolidated revenues. IfAs further described in the risk factor in Item 1A. Risk Factors under the heading, "Our ancillary services and strategic initiatives, including, without limitation, our international operations, that we operate or invest in now or in the future may generate losses and may ultimately be unsuccessful. In the event that one or more of these activities is unsuccessful, our business, results of operations, financial condition and cash flows may be negatively impacted and we may have to write off our investment and incur other exit costs," if any of our ancillary services or strategic initiatives, such as our international operations, are unsuccessful, it wouldcould have a negative impact on our business, results of operations, financial condition and cash flows, and we may determine to exit that line of business, which could result in significant termination costs. In addition, we have in the past and may in the future incur a material write-off or an impairment of our investment, including goodwill, in one or more of ourthese ancillary services or strategic initiatives.services. In that regard, we have incurred, and may in the future incur impairment and restructuring charges in addition to those incurred by our pharmacy business in 2018, described below.
Recent changes in the oral pharmacy space, including reimbursement rate pressures, have negatively affected the economics of our pharmacy services business. As a result, we have transitioned the customer service and fulfillment functions of this business to third parties and have ceased our distribution operation, which will result in a decline in revenues and costs. In 2018, we recognized restructuring charges of $11 million and other asset impairment charges of $17 million related to our pharmacy services business.
We expect to add additional service offerings to our business and pursue additional strategic initiatives in the future as circumstances warrant, which could include healthcare services not related to dialysis. In addition, in connection with our previously announced capital allocation strategy, in 2019 we plan to continue our evaluation of strategic alternatives for various assets in our portfolio. In the second quarter of 2018, we sold Paladina Health (described below), our direct primary care business, as a result of the implementation of this strategy.
As of December 31, 2018,2019, our international dialysis operations provided dialysis and administrative services through a network of 241259 outpatient dialysis centers located in nineten countries outside of the U.S. TheFor 2019, total revenues generated from our international operations as reflected below, were approximately 4% of our 2018 consolidated revenues.
The following table reflects theAncillary services results of operations for the ancillary services and strategic initiatives:
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | (dollars in millions) |
U.S. revenues:(1) | | | |
| | |
|
| Other revenues | $ | 749 |
| | $ | 1,268 |
| | $ | 1,413 |
|
| Total | 749 |
| | 1,268 |
| | 1,413 |
|
International revenues:(1) | | | |
| | |
|
| Net dialysis patient service revenues | 437 |
| | 323 |
| | 202 |
|
| Other revenues | 10 |
| | 5 |
| | 6 |
|
| Total | 447 |
| | 328 |
| | 208 |
|
Total net revenues:(1) | 1,196 |
| | 1,596 |
| | 1,621 |
|
| Operating expenses and charges: |
|
| |
| |
|
|
| Operating and other general expenses | 1,302 |
| | 1,711 |
| | 1,686 |
|
| Goodwill impairment | 3 |
| | 36 |
| | 28 |
|
| Investment and other asset impairments | 17 |
| | 295 |
| | 15 |
|
| Gain on changes in ownership changes, net | (32 | ) | | (6 | ) | | (374 | ) |
| Total operating expenses and charges | 1,290 |
| | 2,036 |
| | 1,355 |
|
| Total ancillary services and strategic initiatives operating (loss) income | $ | (94 | ) | | $ | (439 | ) | | $ | 267 |
|
| | | | | | |
| U.S. operating loss | $ | (70 | ) | | $ | (110 | ) | | $ | (65 | ) |
| Reconciliation of non-GAAP: | | | |
| | |
|
| Restructuring charges | 11 |
| | — |
| | — |
|
| Gain on changes in ownership interests, net | (34 | ) | | — |
| | — |
|
| Goodwill impairment | — |
| | 35 |
| | 28 |
|
| Impairment of assets | 17 |
| | 15 |
| | — |
|
| Accruals for legal matters | — |
| | — |
| | 16 |
|
Adjusted operating loss(2) | $ | (75 | ) | | $ | (60 | ) | | $ | (21 | ) |
| | | | | | |
| International operating (loss) income | $ | (23 | ) | | $ | (329 | ) | | $ | 332 |
|
| Reconciliation of non-GAAP: | | | |
| | |
|
| Goodwill impairment | 3 |
| | — |
| | — |
|
| Impairment of investment | — |
| | 280 |
| | 15 |
|
| Loss (gain) on changes in ownership interests, net | 1 |
| | (6 | ) | | (374 | ) |
| Equity investment loss: | | | | | |
| Loss due to business sale in APAC JV | 9 |
| | — |
| | — |
|
| Loss due to impairments in APAC JV | 8 |
| | 6 |
| | — |
|
| Loss related to restructuring charges | — |
| | 1 |
| | — |
|
| Restructuring charges | — |
| | 2 |
| | — |
|
Adjusted operating loss(2) | $ | (3 | ) | | $ | (46 | ) | | $ | (27 | ) |
Total adjusted ancillary services and strategic initiatives loss(2) | $ | (78 | ) | | $ | (107 | ) | | $ | (48 | ) |
|
| | | | | | | | | | | | | | |
| | Year ended December 31, | | Annual change |
| | 2019 | | 2018 | | Amount | | Percent |
| | (dollars in millions) | | |
| Revenues: | | | | | | | |
| U.S. ancillary | $ | 464 |
| | $ | 749 |
| | $ | (285 | ) | | (38.1 | )% |
| International | 508 |
| | 447 |
| | 61 |
| | 13.6 | % |
| Total ancillary services revenues | $ | 972 |
| | $ | 1,196 |
| | $ | (224 | ) | | (18.7 | )% |
| | | | | | | | |
| Operating income (loss): | | | | | | | |
| U.S. ancillary | $ | (66 | ) | | $ | (70 | ) | | $ | 4 |
| | 5.7 | % |
| International | (123 | ) | | (23 | ) | | (100 | ) | | (434.8 | )% |
| Total ancillary services loss | $ | (189 | ) | | $ | (94 | ) | | $ | (95 | ) | | (101.1 | )% |
| | | | | | | | |
Adjusted operating income (loss)(1): | | | | | | | |
| U.S. ancillary | $ | (66 | ) | | $ | (75 | ) | | $ | 9 |
| | 12.0 | % |
| International | 2 |
| | (3 | ) | | 5 |
| | 166.7 | % |
Total adjusted operating income (loss)(1): | $ | (64 | ) | | $ | (78 | ) | | $ | 14 |
| | 17.9 | % |
Certain columns, rows or percentages may not sum or recalculate due to the use of rounded numbers.
| |
| (1) | On January 1, 2018, we adopted Revenue from Contracts with Customers (Topic 606) using the cumulative effect method for those contracts that were not substantially completed asFor a reconciliation of January 1, 2018. Results related to performance obligations satisfied beginning on and after January 1, 2018 are presented under Topic 606, while results related to the satisfactionadjusted operating income by reportable segment, see "Reconciliations of performance obligations in prior periods continue to be reported in accordance with our historical accounting under Revenue Recognition (Topic 605). See Notes 1 and 2 of the consolidated financial statements for further discussion of our adoption of Topic 606.
non-GAAP measures" section below. |
Revenues:
| |
(2) | For the periods presented in the table above adjusted operating loss is defined as operating loss before certain items which we do not believe are indicative of ordinary results, including goodwill impairment charges, investment and other asset impairments, restructuring charges, gains on ownership changes and accruals for legal matters. Adjusted operating loss as so defined is a non-GAAP measure and is not intended as a substitute for GAAP operating (loss) income. We have presented these adjusted amounts because management believes that these presentations enhance a user’s understanding of our normal consolidated operating (loss) income by excluding certain items which we do not believe are indicative of our ordinary results of operations. As a result, adjusting for these amounts allows for comparison to our normalized prior period results. |
Revenues
AncillaryU.S. ancillary services and strategic initiatives revenues for 2018 decreased by approximately $400 million, or 25.1%, as compared to 2017. This decrease was primarily due to a decline in volume in our pharmacy business due to changes in calcimimetics reimbursement, as well as the restructuringclosure of our pharmacy business, as discussed above, a decreasedistribution operations in our shared savings revenue from our ESCO joint ventures2018 and a decrease in revenue related to the sale of our direct primary care business in the second quarter of 2018.2018, as well as decreases in revenues at Vively Health, our ESCO joint ventures and DaVita Clinical Research. These decreases were partially offset by an increase in revenues from ourat DaVita IKC,
primarily due to an increase in special needs plans revenues. In addition, international expansionrevenues increased due to acquired and non-acquired treatment growth and an increase in DaVita IKC revenues from special needs plans.as we continue to expand internationally.
Ancillary services and strategic initiatives revenues for 2017 decreased by approximately $25 million, or 1.5%, as compared to 2016. This decrease was primarily related to a decrease in volume in our pharmacy business, partially offset by an increase in pharmaceutical rates, an increase in DaVita IKC special needs plan revenues, an increase in shared savings revenue recognized by our ESCO joint ventures and an increase in revenues from expansions in our international business and other strategic initiatives.
Operating and general expenses
Ancillary services and strategic initiativesCharges impacting operating and general expenses for 2018, which included restructuring charges of $11 million related to our pharmacy business, an equity investment loss on the sale of our India business in our APAC JV of $9 million and an equity investment loss of $8 million related to impairments at our APAC JV, decreased by approximately $409 million compared to 2017, which included restructuring charges in our international business of $3 million and an equity investment loss of $6 million for goodwill impairments at our APAC JV. Excluding these items from their respective periods, ancillary services and strategic initiatives adjusted operating and general expenses decreased by $428 million compared to 2017. This decrease was primarily due to a decrease in pharmaceutical costs due to decreased volume related to the changes in calcimimetics reimbursement and restructuring at our pharmacy business, as discussed above, a decrease in expenses related to the sale of our direct primary care business and decreases in labor and benefit costs and professional fees. These decreases in operating expenses were partially offset by an increase in expenses associated with growth in our international operations, an increase in medical costs at DaVita IKC related to the cost of calcimimetics and an increase in members in our special needs plans.
Ancillary services and strategic initiatives operating and general expenses for 2017, which included restructuring charges in our international business of $3 million, as discussed below, and an equity investment loss of $6 million for goodwill impairments at our APAC JV, increased by approximately $25 million from 2016, which included an estimated accrual for certain legal matters of $16 million. Excluding these items from their respective periods, ancillary services and strategic initiatives adjusted operating and general expenses increased by $32 million. This increase in adjusted operating and general expenses was primarily related to an increase in medical costs at DaVita IKC, an increase in labor and benefits costs and additional expenses associated with our international dialysis growth, including losses from adverse changes in foreign exchange rates included in equity investment income, partially offset by a decrease in pharmaceutical costs due to decreased volume in our pharmacy services business.income:
Goodwill impairment charges. During the year ended December 31, 2018,first and third quarter of 2019, we recognized a goodwill impairment chargecharges of $3$41 million atand $79 million, respectively, in our German other health operations, and during the year ended December 31, 2017, we recognized a goodwill impairment charge of $2 million at one of our international kidney care businesses.business. The first quarter charge resulted primarily from a change in relevant discount rates, as well as a decline in current and expected future patient census and an increase in first quarter and expected future costs, principally due to wage increases expected to result from recently announced legislation. The third quarter incremental charge recognized in the Germany kidney care business resulted from changes and developments in our outlook for this business since our last assessment. These primarily concern developments in the business in response to evolving market conditions and changes in our expected timing and ability to mitigate them.
During the years ended December 31, 20172019 and December 31, 2016,2018, we also recognized goodwill impairment charges of $35$5 million and $28$3 million, respectively, at our vascular access reporting unit. TheseGerman other health operations. See further discussion of these impairment charges resulted primarily from changes in future governmental reimbursement rates for this business and our then-evolving plans and expected abilityreporting units that remain at risk of goodwill impairment in Note 10 to mitigate them. As of December 31, 2017, there was no goodwill remaining at our vascular access reporting unit.the consolidated financial statements.
Restructuring charges and other impairments.During the year ended December 31, 2018, we announced a plan to restructure our pharmacy business as discussed above.due to changes in the oral pharmacy space, including reimbursement rate pressures that negatively affected the economics of our pharmacy services business. This included transitioning the customer service and fulfillment functions of this business to third parties and closing our distribution operation, which resulted in a decline in revenues and costs in 2018. As a result of this plan,closure, in 2018 we recognized restructuring charges of $11 million which are included in operating and other general expenses. We also recognized other asset impairment charges of $17 million and $15 million in 2018 and 2017, respectively, related to the restructuring of our pharmacy business.
During the year ended December 31, 2017, we recognized restructuring charges related to our international business of $2 million and recognized equity investment losses of $1 million related to restructuring charges at our APAC JV. These restructuring charges were related to a reorganization of our international general and administrative infrastructure at the global, regional and country level in order to improve efficiency.
During the year ended December 31, 2017, we recognized a non-cash other-than-temporary impairment charge of $280 million on our investment in the APAC JV. This charge resulted from changes in our expectations for the joint venture based on continuing market research and assessments by both us and DaVita Care Pte. Ltd. (the APAC JV) concerning the size of the addressable market available to the joint venture at attractive risk-adjusted returns. We estimated the fair value of our retained interest in the APAC JV with the assistance of an independent third party valuation firm based on information available to management as of December 31, 2017.
During the year ended December 31, 2016, we recognized an impairment of $15 million related to an investment in one of our international reporting units.
Gain on changes in ownership interests, net.We Effective June 1, 2018, we sold 100% of the stock of Paladina Health, our direct primary care business effective June 1, 2018 and recognized a gain of approximately $34 million on this transaction. In addition, we recognized a loss of approximately $1 million related to the unwinding of an international business in the second quarter of 2018.
DuringOperating loss and adjusted operating loss:
U.S. ancillary services operating loss was impacted by the year ended December 31, 2017, we recognized a $6 million non-cash gain relatedcharges discussed above, in addition to the 2016 formation of the APAC JV which resulted from a change in estimate for post-closing adjustments that were pending at the formation of this joint venture.
In 2016, we deconsolidated our Asia Pacific dialysis business and recognized an initial non-cash non-taxable estimated gain of $374 million on our retained investment in the APAC JV net of contingent obligations as a result of adjusting the carrying value of our retained interest in the APAC JV to our proportionate share of the estimated fair value of the business.
Segment operating (loss) income
Ancillary services and strategic initiatives operating results for 2018, which included a net gain on changes in ownership interests of $32 million, other asset impairment charges of $17 million and restructuring charges of $11 million related to our pharmacy business, an equity investment loss due toon the sale of our India business in our APAC JV of $9 million and an equity investment loss of $8 million related to impairments at our APAC JV of $8 millionJV. Both U.S. ancillary services operating loss and adjusted operating loss were impacted by a goodwill impairment charge of $3 million, increased by approximately $345 million from the same period in 2017, which included goodwill impairment charges of $35 milliondecrease related to our vascular access reporting unit, an impairment of $280 million on our investmentpharmacy distribution ceasing operations in the APAC JV, an asset impairment of $15 million related to the restructuring of our pharmacy business, an equity investment loss of $6 million related to goodwill impairments at our APAC JV, restructuring charges2018, as described above, and increases in our international business of $3 million, and an adjustment to the gain on the 2016 ownership change of our APAC JV of $6 million. Excluding these items from their respective periods, adjusted operating losses decreased by $29 million, primarily due to an improvement in our international business, an increase fromresults for DaVita IKC revenues from special needs plans,and DaVita Clinical Research, partially offset by a decreasedecreases in our shared savings revenue fromoperating results at Vively Health and at our ESCO joint ventures, as described above.
Ancillary services and strategic initiatives operating results for 2017, which included goodwill impairment charges of $35 million related to our vascular access reporting unit, an impairment of $280 million on our investment in the APAC JV, an asset impairment of $15 million related to the restructuring of our pharmacy business, an equity investment loss of $6 million related to goodwill impairments at our APAC JV, restructuring charges in our international business of $3 million, and an adjustment to the gain on the 2016 ownership change of our APAC JV of $6 million, decreased by approximately $706 million from 2016, which included an estimated gain on the ownership change of our APAC JV of $374 million, goodwill impairment charges of $28 million at our vascular access reporting unit, estimated accruals for legal matters of $16 million and an investment impairment of $15 million. Excluding these items from their respective periods, adjustedventures. International operating losses increased by $59 million, primarily due to a decrease in revenuesthe goodwill impairment in our pharmacy services business, an increase in medical costs, higher labor and benefits costs, and additional expenses associated with our international operations, partially offset by an increase in DaVita IKC special needs plan revenues, an increase in shared savings revenue recognized by our ESCO joint ventures, an increase in revenues from expansionGermany businesses. International adjusted operating results improved over 2018 due to growth in our international business and a decrease in pharmaceutical costs due to decreased volume in our pharmacy services business.benefited from cost efficiencies implemented.
Corporate level charges
Debt expense. Debt expense for 2018, 2017, and 2016 consisted of interest expense of approximately $462 million, $407 million and $394 million, respectively, and amortization and accretion of debt discounts and premiums, amortization of deferred financing costs and amortization of interest rate cap agreements of approximately $26 million, $24 million, and $20 million, respectively. The increase in debt expense in 2018 as compared to 2017 was primarily due to an increase in our average interest rate and an increase in our average outstanding debt balance. Our overall weighted average effective interest rate in 2018 was 4.96% as compared to 4.70% in 2017.
The increase in debt expense in 2017 as compared to 2016 was primarily due to an increase in our average interest rate, partially offset by a decrease in our average outstanding debt balance. Our overall weighted average effective interest rate in 2017 was 4.70% as compared to 4.43% in 2016.
Corporate administrative support. support
Corporate administrative support consists primarily of labor, benefits and long-term incentive compensation expense, as well as professional fees for departments which provide support to all of our various operating lines of business. This isThese expenses are partially offset by internal management fees charged to our other lines of business for that support. Corporate administrative support expenses are included in general and administrative expenses on our consolidated income statement.
Corporate administrative support costs were approximately $90expenses increased $2 million or 2.2% in 2018 and $45 million in 2017. Corporate administrative support costs increased $45 million2019 primarily due to an increase in long-term incentive compensation expense due to the adoption of a retirement policy for certain executive officers, as discussed below in "Long-term incentive compensation", as well as a reduction in internal management fees charged to our ancillary lines ofpharmacy business partiallywhich ceased operations in 2018. This increase was offset by a decrease in legal fees.
Corporate administrative support costs were approximately $45 million in 2017 and $14 million in 2016. Corporate administrative support costs increased $31 million due to a decrease in internal management fees charged to our ancillary lines of business and increases in long-term incentive compensation expense and labor and benefits expenses, partially offset by decreases in professional fees and other general and administrative expenses.2019 resulting from the adoption of a retirement policy for certain officers of the Company in 2018.
Other income.
Corporate level charges
|
| | | | | | | | | | | | | | |
| | Year ended December 31, | | Annual change |
| | 2019 | | 2018 | | Amount | | Percent |
| | (dollars in millions) | | |
| Debt expense | $ | (444 | ) | | $ | (487 | ) | | $ | 43 |
| | 8.8 | % |
| Debt prepayment, refinancing and redemption charges | $ | (33 | ) | | $ | — |
| | $ | (33 | ) | | |
| Other income | $ | 29 |
| | $ | 10 |
| | $ | 19 |
| | 190.9 | % |
| Effective income tax rate | 23.4 | % | | 24.6 | % | | | | (1.2 | )% |
Effective income tax rate from continuing operations attributable to
DaVita Inc.(1) | 28.3 | % | | 29.2 | % | | | | (0.9 | )% |
| Net income attributable to noncontrolling interests | $ | 210 |
| | $ | 174 |
| | $ | 36 |
| | 20.7 | % |
Other income was approximately $10 million in 2018, $18 million in 2017 and $8 million in 2016, and consisted principally of interest income on cash and cash-equivalents and short- and long-term investments, other non-operating gains from investment transactions, and foreign currency transaction gains and losses. Other income in 2018 as compared to 2017 | |
| (1) | For a reconciliation of effective income tax rate from continuing operations attributable to DaVita Inc., see "Reconciliations of non-GAAP measures" section below. |
Debt expense
Debt expense decreased approximately $8 million, primarily due to an increase of recognized losses on the sale and market valuation of investments and an increase in foreign currency transaction losses. Other income in 2017 as compared to 2016 increased approximately $10 million primarily due to a decrease in foreign currency transaction losses.
Provision for income taxes. The provision for income taxes for 2018, 2017 and 2016 represented an effective annualized tax rate of 24.6%, 23.1% and 26.6% of income from continuing operations, respectively. The 2018 effective tax rate is higher than the 2017 effective tax rate primarily due to the fact that the 2017 effective tax rate reflects a $252 million tax benefit recognized in 2017 related to the enactment of the Tax Cuts and Jobs Act in 2017 (“2017 Tax Act”). Excluding this item, our effective tax rate from continuing operations for 2017 was 41.1%. The decrease in our effective tax rate in 2018 compared to this adjusted effective income tax rate in 2017 of 41.1% was primarily driven by the lower corporate statutory tax rate of 21%,outstanding debt balance, partially offset by an increase in certain items that are no longer deductible under the 2017 Tax Act. Theoverall weighted average effective taxinterest rate on our debt in 2019. Our overall weighted average effective interest rate in 20162019 was lower than the 2017 adjusted effective tax rate of 41.1%, primarily due5.01% compared to the gain on the APAC JV ownership changes, partially offset by goodwill impairment charges, as discussed above.4.96% in 2018. See Note 13 to the consolidated financial statements for further information.information on components of our debt.
Debt prepayment, refinancing and redemption charges
We incurred debt prepayment, refinancing and redemption charges of $33 million in 2019 as a result of the repayment of all principal balances outstanding on our prior senior secured credit facilities and the redemption of our 5.75% senior notes. This consisted of $21 million recognized in the third quarter of 2019 related to debt discount and deferred financing cost write-offs associated with the portion of our prior senior secured debt that was paid in full and redemption charges on our 5.75% senior notes, as well as $12 million recognized in the second quarter of 2019 related to the accelerated amortization of debt discount and deferred financing costs associated with the portion of our prior senior secured debt that was mandatorily prepaid in or shortly after the second quarter of 2019 using proceeds from the sale of DMG and prior extensions of that debt.
Other income
Other income consists primarily of interest income on cash and cash equivalents and short- and long-term investments, realized and unrealized gains and losses recognized on investments, and foreign currency transaction gains and losses. Other income increased in 2019 primarily due to the increase in our holdings of cash and cash equivalents and short-term investments in 2019. Noncontrolling interestsProvision for income taxes
The effective income tax rate and effective income tax rate from continuing operations attributable to DaVita Inc. decreased in 2019 primarily due to a decrease in our estimated blended state tax rate and the lower nondeductible advocacy costs in 2019 as compared to the costs incurred in 2018 to oppose certain legislative and ballot initiatives.
Net income attributable to noncontrolling interests for 2018, 2017 and 2016 was approximately $174 million, $167 million and $153 million, respectively. The increase in noncontrolling interests in 2018 as compared to 2017 was primarily due to an increase in earnings at our DMG physician groups offset by a decrease in noncontrolling interests due to one-time items impacting 2017 including the impairment of our vascular access reporting unit, which reduced income to noncontrolling interests by $10 million, partially offset by the additional income to noncontrolling interests due to the net gain on the settlement with the VA of $24 million.
The increase in income attributable to noncontrolling interests in 20172019 as compared to 20162018 was primarily due to additionalimproved earnings at certain U.S. dialysis partnerships and an increase in the number of such partnerships.
Reconciliations of non-GAAP measures
The following tables provide reconciliations of adjusted operating income to noncontrolling interests relatedoperating income as presented on a U.S. generally accepted accounting principles (GAAP) basis for our U.S. dialysis reportable segment as well as for our U.S. ancillary services, our international business, and for our total ancillary services which combines them and is disclosed as our other segments category. These non-GAAP or “adjusted” measures are presented because management believes these measures are useful adjuncts to, the net gain on the settlement with the VA of $24 million, partially offset by the impairment ofbut not alternatives for, our vascular access reporting unit, which impacted income to noncontrolling interests by $10 million in 2017 and $8 million in 2016, for a net impact of $2 million.GAAP results.
The percentageSpecifically, management uses adjusted operating income to compare and evaluate our performance period over period and relative to competitors, to analyze the underlying trends in our business, to establish operational budgets and forecasts and for incentive compensation purposes. We believe this non-GAAP measure is also useful to investors and analysts in evaluating our performance over time and relative to competitors, as well as in analyzing the underlying trends in our business. We also believe this presentation enhances a user's understanding of net U.S. dialysisour normal operating income by excluding certain items which we do not believe are indicative of our ordinary results of operations.
In addition, our effective income tax rate on income from continuing operations attributable to DaVita Inc. excludes noncontrolling owners' income, which primarily relates to non-tax paying entities. We believe this adjusted effective income tax rate is useful to management, investors and related lab services revenues generatedanalysts in evaluating our performance and establishing expectations for income taxes incurred on our ordinary results attributable to DaVita Inc.
It is important to bear in mind that these non-GAAP “adjusted” measures are not measures of financial performance under GAAP and should not be considered in isolation from, dialysis-related joint ventures was approximately 25% in 2018, 24% in 2017 and 23% in 2016.nor as substitutes for, their most comparable GAAP measures.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2019 |
| | U.S.
dialysis | | Ancillary services | | Corporate
administration | | |
| | | U.S. | | International | | Total | | | Consolidated |
| | (dollars in millions) |
| Operating income | $ | 1,925 |
| | $ | (66 | ) | | $ | (123 | ) | | $ | (189 | ) | | $ | (92 | ) | | $ | 1,643 |
|
| Goodwill impairment | | | | | 125 |
| | 125 |
| | | | 125 |
|
| Adjusted operating income | $ | 1,925 |
| | $ | (66 | ) | | $ | 2 |
| | $ | (64 | ) | | $ | (92 | ) | | $ | 1,768 |
|
Certain columns or rows may not sum or recalculate due to the use of rounded numbers.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2018 |
| | U.S.
dialysis | | Ancillary services | | Corporate
administration | | |
| | | U.S. | | International | | Total | | | Consolidated |
| | (dollars in millions) |
| Operating income | $ | 1,710 |
| | $ | (70 | ) | | $ | (23 | ) | | $ | (94 | ) | | $ | (90 | ) | | $ | 1,526 |
|
| Restructuring charges | | | 11 |
| | | | 11 |
| | | | 11 |
|
(Gain) loss on changes in ownership interests, net | (28 | ) | | (34 | ) | | 1 |
| | (33 | ) | | | | (61 | ) |
| Goodwill impairment | | | | | 3 |
| | 3 |
| | | | 3 |
|
| Impairment of assets | | | 17 |
| | | | 17 |
| | | | 17 |
|
Equity investment loss due to business sale in APAC JV | | | | | 9 |
| | 9 |
| | | | 9 |
|
Equity investment loss due to impairments in APAC JV | | | | | 8 |
| | 8 |
| | | | 8 |
|
| Adjusted operating income | $ | 1,682 |
| | $ | (75 | ) | | $ | (3 | ) | | $ | (78 | ) | | $ | (90 | ) | | $ | 1,513 |
|
Certain columns or rows may not sum or recalculate due to the use of rounded numbers.
|
| | | | | | | |
| | Year ended December 31, |
| | 2019 | | 2018 |
| | (dollars in millions) |
| Income from continuing operations before income taxes | $ | 1,195 |
| | $ | 1,048 |
|
| Less: Noncontrolling owners’ income primarily attributable to non-tax paying entities | (210 | ) | | (167 | ) |
| Income from continuing operations before income taxes attributable to DaVita Inc. | $ | 986 |
| | $ | 881 |
|
| | | | |
| Income tax expense for continuing operations | $ | 280 |
| | $ | 258 |
|
| Less: Income tax attributable to noncontrolling interests | (1 | ) | | (1 | ) |
| Income tax expense from continuing operations attributable to DaVita Inc. | $ | 279 |
| | $ | 257 |
|
| | | | |
| Effective income tax rate on income from continuing operations attributable to DaVita Inc. | 28.3 | % | | 29.2 | % |
Certain columns or rows may not sum or recalculate due to the use of rounded numbers.
Accounts receivable
Our consolidated accounts receivable balances at December 31, 20182019 and December 31, 20172018, were $1.859$1.796 billion and $1.715$1.859 billion, respectively, representing approximately 6258 days and 5762 days of revenue (DSO), respectively, net of the allowance for uncollectible accounts. The increasedecrease in consolidated DSO was primarily due to highera decrease of two days of DSO in our U.S. dialysis business primarily due to improved collections related to certain payors as well as improved DSO at our international operations and the cessation of operations at our pharmacy business. Historically, our pharmacy business experienced relatively lower DSO than the rest of our business.operations. Our DSO calculation is based on the current quarter’s average revenues per day. There were no significant changes during 20182019 from 20172018 in the amount of unreserved accounts receivable over one year old or the amounts pending approval from third-party payors.
As of December 31, 20182019 and 2017,2018, our net patient services accounts receivable balances that are more than six months old represents approximately 18% and 21% of our dialysis accounts receivable balances, respectively. The decrease was primarily due to collections at DaVita Health Solutions and in certain international operations.balances. Substantially all revenue realized is from government and commercial payors, as discussed above. There were no significant unreserved balances over one year old. Less than 1% of our revenues are classified as patient pay.
Amounts pending approval from third-party payors associated with Medicare bad debt claims as of December 31, 20182019 and 2017,2018, other than the standard monthly billing, consisted of approximately $136$138 million and $104$136 million, respectively, and are classified as other receivables. A significant portion of our Medicare bad debt claims are typically paid to us before the Medicare fiscal intermediary audits the claims but are subject to adjustment based upon the actual results of these audits. Such audits typically occur one to four years after the claims are filed.
Liquidity and capital resources
The following table summarizes our major sources and uses of cash, cash equivalents and restricted cash:
|
| | | | | | | | | | | | | | |
| | Year ended December 31, | | Annual change |
| | 2019 | | 2018 | | Amount | | Percent |
| | (dollars in millions) | | |
| Net cash provided by operating activities: | | | | | | | |
| Net income | $ | 1,021 |
| | $ | 333 |
| | $ | 688 |
| | 206.6 | % |
| Non-cash items | 964 |
| | 1,340 |
| | (376 | ) | | (28.1 | )% |
| Working capital | 111 |
| | 96 |
| | 15 |
| | 15.6 | % |
| Other | (24 | ) | | 2 |
| | (26 | ) | | (1,300.0 | )% |
| | $ | 2,072 |
| | $ | 1,772 |
| | $ | 300 |
| | 16.9 | % |
| | | | | | | | |
| Net cash provided by (used in) investing activities: | | | | | | | |
| Capital expenditures: | | | | | | | |
| Routine maintenance/IT/other | $ | (375 | ) | | $ | (459 | ) | | $ | 84 |
| | 18.3 | % |
| Development and relocations | (391 | ) | | (528 | ) | | 137 |
| | 25.9 | % |
| Acquisition expenditures | (101 | ) | | (183 | ) | | 82 |
| | 44.8 | % |
| Proceeds from sale of self-developed properties | 58 |
| | 45 |
| | 13 |
| | 28.9 | % |
DMG sale net proceeds received at closing, net of DMG cash divested | 3,825 |
| | — |
| | 3,825 |
| | |
| Other | (20 | ) | | 119 |
| | (139 | ) | | (116.8 | )% |
| | $ | 2,995 |
| | $ | (1,006 | ) | | $ | 4,001 |
| | 397.7 | % |
| | | | | | | | |
| Net cash used in financing activities: | | | | | | | |
| Debt (payments) issuances, net | $ | (2,080 | ) | | $ | 695 |
| | $ | (2,775 | ) | | (399.3 | )% |
| Distributions to noncontrolling interest | (233 | ) | | (196 | ) | | (37 | ) | | (18.9 | )% |
| Contributions from noncontrolling interest | 57 |
| | 52 |
| | 5 |
| | 9.6 | % |
| Stock award exercises and other share issuances | 11 |
| | 14 |
| | (3 | ) | | (21.4 | )% |
| Share repurchases | (2,384 | ) | | (1,162 | ) | | (1,222 | ) | | (105.2 | )% |
| Other | (68 | ) | | (28 | ) | | (40 | ) | | (142.9 | )% |
| | $ | (4,696 | ) | | $ | (625 | ) | | $ | (4,071 | ) | | (651.4 | )% |
| | | | | | | | |
| Total number of shares repurchased | 41,020,232 |
| | 16,844,067 |
| | 24,176,165 |
| | 143.5 | % |
Certain columns or rows may not sum or recalculate due to the use of rounded numbers.
Consolidated cash flows
Consolidated cash flows from operating activities for 2019 were $2,072 million, of which $1,973 million was from continuing operations, compared with consolidated operating cash flows for the same period in 2018 of $1,772 million, of which $1,481 million was from continuing operations. The increase in cash flow from continuing operations was primarily driven by an increase in operating income in 2019 as compared to 2018, driven by decreases in pharmaceutical and advocacy costs, as well as a decrease in DSO of approximately four days and cash tax payments.
Cash flows from investing activities in 2019 increased $4,001 million compared to 2018 primarily due to the net cash proceeds received from the DMG sale, which closed in June 2019, as well as a decrease in capital and acquisition expenditures. We developed 38 fewer centers and acquired 23 fewer centers in 2019 compared to 2018. See below for additional information regarding the growth in our dialysis centers.
Cash flows used in financing activities increased $4,071 million in 2019 compared to 2018. Significant financing activities included net payments of $2,080 million on debt during 2019. Net debt payments primarily consisted of principal prepayments totaling $5,142 million on our term debt under our prior senior secured credit facility funded primarily by the net proceeds from the DMG sale and the redemption of all of our outstanding 5.75% senior notes due in 2022 for an aggregate cash payment consisting of principal and redemption premium of $1,262 million, partially offset by funding of our term debt of $4,500 million under our new senior secured credit facility. In addition, we incurred deferred financing costs related to our new
term debt and a cap premium fee for our forward interest rate cap agreements. By comparison, 2018 included net advances of $695 million, which included a $995 million draw on our prior Term Loan A-2 and net payments of $125 million on our prior revolving line of credit, net of scheduled principal payments on our term debt under our prior senior secured credit facility. See further discussion in Note 13 to the consolidated financial statements related to debt activities. Cash flows used for share repurchases increased in 2019 as compared to 2018 primarily due to our modified Dutch auction tender offer (Tender Offer). See below for further information on our share repurchases.
Dialysis center capacity and growth
The table below shows the growth in our dialysis operations by number of dialysis centers owned or operated:
|
| | | | | | | | | | | |
| | U.S. | | International |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Number of centers operated at beginning of year | 2,664 |
| | 2,510 |
| | 241 |
| | 237 |
|
| Acquired centers | 7 |
| | 18 |
| | 16 |
| | 28 |
|
| Developed centers | 115 |
| | 152 |
| | 2 |
| | 3 |
|
Net change in non-owned managed or administered centers(1) | (1 | ) | | (5 | ) | | — |
| | — |
|
Sold and closed centers(2) | (10 | ) | | (2 | ) | | (1 | ) | | (2 | ) |
Closed centers(3) | (22 | ) | | (9 | ) | | — |
| | — |
|
| Net change in Asia Pacific joint venture centers | — |
| | — |
| | 1 |
| | (25 | ) |
| Number of centers operated at end of year | 2,753 |
| | 2,664 |
| | 259 |
| | 241 |
|
| |
| (1) | Includes dialysis centers in which we own a noncontrolling interest or which are wholly-owned by third parties. |
| |
| (2) | Dialysis centers that were sold and/or closed for which patients were not retained. |
| |
| (3) | Dialysis centers that were closed for which the majority of patients were retained and transferred to existing outpatient dialysis centers. |
Stock repurchases
The following table summarizes our repurchases of our common stock during the years ended December 31, 2019 and 2018:
|
| | | | | | | | | | | | | | | | | | | | | |
| | 2019 | | 2018 |
| | Shares repurchased | | Amount paid
(in millions) | | Paid per share | | Shares repurchased | | Amount paid
(in millions) | | Paid per share |
Tender Offer(1) | 21,801,975 |
| | $ | 1,234 |
| | $ | 56.61 |
| | — |
| | $ | — |
| | $ | — |
|
| Open market | 19,218,257 |
| | 1,168 |
| | 60.79 |
| | 16,844,067 |
| | 1,154 |
| | 68.48 |
|
| | 41,020,232 |
| | $ | 2,402 |
| | $ | 58.57 |
| | 16,844.067 |
| | $ | 1,154 |
| | $ | 68.48 |
|
| |
| (1) | The amount paid for shares repurchased associated with our Tender Offer during the year ended December 31, 2019 includes the clearing price of $56.50 per share plus related fees and expenses of $2 million. |
Subsequent to December 31, 2019, we have repurchased 290,904 shares of our common stock for $22 million at an average cost of $74.92 per share from January 1, 2020 through February 20, 2020. We retired all shares of common stock held in treasury effective December 31, 2019 and December 31, 2018.
See further discussion in Note 19 to the consolidated financial statements.
Available liquidity.liquidity
As of December 31, 2018,2019, our Kidney Care cash balance was $323 million$1.102 billion and Kidney Care alsowe had approximately $3$12 million in short-term investments. As of December 31, 2018, our DMG cash balance was $415 million and DMG2019, we also had approximately $4 million in short-term investments. As of December 31, 2018, we had $175 million drawn on ouran undrawn $1.0 billion revolving line of credit under our senior secured credit facilities, in addition to theof which approximately $14$13 million was committed for outstanding letters of credit. As of December 31, 2018, weWe also have approximately $23$60 million of additional outstanding letters of credit under a separate bilateral secured letter of credit facility and $0.2 million of committed outstanding letters of credit which are backed by a certificate of deposit.facility.
Consolidated cash flows from operations during 2018 was $1.8 billion, of which $1.5 billion was from continuing operations, compared withSee Note 13 to the consolidated cash flows from operations of $1.9 billionfinancial statements for 2017, of which $1.6 billion was from continuing operations. Consolidated cash flows decreased due to increases in DSO, cash interest payments, advocacy spend and the timing of other working capital items partially offset by a decrease in cash taxes. Cash flows from operations in 2018 included cash interest payments of approximately $489 million and cash tax payments of $93 million. Cash flows from operations in 2017 included cash interest payments of approximately $425 million and cash tax payments of $387 million.
Non-operating cash outflows in 2018 included $987 million for capital asset expenditures, including $528 million for new center developments and relocations and $459 million for maintenance and information technology. We also spent an additional $183 million for acquisitions. In addition, during 2018 we received $14 million associated with stock award exercises and other share issuances. We also made distributions to noncontrolling interests of $196 million and received contributions from noncontrolling interests of $52 million associated with new or existing joint ventures. We also repurchased a total of 16,844,067 sharescomponents of our common stock for $1.2 billion, or an average price of $68.48 per share, in 2018. In addition, we settled $8 million in share repurchases related to 2017. Our proceeds from the sale of self-developed properties in 2018 was $45 million.
Consolidated cash flows from operations during 2017 was $1.9 billion, of which $1.6 billion was from continuing operations, compared with cash flows from operations of $2.0 billion for 2016, of which $1.7 billion was from continuing operations. Consolidated cash flows declined due to an increase in DSO and the timing of other working capital items, partially offset by the payment received from the settlement with the VA, net of associated tax payments. Cash flows from operations in 2017 included cash interest payments of approximately $425 million and cash tax payments of $387 million. Cash flows from operations in 2016 included cash interest payments of approximately $407 million and cash tax payments of $339 million.
Non-operating cash outflows in 2017 included $905 million for capital asset expenditures, including $559 million for new center developments and relocations and $346 million for maintenance and information technology. We also spent an
additional $804 million for acquisitions in 2017. In addition, during 2017 we received $21 million associated with stock award exercises and other share issuances. We also made distributions to noncontrolling interests of $211 million, which included $24 million related to the noncontrolling interest portion of the VA settlement gain, and received contributions from noncontrolling interests of $75 million associated with new or existing joint ventures. We also repurchased a total of 12,966,672 shares of our common stock for $811 million, or an average price of $62.54 per share, of which $8 million was unsettled at December 31, 2017. Our proceeds from the sale of self-developed properties in 2017 was $58 million.
During 2018, in the U.S. we opened 152 dialysis centers, acquired 18 dialysis centers, closed and merged eight dialysis centers, closed two dialysis centers, sold one dialysis center, and terminated management and administrative services agreements covering five dialysis centers. In addition, our international dialysis operations acquired 28 dialysis centers, developed three dialysis centers, and closed two dialysis centers. Our APAC JV also acquired two dialysis centers, closed five dialysis centers and sold 22 dialysis centers.
During 2018, our DMG business acquired one primary care physician practice and four private medical practices.
In December 2017, we entered into an equity purchase agreement to sell our DMG division to Optum, a subsidiary of UnitedHealth Group Inc., subject to receipt of required regulatory approvals and other customary closing conditions. On December 11, 2018, we entered into an amendment to the equity purchase agreement, which, among other things, reduced the purchase price for DMG from $4.900 billion to $4.340 billion.
During 2017, in the U.S. we opened 121 dialysis centers, acquired 66 dialysis centers, including dialysis centers associated with the acquisition of Renal Ventures, closed and merged ten dialysis centers, closed nine dialysis centers, divested six dialysis centers, deconsolidated seven dialysis centers which we continue to operate under management services agreements, and terminated two management services agreements. In addition, our international dialysis operations acquired 68 dialysis centers, opened eight dialysis centers, and closed one dialysis center. Our APAC JV acquired two dialysis centers, opened nine dialysis centers and closed three dialysis centers.
During 2017, our DMG business acquired four primary care physician practices, including the acquisition of Magan, seven private medical practices and one independent physician association.
During the year ended December 31, 2018, we made mandatory principal payments under our senior secured credit facilities totaling $100 million on Term Loan A and $35 million on Term Loan B. During the year ended December 31, 2017, we made mandatory principal payments under our senior secured credit facilities totaling $88 million on Term Loan A and $35 million on Term Loan B.
Interest rate cap agreements
As of December 31, 2018, we maintain several interest rate cap agreements that were entered into in October 2015 with notional amounts totaling $3.5 billion. These cap agreements became effective June 29, 2018, have the economic effect of capping the LIBOR variable component of our interest rate at a maximum of 3.50% on an equivalent amount of ourlong-term debt and expire on June 30, 2020. As of December 31, 2018, the total fair value of these cap agreements was an asset of approximately $0.9 million. During the year ended December 31, 2018, we recognized debt expense of $4.3 million from these cap agreements and recorded a loss of $0.2 million in other comprehensive income due to a decrease in the unrealized fair value of these cap agreements.
Previously, we maintained othertheir interest rate cap agreements that were entered into in November 2014 with notional amounts also totaling $3.5 billion. These cap agreements had the economic effect of capping the LIBOR variable component of our interest rate at a maximum of 3.50% on an equivalent amount of our debt and expired on June 30, 2018. During the year ended 2018, we recognized debt expense of $4.1 million from these cap agreements and recorded an immaterial loss in other comprehensive income due to a decrease in the unrealized fair value of these cap agreements through expiration.
Other items
As of December 31, 2018, our Term Loan B debt bears interest at LIBOR plus an interest rate margin of 2.75%. Term Loan B is subject to an interest rate cap if LIBOR should rise above 3.50%. Term Loan A bears interest at LIBOR plus an interest rate margin of 2.00% and Term Loan A-2 bears interest at LIBOR plus an interest rate margin of 1.00%. The capped portion of Term Loan A if LIBOR should rise above 3.50% is $157.5 million. Both the uncapped portion of Term Loan A of $517.5 million and the entire balance of Term Loan A-2 are subject to the variability of LIBOR. Interest rates on our Senior Notes are fixed by their terms.
Our overall weighted average effective interest rate on the senior secured credit facilities at the end of 2018 was 5.11%, based upon the current margins in effect of 2.00% for Term Loan A, 1.00% for Term Loan A-2 and 2.75% for Term Loan B.
As of December 31, 2018, the interest rates were fixed on approximately 48% of our total debt, and were fixed and economically fixed, including via interest rate cap agreements, on approximately 82% of our total debt.
Our overall weighted average effective interest rate during the year ended December 31, 2018 was 4.96% and as of December 31, 2018 was 5.19%.
As of December 31, 2018, we had $175 million drawn on our $1.0 billion revolving line of credit under our senior secured credit facilities, in addition to approximately $14 million committed for outstanding letters of credit. As of December 31, 2018, we also have approximately $23 million of additional outstanding letters of credit under a separate bilateral secured letter of credit facility, and $0.2 million of committed outstanding letters of credit which are backed by a certificate of deposit.rates.
We believe that our cash flow from operations and other sources of liquidity, including from amounts available under our existingnew senior secured credit facilities and anticipated debt refinancing, as well as proceeds fromour access to the anticipated sale of our DMG business if consummated,capital markets, will be sufficient to fund our scheduled debt service
under the terms of our debt agreements and other obligations for the foreseeable future, including the next 12 months. However, ourOur primary recurrent sources of liquidity are cash from operations and cash from borrowings, which are subject to general, economic, financial, competitive, regulatory and other factors that are beyond our control, as described in Item 1A Risk Factors under the heading "The level of our current and future debt could have an adverse impact on our business, and our ability to generate cash to service our indebtedness and for other intended purposes depends on many factors beyond our control."
Goodwill
We elected to early adopt ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, effective January 1, 2017. The amendments in this ASU simplify the test for goodwill impairment by eliminating the second step in the assessment. All goodwill impairment tests performed since adoption of this ASU were performed under this new guidance.
During the year ended December 31, 2018, we performed annual and other impairment assessments for various reporting units. As a result of these assessments, we recognized a goodwill impairment charge of $3 million at our German other health operations during the year ended December 31, 2018. We also recognized a goodwill impairment charge of $2 million at one of our international kidney care businesses during the year ended December 31, 2017.
During the years ended December 31, 2017 and December 31, 2016, we recognized goodwill impairment charges of $35 million and $28 million, respectively, at our vascular access reporting unit. These charges resulted primarily from changes in future governmental reimbursement rates for this business and our then-evolving plans and expected ability to mitigate them. As of December 31, 2017, there was no goodwill remaining at our vascular access reporting unit.
Based on our most recent assessments, we determined that reductions in reimbursement rates, changes in actual or expected growth rates, or other significant adverse changes in expected future cash flows or valuation assumptions could result in goodwill impairment charges in the future for the following reporting units, which remain at risk of goodwill impairment as of December 31, 2018:
|
| | | | | | | | | | | | | |
| Reporting unit | | Goodwill
balance as of
December 31, 2018 | | Carrying amount
coverage(1) | | Sensitivities |
Operating
income(2) | | Discount
rate(3) |
| | | (in millions) | | | | | | |
| Germany Kidney Care | | $ | 403 |
| | 0.5 | % | | (1.5 | )% | | (10.3 | )% |
| Brazil Kidney Care | | $ | 39 |
| | 9.8 | % | | (2.5 | )% | | (7.3 | )% |
| Germany other health operations | | $ | 13 |
| | 8.1 | % | | (2.2 | )% | | (11.1 | )% |
| |
(1) | Excess of estimated fair value of the reporting unit over its carrying amount as of the latest assessment date. |
| |
(2) | Potential impact on estimated fair value of a sustained, long-term reduction of 3% in operating income as of the latest assessment date. |
| |
(3) | Potential impact on estimated fair value of an increase in discount rates of 100 basis points as of the latest assessment date. |
There were no major changes in the business, prospects, or expected future results of these reporting units from their latest assessment date through December 31, 2018.
Except as described above, none of our various other reporting units was considered at risk of significant goodwill impairment as of December 31, 2018. Since the dates of our last annual goodwill impairment tests, there have been certain developments, events, changes in operating performance and other changes in key circumstances that have affected our businesses. However, except as further described above, these did not cause management to believe it is more likely than not that the fair values of any of our reporting units would be less than their respective carrying amounts as of December 31, 2018.
Long-term incentive compensation
Long-term incentive program (LTIP) compensation includes both stock-based awards (principally stock-settled stock appreciation rights, restricted stock units and performance stock units) as well as long-term performance-based cash awards. Long-term incentive compensation expense, which was primarily general and administrative in nature, was attributed among our U.S. dialysis and related lab services business, corporate administrative support, and the ancillary services and strategic initiatives.
Our stock-based compensation expense for stock-settled awards are measured at the estimated fair value of awards on the date of grant and recognized on a cumulative straight-line basis over the vesting terms of the awards unless the stock awards are based on non-market based performance metrics, in which case expense is adjusted for expected ultimate payouts as of the end of each reporting period. Stock-based compensation expense for cash-settled awards is based on the estimated fair values as of the end of each reporting period. The expense for all stock-based awards is recognized net of expected forfeitures.
During 2018, we granted 1,902,652 stock-settled stock appreciation rights with an aggregate grant-date fair value of $30.9 million and a weighted-average expected life of approximately 4.2 years and 1,101,388 stock units with an aggregate grant-date fair value of $72.9 million and a weighted-average expected life of approximately 3.3 years. We did not grant any cash-settled stock-based awards during 2018.
For the year ended December 31, 2018, long-term incentive compensation expense of $85.8 million increased by approximately $23.8 million as compared to 2017. This increase in long-term incentive compensation expense was primarily due to the adoption of a retirement policy (Rule of 65 policy). The Rule of 65 policy generally provides that Section 16 executive officers that are a minimum age of 55 with five years of continuous service with the Company receive certain benefits with respect to their outstanding equity awards upon a qualifying retirement if the sum of their age plus years of service is greater than or equal to 65. These benefits include accelerated vesting of restricted stock unit awards, continued vesting of stock-settled stock appreciation rights and performance stock unit awards and an exercise window from the original vest date through the original expiration date regardless of continued employment, with pro rata vesting for a Rule of 65 retirement within one year of the award grant date. The adoption of the Rule of 65 policy resulted in a $14.7 million modification charge and a net acceleration of expense of $9.7 million during the year ended December 31, 2018 that is included in the expense amounts reported above. Future equity awards to Rule of 65 eligible executives will be expensed over the period during which risk of forfeiture exists.
For the year ended December 31, 2017, long-term incentive compensation expense of $62.0 million decreased by approximately $3.0 million as compared to 2016. This decrease in long-term incentive compensation expense was primarily due to cumulative revaluation of liability-based awards for reductions in estimated ultimate payouts, as well as the final vesting of a prior broad grant that is no longer contributing expense.
As of December 31, 2018, there was $99.9 million in total estimated but unrecognized long-term incentive compensation expense for LTIP awards outstanding, including $88.6 million relating to stock-based awards under our equity compensation plans. We expect to recognize the performance-based cash component of this LTIP expense over a weighted average remaining period of 0.8 years and the stock-based component of this LTIP expense over a weighted average remaining period of 1.5 years.
For the years ended December 31, 2018, 2017 and 2016, we received $8.0 million, $13.5 million and $28.4 million, respectively, in actual tax benefits upon the exercise of stock awards. Since we issue stock-settled stock appreciation rights rather than stock options, we did not receive cash proceeds from stock option exercises during the years ended December 31, 2018, 2017 and 2016.
Stock repurchases
We repurchased a total of 16,844,067 shares for $1.2 billion, or an average price of $68.48, during the year ended December 31, 2018. We also repurchased a total of 12,966,672 shares for $811 million, or an average price of $62.54, during the year ended December 31, 2017 and a total of 16,649,090 shares for $1.1 billion, or an average price of $64.41, during the
year ended December 31, 2016. Subsequent to December 31, 2018, we have not repurchased any shares of our common stock through February 22, 2019. We retired all shares held in treasury effective December 31, 2018 and December 31, 2017.
On July 11, 2018, our Board of Directors approved an additional share repurchase authorization in the amount of $1.4 billion. This share repurchase authorization was in addition to the $110 million remaining at that time under our Board of Directors' prior share repurchase authorization approved in October 2017. Accordingly, as of February 22, 2019, we have a total of $1.4 billion available under the current Board repurchase authorizations for additional share repurchases. Although these share repurchase authorizations do not have expiration dates, we remain subject to share repurchase limitations under the terms of our senior secured credit facilities and the indentures governing our senior notes.
Off-balance sheet arrangements and aggregate contractual obligations
In addition to the debt obligations and operating lease liabilities reflected on our balance sheet, we have commitments associated with operating leases and letters of credit, as well as potential obligations associated with our equity investments in nonconsolidated businesses and to dialysis centersventures that are wholly-owned by third parties. Substantially all of our U.S. dialysis facilities are leased. We have potential obligations to purchase the noncontrolling interests held by third parties in severalmany of our majority-owned joint venturespartnerships and other nonconsolidated entities. These obligations are in the form of put provisions that are exercisable at the third-party owners’ discretion within specified periods as outlined in each specific put provision. If these put provisions were exercised, we would be required to purchase the third-party owners’ equity interests, generally at either the appraised fair market value of the equity interests or in certain cases at a predetermined multiple of earnings or cash flows attributable to the equity interests put to us, which is intended to approximate fair value. The methodology we use to estimate the fair values of noncontrolling interests subject to put provisions assumes the higher of either a liquidation value of net assets or an average multiple of earnings, based on historical earnings, patient mix and other performance indicators that can affect future results, as well as other factors. The estimated fair values of noncontrolling interests subject to put provisions are a critical accounting estimate that involves significant judgments and assumptions and may not be indicative of the actual values at which the noncontrolling interests may ultimately be settled, which could vary significantly from our current estimates. The estimated fair values of noncontrolling interests subject to put provisions can fluctuate and the implicit multiple of earnings at which these noncontrolling interests obligations may be settled will vary significantly depending upon market conditions including potential purchasers’ access to the capital markets, which can impact the level of competition for dialysis and non-dialysis related businesses, the economic performance of these businesses and the restricted marketability of the third-party owners’ equity interests. The amount of noncontrolling interests subject to put provisions that employ a contractually predetermined multiple of earnings rather than fair value are immaterial. For additional information see Note 1817 to the consolidated financial statements.
We also have certain other potential commitments to provide operating capital to several dialysis centersbusinesses that are wholly-owned by third parties or businesses in which we own a noncontrolling equity interest as well as to physician-owned vascular access clinics or medical practices that we operate under management and administrative services agreements.
The following is a summary of these contractual obligations and commitments as of December 31, 2018:2019:
|
| | | | | | | | | | | | | | | | | | | |
| | 1 year | | 2-3
years | | 4-5
years | | After
5 years | | Total |
| | (dollars in millions) |
| Scheduled payments under contractual obligations: | | | | | | | | | |
| Long-term debt principal | $ | 1,907 |
| | $ | 3,345 |
| | $ | 1,283 |
| | $ | 3,336 |
| | $ | 9,871 |
|
| Interest payments on the senior notes | 237 |
| | 473 |
| | 401 |
| | 202 |
| | 1,313 |
|
Interest payments on Term Loan B(1) | 178 |
| | 263 |
| | — |
| | — |
| | 441 |
|
Interest payments on Term Loan A(2) | 15 |
| | — |
| | — |
| | — |
| | 15 |
|
Interest payments on Term Loan A-2(2) | 18 |
| | — |
| | — |
| | — |
| | 18 |
|
| Kidney Care capital lease obligations | 22 |
| | 49 |
| | 46 |
| | 166 |
| | 283 |
|
| Kidney Care operating leases | 483 |
| | 895 |
| | 745 |
| | 1,590 |
| | 3,714 |
|
| DMG capital lease obligations | 35 |
| | — |
| | — |
| | — |
| | 35 |
|
| DMG operating leases | 90 |
| | 154 |
| | 117 |
| | 267 |
| | 628 |
|
| | $ | 2,985 |
| | $ | 5,179 |
| | $ | 2,592 |
| | $ | 5,561 |
| | $ | 16,318 |
|
| Potential cash requirements under other commitments: | | | | | | | | | |
| Letters of credit | $ | 37 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 37 |
|
| Noncontrolling interests subject to put provisions | 624 |
| | 265 |
| | 113 |
| | 123 |
| | 1,125 |
|
| Non-owned and minority owned put provisions | 2 |
| | — |
| | 456 |
| | — |
| | 458 |
|
| Operating capital advances | 1 |
| | 2 |
| | 1 |
| | 1 |
| | 5 |
|
| Purchase commitments | 304 |
| | 571 |
| | 251 |
| | — |
| | 1,126 |
|
| | $ | 968 |
| | $ | 838 |
| | $ | 821 |
| | $ | 124 |
| | $ | 2,751 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2021-2022 | | 2023-2024 | | Thereafter | | Total |
| | (dollars in millions) |
| Scheduled payments under contractual obligations: | | | | | | | | | |
Long-term debt(1): |
|
| |
|
| |
|
| |
|
| |
|
|
| Principal payments | $ | 105 |
| | $ | 279 |
| | $ | 3,348 |
| | $ | 4,180 |
| | $ | 7,912 |
|
Interest payments on credit facilities and senior notes(1) | 336 |
| | 657 |
| | 622 |
| | 209 |
| | 1,824 |
|
Financing leases(2) | 25 |
| | 43 |
| | 49 |
| | 152 |
| | 269 |
|
Operating leases, including imputed interest(2) | 462 |
| | 945 |
| | 768 |
| | 1,511 |
| | 3,685 |
|
| | $ | 928 |
| | $ | 1,924 |
| | $ | 4,787 |
| | $ | 6,052 |
| | $ | 13,690 |
|
| Potential cash requirements under other commitments: | | | | | | | | | |
| Letters of credit | $ | 73 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 73 |
|
| Noncontrolling interests subject to put provisions | 829 |
| | 188 |
| | 106 |
| | 57 |
| | 1,180 |
|
| Non-owned and minority owned put provisions | 108 |
| | — |
| | 7 |
| | — |
| | 115 |
|
| Operating capital advances | 1 |
| | 2 |
| | 2 |
| | 5 |
| | 10 |
|
| Purchase commitments | 399 |
| | 624 |
| | — |
| | — |
| | 1,023 |
|
| | $ | 1,410 |
| | $ | 814 |
| | $ | 115 |
| | $ | 62 |
| | $ | 2,401 |
|
| |
| (1) | Based upon current LIBOR-basedSee Note 13 to the consolidated financial statements for components of our long-term debt and related interest rates in effect at December 31, 2018 plus an interest rate margin of 2.75% for Term Loan B.rates. |
| |
| (2) | Based upon current LIBOR-basedSee Note 14 to the consolidated financial statements for components of our leases and related interest rates in effect at December 31, 2018 plus an interest rate margin of 2.00% for Term Loan A and plus an interest rate margin of 1.00% for Term Loan A-2.rates. |
In addition to the commitments listed above, we have an agreement with Fresenius Medical Care (FMC) to purchase a certain amount of dialysis equipment, parts and supplies from FMC, which was extended through December 31, 2020. The actual amount of purchases in future years from FMC will depend upon a number of factors, including the operating requirements of our centers, the number of centers we acquire, and growth of our existing centers.
We also have an agreement with Baxter Healthcare Corporation (Baxter) that commits us to purchase a certain amount of peritoneal dialysis supplies at fixed prices through 2022.
In 2017, wethe Company entered into a Sourcing and Supply Agreement with Amgen USA Inc. (Amgen) that expires on December 31, 2022. Under the terms of thisthe agreement, wethe Company will purchase EPO from Amgen in amounts necessary to meet no less than 90% of ourits requirements for erythropoiesis stimulatingerythropoiesis-stimulating agents (ESAs) through the expiration of the contract with Amgen.contract. The actual amount of EPO that wethe Company will purchase will depend upon the amount of EPO administered during dialysis as prescribed by physicians and the overall number of patients that we serve.the Company serves.
The Company has an agreement with Fresenius Medical Care (FMC) to purchase a certain amount of dialysis equipment, parts and supplies from FMC, which extends through December 31, 2020. The Company also has agreements with Baxter Healthcare Corporation (Baxter) that commit the Company to purchase certain amounts of dialysis supplies at fixed prices through 2022. If the Company fails to meet the minimum purchase commitments under these contracts during any year, it is required to pay the difference to the supplier.
Settlements of approximately $49$83 million of existing income tax liabilities for unrecognized tax benefits, including interest, penalties and other long-term tax liabilities, are excluded from the above table as reasonably reliable estimates of their timing cannot be made.
Supplemental information concerning certain physician groups and unrestricted subsidiaries
The following information is presented as supplemental data as required by the indentures governing our senior notes.
We provide services to certain physician groups, including those within our DMG business, which while consolidated in our financial statements for financial reporting purposes, are not subsidiaries of or owned by us, do not constitute “Subsidiaries” as defined in the indentures governing our outstanding senior notes, and do not guarantee those senior notes. In addition, we have entered into management agreements with these physician groups pursuant to which we receive management fees from the physician groups.
As of December 31, 2018, if these physician groups were not consolidated in our financial statements, our consolidated assets would have been approximately $18.578 billion and our consolidated other liabilities would have been approximately $3.571 billion. Our consolidated indebtedness would have remained approximately $10.154 billion since almost all of these physician groups are classified as held for sale and the remainder of them do not carry third party debt. For the year ended December 31, 2018, if these physician groups were not consolidated in our financial statements, our consolidated net income would have been reduced by approximately $30 million. Our consolidated total net revenues and consolidated operating income would have remained approximately $11.405 billion and $1.526 billion, respectively, since almost all of these physician groups are being reported as discontinued operations.
In addition, our DMG business owns a 67% equity interest in California Medical Group Insurance (CMGI), which is an Unrestricted Subsidiary as defined in the indentures governing our outstanding senior notes, and does not guarantee those senior notes. DMG's equity interest in CMGI is accounted for under the equity method of accounting, meaning that, although CMGI is not consolidated in our financial statements for financial reporting purposes, our consolidated income statement reflects our pro rata share of CMGI’s net income within net loss from discontinued operations.
For the year ended December 31, 2018, excluding DMG's equity investment income attributable to CMGI, our consolidated net income would be decreased by approximately $92 thousand. See Note 29 to the consolidated financial statements for further details.
Contingencies
The information in Note 1716 to the consolidated financial statements included in this report is incorporated by reference in response to this item.
Critical accounting policies, estimates and judgments
Our consolidated financial statements and accompanying notes are prepared in accordance with United States generally accepted accounting principles. These accounting principles require us to make estimates, judgments and assumptions that affect the reported amounts of revenues, expenses, assets, liabilities, contingencies and temporary equity.noncontrolling interests subject to put provisions (redeemable equity interests). All significant estimates, judgments and assumptions are developed based on the best information available to us at the time made and are regularly reviewed and updated when necessary. Actual results will generally differ from these estimates, and such differences may be material. Changes in estimates are reflected in our financial statements in the period of change based upon on-going actual experience trends or subsequent settlements and realizations depending on the nature and predictability of the estimates and contingencies. Interim changes in estimates are applied prospectively within annual periods. Certain accounting estimates, including those concerning revenue recognition and accounts receivable, impairments of goodwill, and investments, accounting for income taxes, consolidation of variable interest entities, and fair value estimates are considered to be critical to evaluating and understanding our financial results because they involve inherently uncertain matters and their application requires the most difficult and complex judgments and estimates. For additional information, see Part II Item 15, "Exhibits, Financial Statement Schedules" – Note 1 – "Organization and summary of significant accounting policies" as referred from Part II Item 8, "Financial Statements and Supplementary Data."
Dialysis and related lab servicesU.S. dialysis revenue recognition and accounts receivable. There are significant estimating risks associated with the amount of U.S. dialysis and related lab services revenue that we recognize in a given reporting period. Payment rates are often subject to significant uncertainties related to wide variations in the coverage terms of the commercial healthcare plans under which we receive payments. In addition, ongoing insurance coverage changes, geographic coverage differences, differing interpretations of contract coverage, and other payor issues complicate the billing and collection process. Net revenue recognition and allowances for uncollectible billings require the use of estimates of the amounts that will ultimately be realized considering, among other items, retroactive adjustments that may be associated with regulatory reviews, audits, billing reviews and other matters.
Revenues associated with Medicare and Medicaid programs are recognized based on (a) the payment rates that are established by statute or regulation for the portion of the payment rates paid by the government payor (e.g., 80% for Medicare patients) and (b) for the portion not paid by the primary government payor, the estimated amounts that will ultimately be collectible from other government programs payingproviding secondary coverage (e.g., Medicaid secondary coverage), the patient’s commercial health plan secondary coverage, or the patient. Our dialysis related reimbursements from Medicare are subject to certain variations under Medicare’s single bundled payment rate system whereby our reimbursements can be adjusted for certain patient characteristics and certain other variable factors. Our revenue recognition depends upon our ability to effectively capture, document and bill for Medicare’s base payment rate and these other factors. In addition, as a result of the potential range of variations that can occur in our dialysis-related reimbursements from Medicare under the single bundled payment rate system, our revenue recognition is subject to a greater degree of estimating risk.
Commercial healthcare plans, including contracted managed-care payors, are billed at our usual and customary rates; however, revenue is recognized based on estimated net realizable revenue for the services provided. Net realizable revenue is estimated based on contractual terms for the patients covered under commercial healthcare plans with which we have formal agreements, non-contracted commercial healthcare plan coverage terms if known, estimated secondary collections, historical collection experience, historical trends of refunds and payor payment adjustments (retractions), inefficiencies in our billing and collection processes that can result in denied claims for payments, a slowdownthe estimated timing of collections, changes in collections, a reduction inour expectations of the amounts that we expect to collect and regulatory compliance issues.matters. Determining applicable primary and secondary coverage for our approximately 202,700206,900 U.S. dialysis patients at any point in time, together with the changes in patient coverages that occur each month, requires complex, resource-intensive processes. Collections, refunds and payor retractions typically continue to occur for up to three years or longer after services are provided.
We generally expect the range of our U.S. dialysis and related lab services revenuesrevenue estimating risk to be within 1% of its revenue, which can represent as much as approximately 5% of our U.S. dialysis and related lab services’business’s adjusted operating income. Changes in estimates are reflected in the then-current financial statements based on on-going actual experience trends, or subsequent settlements and realizations depending on the nature and predictability of the estimates and contingencies. Changes in revenue estimates for prior periods are separately disclosed and reported if material to the current reporting period and longer term trend analyses, and have not been significant.
Laboratory service revenuesRevenues for current period dates oflaboratory services, which are integrally related to our dialysis services, are recognized in the period services are provided at the estimated net realizable amounts to be received.
Impairments of goodwill and investments.goodwill. We account for impairments of goodwill and equity method and other investments in accordance with the provisions of applicable accounting guidance. Goodwill is not amortized, but is assessed for impairment when changes in circumstances warrant and at least annually. An impairment charge is recorded when and to the extent a reporting unit's carrying amount is determined to exceed its estimated fair value. Equity method and other investments are assessed
Changes in circumstance that may trigger a goodwill impairment assessment for other-than-temporary impairment when changes in circumstances warrant. An other-than-temporary impairment charge is recorded when the fair valueone of an investment has fallen below its carrying amount and the shortfall is expected to be indefinitely or permanently unrecoverable.
Such changes in circumstanceour business units can include, among others, changes in the legal environment, addressable market, business strategy, development or business plans, reimbursement structure, operating performance, future prospects, relationships with partners, and/or market value indications for the subject business. We use a variety of factors to assess changes in the financial condition, future prospects and other circumstances concerning the subject businesses and to estimate their fair value when applicable. Any change in the factors, assessments or assumptions involved could affect a determination of whether and when to assess goodwill or an investment for impairment as well as the outcome of such an assessment. These assessments and the related valuations can involve significant uncertainties and require significant judgment on various matters, some of which could be subject to reasonable disagreement.
Accounting for income taxes. Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best assessment of estimated current and future taxes to be paid. We are subject to income taxes in the United States and numerous state and foreign jurisdictions, and changes in tax laws or regulations may be proposed or enacted that could adversely affect our overall tax liability. The actual impact of any such laws or regulations could be materially different from our current estimates.
Significant judgments and estimates are required in determining our consolidated income tax expense. Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, results of recent operations, and assumptions about the amount of future federal, state, and foreign pre-tax operating income adjusted for items that do not have tax consequences. The assumptions about future taxable income require significant judgments and are consistent with the plans and estimates we use to manage the underlying businesses. To the extent that recovery is not likely, a valuation allowance is established. The allowance is regularly reviewed and updated for changes in circumstances that would cause a change in judgment about the realizability of the related deferred tax assets.
Consolidation of variable interest entities. We rely on the operating activities of certain entities that we do not directly own or control, but over which we have indirect influence and of which we are considered the primary beneficiary. Under accounting guidance applicable to variable interest entities, we have determined that these entities are to be included in our consolidated financial statements. The analyses upon which these determinations rest are complex, involve uncertainties, and require judgment on various matters, some of which could be subject to reasonable disagreement. While these determinations
have a meaningful effect on the description and classification of various amounts in our consolidated financial statements, non-consolidation of these entities would not have had a material effect on our results of operations.
Fair value estimates. The FASB defines fair value generally as the amount at which an asset (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale. It also defines fair value more specifically for most purposes as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
We rely on fair value measurements and estimates for purposes that require the recording, reassessment, or adjustment of the carrying amounts of certain assets, liabilities and noncontrolling interests subject to put provisions (temporary equity)(redeemable equity interests). These purposes can include thepurchase accounting for business combination transactions; impairment assessments for goodwill, other intangible assets, and other long-lived assets; recurrent revaluation of investments in debt and equity securities,
interest rate cap agreements or other derivative instruments, contingent earn-out obligations, and noncontrolling interests subject to put provisions; and the accounting for equity method and other investments and stock-based compensation, among others. The criticality of a particular fair value estimate to our consolidated financial statements depends upon the nature and size of the item being measured, the extent of uncertainties involved and the nature and magnitude or potential effect of assumptions and judgments required. Critical fair value estimates can involve significant uncertainties and require significant judgment on various matters, some of which could be subject to reasonable disagreement.
Loss contingencies. As discussed in Notes 1 and 16 to the consolidated financial statements, we operate in a highly regulated industry and are party to various lawsuits, claims, qui tam suits, governmental investigations and audits (including investigations resulting from our obligation to self-report suspected violations of law), contract disputes and other legal proceedings. Assessments of such matters can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions. We record accruals for loss contingencies on such matters to the extent that we determine an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. See Note 16 to the consolidated financial statements included in this report for further discussion. As described in Note 22 to the consolidated financial statements, the final sale price for our DMG business remains subject to certain post-closing adjustments under its equity purchase agreement which could have a material effect on the total sale proceeds we retain or the total amount of our loss on sale of this business.
Significant new accounting standards
See Note 1 to the consolidated financial statements included in this report for information regarding certain recent financial accounting standards that have been issued by the FASB.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Interest rate sensitivity
The tables below provide information about our financial instruments that are sensitive to changes in interest rates. The table below presents principal repayments and current weighted average interest rates on our debt obligations as of December 31, 2018.2019. The variable rates presented reflect the weighted average LIBOR rates in effect for all debt tranches plus interest rate margins in effect as of December 31, 2018.2019. The Term Loan A interest rate margin in effect at December 31, 2018 is 2.00%2019, was 1.50%, and along with theour revolving line of credit, is subject to adjustment depending upon changes in certain of our financial ratios, including a leverage ratio. At December 31, 2019, the Term Loan A-2 currently bearsB interest atrate margin in effect was LIBOR plus an interest rate margin of 1.00%. Term Loan B currently bears interest at LIBOR plus an interest rate margin of 2.75%2.25%.
| | | | Expected maturity date | | Thereafter | | Total | | Average
interest
rate | | Fair value | Expected maturity date | | | | Average
interest
rate | | Fair value |
| | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | |
| | |
| | |
| | |
| 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter | | Total | |
| | (dollars in millions) | | |
| | |
| (dollars in millions) |
| Long term debt: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Fixed rate | $ | 37 |
| | $ | 34 |
| | $ | 29 |
| | $ | 1,279 |
| | $ | 28 |
| | $ | 3,494 |
| | $ | 4,901 |
| | 5.29 | % | | $ | 4,643 |
| $ | 32 |
| | $ | 27 |
| | $ | 29 |
| | $ | 42 |
| | $ | 1,777 |
| | $ | 1,717 |
| | $ | 3,624 |
| | 5.11 | % | | $ | 3,702 |
|
| Variable rate | $ | 1,892 |
| | $ | 46 |
| | $ | 3,285 |
| | $ | 12 |
| | $ | 10 |
| | $ | 8 |
| | $ | 5,253 |
| | 5.11 | % | | $ | 5,259 |
| $ | 98 |
| | $ | 126 |
| | $ | 140 |
| | $ | 183 |
| | $ | 1,395 |
| | $ | 2,615 |
| | $ | 4,557 |
| | 3.94 | % | | $ | 4,585 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Notional amount | | Contract maturity date | | Receive variable | | Fair value |
| | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | |
| | | | (dollars in millions) | | | | |
| Cap agreements | $ | 3,500 |
| | $ | — |
| | $ | 3,500 |
| | $ | — |
| | $ | — |
| | $ | — |
| | LIBOR above 3.5% | | $ | 0.9 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Notional amount | | Contract maturity date | | Receive variable | | Fair value |
| | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | |
| | (dollars in millions) |
| 2015 cap agreements | $ | 3,500 |
| | $ | 3,500 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | LIBOR above 3.5% | | $ | — |
|
| 2019 cap agreements | $ | 3,500 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3,500 |
| | LIBOR above 2.0% | | $ | 24 |
|
On March 29, 2018, we entered into an Increase Joinder No. 1 (Increase Joinder Agreement) under our existing senior secured credit facilities. Pursuant to this Increase Joinder Agreement, we entered into an additional $995 million Term Loan A-2.
Our senior secured credit facilities, which include Term Loan A, Term Loan A-2, and Term Loan B, consist of various individual tranches of debt that can range in maturity from one month to twelve months (currently, all tranches are one month in duration). For Term Loan A, Term Loan A-2, and Term Loan B, each tranche bears interest at a LIBOR rate that is determined by the duration of such tranche plus an interest rate margin. The LIBOR variable component of the interest rate for
each tranche is reset as such tranche matures and a new tranche is established. LIBOR can fluctuate significantly depending upon conditions in the credit and capital markets.
As of December 31, 2018, our Term Loan A bears interest at LIBOR plus an interest rate margin of 2.00%, our Term Loan A-2 bears interest at LIBOR plus an interest rate margin of 1.00%, and our Term Loan B bears interest at LIBOR plus an interest rate margin of 2.75%. LIBOR was greater than the 0.75% embedded LIBOR floor on Term Loan B, resulting in Term Loan B being subject to LIBOR-based interest rate volatility on the LIBOR variable component of our interest rate as of December 31, 2018. However, this LIBOR-based interest component is effectively limited to a maximum LIBOR rate of 3.50% on the outstanding principal debt on Term Loan B and on $157.5 million of Term Loan A as a result of the interest rate cap agreements, as described below. In addition, the uncapped portion of Term Loan A of $517.5 million and the entire balance of Term Loan A-2 are subject to the variability of LIBOR. See the table above for further details. Interest rates on our Senior Notes are fixed by their terms.
As of December 31, 2018, we maintain several interest rate cap agreements that were entered into in October 2015 with notional amounts totaling $3.5 billion. These cap agreements became effective June 29, 2018, have the economic effect of capping the LIBOR variable component of our interest rate at a maximum of 3.50% on an equivalent amountdiscussion of our debt, see Note 13 to our consolidated financial statements at Part II Item 15, "Exhibits, Financial Statement Schedules" – Note 13 – "Long-term debt" as referred from Part II Item 8, "Financial Statements and will expire on June 30, 2020. As of December 31, 2018, the total fair value of these cap agreements was an asset of approximately $0.9 million. During the year ended December 31, 2018, we recognized debt expense of $4.3 million from these cap agreements and recorded a loss of $0.2 million in other comprehensive income due to a decrease in the unrealized fair value of these cap agreements.
Previously, we maintained other interest rate cap agreements that were entered into in November 2014 with notional amounts also totaling $3.5 billion. These cap agreements had the economic effect of capping the LIBOR variable component of our interest rate at a maximum of 3.50% on an equivalent amount of our debt and expired on June 30, 2018. During the year ended 2018, we recognized debt expense of $4.1 million from these cap agreements and recorded an immaterial loss in other comprehensive income due to a decrease in the unrealized fair value of these cap agreements through expiration.
Our overall weighted average effective interest rate on the senior secured credit facilities at the end of 2018 was 5.11%, based upon the current margins in effect of 2.00% for Term Loan A, 1.00% for Term Loan A-2 and 2.75% for Term Loan B as of December 31, 2018.
Our overall weighted average effective interest rate during the year ended December 31, 2018 was 4.96% and as of December 31, 2018 was 5.19%.
As of December 31, 2018, we had $175 million drawn on our $1.0 billion revolving line of credit under our senior secured credit facilities, in addition to approximately $14.2 million committed for outstanding letters of credit. We also have approximately $22.6 million of additional outstanding letters of credit under a separate bilateral secured letter of credit facility, and $0.2 million of committed outstanding letters of credit which are backed by a certificate of deposit.Supplementary Data."
We believe that our cash flow from operations and other sources of liquidity, including from amounts available under our existingcurrent credit facilities and anticipated debt refinancing, as well as proceeds fromour access to the anticipated sale of our DMG business if consummated,capital markets, will be sufficient to fund our scheduled debt service under the terms of our debt agreements and other obligations for the foreseeable future, including the next 12 months. Our primary recurrent sources of liquidity are cash from operations and cash from borrowings.
One means of assessing exposure to debt-related interest rate changes is a duration-based analysis that measures the potential loss in net income resulting from a hypothetical increase in interest rates of 100 basis points across all variable rate maturities (referred to as a parallel shift in the yield curve). Under this model, with all else constant, it is estimated that such an increase would have reduced net income by approximately $32.4 million, $37.8 million, $27.6 million, and $11.6$27.6 million, net of tax, for the years ended December 31, 2019, 2018, 2017, and 2016,2017, respectively.
Exchange rate sensitivity
While our business is predominantly conducted in the U.S., we have developing operations in nine other countries as well. For financial reporting purposes, the U.S. dollar is our reporting currency. However, the functional currencies of our operating businesses in other countries are typically those of the countries in which they operate. Therefore, changes in the rate of exchange between the U.S. dollar and the local currencies in which our international operations are conducted affect our results of operations and financial position as reported in our consolidated financial statements.
We have consolidated the balance sheets of our non-U.S. dollar denominated operations into U.S. dollars at the exchange rates prevailing at the balance sheet dates and have translated their revenues and expense at average exchange rates during each period. Additionally, our individual subsidiaries are exposed to transactional risks mainly resulting from intercompany transactions between and among subsidiaries with different functional currencies. This exposes the subsidiaries to fluctuations in the rate of exchange between the invoicing or obligation currencies and the currency in which their local operations are conducted.
We evaluate our exposure to foreign exchange risk through the judgment of our regionalinternational and corporate management teams. Through 2018,2019, our international operations remained fairly small relative to the size of our consolidated financial statements, constituting less than 7%approximately 8% of our consolidated assets as of December 31, 20182019, and approximately 4% of our consolidated net revenues for the year ended December 31, 2018.2019. In addition, our foreign currency translation (losses) gains were less than approximately (1)%, (3)%, 6%, and (2)%6% of our consolidated operating income for the years ended December 31, 2019, 2018 2017 and 2016.2017.
Given the still small size of our international operations, management does not consider our exposure to foreign exchange risk to be significant to the consolidated enterprise. As such, through December 31, 20182019, we have not engaged in transactions to hedge the exposure of our international transactions or net investments to foreign currency risk. However, we may do so in the future.
Item 8. Financial Statements and Supplementary Data.
See the Index to Financial Statements and Index to Financial Statement Schedules included at “Item 15. Exhibits, Financial Statement Schedules.”
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Management has established and maintains disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that it files or submits pursuant to the Securities Exchange Act of 1934 (Exchange Act) as amended is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management including our Chief Executive Officer and Chief Financial Officer as appropriate to allow for timely decisions regarding required disclosures.
At the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures in accordance with the Exchange Act requirements. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective for timely identification and review of material information required to be included in our Exchange Act reports, including this report on Form 10-K.report. Management recognizes that these controls and procedures can provide only reasonable assurance of desired outcomes, and that estimates and judgments are still inherent in the process of maintaining effective controls and procedures.
Beginning January 1, 2018,2019, we adopted FASB Accounting Standards Codification Topic 606,842, Revenue from Contracts with CustomersLeases. Although theAs a result of adopting this new standard, is expected to have an immaterial impact on our ongoing net income, we did implementimplemented new business processes and related control activities in order to maintain appropriate controls over financial reporting. There was no other change in our internal control over financial reporting that was identified during the evaluation that occurred during the fourth fiscal quarter andof 2019 that has materially affected, or is reasonably likely to materially affect, ourthe Company’s internal control over financial reporting.
Item 9B. Other Information.
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
We intend to disclose any amendments or waivers to the Code of Ethics applicable to our principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions, on our website located at http://www.davita.com. In 2002, we adopted a Corporate Governance Code of Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, and to all of our financial accounting and legal professionals who are directly or indirectly involved in the preparation, reporting and fair presentation of our financial statements and Exchange Act reports. The Code of Ethics is posted on our website, located at http://www.davita.com. We also maintain a Corporate Code of Conduct that applies to all of our employees, officers and directors, which is posted on our website.
Under our Corporate Governance Guidelines all Board Committees including the Audit Committee, Nominating and Governance Committee and the Compensation Committee, which are comprised solely of independent directors as defined within the listing standards of the New York Stock Exchange, have written charters that outline the committee’s purpose, goals, membership requirements and responsibilities. These charters are regularly reviewed and updated as necessary by our Board of Directors. All Board Committee charters as well as the Corporate Governance Guidelines are posted on our website located at http://www.davita.com.
The other information required to be disclosed by this item will appear in, and is incorporated by reference from, the sections entitled “Proposal 1 Election of Directors”, “Corporate Governance”, and “Security Ownership of Certain Beneficial Owners and Management” to be included in our definitive proxy statement relating to our 20192020 annual stockholder meeting.
Item 11. Executive Compensation.
The information required by this item will appear in, and is incorporated by reference from, the sections entitled "Executive Compensation", "Pay Ratio Disclosure", "Compensation of Directors" and "Compensation Committee Interlocks and Insider Participation" included in our definitive proxy statement relating to our 20192020 annual stockholder meeting. The information required by Item 407(e)(5) of Regulation S-K will appear in and is incorporated by reference from the section entitled “Compensation Committee Report” to be included in our definitive proxy statement relating to our 20192020 annual stockholder meeting; however, this information shall not be deemed to be filed.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table provides information about our common stock that may be issued upon the exercise of stock-settled stock appreciation rights, restricted stock units and other rights under all of our existing equity compensation plans as of December 31, 2018,2019, which consist of our 2011 Incentive Award Plan and our Employee Stock Purchase Plan. The material terms of these plans are described in Note 1918 to the consolidated financial statements.
| | | Plan category | | Number of
shares to be issued upon exercise
of outstanding options, warrants and rights | | Weighted average exercise price of outstanding options, warrants and rights | | Number of shares remaining
available for future issuance under equity
compensation plans (excluding securities reflected in
column (a)) | | Total of shares reflected in columns (a) and (c) | | Number of
shares to be issued upon exercise
of outstanding options, warrants and rights(1)(2) | | Weighted average exercise price of outstanding options, warrants and rights(3) | | Number of shares remaining
available for future issuance under equity
compensation plans (excluding securities reflected in
column (a)) | | Total of shares reflected in columns (a) and (c) |
| | | (a) | | (b) | | (c) | | (d) | | (a) | | (b) | | (c) | | (d) |
| Equity compensation plans approved by shareholders | | 8,155,501(1) |
| | 69.90(2) |
| | 29,818,042 |
| | 37,973,543 |
| | 10,606,446 |
| | $ | 64.10 |
| | 21,958,174 |
| | 32,564,620 |
|
Equity compensation plans not requiring shareholder
approval | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | | 8,155,501 |
| | $ | 69.90 |
| | 29,818,042 |
| | 37,973,543 |
| | 10,606,446 |
| | $ | 64.10 |
| | 21,958,174 |
| | 32,564,620 |
|
| |
| (1) | Does not include the Premium Priced Award described in Note 18, as that Board-approved award remained contingent on stockholder approval of an amendment to our 2011 Incentive Award Plan which did not occur until January 2020. |
| |
| (2) | Includes 722,4121,073,051 shares of common stock reserved for issuance in connection with performance share units and performance stock appreciation rights at the maximum number of shares issuable thereunder. |
| |
(2)(3) | This weighted-average includes performance stock appreciation rights at 100% of target amount and excludes full value awards such as restricted stock units and performance share units. |
Other information required to be disclosed by Item 12 will appear in, and is incorporated by reference from, the section entitled “Security Ownership of Certain Beneficial Owners and Management” to be included in our definitive proxy statement relating to our 20192020 annual stockholder meeting.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item will appear in, and is incorporated by reference from, the section entitled “Certain Relationships and Related Transactions” and the section entitled “Corporate Governance” to be included in our definitive proxy statement relating to our 20192020 annual stockholder meeting.
Item 14. Principal Accounting Fees and Services.
The information required by this item will appear in, and is incorporated by reference from, the section entitled “Proposal 2 Ratification of the Appointment of our Independent Registered Public Accounting Firm” to be included in our definitive proxy statement relating to our 20192020 annual stockholder meeting.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) Documents filed as part of this Report:
(1) Index to Financial Statements: (2) Index to Financial Statement Schedules: (3) Exhibits
The information required by this Item is set forth in the Exhibit Index that precedes the signature pages of this Annual Report on Form 10-K.
Item 16. Form 10-K Summary.
None.
DAVITA INC.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining an adequate system of internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles and which includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
During the last fiscal year, the Company conducted an evaluation, under the oversight of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s internal control over financial reporting. This evaluation was completed based on the criteria established in the report titled “Internal Control—Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based upon our evaluation under the COSO framework, we have concluded that the Company’s internal control over financial reporting was effective as of December 31, 2018.2019.
The Company’s independent registered public accounting firm, KPMG LLP, has issued an attestation report on the Company’s internal control over financial reporting, which report is included in this Annual Report.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
DaVita Inc.:
Opinion on the ConsolidatedFinancial Statements
We have audited the accompanying consolidated balance sheets of DaVita Inc. and subsidiaries (the Company) as of December 31, 20182019 and 2017,2018, the related consolidated statements of income, comprehensive income, equity, and cash flowsflow for each of the years in the three-yearthree‑year period ended December 31, 2018,2019, and the related notes and financial statement Schedule II - Valuation and Qualifying Accounts (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20182019 and 2017,2018, and the results of its operations and its cash flows for each of the years in the three-yearthree‑year period ended December 31, 2018,2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018,2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 22, 201921, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Notes 1 and 14 to the consolidated financial statements, the Company changed its method of accounting for leases as of January 1, 2019 due to the adoption of the Financial Accounting Standards Board’s Accounting Standards Codification Topic 842 Leases.
As discussed in Notes 1 and 2 to the consolidated financial statements, the Company has changed its method of accounting for revenue recognition inas of January 1, 2018 due to the adoption of the Financial Accounting Standards Board’s Accounting Standards Codification Topic 606 Revenue from Contracts with Customers.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
U.S. dialysis revenue recognition
As discussed in Notes 1 and 2 to the consolidated financial statements, the Company recognized $10,531 million in U.S. dialysis patient service revenue for the year ended December 31, 2019. There are significant uncertainties associated with
estimating revenue, which generally take several years to resolve. As these estimates are refined over time, both positive and negative adjustments are recognized in the current period.
We identified the evaluation of the recognition of the transaction price the Company expects to collect as a result of satisfying its performance obligations related to U.S. dialysis revenue as a critical audit matter because it involves significant estimation requiring complex auditor judgment. The key assumptions and inputs used to estimate the transaction price relate to ongoing insurance coverage changes, differing interpretations of contract coverage, determination of applicable primary and secondary coverage, coordination of benefits, and varying patient characteristics impacting Medicare reimbursements. Changes to the key assumptions and inputs used in the methodology may have a significant effect on the Company’s determination of the estimate.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s U.S. dialysis revenue recognition process, including controls related to the methodology used to estimate the transaction price, and the key assumptions and inputs. We developed an independent estimate of the transaction price based on actual and expected cash collections. We evaluated the Company’s key assumptions and inputs to estimate the transaction price the Company expects to collect as a result of satisfying its performance obligations by comparing key assumptions to historical collection experience, trends of refunds and payor payment adjustments, delays in the Company’s billing and collection process and regulatory compliance matters. Additionally, we compared revenue related to the transaction price estimates recognized in prior periods to actual cash collections related to performance obligations satisfied in prior periods to analyze the Company’s ability to estimate the transaction price the Company expects to collect as a result of satisfying its performance obligations.
Evaluation of the goodwill impairment analyses for the Germany kidney care reporting unit
As discussed in Note 10 to the consolidated financial statements, the Company performed annual and other impairment assessments for their reporting units throughout 2019. As a result of these assessments, the Company recognized goodwill impairment charges totaling $119 million related to its Germany kidney care reporting unit during 2019. The goodwill balance for the Germany kidney care reporting unit as of December 31, 2019 was $295 million.
We identified the evaluation of the goodwill impairment analyses for the Germany kidney care reporting unit as a critical audit matter. The evaluations included assessing the key assumptions used in estimating the fair value of the reporting unit, such as forecasted revenue growth, projected profit margins, discount rates, and revenue and clinical earnings before interest, taxes, depreciation, and amortization (EBITDA) multiples. Evaluation of these key assumptions involved a high degree of subjectivity and auditor judgment as changes to these assumptions could have a significant impact on the goodwill impairment charges recognized.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s goodwill impairment assessment process, including controls over the development of key assumptions as described above. We assessed the Company’s ability to forecast by comparing prior year actual results of the reporting unit to previously forecasted amounts for the reporting unit. We evaluated the Company’s forecasted revenue growth rates and projected profit margins for the reporting unit by comparing the projections to the Company’s underlying business strategies and operating plans for the reporting unit and other industry and market data. In addition, we involved valuation professionals with specialized skills and knowledge, who assisted in:
evaluating the revenue growth rates and projected profit margins for the reporting unit by comparing projected rates with comparable companies;
comparing the discount rates for the reporting unit to a discount rate range that was independently developed using publicly available market data for comparable companies;
evaluating the revenue and clinical EBITDA multiples utilized in the Company’s valuation of the reporting unit by comparing the multiples selected to a range of multiples from comparable transactions; and
assessing the valuation methodology used by the Company to estimate the fair value of the reporting unit.
Evaluation of legal proceedings and regulatory matters
As discussed in Notes 1 and 16 to the consolidated financial statements, the Company operates in a highly regulated industry and is a party to various lawsuits, claims, qui tam suits, governmental investigations and audits (including investigations resulting from its obligation to self-report suspected violations of law) and other legal proceedings. The Company records accruals for certain legal proceedings and regulatory matters to the extent that the Company determines an unfavorable outcome is probable and the amount of the loss can be reasonably estimated.
We identified the evaluation of the recorded amounts or related disclosures for these legal proceedings and regulatory matters as a critical audit matter. A high degree of auditor judgment was required due to the nature of the estimates and assumptions that are part of the Company’s process. Such estimates and assumptions primarily relate to the probability and corresponding estimate of the monetary loss in the event of an unfavorable outcome for the Company.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s legal proceedings and regulatory matters process, including controls over the development of significant judgments used to estimate, record, and disclose the Company’s exposure related to legal proceedings and regulatory matters. We tested existing legal proceedings and regulatory matters by 1) reading certain written correspondence received from outside parties, 2) reading certain written responses provided to outside parties, and 3) obtaining invoice and cash payment documentation for a sample of transactions. We read letters received directly from the Company’s external and internal legal counsel that described certain legal proceedings and regulatory matters. We also evaluated the Company’s ability to estimate its monetary losses relating to legal proceedings and regulatory matters by comparing historically recorded liabilities for certain prior legal proceedings and regulatory matters to actual monetary losses incurred upon resolution of such prior legal proceedings and regulatory matters. We involved forensic professionals with specialized skills and knowledge who assisted in evaluating the Company’s compliance hotline records. Additionally, we assessed the population of legal proceedings and regulatory matters, as well as the sufficiency of the recorded amounts or related disclosures 1) by making inquiries of certain key executives and directors and 2) based on information received through procedures described above and through publicly available information about the Company, its competitors, and the industry.
/s/ KPMG LLP
We have served as the Company’s auditor since 2000.
Seattle, Washington
February 22, 201921, 2020
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
DaVita Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited DaVita Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2018,2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018,2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 20182019 and 2017,2018, the related consolidated statements of income, comprehensive income, equity, and cash flowsflow for each of the years in the three-year period ended December 31, 2018,2019, and the related notes and financial statement Schedule II - Valuation and Qualifying Accounts (collectively, the consolidated financial statements), and our report dated February 22, 201921, 2020 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Seattle, Washington
February 22, 201921, 2020
DAVITA INC.
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
| | | | Year ended December 31, | Year ended December 31, |
| | 2018 | | 2017 | | 2016 | 2019 | | 2018 | | 2017 |
| Dialysis and related lab patient service revenues | $ | 10,709,981 |
| | $ | 10,093,670 |
| | $ | 9,727,360 |
| |
| Dialysis patient service revenues | | $ | 10,918,421 |
| | $ | 10,709,981 |
| | $ | 10,093,670 |
|
| Provision for uncollectible accounts | (49,587 | ) | | (485,364 | ) | | (431,304 | ) | (21,715 | ) | | (49,587 | ) | | (485,364 | ) |
| Net dialysis and related lab patient service revenues | 10,660,394 |
| | 9,608,306 |
| | 9,296,056 |
| |
| Net dialysis patient service revenues | | 10,896,706 |
| | 10,660,394 |
| | 9,608,306 |
|
| Other revenues | 744,457 |
| | 1,268,328 |
| | 1,411,411 |
| 491,773 |
| | 744,457 |
| | 1,268,328 |
|
| Total revenues | 11,404,851 |
| | 10,876,634 |
| | 10,707,467 |
| 11,388,479 |
| | 11,404,851 |
| | 10,876,634 |
|
| Operating expenses and charges: | |
| | |
| | |
| |
| | |
| | |
|
| Patient care costs and other costs | 8,195,513 |
| | 7,640,005 |
| | 7,431,582 |
| |
| Patient care costs | | 7,914,485 |
| | 8,195,513 |
| | 7,640,005 |
|
| General and administrative | 1,135,454 |
| | 1,064,026 |
| | 1,072,841 |
| 1,103,312 |
| | 1,135,454 |
| | 1,064,026 |
|
| Depreciation and amortization | 591,035 |
| | 559,911 |
| | 509,497 |
| 615,152 |
| | 591,035 |
| | 559,911 |
|
| Provision for uncollectible accounts | (7,300 | ) | | (7,033 | ) | | 11,677 |
| — |
| | (7,300 | ) | | (7,033 | ) |
| Equity investment income | 4,484 |
| | 8,640 |
| | (16,874 | ) | |
| Equity investment (income) loss | | (12,679 | ) | | 4,484 |
| | 8,640 |
|
| Investment and other asset impairments | 17,338 |
| | 295,234 |
| | 14,993 |
| — |
| | 17,338 |
| | 295,234 |
|
| Goodwill impairment charges | 3,106 |
| | 36,196 |
| | 28,415 |
| 124,892 |
| | 3,106 |
| | 36,196 |
|
| Gain on changes in ownership interest, net | (60,603 | ) | | (6,273 | ) | | (374,374 | ) | — |
| | (60,603 | ) | | (6,273 | ) |
| Gain on settlement, net | — |
| | (526,827 | ) | | — |
| — |
| | — |
| | (526,827 | ) |
| Total operating expenses and charges | 9,879,027 |
| | 9,063,879 |
| | 8,677,757 |
| 9,745,162 |
| | 9,879,027 |
| | 9,063,879 |
|
| Operating income | 1,525,824 |
| | 1,812,755 |
| | 2,029,710 |
| 1,643,317 |
| | 1,525,824 |
| | 1,812,755 |
|
| Debt expense | (487,435 | ) | | (430,634 | ) | | (414,116 | ) | (443,824 | ) | | (487,435 | ) | | (430,634 | ) |
| Debt prepayment, refinancing and redemption charges | | (33,402 | ) | | — |
| | — |
|
| Other income, net | 10,089 |
| | 17,665 |
| | 7,511 |
| 29,348 |
| | 10,089 |
| | 17,665 |
|
| Income from continuing operations before income taxes | 1,048,478 |
| | 1,399,786 |
| | 1,623,105 |
| 1,195,439 |
| | 1,048,478 |
| | 1,399,786 |
|
| Income tax expense | 258,400 |
| | 323,859 |
| | 431,761 |
| 279,628 |
| | 258,400 |
| | 323,859 |
|
| Net income from continuing operations | 790,078 |
| | 1,075,927 |
| | 1,191,344 |
| 915,811 |
| | 790,078 |
| | 1,075,927 |
|
| Net loss from discontinued operations, net of tax | (457,038 | ) | | (245,372 | ) | | (158,262 | ) | |
| Net income (loss) from discontinuing operations, net of tax | | 105,483 |
| | (457,038 | ) | | (245,372 | ) |
| Net income | 333,040 |
| | 830,555 |
| | 1,033,082 |
| 1,021,294 |
| | 333,040 |
| | 830,555 |
|
| Less: Net income attributable to noncontrolling interests | (173,646 | ) | | (166,937 | ) | | (153,208 | ) | (210,313 | ) | | (173,646 | ) | | (166,937 | ) |
| Net income attributable to DaVita Inc. | $ | 159,394 |
| | $ | 663,618 |
| | $ | 879,874 |
| $ | 810,981 |
| | $ | 159,394 |
| | $ | 663,618 |
|
| Earnings per share attributable to DaVita Inc.: | |
| | |
| | |
| |
| | |
| | |
|
| Basic net income from continuing operations per share | $ | 3.66 |
| | $ | 4.78 |
| | $ | 5.12 |
| $ | 4.61 |
| | $ | 3.66 |
| | $ | 4.78 |
|
| Basic net income per share | $ | 0.93 |
| | $ | 3.52 |
| | $ | 4.36 |
| $ | 5.29 |
| | $ | 0.93 |
| | $ | 3.52 |
|
| Diluted net income from continuing operations per share | $ | 3.62 |
| | $ | 4.71 |
| | $ | 5.04 |
| $ | 4.60 |
| | $ | 3.62 |
| | $ | 4.71 |
|
| Diluted net income per share | $ | 0.92 |
| | $ | 3.47 |
| | $ | 4.29 |
| $ | 5.27 |
| | $ | 0.92 |
| | $ | 3.47 |
|
| Weighted average shares for earnings per share: | |
| | |
| | |
| |
| | |
| | |
|
| Basic | 170,785,999 |
| | 188,625,559 |
| | 201,641,173 |
| 153,180,908 |
| | 170,785,999 |
| | 188,625,559 |
|
| Diluted | 172,364,581 |
| | 191,348,533 |
| | 204,904,656 |
| 153,812,064 |
| | 172,364,581 |
| | 191,348,533 |
|
| Amounts attributable to DaVita Inc.: | | | | | | | | | | |
| Net income from continuing operations | $ | 624,321 |
| | $ | 901,277 |
| | $ | 1,032,373 |
| $ | 706,832 |
| | $ | 624,321 |
| | $ | 901,277 |
|
| Net loss from discontinued operations | (464,927 | ) | | (237,659 | ) | | (152,499 | ) | |
| Net income (loss) from discontinued operations | | 104,149 |
| | (464,927 | ) | | (237,659 | ) |
| Net income attributable to DaVita Inc. | $ | 159,394 |
| | $ | 663,618 |
| | $ | 879,874 |
| $ | 810,981 |
| | $ | 159,394 |
| | $ | 663,618 |
|
See notes to consolidated financial statements.
DAVITA INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
| | | | Year ended December 31, | Year ended December 31, |
| | 2018 | | 2017 | | 2016 | 2019 | | 2018 | | 2017 |
| Net income | $ | 333,040 |
| | $ | 830,555 |
| | $ | 1,033,082 |
| $ | 1,021,294 |
| | $ | 333,040 |
| | $ | 830,555 |
|
| Other comprehensive (loss) income: | |
| | |
| | |
| |
| | |
| | |
|
| Unrealized losses on interest rate cap and swap agreements, net: | |
| | |
| | |
| |
| Unrealized gains (losses) on interest rate cap agreements, net: | | |
| | |
| | |
|
| Unrealized gains (losses) | | 1,151 |
| | (133 | ) | | (5,437 | ) |
| Reclassification into net income | | 6,377 |
| | 6,286 |
| | 5,058 |
|
| Unrealized losses on investments, net: | | | | | | |
|
| Unrealized losses | (133 | ) | | (5,437 | ) | | (3,670 | ) | — |
| | — |
| | 3,705 |
|
| Reclassification into net income | 6,286 |
| | 5,058 |
| | 2,566 |
| — |
| | — |
| | (220 | ) |
| Unrealized gains (losses) on investments, net: | | | | | |
| |
| Unrealized losses | — |
| | 3,705 |
| | 1,427 |
| |
| Reclassification into net income | — |
| | (220 | ) | | (423 | ) | |
| Foreign currency translation adjustments: | | | | | |
| |
| Unrealized (losses) gains on foreign currency translation: | | | | | | |
|
| Foreign currency translation adjustments | (45,944 | ) | | 99,770 |
| | (39,614 | ) | (20,102 | ) | | (45,944 | ) | | 99,770 |
|
| Reclassification into net income | — |
| | — |
| | 10,087 |
| |
| Other comprehensive (loss) income | (39,791 | ) | | 102,876 |
| | (29,627 | ) | (12,574 | ) | | (39,791 | ) | | 102,876 |
|
| Total comprehensive income | 293,249 |
| | 933,431 |
| | 1,003,455 |
| 1,008,720 |
| | 293,249 |
| | 933,431 |
|
| Less: Comprehensive income attributable to noncontrolling interests | (173,646 | ) | | (166,935 | ) | | (153,398 | ) | (210,313 | ) | | (173,646 | ) | | (166,935 | ) |
| Comprehensive income attributable to DaVita Inc. | $ | 119,603 |
| | $ | 766,496 |
| | $ | 850,057 |
| $ | 798,407 |
| | $ | 119,603 |
| | $ | 766,496 |
|
See notes to consolidated financial statements.
DAVITA INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
| | | | December 31, 2018 | | December 31, 2017 | December 31, 2019 | | December 31, 2018 |
| ASSETS | |
| | |
| |
| | |
|
| Cash and cash equivalents | $ | 323,038 |
| | $ | 508,234 |
| $ | 1,102,372 |
| | $ | 323,038 |
|
| Restricted cash and equivalents | 92,382 |
| | 10,686 |
| 106,346 |
| | 92,382 |
|
| Short-term investments | 2,935 |
| | 32,830 |
| 11,572 |
| | 2,935 |
|
| Accounts receivable, net | 1,858,608 |
| | 1,714,750 |
| 1,795,598 |
| | 1,858,608 |
|
| Inventories | 107,381 |
| | 181,799 |
| 97,949 |
| | 107,381 |
|
| Other receivables | 469,796 |
| | 399,262 |
| 489,695 |
| | 469,796 |
|
| Prepaid and other current assets | 111,840 |
| | 112,058 |
| 66,866 |
| | 111,840 |
|
| Income tax receivable | 68,614 |
| | 49,440 |
| 19,772 |
| | 68,614 |
|
| Current assets held for sale, net | 5,389,565 |
| | 5,761,642 |
| — |
| | 5,389,565 |
|
| Total current assets | 8,424,159 |
| | 8,770,701 |
| 3,690,170 |
| | 8,424,159 |
|
| Property and equipment, net | 3,393,669 |
| | 3,149,213 |
| 3,473,384 |
| | 3,393,669 |
|
| Operating lease right-of-use assets | | 2,830,047 |
| | — |
|
| Intangible assets, net | 118,846 |
| | 113,827 |
| 135,684 |
| | 118,846 |
|
| Equity method and other investments | 224,611 |
| | 245,534 |
| 241,983 |
| | 224,611 |
|
| Long-term investments | 35,424 |
| | 37,695 |
| 36,519 |
| | 35,424 |
|
| Other long-term assets | 71,583 |
| | 47,287 |
| 115,972 |
| | 71,583 |
|
| Goodwill | 6,841,960 |
| | 6,610,279 |
| 6,787,635 |
| | 6,841,960 |
|
| | $ | 19,110,252 |
| | $ | 18,974,536 |
| $ | 17,311,394 |
| | $ | 19,110,252 |
|
| LIABILITIES AND EQUITY | |
| | |
| |
| | |
|
| Accounts payable | $ | 463,270 |
| | $ | 509,116 |
| $ | 403,840 |
| | $ | 463,270 |
|
| Other liabilities | 595,850 |
| | 579,005 |
| 756,174 |
| | 595,850 |
|
| Accrued compensation and benefits | 658,913 |
| | 616,116 |
| 695,052 |
| | 658,913 |
|
| Current portion of operating lease liabilities | | 343,912 |
| | — |
|
| Current portion of long-term debt | 1,929,369 |
| | 178,213 |
| 130,708 |
| | 1,929,369 |
|
| Income tax payable | | 42,412 |
| | — |
|
| Current liabilities held for sale | 1,243,759 |
| | 1,185,070 |
| — |
| | 1,243,759 |
|
| Total current liabilities | 4,891,161 |
| | 3,067,520 |
| 2,372,098 |
| | 4,891,161 |
|
| Long-term operating lease liabilities | | 2,723,800 |
| | — |
|
| Long-term debt | 8,172,847 |
| | 9,158,018 |
| 7,977,526 |
| | 8,172,847 |
|
| Other long-term liabilities | 450,669 |
| | 365,325 |
| 160,809 |
| | 450,669 |
|
| Deferred income taxes | 562,536 |
| | 486,247 |
| 577,543 |
| | 562,536 |
|
| Total liabilities | 14,077,213 |
| | 13,077,110 |
| 13,811,776 |
| | 14,077,213 |
|
| Commitments and contingencies: | | | | |
| Commitments and contingencies | | | | |
| Noncontrolling interests subject to put provisions | 1,124,641 |
| | 1,011,360 |
| 1,180,376 |
| | 1,124,641 |
|
| Equity: | |
| | |
| |
| | |
|
| Preferred stock ($0.001 par value, 5,000,000 shares authorized; none issued) | — |
| | — |
| — |
| | — |
|
Common stock ($0.001 par value, 450,000,000 shares authorized; 166,387,307 and
182,462,278 shares issued and outstanding, respectively) | 166 |
| | 182 |
| |
| Common stock ($0.001 par value, 450,000,000 shares authorized; 125,842,853 and 166,387,307 shares issued and outstanding at December 31, 2019 and 2018, respectively) | | 126 |
| | 166 |
|
| Additional paid-in capital | 995,006 |
| | 1,042,899 |
| 749,043 |
| | 995,006 |
|
| Retained earnings | 2,743,194 |
| | 3,633,713 |
| 1,431,738 |
| | 2,743,194 |
|
| Accumulated other comprehensive (loss) income | (34,924 | ) | | 13,235 |
| |
| Accumulated other comprehensive loss | | (47,498 | ) | | (34,924 | ) |
| Total DaVita Inc. shareholders' equity | 3,703,442 |
| | 4,690,029 |
| 2,133,409 |
| | 3,703,442 |
|
| Noncontrolling interests not subject to put provisions | 204,956 |
| | 196,037 |
| 185,833 |
| | 204,956 |
|
| Total equity | 3,908,398 |
| | 4,886,066 |
| 2,319,242 |
| | 3,908,398 |
|
| | $ | 19,110,252 |
| | $ | 18,974,536 |
| $ | 17,311,394 |
| | $ | 19,110,252 |
|
See notes to consolidated financial statements.
DAVITA INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(dollars in thousands)
| | | | Year ended December 31, | Year ended December 31, |
| | 2018 | | 2017 | | 2016 | 2019 | | 2018 | | 2017 |
| Cash flows from operating activities: | | | |
| | |
| | | |
| | |
|
| Net income | $ | 333,040 |
| | $ | 830,555 |
| | $ | 1,033,082 |
| $ | 1,021,294 |
| | $ | 333,040 |
| | $ | 830,555 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| | |
| | | | | |
|
| Depreciation and amortization | 591,035 |
| | 777,485 |
| | 720,252 |
| 615,152 |
| | 591,035 |
| | 777,485 |
|
| Impairment charges | 61,981 |
| | 981,589 |
| | 296,408 |
| 124,892 |
| | 61,981 |
| | 981,589 |
|
| Valuation adjustment on disposal group | 316,840 |
| | — |
| | — |
| — |
| | 316,840 |
| | — |
|
| Debt prepayment, refinancing and redemption charges | | 33,402 |
| | — |
| | — |
|
| Stock-based compensation expense | 73,061 |
| | 35,092 |
| | 38,338 |
| 67,850 |
| | 73,061 |
| | 35,092 |
|
| Deferred income taxes | 273,660 |
| | (395,217 | ) | | 52,010 |
| 41,723 |
| | 273,660 |
| | (395,217 | ) |
| Equity investment income, net | 26,449 |
| | 28,925 |
| | 17,766 |
| 8,582 |
| | 26,449 |
| | 28,925 |
|
| Gain on sales of business interests, net | (85,699 | ) | | (23,402 | ) | | (404,165 | ) | |
| Loss (gain) on sales of business interests, net | | 23,022 |
| | (85,699 | ) | | (23,402 | ) |
| Other non-cash charges, net | 82,374 |
| | 66,920 |
| | (7,343 | ) | 49,579 |
| | 82,374 |
| | 66,920 |
|
| Changes in operating assets and liabilities, net of effect of acquisitions and divestitures: | | | | | |
| | | | | |
| Accounts receivable | (81,176 | ) | | (156,305 | ) | | (152,240 | ) | (79,957 | ) | | (81,176 | ) | | (156,305 | ) |
| Inventories | 73,505 |
| | (18,625 | ) | | 22,920 |
| 10,158 |
| | 73,505 |
| | (18,625 | ) |
| Other receivables and other current assets | 236,995 |
| | (111,432 | ) | | (45,351 | ) | 2,790 |
| | 236,995 |
| | (111,432 | ) |
| Other long-term assets | 3,497 |
| | (11,945 | ) | | 35,893 |
| 6,965 |
| | 3,497 |
| | (11,945 | ) |
| Accounts payable | (35,959 | ) | | 26,876 |
| | 11,897 |
| (84,539 | ) | | (35,959 | ) | | 26,876 |
|
| Accrued compensation and benefits | 84,165 |
| | (78,239 | ) | | 68,272 |
| (14,697 | ) | | 84,165 |
| | (78,239 | ) |
| Other current liabilities | (157,462 | ) | | 1,908 |
| | 176,494 |
| 181,940 |
| | (157,462 | ) | | 1,908 |
|
| Income taxes | (23,635 | ) | | (52,176 | ) | | 77,376 |
| 95,645 |
| | (23,635 | ) | | (52,176 | ) |
| Other long-term liabilities | (1,031 | ) | | 11,157 |
| | 30,517 |
| (31,446 | ) | | (1,031 | ) | | 11,157 |
|
| Net cash provided by operating activities | 1,771,640 |
| | 1,913,166 |
| | 1,972,126 |
| 2,072,355 |
| | 1,771,640 |
| | 1,913,166 |
|
| Cash flows from investing activities: | | | |
| | |
| | | |
| | |
|
| Additions of property and equipment | (987,138 | ) | | (905,250 | ) | | (829,095 | ) | (766,546 | ) | | (987,138 | ) | | (905,250 | ) |
| Acquisitions | (183,156 | ) | | (803,879 | ) | | (563,856 | ) | (100,861 | ) | | (183,156 | ) | | (803,879 | ) |
| Proceeds from asset and business sales | 150,205 |
| | 92,336 |
| | 64,725 |
| 3,877,392 |
| | 150,205 |
| | 92,336 |
|
| Purchase of investments available for sale | (8,448 | ) | | (13,117 | ) | | (13,539 | ) | |
| Purchase of other debt and equity investments | | (5,458 | ) | | (8,448 | ) | | (13,117 | ) |
| Purchase of investments held-to-maturity | (5,963 | ) | | (228,990 | ) | | (1,133,192 | ) | (101,462 | ) | | (5,963 | ) | | (228,990 | ) |
| Proceeds from sale of investments available for sale | 9,526 |
| | 6,408 |
| | 18,963 |
| |
| Proceeds from sale of other debt and equity investments | | 3,676 |
| | 9,526 |
| | 6,408 |
|
| Proceeds from investments held-to-maturity | 34,862 |
| | 492,470 |
| | 1,240,502 |
| 95,376 |
| | 34,862 |
| | 492,470 |
|
| Purchase of equity investments | (19,177 | ) | | (4,816 | ) | | (27,096 | ) | (9,366 | ) | | (19,177 | ) | | (4,816 | ) |
| Proceeds from sale of equity investments | — |
| | — |
| | 40,920 |
| |
| Distributions received on equity investments | 3,646 |
| | 106 |
| | — |
| 2,589 |
| | 3,646 |
| | 106 |
|
| Net cash used in investing activities | (1,005,643 | ) | | (1,364,732 | ) | | (1,201,668 | ) | |
| Net cash provided by (used in) investing activities | | 2,995,340 |
| | (1,005,643 | ) | | (1,364,732 | ) |
| Cash flows from financing activities: | | | | | | | | | | |
| Borrowings | 59,934,750 |
| | 50,991,960 |
| | 51,991,490 |
| 38,525,850 |
| | 59,934,750 |
| | 50,991,960 |
|
| Payments on long-term debt and other financing costs | (59,239,973 | ) | | (50,837,112 | ) | | (52,116,120 | ) | (40,606,041 | ) | | (59,239,973 | ) | | (50,837,112 | ) |
| Purchase of treasury stock | (1,161,511 | ) | | (802,949 | ) | | (1,097,822 | ) | (2,383,816 | ) | | (1,161,511 | ) | | (802,949 | ) |
| Distributions to noncontrolling interests | (196,441 | ) | | (211,467 | ) | | (192,401 | ) | (233,123 | ) | | (196,441 | ) | | (211,467 | ) |
| Stock award exercises and other share issuances, net | 13,577 |
| | 21,252 |
| | 23,543 |
| 11,382 |
| | 13,577 |
| | 21,252 |
|
| Excess tax benefits from stock award exercises | — |
| | — |
| | 13,251 |
| |
| Contributions from noncontrolling interests | 52,311 |
| | 74,552 |
| | 47,590 |
| 57,317 |
| | 52,311 |
| | 74,552 |
|
| Proceeds from sales of additional noncontrolling interests | 15 |
| | 2,864 |
| | — |
| |
| Proceeds from sales of additional noncontrolling interest | | — |
| | 15 |
| | 2,864 |
|
| Purchases of noncontrolling interests | (28,082 | ) | | (5,357 | ) | | (21,512 | ) | (68,019 | ) | | (28,082 | ) | | (5,357 | ) |
| Net cash used in financing activities | (625,354 | ) | | (766,257 | ) | | (1,351,981 | ) | (4,696,450 | ) | | (625,354 | ) | | (766,257 | ) |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (3,350 | ) | | 254 |
| | 4,276 |
| (1,760 | ) | | (3,350 | ) | | 254 |
|
| Net increase (decrease) in cash, cash equivalents and restricted cash | 137,293 |
| | (217,569 | ) | | (577,247 | ) | 369,485 |
| | 137,293 |
| | (217,569 | ) |
Less: Net increase (decrease) in cash, cash equivalents and restricted cash from discontinued
operations | 240,793 |
| | (53,026 | ) | | (15,793 | ) | |
| Net decrease in cash, cash equivalents and restricted cash from continuing operations | (103,500 | ) | | (164,543 | ) | | (561,454 | ) | |
Less: Net (decrease) increase in cash, cash equivalents and restricted cash from discontinued
operations | | (423,813 | ) | | 240,793 |
| | (53,026 | ) |
| Net increase (decrease) in cash, cash equivalents and restricted cash from continuing operations | | 793,298 |
| | (103,500 | ) | | (164,543 | ) |
| Cash, cash equivalents and restricted cash of continuing operations at beginning of the year | 518,920 |
| | 683,463 |
| | 1,244,917 |
| 415,420 |
| | 518,920 |
| | 683,463 |
|
| Cash, cash equivalents and restricted cash of continuing operations at end of the year | $ | 415,420 |
| | $ | 518,920 |
| | $ | 683,463 |
| $ | 1,208,718 |
| | $ | 415,420 |
| | $ | 518,920 |
|
See notes to consolidated financial statements.
DAVITA INC.
CONSOLIDATED STATEMENTS OF EQUITY
(dollars and shares in thousands)
| | | | Non-controlling
interests
subject to put
provisions | | | DaVita Inc. Shareholders' Equity | | Non-controlling interests not
subject to
put provisions | Non-controlling
interests
subject to put
provisions | | DaVita Inc. Shareholders' Equity | | Non-controlling interests not
subject to
put provisions |
| | | | Common stock | | Additional
paid-in
capital | | Retained
earnings | | Treasury stock | | Accumulated
other
comprehensive
income (loss) | | | | | Common stock | | Additional
paid-in
capital | | Retained
earnings | | Treasury stock | | Accumulated
other
comprehensive
income (loss) | | | |
| | | | Shares | | Amount | | Shares | | Amount | | Total | | | Shares | | Amount | | Shares | | Amount | | Total | |
| Balance at December 31, 2015 | $ | 864,066 |
| | | 217,120 |
| | $ | 217 |
| | $ | 1,118,326 |
| | $ | 4,356,835 |
| | (7,366 | ) | | $ | (544,772 | ) | | $ | (59,826 | ) | | $ | 4,870,780 |
| | $ | 213,392 |
| |
| Comprehensive income: | |
| | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | | | | |
| Net income | 99,834 |
| | | | | | | | | 879,874 |
| | | | | | | | 879,874 |
| | 53,374 |
| |
| Other comprehensive loss | |
| | | | | | | | | | | | | | | (29,817 | ) | | (29,817 | ) | | 190 |
| |
| Stock purchase shares issued | |
| | | 438 |
| | 1 |
| | 23,902 |
| | | | | | | | | | 23,903 |
| | | |
| Stock unit shares issued | |
| | | 4 |
| | — |
| | (19,815 | ) | | | | 276 |
| | 19,815 |
| | | | — |
| | | |
Stock-settled SAR shares
issued | |
| | | 218 |
| | — |
| | (36,685 | ) | | | | 513 |
| | 36,685 |
| | | | — |
| | | |
Stock-settled stock-based
compensation expense | |
| | | | | | | 37,970 |
| | | | | | | | | | 37,970 |
| | | |
Excess tax benefits from stock
awards exercised | | | | | | | | 13,251 |
| | | | | | | | | | 13,251 |
| | | |
Changes in non-controlling
interests from: | | | | | | | | | | | | | | | | | | | | | |
| Distributions | (111,092 | ) | | | | | | | | | | | | | | | | | | | (81,309 | ) | |
| Contributions | 33,517 |
| | | | | | | | | | | | | | | | | | | 14,073 |
| |
| Acquisitions and divestitures | 28,874 |
| | | | | | | 3,423 |
| | | | | | | | | | 3,423 |
| | 2,585 |
| |
| Partial purchases | (6,660 | ) | | | | | | | (13,105 | ) | | | | | | | | | | (13,105 | ) | | (1,747 | ) | |
| Fair value remeasurements | 65,855 |
| | | | | | | (65,855 | ) | | | | | | | | | | (65,855 | ) | | | |
Reclassifications and
expirations of puts | (1,136 | ) | | | | | | | | | | | | | | | | | | | 1,136 |
| |
| Purchase of treasury stock | | | | | | | | | | | | (16,649 | ) | | (1,072,377 | ) | | | | (1,072,377 | ) | | | |
| Retirement of treasury stock | |
| | | (23,226 | ) | | (23 | ) | | (34,230 | ) | | (1,526,396 | ) | | 23,226 |
| | 1,560,649 |
| | |
| | |
| | |
| |
| Balance at December 31, 2016 | $ | 973,258 |
| | | 194,554 |
| | $ | 195 |
| | $ | 1,027,182 |
| | $ | 3,710,313 |
| | — |
| | $ | — |
| | $ | (89,643 | ) | | $ | 4,648,047 |
| | $ | 201,694 |
| $ | 973,258 |
| | 194,554 |
| | $ | 195 |
| | $ | 1,027,182 |
| | $ | 3,710,313 |
| | — |
| | $ | — |
| | $ | (89,643 | ) | | $ | 4,648,047 |
| | $ | 201,694 |
|
| Comprehensive income: | |
| | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | | | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | | | |
| Net income | 103,641 |
| | | | | | | | | 663,618 |
| | | | | | | | 663,618 |
| | 63,296 |
| 103,641 |
| | | | | | | | 663,618 |
| | | | | | | | 663,618 |
| | 63,296 |
|
| Other comprehensive income | |
| | | | | | | | | | | | | | | 102,878 |
| | 102,878 |
| | (2 | ) | |
| | | | | | | | | | | | | | 102,878 |
| | 102,878 |
| | (2 | ) |
| Stock purchase shares issued | | | | 360 |
| | | | 22,131 |
| | | | | | | | | | 22,131 |
| | | | | 360 |
| | | | 22,131 |
| | | | | | | | | | 22,131 |
| | |
| Stock unit shares issued | |
| | | 117 |
| | | | (101 | ) | | | | | | | | | | (101 | ) | | |
| |
| | 117 |
| | | | (101 | ) | | | | | | | | | | (101 | ) | | |
|
Stock-settled SAR shares
issued | | | | 398 |
| | | | — |
| | | | | | | | | | — |
| | | | | 398 |
| | | | — |
| | | | | | | | | | — |
| | |
Stock-settled stock-based
compensation expense | | | | | | | | 34,981 |
| | | | | | | | | | 34,981 |
| | | | | | | | | 34,981 |
| | | | | | | | | | 34,981 |
| | |
Changes in noncontrolling
interest from: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Distributions | (128,853 | ) | | | | | | | | | | | | | | | | | | | (82,614 | ) | (128,853 | ) | | | | | | | | | | | | | | | | | | (82,614 | ) |
| Contributions | 52,911 |
| | | | | | | | | | | | | | | | | | | 21,641 |
| 52,911 |
| | | | | | | | | | | | | | | | | | 21,641 |
|
| Acquisitions and divestitures | 43,799 |
| | | | | | | (823 | ) | | | | | | | | | | (823 | ) | | (5,770 | ) | 43,799 |
| | | | | | (823 | ) | | | | | | | | | | (823 | ) | | (5,770 | ) |
| Partial purchases | (397 | ) | | | | | | | (2,752 | ) | | | | | | | | | | (2,752 | ) | | (2,208 | ) | (397 | ) | | | | | | (2,752 | ) | | | | | | | | | | (2,752 | ) | | (2,208 | ) |
| Fair value remeasurements | (32,999 | ) | | | | | | | 32,999 |
| | | | | | | | | | 32,999 |
| | |
| (32,999 | ) | | | | | | 32,999 |
| | | | | | | | | | 32,999 |
| | |
|
| Purchase of treasury stock | | | | | | | | | | | | (12,967 | ) | | (810,949 | ) | | | | (810,949 | ) | | | | | | | | | | | | | (12,967 | ) | | (810,949 | ) | | | | (810,949 | ) | | |
| Retirement of treasury stock | | | | (12,967 | ) | | (13 | ) | | (70,718 | ) | | (740,218 | ) | | 12,967 |
| | 810,949 |
| | | | | | | | | (12,967 | ) | | (13 | ) | | (70,718 | ) | | (740,218 | ) | | 12,967 |
| | 810,949 |
| | | | | | |
| Balance at December 31, 2017 | $ | 1,011,360 |
| | | 182,462 |
| | $ | 182 |
| | $ | 1,042,899 |
| | $ | 3,633,713 |
| | — |
| | $ | — |
| | $ | 13,235 |
| | $ | 4,690,029 |
| | $ | 196,037 |
| $ | 1,011,360 |
| | 182,462 |
| | $ | 182 |
| | $ | 1,042,899 |
| | $ | 3,633,713 |
| | — |
| | $ | — |
| | $ | 13,235 |
| | $ | 4,690,029 |
| | $ | 196,037 |
|
Cumulative effect of change
in accounting principle | | | | | | | | | | 8,368 |
| | | | | | (8,368 | ) | | — |
| | |
| Comprehensive income: | | |
| | | | | | | | | | | | | | | | | | |
| Net income | | 105,531 |
| | | | | | | | 159,394 |
| | | | | | | | 159,394 |
| | 68,115 |
|
| Other comprehensive income | | | | | | | | | | | | | | | | (39,791 | ) | | (39,791 | ) | | |
| Stock purchase shares issued | | | | 398 |
| | | | 17,398 |
| | | | | | | | | | 17,398 |
| | |
| Stock unit shares issued | | | | 158 |
| | | | (448 | ) | | | | | | | | | | (448 | ) | | |
Stock-settled SAR shares
issued | | | | 213 |
| | 1 |
| | (4,887 | ) | | | | | | | | | | (4,886 | ) | | |
Stock-settled stock-based
compensation expense | | | | | | | | 73,081 |
| | | | | | | | | | 73,081 |
| | |
Changes in noncontrolling
interest from: | | | | | | | | | | | | | | | | | | | | |
| Distributions | | (119,173 | ) | | | | | | | | | | | | | | | | | | (77,268 | ) |
| Contributions | | 32,918 |
| | | | | | | | | | | | | | | | | | 19,393 |
|
| Acquisitions and divestitures | | 79,078 |
| | | | | | 3,546 |
| | | | | | | | | | 3,546 |
| | 318 |
|
| Partial purchases | | (8,546 | ) | | | | | | (17,897 | ) | | | | | | | | | | (17,897 | ) | | (1,639 | ) |
| Fair value remeasurements | | 23,473 |
| | | | | | (23,473 | ) | | | | | | | | | | (23,473 | ) | | |
| Purchase of treasury stock | | | | | | | | | | | | (16,844 | ) | | (1,153,511 | ) | | | | (1,153,511 | ) | | |
| Retirement of treasury stock | | | | (16,844 | ) | | (17 | ) | | (95,213 | ) | | (1,058,281 | ) | | 16,844 |
| | 1,153,511 |
| | | | — |
| | |
| Balance at December 31, 2018 | | $ | 1,124,641 |
| | 166,387 |
| | $ | 166 |
| | $ | 995,006 |
| | $ | 2,743,194 |
| | — |
| | $ | — |
| | $ | (34,924 | ) | | $ | 3,703,442 |
| | $ | 204,956 |
|
DAVITA INC.
CONSOLIDATED STATEMENTS OF EQUITY - continued
(dollars and shares in thousands)
| | | | Non-controlling
interests
subject to put
provisions | | | DaVita Inc. Shareholders' Equity | | Non-controlling interests not
subject to
put provisions | Non-controlling
interests
subject to put
provisions | | DaVita Inc. Shareholders' Equity | | Non-controlling interests not
subject to
put provisions |
| | | | | Additional
paid-in
capital | | Retained
earnings | | | | Accumulated
other
comprehensive
income (loss) | | | | | | | Additional
paid-in
capital | | Retained
earnings | | | | Accumulated
other
comprehensive
income (loss) | | | |
| | | Common stock | | Treasury stock | | | | | Common stock | | Treasury stock | | | |
| | | Shares | | Amount | | Shares | | Amount | | Total | | | Shares | | Amount | | Shares | | Amount | | Total | |
Cumulative effect of change
in accounting principle | | (38 | ) | |
|
| |
|
| |
|
| | 39,876 |
| |
|
| |
|
| |
|
| | 39,876 |
| | (6 | ) |
| Comprehensive income: | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Net income | 105,531 |
| | | | | | | | | 159,394 |
| | | | | | | | 159,394 |
| | 68,115 |
| 143,413 |
| |
|
| |
|
| |
|
| | 810,981 |
| |
|
| |
|
| |
|
| | 810,981 |
| | 66,900 |
|
Cumulative effect of change
in accounting principle | | | | | | | | | | 8,368 |
| | | | | | (8,368 | ) | | — |
| | | |
| Comprehensive income | | | | | | | | | | | | | | | | (39,791 | ) | | (39,791 | ) | | | |
| Other comprehensive income | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| | (12,574 | ) | | (12,574 | ) | |
|
|
| Stock purchase shares issued | | | | 398 |
| | | | 17,398 |
| | | | | | | | | | 17,398 |
| | |
|
| | 315 |
| | 1 |
| | 16,569 |
| |
|
| |
|
| |
|
| |
|
| | 16,570 |
| |
|
|
| Stock unit shares issued | | | | 158 |
| | | | (448 | ) | | | | | | | | | | (448 | ) | | |
|
| | 160 |
| |
|
| | (3,246 | ) | |
|
| |
|
| |
|
| |
|
| | (3,246 | ) | |
|
|
Stock-settled SAR shares
issued | | | | 213 |
| | 1 |
| | (4,887 | ) | | | | | | | | | | (4,886 | ) | | |
|
| | 1 |
| |
|
| | (44 | ) | |
|
| |
|
| |
|
| |
|
| | (44 | ) | |
|
|
Stock-settled stock-based
compensation expense | | | | | | | | 73,081 |
| | | | | | | | | | 73,081 |
| | |
|
| |
|
| |
|
| | 67,549 |
| |
|
| |
|
| |
|
| |
|
| | 67,549 |
| |
|
|
Changes in noncontrolling
interest from: | | | | | | | | | | | | | | | | | | | | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
| Distributions | (119,173 | ) | | | | | | | | | | | | | | | | | | | (77,268 | ) | (155,011 | ) | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| | | | (78,112 | ) |
| Contributions | 32,918 |
| | | | | | | | | | | | | | | | | | | 19,393 |
| 35,572 |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| | | | 21,745 |
|
| Acquisitions and divestitures | 79,078 |
| | | | | | | 3,546 |
| | | | | | | | | | 3,546 |
| | 318 |
| (6,332 | ) | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| | | | (10,170 | ) |
| Partial purchases | (8,546 | ) | | | | | | | (17,897 | ) | | | | | | | | | | (17,897 | ) | | (1,639 | ) | (11,394 | ) | |
|
| |
|
| | (37,145 | ) | |
|
| |
|
| |
|
| |
|
| | (37,145 | ) | | (19,480 | ) |
| Fair value remeasurements | 23,473 |
| | | | | | | (23,473 | ) | | | | | | | | | | (23,473 | ) | | | 49,525 |
| |
|
| |
|
| | (49,525 | ) | |
|
| |
|
| |
|
| |
|
| | (49,525 | ) | |
|
|
| Purchase of treasury stock | | | | | | | | | | | | (16,844 | ) | | (1,153,511 | ) | | | | (1,153,511 | ) | | |
|
| |
|
| |
|
| |
|
| |
|
| | (41,020 | ) | | (2,402,475 | ) | |
|
| | (2,402,475 | ) | |
|
|
| Retirement of treasury stock | | | | (16,844 | ) | | (17 | ) | | (95,213 | ) | | (1,058,281 | ) | | 16,844 |
| | 1,153,511 |
| | | | — |
| | |
|
| | (41,020 | ) | | (41 | ) | | (240,121 | ) | | (2,162,313 | ) | | 41,020 |
| | 2,402,475 |
| |
|
| | — |
| |
|
|
| Balance at December 31, 2018 | $ | 1,124,641 |
| | | 166,387 |
| | $ | 166 |
| | $ | 995,006 |
| | $ | 2,743,194 |
| | — |
| | $ | — |
| | $ | (34,924 | ) | | $ | 3,703,442 |
| | $ | 204,956 |
| |
| Balance at December 31, 2019 | | $ | 1,180,376 |
| | 125,843 |
| | $ | 126 |
| | $ | 749,043 |
| | $ | 1,431,738 |
| | — |
| | $ | — |
| | $ | (47,498 | ) | | $ | 2,133,409 |
| | $ | 185,833 |
|
See notes to consolidated financial statements.
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
1. Organization and summary of significant accounting policies
Organization
DaVita Inc. (the Company) consists of two major divisions, DaVita Kidney Care (Kidney Care) and DaVita Medical Group (DMG). The Kidney Care division isCompany's operations are comprised of the Company’s U.S.its dialysis and related lab services to patients in the United States (its U.S. dialysis business), its ancillary services and strategic initiatives including its international operations (collectively, its ancillary services), and its corporate administrative support.
The Company’s largest line of business is its U.S. dialysis and related lab services business, which operates kidney dialysis centers in the U.S. for patients suffering from chronic kidney failure, also known as end stage renal disease (ESRD). As of December 31, 2018,2019, the Company operated or provided administrative services through a network of 2,6642,753 U.S. outpatient dialysis centers in 46 states and the District of Columbia, serving a total of approximately 202,700206,900 patients. In addition, as of December 31, 2018,2019, the Company operated or provided administrative services to a total of 241259 outpatient dialysis centers serving approximately 25,00028,700 patients located in nine10 countries outside of the U.S.
The Company’s DMG division is a patient- and physician-focused integrated healthcare delivery and management company that provides medical services to members primarily through capitation contracts with some of the nation’s leading health plans. In December 2017,On June 19, 2019, the Company entered into an agreement to sellcompleted the sale of its DMG divisionDaVita Medical Group (DMG) business to Collaborative Care Holdings, LLC (Optum), a subsidiary of UnitedHealth Group Inc., subject to receipt of required regulatory approvals and other customary closing conditions. As a result the DMG business has been classified as held for sale and itsof this transaction, DMG's results of operations arehave been reported as discontinued operations for all periods presented in these consolidated financial statements. For financial information about the DMG business, see Note 22.
The Company’s U.S. dialysis and related lab services business qualifies as a separately reportable segment and the Company’s other ancillary services, and strategic initiatives, including its international operations, have been combined and disclosed in the other segments category.
Basis of presentation
These consolidated financial statements are prepared in accordance with United States generally accepted accounting principles (U.S. GAAP). The financial statements include DaVita Inc. and its subsidiaries, partnerships and other entities in which it maintains a majority voting interest or other controlling financial interest (collectively, the Company). All significant intercompany transactions and balances have been eliminated. Equity investments in investees over which the Company only has significant influence are recorded on the equity method, while investments in other equity securities are recorded at fair value or pursuant to anon the adjusted cost method, measurement alternative, as applicable. For the Company’s international subsidiaries, local currencies are considered their functional currencies. Translation adjustments result from translating the financial statements of the Company’s international subsidiaries’ financial statementssubsidiaries from their functional currencies into the Company’s reporting currency (the U.S. dollar, or USD). Prior year balances and amounts have been reclassified to conform to the current year presentation.
The Company has evaluated subsequent events through the date these consolidated financial statements were issued and has included all necessary adjustments and disclosures.
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires the use of estimates and assumptions that affect the reported amounts of revenues, expenses, assets, liabilities, contingencies and noncontrolling interests subject to put provisions. Although actual results in subsequent periods will differ from these estimates, such estimates are developed based on the best information available to management and management’s best judgments at the time. All significant assumptions and estimates underlying the amounts reported in the financial statements and accompanying notes are regularly reviewed and updated when necessary. Changes in estimates are reflected in the financial statements based upon on-going actual experience trends or subsequent settlements and realizations depending on the nature and predictability of the estimates and contingencies. Interim changes in estimates related to annual operating costs are applied prospectively within annual periods.
The most significant assumptions and estimates underlying these consolidated financial statements and accompanying notes involve revenue recognition and accounts receivable, contingencies, impairments of goodwill and investments, accounting for income taxes consolidation of variable interest entities, and certain fair value estimates. Specific estimating risks and contingencies are further addressed within these notes to the consolidated financial statements.
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars in thousands, except per share data)
Revenues
On January 1, 2018, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 606 Revenue from Contracts with Customers (Topic 606) using the cumulative effect method for those
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
contracts that were not substantially completed as of January 1, 2018. Results for reporting periods beginning on and after January 1, 2018 are presented under Topic 606, while prior period amounts continue to be presented in accordance with the Company's historical accounting under Revenue Recognition (Topic 605).
The adoption of this new standard primarily changed the Company’s presentation of revenues, provision for uncollectible accounts and allowance for doubtful accounts. Topic 606 requires revenue to be recognized based on the Company’s estimate of the transaction price the Company expects to collect as a result of satisfying its performance obligations. Accordingly, for performance obligations satisfied after the adoption of Topic 606, the Company no longer separately presents a provision for uncollectible accounts on the consolidated income statement and no longer presents the related allowance for doubtful accounts on the consolidated balance sheet. However, as a result of the Company’s election to apply Topic 606 only to contracts not substantially completed as of January 1, 2018, the Company continues to maintain an allowance for doubtful accounts related to performance obligations satisfied prior to the adoption of Topic 606. Net collections or write-offs of accounts receivable generated prior to January 1, 2018, beyond amounts previously reserved thereon, are presented in the provision for uncollectible accounts on the consolidated income statement in accordance with Topic 605.
Dialysis and related lab patient service revenues
Revenues are recognized based on the Company’s estimate of the transaction price the Company expects to collect as a result of satisfying its performance obligations. Dialysis patient service revenues are recognized in the period services are provided.provided based on these estimates. Revenues consist primarily of payments from government and commercial health plans for dialysis and related lab services provided to patients. A usual and customary fee schedule is maintained for the Company’s dialysis treatments and related lab services; however, actual collectible revenue is normally recognized at a discount from the fee schedule.
Revenues associated with Medicare and Medicaid programs are estimated based on: (a) the payment rates that are established by statute or regulation for the portion of payment rates paid by the government payor (e.g., 80% for Medicare patients) and (b) for the portion not paid by the primary government payor, estimates of the amounts ultimately collectible from other government programs payingproviding secondary coverage (e.g., Medicaid secondary coverage), the patient’s commercial health plan secondary coverage, or the patient.
Under Medicare’s bundled payment rate system, services covered by Medicare are subject to estimating risk, whereby reimbursements from Medicare can vary significantly depending upon certain patient characteristics and other variable factors. Even with the bundled payment rate system, Medicare payments for bad debt claims as established by cost reports require evidence of collection efforts. As a result, billing and collection of Medicare bad debt claims can be delayed significantly and final payment is subject to audit. The Company’s revenue recognition is estimated based on its judgment regarding its ability to collect, which depends upon its ability to effectively capture, document and bill for Medicare’s base payment rate as well as these other variable factors.
Medicaid payments, when Medicaid coverage is secondary, can also be difficult to estimate. For many states, Medicaid payment terms and methods differ from Medicare, and may prevent accurate estimation of individual payment amounts prior to billing.
Revenues associated with commercial health plans are estimated based on contractual terms for the patients under healthcare plans with which the Company has formal agreements, non-contracted health plan coverage terms if known, estimated secondary collections, historical collection experience, historical trends of refunds and payor payment adjustments (retractions), inefficiencies in the Company’s billing and collection processes that can result in denied claims for payments, delays in collections due to payor payment inefficiencies, and regulatory compliance matters.
Commercial revenue recognition also involves significant estimating risks. With many larger commercial insurers, the Company has several different contracts and payment arrangements, and these contracts often include only a subset of the Company’s centers. In certain circumstances, it may not be possible to determine which contract, if any, should be applied prior to billing. In addition, for services provided by non-contracted centers, final collection may require specific negotiation of a payment amount, typically at a significant discount from the Company’s usual and customary rates.
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars in thousands, except per share data)
Other revenues
Other revenues consist of the revenues associated with the non-dialysis ancillary services and strategic initiatives,fees for management and administrative support services that are provided to outpatient dialysis centers that the Company does not own or in which the Company owns a noncontrolling interest, revenues associated with the Company's non-dialysis ancillary services and strategic initiatives, and administrative and management support services to certain other non-dialysis joint ventures in which the Company owns a noncontrolling interest. Revenues associated with pharmacy services are estimated as prescriptions are filled and shipped to patients. Revenues associated with dialysis management services, disease management services, clinical research programs, physician services, ESRD seamless care
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
organizations, and comprehensive care are estimated in the period services are provided. Revenues associated with pharmacy services were estimated as prescriptions were filled and shipped to patients. Revenues associated with direct primary care were estimated over the membership period.
Other income
Other income includes interest income on cash and cash-equivalentscash equivalents and short- and long-term investments, other non-operatingrealized and unrealized gains from investment transactions,and losses recognized on investments, and foreign currency transaction gains and losses.
Cash and cash equivalents
Cash equivalents are short-term highly liquid investments with maturities of three months or less at date of purchase.
Restricted cash and equivalents
Restricted cash and cash equivalents are restricted cash or cash equivalentsprimarily held in trust to satisfy insurer and state regulatory requirements related to the Company's self-insurance forwholly-owned captive insurance companies that bear professional and general liability and workers' compensation risks administered by wholly-owned captive insurance entities.for the Company.
Investments in debt and equity securities
The Company classifies certain debt securities as held-to-maturity and records them at amortized cost based on the Company’s intentions and strategies concerning those investments. Equity securities that have readily determinable fair values or redemption values are classified as short-term or long-term investments and recorded at estimated fair value with changes in fair value recognized in current earnings. See Note 5 for further details, including recent changes to the Company's accounting for these investments.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or net realizable value and consist principally of pharmaceuticals and dialysis-related supplies. Rebates related to inventory purchases are recorded when earned and are based on certain qualification requirements which are dependent on a variety of factors including future pricing levels byfrom the manufacturer and related data submission.
Property and equipment
Property and equipment is stated at cost less accumulated depreciation and amortization and is further reduced by any impairments. Maintenance and repairs are charged to expense as incurred. Depreciation and amortization expenses are computed using the straight-line method over the useful lives of the assets estimated as follows: buildings, 2025 years to 40 years; leasehold improvements, the shorter of ten years or the expected lease term; and equipment and information systems, principally three years to 15 years. Disposition gains and losses are included in current operating expenses. Property and equipment assets are reviewed for possible impairment whenever significant events or changes in circumstances indicate that an impairment may have occurred.
Leases
The Company leases substantially all of its U.S. dialysis facilities. The Company categorizes leases with contractual terms longer than twelve months as either operating or finance leases. Finance leases are generally those leases that allow the Company to substantially utilize or pay for the entire asset over its estimated life. All other leases are categorized as operating leases.
Assets acquired under finance leases are recorded on the balance sheet within property and equipment, net and liabilities for finance lease obligations are recorded within long-term debt. Finance lease assets are amortized to depreciation expense on a straight-line basis over the shorter of their estimated useful lives or the lease term.
Rights to use assets under operating leases are recorded on the balance sheet as operating lease right-of-use assets and liabilities for operating lease obligations are recorded as operating lease liabilities. Reductions in the carrying amount of operating lease right-of-use assets are recorded to rent expense over the lease term.
The majority of the Company’s facilities are leased under non-cancellable operating leases ranging in terms from five years to 15 years and which contain renewal options of five years to ten years at the fair rental value at the time of renewal. The
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
Company has elected the practical expedient to not separate lease components from non-lease components for its financing and operating leases.
Amortizable intangibles
Amortizable intangible assets and liabilities include non-competition and similar agreements, leasenoncompetition agreements and hospital acute services contracts, each of which have finite useful lives. Amortization expense is computed using the straight-line method over the useful lives of the assets estimated as follows: non-competition and similar agreements twoover three years to ten years; and lease agreementsyears, and hospital acute service contracts over the term of the leasecontract period. Amortizable intangible assets are reviewed for possible impairment whenever significant events or contract period, respectively.
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollarschanges in thousands, except per share data)
Indefinite-lived intangibles
Indefinite-lived intangible assets include international licenses and accreditations that allow the Company to be reimbursed for providing dialysis services to patients, each of which has an indefinite useful life. Indefinite-lived intangibles are not amortized, but are assessed for impairment at least annually and whenever significant events or changes in circumstances indicate that an impairment may have occurred.
Equity method and other investments
Equity investments that do not have readily determinable fair values are carried on the equity method if the Company maintains significant influence over the investee or on anthe adjusted cost method measurement alternative representing eitherif it does not. The adjusted cost method represents the Company's cost for an investment, net of any other-than-temporary impairment, or a subsequent observation of the investment's fair value, in each case net of any applicable other-than-temporary impairment.value. The Company classifies its equity and adjusted cost method investments as “Equity method and other investments” on its balance sheet. See Note 10 to these consolidated financial statements9 for further details, including recent changes to the Company's accounting for these investments.
Goodwill
Goodwill represents the difference between the fair value of businesses acquired and the fair value of the identifiable tangible and intangible net assets acquired. Goodwill is not amortized, but is assessed by individual reporting unit for impairment as circumstances warrant and at least annually. An impairment charge is recorded when and to the extent a reporting unit's carrying amount is determined to exceed its fair value. The Company operates multiple reporting units. See Note 11 to these consolidated financial statements for further details.
Impairment of equity method and other investments
Equity method and other investments are assessed for other-than-temporary impairment when significant events or changes in circumstances indicate that an other-than-temporary impairment may have occurred. An other-than-temporary impairment charge is recorded when the fair value of an investment has fallen below its carrying amount and the shortfall is expected to be indefinitely or permanently unrecoverable.
Impairment of other long-lived assetsGoodwill
Other long-lived assets, including property and equipment and intangible assets, are reviewed for possible impairment whenever significant events or changes in circumstances indicate that an impairment may have occurred. Such changes can include changes in the Company’s business strategy and plans, changes in the quality or structure of its relationships with its partners or deteriorating performance of individual outpatient dialysis centers or other business units. An impairment of an amortizable or depreciable asset is indicated when the sum of the expected future undiscounted net cash flows identifiable to the related asset group is less than its carrying amount. Impairment losses are measured based onGoodwill represents the difference between the estimated fair value of businesses acquired and the fair value of the identifiable tangible and intangible net assets acquired. Goodwill is not amortized, but is assessed by individual reporting unit for impairment as circumstances warrant and at least annually. An impairment charge is recognized when and to the extent a reporting unit's carrying amount of the subject asset group and are included in operating expenses.is determined to exceed its fair value. The Company operates multiple reporting units. See Note 10 for further details.
Self-insurance
The Company is predominantly self-insured with respect toself-insures its professional and general liability and workers' compensation risks through its wholly-owned captive insurance companies, with excess or reinsurance coverage for additional risk. The Company is also predominantly self-insured with respect to employee medical and other health benefits. The Company records insurance liabilities for the professional and general liability, workers’ compensation, and employee health benefit risks that it retains and estimates its liability for those risks using third party actuarial calculations that are based upon historical claims experience and expectations for future claims.
Income taxes
Federal and state income taxes are computed at currently enacted tax rates less tax credits using the asset and liability method. Deferred taxes are adjusted both for items that do not currently have tax consequences and for the cumulative effect of any changes in tax rates from those previously used to determine deferred tax assets or liabilities. Tax provisions include amounts that are currently payable, changes in deferred tax assets and liabilities that arise because of temporary differences between the timing of when items of income and expense are recognized for financial reporting and income tax purposes, changes in the recognition of tax positions and any changes in the valuation allowance caused by a change in judgment about
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars in thousands, except per share data)
the realizability of the related deferred tax assets. A valuation allowance is established when necessary to reduce deferred tax assets to amounts expected to be realized.
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
The Company uses a recognition threshold of more-likely-than-not and a measurement attribute on all tax positions taken or expected to be taken in a tax return in order to be recognized in the financial statements. Once the recognition threshold is met, the tax position is then measured to determine the actual amount of benefit to recognize in the financial statements.
Stock-based compensation
The Company’s stock-based compensation expense for stock-settled awards is measured at the estimated fair value of awards on the date of grant and recognized on a cumulative straight-line basis over the vesting terms of the awards, unless the stock awards are based on non-market based performance metrics, in which case expense is adjusted for the ultimate number of shares expected ultimate payoutsto be issued as of the end of each reporting period. Stock-based compensation expense for cash-settled awards is based on thetheir estimated fair values as of the end of each reporting period. The expense for all stock-based awards is recognized net of expected forfeitures.
Interest rate cap and swap agreements
The Company often carries a combination of current or forward interest rate caps or interest rate swaps on portions of its variable rate debt as a means of hedging its exposure to changes in LIBOR interest rates as part of its overall interest rate risk management strategy. These interest rate caps and swaps are not held for trading or speculative purposes and are typically designated as qualifying cash flow hedges. See Note 14 to these consolidated financial statements13 for further details.
Noncontrolling interests
Noncontrolling interests represent third-party equity ownership interests in entities which are consolidated by the Company for financial statement reporting purposes. As of December 31, 2018,2019, third parties held noncontrolling equity interests in 653672 consolidated legal entities, including 650 legal entities classified within continuing operations.entities.
Fair value estimates
The Company relies on fair value measurements and estimates for purposes that require the recording, reassessment, or adjustment of the carrying amounts of certain assets, liabilities, and noncontrolling interests subject to put provisions (temporary(redeemable equity interests classified as temporary equity). These purposes can include the accounting for business combination transactions; impairment assessments for goodwill, other intangible assets, or other long-lived assets; recurrent revaluation of investments in debt and equity securities, contingent earn-out obligations, interest rate cap agreements or other derivative instruments, contingent earn-out obligations, and noncontrolling interests subject to put provisions; and the accounting for equity method and other investments and stock-based compensation, as applicable. The Company has also classified its assets, liabilities and temporary equity into the appropriate fair value hierarchy levels as defined by the FASB. See Note 24 to these consolidated financial statements for further details.
New accounting standards
On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. In 2015, 2016 and 2017, the FASB issued ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-11, ASU 2016-12, and ASU 2017-10, each of which amended the guidance in ASU 2014-09. These ASUs replaced most existing revenue recognition guidance in GAAP. The CompanyNew standards recently adopted these ASUs beginning January 1, 2018. See Note 2 for further details.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. In February 2018, the FASB issued ASU 2018-03, which provides various related technical corrections and improvements. The Company adopted these ASUs beginning January 1, 2018. See Note 5 for further details.
In February 2016, the FASB issued ASU No. 2016-02, Leases(Topic (Topic 842). The amendments in this ASU include revisions toTopic 842 revise lessee accounting requiringfor leases. Under the new guidance, lessees are required to recognize a lease liability and a right-of-use asset for substantially all leases with lease terms in excess of twelve months. The new lease guidance also simplifies the accounting for sale leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. The Company plans to adopt the amendments in this ASUadopted Topic 842 as of January 1, 2019 using a modified retrospective transition approach with a cumulative effect adjustment for leases existing at or entered into after, the adoption date with a cumulative effect adjustment.date. The Company is planning on electingelected to apply the package of practical expedients to not reassess prior
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars in thousands, except per share data)
conclusions related to contracts containing leases, lease classification and initial direct costs. The Company estimates the impactAdoption of this guidance will result in recognition of additional net lease liabilities of approximately $3,000,000Topic 842 as of January 1, 2019. The Company is still finalizing its calculations, including2019 resulted in the amountrecognition of rightoperating right-of-use assets of use assets to recognize as well as, the$2,783,784, operating lease liabilities of $3,001,354 and a cumulative effect adjustment to beginning retained earnings. The Company does not believeearnings of $39,876, primarily related to deferred gains on prior sale leaseback transactions. Adoption of this new guidance will have a material effect on its results of operations or liquidity.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments in this ASU clarify how certain cash receipts and cash payments should be classified on the statement of cash flows. In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted cash. The amendments in this ASU require that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The adoption of these ASUs did not have a material impact on the Company’s consolidated financial statements when adopted on January 1, 2018.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The amendments in this ASU allow entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The priorlease guidance did not allow recognition untilmaterially impact the assetCompany's consolidated net earnings and had been sold to an outside party. The amendments in this ASU were effective for the Company beginning on January 1, 2018 and have been applied on a modified retrospective basis. The adoption of this ASU did not have a material0 impact on the Company’s consolidated financial statements.cash flows. See Note 14 for further details.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The amendments in this ASU better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The amendments in this ASU arewere effective for the Company on January 1, 2019 and are to be applied prospectively. The adoption2019. Adoption of this ASU isdid not expected to have a material impact on the Company’s consolidated financial statements.
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
New standards not yet adopted
In February 2018,June 2016, the FASB issued ASU No. 2018-02,2016-13, Income StatementFinancial Instruments - Reporting Comprehensive IncomeCredit Losses (Topic 220), Reclassification326): Measurement of Certain Tax Effects from Accumulated Other Comprehensive IncomeCredit Losses on Financial Instruments. , which allows for the reclassification of certain income tax effects related to the Tax Cuts and Jobs Act (2017 Tax Act) between “Accumulated other comprehensive income” and “Retained earnings.” This ASU relates to the requirement that adjustments to deferred tax liabilities and assets related to a change in tax laws or rates be included in “Income from continuing operations”, even in situations where the related items were originally recognized in “Other comprehensive income” (rather than in “Income from continuing operations”). The amendments in this ASU werechange the approach for recognizing credit losses on financial assets from the incurred loss methodology in current U.S. GAAP to a methodology that reflects current expected credit losses, which requires consideration of a broader range of reasonable and supportable information to inform those credit loss estimates. The current incurred loss model delays recognition of credit losses until it is probable that a loss has been incurred, while this ASU’s new current expected credit loss model requires estimation of credit losses expected over the life of the financial asset or group of similar financial assets. The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. Thethe Company elected to early adopt this ASU on January 1, 20182020 and are to be applied on a modified retrospective approach. The Company has evaluated the change in the period of adoption. The adoptionimpact of this ASU resulted instandard on its consolidated financial statements, including accounting policies, processes, and systems, and does not expect the reclassification of an immaterial amount of deferred tax effects from accumulated other comprehensive incomeimpact to retained earnings via a cumulative change in accounting principle effective January 1, 2018. See Note 20 for more details.be material.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework -Changes to the Disclosure Requirements for Fair Value Measurement. The applicable amendments in this ASU remove requirements for disclosures concerning transfers between fair value measurement Levels 1, 2 and 3 and disclosures concerning valuation processes for Level 3 fair value measurements. The applicable amendments in this ASU also add a requirement to separately disclose the changes in unrealized gains and losses included in other comprehensive income for the reporting period for Level 3 items measured at fair value on a recurring basis, and require disclosure of the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this ASU are effective for the Company beginning on January 1, 2020 and its new requirements are to be applied on a prospective basis. The adoptionAdoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 attempts to simplify aspects of accounting for franchise taxes and enacted changes in tax laws or rates, and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 is effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods within that fiscal year. Early adoption is permitted for all entities. The Company is currently assessing the effect this guidance may have on its consolidated financial statements.
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars in thousands, except per share data)
2. Revenue recognition and accounts receivable
The following table summarizes the Company's segment revenues by primary payor source:
| | | | Year ended December 31, 2018 | Year ended December 31, 2019 |
| | U.S. dialysis and related lab services | | Other - Ancillary services and strategic initiatives | | Consolidated | U.S. dialysis | | Other - Ancillary services | | Consolidated |
| Patient service revenues: | | | | | | | | | | |
| Medicare and Medicare Advantage | $ | 6,063,891 |
| | $ | — |
| | $ | 6,063,891 |
| $ | 6,129,697 |
| | $ | | $ | 6,129,697 |
|
| Medicaid and Managed Medicaid | 628,766 |
| | — |
| | 628,766 |
| 669,089 |
| |
| | 669,089 |
|
| Other government | 446,999 |
| | 335,594 |
| | 782,593 |
| 446,010 |
| | 352,765 |
| | 798,775 |
|
| Commercial | 3,176,413 |
| | 101,681 |
| | 3,278,094 |
| 3,286,089 |
| | 144,256 |
| | 3,430,345 |
|
| Other revenues: | | | | | | | | | | |
| Medicare and Medicare Advantage | — |
| | 492,812 |
| | 492,812 |
|
| | 264,538 |
| | 264,538 |
|
| Medicaid and Managed Medicaid | — |
| | 44,246 |
| | 44,246 |
|
| | 606 |
| | 606 |
|
| Commercial | — |
| | 90,890 |
| | 90,890 |
|
| | 130,823 |
| | 130,823 |
|
Other(1) | 19,880 |
| | 130,865 |
| | 150,745 |
| 32,021 |
| | 78,940 |
| | 110,961 |
|
| Eliminations of intersegment revenues | (92,950 | ) | | (34,236 | ) | | (127,186 | ) | (132,325 | ) | | (14,030 | ) | | (146,355 | ) |
| Total | $ | 10,242,999 |
| | $ | 1,161,852 |
| | $ | 11,404,851 |
| $ | 10,430,581 |
| | $ | 957,898 |
| | $ | 11,388,479 |
|
| |
| (1) | Other consists of management service fees earned in the respective Company line of business as well as other revenue from the Company's ancillary services and strategic initiatives.services. |
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
|
| | | | | | | | | | | |
| | Year ended December 31, 2018 |
| | U.S. dialysis | | Other - Ancillary services | | Consolidated |
| Patient service revenues: | | | | | |
| Medicare and Medicare Advantage | $ | 6,063,891 |
| | $ | | $ | 6,063,891 |
|
| Medicaid and Managed Medicaid | 628,766 |
| |
| | 628,766 |
|
| Other government | 446,999 |
| | 335,594 |
| | 782,593 |
|
| Commercial | 3,176,413 |
| | 101,681 |
| | 3,278,094 |
|
| Other revenues: | | | | | |
| Medicare and Medicare Advantage |
| | 492,812 |
| | 492,812 |
|
| Medicaid and Managed Medicaid |
| | 44,246 |
| | 44,246 |
|
| Commercial |
| | 90,890 |
| | 90,890 |
|
Other(1) | 19,880 |
| | 130,865 |
| | 150,745 |
|
| Eliminations of intersegment revenues | (92,950 | ) | | (34,236 | ) | | (127,186 | ) |
| Total | $ | 10,242,999 |
| | $ | 1,161,852 |
| | $ | 11,404,851 |
|
| |
| (1) | Other consists of management service fees earned in the respective Company line of business as well as other revenue from the Company's ancillary services. |
| | | | Year ended December 31, 2017(1) | Year ended December 31, 2017(1) |
| | U.S. dialysis and related lab services | | Other - Ancillary services and strategic initiatives | | Consolidated | U.S. dialysis | | Other - Ancillary services | | Consolidated |
| Patient service revenues: | | | | | | | | | | |
| Medicare and Medicare Advantage | $ | 5,253,012 |
| | $ | — |
| | $ | 5,253,012 |
| $ | 5,253,012 |
| | $ | | $ | 5,253,012 |
|
| Medicaid and Managed Medicaid | 606,827 |
| | — |
| | 606,827 |
| 606,827 |
| |
| | 606,827 |
|
| Other government | 362,567 |
| | 259,651 |
| | 622,218 |
| 362,567 |
| | 259,651 |
| | 622,218 |
|
| Commercial | 3,117,920 |
| | 63,505 |
| | 3,181,425 |
| 3,117,920 |
| | 63,505 |
| | 3,181,425 |
|
| Other revenues: | | | | | | | | | | |
| Medicare and Medicare Advantage | — |
| | 902,289 |
| | 902,289 |
|
| | 902,289 |
| | 902,289 |
|
| Medicaid and Managed Medicaid | — |
| | 71,426 |
| | 71,426 |
|
| | 71,426 |
| | 71,426 |
|
| Commercial | — |
| | 116,503 |
| | 116,503 |
|
| | 116,503 |
| | 116,503 |
|
Other(2) | 19,739 |
| | 182,974 |
| | 202,713 |
| 19,739 |
| | 182,974 |
| | 202,713 |
|
| Eliminations of intersegment revenues | (55,176 | ) | | (24,603 | ) | | (79,779 | ) | (55,176 | ) | | (24,603 | ) | | (79,779 | ) |
| Total | $ | 9,304,889 |
| | $ | 1,571,745 |
| | $ | 10,876,634 |
| $ | 9,304,889 |
| | $ | 1,571,745 |
| | $ | 10,876,634 |
|
| |
| (1) | As noted above, prior period amounts have not been adjusted under the cumulative effect method. In this table, the Company's U.S. dialysis and related lab services revenues for the year ended December 31, 2017 has been presented net of the provision for uncollectible accounts of $485,364 to conform to the current period presentation. |
| |
| (2) | Other consists of management service fees earned in the respective Company line of business as well as other revenue from the Company's ancillary services and strategic initiatives. |
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars in thousands, except per share data)
|
| | | | | | | | | | | |
| | Year ended December 31, 2016(1) |
| | U.S. dialysis and related lab services | | Other - Ancillary services and strategic initiatives | | Consolidated |
| Patient service revenues: | | | | | |
| Medicare and Medicare Advantage | $ | 5,303,718 |
| | $ | — |
| | $ | 5,303,718 |
|
| Medicaid and Managed Medicaid | 319,553 |
| | — |
| | 319,553 |
|
| Other government | 143,207 |
| | 165,193 |
| | 308,400 |
|
| Commercial | 3,355,066 |
| | 36,674 |
| | 3,391,740 |
|
| Other revenues: | | | | | |
| Medicare and Medicare Advantage | — |
| | 974,146 |
| | 974,146 |
|
| Medicaid and Managed Medicaid | — |
| | 82,428 |
| | 82,428 |
|
| Commercial | — |
| | 128,824 |
| | 128,824 |
|
Other(2) | 16,645 |
| | 234,107 |
| | 250,752 |
|
| Eliminations of intersegment revenues | (27,355 | ) | | (24,739 | ) | | (52,094 | ) |
| Total | $ | 9,110,834 |
| | $ | 1,596,633 |
| | $ | 10,707,467 |
|
| |
(1) | As noted above, prior period amounts have not been adjusted under the cumulative effect method. In this table, the Company's dialysis and related lab services revenues for the year ended December 31, 2016 has been presented net of the provision for uncollectible accounts of $431,304 to conform to the current period presentation. |
| |
(2) | Other consists of management service fees earned in the respective Company line of business as well as revenue from the Company's ancillary services and strategic initiatives.services. |
The Company’s allowance for doubtful accounts related to performance obligations satisfied prior to the adoption of Topic 606 was $52,924$8,328 and $218,399$52,924 as of December 31, 20182019 and 2017,2018, respectively.
ThereAs described in Note 1, there are significant risks associated with estimating revenue, many of which generally take several years to resolve. These estimates are subject to ongoing insurance coverage changes, geographic coverage differences, differing interpretations of contract coverage and other payor issues, as well as patient issues including determining applicable primary and secondary coverage, changes in patient coverage and coordination of benefits. As these estimates are refined over time, both positive and negative adjustments to revenue are recognized in the current period. As a result of these changes in these estimates, additional revenue of $37,274 was recognized during the year ended December 31, 2019 associated with performance obligations satisfied prior to January 1, 2019 and additional revenue of $88,495 was recognized during the year ended December 31, 2018 associated with performance obligations satisfied in years prior to the adoption of Topic 606, of $88,495, which includes
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
included a benefit of $36,000 for the year ended December 31, 2018 from electing to apply Topic 606 only to contracts not substantially completed as of January 1, 2018.
There is no0 single commercial payor that accounted for more than 10% of total consolidated accounts receivable or consolidated net revenues at or for the yearyears ended December 31, 2018 and 2017.2019 or 2018.
Net dialysis and related lab services accounts receivable and other receivables from Medicare, including Medicare-assigned plans, and Medicaid, including managed Medicaid plans, were approximately $1,080,561$1,038,248 and $874,971$1,080,561 as of December 31, 20182019 and 2017,2018, respectively. Approximately 18% and 21% of the Company’s net patient services accounts receivable balances as of both December 31, 20182019 and 2017, respectively,2018, were more than six months old. The decrease was primarily due to improved collections at DaVita Health Solutions and in certain international operations. There were no0 significant balances over one year old at December 31, 2018. Accounts2019. The Company's accounts receivable are principally due from Medicare and Medicaid programs and commercial insurance plans.
3. Earnings per share
Basic earnings per share is calculated by dividing net income attributable to the Company, adjusted for any change in noncontrolling interest redemption rights in excess of fair value, by the weighted average number of common shares net ofoutstanding, reduced for 2018 and 2017 by the weighted average shares held in escrow that under certain circumstances may have been returned to the Company. Weighted average common shares outstanding include restricted stock unit awards that are no longer subject to forfeiture because the recipients have satisfied either their explicit vesting terms or retirement eligibility requirements.
Diluted earnings per share includes the dilutive effect of outstanding stock-settled stock appreciation rights and unvested stock units (under the treasury stock method) as well asand, for 2018 and 2017, the weighted average contingently returnable shares held in escrow that were outstanding during the period.
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars in thousands, except per share data)
The reconciliations of the numerators and denominators used to calculate basic and diluted earnings per share were as follows:
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
| | | | Year ended December 31, | | | | | | | |
| | 2018 | | 2017 | | 2016 | Year ended December 31, |
| | (shares in thousands) | 2019 | | 2018 | | 2017 |
| Numerators: | | | | | |
| | | | | |
|
| Net income from continuing operations attributable to DaVita Inc. | $ | 624,321 |
| | $ | 901,277 |
| | $ | 1,032,373 |
| $ | 706,832 |
| | $ | 624,321 |
| | $ | 901,277 |
|
| Net loss from discontinued operations attributable to DaVita Inc. | (464,927 | ) | | (237,659 | ) | | (152,499 | ) | |
| Net income (loss) from discontinued operations attributable to DaVita Inc. | | 104,149 |
| | (464,927 | ) | | (237,659 | ) |
| Net income attributable to DaVita Inc. for earnings per share calculation | $ | 159,394 |
| | $ | 663,618 |
| | $ | 879,874 |
| $ | 810,981 |
| | $ | 159,394 |
| | $ | 663,618 |
|
| | | | | | | |
| Basic: | | | | | | | | | | |
| Weighted average shares outstanding during the period | 171,886 |
| | 190,820 |
| | 203,835 |
| 153,181 |
| | 171,886 |
| | 190,820 |
|
Weighted average contingently returnable shares previously held in escrow for
the DaVita HealthCare Partners merger | (1,100 | ) | | (2,194 | ) | | (2,194 | ) | — |
| | (1,100 | ) | | (2,194 | ) |
| Weighted average shares for basic earnings per share calculation | 170,786 |
| | 188,626 |
| | 201,641 |
| 153,181 |
| | 170,786 |
| | 188,626 |
|
| Basic net income from continuing operations per share attributable to DaVita Inc. | $ | 3.66 |
| | $ | 4.78 |
| | $ | 5.12 |
| |
| Basic net loss from discontinued operations per share attributable to DaVita Inc. | (2.73 | ) | | (1.26 | ) | | (0.76 | ) | |
| | | | | | | |
| Basic net income (loss) attributable to DaVita Inc. from: | | | | | | |
| Continuing operations per share | | $ | 4.61 |
| | $ | 3.66 |
| | $ | 4.78 |
|
| Discontinued operations per share | | 0.68 |
| | (2.73 | ) | | (1.26 | ) |
| Basic net income per share attributable to DaVita Inc. | $ | 0.93 |
| | $ | 3.52 |
| | $ | 4.36 |
| $ | 5.29 |
| | $ | 0.93 |
| | $ | 3.52 |
|
| | | | | | | |
| Diluted: | | | | | |
| | | | | |
|
| Weighted average shares outstanding during the period | 171,886 |
| | 190,820 |
| | 203,835 |
| 153,181 |
| | 171,886 |
| | 190,820 |
|
| Assumed incremental shares from stock plans | 479 |
| | 529 |
| | 1,070 |
| 631 |
| | 479 |
| | 529 |
|
| Weighted average shares for diluted earnings per share calculation | 172,365 |
| | 191,349 |
| | $ | 204,905 |
| 153,812 |
| | 172,365 |
| | $ | 191,349 |
|
| Diluted net income from continuing operations per share attributable to DaVita Inc. | $ | 3.62 |
| | $ | 4.71 |
| | $ | 5.04 |
| |
| Diluted net loss from discontinued operations per share attributable to DaVita Inc. | (2.70 | ) | | (1.24 | ) | | (0.75 | ) | |
| | | | | | | |
| Diluted net income (loss) attributable to DaVita Inc. from: | | | | | | |
| Continuing operations per share | | $ | 4.60 |
| | $ | 3.62 |
| | $ | 4.71 |
|
| Discontinued operations per share | | 0.67 |
| | (2.70 | ) | | (1.24 | ) |
| Diluted net income per share attributable to DaVita Inc. | $ | 0.92 |
| | $ | 3.47 |
| | $ | 4.29 |
| $ | 5.27 |
| | $ | 0.92 |
| | $ | 3.47 |
|
| | | | | | | |
Anti-dilutive stock-settled awards excluded from calculation(1) | 5,295 |
| | 4,350 |
| | 2,523 |
| 5,936 |
| | 5,295 |
| | 4,350 |
|
| |
| (1) | Shares associated with stock-settled stock appreciation rights excluded from the diluted denominator calculation because they were anti-dilutive under the treasury stock method. |
4. Restricted cash and equivalents
The Company had restricted cash and cash equivalents of $92,382$106,346 and $10,686$92,382 at December 31, 20182019 and 2017,2018, respectively. Approximately $79,329$91,847 of the balance at December 31, 20182019 represents restricted cash equivalents held in trust to satisfy insurer and state regulatory requirements related to the Company's self-insurance forwholly-owned captive insurance companies that bear professional and general liability and workers' compensation risks administered by wholly-owned captive insurance entities. Prior tofor the first quarter of 2018, these requirements were satisfied by a letter of credit rather than restricted cash held in trust.Company. The remaining restricted cash and cash equivalents held at December 31, 2018 and 20172019 primarily represent cash pledged to third parties in connection with two1 of the Company's ancillary and strategic initiatives businesses.
5. Short-term and long-term investments
Effective January 1, 2018, theThe Company adopted ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.Liabilities, The amendments in this ASU revise accountingand related to (i) the classification and measurement of investments in equity securities and (ii) the presentation of certain fair value changes for financial liabilities at fair value. The Company also adopted ASU 2018-03 which provides relatedconcerning certain technical corrections and improvements. The principal effect of these ASUs on the Company's consolidated financial statements is that, prior to adoption of ASU 2016-01, changes in the fair values of available-for-sale equity investments with readily determinable fair values or redemption values were recognized in other comprehensive income until realized, while underimprovements, effective January 1, 2018. Under ASU 2016-01 all changes in the fair values of such equity securities with readily determinable fair values are to be recognized in current earnings within "Other income, net". The adoptionearnings. Adoption of these ASUs, did not havein conjunction with ASU 2018-02, resulted in a materialcumulative effect on these consolidated financial statements.of change in accounting principle effective January 1, 2018 which decreased accumulated other comprehensive income and increased retained earnings by $5,662 in after-tax unrealized gains accumulated
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
Effective January 1, 2018, the Company recognized a cumulative effect of change in accounting principle upon adoption of ASUs 2016-01 and 2018-03, in conjunction with ASU 2018-02, the effect of which was to decrease accumulated other comprehensive income, and to increase retained earnings, by $5,662 in after-tax unrealized gains accumulated in other comprehensive income through December 31, 2017 from equity securities previously classified as available-for-sale investments prior to adoption of ASU 2016-01.investments.
From January 1, 2018, equity securities that have readily determinable fair values or redemption values are recorded at estimated fair value with changes in their value recognized in current earnings.earnings within "Other income, net". The Company classifies its debt securities as held-to-maturity and records them at amortized cost based on its intentions and strategy concerning those investments.
The Company classifies these debt and equity investments as "Short-term investments" or "Long-term investments" on its consolidated balance sheet, as applicable, based on the characteristics of the financial instrument or the Company's intentions or expectations for the investment.
The Company’s investments in these short-term and long-term debt and equity investments consist of the following:
| | | | December 31, 2018 | | December 31, 2017 | December 31, 2019 | | December 31, 2018 |
| | Debt
securities | | Equity
securities | | Total | | Debt
securities | | Equity
securities | | Total | Debt
securities | | Equity
securities | | Total | | Debt
securities | | Equity
securities | | Total |
| Certificates of deposit and other time deposits | $ | 2,235 |
| | $ | — |
| | $ | 2,235 |
| | $ | 31,630 |
| | $ | — |
| | $ | 31,630 |
| $ | 8,140 |
| | $ | — |
| | $ | 8,140 |
| | $ | 2,235 |
| | $ | — |
| | $ | 2,235 |
|
| Investments in mutual funds and common stock | — |
| | 36,124 |
| | 36,124 |
| | — |
| | 38,895 |
| | 38,895 |
| — |
| | 39,951 |
| | 39,951 |
| | — |
| | 36,124 |
| | 36,124 |
|
| | $ | 2,235 |
| | $ | 36,124 |
| | $ | 38,359 |
| | $ | 31,630 |
| | $ | 38,895 |
| | $ | 70,525 |
| $ | 8,140 |
| | $ | 39,951 |
| | $ | 48,091 |
| | $ | 2,235 |
| | $ | 36,124 |
| | $ | 38,359 |
|
| Short-term investments | $ | 2,235 |
| | $ | 700 |
| | $ | 2,935 |
| | $ | 31,630 |
| | $ | 1,200 |
| | $ | 32,830 |
| $ | 8,140 |
| | $ | 3,432 |
| | $ | 11,572 |
| | $ | 2,235 |
| | $ | 700 |
| | $ | 2,935 |
|
| Long-term investments | — |
| | 35,424 |
| | 35,424 |
| | — |
| | 37,695 |
| | 37,695 |
| — |
| | 36,519 |
| | 36,519 |
| | — |
| | 35,424 |
| | 35,424 |
|
| | $ | 2,235 |
| | $ | 36,124 |
| | $ | 38,359 |
| | $ | 31,630 |
| | $ | 38,895 |
| | $ | 70,525 |
| $ | 8,140 |
| | $ | 39,951 |
| | $ | 48,091 |
| | $ | 2,235 |
| | $ | 36,124 |
| | $ | 38,359 |
|
Debt securities: The Company's short-term debt investments are principally bank certificates of deposit with contractual maturities longer than three months but shorter than one year. These debt securities are accounted for as held-to-maturity and recorded at amortized cost, which approximatesapproximated their fair values at December 31, 20182019 and 2017.2018.
Equity securities: The Company's equity investments in mutual funds and common stock are held within a trust to fund existing obligations associated with several of the Company’s non-qualified deferred compensation plans. During 2019, the Company recognized pre-tax net gains of $4,383 in other income associated with changes in the fair value of these equity securities, comprised of pre-tax realized gains of $1,459 and a net increase in unrealized gains of $2,924. During 2018, the Company recognized pre-tax net losses of $1,208 in theother income statement associated with changes in the fair value of these equity securities, comprised of pre-tax realized gains of $4,490 and a net decrease in unrealized gains of $5,698. During 2017, the Company recognized pre-tax realized gains on the sale or redemption of equity securities of $360, or $220 after tax, which were previously recorded in other comprehensive income.
6. Other receivables
Other receivables were comprised of the following:
| | | | December 31, | December 31, |
| | 2018 | | 2017 | 2019 | | 2018 |
| Supplier rebates and non-trade receivables | $ | 334,156 |
| | $ | 295,292 |
| $ | 351,650 |
| | $ | 334,156 |
|
| Medicare bad debt claims | 135,640 |
| | 103,970 |
| 138,045 |
| | 135,640 |
|
| | $ | 469,796 |
| | $ | 399,262 |
| $ | 489,695 |
| | $ | 469,796 |
|
7. Prepaid and other current assets
Other current assets were comprised of the following:
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| Prepaid expenses | $ | 108,315 |
| | $ | 104,727 |
|
| Other | 3,525 |
| | 7,331 |
|
| | $ | 111,840 |
| | $ | 112,058 |
|
8.7. Property and equipment
Property and equipment were comprised of the following:
| | | | December 31, | December 31, |
| | 2018 | | 2017 | 2019 | | 2018 |
| Land | $ | 37,384 |
| | $ | 33,814 |
| $ | 36,480 |
| | $ | 37,384 |
|
| Buildings | 467,181 |
| | 473,489 |
| 392,256 |
| | 467,181 |
|
| Leasehold improvements | 3,164,943 |
| | 2,816,675 |
| 3,545,224 |
| | 3,164,943 |
|
| Equipment and information systems, including internally developed software | 2,586,564 |
| | 2,352,246 |
| 2,880,645 |
| | 2,586,564 |
|
| New center and capital asset projects in progress | 661,695 |
| | 576,651 |
| 588,345 |
| | 661,695 |
|
| | 6,917,767 |
| | 6,252,875 |
| 7,442,950 |
| | 6,917,767 |
|
| Less accumulated depreciation | (3,524,098 | ) | | (3,103,662 | ) | (3,969,566 | ) | | (3,524,098 | ) |
| | $ | 3,393,669 |
| | $ | 3,149,213 |
| $ | 3,473,384 |
| | $ | 3,393,669 |
|
Depreciation expense on property and equipment was $600,905, $574,799, and $544,129 and $494,945 for 2018, 2017 and 2016, respectively.
During2019, 2018 and 2017, the Company recognized asset impairment charges of $17,338 and $15,168, respectively, related to the restructuring of its pharmacy business.respectively.
Interest on debt incurred during the development of new centers and other capital asset projects is capitalized as a component of the asset cost based on the respective in-process capital asset balances. Interest capitalized was $27,322, $25,978 and $19,176 for 2019, 2018 and $12,990 for2017, respectively.
During 2018, 2017 and 2016, respectively.the Company recognized asset impairment charges of $17,338 related to the restructuring of its pharmacy business.
9.8. Intangibles
Intangible assets other than goodwill were comprised of the following:
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| Noncompetition and other agreements | $ | 131,360 |
| | $ | 429,140 |
|
| Lease agreements | 7,584 |
| | 7,623 |
|
| Indefinite-lived assets | 59,885 |
| | 33,255 |
|
| Other | 583 |
| | 583 |
|
| | 199,412 |
| | 470,601 |
|
| Less accumulated amortization | (80,566 | ) | | (356,774 | ) |
| | $ | 118,846 |
| | $ | 113,827 |
|
|
| | | | | | | |
| | December 31, |
| | 2019 | | 2018 |
| Noncompetition agreements | $ | 103,510 |
| | $ | 107,726 |
|
| Indefinite-lived licenses | 90,209 |
| | 59,885 |
|
| Other | 23,887 |
| | 31,801 |
|
| | 217,606 |
| | 199,412 |
|
| Less accumulated amortization | (81,922 | ) | | (80,566 | ) |
| | $ | 135,684 |
| | $ | 118,846 |
|
Amortization expense from amortizable intangible assets other than lease agreements was $14,247, $16,236, and $15,782 for 2019, 2018 and $14,552 for 2018, 2017, and 2016, respectively. Lease agreement intangible assets and liabilities, previously recognized apart from lease right-of-use assets and liabilities prior to adoption of Topic 842, were amortized to rent expense in the amounts of $(296), and $(203) for December 31, 2018 and $(232) for 2018, 2017, and 2016, respectively.
DuringFor the years ended December 31, 2019, 2018 2017 and 2016,2017, the Company recognized no0 impairment charges on any intangible assets other than goodwill.
Amortizable intangible liabilities as of December 31, 2018 and 2017 were comprised of lease agreements of $5,930, and $5,447, respectively, which were net of accumulated amortization of $4,362 and $3,508, respectively.
Lease agreement$4,362. With the adoption of Topic 842 on January 1, 2019, the Company no longer classifies these as intangible assets or intangible liabilities are classified in other long-term liabilitieson its balance sheet. See Notes 1 and amortized to rent expense.14 for further discussion of our adoption of Topic 842.
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
Scheduled amortization charges from amortizable intangible assets and liabilities as of December 31, 20182019 were as follows:
| | | | Noncompetition and other agreements | | Lease liabilities | | Other | Noncompetition
agreements | | Other |
| 2019 | $ | 14,442 |
| | $ | (901 | ) | | $ | 91 |
| |
| 2020 | 13,020 |
| | (895 | ) | | 45 |
| $ | 11,470 |
| | $ | 1,779 |
|
| 2021 | 10,816 |
| | (871 | ) | | — |
| 9,703 |
| | 1,335 |
|
| 2022 | 7,001 |
| | (864 | ) | | — |
| 6,141 |
| | 1,330 |
|
| 2023 | 4,235 |
| | (704 | ) | | — |
| 3,118 |
| | 1,294 |
|
| 2024 | | 1,429 |
| | 1,046 |
|
| Thereafter | 9,311 |
| | (1,695 | ) | | — |
| 525 |
| | 6,305 |
|
| Total | $ | 58,825 |
| | $ | (5,930 | ) | | $ | 136 |
| $ | 32,386 |
| | $ | 13,089 |
|
10.9. Equity method and other investments
Equity investments in nonconsolidated businesses over which the Company maintains significant influence, but which do not have readily determinable fair values, are carried on the equity method.
As described in Note 5 to these consolidated financial statements, effective January 1, 2018, the Company adopted ASU 2016-01 and related ASU 2018-03 concerning recognition and measurement of financial assets and financial liabilities. In adopting this new guidance,ASU 2016-01, the Company has made an accounting policy electionelected to adopt an adjusted cost method measurement alternative for investments in equity securities without readily determinable fair values.
Specifically, undervalues that do not qualify for the equity method. Under this measurement alternative, unless elected otherwise for a particular investment, the Company initially records such equity investments that qualify for the measurement alternative at cost but remeasures them to fair value through earnings when there is an observable transaction involving the same or a similar investment with the same issuer or upon an impairment.
The Company maintains equity method and minor adjusted cost method investments in the private securities of certain other healthcare and healthcare-related businesses. The Company classifies these investments as "Equity method and other investments" on its consolidated balance sheet.
The Company's equity method and other investments were comprised of the following:
| | | | December 31, | December 31, |
| | 2018 | | 2017 | 2019 | | 2018 |
| APAC joint venture | $ | 129,173 |
| | $ | 160,481 |
| $ | 116,924 |
| | $ | 129,173 |
|
| Other equity method partnerships | 83,052 |
| | 79,667 |
| 114,611 |
| | 83,052 |
|
| Adjusted cost method investments | 12,386 |
| | 5,386 |
| 10,448 |
| | 12,386 |
|
| | $ | 224,611 |
| | $ | 245,534 |
| $ | 241,983 |
| | $ | 224,611 |
|
During 2019, 2018 2017 and 2016,2017, the Company recognized equity investment income (loss) income of $12,679, $(4,484), $(8,640) and $16,874,$(8,640), respectively, from its equity method investments in nonconsolidated businesses.
The Company's largest equity method investment is its ownership interest in DaVita Care Pte. Ltd. (the APAC joint venture, or APAC JV). During the fourth quarter of 2019, one of the third party noncontrolling investors in the APAC JV made its final subscribed capital contribution to the joint venture and the other third party noncontrolling investor elected to exit the joint venture. As of December 31, 2018 and 2017,a result, the Company heldnow holds a 60% 75%voting interest and a 73.3% current economic interest in the APAC JV. Based onJV and its other noncontrolling investor holds a25% voting and economic interest in the joint venture. The governance structure and voting rights established for the APAC JV, atwhich remain unchanged since its formation on August 1, 2016, provide that certain key decisions affecting the joint venture’s operations are not subject to the unilateral discretion of the Company but rather are shared with the joint venture's other noncontrolling investors. Theseinvestor. As a result, the Company does not consolidate the APAC JV.
Prior to the transactions described above and as of December 31, 2018, the Company held a 60% voting interest and a 73.3% economic interest in the APAC JV, while the other two noncontrolling investors currently collectively holdheld a 40% voting interest and a 26.7% economic interest in the APAC JV. During the third quarter of 2018, the investors in the APAC JV jointly agreed to a six-month deferral of the subscribed incremental capital contributions originally scheduled for August 1, 2018 based upon revised assessments of the capital needs of the joint venture. Subsequent to December 31, 2018, the investors have jointly agreed to a further deferral of those capital contributions originally scheduled for August 1, 2018, which will now be due with the final capital contributions originally scheduled for August 1, 2019. The Company continues to expect the economic interests of the noncontrolling investors in the APAC JV to adjust to match their voting interests by August 1, 2019.
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars in thousands, except per share data)
Upon formation of the APAC JV on August 1, 2016, the Company deconsolidated this Asia Pacific dialysis business based on the governance structure and voting rights put in place at that time and recognized an initial non-cash non-taxable estimated gain of $374,374 on its retained investment, net of contingent obligations. This retained interest in the APAC JV was adjusted to the Company’s proportionate share of the estimated fair value of the business, as implied by the investment commitments from the JV partners and adjusted for certain time value of money and uncertainty discounts. The Company then recognized an additional $6,273 gain in the first quarter of 2017 upon resolution of certain post-closing adjustments related to this transaction. Subsequent to its deconsolidation on August 1, 2016, the Company’s retained interest in the APAC JV has been accounted for under the equity method.
During the year ended December 31, 2017, the Company recognized a non-cash other-than-temporary impairment charge of $280,066 on its investment in the APAC JV. This charge resulted from changes in itsthen-current expectations for the
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
joint venture based on continuing market research and assessments by both the Company and the APAC JV concerning the size of the addressable market available to the joint venture at attractive risk-adjusted returns. The Company estimated the fair value of its retained interest in the APAC JV with the assistance of an independent third party valuation firm based on information available to management as of December 31, 2017.
The Company's other equity method investments include 2220 legal entities over which the Company has significant influence but in which it does not maintain a controlling financial interest. Almost all of these are U.S. partnerships in the form of limited liability companies. The Company's ownership interests in these partnerships vary, but typically range from 30% to 50%.
The total carrying amount of equity investments carried underThere were 0 significant impairments or other valuation adjustments on the Company's adjusted cost method measurement alternative at December 31, 2018 was $12,386. During 2018, there have been no meaningful impairmentsinvestments during 2019 or other downward or upward valuation adjustments recognized on these investments.2018.
11.10. Goodwill
Changes in the carrying value of goodwill by reportable segments were as follows:
| | | | U.S. dialysis and related lab services | | Other ancillary services and strategic initiatives | | Consolidated total | U.S. dialysis | | Other - Ancillary services | | Consolidated |
| Balance at December 31, 2016 | $ | 5,691,587 |
| | $ | 323,788 |
| | $ | 6,015,375 |
| |
| Acquisitions | 485,434 |
| | 131,598 |
| | 617,032 |
| |
| Divestitures | (32,260 | ) | | (126 | ) | | (32,386 | ) | |
| Impairment charges | — |
| | (36,196 | ) | | (36,196 | ) | |
| Foreign currency and other adjustments | — |
| | 46,454 |
| | 46,454 |
| |
| Balance at December 31, 2017 | $ | 6,144,761 |
| | $ | 465,518 |
| | $ | 6,610,279 |
| $ | 6,144,761 |
| | $ | 465,518 |
| | $ | 6,610,279 |
|
| Acquisitions | 130,574 |
| | 147,774 |
| | 278,348 |
| 130,574 |
| | 147,774 |
| | 278,348 |
|
| Divestitures | (331 | ) | | (15,166 | ) | | (15,497 | ) | (331 | ) | | (15,166 | ) | | (15,497 | ) |
| Impairment charges | — |
| | (3,106 | ) | | (3,106 | ) | — |
| | (3,106 | ) | | (3,106 | ) |
| Foreign currency and other adjustments | — |
| | (28,064 | ) | | (28,064 | ) | — |
| | (28,064 | ) | | (28,064 | ) |
| Balance at December 31, 2018 | $ | 6,275,004 |
| | $ | 566,956 |
| | $ | 6,841,960 |
| $ | 6,275,004 |
| | $ | 566,956 |
| | $ | 6,841,960 |
|
| Acquisitions | | 18,089 |
| | 72,137 |
| | 90,226 |
|
| Impairment charges | | — |
| | (124,892 | ) | | (124,892 | ) |
| Foreign currency and other adjustments | | (5,993 | ) | | (13,666 | ) | | (19,659 | ) |
| Balance at December 31, 2019 | | $ | 6,287,100 |
| | $ | 500,535 |
| | $ | 6,787,635 |
|
| | | | | | | | | | | |
| Goodwill | $ | 6,275,004 |
| | $ | 594,229 |
| | $ | 6,869,233 |
| $ | 6,287,100 |
| | $ | 653,870 |
| | $ | 6,940,970 |
|
| Accumulated impairment charges | — |
| | (27,273 | ) | | (27,273 | ) | — |
| | (153,335 | ) | | (153,335 | ) |
| | $ | 6,275,004 |
| | $ | 566,956 |
| | $ | 6,841,960 |
| $ | 6,287,100 |
| | $ | 500,535 |
| | $ | 6,787,635 |
|
The Company elected to early adopt ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment effective January 1, 2017. The amendments in this ASU simplify the test for goodwill impairment by eliminating the second step in the assessment. All goodwill impairment tests performed since adoption of this ASU were performed under this new guidance. When performing quantitative goodwill impairment assessments, the Company estimates fair value using either appraisals developed with an independent third party valuation firm which consider both discounted cash flow estimates for the subject business and observed market multiples for similar businesses, or offer prices received for the subject business that would be acceptable to the Company.
Each of the Company’s operating segments described in Note 25 to these consolidated financial statements represents an individual reporting unit for goodwill impairment testingassessment purposes and each sovereign jurisdiction within the Company’s international operating segments is considered a separate reporting unit.
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars in thousands, except per share data)
Within the U.S. dialysis and related lab services operating segment, the Company considers each of its dialysis centers to constitute an individual business for which discrete financial information is available. However, since these dialysis centers have similar operating and economic characteristics, and the allocation of resources and significant investment decisions concerning these businesses are highly centralized and the benefits broadly distributed, the Company has aggregated these centers and deemed them to constitute a single reporting unit.
The Company has applied a similar aggregation to the vascular access service centers in its vascular access services reporting unit, to the physician practices in its physician services reporting units, and to the dialysis centers and other health operations within each international reporting unit. For the Company’s other operating segments, discrete business components below the operating segment level constitute individual reporting units.
During the yearthree months ended DecemberMarch 31, 2018, the Company performed annual2019 and other impairment assessments for various reporting units. As a result of these assessments, the Company recognized a goodwill impairment charge of $3,106 at its German other health operations during the year ended December 31, 2018.
During the years ended December 31, 2017 and December 31, 2016September 30, 2019, the Company recognized goodwill impairment charges of $34,696$41,037 and $28,415,$78,439, respectively, atin its vascular access reporting unit. These chargesGermany kidney care business. The first quarter of 2019 charge resulted primarily from a change in relevant discount rates, as well as a decline in current and expected future patient census and an
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
increase in first quarter of 2019 and expected future costs, principally due to wage increases expected to result from recently announced legislation. The incremental charge recognized during the third quarter of 2019 resulted from changes and developments in future governmental reimbursement ratesthe Company's outlook for this business since its last assessment. These primarily concerned developments in the business in response to evolving market conditions and changes in the Company’s then-evolving plansCompany's expected timing and expected ability to mitigate them. Asthem, which was based on results of in-depth operating and strategic reviews completed by the Company’s new Germany management team during the third quarter of 2019. During the year ended December 31, 2017, there was no goodwill remaining at2019, the Company's vascular access reporting unit. The Company also recognized a goodwill impairment charge of $1,500$5,416 in its German other health operations.
The impairment charges recognized in 2019 at onethe Company’s Germany kidney care business and its German other health operations include increases of its international reporting units during$25,621 and $1,013, respectively, to the year ended December 31, 2017.goodwill impairment charges, and reductions to deferred tax expense, related to deferred tax assets that the impairments themselves generated. The result was $124,892 in total goodwill impairment charges to operating income and reductions of $26,634 in tax expense, for a net $98,258 impact on net income.
Based on the most recent assessments, the Company determined that further changes in expected patient census, increases in operating costs, reductions in reimbursement rates, changes in actual or expected growth rates, or other significant adverse changes in expected future cash flows or valuation assumptions could result in goodwill impairment charges in the future for the following reporting units, which remain at risk of goodwill impairment as of December 31, 2018:2019:
|
| | | | | | | | | | | | | |
| Reporting unit | | Goodwill
balance as of
December 31, 2018 | | Carrying amount
coverage(1) | | Sensitivities |
Operating
income(2) | | Discount
rate(3) |
| Germany Kidney Care | | $ | 403,200 |
| | 0.5 | % | | (1.5 | )% | | (10.3 | )% |
| Brazil Kidney Care | | $ | 39,452 |
| | 9.8 | % | | (2.5 | )% | | (7.3 | )% |
| Germany other health operations | | $ | 12,646 |
| | 8.1 | % | | (2.2 | )% | | (11.1 | )% |
|
| | | | | | | | | | | | | |
| Reporting unit | | Goodwill
balance | | Carrying amount
coverage(1) | | Sensitivities |
Operating
income(2) | | Discount
rate(3) |
| Germany kidney care | | $ | 295,151 |
| | — | % | | (1.3 | )% | | (11.0 | )% |
| Brazil kidney care | | $ | 88,551 |
| | 4.4 | % | | (2.8 | )% | | (7.0 | )% |
| |
| (1) | Excess of estimated fair value of the reporting unit over its carrying amount as of the latest assessment date. |
| |
| (2) | Potential impact on estimated fair value of a sustained, long-term reduction of 3% in operating income as of the latest assessment date. |
| |
| (3) | Potential impact on estimated fair value of an increase in discount rates of 100 basis points as of the latest assessment date. |
There were no majorDuring the year ended December 31, 2018, the Company recognized a goodwill impairment charge of $3,106 at its German other health operations.
During the year ended December 31, 2017, the Company recognized goodwill impairment charge of $34,696 at its vascular access reporting unit. This charge resulted primarily from changes in future governmental reimbursement rates for this business and the business, prospects, orCompany’s then-evolving plans and expected future resultsability to mitigate them. As of theseDecember 31, 2017, there was 0 goodwill remaining at the Company's vascular access reporting unit. The Company also recognized a goodwill impairment charge of $1,500 at one of its international reporting units from their latest assessment date throughduring the year ended December 31, 2018.2017.
Except as described above, noneNaN of the Company’s other reporting units were considered at risk of significant goodwill impairment as of December 31, 2018.2019. Since the dates of the Company’s last annual goodwill impairment tests,assessments, there have been certain developments, events, changes in operating performance and other changes in key circumstances that have affected the Company’s businesses. However, except as further described above, these did not cause management to believe it is more likely than not that the fair values of any of the Company’s reporting units would be less than their respective carrying amounts as of December 31, 2018.2019.
11. Other liabilities
Other liabilities were comprised of the following:
|
| | | | | | | |
| | December 31, |
| | 2019 | | 2018 |
| Payor refunds and retractions | $ | 377,044 |
| | $ | 302,244 |
|
| Insurance and self-insurance accruals | 58,941 |
| | 58,569 |
|
| Accrued interest | 54,899 |
| | 82,827 |
|
| Accrued non-income tax liabilities | 36,285 |
| | 28,663 |
|
| Other | 229,005 |
| | 123,547 |
|
| | $ | 756,174 |
| | $ | 595,850 |
|
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
12. Other liabilities
Other liabilities were comprised of the following:
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| Payor refunds and retractions | $ | 302,244 |
| | $ | 292,370 |
|
| Insurance and self-insurance accruals | 58,569 |
| | 64,924 |
|
| Accrued interest | 82,827 |
| | 83,362 |
|
| Accrued non-income tax liabilities | 28,663 |
| | 28,317 |
|
| Other | 123,547 |
| | 110,032 |
|
| | $ | 595,850 |
| | $ | 579,005 |
|
13. Income taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
Income before income taxes from continuing operations consisted of the following:
| | | | Year ended December 31, | Year ended December 31, |
| | 2018 | | 2017 | | 2016 | 2019 | | 2018 | | 2017 |
| Domestic | $ | 1,083,578 |
| | $ | 1,725,822 |
| | $ | 1,278,754 |
| $ | 1,307,299 |
| | $ | 1,083,578 |
| | $ | 1,725,822 |
|
| International | (35,100 | ) | | (326,036 | ) | | 344,351 |
| (111,860 | ) | | (35,100 | ) | | (326,036 | ) |
| | $ | 1,048,478 |
| | $ | 1,399,786 |
| | $ | 1,623,105 |
| $ | 1,195,439 |
| | $ | 1,048,478 |
| | $ | 1,399,786 |
|
Income tax expense for continuing operations consisted of the following:
| | | | Year ended December 31, | Year ended December 31, |
| | 2018 | | 2017 | | 2016 | 2019 | | 2018 | | 2017 |
| Current: | |
| | |
| | |
| |
| | |
| | |
|
| Federal | $ | 140,064 |
| | $ | 330,191 |
| | $ | 322,940 |
| $ | 208,339 |
| | $ | 140,064 |
| | $ | 330,191 |
|
| State | 32,990 |
| | 47,228 |
| | 44,525 |
| 58,026 |
| | 32,990 |
| | 47,228 |
|
| International | 7,557 |
| | 3,422 |
| | 1,928 |
| 15,545 |
| | 7,557 |
| | 3,422 |
|
| Total current income tax | 180,611 |
| | 380,841 |
| | 369,393 |
| 281,910 |
| | 180,611 |
| | 380,841 |
|
| Deferred: | |
| | |
| | |
| |
| | |
| | |
|
| Federal | 52,034 |
| | (98,760 | ) | | 88,412 |
| 44,263 |
| | 52,034 |
| | (98,760 | ) |
| State | 21,096 |
| | 37,347 |
| | (28,530 | ) | (25,836 | ) | | 21,096 |
| | 37,347 |
|
| International | 4,659 |
| | 4,431 |
| | 2,486 |
| (20,709 | ) | | 4,659 |
| | 4,431 |
|
| Total deferred income tax | 77,789 |
| | (56,982 | ) | | 62,368 |
| (2,282 | ) | | 77,789 |
| | (56,982 | ) |
| | $ | 258,400 |
| | $ | 323,859 |
| | $ | 431,761 |
| $ | 279,628 |
| | $ | 258,400 |
| | $ | 323,859 |
|
Income taxes are allocated between continuing and discontinued operations as follows:
| | | | Year ended December 31, | Year ended December 31, |
| | 2018 | | 2017 | | 2016 | 2019 | | 2018 | | 2017 |
| Continuing operations | $ | 258,400 |
| | $ | 323,859 |
| | $ | 431,761 |
| $ | 279,628 |
| | $ | 258,400 |
| | $ | 323,859 |
|
| Discontinued operations | 99,768 |
| | (364,856 | ) | | 24,052 |
| 40,689 |
| | 99,768 |
| | (364,856 | ) |
| | $ | 358,168 |
| | $ | (40,997 | ) | | $ | 455,813 |
| $ | 320,317 |
| | $ | 358,168 |
| | $ | (40,997 | ) |
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
The reconciliation between the Company’s effective tax rate from continuing operations and the U.S. federal income tax rate is as follows:
| | | | Year ended December 31, | Year ended December 31, |
| | 2018 | | 2017 | | 2016 | 2019 | | 2018 | | 2017 |
| Federal income tax rate | 21.0 | % | | 35.0 | % | | 35.0 | % | 21.0 | % | | 21.0 | % | | 35.0 | % |
| State income taxes, net of federal benefit | 4.1 |
| | 3.7 |
| | 2.6 |
| 2.3 |
| | 4.1 |
| | 3.7 |
|
| Change in International valuation allowance | | 1.3 |
| | 0.9 |
| | 0.4 |
|
| Gain on APAC JV ownership changes | — |
| | (0.2 | ) | | (9.9 | ) | — |
| | — |
| | (0.2 | ) |
| Political advocacy costs | 2.3 |
| | — |
| | — |
| 0.2 |
| | 2.3 |
| | — |
|
| APAC investment impairment | — |
| | 6.4 |
| | — |
| — |
| | — |
| | 6.4 |
|
| Impact of 2017 Tax Act | (0.1 | ) | | (20.5 | ) | | — |
| — |
| | (0.1 | ) | | (20.5 | ) |
| Unrecognized tax benefits | | 2.4 |
| | 0.2 |
| | 0.1 |
|
| Other | 1.9 |
| | 2.0 |
| | 1.8 |
| 1.1 |
| | 0.8 |
| | 1.5 |
|
Impact of noncontrolling interests primarily attributable to
non-tax paying entities | (4.6 | ) | | (3.3 | ) | | (2.9 | ) | (4.9 | ) | | (4.6 | ) | | (3.3 | ) |
| Effective tax rate | 24.6 | % | | 23.1 | % | | 26.6 | % | 23.4 | % | | 24.6 | % | | 23.1 | % |
On December 22, 2017, the President signed into law tax legislation known as the Tax Cuts and Jobs Act ("2017(2017 Tax Act")Act). Consistent with Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 118, the Company completed its analysis of certain aspects of the 2017 Tax Act in the prior year2017 and recorded provisional amounts for those items for which the accounting was not complete as of December 31, 2017. As of December 31, 2018, theThe Company has completed its analysis of these provisional items in 2018 and recorded immaterial adjustments to the original estimates.
Deferred tax assets and liabilities arising from temporary differences for continuing operations were as follows:
| | | | December 31, | December 31, |
| | 2018 | | 2017 | 2019 | | 2018 |
| Receivables | $ | 19,327 |
| | $ | 19,705 |
| $ | 19,095 |
| | $ | 19,327 |
|
| Accrued liabilities | 106,506 |
| | 96,537 |
| 64,458 |
| | 106,506 |
|
| Operating lease liabilities | | 580,110 |
| | — |
|
| Net operating loss carryforwards | 117,511 |
| | 108,429 |
| 139,690 |
| | 117,511 |
|
| Other | 36,712 |
| | 37,794 |
| 55,108 |
| | 36,712 |
|
| Deferred tax assets | 280,056 |
| | 262,465 |
| 858,461 |
| | 280,056 |
|
| Valuation allowance | (70,474 | ) | | (61,282 | ) | (91,925 | ) | | (70,474 | ) |
| Net deferred tax assets | 209,582 |
| | 201,183 |
| 766,536 |
| | 209,582 |
|
| Intangible assets | (555,822 | ) | | (501,763 | ) | (563,914 | ) | | (555,822 | ) |
| Property and equipment | (118,008 | ) | | (100,376 | ) | (162,628 | ) | | (118,008 | ) |
| Operating lease assets | | (527,056 | ) | | — |
|
| Investments in partnerships | (67,354 | ) | | (61,529 | ) | (64,960 | ) | | (67,354 | ) |
| Other | (30,934 | ) | | (23,762 | ) | (25,521 | ) | | (30,934 | ) |
| Deferred tax liabilities | (772,118 | ) | | (687,430 | ) | (1,344,079 | ) | | (772,118 | ) |
| Net deferred tax liabilities | $ | (562,536 | ) | | $ | (486,247 | ) | $ | (577,543 | ) | | $ | (562,536 | ) |
At December 31, 2018,2019, the Company had federal net operating loss carryforwards of approximately $124,935$111,322 that expire through 2037,2036, although a substantial amount expire by 2028. The Company also had state net operating loss carryforwards of $459,558 that$434,030, some of which have an indefinite life, although a substantial amount expire through 2038by 2039 and international net operating loss carryforwards of $186,757,$224,197, some of which will begin to expire in 2021 though the majority have an indefinite life. We have a state capital loss carryover of $188,823 that expires in 2024. The utilization of a portion of these losses may be limited in future years based on the profitability of certain entities. A valuation allowance is recorded to account for the unrealizable balances in the table above. The net increase of $9,192$21,451 in the valuation allowance is primarily due to newly created net operating loss carryforwards in state and foreign jurisdictions that the Company does not anticipate being able to utilize.
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
The Company's foreign earnings continue to be indefinitely reinvested as of December 31, 2018.2019. As a result of the passage of the 2017 Tax Act, the Company does not expect such earnings to be taxable if remitted.
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars in thousands, except per share data)
Unrecognized tax benefits
A reconciliation of the beginning and ending liability for unrecognized tax benefits that do not meet the more-likely-than-not threshold is as follows:
| | | | Year ended December 31, | Year ended December 31, |
| | 2018 | | 2017 | 2019 | | 2018 |
| Beginning balance | $ | 32,776 |
| | $ | 24,066 |
| $ | 40,382 |
| | $ | 32,776 |
|
| Additions for tax positions related to current year | 6,111 |
| | 7,606 |
| 3,378 |
| | 6,111 |
|
| Additions for tax positions related to prior years | 4,134 |
| | 804 |
| 24,722 |
| | 4,134 |
|
| Reductions related to lapse of applicable statute | (338 | ) | | (1,380 | ) | (268 | ) | | (338 | ) |
| Impact of 2017 Tax Act | — |
| | 3,731 |
| |
| Reductions related to settlements with taxing authorities | (2,301 | ) | | (2,051 | ) | — |
| | (2,301 | ) |
| Ending balance | $ | 40,382 |
| | $ | 32,776 |
| $ | 68,214 |
| | $ | 40,382 |
|
As of December 31, 2018,2019, the Company’s total liability for unrecognized tax benefits relating to tax positions that do not meet the more-likely-than-not threshold is $40,382,$68,214, of which $37,538$63,968 would impact the Company’s effective tax rate if recognized. This balance represents an increase of $7,606$27,832 from the December 31, 20172018 balance of $32,776,$40,382, primarily due to additions for tax positions related to the current year.prior years.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. At December 31, 20182019 and 2017,2018, the Company had approximately $9,019$14,428 and $4,195,$9,019, respectively, accrued for interest and penalties related to unrecognized tax benefits, net of federal tax benefit.
The Company and its subsidiaries file U.S. federal and state income tax returns and various foreign income tax returns. The Company is no longer subject to U.S. federal and state examinations by tax authorities for years before 2014 and 2009, respectively. In addition to being under audit in various state and local tax jurisdictions, the Company’s federal tax returns are under audit by the Internal Revenue Service for the years 2014-2016.2014-2017.
14. Long-term debt
Long-term debt was comprised of the following:
|
| | | | | | | | | | | |
| | December 31, | | | | |
| | 2018 | | 2017 | | Interest rate | | Maturity date |
| Senior Secured Credit Facilities: | |
| | |
| | | | |
| Term Loan A | $ | 675,000 |
| | $ | 775,000 |
| | 2.00% + LIBOR | | 6/24/2019 |
| Term Loan A-2 | 995,000 |
| | — |
| | 1.00% + LIBOR | | 6/24/2019 |
| Term Loan B | 3,342,500 |
| | 3,377,500 |
| | 2.75% + LIBOR(2) | | 6/24/2021 |
| Revolver | 175,000 |
| | 300,000 |
| | 2.00% + LIBOR | | 6/24/2019 |
| Senior Notes: | | | | | | | |
| 5 3/4% Senior Notes | 1,250,000 |
| | 1,250,000 |
| | 5.75% | | 8/15/2022 |
| 5 1/8% Senior Notes | 1,750,000 |
| | 1,750,000 |
| | 5.125% | | 7/15/2024 |
| 5% Senior Notes | 1,500,000 |
| | 1,500,000 |
| | 5% | | 5/1/2025 |
Acquisition obligations and other notes payable(1) | 183,979 |
| | 150,512 |
| | 6.24% | | 2019-2025 |
Capital lease obligations(1) | 282,737 |
| | 297,170 |
| | 5.49% | | 2019-2036 |
| Total debt principal outstanding | 10,154,216 |
| | 9,400,182 |
| | | | |
| Discount and deferred financing costs | (52,000 | ) | | (63,951 | ) | | | | |
| | 10,102,216 |
| | 9,336,231 |
| | | | |
| Less current portion | (1,929,369 | ) | | (178,213 | ) | | | | |
| | $ | 8,172,847 |
| | $ | 9,158,018 |
| | | | |
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
13. Long-term debt
Long-term debt was comprised of the following:
|
| | | | | | | | | | | | | | | | |
| | December 31, | | | | As of December 31, 2019 |
| | 2019 | | 2018 | | Maturity date | | Interest rate | | Estimated fair value(5) |
Senior Secured Credit Facilities(1): | |
| | |
| | | | | | |
| New Term Loan A | $ | 1,739,063 |
| | $ | — |
| | 8/12/2024 | | LIBOR + 1.50% |
| | $ | 1,739,063 |
|
New Term Loan B(2) | 2,743,125 |
| | — |
| | 8/12/2026 | | LIBOR + 2.25% |
| | $ | 2,770,556 |
|
Prior Term Loan A(3) | — |
| | 675,000 |
| | 12/24/2019 | | (4) |
| | $ | — |
|
Prior Term Loan A-2(3) | — |
| | 995,000 |
| | 12/24/2019 | | (4) |
| | $ | — |
|
| Prior Term Loan B | — |
| | 3,342,500 |
| | 6/24/2021 | | (4) |
| | $ | — |
|
Prior revolving line of credit(3) | — |
| | 175,000 |
| | 12/24/2019 | | (4) |
| | $ | — |
|
| Senior Notes: | | | | | | | | | |
| 5 1/8% Senior Notes | 1,750,000 |
| | 1,750,000 |
| | 7/15/2024 | | 5.125 | % | | $ | 1,789,375 |
|
| 5% Senior Notes | 1,500,000 |
| | 1,500,000 |
| | 5/1/2025 | | 5.00 | % | | $ | 1,538,700 |
|
| 5 3/4% Senior Notes | — |
| | 1,250,000 |
| | 8/15/2022 | | | | |
Acquisition obligations and other
notes payable(6) | 180,352 |
| | 183,979 |
| | 2019-2027 | | 5.35 | % | | $ | 180,352 |
|
Financing lease obligations(7) | 268,534 |
| | 282,737 |
| | 2019-2036 | | 5.39 | % | | $ | 268,534 |
|
| Total debt principal outstanding | 8,181,074 |
| | 10,154,216 |
| | | | | | |
Discount and deferred financing
costs(8) | (72,840 | ) | | (52,000 | ) | | | | | | |
| | 8,108,234 |
| | 10,102,216 |
| | | | | | |
| Less current portion | (130,708 | ) | | (1,929,369 | ) | | | | | | |
| | $ | 7,977,526 |
| | $ | 8,172,847 |
| | | | | | |
| |
| (1) | For acquisition obligations and other notes payable and capital lease obligations, the interest rate is the weighted average interest rate asAs of December 31, 2018 and2019, the maturity date is the rangeCompany has an undrawn new revolving line of maturity dates ascredit under its new senior secured credit facilities of $1,000,000. The new revolving line of credit interest rate in effect at December 31, 2018.2019 was 1.50% plus London Interbank Offered Rate (LIBOR) and it matures on August 12, 2024. |
| |
| (2) | On February 13, 2020, the Company entered into an amendment to its credit agreement governing its senior secured credit facilities to refinance the new Term Loan B haswith a floor$2,743,125 secured Term Loan B-1 that bears interest at a rate equal to LIBOR plus an applicable margin of 0.75%1.75% and matures on August 12, 2026. |
| |
| (3) | On May 6, 2019, the Company entered into an agreement to extend the maturity dates of its then existing Term Loan A, Term Loan A-2 and revolving line of credit under its prior senior secured credit facilities by six months, to December 24, 2019. |
| |
| (4) | At June 30, 2019, the interest rate on the Company's then existing term loan debt was LIBOR plus interest rate margins in effect of 2.00% for the prior Term Loan A and prior revolving line of credit, 1.00% for the prior Term Loan A-2 and 2.75% for the prior Term Loan B. |
| |
| (5) | Fair value estimates are based upon quoted bid and ask prices for these instruments, typically a level 2 input. The balances of acquisition obligations and other notes payable and financing lease obligations are presented in the consolidated financial statements as of December 31, 2019 at their approximate fair values due to the short-term nature of their settlements. |
| |
| (6) | The interest rate presented for acquisition obligations and other notes payable is their weighted average interest rate based on the current interest rate in effect and assuming no changes to the LIBOR based interest rates. |
| |
| (7) | The interest rate presented for financing lease obligations is their weighted average discount rate. |
| |
| (8) | As of December 31, 2019, the carrying amount of the Company’s current senior secured credit facilities includes a discount of $6,457 and deferred financing costs of $45,444, and the carrying amount of the Company’s senior notes includes deferred financing costs of $20,939. As of December 31, 2018, the carrying amount of the Company’s then existing senior secured credit facilities included a discount of $6,104 and deferred financing costs of $12,580, and the carrying amount of the Company’s senior notes included deferred financing costs of $33,316. |
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
Scheduled maturities of long-term debt at December 31, 20182019 were as follows:
| | | 2019 | $ | 1,929,369 |
| |
| 2020 | 80,016 |
| $ | 130,708 |
|
| 2021 | 3,314,149 |
| $ | 153,110 |
|
| 2022 | 1,291,472 |
| $ | 168,951 |
|
| 2023 | 37,881 |
| $ | 224,437 |
|
| 2024 | | $ | 3,172,298 |
|
| Thereafter | $ | 3,501,329 |
| $ | 4,331,570 |
|
The Company completed the sale of its DMG business to Optum on June 19, 2019, and, in accordance with the terms of its prior senior secured credit agreement, used all of the net proceeds from the sale of DMG to prepay term debt outstanding under that credit agreement. During the year ended December 31, 2018,2019, the Company made mandatory principal payments under itsprepayments of $647,424 on the prior Term Loan A, $995,000 on the prior Term Loan A-2 and $2,823,447 on the prior Term Loan B.
On August 12, 2019, the Company entered into a new $5,500,000 senior secured credit agreement (the New Credit Agreement) consisting of a secured term loan A facility in the aggregate principal amount of $1,750,000 with a delayed draw feature, a secured term loan B facility in the aggregate principal amount of $2,750,000 and a secured revolving line of credit in the aggregate principal amount of $1,000,000 (the foregoing referred to as the new Term Loan A, new Term Loan B and new revolving line of credit, respectively). In addition, the Company can increase the existing revolving commitments and enter into one or more incremental term loan facilities totaling $100,000in an amount not to exceed the sum of $1,500,000 (less the amount of other permitted indebtedness incurred or issued in reliance on such amount), plus an amount of indebtedness such that the senior secured leverage ratio is not in excess of 3.50:1.00 after giving effect to such borrowings.
The new Term Loan A and $35,000 on Term Loan B.
Term Loans
On March 29, 2018, the Company entered into an Increase Joinder No. 1 (Increase Joinder Agreement) under its existing senior securednew revolving line of credit facilities. Pursuant to this Increase Joinder Agreement, the Company entered into an additional $995,000 Term Loan A-2.
Total outstanding borrowings under Term Loan A, Term Loan A-2 and Term Loan B consist of various individual tranches that can range in maturity from one month to twelve months (currently all tranches are one month in duration). For Term Loan A, Term Loan A-2 and Term Loan B, each tranche bearsinitially bear interest at a London Interbank Offered Rate (LIBOR) that is determined by the duration of such trancheLIBOR plus an interest rate margin.margin of 1.50%, which is subject to adjustment depending upon the Company's leverage ratio under the New Credit Agreement and can range from 1.00% to 2.00%. The LIBOR variable component of the interest rate for each tranche is reset as such tranche matures and a new tranche is established. At December 31, 2018, the overall weighted average interest rate for Term Loan A Term Loan A-2requires amortizing quarterly principal payments beginning on December 31, 2019, in annual amounts of $10,937 in 2019, $54,689 in 2020, $87,500 in 2021, $98,437 in 2022 and $142,187 in 2023, with the balance of $1,356,250 due in 2024. The new Term Loan B was determined based upon thebears interest at LIBOR interest rates in effect for all of the individual tranches plus their respectivean interest rate margins noted in the table above.
margin of 2.25%. The Company maintains several interest rate cap agreements that have the economic effect of capping the LIBOR variable component of the Company’s interest rate at a maximum of 3.50% on $3,500,000 of outstanding principal debt, including all ofnew Term Loan B requires amortizing quarterly principal payments beginning on December 31, 2019, in annual amounts of $6,875 in 2019 and part of Term Loan A. However,$27,500 for each year from 2020 through 2025, with the remaining $517,500 outstanding principal balance of Term Loan A$2,578,125 due in 2026.
The Company's term loans and the entire outstanding balance on Term Loan A-2 would still be subject to LIBOR-based interest rate volatility. See below for further details. The Company is restricted from paying dividends under the terms of its senior secured credit facilities.
Revolving lines of credit
As of December 31, 2018, the Company has $175,000 drawn on its $1,000,000 revolving line of credit under its New Credit Agreement are guaranteed by certain of the Company’s direct and indirect wholly-owned domestic subsidiaries, which hold most of the Company’s domestic assets, and are secured by substantially all of the assets of DaVita Inc. and these guarantors. Contemporaneous with the Company entering into the New Credit Agreement and pursuant to the indentures governing the Company’s senior secured credit facilities,notes, certain subsidiaries of the Company were released from their guarantees of the Company's senior notes such that, after that release, the remaining subsidiary guarantors of the senior notes were the same subsidiaries guaranteeing the New Credit Agreement. The New Credit Agreement contains certain customary affirmative and negative covenants such as various restrictions or limitations on permitted amounts of investments, acquisitions, share repurchases, payment of dividends, and redemptions and incurrence of other indebtedness. Many of these restrictions and limitations will not apply as long as the Company’s leverage ratio calculated in accordance with the New Credit Agreement is below 4.00:1.00. In addition, to approximately $14,155 committed for outstanding lettersthe New Credit Agreement places limitations on the amount of credit. The Companygross revenue from individual immaterial subsidiaries and also has approximately $22,621requires compliance with a maximum leverage ratio covenant of additional outstanding letters of credit under a separate bilateral secured letter of credit facility,5.00:1.00 through 2022 and $211 of committed outstanding letters of credit which are backed by a certificate of deposit.
Senior Notes4.50:1.00 thereafter.
The Senior Notessenior notes are unsecured obligations, rank equally in right of payment with the Company’s existing and future unsecured senior indebtedness, are guaranteed by substantially allcertain of the Company’s direct and indirect wholly-owned domestic subsidiaries, and require semi-annual interest payments. The Company may redeem some or all of the Senior Notessenior notes at any time on or after certain specific dates and at certain specific redemption prices as outlined in each senior note agreement. Interest rates on the Senior Notessenior notes are fixed by their terms, and the Company is restricted from paying dividends under the indentures governing its Senior Notes.senior notes.
In 2019, the Company used a portion of the proceeds from the new Term Loan A and new Term Loan B to pay off the remaining principal balances outstanding and accrued interest and fees on its prior Term Loan B and prior revolving line of credit in the amount of $1,153,274; to redeem all of its outstanding 5.75% senior notes due in 2022 for an aggregate cash payment consisting of principal, redemption premium and accrued but unpaid interest to the redemption date of $1,267,565; and to repurchase 21,802 shares of common stock under its modified Dutch auction tender offer (Tender Offer) for a total cost of $1,234,154, including fees and expenses, as described in Note 19 of these consolidated financial statements. The remaining
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
Interestdebt borrowings added cash to the balance sheet for potential acquisitions, share repurchases and other general corporate purposes.
In addition to the prepayments described above, during the year ended December 31, 2019, the Company made regularly scheduled principal payments under its then existing senior secured credit facilities of $27,576 on its prior Term Loan A and $17,500 on its prior Term Loan B, as well as $10,937 on its new Term Loan A and $6,875 on its new Term Loan B.
As a result of the transactions described above, the Company recognized debt prepayment, refinancing and redemption charges of $33,402 in the year ended December 31, 2019, as a result of the repayment of all principal balances outstanding on the Company's prior senior secured credit facilities and the redemption of its 5.75% senior notes, of which $21,242 represented debt discount and deferred financing cost write-offs associated with the portion of the Company's prior senior secured debt that was paid in full in the third quarter of 2019 as well as redemption charges on its 5.75% senior notes redeemed in the third quarter of 2019, and $12,160 represented accelerated amortization of debt discount and deferred financing costs associated with the portion of the Company's prior senior secured debt that was mandatorily prepaid in or shortly after the second quarter of 2019 and prior extensions of that debt.
On February 13, 2020, (the “Amendment Date”), the Company entered into an amendment to its credit agreement (the “Repricing Amendment”) governing the senior secured credit facilities to refinance the new Term Loan B with a $2,743,125 secured Term Loan B-1 that bears interest at a rate capequal to LIBOR plus an applicable margin of 1.75% and swap agreementsmatures on August 12, 2026. The Repricing Amendment did not change the interest rate on the new Term Loan A or the new revolving line of credit. NaN additional debt was incurred, nor any proceeds received, by the Company in connection with the Repricing Amendment.
As of December 31, 2018,2019, the Company maintains several interest rate cap agreements as a means of hedging its exposure to and volatility from variable-based interest rate changes as part of its overall interest rate risk management strategy. These agreements are not held for trading or speculative purposes and hadthat have the economic effect of capping the Company’sCompany's maximum exposure to LIBOR variable interest rate changes on specific portions of the Company’sCompany's floating rate debt, as described below. Theseincluding all of the new Term Loan B and a portion of the new Term Loan A. The remaining $982,188 outstanding principal balance of the new Term Loan A is subject to LIBOR-based interest rate volatility. The cap agreements are also designated as cash flow hedges and, as a result, changes in thetheir fair values of these cap agreements are reported in other comprehensive income. The amortization of the original cap premium is recognized as a component of debt expense on a straight-line basisthe interest method over the termterms of the cap agreements. These cap agreements do not contain credit-risk contingent features.
The Company's currentIn August 2019, the Company entered into several forward interest rate cap agreements were entered into in October 2015 with a notional amounts totaling $3,500,000. These cap agreements became effective June 29, 2018,amount of $3,500,000 that have the economic effect of capping the Company's maximum exposure to LIBOR variable componentinterest rate changes on specific portions of the Company’s interestCompany's floating rate atdebt (2019 cap agreements). These 2019 cap agreements are designated as cash flow hedges and, as a maximum of 3.50% on an equivalent amount of the Company’s debt,result, changes in their fair values are reported in other comprehensive income. These 2019 cap agreements do not contain credit-risk contingent features and will expirebecome effective on June 30, 2020. As of December 31, 2018, the total fair value of these cap agreements was an asset of approximately $851. During the year ended December 31, 2018, the Company recognized debt expense of $4,327 from these cap agreements and recorded a loss of $181 in other comprehensive income due to a decrease in the unrealized fair value of these cap agreements.
Previously, the Company maintained other interest rate cap agreements that were entered into in November 2014 with notional amounts also totaling $3,500,000. These cap agreements had the economic effect of capping the LIBOR variable component of the Company’s interest rate at a maximum of 3.50% on an equivalent amount of the Company’s debt and expired on June 30, 2018. During the year ended 2018, the Company recognized debt expense of $4,140 from these cap agreements and recorded an immaterial loss in other comprehensive income due to a decrease in the unrealized fair value of these cap agreements through expiration.
The following table summarizes the Company’s derivative instrumentsinterest rate cap agreements outstanding as of December 31, 2019 and December 31, 2018, and 2017: which are classified in "Other long-term assets" on its consolidated balance sheet:
|
| | | | | | | | | | |
| | | | | Fair value |
| Derivatives designated as hedging instruments | | Balance sheet location | | December 31, 2018 | | December 31, 2017 |
| Interest rate cap agreements | | Other long-term assets | | $ | 851 |
| | $ | 1,032 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Year ended | | December 31, |
| | | | | | | | | | December 31, 2019 | | 2019 | | 2018 |
| | Notional amount | | LIBOR maximum rate | | Effective date | | Expiration date | | Debt expense | | Recorded OCI (loss) gain | | Fair value |
| 2015 cap agreements | $ | 3,500,000 |
| | 3.50% | | 6/29/2018 | | 6/30/2020 | | $ | 8,654 |
| | $ | (851 | ) | | $ | — |
| | $ | 851 |
|
| 2019 cap agreements | $ | 3,500,000 |
| | 2.00% | | 6/30/2020 | | 6/30/2024 | | | | $ | 2,417 |
| | $ | 24,452 |
| | |
The following table summarizes the effects of the Company’s interest rate cap and swap agreements for the years ended December 31, 2019, 2018 2017 and 2016:2017:
| | | | | Amount of unrealized losses in OCI
on interest rate cap and swap agreements | | Location of losses | | Amount of losses
reclassified from accumulated
OCI into income | | Amount of unrealized gains (losses) in OCI
on interest rate cap and swap agreements | | Location of losses | | Reclassification from accumulated other comprehensive income into net income |
| | | Year ended December 31, | | Year ended December 31, | | Year ended December 31, | | Year ended December 31, |
| Derivatives designated as cash flow hedges | | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
| Interest rate cap agreements | | $ | (181 | ) | | $ | (8,897 | ) | | $ | (5,198 | ) | | Debt expense | | $ | 8,466 |
| | $ | 8,278 |
| | $ | 3,899 |
| | $ | 1,566 |
| | $ | (181 | ) | | $ | (8,897 | ) | | Debt expense | | $ | 8,591 |
| | $ | 8,466 |
| | $ | 8,278 |
|
| Interest rate swap agreements | | — |
| | — |
| | (815 | ) | | Debt expense | | — |
| | — |
| | 299 |
| |
| Tax benefit | | 48 |
| | 3,460 |
| | 2,343 |
| | Tax expense | | (2,180 | ) | | (3,220 | ) | | (1,632 | ) | |
| Tax (expense) benefit | | | (415 | ) | | 48 |
| | 3,460 |
| | Tax expense | | (2,214 | ) | | (2,180 | ) | | (3,220 | ) |
| Total | | $ | (133 | ) | | $ | (5,437 | ) | | $ | (3,670 | ) | | | | $ | 6,286 |
| | $ | 5,058 |
| | $ | 2,566 |
| | $ | 1,151 |
| | $ | (133 | ) | | $ | (5,437 | ) | | | | $ | 6,377 |
| | $ | 6,286 |
| | $ | 5,058 |
|
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
See Note 20 for further details on amounts recorded and reclassified from accumulated other comprehensive (loss) income.
The Company’s overall weighted average effective interest rate on the senior secured credit facilities at the end of 20182019 was 5.11%3.93%, based upon the current margins in effect for the new Term Loan A and the new Term Loan B as of December 31, 2018.2019.
The Company’s overall weighted average effective interest rate during the year ended December 31, 20182019 was 4.96%5.01% and as of December 31, 20182019 was 5.19%4.46%.
As of December 31, 2019, the Company’s interest rates were fixed on approximately 44.29% of its total debt.
As of December 31, 2019, the Company had an undrawn revolving line of credit under its new senior secured credit facilities of $1,000,000, of which approximately $13,055 was committed for outstanding letters of credit. The Company also had approximately $59,705 of outstanding letters of credit under a separate bilateral secured letter of credit facility.
Debt expense
Debt expense consisted of interest expense of $419,639, $461,897 $406,341 and $394,013$406,341 and the amortization and accretion of debt discounts and premiums, amortization of deferred financing costs and the amortization of interest rate cap agreements of
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars in thousands, except per share data)
$25,538, $24,185, $25,538 and $24,293 for 2019, 2018 and $20,103 for 2018, 2017, and 2016, respectively. These interest expense amounts are net of capitalized interest.
15.14. Leases
The Company leases substantially all of its U.S. dialysis facilities. The majority of the Company’s facilities are leased under non-cancellable operating leases ranging in terms from five years to 15 years and which contain renewal options of five years to ten years at the fair rental value at the time of renewal. TheThese renewal options are included in the Company’s determination of the right-of-use assets and related lease liabilities when renewal is considered reasonably certain at the commencement date. Certain of the Company’s leases are generally subject to periodic consumer price index increases or contain fixed escalation clauses. The Company also leases certain facilities and equipment under capitalfinance leases. The Company has elected the practical expedient to not separate lease components from non-lease components for its financing and operating leases.
Financing and operating right-of-use assets are recognized based on the net present value of lease payments over the lease term at the commencement date. Since most of the Company's leases do not provide an implicit rate of return, the Company uses its incremental borrowing rate based on information available at the commencement date or remeasurement date in determining the present value of lease payments.
As of December 31, 2019 and December 31, 2018, assets recorded under finance leases were $247,246 and $367,164, respectively, and accumulated amortization associated with finance leases was $27,193 and $131,971, respectively, included in property and equipment, net, on the Company's consolidated balance sheet.
In certain markets, the Company acquires and develops dialysis centers. Upon completion, the Company sells the center to a third party and leases the space back with the intent of operating the center on a long term basis. Both the sale and leaseback terms are generally market terms. The lease terms are consistent with the Company's other operating leases with the majority of the leases under non-cancellable operating leases ranging in terms from five years to 15 years and which contain renewal options of five years to ten years at the fair rental value at the time of renewal.
The Company adopted Topic 842, Leases beginning on January 1, 2019 through a modified retrospective approach for leases existing at the adoption date with a cumulative effect adjustment. Consequently, financial information was not updated for dates and periods before January 1, 2019.
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
The components of lease expense were as follows:
|
| | | | |
| Lease cost | | Year ended December 31, 2019 |
Operating lease cost(1): | | |
| Fixed lease expense | | $ | 526,352 |
|
| Variable lease expense | | 119,740 |
|
| Financing lease cost: | | |
| Amortization of leased assets | | 23,724 |
|
| Interest on lease liabilities | | 14,932 |
|
| Net lease cost | | $ | 684,748 |
|
(1) Includes short-term lease expense and sublease income, which are immaterial.
Other information related to leases was as follows:
|
| | | |
| Lease term and discount rate | | December 31, 2019 |
| Weighted average remaining lease term (years): | | |
| Operating leases | | 9.0 |
|
| Finance leases | | 10.2 |
|
| Weighted average discount rate: | | |
| Operating leases | | 4.1 | % |
| Finance leases | | 5.4 | % |
|
| | | | |
| Other information | | Year ended December 31, 2019 |
| Gains on sale leasebacks, net | | $ | 20,833 |
|
| Cash paid for amounts included in the measurement of lease liabilities: | | |
| Operating cash flows for operating leases | | $ | 637,655 |
|
| Operating cash flows for finance leases | | $ | 22,257 |
|
| Financing cash flows for finance leases | | $ | 25,692 |
|
Net operating lease assets obtained in exchange for new or modified
operating lease liabilities | | $ | 432,074 |
|
Future minimum lease payments under non-cancellable operating and capital leases as of December 31, 2019 are as follows:
| | | | Operating leases | | Capital leases | Operating leases | | Finance leases |
| 2019 | $ | 483,488 |
| | $ | 36,754 |
| |
| 2020 | 462,154 |
| | 41,044 |
| $ | 462,131 |
| | $ | 37,624 |
|
| 2021 | 432,950 |
| | 34,026 |
| 489,799 |
| | 33,267 |
|
| 2022 | 395,462 |
| | 33,690 |
| 454,753 |
| | 33,677 |
|
| 2023 | 349,649 |
| | 33,845 |
| 409,655 |
| | 33,825 |
|
| 2024 | | 358,009 |
| | 33,841 |
|
| Thereafter | 1,589,949 |
| | 194,611 |
| 1,510,665 |
| | 178,434 |
|
| | $ | 3,713,652 |
| | 373,970 |
| |
| Total future minimum lease payments | | 3,685,012 |
| | 350,668 |
|
| Less portion representing interest | | | (91,233 | ) | (617,300 | ) | | (82,134 | ) |
| Total capital lease obligations, including current portion | | | $ | 282,737 |
| |
| Present value of lease liabilities | | $ | 3,067,712 |
| | $ | 268,534 |
|
Rent expense under all operating leases for 2019, 2018, and 2017 was $646,092, $596,117 and 2016 was $596,117, $530,748, and $478,531, respectively. Rent expense is recorded on a straight-line basis over the term of the lease, forincluding leases that contain fixed escalation clauses or include abatement provisions. Leasehold improvement incentives are deferred and amortized to rent expense over the term of the lease. The net book value of property and equipment under capital leases was $235,194 and $257,772 at December 31, 2018 and 2017, respectively. CapitalFinance lease obligations are included in long-term debt. See Note 14 to these consolidated financial statements.13 for further details on long-term debt.
16.DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
15. Employee benefit plans
The Company has a 401(k) retirement savings plan for substantially all of its Kidney CareU.S. employees which has been established pursuant to the applicable provisions of the Internal Revenue Code (IRC). The plan allows for employees to contribute a percentage of their base annual salaries on a tax-deferred basis not to exceed IRC limitations. Beginning in 2018, the Company implemented a 401(k) matching program under which the Company matches 50% of the employee's contribution up to 6% of the employee's salary, subject to certain limitations. The matching contributions are subject to certain eligibility and vesting conditions. For the yearyears ended December 31, 2019 and 2018, the Company accrued matching contributions totaling approximately $67,807.$64,988 and $67,807, respectively. Prior to 2018, the Company did not provide matching contributions in connection with the 401(k) savings plan for its Kidney Care employees.plan.
The Company also maintains a voluntary compensation deferral plan, the Deferred Compensation Plan, as well as other legacy deferral plans. The Deferred Compensation Plan plan is non-qualified and permits certain employees whose annualized base salary equals or exceeds a minimum annual threshold amount as set by the Company to elect to defer all or a portion of their annual bonus payment and up to 50% of their base salary into a deferral account maintained by the Company. Total contributions to this plan in 2019, 2018 and 2017 were $1,751, $3,090 and 2016 were $3,090, $4,497, and $5,344, respectively. Deferred amounts are generally paid out in cash at the participant’s election either in the first or second year following retirement or in a specified future period at least three to four years after the deferral election was effective. During 2019, 2018 2017 and 20162017 the Company distributed $2,730, $4,652 $2,789 and $1,065,$2,789, respectively, to participants from its deferred compensation plans. Participants are credited with their proportional amount of annual earnings from the plans. The assets of these plans are held in rabbi trusts and as such are subject to the claims of the Company’s general creditors in the event of its bankruptcy. As of December 31, 20182019 and 2017,2018, the total fair value of assets held in these plans' trusts was $36,124$39,527 and $38,895,$36,124, respectively. The assets of these plans are recorded at fair value with changes in fair value recorded in other comprehensive income prior to 2018 and recognized in "Other income, net" since January 1, 2018. Any fair value changes to the corresponding liability balance are recorded as compensation expense. See Note 5 to these consolidated financial statements.
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars in thousands, except per share data)
Most of the Company’s outstanding employee stock plan awards include a provision accelerating the vesting of the award in the event of a change of control. The Company also maintains a change of control protection program for its employees who do not have a significant number of stock awards, which has been in place since 2001, and which provides for cash bonuses to employees in the event of a change of control. Based on the market price of the Company’s common stock and shares outstanding at December 31, 2018, these cash bonuses would total approximately $336,530 if a change of control transaction occurred at that price and the Company’s Board of Directors did not modify the program. This amount has not been accrued at December 31, 2018, and would only be accrued upon a change of control. These change of control provisions may affect the price an acquirer would be willing to pay for the Company.further details.
17.16. Contingencies
The majority of the Company’s revenues are from government programs and may be subject to adjustment as a result of: (i) examination by government agencies or contractors, for which the resolution of any matters raised may take extended periods of time to finalize; (ii) differing interpretations of government regulations by different Medicare contractors or regulatory authorities; (iii) differing opinions regarding a patient’s medical diagnosis or the medical necessity of services provided; and (iv) retroactive applications or interpretations of governmental requirements. In addition, the Company’s revenues from commercial payors may be subject to adjustment as a result of potential claims for refunds, as a result of government actions or as a result of other claims by commercial payors.
The Company operates in a highly regulated industry and is a party to various lawsuits, demands, claims, qui tam suits, governmental investigations and audits (including, without limitation, investigations or other actions resulting from its obligation to self-report suspected violations of law) and other legal proceedings. The Company records accruals for certain legal proceedings and regulatory matters to the extent that the Company determines an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. As of December 31, 2018,2019 and December 31, 2017,2018, the Company’s total recorded accruals including DMG, with respect to legal proceedings and regulatory matters, net of anticipated third party recoveries, were immaterial. While these accruals reflect the Company’s best estimate of the probable loss for those matters as of the dates of those accruals, the recorded amounts may differ materially from the actual amount of the losses for those matters, and any anticipated third party recoveries for any such losses may not ultimately be recoverable. Additionally, in some cases, no estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made because of the inherently unpredictable nature of legal proceedings and regulatory matters, which also may be impacted by various factors, including, without limitation, that they may involve indeterminate claims for monetary damages or may involve fines, penalties or non-monetary remedies; present novel legal theories or legal uncertainties; involve disputed facts; represent a shift in regulatory policy; are in the early stages of the proceedings; or may result in a change of business practices. Further, there may be various levels of judicial review available to the Company in connection with any such proceeding.
The following is a description of certain lawsuits, claims, governmental investigations and audits and other legal proceedings to which the Company is subject.
Governmental Inquiries by the Federal Government and Certain Related Civil Proceedings
2016 U.S. Attorney Texas Investigation: In early February 2016, the Company announced that its pharmacy services’ wholly-owned subsidiary, DaVita Rx, LLC (DaVita Rx), a wholly-owned subsidiary of the Company, received a Civil Investigative Demand (CID) from the U.S. Attorney’s Office, Northern District of Texas. The
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
government is conducting a federal False Claims Act (FCA) investigation concerning allegations that DaVita Rx presented or caused to be presented false claims for payment to the government for prescription medications, as well as an investigation into the Company’s relationships with pharmaceutical manufacturers. The CID covers the period from January 1, 2006 through the present. In connection with the Company’s ongoing efforts working with the government, the Company learned that a qui tam complaint had been filed covering some of the issues in the CID and practices that had been identified by the Company in a self-disclosure filed with the Office of Inspector General (OIG) for the U.S. Department of Health and Human Services (HHS) in February 2016. In December 2017, the Company finalized and executed a settlement agreement with the government and relators in the qui tam matter that included total monetary consideration of $63,700, as previously disclosed, of which $41,500 was an incremental cash payment and $22,200 was for amounts previously refunded, and all of which was previously accrued. The government’s investigation into certain of the Company's relationships with pharmaceutical manufacturers is ongoing, and in July 2018 the OIG served the Company with a subpoena seeking additional documents and information relating to those relationships. The Company is continuing to cooperate with the government in this investigation.
2017 U.S. Attorney Massachusetts Investigation: In January 2017, the Company was served with an administrative subpoena for records by the U.S. Attorney’s Office, District of Massachusetts, relating to an investigation into possible federal
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars in thousands, except per share data)
health care offenses. The subpoena coverscovered the period from January 1, 2007 throughto the present, and seekssought documents relevant to charitable patient assistance organizations, particularly the American Kidney Fund, including documents related to efforts to provide patients with information concerning the availability of charitable assistance. The Department of Justice notified the court on July 23, 2019 of its decision to elect not to intervene in the matter of U.S. ex rel. David Gonzalez v. DaVita Healthcare Partners, et al. The complaint then was unsealed in the U.S. District Court, District of Massachusetts by order entered on August 1, 2019. The Department of Justice has confirmed that the complaint, which alleges violations of the FCA and various state false claims acts, was the basis of its investigation initiated in January 2017. The Company is continuing to cooperatehas not been served with the government in this investigation.complaint.
2017 U.S. Attorney Colorado Investigation: In November 2017, the U.S. Attorney’s Office, District of Colorado informed the Company of an investigation it was conducting into possible federal health carehealthcare offenses involving DaVita Kidney Care, as well as several of the Company’s wholly-owned subsidiaries, including DMG,subsidiaries. In addition to DaVita Kidney Care, the matter currently includes an investigation into DaVita Rx, DaVita Laboratory Services, Inc. (DaVita Labs), and RMS Lifeline Inc. (Lifeline). In each of August 2018 and May 2019, the Company received a CID pursuant to the FCA from the U.S. Attorney's Office. The CID was issued pursuant to the FCA and covers the period from January 2005 through the present. In connection with the resolution of the 2015 U.S. OIG Medicare Advantage Civil Investigation referred to below, the Company resolved possible claimsOffice relating to DMG in this investigation. The Company is continuing to cooperate with the government in this investigation.
2017 U.S. Attorney Florida Investigation: In November 2017, the U.S. Attorney’s Office, Southern District of Florida informed the Company of an investigation it was conducting into possible federal healthcare offenses involving the Company's wholly-owned subsidiary, Lifeline. The Company is continuing to cooperate with the government in this investigation.
2018 U.S. Attorney Florida Investigation: In March 2018, DaVita Labs received two CIDs from the U.S. Attorney’s Office, Middle District of Florida that were identical in nature but directed to the two different labs. According to the face of the CIDs, the U.S. Attorney’s Office is conducting an investigation as to whether the Company’s subsidiary submitted claims for blood, urine, and fecal testing, where there were insufficient test validation or stability studies to ensure accurate results, in violation of the FCA. In October 2018, DaVita Labs received a subpoena from the OIG in connection with this matter requesting certain patient records linked to clinical laboratory tests. On September 30, 2019, the U.S. Attorney's Office notified the U.S. District Court, Middle District of Florida, of its decision not to elect to intervene at this time in the matter of U.S. ex rel. Lorne Holland, et al. v. DaVita Healthcare Partners, Inc. et al. The court then unsealed the complaint, which alleges violations of the FCA, by order dated the same day. In January 2020, the private party relators served the Company and DaVita Labs with an amended complaint. The Company is continuingand DaVita Labs dispute these allegations and intend to cooperate with the government indefend this investigation.action accordingly.
* * *
Although the Company cannot predict whether or when proceedings might be initiated or when these matters may be resolved (other than as may be described above), it is not unusual for inquiries such as these to continue for a considerable period of time through the various phases of document and witness requests and on-going discussions with regulators and to develop over the course of time. In addition to the inquiries and proceedings specifically identified above, the Company frequently is subject to other inquiries by state or federal government agencies and/or private civil qui tam complaints filed by relators. Negative findings or terms and conditions that the Company might agree to accept as part of a negotiated resolution of pending or future government inquiries or relator proceedings could result in, among other things, substantial financial penalties or awards against the Company, substantial payments made by the Company, harm to the Company’s reputation, required changes to the Company’s business practices, exclusion from future participation in the Medicare, Medicaid and other federal health care programs and, if criminal proceedings were initiated against the Company, members of its board of directors or management, possible criminal penalties, any of which could have a material adverse effect on the Company.
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
Shareholder and Derivative Claims
Peace Officers’ Annuity and Benefit Fund of Georgia Securities Class Action Civil Suit: On February 1, 2017, the Peace Officers’ Annuity and Benefit Fund of Georgia filed a putative federal securities class action complaint in the U.S. District Court for the District of Colorado against the Company and certain executives. The complaint covers the time period of August 2015 to October 2016 and alleges, generally, that the Company and its executives violated federal securities laws concerning the Company’s financial results and revenue derived from patients who received charitable premium assistance from an industry-funded non-profit organization. The complaint further alleges that the process by which patients obtained commercial insurance and received charitable premium assistance was improper and "created a false impression of DaVita’s business and operational status and future growth prospects." In November 2017, the court appointed the lead plaintiff and an amended complaint was filed on January 12, 2018. On March 27, 2018, the Company and various individual defendants filed a motion to dismiss. Briefing onOn March 28, 2019, the motion is complete. The plaintiffs filed an opposition toU.S. District Court for the District of Colorado denied the motion to dismiss on June 6, 2018.dismiss. The Company filed a reply in support ofanswered the motioncomplaint on July 19, 2018.May 28, 2019. The Company disputes these allegations and intends to defend this action accordingly.
In re DaVita Inc. Stockholder Derivative Litigation: On August 15, 2017, the U.S. District Court for the District of Delaware consolidated three previously disclosed shareholder derivative lawsuits: the Blackburn Shareholder action filed on February 10, 2017, the Gabilondo Shareholder action filed on May 30, 2017, and the City of Warren Police and Fire Retirement
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars in thousands, except per share data)
System Shareholder action filed on June 9, 2017. The complaint covers the time period from 2015 to present and alleges, generally, breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, corporate waste, and misrepresentations and/or failures to disclose certain information in violation of the federal securities laws in connection with an alleged practice to direct patients with government-subsidized health insurance into private health insurance plans to maximize the Company’s profits. An amended complaint was filed in September 2017, and on December 18, 2017, the Company filed a motion to dismiss and a motion to stay proceedings in the alternative. The plaintiffs filed an opposition to the motion to dismiss on March 9, 2018. On JuneApril 25, 2018, the U.S. District Court for the District of Delaware granted the Company’s motion to stay proceedings and stayed the case until January 7, 2019, the date of the next status conference. During the status conference on January 7, 2019, the court further extendeddenied the stay until February 8, 2019. The parties submitted a proposed scheduling order on that date.Company's motion to dismiss. The Company askedanswered the Courtcomplaint on May 28, 2019. On January 31, 2020, the plaintiffs filed a motion for class certification that the Company intends to rule on the fully-briefed motion to dismiss before opening discovery.oppose. The Company disputes these allegations and intends to defend this action accordingly.
Other Proceedings
In addition to the foregoing, from time to time the Company is subject to other lawsuits, demands, claims, governmental investigations and audits and legal proceedings that arise due to the nature of its business, including, without limitation, contractual disputes, such as with payors, suppliers and others, employee-related matters and professional and general liability claims. From time to time, the Company also initiates litigation or other legal proceedings as a plaintiff arising out of contracts or other matters.
Resolved Matters
2011 Suit against the U.S. Department of Veterans Affairs: As previously disclosed, the Company had a pending lawsuit in the U.S. Court of Federal Claims against the federal government which was originally filed in May 2011. The lawsuit related to the U.S. Department of Veterans Affairs (VA) underpayment of dialysis services the Company provided from 2005 through 2011 to veterans pursuant to VA regulations. In the first quarter of 2017, the Company received a payment of $538,000 related to the settlement with the VA. The Company's consolidated entities recognized a net gain of $527,000 on this settlement. The Company's nonconsolidated and managed entities recognized a gain of $9,000, of which the Company's equity investment share was $3,000. The net effect was a net increase of $530,000 to the Company's operating income.
2015 OIG Medicare Advantage Civil Investigation: In March 2015, JSA HealthCare Corporation (JSA), a subsidiary of DMG, received a subpoena from the OIG requesting documents and information for the period from January 1, 2008 through December 31, 2013, for certain MA plans for which JSA provided services. It also requested information regarding JSA’s communications about patient diagnoses as they related to certain MA plans generally, and more specifically as related to two Florida physicians with whom JSA previously contracted.
In addition to the subpoena described above, in June 2015, the Company received a civil subpoena from the OIG seeking production of a wide range of documents relating to the Company’s and its subsidiaries’ (including DMG and its subsidiary JSA) provision of services to MA plans and related patient diagnosis coding and risk adjustment submissions and payments. The Company believes that the request was part of a broader industry investigation into MA patient diagnosis coding and risk adjustment practices and potential overpayments by the government. The information requested included information related to patient diagnosis coding practices for a number of conditions, including potentially improper historical DMG coding for a particular condition. With respect to that condition, the guidance related to that coding issue was discontinued following the Company’s November 1, 2012, acquisition of HealthCare Partners (now known as the Company's DMG business), and the Company notified Centers for Medicare and Medicaid Services (CMS) in April 2015 of the coding practice and potential overpayments. In that regard, the Company identified certain additional coding practices which may have been problematic, some of which were the subject of the previously disclosed and dismissed Swoben Private Civil Suit.
The Company entered into a settlement agreement with the DOJ and OIG to resolve these matters on September 28, 2018. As previously disclosed, an escrow established in connection with the Company's acquisition of HealthCare Partners in 2012 held back a portion of the purchase price to the prior owners of HealthCare Partners as security for the indemnification rights of the Company. The settlement amount of $270,000 was paid with these escrowed funds.
White, Kathleen, et al. v. DaVita Healthcare Partners, Inc., Civil Action No. 15-cv-2106, U.S. District Court for the District of Colorado: Three actions (Menchaca v. DaVita Healthcare Partners, Inc., Saldana v. DaVita Healthcare Partners, Inc. and Hardin v. DaVita Healthcare Partners, Inc.) were consolidated in December 2016 into one action in U.S. District Court for the District of Colorado. In all three actions, the plaintiffs brought claims for wrongful death based on allegations related to Granuflo®, a product used as a component of the dialysis process. The Menchaca and Saldana actions arose out of the treatment of patients in California, while the Hardin action arose out of the treatment of a patient in Illinois. On June 27, 2018,
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars in thousands, except per share data)
the jury returned a verdict in favor of the plaintiffs, collectively awarding $8,500 in compensatory damages and $375,000 in punitive damages. Judgment on this verdict was not entered. In November 2018, the parties settled all three of the consolidated actions collectively for $25,500, and all three cases were dismissed with prejudice. One of the Company’s insurance carriers paid $9,200 of the settlement. The Company believes it is probable that it will be able to recover the remainder of the settlement amount from other insurers, indemnitors, and the like; however, the Company can make no assurances that it will recover the full amount.
* * *
Other than as may be described above, the Company cannot predict the ultimate outcomes of the various legal proceedings and regulatory matters to which the Company is or may be subject from time to time, including those described in this Note 1716 to these consolidated financial statements, or the timing of their resolution or the ultimate losses or impact of developments in those matters, which could have a material adverse effect on the Company’s revenues, earnings and cash flows. Further, any legal proceedings or regulatory matters involving the Company, whether meritorious or not, are time consuming, and often require management’s attention and result in significant legal expense, and may result in the diversion of significant operational resources, or otherwise harm the Company’s business, results of operations, financial condition, cash flows or reputation.
18.17. Noncontrolling interests subject to put provisions and other commitments
Noncontrolling interests subject to put provisions
The Company has potential obligations to purchase the equity interests held by third parties in severalmany of its majority-owned joint venturesdialysis partnerships and other nonconsolidated entities. These noncontrolling interests subject to put provisions constitute redeemable equity interests and are therefore classified as temporary equity and carried at estimated fair value on the Company's balance sheet.
Specifically, these obligations are in the form of put provisions that are exercisable at the third-party owners’ discretion within specified periods as outlined in each specific put provision. If these put provisions were exercised, the Company would be required to purchase the third-party owners’ equity interests, generally at either the appraised fair market value of the equity interests or in certain cases at a predetermined multiple of earnings or cash flows attributable to the equity interests put to the Company, which is
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
intended to approximate fair value. The methodology the Company uses to estimate the fair values of noncontrolling interests subject to put provisions assumes the higher of either a liquidation value of net assets or an average multiple of earnings, based on historical earnings, patient mix and other performance indicators that can affect future results, as well as other factors. The estimated fair values of noncontrolling interests subject to put provisions are a critical accounting estimate that involves significant judgments and assumptions and may not be indicative of the actual values at which the noncontrolling interests may ultimately be settled, which could vary significantly from the Company’s current estimates. The estimated fair values of noncontrolling interests subject to put provisions can fluctuate and the implicit multiple of earnings at which these noncontrolling interests obligations may be settled will vary significantly depending upon market conditions including potential purchasers’ access to the capital markets, which can impact the level of competition for dialysis and non-dialysis related businesses, the economic performance of these businesses and the restricted marketability of the third-party owners’ equity interests. The amount of noncontrolling interests subject to put provisions that employ a contractually predetermined multiple of earnings rather than fair value is immaterial.
The Company has certain other potential commitments to provide operating capital to a number of dialysis centersbusinesses that are wholly-owned by third parties or businesses in which the Company owns a noncontrolling equity interest as well as to physician-owned vascular access clinics or medical practices that the Company operates under management and administrative service agreements of approximately $4,675.$9,669.
Certain consolidated joint venturesdialysis partnerships are originally contractually scheduled to dissolve after terms ranging from ten years to 50 years. While noncontrolling interests in these limited life entities qualify as mandatorily redeemable financial instruments, they are subject to a classification and measurement scope exception from the accounting guidance generally applicable to other mandatorily redeemable financial instruments. Future distributions upon dissolution of these entities would be valued below the related noncontrolling interest carrying balances in the consolidated balance sheet.
Other commitments
In 2017, the Company entered into a Sourcing and Supply Agreement with Amgen USA Inc. (Amgen) that expires on December 31, 2022. Under the terms of the agreement, the Company will purchase EPO from Amgen in amounts necessary to meet no less than 90% of its requirements for erythropoiesis-stimulating agents (ESAs) through the expiration of the contract from Amgen.contract. The actual amount of EPO that the Company will purchase will depend upon the amount of EPO administered during dialysis as prescribed by physicians and the overall number of patients that the Company serves.
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars in thousands, except per share data)
The Company has an agreement with Fresenius Medical Care (FMC) to purchase a certain amount of dialysis equipment, parts and supplies from FMC, which was extendedextends through December 31, 2020. During 2018, 2017 and 2016, the Company purchased $182,446, $176,212 and $164,766, respectively, of certain equipment, parts and supplies from FMC.
The Company also has an agreementagreements with Baxter Healthcare Corporation (Baxter) that commitscommit the Company to purchase a certain amountamounts of peritoneal dialysis supplies at fixed prices through 2022. During 2018, 2017
As of December 31, 2019, the remaining minimum purchase commitments under these arrangements was approximately $399,042, $312,119 and 2016,$312,101, for the years 2020, 2021 and 2022, respectively. If the Company purchased $162,858, $166,764 and $162,109 of peritoneal dialysis supplies from Baxterfails to meet the minimum purchase commitments under this agreement.these contracts during any year, it is required to pay the difference to the supplier.
Other than operating leases disclosed in Note 15 to these consolidated financial statements, the letters of credit disclosed in Note 1413 to these consolidated financial statements, and the arrangements as described above, the Company has no off balance sheet financing arrangements as of December 31, 2018.2019.
19.18. Long-term incentive compensation and shareholders’ equity
Long-term incentive compensation
Long-term incentive program (LTIP) compensation includes both stock-based awards (principally stock-settled stock appreciation rights, restricted stock units and performance stock units) as well asand long-term performance-based cash awards. Long-term incentive compensation expense, which wasis primarily general and administrative in nature, wasis attributed to the Company’s U.S. dialysis and related lab services business, its corporate administrative support, and theits ancillary services and strategic initiatives.services.
The Company’s stock-based compensation expense for stock-settled awards is measured at the estimated fair value of awards on the date of grant and recognized on a cumulative straight-line basis over the vesting terms of the awards, unless the stock awards are based on non-market basednon-market-based performance metrics, in which case expense is adjusted for the ultimate number of shares expected ultimate payoutsto be issued as of the end of each reporting period. Stock-based compensation expense for cash-settled awards is based on thetheir estimated fair values as of the end of each reporting period. The expense for all stock-based awards is recognized net of expected forfeitures.
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
Stock-based compensation to be settled in shares is recorded to the Company’s shareholders’ contributed capital, while stock-based compensation to be settled in cash is recorded to a liability. Shares issued upon exercise of stock awards are issued from authorized but unissued shares.
Long-term incentive compensation plans
The Company’s 2011 Incentive Award Plan (the 2011 Plan) is the Company’s omnibus equity compensation plan and provides for grants of stock-based awards to employees, directors and other individuals providing services to the Company, except that incentive stock options may only be awarded to employees. The 2011 Plan authorizes the Company to award stock options, stock appreciation rights, restricted stock units, restricted stock, and other stock-based or performance-based awards, and is designed to enable the Company to grant equity and cash awards that qualified as performance-based compensation under Section 162(m) of the Internal Revenue Code for tax years 2017 and prior.awards. The 2011 Plan mandates a maximum award term of five years and stipulates that stock appreciation rights and stock options be granted with prices not less than fair market value on the date of grant. The 2011 Plan also requires that full value share awards such as restricted stock units reduce shares available under the 2011 Plan at a ratio of 3.5:1. The Company’s nonqualified stock appreciation rights and stock units awarded under the 2011 Plan generally vest over 36 months to 48 months from the date of grant. At December 31, 2018,2019, there were 6,162,797 stock-settled stock appreciation rights, 1,860,475 stock-settled stock units, 23,000 cash-settled stock appreciation rights and 1,600 cash-settled stock units outstanding, and 23,091,76415,547 shares available for future grants under the 2011 Plan. This number of shares available does not reflect reduction for the Premium Priced Award described below, as that Board-approved award remained contingent on stockholder approval of an amendment to the 2011 Plan which did not occur until January 2020.
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars in thousands, except per share data)
A combined summary of the status of the Company’s stock-settled awards under the 2011 Plan, including base shares for stock-settled stock appreciation rights (SSARs) and stock-settled stock unit awards is as follows:
| | | | Year ended December 31, 2018 | Year ended December 31, 2019 |
| | Stock appreciation rights | | Stock units | Stock appreciation rights | | Stock units |
| | Awards | | Weighted
average
exercise
price | | Weighted
average
remaining
contractual life | | Awards | | Weighted
average
remaining
contractual life | Awards | | Weighted
average
exercise
price | | Weighted
average
remaining
contractual life | | Awards | | Weighted
average
remaining
contractual life |
| Outstanding at beginning of year | 6,648,199 |
| | $ | 67.92 |
| | | | 1,075,572 |
| | |
| 6,163 |
| | $ | 69.90 |
| | | | 1,860 |
| | |
|
| Granted | 1,902,652 |
| | $ | 66.54 |
| | | | 1,101,388 |
| | |
| |
Granted (1) ( 2) | | 2,389 |
| | $ | 52.45 |
| | | | 1,961 |
| | |
|
| Exercised | (2,059,872 | ) | | $ | 60.34 |
| | | | (165,543 | ) | | |
| (20 | ) | | $ | 64.17 |
| | | | (225 | ) | | |
|
| Expired | | (1,058 | ) | | $ | 70.97 |
| | — |
| | |
| Canceled | (328,182 | ) | | $ | 70.44 |
| | | | (150,942 | ) | | |
| (521 | ) | | $ | 65.23 |
| | | | (436 | ) | | |
|
| Outstanding at end of period | 6,162,797 |
| | $ | 69.90 |
| | 2.9 | | 1,860,475 |
| | 2.2 |
| |
Outstanding at end of period (1) | | 6,953 |
| | $ | 64.10 |
| | 3.0 | | 3,160 |
| | 2.3 |
|
| Exercisable at end of period | 1,422,529 |
| | $ | 73.39 |
| | 0.9 | | — |
| | — |
| 1,254 |
| | $ | 77.68 |
| | 1.1 | | — |
| | — |
|
| Weighted-average fair value of grants | | | | | | | | | | | | | | |
| 2019 | | $ | 14.04 |
| | |
| | | | $ | 50.58 |
| | |
|
| 2018 | $ | 16.24 |
| | |
| | | | $ | 66.23 |
| | |
| $ | 16.24 |
| | |
| | | | $ | 66.23 |
| | |
|
| 2017 | $ | 14.51 |
| | |
| | | | $ | 65.73 |
| | |
| $ | 14.51 |
| | |
| | | | $ | 65.73 |
| | |
|
| 2016 | $ | 13.74 |
| | |
| | | | $ | 70.99 |
| | |
| |
|
| | | | | | | | | | | | | | |
| | | Awards Outstanding | | Weighted average exercise price | | Awards exercisable | | Weighted average exercise price |
| Range of SSARs base prices | |
| $50.01–$60.00 | | 131,470 |
| | $ | 57.90 |
| | — |
| | $ | — |
|
| $60.01–$70.00 | | 4,083,162 |
| | $ | 66.66 |
| | 757,237 |
| | $ | 68.96 |
|
| $70.01–$80.00 | | 1,351,997 |
| | $ | 74.78 |
| | 346,316 |
| | $ | 73.81 |
|
| $80.01–$90.00 | | 596,168 |
| | $ | 83.60 |
| | 318,976 |
| | $ | 83.47 |
|
| Total | | 6,162,797 |
| | $ | 69.90 |
| | 1,422,529 |
| | $ | 73.39 |
|
| |
| (1) | Awards granted and outstanding do not reflect the Premium Priced Award described below, as that Board-approved award remained contingent on stockholder approval of an amendment to the 2011 Plan which did not occur until January 2020. |
| |
| (2) | Includes approximately 8 shares resulting from the payout of the first tranche of fiscal year 2016 PSU grants due to exceeding target payout. |
|
| | | | | | | | | | | | | | |
| | | Awards Outstanding | | Weighted average exercise price | | Awards exercisable | | Weighted average exercise price |
| Range of SSARs base prices | |
| $50.01–$60.00 | | 2,400 |
| | $ | 52.63 |
| | — |
| | $ | — |
|
| $60.01–$70.00 | | 3,069 |
| | $ | 66.16 |
| | 186 |
| | $ | 65.92 |
|
| $70.01–$80.00 | | 925 |
| | $ | 75.28 |
| | 509 |
| | $ | 75.50 |
|
| $80.01–$90.00 | | 559 |
| | $ | 83.59 |
| | 559 |
| | $ | 83.59 |
|
| Total | | 6,953 |
| | $ | 64.10 |
| | 1,254 |
| | $ | 77.68 |
|
The Company did not grant any cash-settled stock-based awards during 2018. Liability-classified stock-based awards contributed $(20), $114
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and $376 to stock-based compensation expense for the years ended December 31, 2018, 2017 and 2016, respectively. As of December 31, 2018, the Company had 24,600 liability-classified stock-based awards outstanding, none of which were vested, and a total stock-based compensation liability balance of $79.shares in thousands, except per share data)
For the years ended December 31, 2019, 2018, 2017, and 2016,2017, the aggregate intrinsic value of stock-based awards exercised was $11,475, $31,045 $34,895 and $73,944,$34,895, respectively. At December 31, 2018,2019, the aggregate intrinsic value of stock-based awards outstanding was $95,822$319,486 and the aggregate intrinsic value of stock awards exercisable was zero.$1,783.
Estimated fair value of stock-based compensation awards
The Company has estimated the grant-date fair value of stock-settled stock appreciation rights awards using the Black-Scholes-Merton valuation model and stock-settled stock unit awards at intrinsic value on the date of grant, except for portions of the Company’s performance stock unit awards for which a Monte Carlo simulation was used to estimate the grant-date fair value. The following assumptions were used in estimating these values and determining the related stock-based compensation expense attributable to the current period:
Expected term of the awards: The expected term of awards granted represents the period of time that they are expected to remain outstanding from the date of grant. The Company determines the expected term of its stock awards based on its historical experience with similar awards, considering the Company’s historical exercise and post-vesting termination patterns, and the terms expected by peer companies in near industries.
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars in thousands, except per share data)
Expected volatility: Expected volatility represents the volatility anticipated over the expected term of the award. The Company determines the expected volatility for its awards based on the volatility of the price of its common stock over the most recent retrospective period commensurate with the expected term of the award, considering the volatility expectations implied by the market price of its exchange-traded options and the volatilities expected by peer companies in near industries.
Expected dividend yield: The Company has not paid dividends on its common stock and does not currently expect to pay dividends during the term of stock awards granted.
Risk-free interest rate: The Company bases the expected risk-free interest rate on the implied yield currently available on stripped interest coupons of U.S. Treasury issues with a remaining term equivalent to the expected term of the award.
A summary of the weighted average valuation inputs described above used for estimating the grant-date fair value of stock-settled stock appreciation rightsSSAR awards granted in the periods indicated is as follows:
| | | | Year ended December 31, | Year ended December 31, |
| | 2018 | | 2017 | | 2016 | 2019 | | 2018 | | 2017 |
| Expected term | 4.2 |
| | 4.2 |
| | 4.2 |
| 4.0 |
| | 4.2 |
| | 4.2 |
|
| Expected volatility | 23.8 | % | | 23.9 | % | | 21.0 | % | 29.5 | % | | 23.8 | % | | 23.9 | % |
| Expected dividend yield | — | % | | — | % | | — | % | — | % | | — | % | | — | % |
| Risk-free interest rate | 2.9 | % | | 1.7 | % | | 1.0 | % | 2.2 | % | | 2.9 | % | | 1.7 | % |
The Company estimates expected forfeitures based upon historical experience with separate groups of employees that have exhibited similar forfeiture behavior in the past. Stock-based compensation expense is recorded only for awards that are expected to vest.
On November 4, 2019, the independent members of the Company’s Board of Directors (Board) approved an award of 2,500 premium-priced stock-settled stock appreciation rights (Premium-Priced Award) to the Company’s Chief Executive Officer (CEO), which award was subject to stockholder approval of a related amendment to the 2011 Plan. Stockholders approved such amendment to the 2011 Plan on January 23, 2020, authorizing the grant to our CEO. Since stockholder approval occurred in 2020, this award was treated as granted in 2020 for accounting purposes.
The base price of the Premium-Priced Award was $67.80 per share, which was a 20% premium to the clearing price of the Company's recent modified Dutch auction tender offer (Tender Offer). The award vests 50% on each of November 4, 2022 and November 4, 2023 and expires on November 4, 2024. The award includes a requirement that the CEO hold any shares acquired upon exercise of this award, net of shares used to cover related taxes, until November 4, 2024 (that is, for the full term of the award), subject to lapse of the holding period upon a change in control of the Company or due to the CEO's death or termination due to disability.
Employee stock purchase plan
The Employee Stock Purchase Plan entitles qualifying employees to purchase up to $25 of the Company’s common stock during each calendar year. The amounts used to purchase stock are accumulated through payroll withholdings or through
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
optional lump sum payments made in advance of the first day of the purchase right period. This compensatory plan allows employees to purchase stock for the lesser of 100% of its fair market value on the first day of the purchase right period or 85% of its fair market value on the last day of the purchase right period. Purchase right periods begin on January 1 and July 1, and end on December 31. Contributions used to purchase the Company’s common stock under this plan for the 2019, 2018 2017 and 20162017 participation periods were $16,569, $17,398 $22,131 and $23,902,$22,131, respectively. Shares purchased pursuant to the plan’s 2019, 2018 2017 and 20162017 participation periods were 397,749, 360,368315, 398 and 438,002,360, respectively. At December 31, 2018,2019, there were 6,726,2786,411 shares remaining available for future grants under this plan.
The fair value of participants’ purchase rights was estimated as of the beginning dates of the purchase right periods using the Black-Scholes-Merton valuation model with the following weighted average assumptions for purchase right periods in 2019, 2018 2017 and 2016,2017, respectively: expected volatility of 24%28.8%, 23%24.2% and 22%22.7%; risk-free interest raterates of 1.9%2.6%, 1.3%1.9% and 0.8%1.3%, and no0 dividends. Using these assumptions, the weighted average estimated per share fair value of theseeach purchase rightsright was $13.80, $17.45 and $15.19 for 2019, 2018 and $16.73 for 2018, 2017, and 2016, respectively.
Long-term incentive compensation expense and proceeds
For the years ended December 31, 2019, 2018 2017 and 2016,2017, the Company recognized $118,513, $85,759 $61,978 and $64,956,$61,978, respectively, in total long-term incentive program (LTIP)LTIP expense, of which $63,705, $73,582 $34,431 and $34,530,$34,431, respectively, was stock-based compensation expense for stock appreciation rights, stock units and discounted employee stock plan purchases, which are primarily included in general and administrative expenses. The estimated tax benefits recorded for stock-based compensation in 2019, 2018 and 2017 were $9,186, $13,591 and 2016 were $13,591, $7,717, and $12,731, respectively. As of December 31, 2018,2019, there was $99,935$147,267 of total estimated unrecognized compensation expense for outstanding LTIP awards outstanding, including $88,596$136,818 related to stock-based compensation arrangements under the Company’s equity compensation and stock purchase plans. The Company expects to recognize the performance-based cash component of this LTIP expense over a weighted average remaining period of 0.80.6 years and the stock-based component of this LTIP expense over a weighted average remaining period of 1.5 years.
During the year ended December 31, 2018, the Company adopted a retirement policy (Rule of 65 policy). The Rule of 65 policy generally provides that Section 16 executive officers that are a minimum age of 55 with five years of continuous service with the Company receive certain benefits with respect to their outstanding equity awards upon a qualifying retirement if the
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars in thousands, except per share data)
sum of their age plus years of service is greater than or equal to 65. These benefits generally include accelerated vesting of restricted stock unit awards, continued vesting of stock-settled stock appreciation rights and performance stock unit awards and an exercise window from the original vest date through the original expiration date regardless of continued employment, with pro rata vesting for a Rule of 65 retirement within one year of the award grant date. The adoption of the Rule of 65 policy resulted in a $14,704 modification charge and a net acceleration of expense of $9,727 during the year ended December 31, 2018 that is included in the expense amounts reported above.
For the years ended December 31, 2019, 2018 2017 and 2016,2017, the Company received $2,251, $7,988 $13,473 and $28,397,$13,473, respectively, in actual tax benefits upon the exercise of stock awards. Since the Company issues stock-settled stock appreciation rights rather than stock options, there have been nowere 0 cash proceeds from stock option exercisesexercises.
19. Shareholders’ equity
Stock repurchases
The following table summarizes our repurchases of our common stock during the years ended December 31, 2018, 2017 and 2016.
Stock repurchases
During the years ended December 31,2019, 2018 and
2017, the Company repurchased a total of 16,844,067 shares and 12,966,672 shares of its common stock for $1,153,511 and $810,949, or an average price of $68.48 and $62.54 per share, respectively, pursuant to previously announced authorizations by the Board of Directors. 2017: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| | Shares repurchased | | Amount paid | | Paid per share | | Shares repurchased | | Amount paid | | Paid per share | | Shares repurchased | | Amount paid | | Paid per share |
Tender Offer(1) | 21,802 |
| | $ | 1,234,154 |
| | $ | 56.61 |
| | — |
| | $ | — |
| | $ | — |
| | — |
| | $ | — |
| | $ | — |
|
| Open market | 19,218 |
| | 1,168,321 |
| | 60.79 |
| | 16,844 |
| | 1,153,511 |
| | 68.48 |
| | 12,967 |
| | 810,949 |
| | 62.54 |
|
| | 41,020 |
| | $ | 2,402,475 |
| | $ | 58.57 |
| | 16,844 |
| | $ | 1,153,511 |
| | $ | 68.48 |
| | 12,967 |
| | $ | 810,949 |
| | $ | 62.54 |
|
| |
| (1) | The amount paid for shares repurchased associated with the Company's Tender Offer during the year ended December 31, 2019 includes the clearing price of $56.50 per share plus related fees and expenses of $2,343. |
Subsequent to December 31, 2018,2019, the Company has not repurchased any291 shares of itsour common stock for $21,794 at an average cost of $74.92 per share subsequent to December 31, 2019 through February 22, 2019.20, 2020.
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
On July 11, 2018, the Company's Board of Directors approved an additional share repurchase authorization in the amount of approximately $1,389,999. This share repurchase authorization was in addition to the approximately $110,001 remaining at that time under the Company’s Board of Directors’Board's prior share repurchase authorization approved in October 2017. Accordingly,
Effective July 17, 2019, the Board terminated all remaining prior share repurchase authorizations available to the Company at that time and approved a new share repurchase authorization of $2,000,000.
Effective as of the close of business on November 4, 2019, the Board terminated all remaining prior share repurchase authorizations available to the Company under the aforementioned July 17, 2019 authorization and approved a new share repurchase authorization of $2,000,000. The Company is authorized to make purchases from time to time in the open market or in privately negotiated transactions, including without limitation, through accelerated share repurchase transactions, derivative transactions, tender offers, Rule 10b5-1 plans or any combination of the foregoing, depending upon market conditions and other considerations.
As of February 22, 2019,20, 2020, the Company has a total of $1,355,605$1,681,701 available under the current Board repurchase authorizationsauthorization for additional share repurchases. Although thesethis share repurchase authorizations doauthorization does not have an expiration dates,date, the Company remains subject to share repurchase limitations, including under the terms of itsthe current senior secured credit facilities and the indentures governing its Senior Notes.the Company's senior notes.
The Company retired all shares held in its treasury effective as of December 31, 20182019 and December 31, 2017.2018.
Charter documents & Delaware law
The Company’s charter documents include provisions that may deter hostile takeovers, delay or prevent changes of control or changes in management, or limit the ability of stockholders to approve transactions that they may otherwise determine to be in their best interests. These include provisions prohibiting stockholders from acting by written consent, requiring 90 days advance notice of stockholder proposals or nominations to the Board of Directors and granting the Board of Directors the authority to issue up to 5,000,0005,000 shares of preferred stock and to determine the rights and preferences of the preferred stock without the need for further stockholder approval.
The Company is also subject to Section 203 of the Delaware General Corporation Law which, subject to exceptions, would prohibit the Company from engaging in any business combinations with any interested stockholder, as defined in that section, for a period of three years following the date on which that stockholder became an interested stockholder. These restrictions may discourage, delay or prevent a change in the control of the Company.
Changes in DaVita Inc.’s ownership interestinterests in consolidated subsidiaries
The effects of changes in DaVita Inc.’s ownership interestinterests in consolidated subsidiaries on the Company’s consolidated equity are as follows:
| | | | Year ended December 31, | Year ended December 31, |
| | 2018 | | 2017 | | 2016 | 2019 | | 2018 | | 2017 |
| Net income attributable to DaVita Inc. | $ | 159,394 |
| | $ | 663,618 |
| | $ | 879,874 |
| $ | 810,981 |
| | $ | 159,394 |
| | $ | 663,618 |
|
| Changes in paid-in-capital for: | | | | | | |
| Changes in paid-in capital for: | | | | | | |
| Sales of noncontrolling interest | 79 |
| | (114 | ) | | — |
| — |
| | 79 |
| | (114 | ) |
| Purchase of noncontrolling interests | (17,897 | ) | | (2,752 | ) | | (13,105 | ) | (37,145 | ) | | (17,897 | ) | | (2,752 | ) |
| Net transfer in noncontrolling interests | (17,818 | ) | | (2,866 | ) | | (13,105 | ) | (37,145 | ) | | (17,818 | ) | | (2,866 | ) |
Net income attributable to DaVita Inc. net of transfers in
noncontrolling interests | $ | 141,576 |
| | $ | 660,752 |
| | $ | 866,769 |
| $ | 773,836 |
| | $ | 141,576 |
| | $ | 660,752 |
|
The Company acquired additional ownership interests in several existing majority-owned partnerships for $68,019, $28,082, and $5,357 in 2019, 2018, and 2017, respectively.
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
The Company acquired additional ownership interests in several existing majority-owned joint ventures for $28,082, $5,357, and $21,512 in 2018, 2017, and 2016, respectively.
20. Accumulated other comprehensive (loss) income
Charges and credits to other comprehensive (loss) income have been as follows:
| | | | Interest rate cap and swap agreements | | Investment securities | | Foreign currency translation adjustments | | Accumulated other comprehensive (loss) income | |
| Balance at January 1, 2016 | $ | (10,925 | ) | | $ | 1,361 |
| | $ | (50,262 | ) | | $ | (59,826 | ) | |
| Unrealized (losses) gains | (6,013 | ) | | 1,802 |
| | (39,614 | ) | | (43,825 | ) | |
| Related income tax | 2,343 |
| | (565 | ) | | — |
| | 1,778 |
| |
| | (3,670 | ) | | 1,237 |
| | (39,614 | ) | | (42,047 | ) | |
| Reclassification of income (loss) into net income | 4,198 |
| | (690 | ) | | 10,087 |
| | 13,595 |
| |
| Related income tax | (1,632 | ) | | 267 |
| | — |
| | (1,365 | ) | |
| | 2,566 |
| | (423 | ) | | 10,087 |
| | 12,230 |
| Interest rate cap agreements | | Investment securities | | Foreign currency translation adjustments | | Accumulated other comprehensive (loss) income |
| Balance at December 31, 2016 | $ | (12,029 | ) | | $ | 2,175 |
| | $ | (79,789 | ) | | $ | (89,643 | ) | $ | (12,029 | ) | | $ | 2,175 |
| | $ | (79,789 | ) | | $ | (89,643 | ) |
| Unrealized (losses) gains | (8,897 | ) | | 5,075 |
| | 99,770 |
| | 95,948 |
| (8,897 | ) | | 5,075 |
| | 99,770 |
| | 95,948 |
|
| Related income tax | 3,460 |
| | (1,368 | ) | | — |
| | 2,092 |
| 3,460 |
| | (1,368 | ) | | — |
| | 2,092 |
|
| | (5,437 | ) | | 3,707 |
| | 99,770 |
| | 98,040 |
| (5,437 | ) | | 3,707 |
| | 99,770 |
| | 98,040 |
|
| Reclassification of income (loss) into net income | 8,278 |
| | (360 | ) | | — |
| | 7,918 |
| 8,278 |
| | (360 | ) | | — |
| | 7,918 |
|
| Related income tax | (3,220 | ) | | 140 |
| | — |
| | (3,080 | ) | (3,220 | ) | | 140 |
| | — |
| | (3,080 | ) |
| | 5,058 |
| | (220 | ) | | — |
| | 4,838 |
| 5,058 |
| | (220 | ) | | — |
| | 4,838 |
|
| Balance at December 31, 2017 | $ | (12,408 | ) | | $ | 5,662 |
| | $ | 19,981 |
| | $ | 13,235 |
| $ | (12,408 | ) | | $ | 5,662 |
| | $ | 19,981 |
| | $ | 13,235 |
|
Cumulative effect of change in accounting principle(1) | (2,706 | ) | | (5,662 | ) | | — |
| | (8,368 | ) | (2,706 | ) | | (5,662 | ) | | — |
| | (8,368 | ) |
| Unrealized losses | (181 | ) | | — |
| | (45,944 | ) | | (46,125 | ) | (181 | ) | | — |
| | (45,944 | ) | | (46,125 | ) |
| Related income tax | 48 |
| | — |
| | — |
| | 48 |
| 48 |
| | — |
| | — |
| | 48 |
|
| | (133 | ) | | — |
| | (45,944 | ) | | (46,077 | ) | (133 | ) | | — |
| | (45,944 | ) | | (46,077 | ) |
| Reclassification of income into net income | 8,466 |
| | — |
| | — |
| | 8,466 |
| 8,466 |
| | — |
| | — |
| | 8,466 |
|
| Related income tax | (2,180 | ) | | — |
| | — |
| | (2,180 | ) | (2,180 | ) | | — |
| | — |
| | (2,180 | ) |
| | 6,286 |
| | — |
| | — |
| | 6,286 |
| 6,286 |
| | — |
| | — |
| | 6,286 |
|
| Balance at December 31, 2018 | $ | (8,961 | ) | | $ | — |
| | $ | (25,963 | ) | | $ | (34,924 | ) | $ | (8,961 | ) | | $ | — |
| | $ | (25,963 | ) | | $ | (34,924 | ) |
| Unrealized gains (losses) | | 1,566 |
| | — |
| | (20,102 | ) | | (18,536 | ) |
| Related income tax | | (415 | ) | | — |
| | — |
| | (415 | ) |
| | | 1,151 |
| | — |
| | (20,102 | ) | | (18,951 | ) |
| Reclassification of income into net income | | 8,591 |
| | — |
| | — |
| | 8,591 |
|
| Related income tax | | (2,214 | ) | | — |
| | — |
| | (2,214 | ) |
| | | 6,377 |
| | — |
| | — |
| | 6,377 |
|
| Balance at December 31, 2019 | | $ | (1,433 | ) | | $ | — |
| | $ | (46,065 | ) | | $ | (47,498 | ) |
| |
| (1) | Reflects the cumulative effect of a change in accounting principle for ASUs 2016-01 and 2018-03 on classification and measurement of financial instruments and ASU 2018-02 on remeasurement and reclassification of deferred tax effects in accumulated other comprehensive income associated with the 2017 Tax Act. See Note 5 for further details. |
The reclassification of net cap and swap realized losses into income are recorded as debt expense in the corresponding consolidated statements of income. See Note 14 to these consolidated financial statements13 for further details.
Prior to January 1, 2018, unrealized gains and losses on available-for-sale equity securities were recorded to accumulated other comprehensive income and reclassified to other income when realized. From January 1, 2018, unrealized gains and losses on investment securities are recorded directly to other income rather than to accumulated other comprehensive income.
21. Acquisitions and divestitures
Routine acquisitions
During 2019, the Company acquired 7 dialysis centers in the U.S. and 16 dialysis centers outside the U.S. for a total of $98,836 in net cash paid, earn-outs of $23,536, and deferred purchase price and liabilities assumed of $4,326. During 2018, the Company acquired 18 dialysis centers in the U.S. and 28 dialysis centers outside the U.S. for a total of $176,161 in net cash, paid, earn-outs of $1,246,$1,246, and deferred purchase price and liabilities assumed of $34,394.$34,394. In one of these transactions wethe Company acquired a controlling interest in a previously nonconsolidated U.S. dialysis partnership for which we
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars in thousands, except per share data)
the Company recognized a non-cash gain of $28,152$28,152 on our prior interest upon consolidation. During 2017, the Company acquired 30 dialysis centers in the U.S. and 68 dialysis centers outside the U.S. for a total of $308,550 in net cash, earn-outs of $2,692 and deferred purchase
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
price of $23,748. During 2016, the Company acquired eight dialysis centers in the U.S. and 21 dialysis centers outside the U.S. for a total of $165,108 in net cash, earn-outs of $1,511 and deferred purchase price of $17,963. The assets and liabilities for all acquisitions were recorded at their estimated fair values at the dates of the acquisitions and are included in the Company’s financial statements and operating results from the effective dates of the acquisitions. For several of the 20182019 acquisitions, certain income tax amounts are pending final evaluation and quantification of any pre-acquisition tax contingencies. In addition, valuation of intangibles and certain other working capital items relating to several of these acquisitions are pending final quantification.
The following table summarizes the assets acquired and liabilities assumed in these transactions and recognized at their acquisition dates at estimated fair values, as well as the estimated fair value of noncontrolling interests assumed in these transactions:
| | | | Year ended December 31, | Year ended December 31, |
| | 2018 | | 2017 | | 2016 | 2019 | | 2018 | | 2017 |
| Current assets | $ | 23,686 |
| | $ | 14,366 |
| | $ | 3,996 |
| $ | 6,713 |
| | $ | 23,686 |
| | $ | 14,366 |
|
| Property and equipment | 11,421 |
| | 18,192 |
| | 8,840 |
| 4,842 |
| | 11,421 |
| | 18,192 |
|
| Amortizable intangible and other long-term assets | 3,079 |
| | 11,663 |
| | 5,876 |
| 1,980 |
| | 3,079 |
| | 11,663 |
|
| Non-amortizable intangibles | 23,656 |
| | 32,296 |
| | — |
| |
| Indefinite-lived licenses | | 31,858 |
| | 23,656 |
| | 32,296 |
|
| Goodwill | 278,348 |
| | 318,832 |
| | 198,927 |
| 90,226 |
| | 278,348 |
| | 318,832 |
|
| Deferred income taxes | — |
| | (210 | ) | | 597 |
| — |
| | — |
| | (210 | ) |
| Noncontrolling interests assumed | (80,291 | ) | | (44,303 | ) | | (30,337 | ) | (1,762 | ) | | (80,291 | ) | | (44,303 | ) |
| Liabilities assumed | (19,946 | ) | | (15,846 | ) | | (3,317 | ) | (7,159 | ) | | (19,946 | ) | | (15,846 | ) |
| Aggregate purchase cost | $ | 239,953 |
| | $ | 334,990 |
| | $ | 184,582 |
| |
| | $ | 126,698 |
| | $ | 239,953 |
| | $ | 334,990 |
|
Amortizable intangible assets acquired during 2019, 2018 and 2017, primarily related to non-compete agreements, during 2018, 2017 and 2016 had weighted-average estimated useful lives of six years, sevensix years and seven years, respectively. The total amount of goodwill deductible for tax purposes associated with these acquisitions for 2019, 2018, 2017, and 20162017 was approximately $88,517, $165,013 $237,363 and $169,379,$237,363, respectively.
Acquisition of Renal Ventures
On May 1, 2017, the Company completed its acquisition of 100% of the equity of Colorado-based Renal Ventures Management, LLC (Renal Ventures) for approximately $359,913 in net cash. Renal Ventures operated 36 dialysis centers, one1 uncertified dialysis center and one1 home program, thatwhich provided services to approximately 2,600 patients in six6 states. As a part of this transaction, the Company was required to divest three3 Renal Ventures outpatient dialysis centers, and three3 outpatient dialysis centers and one1 uncertified dialysis center of the Company, for approximately $21,219 in net cash. The Company also incurred approximately $11,950 in transaction and integration costs during the year ended December 31, 2017 associated with this acquisition that are included in general and administrative expenses.
The purchase price allocation for the Renal Ventures acquisition was finalized in 2018 with no material change to the initial allocation.
The following table summarizes the assets acquired and liabilities assumed in this transaction and recognized at the acquisition date at estimated fair values:
|
| | | |
| Current assets, net of cash acquired | $ | 22,739 |
|
| Property and equipment | 36,295 |
|
| Amortizable intangible and other long-term assets | 11,547 |
|
| Goodwill | 298,200 |
|
| Current liabilities | (8,389 | ) |
| Long-term liabilities | (479 | ) |
| | $ | 359,913 |
|
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars in thousands, except per share data)
Amortizable intangible assets acquired, primarily related to non-compete agreements, had weighted-average estimated useful lives of five years. The total estimated amount of goodwill deductible for tax purposes associated with this acquisition was approximately $298,200.
Change
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in ownership interests in Asia Pacific joint venturethousands, except per share data)
Upon formation of the APAC JV on August 1, 2016, the Company deconsolidated this Asia Pacific dialysis business based on the governance structure and voting rights put in place at that time and recognized an initial non-cash non-taxable estimated gain of $374,374 on its retained investment, net of contingent obligations. See further discussion of this joint venture in Note 10.
Pro forma financial information (unaudited)
The following summary, prepared on a pro forma basis, combines the results of operations as if all acquisitions within continuing operations in 20182019 and 20172018 had been consummated as of the beginning of 2017,2018, including the impact of certain adjustments such as amortization of intangibles, interest expense on acquisition financing and income tax effects.
| | | | Year ended December 31, | Year ended December 31, |
| | 2018 | | 2017 | 2019 | | 2018 |
| | (unaudited) | (unaudited) |
| Pro forma net revenues | $ | 11,508,555 |
| | $ | 11,176,736 |
| |
| Pro forma total revenues | | $ | 11,416,498 |
| | $ | 11,566,736 |
|
Pro forma net income from continuing operations attributable to
DaVita Inc. | $ | 634,326 |
| | $ | 922,718 |
| $ | 709,631 |
| | $ | 640,112 |
|
Pro forma basic net income per share from continuing operations
attributable to DaVita Inc. | $ | 3.71 |
| | $ | 4.89 |
| $ | 4.63 |
| | $ | 3.75 |
|
Pro forma diluted net income per share from continuing operations
attributable to DaVita Inc. | $ | 3.68 |
| | $ | 4.82 |
| $ | 4.61 |
| | $ | 3.71 |
|
Contingent earn-out obligations
The Company has several contingent earn-out obligations associated with acquisitions that could result in the Company paying the former shareholdersowners of acquired companies a total of up to approximately $11,210$33,889 if certain EBITDA, operating income performance targets or quality margins are met over the next one year to five years.
Contingent earn-out obligations are remeasured to fair value at each reporting date until the contingencies are resolved with changes in the liability due to the remeasurement recognized in earnings. See Note 24 to these consolidated financial statements for further details. As of December 31, 2018,2019, the Company estimated the fair value of these contingent earn-out obligations to be $2,608,$24,586, of which a total of $431$6,712 is included in other current liabilities, and the remaining $2,177$17,874 is included in other long-term liabilities in the Company’s consolidated balance sheet.
The following is a reconciliation of changes in liabilities for contingent earn-out obligations for the year ended December 31, 2018:2019:
| | | Beginning balance December 31, 2017 | $ | 6,388 |
| |
| Balance at December 31, 2017 | | $ | 6,388 |
|
| Contingent earn-out obligations associated with acquisitions | 1,246 |
| 1,246 |
|
| Remeasurement of fair value | (4,729 | ) | (4,729 | ) |
| Payments of contingent earn-out obligations | (297 | ) | (297 | ) |
| Ending balance December 31, 2018 | $ | 2,608 |
| |
| Balance at December 31, 2018 | | $ | 2,608 |
|
| Contingent earn-out obligations associated with acquisitions | | 23,536 |
|
| Remeasurement of fair value | | (784 | ) |
| Payments of contingent earn-out obligations | | (774 | ) |
| | | $ | 24,586 |
|
22. HeldDiscontinued operations previously held for sale and discontinued operations
DaVita Medical Group (DMG)
In December 2017,On June 19, 2019, the Company entered into an equity purchase agreement to sellcompleted the sale of its DMG divisionbusiness to Optum, a subsidiary of UnitedHealth Group Inc., subjectfor an aggregate purchase price of $4,340,000, prior to receiptcertain closing and post-closing adjustments specified in the related equity purchase agreement dated as of required regulatory approvalsDecember 5, 2017, as amended as of September 20, 2018 and other customary closing conditions. Onas of December 11, 2018 the Company entered into an amendment to(as amended, the equity purchase agreement, which, among other things, reducedagreement).
The Company recorded a preliminary estimated pre-tax net loss of approximately $23,022 on the purchase price forsale of its DMG business in 2019. This preliminary net loss is based on initial estimates of the Company's expected aggregate proceeds from $4,900,000 to $4,340,000. The current deadline to close the sale, net of transaction undercosts and obligations, as well as the equity purchase agreement is June 30, 2019,estimated values of DMG net assets sold as of the closing date. These estimated net proceeds include $4,465,476 in cash received from Optum at closing, or $3,824,509 net of cash and restricted cash included in the transaction is expected to close prior to that date. As a result ofDMG net assets sold.
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
this pending transaction,The ultimate net proceeds from the DMG business has been classifiedsale, as well as the value of its previously held for sale net assets sold, remain subject to estimate revisions and its results of operations are reported as discontinued operations for all periods presented in these consolidated financial statements.
During 2018,post-closing adjustments pursuant to the equity purchase agreement, which could be material. Under the equity purchase agreement, the Company recorded $468,005 in chargesalso has certain indemnification obligations that could require payments to the buyer relating to the Company's previous ownership and operation of the DMG business. Potential payments under these provisions, if any, remain subject to significant uncertainties and could have a material adverse effect on the net proceeds ultimately retained by the Company or the total amount of its DMG business which included a $316,840 valuation adjustment, a $41,537 goodwill impairment charge and $109,628 in related tax expenseloss on the sale of this held-for-sale business based on updated assessments of fair value.business.
The following table presents the financial results of discontinued operations related to DMG:
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Net revenues | $ | 4,963,792 |
| | $ | 4,676,213 |
| | $ | 4,113,414 |
|
| Expenses | 4,962,686 |
| | 4,634,782 |
| | 3,994,624 |
|
| Goodwill and other asset impairment charges | 41,537 |
| | 651,659 |
| | 253,000 |
|
| Valuation adjustment on disposal group | 316,840 |
| | — |
| | — |
|
| Loss from discontinued operations before taxes | (357,271 | ) | | (610,228 | ) | | (134,210 | ) |
| Income tax expense (benefit) | 99,768 |
| | (364,856 | ) | | 24,052 |
|
| Net loss from discontinued operations, net of tax | $ | (457,038 | ) | | $ | (245,372 | ) | | $ | (158,262 | ) |
The following table presents the financial position of discontinued operations related to DMG:
|
| | | | | | | |
| | December 31, 2018 | | December 31, 2017 |
| Assets | |
| | |
|
| Cash and cash equivalents | $ | 414,683 |
| | $ | 179,668 |
|
| Other current assets | 557,403 |
| | 826,608 |
|
| Property and equipment, net | 458,040 |
| | 379,945 |
|
| Intangible assets, net | 1,316,974 |
| | 1,316,550 |
|
| Other long-term assets | 112,127 |
| | 178,894 |
|
| Goodwill | 2,847,178 |
| | 2,879,977 |
|
| Valuation allowance on disposal group | (316,840 | ) | | — |
|
| Total current assets held for sale | $ | 5,389,565 |
| | $ | 5,761,642 |
|
| Liabilities | |
| | |
|
| Other liabilities | $ | 479,134 |
| | $ | 505,734 |
|
| Medical payables | 436,839 |
| | 457,040 |
|
| Current portion of long-term debt | 3,122 |
| | 2,845 |
|
| Long-term debt | 33,425 |
| | 35,003 |
|
| Other long-term liabilities | 291,239 |
| | 184,448 |
|
| Total current liabilities held for sale | $ | 1,243,759 |
| | $ | 1,185,070 |
|
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Net revenues | $ | 2,713,059 |
| | $ | 4,963,792 |
| | $ | 4,676,213 |
|
| Expenses | 2,543,865 |
| | 4,962,686 |
| | 4,634,782 |
|
| Goodwill and other asset impairment charges | — |
| | 41,537 |
| | 651,659 |
|
| Valuation adjustment on disposal group | — |
| | 316,840 |
| | — |
|
| Income (loss) from discontinued operations before taxes | 169,194 |
| | (357,271 | ) | | (610,228 | ) |
| Loss on sale of discontinued operations before taxes | (23,022 | ) | | — |
| | — |
|
| Income tax expense (benefit) | 40,689 |
| | 99,768 |
| | (364,856 | ) |
| Net income (loss) from discontinued operations, net of tax | $ | 105,483 |
| | (457,038 | ) | | $ | (245,372 | ) |
The following table presents cash flows of discontinued operations related to DMG:
| | | | Year ended December 31, | Year ended December 31, |
| | 2018 | | 2017 | | 2016 | 2019 | | 2018 | | 2017 |
| Net cash provided by operating activities from discontinued operations | $ | 290,684 |
| | $ | 357,274 |
| | $ | 287,044 |
| $ | 99,634 |
| | $ | 290,684 |
| | $ | 357,274 |
|
| Net cash used in investing activities from discontinued operations | $ | (57,382 | ) | | $ | (232,329 | ) | | $ | (430,917 | ) | $ | (43,442 | ) | | $ | (57,382 | ) | | $ | (232,329 | ) |
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars in thousands, except per share data)
DMG acquisitions
During the period from January 1, 2019 to June 18, 2019 immediately prior to the sale, the DMG business acquired 2 medical businesses for a total of $2,025 in net cash and deferred purchase price of $212. During 2018, the Company's DMG business acquired other medical businesses for a total of $6,995 in net cash, and deferred purchase price of $1,142. During 2017, the Company's DMG business acquired other medical businesses for a total of $135,416 in net cash, deferred purchase price of $1,038 and liabilities assumed of $10,145. During 2016, the Company's DMG business acquired other medical businesses for a total of $398,748 in net cash and deferred purchase price and liabilities assumed of $7,694. For several of the 2018 acquisitions, certain income tax amounts are pending final evaluation and quantification of any pre-acquisition tax contingencies. In addition, valuation of medical claims liabilities and certain other working capital items relating to several of these acquisitions are pending final quantification. The assets and liabilities for all acquisitions were recorded at their estimated fair values at the dates of the acquisitions and are included in the Company’s current held for sale assets and liabilities.
Sale of Tandigm Health investment
In 2018, DMG sold its 19% ownership interest in the Tandigm Health joint venture and a related supporting business for a gain of $25,096 and associated taxes of $6,460, resulting in a net of tax gain of $18,636.
Goodwill impairment charges
The Company recorded goodwill and other asset impairment charges for the DMG business as presented above. As a result of the December 2018 amendment to the equity purchase agreement, discussed above, the Company recorded a goodwill impairment charge in 2018. Goodwill impairment charges for 2017 and 2016 resulted from continuing developments in the Company’s DMG business, including recent annual updates to Medicare Advantage benchmark reimbursement rates, changes in expectations concerning future government reimbursement rates and the Company’s expected ability to mitigate them, medical cost and utilization trends, commercial pricing pressures, underperformance of certain DMG business units and other market factors.
23. Variable interest entities
The Company relies on the operating activities ofmanages or maintains an ownership interest in certain legal entities that it does not directly own or control, but over which it has indirect influence and of which it is considered the primary beneficiary. These entities are subject to the consolidation guidance applicable to variable interest entities (VIEs). Almost all of these legal entities are either U.S. dialysis partnerships encumbered by guaranteed debt, U.S. dialysis limited partnerships, or other legal entities subject to nominee ownership arrangements.
Under U.S. GAAP, VIEs typically include entities for which (i) the entity’s equity is not sufficient to finance its activities without additional subordinated financial support; (ii) the equity holders as a group lack the power to direct the activities that most significantly influence the entity’s economic performance, the obligation to absorb the entity’s expected losses, or the right to receive the entity’s expected returns; or (iii) the voting rights of some investors are not proportional to their obligations to absorb the entity’s losses.
The Company has determined that substantially allsubstantial majority of VIEs the legal entities itCompany is associated with are U.S. dialysis partnerships which the Company manages and in which it maintains a controlling majority ownership interest. These U.S. dialysis partnerships are considered VIEs because they are either (i) encumbered by debt guaranteed proportionately by the partners that qualify as VIEs must be includedis considered necessary to finance the partnership's activities, or (ii) in its consolidated financial statements. A numberthe form of these VIEslimited partnerships for which the limited partners are within the Company's DMG business, which has been reclassified as held for sale and as a discontinued operation in these financial statements.not considered to have substantive kick-out or participating rights. The Company manages theseconsolidates virtually all such U.S. dialysis partnerships.
The Company also relies on the operating activities of certain legal entities in which it does not maintain a controlling ownership interest but over which it has indirect influence and provides operating and capital funding as necessary forof which it is considered the entities to accomplish their operational and strategic objectives. A number of theseprimary beneficiary. These entities are typically subject to nominee share ownership or shareand transfer restriction agreements that effectively transfer the majority of the economic risks and rewards of their ownership to the Company. In other cases, theThe Company’s management, restriction and other agreements with these
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
concerning such nominee-owned entities typically include both financial terms and protective and participating rights to the entities’ operating, strategic and non-clinical governance decisions which transfer substantial powers over and economic responsibility for thethese entities to the Company. In some cases, suchThe Company consolidates all of the nominee-owned entities are subject to broad exclusivity or noncompetition restrictions that benefit the Company. Further, in some cases, the Company has contractual arrangements with its related party nominee owners that effectively indemnify these parties from the economic losses from, or entitle the Company to the economic benefits of, these entities.which it is most closely associated.
At December 31, 2018,2019, these consolidated financial statements include total assets of VIEs of $917,922$319,691 and total liabilities and noncontrolling interests of VIEs to third parties of $507,445, including assets of $658,684 and liabilities and noncontrolling interests of $355,196 related to the Company's DMG business which is classified as held for sale.$231,586.
The Company also sponsors certain non-qualified deferred compensation plans whose trusts qualify as VIEs and the Company consolidates these plans as their primary beneficiary. The assets of these plans are recorded in short-term or long-term investments with related liabilities recorded in accrued compensation and benefits and other long-term liabilities. See Note 16
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars in thousands, except per share data)
to these consolidated financial statements15 for disclosures onconcerning the assets of these consolidated non-qualified deferred compensation plans.
24. Fair values of financial instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are determined based on the principal or most advantageous market for the item being measured, assume that buyers and sellers are independent, willing and able to transact, and knowledgeable, with access to all information customarily available in such a transaction, and are based on assumptions that market participants would use in pricing the item, not assumptions specific to the reporting entity.
The Company measures the fair value of certain assets, liabilities, and noncontrolling interests subject to put provisions (temporary(redeemable equity interests classified as temporary equity) based upon certain valuation techniques that include observable or unobservable inputs and assumptions that market participants would use in pricing these assets, liabilities, temporary equity and commitments. The Company has also classified certain assets, liabilities and temporary equity that are measured at fair value into the appropriate fair value hierarchy levels as defined by the FASB.
The following table summarizes the Company’s assets, liabilities and temporary equity measured at fair value on a recurring basis as of December 31, 20182019 and 2017: 2018:
| | | December 31, 2019 | | Total | | Quoted prices in
active markets for
identical assets
(Level 1) | | Significant other
observable inputs
(Level 2) | | Significant
unobservable
inputs
(Level 3) |
| Assets | | |
| | |
| | |
| | |
|
| Investments in equity securities | | $ | 39,951 |
| | $ | 39,951 |
| | $ | — |
| | $ | — |
|
| Interest rate cap agreements | | $ | 24,452 |
| | $ | — |
| | $ | 24,452 |
| | $ | — |
|
| Liabilities | | |
| | |
| | |
| | |
|
| Contingent earn-out obligations | | $ | 24,586 |
| | $ | — |
| | $ | — |
| | $ | 24,586 |
|
| Temporary equity | | |
| | |
| | |
| | |
|
| Noncontrolling interests subject to put provisions | | $ | 1,180,376 |
| | $ | — |
| | $ | — |
| | $ | 1,180,376 |
|
| December 31, 2018 | Total | | Quoted prices in
active markets for
identical assets
(Level 1) | | Significant other
observable inputs
(Level 2) | | Significant
unobservable
inputs
(Level 3) | |
| | |
| | |
| | |
|
| Assets | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
| Investments in equity securities | $ | 36,124 |
| | $ | 36,124 |
| | $ | — |
| | $ | — |
| $ | 36,124 |
| | $ | 36,124 |
| | $ | — |
| | $ | — |
|
| Interest rate cap agreements | $ | 851 |
| | $ | — |
| | $ | 851 |
| | $ | — |
| $ | 851 |
| | $ | — |
| | $ | 851 |
| | $ | — |
|
| Liabilities | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
| Contingent earn-out obligations | $ | 2,608 |
| | $ | — |
| | $ | — |
| | $ | 2,608 |
| $ | 2,608 |
| | $ | — |
| | $ | — |
| | $ | 2,608 |
|
| Temporary equity | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
| Noncontrolling interests subject to put provisions | $ | 1,124,641 |
| | $ | — |
| | $ | — |
| | $ | 1,124,641 |
| $ | 1,124,641 |
| | $ | — |
| | $ | — |
| | $ | 1,124,641 |
|
| December 31, 2017 | |
| | |
| | |
| | |
| |
| Assets | |
| | |
| | |
| | |
| |
| Investments in equity securities | $ | 38,895 |
| | $ | 38,895 |
| | $ | — |
| | $ | — |
| |
| Interest rate cap agreements | $ | 1,032 |
| | $ | — |
| | $ | 1,032 |
| | $ | — |
| |
| Liabilities | |
| | |
| | |
| | |
| |
| Contingent earn-out obligations | $ | 6,388 |
| | $ | — |
| | $ | — |
| | $ | 6,388 |
| |
| Temporary equity | |
| | |
| | |
| | |
| |
| Noncontrolling interests subject to put provisions | $ | 1,011,360 |
| | $ | — |
| | $ | — |
| | $ | 1,011,360 |
| |
Investments in equity securities represent investments in various open-ended registered investment companies (mutual funds) and common stock and are recorded at fair value estimated based on reported market prices or redemption prices, as applicable. See Note 5 to these consolidated financial statements for further discussion.
Interest rate cap agreements are recorded at fair value estimated from valuation models utilizing the income approach and commonly accepted valuation techniques that use inputs from closing prices for similar assets and liabilities in active
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
markets as well as other relevant observable market inputs at quoted intervals such as current interest rates, forward yield curves, implied volatility and credit default swap pricing. The Company does not believe the ultimate amount that could be realized upon settlement of these interest rate cap agreements would be materially different from the fair value estimates currently reported. See Note 14 to these consolidated financial statements13 for further discussion.
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars in thousands, except per share data)
The estimated fair value measurements of contingent earn-out obligations are primarily based on unobservable inputs, including projected EBITDA.earnings before interest, taxes, depreciation, and amortization (EBITDA) and revenue. The estimated fair value of these contingent earn-out obligations is remeasured as of each reporting date and could fluctuate based upon any significant changes in key assumptions, such as changes in the Company credit risk adjusted rate that is used to discount obligations to present value. See Note 21 to these consolidated financial statements for further discussion.
See Note 18 to these consolidated financial statements17 for a discussion of the Company’s methodology for estimating the fair values of noncontrolling interests subject to put obligations.
The Company's fair value estimates for its senior secured credit facilities and senior notes are based upon quoted bid and ask prices for these instruments, typically a level 2 input. See Note 13 for further discussion of the Company's debt.
Other financial instruments consist primarily of cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, accounts payable, other accrued liabilities, lease liabilities and debt. The balances of non-debt financial instruments are presented in the consolidated financial statements at December 31, 20182019 and 20172018 at their approximate fair values due to the short-term nature of their settlements. The carrying amount of the Company’s senior secured credit facilities totaled $5,168,815, including a discount of $6,104 and deferred financing costs of $12,580, as of December 31, 2018, and the fair value was approximately $5,194,163 based upon quoted market prices. The carrying amount of the Company’s Senior Notes was approximately $4,466,685, including deferred financing costs of $33,316, at December 31, 2018 and the fair value was approximately $4,241,250 at December 31, 2018 based upon quoted market prices. The fair value of all other debt approximates its carrying value.
25. Segment reporting
The Company consists of two major divisions, DaVita Kidney Care (Kidney Care) and DaVita Medical Group (DMG). The Kidney Care division isCompany's operations are comprised of the Company’sits U.S. dialysis and related lab services business, its various ancillary services and strategic initiatives, including its international operations, and the Company’sits corporate administrative support. See Note 1 "Organization" for a summary description of the Company's businesses.
On June 19, 2019, the Company completed the sale of its DMG business to Optum. As a result of this transaction, DMG's results of operations have been reported as discontinued operations for all periods presented.
The Company’s operating segments have been defined based on the separate financial information that is regularly produced and reviewed by the Company’s chief operating decision maker in making decisions about allocating resources to and assessing the financial performance of the Company’s various operating lines of business. The chief operating decision maker for the Company is its Chief Executive Officer.
The Company’s separate operating segments include its U.S. dialysis and related lab services business, each of its ancillary services and strategic initiatives, its kidney care operations in each foreign sovereign jurisdiction, its other health operations in each foreign sovereign jurisdiction, and its equity method investment in the Asia Pacific joint venture. The U.S. dialysis and related lab services business qualifies as a separately reportable segment, and all other ancillary services and strategic initiatives operating segments, including the international operating segments, have been combined and disclosed in the other segments category.
The Company’s operating segment financial information included in this report is prepared on the internal management reporting basis that the chief operating decision maker uses to allocate resources and assess the financial performance of the Company's operating segments. For internal management reporting, segment operations include direct segment operating expenses but generally exclude corporate administrative support costs, which consist primarily of indirect labor, benefits and long-term incentive-basedincentive compensation expenses of certain departments which provide support to all of the Company’s various operating lines of business, except to the extent that such costs are charged to and borne by certain ancillary services and strategic initiatives via internal management fees. These corporate administrative support costs are reduced by internal management fees received from the Company’s ancillary lines of business.
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
The following is a summary of segment revenues, segment operating margin (loss), and a reconciliation of segment operating margin to consolidated income from continuing operations before income taxes:
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2019 | | 2018 | | 2017 |
Segment revenues:(1) | |
| | |
| | |
|
| U.S. dialysis | |
| | |
| | |
|
| Patient service revenues: | |
| | |
| | |
|
| External sources | $ | 10,421,401 |
| | $ | 10,274,046 |
| | $ | 9,767,123 |
|
| Intersegment revenues | 131,199 |
| | 92,950 |
| | 55,176 |
|
| Total U.S. dialysis revenues | 10,552,600 |
| | 10,366,996 |
| | 9,822,299 |
|
| Provision for uncollectible accounts | (21,715 | ) | | (50,927 | ) | | (481,973 | ) |
| Net U.S. dialysis patient service revenues | 10,530,885 |
| | 10,316,069 |
| | 9,340,326 |
|
Other revenues(2) | | | | | |
| External sources | 30,895 |
| | 19,880 |
| | 19,739 |
|
| Intersegment revenues | 1,126 |
| | — |
| | — |
|
| Total net U.S. dialysis revenues | $ | 10,562,906 |
| | $ | 10,335,949 |
| | $ | 9,360,065 |
|
| Other - Ancillary services | | | | | |
| Net patient service revenues | $ | 497,021 |
| | $ | 437,275 |
| | $ | 323,156 |
|
| Other external sources | 460,877 |
| | 724,577 |
| | 1,248,589 |
|
| Intersegment revenues | 14,030 |
| | 34,236 |
| | 24,603 |
|
| Total ancillary services | $ | 971,928 |
| | $ | 1,196,088 |
| | $ | 1,596,348 |
|
| Total net segment revenues | 11,534,834 |
| | 11,532,037 |
| | 10,956,413 |
|
| Elimination of intersegment revenues | (146,355 | ) | | (127,186 | ) | | (79,779 | ) |
| Consolidated revenues | $ | 11,388,479 |
| | $ | 11,404,851 |
| | $ | 10,876,634 |
|
| Segment operating margin (loss): | | | | | |
| U.S. dialysis | $ | 1,924,826 |
| | $ | 1,709,721 |
| | $ | 2,297,198 |
|
| Other - Ancillary services | (189,174 | ) | | (93,789 | ) | | (439,477 | ) |
| Total segment margin | 1,735,652 |
| | 1,615,932 |
| | 1,857,721 |
|
Reconciliation of segment operating margin to consolidated income from
continuing operations before income taxes: | | | | | |
| Corporate administrative support | (92,335 | ) | | (90,108 | ) | | (44,966 | ) |
| Consolidated operating income | 1,643,317 |
| | 1,525,824 |
| | 1,812,755 |
|
| Debt expense | (443,824 | ) | | (487,435 | ) | | (430,634 | ) |
| Debt prepayment, refinancing and redemption charges | (33,402 | ) | | — |
| | — |
|
| Other income | 29,348 |
| | 10,089 |
| | 17,665 |
|
| Income from continuing operations before income taxes | $ | 1,195,439 |
| | $ | 1,048,478 |
| | $ | 1,399,786 |
|
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2018 | | 2017 | | 2016 |
Segment revenues:(1) | |
| | |
| | |
|
| U.S. dialysis and related lab services | |
| | |
| | |
|
| Patient service revenues: | |
| | |
| | |
|
| External sources | $ | 10,274,046 |
| | $ | 9,767,123 |
| | $ | 9,524,067 |
|
| Intersegment revenues | 92,950 |
| | 55,176 |
| | 27,355 |
|
| Total U.S. dialysis and related lab services revenues | 10,366,996 |
| | 9,822,299 |
| | 9,551,422 |
|
| Provision for uncollectible accounts | (50,927 | ) | | (481,973 | ) | | (429,878 | ) |
| Net U.S. dialysis and related lab services patient service revenues | 10,316,069 |
| | 9,340,326 |
| | 9,121,544 |
|
Other revenues(2) | 19,880 |
| | 19,739 |
| | 16,645 |
|
| Total net U.S. dialysis and related lab services revenues | 10,335,949 |
| | 9,360,065 |
| | 9,138,189 |
|
| Other - Ancillary services and strategic initiatives | |
| | |
| | |
|
| Net patient service revenues | 437,275 |
| | 323,156 |
| | 201,867 |
|
| Other external sources | 724,577 |
| | 1,248,589 |
| | 1,394,766 |
|
| Intersegment revenues | 34,236 |
| | 24,603 |
| | 24,739 |
|
| Total ancillary services and strategic initiatives revenues | 1,196,088 |
| | 1,596,348 |
| | 1,621,372 |
|
| Total net segment revenues | 11,532,037 |
| | 10,956,413 |
| | 10,759,561 |
|
| Elimination of intersegment revenues | (127,186 | ) | | (79,779 | ) | | (52,094 | ) |
| Consolidated net revenues | $ | 11,404,851 |
| | $ | 10,876,634 |
| | $ | 10,707,467 |
|
| Segment operating margin (loss): | |
| | |
| | |
|
| U.S. dialysis and related lab services | $ | 1,709,721 |
| | $ | 2,297,198 |
| | $ | 1,777,014 |
|
| Other—Ancillary services and strategic initiatives | (93,789 | ) | | (439,477 | ) | | 266,324 |
|
| Total segment margin | 1,615,932 |
| | 1,857,721 |
| | 2,043,338 |
|
Reconciliation of segment operating margin to consolidated income from
continuing operations before income taxes: | |
| | |
| | |
|
| Corporate administrative support | (90,108 | ) | | (44,966 | ) | | (13,628 | ) |
| Consolidated operating income | 1,525,824 |
| | 1,812,755 |
| | 2,029,710 |
|
| Debt expense | (487,435 | ) | | (430,634 | ) | | (414,116 | ) |
| Other income | 10,089 |
| | 17,665 |
| | 7,511 |
|
| Income from continuing operations before income taxes | $ | 1,048,478 |
| | $ | 1,399,786 |
| | $ | 1,623,105 |
|
| |
| (1) | On January 1, 2018, the Company adopted Revenue from Contracts with Customers (Topic 606) using the cumulative effect method for those contracts that were not substantially completed as of January 1, 2018. Results related to performance obligations satisfied beginning on and after January 1, 2018 are presented under Topic 606, while results related to the satisfaction of performance obligations in prior periods continue to be reported in accordance with the Company's historical accounting under Revenue Recognition (Topic 605). See Notes 1 and 2 of these consolidated financial statements for further discussion of the Company's adoption of Topic 606. |
| |
| (2) | Includes management fee revenues from providing management and administrative services to dialysis ventures in which the Company owns a noncontrolling interest or which are wholly-owned by third parties. |
Depreciation and amortization expense by reportable segment is as follows:
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| U.S. dialysis and related lab services | $ | 558,810 |
| | $ | 520,965 |
| | $ | 482,768 |
|
| Other - Ancillary services and strategic initiatives | 32,225 |
| | 38,946 |
| | 26,729 |
|
| | $ | 591,035 |
| | $ | 559,911 |
| | $ | 509,497 |
|
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
Depreciation and amortization expense by reportable segment was as follows:
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| U.S. dialysis | $ | 583,454 |
| | $ | 558,810 |
| | $ | 520,965 |
|
| Other - Ancillary services | 31,698 |
| | 32,225 |
| | 38,946 |
|
| | $ | 615,152 |
| | $ | 591,035 |
| | $ | 559,911 |
|
Summary of assets by reportable segment iswas as follows:
|
| | | | | | | |
| | Year ended December 31, |
| | 2018 | | 2017 |
| Segment assets | |
| | |
|
U.S. dialysis and related lab services (including equity investments of
$95,290 and $84,866, respectively) | $ | 12,333,641 |
| | $ | 11,802,131 |
|
Other - Ancillary services and strategic initiatives(1) (including equity
investments of $129,321 and $160,668, respectively) | 1,387,046 |
| | 1,410,763 |
|
DMG - Held for sale (including equity investments of $4,833 and
$10,321, respectively) | 5,389,565 |
| | 5,761,642 |
|
| Consolidated assets | $ | 19,110,252 |
| | $ | 18,974,536 |
|
|
| | | | | | | |
| | Year ended December 31, |
| | 2019 | | 2018 |
| Segment assets | |
| | |
|
U.S. dialysis (including equity investments of $124,188 and $95,290,
respectively) | $ | 15,778,880 |
| | $ | 12,333,641 |
|
Other - Ancillary services(1) (including equity investments of $117,795
and $129,321, respectively) | 1,532,514 |
| | 1,387,046 |
|
DMG - Discontinued operations (including equity investments of
$0 and $4,833 respectively) | — |
| | 5,389,565 |
|
| Consolidated assets | $ | 17,311,394 |
| | $ | 19,110,252 |
|
| |
| (1) | Includes approximately $154,572 and $136,052 in 2019 and $125,932 in 2018, and 2017, respectively, of net property and equipment related to the Company’s international operations. |
Expenditures for property and equipment by reportable segment iswere as follows:
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | | | | | |
| U.S. dialysis and related lab services | $ | 856,108 |
| | $ | 769,732 |
| | $ | 675,994 |
|
| Other - Ancillary services and strategic initiatives | 45,806 |
| | 40,377 |
| | 68,702 |
|
| DMG - Held for sale | 85,224 |
| | 95,141 |
| | 84,399 |
|
| | $ | 987,138 |
| | $ | 905,250 |
| | $ | 829,095 |
|
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| U.S. dialysis | $ | 681,339 |
| | $ | 856,108 |
| | $ | 769,732 |
|
| Other - Ancillary services | 46,741 |
| | 45,806 |
| | 40,377 |
|
| DMG - Discontinued operations | 38,466 |
| | 85,224 |
| | 95,141 |
|
| | $ | 766,546 |
| | $ | 987,138 |
| | $ | 905,250 |
|
26. Supplemental cash flow information
The table below provides supplemental cash flow information:
| | | | Year ended December 31, | Year ended December 31, |
| | 2018 | | 2017 | | 2016 | 2019 | | 2018 | | 2017 |
| Cash paid: | |
| | |
| | |
| |
| | |
| | |
|
| Income taxes | $ | 92,526 |
| | $ | 387,159 |
| | $ | 339,411 |
| |
| Income taxes, net | | $ | 157,983 |
| | $ | 92,526 |
| | $ | 387,159 |
|
| Interest | $ | 488,974 |
| | $ | 424,547 |
| | $ | 406,987 |
| $ | 473,176 |
| | $ | 488,974 |
| | $ | 424,547 |
|
| Non-cash investing and financing activities: | |
| | |
| | |
| |
| | |
| | |
|
| Fixed assets under capital lease obligations | $ | 8,828 |
| | $ | 48,378 |
| | $ | 28,127 |
| |
| Fixed assets under financing lease obligations | | $ | 18,953 |
| | $ | 8,828 |
| | $ | 48,378 |
|
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
27. Selected quarterly financial data (unaudited)
| | | | | December 31, | | September 30, | | June 30, | | March 31, |
| 2019 | | | | | | | | |
| Total revenues | | $ | 2,898,584 |
| | $ | 2,904,078 |
| | $ | 2,842,705 |
| | $ | 2,743,112 |
|
| Operating income | | $ | 462,588 |
| | $ | 378,336 |
| | $ | 461,886 |
| | $ | 340,507 |
|
| Attributable to DaVita Inc.: | | | | | | | | |
Net income from continuing operations(1) | | $ | 242,242 |
| | $ | 150,113 |
| | $ | 194,223 |
| | $ | 120,254 |
|
| Net (loss) income from discontinued operations | | 2,629 |
| | (6,843 | ) | | 79,328 |
| | 29,035 |
|
| Net income | | $ | 244,871 |
| | $ | 143,270 |
| | $ | 273,551 |
| | $ | 149,289 |
|
| Per share attributable to DaVita Inc.: | | | | | | | | |
| Basic net income from continuing operations | | $ | 1.87 |
| | $ | 1.00 |
| | $ | 1.17 |
| | $ | 0.72 |
|
| Basic net income (loss) from discontinued operations | | 0.02 |
| | (0.05 | ) | | 0.47 |
| | 0.18 |
|
| Basic net income | | $ | 1.89 |
| | $ | 0.95 |
| | $ | 1.64 |
| | $ | 0.90 |
|
| Diluted net income from continuing operations | | $ | 1.86 |
| | $ | 0.99 |
| | $ | 1.16 |
| | $ | 0.72 |
|
| Diluted net income (loss) from discontinued operations | | 0.02 |
| | (0.04 | ) | | 0.48 |
| | 0.18 |
|
| Diluted net income | | $ | 1.88 |
| | $ | 0.95 |
| | $ | 1.64 |
| | $ | 0.90 |
|
| 2018 | December 31 | | September 30 | | June 30 | | March 31 | | | | | | | |
| Total revenues | $ | 2,821,124 |
| | $ | 2,847,330 |
| | $ | 2,886,953 |
| | $ | 2,849,444 |
| $ | 2,821,124 |
| | $ | 2,847,330 |
| | $ | 2,886,953 |
| | $ | 2,849,444 |
|
| Operating income | $ | 387,908 |
| | $ | 289,038 |
| | $ | 438,192 |
| | $ | 410,686 |
| $ | 387,908 |
| | $ | 289,038 |
| | $ | 438,192 |
| | $ | 410,686 |
|
| Attributable to DaVita Inc.: | | | | | | | | | | | | | | |
Net income from continuing operations(1) | $ | 160,332 |
| | $ | 73,371 |
| | $ | 199,603 |
| | $ | 191,015 |
| $ | 160,332 |
| | $ | 73,371 |
| | $ | 199,603 |
| | $ | 191,015 |
|
Net (loss) income from discontinued operations(2) | $ | (310,104 | ) | | $ | (210,167 | ) | | $ | 67,673 |
| | $ | (12,329 | ) | |
| Net (loss) income from discontinued operations | | (310,104 | ) | | (210,167 | ) | | 67,673 |
| | (12,329 | ) |
| Net (loss) income | $ | (149,772 | ) | | $ | (136,796 | ) | | $ | 267,276 |
| | $ | 178,686 |
| $ | (149,772 | ) | | $ | (136,796 | ) | | $ | 267,276 |
| | $ | 178,686 |
|
| Per share attributable to DaVita Inc.: | | | | | | | | | | | | | | |
| Basic net income from continuing operations | $ | 0.97 |
| | $ | 0.44 |
| | $ | 1.16 |
| | $ | 1.07 |
| $ | 0.97 |
| | $ | 0.44 |
| | $ | 1.16 |
| | $ | 1.07 |
|
| Basic net (loss) income from discontinued operations | $ | (1.87 | ) | | $ | (1.26 | ) | | $ | 0.40 |
| | $ | (0.07 | ) | (1.87 | ) | | (1.26 | ) | | 0.40 |
| | (0.07 | ) |
| Basic net (loss) income | $ | (0.90 | ) | | $ | (0.82 | ) | | $ | 1.56 |
| | $ | 1.00 |
| $ | (0.90 | ) | | $ | (0.82 | ) | | $ | 1.56 |
| | $ | 1.00 |
|
| Diluted net income from continuing operations | $ | 0.96 |
| | $ | 0.44 |
| | $ | 1.15 |
| | $ | 1.05 |
| $ | 0.96 |
| | $ | 0.44 |
| | $ | 1.15 |
| | $ | 1.05 |
|
| Diluted net (loss) income from discontinued operations | $ | (1.86 | ) | | $ | (1.26 | ) | | $ | 0.38 |
| | $ | (0.07 | ) | (1.86 | ) | | (1.26 | ) | | 0.38 |
| | (0.07 | ) |
| Diluted net (loss) income | $ | (0.90 | ) | | $ | (0.82 | ) | | $ | 1.53 |
| | $ | 0.98 |
| $ | (0.90 | ) | | $ | (0.82 | ) | | $ | 1.53 |
| | $ | 0.98 |
|
| 2017 | | | | | | | | |
| Total revenues | $ | 2,780,913 |
| | $ | 2,765,071 |
| | $ | 2,699,399 |
| | $ | 2,631,251 |
| |
| Operating income | $ | 150,337 |
| | $ | 395,294 |
| | $ | 391,196 |
| | $ | 875,928 |
| |
| Attributable to DaVita Inc.: | | | | | | | | |
Net income from continuing operations(1) | $ | 156,210 |
| | $ | 152,870 |
| | $ | 151,292 |
| | $ | 440,905 |
| |
Net income (loss) from discontinued operations(2) | $ | 147,186 |
| | $ | (367,346 | ) | | $ | (24,291 | ) | | $ | 6,792 |
| |
| Net income (loss) | $ | 303,396 |
| | $ | (214,476 | ) | | $ | 127,001 |
| | $ | 447,697 |
| |
| Per share attributable to DaVita Inc.: | | | | | | | | |
| Basic net income from continuing operations | $ | 0.86 |
| | $ | 0.81 |
| | $ | 0.79 |
| | $ | 2.29 |
| |
| Basic net income (loss) from discontinued operations | $ | 0.80 |
| | $ | (1.95 | ) | | $ | (0.13 | ) | | $ | 0.04 |
| |
| Basic net income (loss) | $ | 1.66 |
| | $ | (1.14 | ) | | $ | 0.66 |
| | $ | 2.33 |
| |
| Diluted net income from continuing operations | $ | 0.85 |
| | $ | 0.80 |
| | $ | 0.78 |
| | $ | 2.26 |
| |
| Diluted net income (loss) from discontinued operations | $ | 0.79 |
| | $ | (1.92 | ) | | $ | (0.13 | ) | | $ | 0.03 |
| |
| Diluted net income (loss) | $ | 1.64 |
| | $ | (1.12 | ) | | $ | 0.65 |
| | $ | 2.29 |
| |
| |
| (1) | Included in the fourth quarter of 2018 is a net gainThe following table summarizes impairment charges, (gain) loss on changes in ownership interests of $28,152; an equity investment loss of $8,715 due to the sale of the APAC JV's India business; and an equity investment loss of $1,530 due to impairments at the APAC JV. The third quarter of 2018 includesinterest, restructuring charges, of $11,366 and other asset impairment charges of $6,093 related to the Company's pharmacy business; an equity investment loss of $5,995 due to impairments at the APAC JV; an adjustment to the gain on changes in ownership interests on the sale of the Company's direct primary care business of $1,506; and $23,470 in additional stock-based compensation expense related to modification charges and net acceleration of expense. The second quarter of 2018 includes asset impairment charges of $11,245 related to the pharmacy business; a net gain on changesexpense included in ownership interests of $35,205 on the Company's direct primary care business; a loss of $1,248 related to the unwinding of a business internationally;operating expenses and a goodwill impairment charge of $3,106 at the Company's German other health operations. Included in the fourth quarter of 2017 was an impairment of $280,066 on the Company's investment in the APAC JV. The third quarter of 2017 included an equity investment loss of $6,293 for goodwill impairments at the APAC JV and restructuring charges in the Company's international business of $2,700. The second quarter of 2017 included goodwill impairment charges of $10,498 related to the vascular access reporting unit. The first quarter of 2017 included a net gain on settlement of $529,504; goodwill impairment charges of $24,198 related to the vascular access reporting unit; an asset impairment of $15,168 related to the restructuring of the pharmacy business;2019 and a gain adjustment on the 2016 ownership change of the APAC JV of $6,273.2018 by quarter: |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter ended | | Quarter ended |
| | December 31,
2019 | | September 30,
2019 | | June 30,
2019 | | March 31,
2019 | | December 31,
2018 | | September 30,
2018 | | June 30,
2018 | | March 31,
2018 |
Certain operating expenses and charges: | | | | | | | | | | | | | | | |
| Impairment charges | | | $ | 83,855 |
| | | | $ | 41,037 |
| | $ | 1,530 |
| | $ | 12,088 |
| | $ | 14,351 |
| | |
(Gain) loss on changes in
ownership interest, net | | | | | | | | | $ | (19,437 | ) | | $ | 1,506 |
| | $ | (33,957 | ) | | |
| Restructuring charges | | | | | | | | | | | $ | 11,366 |
| | | | |
Stock-based compensation
modification charges and
net acceleration of expense | | | | | | | | | | | $ | 23,470 |
| | | | |
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
| |
(2) | Included in discontinued operations in the fourth quarter of 2018 is a $218,639 disposal group valuation adjustment, a $41,537 goodwill impairment charge and $8,318 in related tax benefit. The third quarter of 2018 includes a $216,147 charge on the Company's DMG business which included a $98,201 disposal group valuation adjustment and $117,946 in related tax expense on this held-for-sale business. The second quarter of 2018 includes a gain on the sale of the Company's Tandigm investment of $25,096. The fourth quarter of 2017 includes a net tax benefit of $163,555 due to a remeasurement of deferred taxes resulting from DMG's reclassification to held for sale. The third quarter of 2017 includes goodwill impairment charges of $601,040 related to certain DMG reporting units; a non-cash gain associated with the Company's Magan acquisition of $17,129; restructuring charges of $9,569; and a reduction in estimated accruals for legal matters of $11,100. The second quarter of 2017 includes goodwill impairment charges of $50,619 related to certain DMG reporting units and a reduction in estimated accruals for legal matters of $3,600. |
28. Consolidating financial statements
The following information is presented in accordance with Rule 3-10 of Regulation S-X. The operating and investing activities of the separate legal entities included in the Company’s consolidated financial statements are fully interdependent and integrated. Revenues and operating expenses of the separate legal entities include intercompany charges for management and other administrative services. The Company’s Senior Notessenior notes are guaranteed by substantially alla substantial majority of its domestic subsidiaries. Each of the guarantor subsidiaries hasas measured by revenue, income and assets. The subsidiary guarantors have guaranteed the Senior Notessenior notes on a joint and several basis. However, thea subsidiary guarantor subsidiaries canwill be released from theirits obligations under its guarantee of the senior notes and the indentures governing the senior notes if, in the event ofgeneral, there is a sale or other disposition of all or substantially all of the assets of such subsidiary guarantor, including by merger or consolidation, or thea sale or other disposition of all of the equity interests in such subsidiary ownedguarantor held by the Company ifand its restricted subsidiaries, as defined in the indentures; such subsidiary guarantor is designated by the Company as an unrestricted subsidiary, as defined in the indentures, or otherwise ceases to be a restricted subsidiary and ifof the Company, in each case in accordance with the indentures; or such subsidiary guarantor no longer guarantiesguarantees any other indebtedness, as defined in the indentures, of the Company. CertainCompany or any of its restricted subsidiaries, except for guarantees that are contemporaneously released. The senior notes are not guaranteed by certain of the Company's domestic subsidiaries, any of the Company's foreign subsidiaries, or any entities that do not constitute subsidiaries within the meaning of the indentures, such as corporations in which the Company holds capital stock with less than a majority of the voting power, joint ventures and partnerships in which the Company holds less than a majority of the equity or voting interests, non-owned entities and third parties are notparties. Contemporaneously with the Company entering into the New Credit Agreement and pursuant to the indentures governing the Company's senior notes, certain subsidiaries of the Company were released from their guarantees of the Company's senior notes such that, after that release, the remaining subsidiary guarantors of the Senior Notes.senior notes were the same subsidiaries guaranteeing the New Credit Agreement. The following consolidating statements have been prepared for all periods presented based on the current subsidiary guarantors and non-guarantors stipulated in the Company's New Credit Agreement.
Consolidating Statements of Income
| | | For twelve months ended December 31, 2018 | | DaVita Inc. | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Consolidating Adjustments | | Consolidated Total | |
| Dialysis and related lab patient service revenues | | $ | — |
| | $ | 7,263,195 |
| | $ | 3,657,456 |
| | $ | (210,670 | ) | | $ | 10,709,981 |
| |
| For year ended December 31, 2019 | | | DaVita Inc. | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Consolidating Adjustments | | Consolidated Total |
| Dialysis patient service revenues | | | $ | — |
| | $ | 6,961,825 |
| | $ | 4,226,402 |
| | $ | (269,806 | ) | | $ | 10,918,421 |
|
| Less: Provision for uncollectible accounts | | — |
| | (36,377 | ) | | (13,210 | ) | | — |
| | (49,587 | ) | | — |
| | (15,296 | ) | | (6,419 | ) | | — |
| | (21,715 | ) |
| Net dialysis and related lab patient service revenues | | — |
| | 7,226,818 |
| | 3,644,246 |
| | (210,670 | ) | | 10,660,394 |
| |
| Net dialysis patient service revenues | | | — |
| | 6,946,529 |
| | 4,219,983 |
| | (269,806 | ) | | 10,896,706 |
|
| Other revenues | | 799,230 |
| | 714,489 |
| | 189,927 |
| | (959,189 | ) | | 744,457 |
| | 804,684 |
| | 601,394 |
| | 171,856 |
| | (1,086,161 | ) | | 491,773 |
|
| Total net revenues | | 799,230 |
| | 7,941,307 |
| | 3,834,173 |
| | (1,169,859 | ) | | 11,404,851 |
| |
| Total revenues | | | 804,684 |
| | 7,547,923 |
| | 4,391,839 |
| | (1,355,967 | ) | | 11,388,479 |
|
| Operating expenses and charges | | 646,640 |
| | 7,100,415 |
| | 3,301,831 |
| | (1,169,859 | ) | | 9,879,027 |
| | 642,717 |
| | 6,631,471 |
| | 3,826,941 |
| | (1,355,967 | ) | | 9,745,162 |
|
| Operating income | | 152,590 |
| | 840,892 |
| | 532,342 |
| | — |
| | 1,525,824 |
| | 161,967 |
| | 916,452 |
| | 564,898 |
| | — |
| | 1,643,317 |
|
| Debt expense | | (491,749 | ) | | (208,484 | ) | | (36,427 | ) | | 249,225 |
| | (487,435 | ) | | (482,074 | ) | | (183,272 | ) | | (53,043 | ) | | 241,163 |
| | (477,226 | ) |
| Other income, net | | 418,839 |
| | 10,367 |
| | 22,195 |
| | (441,312 | ) | | 10,089 |
| | 309,623 |
| | 7,314 |
| | 46,306 |
| | (333,895 | ) | | 29,348 |
|
| Income tax expense | | 23,482 |
| | 187,691 |
| | 47,227 |
| | — |
| | 258,400 |
| |
| Income tax (benefit) expense | | | (2,616 | ) | | 263,563 |
| | 18,681 |
| | — |
| | 279,628 |
|
| Equity earnings in subsidiaries | | 103,196 |
| | 344,025 |
| | — |
| | (447,221 | ) | | — |
| | 818,849 |
| | 429,628 |
| | — |
| | (1,248,477 | ) | | — |
|
| Net income from continuing operations | | 159,394 |
| | 799,109 |
| | 470,883 |
| | (639,308 | ) | | 790,078 |
| | 810,981 |
| | 906,559 |
| | 539,480 |
| | (1,341,209 | ) | | 915,811 |
|
| Net (loss) income from discontinued operations, net of tax | | — |
| | (695,913 | ) | | 46,788 |
| | 192,087 |
| | (457,038 | ) | |
| Net income from discontinued operations, net of tax | | | — |
| | — |
| | 12,751 |
| | 92,732 |
| | 105,483 |
|
| Net income | | 159,394 |
| | 103,196 |
| | 517,671 |
| | (447,221 | ) | | 333,040 |
| | 810,981 |
| | 906,559 |
| | 552,231 |
| | (1,248,477 | ) | | 1,021,294 |
|
Less: Net income attributable to noncontrolling
interests | | — |
| | — |
| | — |
| | (173,646 | ) | | (173,646 | ) | | — |
| | — |
| | — |
| | (210,313 | ) | | (210,313 | ) |
| Net income attributable to DaVita Inc. | | $ | 159,394 |
| | $ | 103,196 |
| | $ | 517,671 |
| | $ | (620,867 | ) | | $ | 159,394 |
| | $ | 810,981 |
| | $ | 906,559 |
| | $ | 552,231 |
| | $ | (1,458,790 | ) | | $ | 810,981 |
|
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
Consolidating Statements of Income - (continued)
| | | For twelve months ended December 31, 2017 | | DaVita Inc. | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Consolidating Adjustments | | Consolidated Total | |
| Dialysis and related lab patient service revenues | | $ | — |
| | $ | 6,884,750 |
| | $ | 3,393,026 |
| | $ | (184,106 | ) | | $ | 10,093,670 |
| |
| For year ended December 31, 2018 | | | DaVita Inc. | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Consolidating Adjustments | | Consolidated Total |
| Dialysis patient service revenues | | | $ | — |
| | $ | 6,834,865 |
| | $ | 4,096,666 |
| | $ | (221,550 | ) | | $ | 10,709,981 |
|
| Less: Provision for uncollectible accounts | | — |
| | (340,552 | ) | | (151,982 | ) | | 7,170 |
| | (485,364 | ) | | — |
| | (34,977 | ) | | (14,610 | ) | | — |
| | (49,587 | ) |
| Net dialysis and related lab patient service revenues | | — |
| | 6,544,198 |
| | 3,241,044 |
| | (176,936 | ) | | 9,608,306 |
| |
| Net dialysis patient service revenues | | | — |
| | 6,799,888 |
| | 4,082,056 |
| | (221,550 | ) | | 10,660,394 |
|
| Other revenues | | 793,751 |
| | 1,204,467 |
| | 68,322 |
| | (798,212 | ) | | 1,268,328 |
| | 799,230 |
| | 488,086 |
| | 558,079 |
| | (1,100,938 | ) | | 744,457 |
|
| Total net revenues | | 793,751 |
| | 7,748,665 |
| | 3,309,366 |
| | (975,148 | ) | | 10,876,634 |
| |
| Total revenues | | | 799,230 |
| | 7,287,974 |
| | 4,640,135 |
| | (1,322,488 | ) | | 11,404,851 |
|
| Operating expenses and charges | | 527,942 |
| | 6,475,550 |
| | 3,035,535 |
| | (975,148 | ) | | 9,063,879 |
| | 646,640 |
| | 6,551,328 |
| | 4,003,547 |
| | (1,322,488 | ) | | 9,879,027 |
|
| Operating income | | 265,809 |
| | 1,273,115 |
| | 273,831 |
| | — |
| | 1,812,755 |
| | 152,590 |
| | 736,646 |
| | 636,588 |
| | — |
| | 1,525,824 |
|
| Debt expense | | (426,149 | ) | | (209,612 | ) | | (34,831 | ) | | 239,958 |
| | (430,634 | ) | | (491,749 | ) | | (201,496 | ) | | (43,414 | ) | | 249,224 |
| | (487,435 | ) |
| Other income, net | | 411,731 |
| | 11,169 |
| | 18,467 |
| | (423,702 | ) | | 17,665 |
| | 418,839 |
| | 3,430 |
| | 29,132 |
| | (441,312 | ) | | 10,089 |
|
| Income tax expense | | 65,965 |
| | 237,670 |
| | 20,224 |
| | — |
| | 323,859 |
| | 23,482 |
| | 155,372 |
| | 79,546 |
| | — |
| | 258,400 |
|
| Equity earnings in subsidiaries | | 478,192 |
| | 74,375 |
| | — |
| | (552,567 | ) | | — |
| | 103,196 |
| | 388,737 |
| | — |
| | (491,933 | ) | | — |
|
| Net income from continuing operations | | 663,618 |
| | 911,377 |
| | 237,243 |
| | (736,311 | ) | | 1,075,927 |
| | 159,394 |
| | 771,945 |
| | 542,760 |
| | (684,021 | ) | | 790,078 |
|
| Net (loss) income from discontinued operations, net of tax | | — |
| | (433,185 | ) | | 4,069 |
| | 183,744 |
| | (245,372 | ) | |
| Net income | | 663,618 |
| | 478,192 |
| | 241,312 |
| | (552,567 | ) | | 830,555 |
| |
| Net loss from discontinued operations, net of tax | | | — |
| | — |
| | (649,126 | ) | | 192,088 |
| | (457,038 | ) |
| Net income (loss) | | | 159,394 |
| | 771,945 |
| | (106,366 | ) | | (491,933 | ) | | 333,040 |
|
Less: Net income attributable to noncontrolling
interests | | — |
| | — |
| | — |
| | (166,937 | ) | | (166,937 | ) | | — |
| | — |
| | — |
| | (173,646 | ) | | (173,646 | ) |
| Net income attributable to DaVita Inc. | | $ | 663,618 |
| | $ | 478,192 |
| | $ | 241,312 |
| | $ | (719,504 | ) | | $ | 663,618 |
| |
| Net income (loss) attributable to DaVita Inc. | | | $ | 159,394 |
| | $ | 771,945 |
| | $ | (106,366 | ) | | $ | (665,579 | ) | | $ | 159,394 |
|
| | | For twelve months ended December 31, 2016 | | DaVita Inc. | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Consolidating Adjustments | | Consolidated Total | |
| Dialysis and related lab patient service revenues | | $ | — |
| | $ | 6,665,601 |
| | $ | 3,215,085 |
| | $ | (153,326 | ) | | $ | 9,727,360 |
| |
| For year ended December 31, 2017 | | | DaVita Inc. | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Consolidating Adjustments | | Consolidated Total |
| Dialysis patient service revenues | | | $ | — |
| | $ | 6,417,574 |
| | $ | 3,848,172 |
| | $ | (172,076 | ) | | $ | 10,093,670 |
|
| Less: Provision for uncollectible accounts | | — |
| | (272,426 | ) | | (158,878 | ) | | — |
| | (431,304 | ) | | — |
| | (322,085 | ) | | (170,447 | ) | | 7,168 |
| | (485,364 | ) |
Net dialysis and related lab patient service
revenues | | — |
| | 6,393,175 |
| | 3,056,207 |
| | (153,326 | ) | | 9,296,056 |
| |
Net dialysis patient service
revenues | | | — |
| | 6,095,489 |
| | 3,677,725 |
| | (164,908 | ) | | 9,608,306 |
|
| Other revenues | | 767,791 |
| | 1,378,952 |
| | 30,184 |
| | (765,516 | ) | | 1,411,411 |
| | 793,751 |
| | 408,460 |
| | 1,080,832 |
| | (1,014,715 | ) | | 1,268,328 |
|
| Total net revenues | | 767,791 |
| | 7,772,127 |
| | 3,086,391 |
| | (918,842 | ) | | 10,707,467 |
| | 793,751 |
| | 6,503,949 |
| | 4,758,557 |
| | (1,179,623 | ) | | 10,876,634 |
|
| Operating expenses and charges | | 493,175 |
| | 6,907,469 |
| | 2,195,955 |
| | (918,842 | ) | | 8,677,757 |
| | 527,942 |
| | 5,331,545 |
| | 4,384,015 |
| | (1,179,623 | ) | | 9,063,879 |
|
| Operating income | | 274,616 |
| | 864,658 |
| | 890,436 |
| | — |
| | 2,029,710 |
| | 265,809 |
| | 1,172,404 |
| | 374,542 |
| | — |
| | 1,812,755 |
|
| Debt expense | | (407,925 | ) | | (191,083 | ) | | (40,434 | ) | | 225,326 |
| | (414,116 | ) | | (426,149 | ) | | (200,953 | ) | | (43,490 | ) | | 239,958 |
| | (430,634 | ) |
| Other income, net | | 396,797 |
| | 3,726 |
| | 7,694 |
| | (400,706 | ) | | 7,511 |
| | 411,731 |
| | 5,979 |
| | 23,657 |
| | (423,702 | ) | | 17,665 |
|
| Income tax expense | | 77,334 |
| | 238,446 |
| | 115,981 |
| | — |
| | 431,761 |
| | 65,965 |
| | 210,068 |
| | 47,826 |
| | — |
| | 323,859 |
|
| Equity earnings in subsidiaries | | 693,720 |
| | 667,278 |
| | — |
| | (1,360,998 | ) | | — |
| | 478,192 |
| | 460,261 |
| | — |
| | (938,453 | ) | | — |
|
| Net income from continuing operations | | 879,874 |
| | 1,106,133 |
| | 741,715 |
| | (1,536,378 | ) | | 1,191,344 |
| | 663,618 |
| | 1,227,623 |
| | 306,883 |
| | (1,122,197 | ) | | 1,075,927 |
|
| Net (loss) income from discontinued operations, net of tax | | — |
| | (412,413 | ) | | 78,771 |
| | 175,380 |
| | (158,262 | ) | |
| Net income | | 879,874 |
| | 693,720 |
| | 820,486 |
| | (1,360,998 | ) | | 1,033,082 |
| |
| Net loss from discontinued operations, net of tax | | | — |
| | — |
| | (429,116 | ) | | 183,744 |
| | (245,372 | ) |
| Net income (loss) | | | 663,618 |
| | 1,227,623 |
| | (122,233 | ) | | (938,453 | ) | | 830,555 |
|
Less: Net income attributable to noncontrolling
interests | | — |
| | — |
| | — |
| | (153,208 | ) | | (153,208 | ) | | — |
| | — |
| | — |
| | (166,937 | ) | | (166,937 | ) |
| Net income attributable to DaVita Inc. | | $ | 879,874 |
| | $ | 693,720 |
| | $ | 820,486 |
| | $ | (1,514,206 | ) | | $ | 879,874 |
| |
| Net income (loss) attributable to DaVita Inc. | | | $ | 663,618 |
| | $ | 1,227,623 |
| | $ | (122,233 | ) | | $ | (1,105,390 | ) | | $ | 663,618 |
|
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
Consolidating Statements of Comprehensive Income
| | | For the year ended December 31, 2018 | | DaVita Inc. | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Consolidating Adjustments | | Consolidated Total | |
| For the year ended December 31, 2019 | | | DaVita Inc. | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Consolidating Adjustments | | Consolidated Total |
| Net income | | $ | 159,394 |
| | $ | 103,196 |
| | $ | 517,671 |
| | $ | (447,221 | ) | | $ | 333,040 |
| | $ | 810,981 |
| | $ | 906,559 |
| | $ | 552,231 |
| | $ | (1,248,477 | ) | | $ | 1,021,294 |
|
| Other comprehensive income (loss) | | 6,153 |
| | — |
| | (45,944 | ) | | — |
| | (39,791 | ) | | 7,528 |
| | — |
| | (20,102 | ) | | — |
| | (12,574 | ) |
| Total comprehensive income | | 165,547 |
| | 103,196 |
| | 471,727 |
| | (447,221 | ) | | 293,249 |
| | 818,509 |
| | 906,559 |
| | 532,129 |
| | (1,248,477 | ) | | 1,008,720 |
|
Less: Comprehensive income attributable to
noncontrolling interest | | — |
| | — |
| | — |
| | (173,646 | ) | | (173,646 | ) | | — |
| | — |
| | — |
| | (210,313 | ) | | (210,313 | ) |
| Comprehensive income attributable to DaVita Inc. | | $ | 165,547 |
| | $ | 103,196 |
| | $ | 471,727 |
| | $ | (620,867 | ) | | $ | 119,603 |
| | $ | 818,509 |
| | $ | 906,559 |
| | $ | 532,129 |
| | $ | (1,458,790 | ) | | $ | 798,407 |
|
| | | | | | | | | | | | | | | | | | | | | |
| For the year ended December 31, 2018 | | | |
| | |
| | |
| | |
| | |
|
| Net income (loss) | | | $ | 159,394 |
| | $ | 771,945 |
| | $ | (106,366 | ) | | $ | (491,933 | ) | | $ | 333,040 |
|
| Other comprehensive income (loss) | | | 6,153 |
| | — |
| | (45,944 | ) | | — |
| | (39,791 | ) |
| Total comprehensive income (loss) | | | 165,547 |
| | 771,945 |
| | (152,310 | ) | | (491,933 | ) | | 293,249 |
|
Less: Comprehensive income attributable to
noncontrolling interest | | | — |
| | — |
| | — |
| | (173,646 | ) | | (173,646 | ) |
| Comprehensive income (loss) attributable to DaVita Inc. | | | $ | 165,547 |
| | $ | 771,945 |
| | $ | (152,310 | ) | | $ | (665,579 | ) | | $ | 119,603 |
|
| | | | | | | | | | | | |
| For the year ended December 31, 2017 | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Net income | | $ | 663,618 |
| | $ | 478,192 |
| | $ | 241,312 |
| | $ | (552,567 | ) | | $ | 830,555 |
| |
| Other comprehensive income | | 3,106 |
| | — |
| | 99,770 |
| | — |
| | 102,876 |
| |
| Total comprehensive income | | 666,724 |
| | 478,192 |
| | 341,082 |
| | (552,567 | ) | | 933,431 |
| |
| Net income (loss) | | | $ | 663,618 |
| | $ | 1,227,623 |
| | $ | (122,233 | ) | | $ | (938,453 | ) | | $ | 830,555 |
|
| Other comprehensive income (loss) | | | 3,106 |
| | — |
| | 99,770 |
| | — |
| | 102,876 |
|
| Total comprehensive income (loss) | | | 666,724 |
| | 1,227,623 |
| | (22,463 | ) | | (938,453 | ) | | 933,431 |
|
Less: Comprehensive income attributable to
noncontrolling interest | | — |
| | — |
| | — |
| | (166,935 | ) | | (166,935 | ) | | — |
| | — |
| | — |
| | (166,935 | ) | | (166,935 | ) |
| Comprehensive income attributable to DaVita Inc. | | $ | 666,724 |
| | $ | 478,192 |
| | $ | 341,082 |
| | $ | (719,502 | ) | | $ | 766,496 |
| |
| | | | | | | | | | | | |
| For the year ended December 31, 2016 | | |
| | |
| | |
| | |
| | |
| |
| Net income | | $ | 879,874 |
| | $ | 693,720 |
| | $ | 820,486 |
| | $ | (1,360,998 | ) | | $ | 1,033,082 |
| |
| Other comprehensive loss | | (290 | ) | | — |
| | (29,337 | ) | | — |
| | (29,627 | ) | |
| Total comprehensive income | | 879,584 |
| | 693,720 |
| | 791,149 |
| | (1,360,998 | ) | | 1,003,455 |
| |
Less: Comprehensive income attributable to
noncontrolling interest | | — |
| | — |
| | — |
| | (153,398 | ) | | (153,398 | ) | |
| Comprehensive income attributable to DaVita Inc. | | $ | 879,584 |
| | $ | 693,720 |
| | $ | 791,149 |
| | $ | (1,514,396 | ) | | $ | 850,057 |
| |
| Comprehensive income (loss) attributable to DaVita Inc. | | | $ | 666,724 |
| | $ | 1,227,623 |
| | $ | (22,463 | ) | | $ | (1,105,388 | ) | | $ | 766,496 |
|
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
Consolidating Balance Sheets
| | | As of December 31, 2018 | | DaVita Inc. | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Consolidating Adjustments | | Consolidated Total | |
| As of December 31, 2019 | | | DaVita Inc. | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Consolidating Adjustments | | Consolidated Total |
| Cash and cash equivalents | | $ | 60,653 |
| | $ | — |
| | $ | 262,385 |
| | $ | — |
| | $ | 323,038 |
| | $ | 758,241 |
| | $ | 532 |
| | $ | 343,599 |
| | $ | — |
| | $ | 1,102,372 |
|
| Restricted cash and equivalents | | 1,005 |
| | 12,048 |
| | 79,329 |
| | — |
| | 92,382 |
| | 14,499 |
| | — |
| | 91,847 |
| | — |
| | 106,346 |
|
| Accounts receivable, net | | — |
| | 1,264,290 |
| | 594,318 |
| | — |
| | 1,858,608 |
| | — |
| | 1,189,301 |
| | 606,297 |
| | — |
| | 1,795,598 |
|
| Other current assets | | 37,185 |
| | 601,318 |
| | 122,063 |
| | — |
| | 760,566 |
| | 76,787 |
| | 548,553 |
| | 102,410 |
| | (41,896 | ) | | 685,854 |
|
| Current assets held for sale | | — |
| | 4,440,953 |
| | 948,612 |
| | — |
| | 5,389,565 |
| |
| Total current assets | | 98,843 |
| | 6,318,609 |
| | 2,006,707 |
| | — |
| | 8,424,159 |
| | 849,527 |
| | 1,738,386 |
| | 1,144,153 |
| | (41,896 | ) | | 3,690,170 |
|
| Property and equipment, net | | 491,462 |
| | 1,624,835 |
| | 1,277,372 |
| | — |
| | 3,393,669 |
| | 543,932 |
| | 1,589,417 |
| | 1,344,543 |
| | (4,508 | ) | | 3,473,384 |
|
| Operating lease right-of-use assets | | | 109,415 |
| | 1,656,145 |
| | 1,084,552 |
| | (20,065 | ) | | 2,830,047 |
|
| Intangible assets, net | | 153 |
| | 42,933 |
| | 75,760 |
| | — |
| | 118,846 |
| | 362 |
| | 31,569 |
| | 103,753 |
| | — |
| | 135,684 |
|
| Investments in subsidiaries | | 10,102,750 |
| | 3,239,862 |
| | — |
| | (13,342,612 | ) | | — |
| |
| Intercompany receivables | | 3,419,448 |
| | — |
| | 1,471,203 |
| | (4,890,651 | ) | | — |
| |
| Investments in and advances to affiliates, net | | | 10,813,991 |
| | 7,611,402 |
| | 3,051,208 |
| | (21,476,601 | ) | | — |
|
| Other long-term assets and investments | | 53,385 |
| | 80,537 |
| | 197,696 |
| | — |
| | 331,618 |
| | 102,779 |
| | 133,698 |
| | 176,315 |
| | (18,318 | ) | | 394,474 |
|
| Goodwill | | — |
| | 4,812,365 |
| | 2,029,595 |
| | — |
| | 6,841,960 |
| | — |
| | 4,812,972 |
| | 1,974,663 |
| | — |
| | 6,787,635 |
|
| Total assets | | $ | 14,166,041 |
| | $ | 16,119,141 |
| | $ | 7,058,333 |
| | $ | (18,233,263 | ) | | $ | 19,110,252 |
| | $ | 12,420,006 |
| | $ | 17,573,589 |
| | $ | 8,879,187 |
| | $ | (21,561,388 | ) | | $ | 17,311,394 |
|
| Current liabilities | | $ | 1,945,943 |
| | $ | 1,251,534 |
| | $ | 449,925 |
| | $ | — |
| | $ | 3,647,402 |
| | $ | 379,286 |
| | $ | 1,327,378 |
| | $ | 666,470 |
| | $ | (1,036 | ) | | $ | 2,372,098 |
|
| Current liabilities held for sale | | — |
| | 722,766 |
| | 520,993 |
| | — |
| | 1,243,759 |
| |
| Total current liabilities | | 1,945,943 |
| | 1,974,300 |
| | 970,918 |
| | — |
| | 4,891,161 |
| |
| Intercompany payables | | — |
| | 3,327,026 |
| | 1,563,625 |
| | (4,890,651 | ) | | — |
| | 1,381,863 |
| | 3,051,208 |
| | 2,615,151 |
| | (7,048,222 | ) | | — |
|
| Long-term operating lease liabilities | | | 136,123 |
| | 1,567,776 |
| | 1,039,145 |
| | (19,244 | ) | | 2,723,800 |
|
| Long-term debt and other long-term liabilities | | 7,918,581 |
| | 715,065 |
| | 552,406 |
| | — |
| | 9,186,052 |
| | 7,741,725 |
| | 674,558 |
| | 364,102 |
| | (64,507 | ) | | 8,715,878 |
|
| Noncontrolling interests subject to put provisions | | 598,075 |
| | — |
| | — |
| | 526,566 |
| | 1,124,641 |
| | 647,600 |
| | — |
| | — |
| | 532,776 |
| | 1,180,376 |
|
| Total DaVita Inc. shareholders' equity | | 3,703,442 |
| | 10,102,750 |
| | 3,239,862 |
| | (13,342,612 | ) | | 3,703,442 |
| | 2,133,409 |
| | 10,952,669 |
| | 3,475,710 |
| | (14,428,379 | ) | | 2,133,409 |
|
Noncontrolling interests not subject to put
provisions | | — |
| | — |
| | 731,522 |
| | (526,566 | ) | | 204,956 |
| | — |
| | — |
| | 718,609 |
| | (532,776 | ) | | 185,833 |
|
| Total equity | | 3,703,442 |
| | 10,102,750 |
| | 3,971,384 |
| | (13,869,178 | ) | | 3,908,398 |
| | 2,133,409 |
| | 10,952,669 |
| | 4,194,319 |
| | (14,961,155 | ) | | 2,319,242 |
|
| Total liabilities and equity | | $ | 14,166,041 |
| | $ | 16,119,141 |
| | $ | 7,058,333 |
| | $ | (18,233,263 | ) | | $ | 19,110,252 |
| | $ | 12,420,006 |
| | $ | 17,573,589 |
| | $ | 8,879,187 |
| | $ | (21,561,388 | ) | | $ | 17,311,394 |
|
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
Consolidating Balance Sheets - (continued) | | | As of December 31, 2017 | | DaVita Inc. | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Consolidating Adjustments | | Consolidated Total | |
| As of December 31, 2018 | | | DaVita Inc. | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Consolidating Adjustments | | Consolidated Total |
| Cash and cash equivalents | | $ | 149,305 |
| | $ | — |
| | $ | 358,929 |
| | $ | — |
| | $ | 508,234 |
| | $ | 60,653 |
| | $ | 1,232 |
| | $ | 261,153 |
| | $ | — |
| | $ | 323,038 |
|
| Restricted cash and equivalents | | 1,002 |
| | 9,384 |
| | 300 |
| | — |
| | 10,686 |
| | 1,005 |
| | 12,048 |
| | 79,329 |
| | — |
| | 92,382 |
|
| Accounts receivable, net | | — |
| | 1,208,715 |
| | 506,035 |
| | — |
| | 1,714,750 |
| | — |
| | 1,204,122 |
| | 654,486 |
| | — |
| | 1,858,608 |
|
| Other current assets | | 67,025 |
| | 621,409 |
| | 86,955 |
| | — |
| | 775,389 |
| | 37,185 |
| | 565,974 |
| | 157,407 |
| | — |
| | 760,566 |
|
| Current assets held for sale | | — |
| | 4,992,067 |
| | 769,575 |
| | — |
| | 5,761,642 |
| | — |
| | — |
| | 5,389,565 |
| | — |
| | 5,389,565 |
|
| Total current assets | | 217,332 |
| | 6,831,575 |
| | 1,721,794 |
| | — |
| | 8,770,701 |
| | 98,843 |
| | 1,783,376 |
| | 6,541,940 |
| | — |
| | 8,424,159 |
|
| Property and equipment, net | | 408,010 |
| | 1,560,390 |
| | 1,180,813 |
| | — |
| | 3,149,213 |
| | 491,462 |
| | 1,584,321 |
| | 1,317,886 |
| | — |
| | 3,393,669 |
|
| Intangible assets, net | | 250 |
| | 50,971 |
| | 62,606 |
| | — |
| | 113,827 |
| | 153 |
| | 42,896 |
| | 75,797 |
| | — |
| | 118,846 |
|
| Investments in subsidiaries | | 10,009,874 |
| | 3,085,722 |
| | — |
| | (13,095,596 | ) | | — |
| |
| Intercompany receivables | | 3,677,947 |
| | — |
| | 1,313,213 |
| | (4,991,160 | ) | | — |
| |
| Investments in and advances to affiliates, net | | | 13,522,198 |
| | 6,196,801 |
| | 2,498,545 |
| | (22,217,544 | ) | | — |
|
| Other long-term assets and investments | | 47,297 |
| | 68,344 |
| | 214,875 |
| | — |
| | 330,516 |
| | 53,385 |
| | 90,037 |
| | 188,196 |
| | — |
| | 331,618 |
|
| Goodwill | | — |
| | 4,732,320 |
| | 1,877,959 |
| | — |
| | 6,610,279 |
| | — |
| | 4,806,939 |
| | 2,035,021 |
| | — |
| | 6,841,960 |
|
| Total assets | | $ | 14,360,710 |
| | $ | 16,329,322 |
| | $ | 6,371,260 |
| | $ | (18,086,756 | ) | | $ | 18,974,536 |
| | $ | 14,166,041 |
| | $ | 14,504,370 |
| | $ | 12,657,385 |
| | $ | (22,217,544 | ) | | $ | 19,110,252 |
|
| Current liabilities | | $ | 238,706 |
| | $ | 1,207,482 |
| | $ | 436,262 |
| | $ | — |
| | $ | 1,882,450 |
| | $ | 1,945,943 |
| | $ | 1,217,526 |
| | $ | 483,933 |
| | $ | — |
| | $ | 3,647,402 |
|
| Current liabilities held for sale | | — |
| | 739,294 |
| | 445,776 |
| | — |
| | 1,185,070 |
| | — |
| | — |
| | 1,243,759 |
| | — |
| | 1,243,759 |
|
| Total current liabilities | | 238,706 |
| | 1,946,776 |
| | 882,038 |
| | — |
| | 3,067,520 |
| | 1,945,943 |
| | 1,217,526 |
| | 1,727,692 |
| | — |
| | 4,891,161 |
|
| Intercompany payables | | — |
| | 3,690,042 |
| | 1,301,118 |
| | (4,991,160 | ) | | — |
| | — |
| | 2,498,545 |
| | 6,161,292 |
| | (8,659,837 | ) | | — |
|
| Long-term debt and other long-term liabilities | | 8,857,373 |
| | 682,630 |
| | 469,587 |
| | — |
| | 10,009,590 |
| | 7,918,581 |
| | 687,443 |
| | 580,028 |
| | — |
| | 9,186,052 |
|
| Noncontrolling interests subject to put provisions | | 574,602 |
| | — |
| | — |
| | 436,758 |
| | 1,011,360 |
| | 598,075 |
| | — |
| | — |
| | 526,566 |
| | 1,124,641 |
|
| Total DaVita Inc. shareholders' equity | | 4,690,029 |
| | 10,009,874 |
| | 3,085,722 |
| | (13,095,596 | ) | | 4,690,029 |
| | 3,703,442 |
| | 10,100,856 |
| | 3,456,851 |
| | (13,557,707 | ) | | 3,703,442 |
|
Noncontrolling interests not subject to put
provisions | | — |
| | — |
| | 632,795 |
| | (436,758 | ) | | 196,037 |
| | — |
| | — |
| | 731,522 |
| | (526,566 | ) | | 204,956 |
|
| Total equity | | 4,690,029 |
| | 10,009,874 |
| | 3,718,517 |
| | (13,532,354 | ) | | 4,886,066 |
| | 3,703,442 |
| | 10,100,856 |
| | 4,188,373 |
| | (14,084,273 | ) | | 3,908,398 |
|
| Total liabilities and equity | | $ | 14,360,710 |
| | $ | 16,329,322 |
| | $ | 6,371,260 |
| | $ | (18,086,756 | ) | | $ | 18,974,536 |
| | $ | 14,166,041 |
| | $ | 14,504,370 |
| | $ | 12,657,385 |
| | $ | (22,217,544 | ) | | $ | 19,110,252 |
|
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
Consolidating Statements of Cash Flow
| | | For the year ended December 31, 2018 | | DaVita Inc. | | Guarantor
Subsidiaries | | Non-Guarantor
Subsidiaries | | Consolidating
Adjustments | | Consolidated
Total | |
| For the year ended December 31, 2019 | | | DaVita Inc. | | Guarantor
Subsidiaries | | Non-Guarantor
Subsidiaries | | Consolidating
Adjustments | | Consolidated
Total |
| Cash flows from operating activities: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Net income | | $ | 159,394 |
| | $ | 103,196 |
| | $ | 517,671 |
| | $ | (447,221 | ) | | $ | 333,040 |
| | $ | 810,981 |
| | $ | 906,559 |
| | $ | 552,231 |
| | $ | (1,248,477 | ) | | $ | 1,021,294 |
|
Changes in operating assets and liabilities and
non-cash items included in net income | | (86,070 | ) | | 818,027 |
| | 259,422 |
| | 447,221 |
| | 1,438,600 |
| | (602,288 | ) | | (73,356 | ) | | 478,228 |
| | 1,248,477 |
| | 1,051,061 |
|
| Net cash provided by operating activities | | 73,324 |
| | 921,223 |
| | 777,093 |
| | — |
| | 1,771,640 |
| | 208,693 |
| | 833,203 |
| | 1,030,459 |
| | — |
| | 2,072,355 |
|
| Cash flows from investing activities: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Additions of property and equipment, net | | (175,787 | ) | | (534,278 | ) | | (277,073 | ) | | — |
| | (987,138 | ) | | (145,378 | ) | | (310,032 | ) | | (311,136 | ) | | — |
| | (766,546 | ) |
| Acquisitions | | — |
| | (73,046 | ) | | (110,110 | ) | | — |
| | (183,156 | ) | | — |
| | (11,851 | ) | | (89,010 | ) | | — |
| | (100,861 | ) |
| Proceeds from asset sales, net of cash divested | | — |
| | 61,962 |
| | 88,243 |
| | — |
| | 150,205 |
| | 3,824,516 |
| | 1,777 |
| | 51,099 |
| | — |
| | 3,877,392 |
|
| Investments and other items | | 30,962 |
| | (16,362 | ) | | (154 | ) | | — |
| | 14,446 |
| | (4,606 | ) | | (6,676 | ) | | (3,363 | ) | | — |
| | (14,645 | ) |
| Net cash used in investing activities | | (144,825 | ) | | (561,724 | ) | | (299,094 | ) | | — |
| | (1,005,643 | ) | |
| Net cash provided by (used in) investing activities | | | 3,674,532 |
| | (326,782 | ) | | (352,410 | ) | | — |
| | 2,995,340 |
|
| Cash flows from financing activities: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Long-term debt and related financing costs, net | | 725,889 |
| | (11,437 | ) | | (19,675 | ) | | — |
| | 694,777 |
| | (2,052,197 | ) | | (10,481 | ) | | (17,513 | ) | | — |
| | (2,080,191 | ) |
| Intercompany borrowing | | 404,897 |
| | (311,778 | ) | | (93,119 | ) | | — |
| | — |
| | 1,267,138 |
| | (455,405 | ) | | (811,733 | ) | | — |
| | — |
|
| Other items | | (1,147,934 | ) | | (28,067 | ) | | (144,130 | ) | | — |
| | (1,320,131 | ) | | (2,387,084 | ) | | (53,283 | ) | | (175,892 | ) | | — |
| | (2,616,259 | ) |
| Net cash used in financing activities | | (17,148 | ) | | (351,282 | ) | | (256,924 | ) | | — |
| | (625,354 | ) | | (3,172,143 | ) | | (519,169 | ) | | (1,005,138 | ) | | — |
| | (4,696,450 | ) |
| Effect of exchange rate changes on cash | | — |
| | — |
| | (3,350 | ) | | — |
| | (3,350 | ) | | — |
| | — |
| | (1,760 | ) | | — |
| | (1,760 | ) |
| Net (decrease) increase in cash, cash equivalents and restricted cash | | (88,649 | ) | | 8,217 |
| | 217,725 |
| | — |
| | 137,293 |
| |
| Net increase (decrease) in cash, cash equivalents and restricted cash | | | 711,082 |
| | (12,748 | ) | | (328,849 | ) | | — |
| | 369,485 |
|
Less: Net increase in cash, cash equivalents and
restricted cash from discontinued operations | | — |
| | 5,553 |
| | 235,240 |
| | — |
| | 240,793 |
| | — |
| | — |
| | (423,813 | ) | | — |
| | (423,813 | ) |
| Net (decrease) increase in cash, cash equivalents and restricted cash from continuing operations | | (88,649 | ) | | 2,664 |
| | (17,515 | ) | | — |
| | (103,500 | ) | |
| Net increase (decrease) in cash, cash equivalents and restricted cash from continuing operations | | | 711,082 |
| | (12,748 | ) | | 94,964 |
| | — |
| | 793,298 |
|
Cash, cash equivalents and restricted cash of
continuing operations at beginning of the year | | 150,307 |
| | 9,384 |
| | 359,229 |
| | — |
| | 518,920 |
| | 61,658 |
| | 13,280 |
| | 340,482 |
| | — |
| | 415,420 |
|
Cash, cash equivalents and restricted cash of
continuing operations at end of the year | | $ | 61,658 |
| | $ | 12,048 |
| | $ | 341,714 |
| | $ | — |
| | $ | 415,420 |
| | $ | 772,740 |
| | $ | 532 |
| | $ | 435,446 |
| | $ | — |
| | $ | 1,208,718 |
|
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
Consolidating Statements of Cash Flow - (continued)
| | | For the year ended December 31, 2017 | | DaVita Inc. | | Guarantor
Subsidiaries | | Non-Guarantor
Subsidiaries | | Consolidating
Adjustments | | Consolidated
Total | |
| For the year ended December 31, 2018 | | | DaVita Inc. | | Guarantor
Subsidiaries | | Non-Guarantor
Subsidiaries | | Consolidating
Adjustments | | Consolidated
Total |
| Cash flows from operating activities: | | | | | | | | | | | | | | | | | | | | |
| Net income | | $ | 663,618 |
| | $ | 478,192 |
| | $ | 241,312 |
| | $ | (552,567 | ) | | $ | 830,555 |
| | $ | 159,394 |
| | $ | 771,945 |
| | $ | (106,366 | ) | | $ | (491,933 | ) | | $ | 333,040 |
|
Changes in operating assets and liabilities and
non-cash items included in net income | | (533,300 | ) | | 368,135 |
| | 695,209 |
| | 552,567 |
| | 1,082,611 |
| | (86,070 | ) | | (150,976 | ) | | 1,183,713 |
| | 491,933 |
| | 1,438,600 |
|
| Net cash provided by operating activities | | 130,318 |
| | 846,327 |
| | 936,521 |
| | — |
| | 1,913,166 |
| | 73,324 |
| | 620,969 |
| | 1,077,347 |
| | — |
| | 1,771,640 |
|
| Cash flows from investing activities: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Additions of property and equipment, net | | (155,972 | ) | | (490,800 | ) | | (258,478 | ) | | — |
| | (905,250 | ) | | (175,787 | ) | | (425,008 | ) | | (386,343 | ) | | — |
| | (987,138 | ) |
| Acquisitions | | — |
| | (693,522 | ) | | (110,357 | ) | | — |
| | (803,879 | ) | | — |
| | (42,987 | ) | | (140,169 | ) | | — |
| | (183,156 | ) |
Proceeds from asset and business sales, net of cash
divested | | — |
| | 90,340 |
| | 1,996 |
| | — |
| | 92,336 |
| | — |
| | 55,184 |
| | 95,021 |
| | — |
| | 150,205 |
|
| Investments and other items | | 211,619 |
| | (7,004 | ) | | 47,446 |
| | — |
| | 252,061 |
| | 30,962 |
| | (8,286 | ) | | (8,230 | ) | | — |
| | 14,446 |
|
| Net cash provided by (used in) investing activities | | 55,647 |
| | (1,100,986 | ) | | (319,393 | ) | | — |
| | (1,364,732 | ) | |
| Net cash used in investing activities | | | (144,825 | ) | | (421,097 | ) | | (439,721 | ) | | — |
| | (1,005,643 | ) |
| Cash flows from financing activities: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Long-term debt and related financing costs, net | | 173,529 |
| | (12,662 | ) | | (6,019 | ) | | — |
| | 154,848 |
| | 725,889 |
| | (8,874 | ) | | (22,238 | ) | | — |
| | 694,777 |
|
| Intercompany borrowing | | 22,589 |
| | 218,980 |
| | (241,569 | ) | | — |
| | — |
| | 404,897 |
| | (168,224 | ) | | (236,673 | ) | | — |
| | — |
|
| Other items | | (781,697 | ) | | (2,493 | ) | | (136,915 | ) | | — |
| | (921,105 | ) | | (1,147,934 | ) | | (29,457 | ) | | (142,740 | ) | | — |
| | (1,320,131 | ) |
| Net cash (used in) provided by financing activities | | (585,579 | ) | | 203,825 |
| | (384,503 | ) | | — |
| | (766,257 | ) | |
| Net cash used in financing activities | | | (17,148 | ) | | (206,555 | ) | | (401,651 | ) | | — |
| | (625,354 | ) |
| Effect of exchange rate changes on cash | | — |
| | — |
| | 254 |
| | — |
| | 254 |
| | — |
| | — |
| | (3,350 | ) | | — |
| | (3,350 | ) |
| Net (decrease) increase in cash, cash equivalents and restricted cash | | (399,614 | ) | | (50,834 | ) | | 232,879 |
| | — |
| | (217,569 | ) | | (88,649 | ) | | (6,683 | ) | | 232,625 |
| | — |
| | 137,293 |
|
Less: Net decrease in cash, cash equivalents
and restricted cash from discontinued operations | | — |
| | (51,531 | ) | | (1,495 | ) | | — |
| | (53,026 | ) | | — |
| | — |
| | 240,793 |
| | — |
| | 240,793 |
|
| Net (decrease) increase in cash, cash equivalents and restricted cash from continuing operations | | (399,614 | ) | | 697 |
| | 234,374 |
| | — |
| | (164,543 | ) | |
| Net decrease in cash, cash equivalents and restricted cash from continuing operations | | | (88,649 | ) | | (6,683 | ) | | (8,168 | ) | | — |
| | (103,500 | ) |
Cash, cash equivalents and restricted cash of
continuing operations at beginning of the year | | 549,921 |
| | 8,687 |
| | 124,855 |
| | — |
| | 683,463 |
| | 150,307 |
| | 19,963 |
| | 348,650 |
| | — |
| | 518,920 |
|
Cash, cash equivalents and restricted cash of
continuing operations at end of the year | | $ | 150,307 |
| | $ | 9,384 |
| | $ | 359,229 |
| | $ | — |
| | $ | 518,920 |
| | $ | 61,658 |
| | $ | 13,280 |
| | $ | 340,482 |
| | $ | — |
| | $ | 415,420 |
|
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
Consolidating Statements of Cash Flow - (continued)
| | | For the year ended December 31, 2016 | | DaVita Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Consolidating Adjustments | | Consolidated Total | |
| For the year ended December 31, 2017 | | | DaVita Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Consolidating Adjustments | | Consolidated Total |
| Cash flows from operating activities: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Net income | | $ | 879,874 |
| | $ | 693,720 |
| | $ | 820,486 |
| | $ | (1,360,998 | ) | | $ | 1,033,082 |
| | $ | 663,618 |
| | $ | 1,227,623 |
| | $ | (122,233 | ) | | $ | (938,453 | ) | | $ | 830,555 |
|
Changes in operating assets and liabilities and
non-cash items included in net income | | (612,706 | ) | | 359,366 |
| | (168,614 | ) | | 1,360,998 |
| | 939,044 |
| | (533,300 | ) | | (739,023 | ) | | 1,416,481 |
| | 938,453 |
| | 1,082,611 |
|
| Net cash provided by operating activities | | 267,168 |
| | 1,053,086 |
| | 651,872 |
| | — |
| | 1,972,126 |
| | 130,318 |
| | 488,600 |
| | 1,294,248 |
| | — |
| | 1,913,166 |
|
| Cash flows from investing activities: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Additions of property and equipment, net | | (139,303 | ) | | (382,305 | ) | | (307,487 | ) | | — |
| | (829,095 | ) | | (155,972 | ) | | (348,292 | ) | | (400,986 | ) | | — |
| | (905,250 | ) |
| Acquisitions | | — |
| | (472,413 | ) | | (91,443 | ) | | — |
| | (563,856 | ) | | — |
| | (528,588 | ) | | (275,291 | ) | | — |
| | (803,879 | ) |
| Proceeds from asset sales | | — |
| | 70,342 |
| | (5,617 | ) | | — |
| | 64,725 |
| | — |
| | 25,989 |
| | 66,347 |
| | — |
| | 92,336 |
|
| Investments and other items | | 153,031 |
| | (29,038 | ) | | 2,565 |
| | — |
| | 126,558 |
| | 211,619 |
| | (3,526 | ) | | 43,968 |
| | — |
| | 252,061 |
|
| Net cash provided by (used in) investing activities | | 13,728 |
| | (813,414 | ) | | (401,982 | ) | | — |
| | (1,201,668 | ) | | 55,647 |
| | (854,417 | ) | | (565,962 | ) | | — |
| | (1,364,732 | ) |
| Cash flows from financing activities: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Long-term debt and related financing costs, net | | (92,460 | ) | | (27,830 | ) | | (4,152 | ) | | — |
| | (124,442 | ) | | 173,529 |
| | (8,186 | ) | | (10,495 | ) | | — |
| | 154,848 |
|
| Intercompany borrowing | | 236,052 |
| | (231,800 | ) | | (4,252 | ) | | — |
| | — |
| | 22,589 |
| | 382,452 |
| | (405,041 | ) | | — |
| | — |
|
| Other items | | (1,061,203 | ) | | (21,525 | ) | | (144,811 | ) | | — |
| | (1,227,539 | ) | | (781,697 | ) | | (2,205 | ) | | (137,203 | ) | | — |
| | (921,105 | ) |
| Net cash used in financing activities | | (917,611 | ) | | (281,155 | ) | | (153,215 | ) | | — |
| | (1,351,981 | ) | |
| Net cash (used in) provided by financing activities | | | (585,579 | ) | | 372,061 |
| | (552,739 | ) | | — |
| | (766,257 | ) |
| Effect of exchange rate changes on cash | | — |
| | — |
| | 4,276 |
| | — |
| | 4,276 |
| | — |
| | — |
| | 254 |
| | — |
| | 254 |
|
| Net (decrease) increase in cash, cash equivalents and restricted cash | | (636,715 | ) | | (41,483 | ) | | 100,951 |
| | — |
| | (577,247 | ) | | (399,614 | ) | | 6,244 |
| | 175,801 |
| | — |
| | (217,569 | ) |
| Less: Net (decrease) increase in cash, cash equivalents and restricted cash from discontinued operations | | — |
| | (50,170 | ) | | 34,377 |
| | — |
| | (15,793 | ) | |
| Less: Net decrease in cash, cash equivalents and restricted cash from discontinued operations | | | — |
| | — |
| | (53,026 | ) | | — |
| | (53,026 | ) |
| Net (decrease) increase in cash, cash equivalents and restricted cash from continuing operations | | (636,715 | ) | | 8,687 |
| | 66,574 |
| | — |
| | (561,454 | ) | | (399,614 | ) | | 6,244 |
| | 228,827 |
| | — |
| | (164,543 | ) |
Cash, cash equivalents and restricted cash of
continuing operations at beginning of the year | | 1,186,636 |
| | — |
| | 58,281 |
| | — |
| | 1,244,917 |
| | 549,921 |
| | 13,719 |
| | 119,823 |
| | — |
| | 683,463 |
|
Cash, cash equivalents and restricted cash of
continuing operations at end of the year | | $ | 549,921 |
| | $ | 8,687 |
| | $ | 124,855 |
| | $ | — |
| | $ | 683,463 |
| | $ | 150,307 |
| | $ | 19,963 |
| | $ | 348,650 |
| | $ | — |
| | $ | 518,920 |
|
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars and shares in thousands, except per share data)
29. Supplemental data under senior note indentures (unaudited)
The following information is presented asCompany previously disclosed certain unaudited supplemental data concerning entities that do not constitute “Subsidiaries” as required bydefined in the indentures governing the Company’s Senior Notes.
Condensed Consolidating Statementssenior notes with its consolidated financial statements, as required by those indentures. As a result of Income
|
| | | | | | | | | | | | | | | | |
| For the year ended December 31, 2018 | | Consolidated Total | | Physician Groups | | Unrestricted Subsidiaries | | Company and Restricted Subsidiaries(1) |
| Dialysis and related lab patient service revenues | | $ | 10,709,981 |
| | $ | — |
| | $ | — |
| | $ | 10,709,981 |
|
| Less: Provision for uncollectible accounts | | (49,587 | ) | | — |
| | — |
| | (49,587 | ) |
| Net dialysis and related lab patient service revenues | | 10,660,394 |
| | — |
| | — |
| | 10,660,394 |
|
| Other revenues | | 744,457 |
| | — |
| | — |
| | 744,457 |
|
| Total net revenues | | 11,404,851 |
| | — |
| | — |
| | 11,404,851 |
|
| Operating expenses and charges | | 9,879,027 |
| | — |
| | — |
| | 9,879,027 |
|
| Operating income | | 1,525,824 |
| | — |
| | — |
| | 1,525,824 |
|
| Debt expense | | (487,435 | ) | | — |
| | — |
| | (487,435 | ) |
| Other income, net | | 10,089 |
| | — |
| | — |
| | 10,089 |
|
| Income tax expense | | 258,400 |
| | — |
| | — |
| | 258,400 |
|
| Net income from continuing operations | | 790,078 |
| | — |
| | — |
| | 790,078 |
|
| Net (loss) income from discontinued operations, net of tax | | (457,038 | ) | | 37,373 |
| | 92 |
| | (494,503 | ) |
| Net income | | 333,040 |
| | 37,373 |
| | 92 |
| | 295,575 |
|
| Less: Net income attributable to noncontrolling interests | | (173,646 | ) | | (7,841 | ) | | — |
| | (165,805 | ) |
| Net income attributable to DaVita Inc. | | $ | 159,394 |
| | $ | 29,532 |
| | $ | 92 |
| | $ | 129,770 |
|
Condensed Consolidating Statements of Comprehensive Income
|
| | | | | | | | | | | | | | | | |
| For the year ended December 31, 2018 | | Consolidated Total | | Physician Groups | | Unrestricted Subsidiaries | | Company and Restricted Subsidiaries(1) |
| Net income | | $ | 333,040 |
| | $ | 37,373 |
| | $ | 92 |
| | $ | 295,575 |
|
| Other comprehensive loss | | (39,791 | ) | | — |
| | — |
| | (39,791 | ) |
| Total comprehensive income | | 293,249 |
| | 37,373 |
| | 92 |
| | 255,784 |
|
Less: Comprehensive income attributable to noncontrolling
interest | | (173,646 | ) | | (7,841 | ) | | — |
| | (165,805 | ) |
| Comprehensive income attributable to DaVita Inc. | | $ | 119,603 |
| | $ | 29,532 |
| | $ | 92 |
| | $ | 89,979 |
|
| |
(1) | After the elimination of the unrestricted subsidiaries and the physician groups |
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars in thousands, except per share data)
Condensed Consolidating Balance Sheets
|
| | | | | | | | | | | | | | | | |
| As of December 31, 2018 | | Consolidated Total | | Physician Groups | | Unrestricted Subsidiaries | | Company and Restricted Subsidiaries(1) |
| Cash and cash equivalents | | $ | 323,038 |
| | $ | — |
| | $ | — |
| | $ | 323,038 |
|
| Restricted cash and equivalents | | 92,382 |
| | — |
| | — |
| | 92,382 |
|
| Accounts receivable, net | | 1,858,608 |
| | — |
| | — |
| | 1,858,608 |
|
| Other current assets | | 760,566 |
| | — |
| | — |
| | 760,566 |
|
| Other current assets held for sale | | 5,389,565 |
| | 532,050 |
| | 2,825 |
| | 4,854,690 |
|
| Total current assets | | 8,424,159 |
| | 532,050 |
| | 2,825 |
| | 7,889,284 |
|
| Property and equipment, net | | 3,393,669 |
| | — |
| | — |
| | 3,393,669 |
|
| Amortizable intangibles, net | | 118,846 |
| | — |
| | — |
| | 118,846 |
|
| Other long-term assets | | 331,618 |
| | — |
| | — |
| | 331,618 |
|
| Goodwill | | 6,841,960 |
| | — |
| | — |
| | 6,841,960 |
|
| Total assets | | $ | 19,110,252 |
| | $ | 532,050 |
| | $ | 2,825 |
| | $ | 18,575,377 |
|
| Current liabilities | | $ | 3,647,402 |
| | $ | — |
| | $ | — |
| | $ | 3,647,402 |
|
| Current liabilities held for sale | | 1,243,759 |
| | 351,925 |
| | — |
| | 891,834 |
|
| Total current liabilities | | 4,891,161 |
| | 351,925 |
| | — |
| | 4,539,236 |
|
| Payables to parent | | — |
| | 25,456 |
| | 2,825 |
| | (28,281 | ) |
| Long-term debt and other long-term liabilities | | 9,186,052 |
| | — |
| | — |
| | 9,186,052 |
|
| Noncontrolling interests subject to put provisions | | 1,124,641 |
| | — |
| | — |
| | 1,124,641 |
|
| Total DaVita Inc. shareholders' equity | | 3,703,442 |
| | 154,669 |
| | — |
| | 3,548,773 |
|
| Noncontrolling interests not subject to put provisions | | 204,956 |
| | — |
| | — |
| | 204,956 |
|
| Shareholders' equity | | 3,908,398 |
| | 154,669 |
| | — |
| | 3,753,729 |
|
| Total liabilities and shareholders' equity | | $ | 19,110,252 |
| | $ | 532,050 |
| | $ | 2,825 |
| | $ | 18,575,377 |
|
DAVITA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(dollars in thousands, except per share data)
Condensed Consolidating Statements of Cash Flow
|
| | | | | | | | | | | | | | | | |
| For the year ended December 31, 2018 | | Consolidated Total | | Physician Groups | | Unrestricted Subsidiaries | | Company and Restricted Subsidiaries(1) |
| Cash flows from operating activities: | | |
| | |
| | |
| | |
|
| Net income | | $ | 333,040 |
| | $ | 37,373 |
| | $ | 92 |
| | $ | 295,575 |
|
Changes in operating and intercompany assets and liabilities
and non-cash items included in net income | | 1,438,600 |
| | 81,722 |
| | (92 | ) | | 1,356,970 |
|
| Net cash provided by operating activities | | 1,771,640 |
| | 119,095 |
| | — |
| | 1,652,545 |
|
| Cash flows from investing activities: | | |
| | |
| | |
| | |
|
| Additions of property and equipment | | (987,138 | ) | | (2,746 | ) | | — |
| | (984,392 | ) |
| Acquisitions and divestitures, net | | (183,156 | ) | | — |
| | — |
| | (183,156 | ) |
| Proceeds from asset sales | | 150,205 |
| | — |
| | — |
| | 150,205 |
|
| Investments and other items, net | | 14,446 |
| | (154 | ) | | — |
| | 14,600 |
|
| Net cash used in investing activities | | (1,005,643 | ) | | (2,900 | ) | | — |
| | (1,002,743 | ) |
| Cash flows from financing activities: | | |
| | |
| | |
| | |
|
| Long-term debt and related financing costs, net | | 694,777 |
| | — |
| | — |
| | 694,777 |
|
| Intercompany | | — |
| | 25,296 |
| | — |
| | (25,296 | ) |
| Other items | | (1,320,131 | ) | | — |
| | — |
| | (1,320,131 | ) |
| Net cash (used in) provided by financing activities | | (625,354 | ) | | 25,296 |
| | — |
| | (650,650 | ) |
| Effect of exchange rate changes on cash | | (3,350 | ) | | — |
| | — |
| | (3,350 | ) |
| Net increase (decrease) in cash, cash equivalents and restricted cash | | 137,293 |
| | 141,491 |
| | — |
| | (4,198 | ) |
Less: Net increase in cash, cash equivalents and restricted
cash from discontinued operations | | 240,793 |
| | 141,491 |
| | — |
| | 99,302 |
|
| Net decrease in cash, cash equivalents and restricted cash from continuing operations | | (103,500 | ) | | — |
| | — |
| | (103,500 | ) |
Cash, cash equivalents and restricted cash of continuing
operations at beginning of the year | | 518,920 |
| | — |
| | — |
| | 518,920 |
|
Cash, cash equivalents and restricted cash of continuing
operations at end of the year | | $ | 415,420 |
| | $ | — |
| | $ | — |
| | $ | 415,420 |
|
| |
(1) | After the elimination of the unrestricted subsidiaries and the physician groups |
EXHIBIT INDEX
|
| | |
| | Agreement and Plan of Merger, dated as of May 20, 2012, by and among DaVita Inc., Seismic Acquisition LLC, HealthCare Partners Holdings, LLC, and the Member Representative.(28)(25) |
| | | |
| | Amendment, dated as of July 6, 2012, to the Agreement and Plan of Merger, dated as of May 20, 2012, by and among DaVita Inc., Seismic Acquisition LLC, HealthCare Partners Holdings, LLC, and the Member Representative.(25)(22) |
| | | |
| | Amendment No. 2, dated as of August 30, 2013, to the Agreement and Plan of Merger, dated as of May 20, 2012, by and among DaVita Inc., Seismic Acquisition LLC, HealthCare Partners Holdings, LLC, and the Member Representative.ü (4) |
| | | |
| | Amendment No. 3, dated as of June 22, 2018, to the Agreement and Plan of Merger, dated as of May 20, 2012, by and among DaVita Inc., Seismic Acquisition LLC, HealthCare Partners Holdings, LLC, and the Member Representative.(30)(26) |
| | |
| | Equity Purchase Agreement, dated as of December 5, 2017, by and among DaVita Inc., Collaborative Care Holdings, LLC, and solely with respect to Section 9.3 and Section 9.18 thereto, UnitedHealth Group Incorporated.(2) |
| | |
| | Amendment No. 1 dated as of September 20, 2018, to that certain Equity Purchase Agreement, dated as of December 5, 2017, by and among DaVita, Inc., a Delaware corporation, Collaborative Care Holdings, LLC, a Delaware limited liability company and a wholly owned subsidiary of Optum, Inc., and solely with respect to Section 9.3 and Section 9.18 thereto, UnitedHealth Group Incorporated, a Delaware corporation.(27) |
| | |
| | Second Amendment to Equity Purchase Agreement by and between DaVita, Inc., a Delaware corporation, and Collaborative Care Holdings, LLC, a Delaware limited liability company, dated as of December 11, 2018, amending that certain Equity Purchase Agreement, dated as of December 5, 2017, by and among DaVita, Inc., Collaborative Care Holdings, LLC, and, solely with respect to Section 9.3 and Section 9.18 thereto, UnitedHealth Group Incorporated (as previously amended).(13) |
| | | |
| | Restated Certificate of Incorporation of DaVita Inc., as filed with the Secretary of State of Delaware on November 1, 2016.(1) |
| | | |
| | Amended and Restated Bylaws for DaVita Inc. dated as of September 7, 2016.(1) |
| | | |
| | Indenture, dated August 28, 2012, by and among DaVita Inc., the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as Trustee.(4) |
| | |
| | Form of 5.750% Senior Notes due 2022 and related Guarantee (included in Exhibit 4.1).(4) |
| | |
| | Indenture, dated June 13, 2014, by and among DaVita Inc., the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as Trustee.(26)(23) |
| | | |
| | Form of 5.125% Senior Notes due 2024 and related Guarantee (included in Exhibit 4.3)4.1).(26)(23) |
| | | |
| | Second Supplemental Indenture for the 5.750% Senior Notes due 2022, dated June 13, 2014, by and among DaVita Inc., the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as Trustee.(21) |
| | |
| | Indenture for the 5.000% Senior Notes due 2025, dated April 17, 2015, by and among DaVita Inc., the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as Trustee.(22)(19) |
| | | |
| | Form of 5.000% Senior Notes due 2025 and related Guarantee (included in Exhibit 4.6)4.3).(22)(19) |
| | |
| | Description of Securities.ü |
| | | |
| | Sourcing and Supply Agreement between DaVita Inc. and Amgen USA Inc. effective as of January 6, 2017.(6)** |
| | | |
| | Equity Purchase Agreement, dated as of December 5, 2017, by and among DaVita Inc., Collaborative Care Holdings, LLC, and solely with respect to Section 9.3 and Section 9.18 thereto, UnitedHealth Group Incorporated.(2) |
| | |
| | Amendment No. 1 dated as of September 20, 2018, to that certain Equity Purchase Agreement, dated as of December 5, 2017, by and among DaVita, Inc., a Delaware corporation, Collaborative Care Holdings, LLC, a Delaware limited liability company and a wholly owned subsidiary of Optum, Inc., and solely with respect to Section 9.3 and Section 9.18 thereto, UnitedHealth Group Incorporated, a Delaware corporation.(31) |
| | |
|
| | |
| | Second Amendment to Equity Purchase Agreement by and between DaVita, Inc., a Delaware corporation, and Collaborative Care Holdings, LLC, a Delaware limited liability company, dated as of December 11, 2018, amending that certain Equity PurchaseCredit Agreement, dated as of December 5, 2017,August 12, 2019, by and among DaVita Inc., Collaborative Care Holdings,certain subsidiary guarantors party thereto, the lenders party thereto, Credit Agricole Corporate and Investment Bank, JPMorgan Chase Bank, N.A. and MUFG Bank Ltd., as co-syndication agents, Bank of America, N.A., Barclays Bank PLC, Credit Suisse Loan Funding LLC, Goldman Sachs Bank USA, Morgan Stanley Senior Funding, Inc. and solely with respect to Section 9.3Suntrust Bank, as co-documentation agents, and Section 9.18 thereto, UnitedHealth Group Incorporated (as previously amended).(14)Wells Fargo Bank, National Association, as administrative agent, collateral agent and swingline lender.(29) |
| | | |
| | First Amendment, dated as of February 13, 2020, to that certain Credit Agreement, dated as of June 24, 2014,August 12, 2019, by and among DaVita Inc., the guarantors thecertain subsidiary guarantors party thereto, the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, Barclays Bank PLC, and Wells Fargo Bank, National Association, as Co-Syndication Agents, Bank of America, N.A., Credit Suisse AG, Goldman Sachs Bank USA, JPMorgan Chase Bank, N.A., Morgan Stanley Senior Funding, Inc.,administrative agent, collateral agent and SunTrust Bank, as Co-Documentation Agents, Barclays Bank PLC, Wells Fargo Securities, LLC, Credit Suisse Securities (USA) LLC, Goldman Sachs Bank USA, J.P. Morgan Securities, LLC, Bank of America, N.A., Morgan Stanley Senior Funding, Inc., and SunTrust Robinson Humphrey, Inc. as Joint Lead Arrangers and Joint Bookrunners, The Bank of Nova Scotia, Credit Agricole Securities (USA) Inc., The Bank of Tokyo-Mitsubishi UFJ, Ltd., and Sumitomo Mitsui Banking Corporation, as Senior Managing Agents, HSBC Securities (USA) Inc., Fifth Third Bank, and Compass Bank as Managing Agents. (21)swingline lender.ü |
| | | |
| | Amendment No. 1, dated as of November 21, 2018, to that certain Credit Agreement, dated as of June 24, 2014, by and among DaVita Inc., the guarantors party thereto, the lenders party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, and the other agents from time to time party thereto.(16) |
| | |
| | Corporate Integrity Agreement, dated as of October 22, 2014, by and among the Office of Inspector General of The Department of Health and Human Services and DaVita Inc.(27)(24) |
| | | |
| | Form of Non-Competition and Non-Solicitation Agreement, dated as of May 20, 2012, between DaVita Inc. and Dr. Robert Margolis, Dr. William Chin, Dr. Thomas Paulsen, Mr. Zan Calhoun, and Ms. Lori Glisson. (28)(25) |
| | | |
| | Employment Agreement, effective July 25, 2008, between DaVita Inc. and Kent J. Thiry.(15)(14)* |
| | | |
| | Amendment to Employment Agreement, effective December 31, 2014, by and between DaVita Inc. and Kent. J. Thiry.(4)* |
| | |
| | Amendment Number Two to Employment Agreement, effective August 20, 2018, by and between DaVita Inc. and Kent J. Thiry.(28)* |
| | |
| | Executive Chairman Agreement between Kent J. Thiry and DaVita, Inc., dated as of April 29, 2019.(15)* |
| | |
| | Restricted Stock Units Agreement, effective as of May 15, 2019, by and between DaVita Inc. and Kent Thiry.(30)* |
| | | |
| | Amendment Number Two to EmploymentPerformance Stock Units Agreement, effective as of August 20, 2018,May 15, 2019, by and between DaVita Inc. and Kent J. Thiry (32).Thiry.(30)* |
| | | |
| | Employment Agreement, effective March 17, 2010,dated as of April 29, 2019, by and between Javier J. Rodriguez and DaVita Inc. and Javier Rodriguez.(20)(15)* |
| | | |
| | Amendment to EmploymentStock Appreciation Rights Agreement, effective December 31, 2014,November 4, 2019, by and between Javier J. Rodriguez and DaVita Inc. and Javier Rodriguez.(32)*ü
|
| | | |
| | Employment Agreement, effective February 21, 2017, by and between DaVita Inc. and Joel Ackerman.(9)* |
| | | |
| | Employment Agreement, effective April 27, 2016, by and between DaVita HealthCare Partners Inc. and Kathleen A. Waters.(6)* |
| | | |
| | Employment Agreement, effective September 22, 2005, by and between DaVita Inc. and James Hilger.(8)* |
| | | |
| | Amendment to Mr. Hilger’s Employment Agreement, effective December 12, 2008.(18)(17)* |
| | | |
| | Second Amendment to Mr. Hilger’s Employment Agreement, effective December 27, 2012.(23)(20)* |
| | | |
| | Third Amendment to Employment Agreement, effective December 31, 2014, by and between DaVita Inc. and James Hilger.(4)*ü |
| | | |
| | Transition Agreement, dated as of July 31, 2018, by and between DaVita Inc. and James Hilger.(30)(26)* |
| | |
|
| | |
| | |
| | Amendment to Stock Appreciation Rights Agreements, entered intoEmployment Agreement, effective as of March 1, 2018,April 29, 2015, by and between DaVita HealthCare Partners Inc. and Carol Anthony Davidson.(29)Michael Staffieri.*ü |
| | | |
| | Consulting Agreement, effective June 15, 2017, by and between DaVita Inc. and Roger J. Valine.(3)* |
| | | |
| | Amendment to Stock Appreciation Rights Agreements, effective June 15, 2017, by and between DaVita Inc. and Roger J. Valine.(3)Form of Indemnity Agreement.(12)* |
| | | |
| | Form of Indemnity Agreement.(12)(7)* |
| | | |
| | Form of Indemnity Agreement.(7)* |
| | |
| | DaVita Deferred Compensation Plan.(9)* |
| | | |
| | Executive Incentive Plan (as Amended and Restated effective January 1, 2009).(19)* |
| | |
| | DaVita Voluntary Deferral Plan.(5)* |
| | | |
| | Deferred Bonus Plan (Prosperity Plan).(16)* |
| | |
| | Amendment No. 1 to Deferred Bonus Plan (Prosperity Plan).(17)* |
| | | |
| | Amended and Restated Employee Stock Purchase Plan.(31)* |
| | |
| | Amendment No. 1 to Deferred BonusDaVita Inc. Severance Plan (Prosperity Plan).(18)for Directors and Above.(4)* |
| | | |
| | Amended and Restated Employee Stock Purchase Plan.(13)DaVita Inc. Non-Employee Director Compensation Policy. (18)* |
| | | |
| | DaVita Inc. Severance Plan for Directors and Above.*ü
|
| | |
| | Change in Control Bonus Program.(18)* |
| | |
| | DaVita Inc. Non-Employee Director Compensation Policy. (29)* |
| | |
| | Amended and Restated DaVita Inc. 2011 Incentive Award Plan.(11)* |
| | | |
| | Amendment No. 1 to the Amended and Restated DaVita Inc. 2011 Incentive Award Plan.(32)* |
| | |
| | DaVita Inc. Rule of 65 Policy, adopted on August 19, 2018.(32)(28)* |
| | | |
| | Form of Stock Appreciation Rights Agreement-Executives (DaVita Inc. 2011 Incentive Award Plan).(30)* |
| | |
| | Form of Restricted Stock Units Agreement-Executives (DaVita Inc. 2011 Incentive Award Plan).(30)* |
| | |
| | Form of Performance Stock Units Agreement -Executives (DaVita Inc. 2011 Incentive Award Plan).(30)* |
| | |
| | Form of Stock Appreciation Rights Agreement-Board members (DaVita Inc. 2011 Incentive Award Plan).(30)(26)* |
| | | |
| | Form of 2014 Long Term Incentive Program Stock Appreciation Rights Agreement under the DaVita Inc. 2011 Incentive Award Plan and Long-Term Incentive Program.(10)* |
| | | |
| | Form of 2014 Long Term Incentive Program Restricted Stock Units Agreement under the DaVita Inc. 2011 Incentive Award Plan and Long-Term Incentive Program.(10)* |
| | | |
| | Form of Stock Appreciation Rights Agreement-Board members (DaVita Inc. 2011 Incentive Award Plan).(24)(21)* |
| | |
| | Form of Stock Appreciation Rights Agreement-Executives (DaVita Inc. 2011 Incentive Award Plan).(20)* |
| | |
| | Form of Restricted Stock Units Agreement-Executives (DaVita Inc. 2011 Incentive Award Plan).(21)* |
| | |
| | Form of Long-Term Incentive Program Award Agreement (For 162(m) designated teammates) (DaVita Inc. 2011 Incentive Award Plan).(20)* |
| | |
| | Form of Long-Term Incentive Program Award Agreement (DaVita Inc. 2011 Incentive Award Plan).(20)* |
| | |
| | Form of Restricted Stock Units Agreement-Executives (DaVita Inc. 2011 Incentive Award Plan).(30)* |
| | |
| | Form of Performance Stock Units Agreement-Executives (DaVita Inc. 2011 Incentive Award Plan).(30)* |
| | | |
|
| | |
| | Form of Stock Appreciation Rights Agreement-Executives (DaVita Inc. 2011 Incentive Award Plan).(23)(30)* |
| | | |
| | Form of Restricted Stock Units Agreement-Executives (DaVita Inc. 2011 Incentive Award Plan).(24)* |
| | |
| | Form of Long-Term Incentive Program Award Agreement (For 162(m) designated teammates) (DaVita Inc. 2011 Incentive Award Plan).(23)(30)* |
| | | |
| | Form of Long-Term Incentive Program Award AgreementPerformance Stock Units Agreement-Executives (DaVita Inc. 2011 Incentive Award Plan).(23)(30)* |
| | |
| | Form of Stock Appreciation Rights Agreement-Executives (DaVita Inc. 2011 Incentive Award Plan).(30)* |
| | | |
| | List of our subsidiaries.ü |
| | | |
| | Consent of KPMG LLP, independent registered public accounting firm.ü |
| | | |
| | Powers of Attorney with respect to DaVita. (Included on Page S-1). |
| | | |
| | Certification of the Chief Executive Officer, dated February 22, 2019,21, 2020, pursuant to Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.ü |
| | | |
| | Certification of the Chief Financial Officer, dated February 22, 2019,21, 2020, pursuant to Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.ü |
| | | |
| | Certification of the Chief Executive Officer, dated February 22, 2019,21, 2020, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.ü |
| | | |
| | Certification of the Chief Financial Officer, dated February 22, 2019,21, 2020, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.ü |
| | | |
| 101.INS | | XBRL Instance Document - the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.ü |
| | | |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document.ü |
| | |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document.ü |
| | | |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document.ü |
| | | |
| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document.ü |
| | | |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document.ü |
| | |
| 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).ü |
|
| |
| ü | Included in this filing. |
| * | Management contract or executive compensation plan or arrangement. |
| ** | Portions of this exhibit are subject to a request for confidential treatment and have been redacted and filed separately with the SEC. |
| |
| (1) | Filed on November 2, 2016 as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016. |
| |
| (2) | Filed on December 6, 2017 as an exhibit to the Company’s Current Report on Form 8-K. |
| |
| (3) | Filed on November 7, 2017 as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017. |
| |
| (4) | Filed on August 28, 2012February 22, 2019 as an exhibit to the Company’s CurrentAnnual Report on Form 8-K.10-K for the year ended December 31, 2018. |
| |
| (5) | Filed on November 8, 2005 as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005. |
| |
| (6) | Filed on May 2, 2017 as an exhibit to the Company’s Quarterly Report on 10-Q for the quarter ended March 31, 2017. |
| |
| (7) | Filed on March 3, 2005 as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. |
| |
| (8) | Filed on August 7, 2006 as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ending June 30, 2006. |
| |
| (9) | Filed on February 24, 2017 as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. |
| |
| (10) | Filed on November 6, 2014 as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014. |
| |
| (11) | Filed on April 28, 2014 as Appendix A to the Company's Definitive Proxy Statement on Schedule 14A. |
| |
| (12) | Filed on December 20, 2006 as an exhibit to the Company’s Current Report on Form 8-K. |
| |
| (13) | Filed on June 4, 2007 as an exhibit to the Company’s Current Report on Form 8-K. |
| |
(14) | Filed on December 17, 2018 as an exhibit to the Company’s Current Report on Form 8-K. |
| |
(15)(14) | Filed on July 31, 2008 as an exhibit to the Company’s Current Report on Form 8-K. |
| |
(16)(15) | Filed on November 26, 2018April 29, 2019 as an exhibit to the Company’sCompany's Current Report on Form 8-K. |
| |
(17)(16) | Filed on February 29, 2008 as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. |
| |
(18)(17) | Filed on February 27, 2009 as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 20082008. |
| |
(19)(18) | Filed on June 18, 2009 as an exhibit to the Company’s Current Report on Form 8-K. |
| |
(20) | Filed on April 14, 2010 as an exhibit to the Company’s Current Report on Form 8-K. |
| |
(21) | Filed on August 1, 2014May 7, 2019 as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2014.March 31, 2019. |
| |
(22)(19) | Filed on April 17, 2015 as an exhibit to the Company’s Current Report on Form 8-K. |
| |
(23)(20) | Filed on March 1, 2013 as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. |
| |
(24)(21) | Filed on August 4, 2011 as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2011. |
| |
(25)(22) | Filed on July 9, 2012 as an exhibit to the Company’s Current Report on Form 8-K. |
| |
(26)(23) | Filed on June 16, 2014 as an exhibit to the Company's Current Report on Form 8-K. |
| |
(27)(24) | Filed on October 23, 2014 as an exhibit to the Company's Current Report on Form 8-K. |
| |
(28)(25) | Filed on May 21, 2012 as an exhibit to the Company's Current Report on Form 8-K. |
| |
(29) | Filed on May 3, 2018 as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018. |
| |
(30)(26) | Filed on August 1, 2018 as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018. |
| |
(31)(27) | Filed on September 24, 2018 as an exhibit to the Company’s Current Report on Form 8-K. |
| |
(32)(28) | Filed on August 23, 2018 as an exhibit to the Company’s Current Report on Form 8-K. |
| |
| (29) | Filed on August 14, 2019 as an exhibit to the Company’s Current Report on Form 8-K. |
| |
| (30) | Filed on July 22, 2019 as an exhibit to the Company’s Tender Offer Statement on Schedule TO-I. |
| |
| (31) | Filed on May 10, 2016 as an appendix to the Company's Proxy Statement on DEF 14A. |
| |
| (32) | Filed on December 6, 2019 as an appendix to the Company's Proxy Statement on DEF 14A. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, we have duly caused this Annual Report on Form 10-K to be signed on our behalf by the undersigned, thereunto duly authorized, in the City of Denver, State of Colorado, on February 22, 2019.21, 2020.
|
| | |
| DAVITA INC. |
| | | |
| By: | | /S/ KJENTAVIER J. TRHIRYODRIGUEZ |
| | | KentJavier J. ThiryRodriguez
Chairman and Chief Executive Officer
|
KNOW ALL MEN BY THESE PRESENT, that each person whose signature appears below constitutes and appoints KentJavier J. Thiry,Rodriguez, Joel Ackerman, and Kathleen Waters, and each of them his or her true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | |
| Signature | | Title | | Date |
| | | |
/S/ KJENTAVIER J. TRHIRYODRIGUEZ | | Chairman and Chief Executive Officer | | February 22, 201921, 2020 |
KentJavier J. ThiryRodriguez | | (Principal Executive Officer) | | |
| | | |
/S/ JOEL ACKERMAN | | Chief Financial Officer and Treasurer | | February 22, 201921, 2020 |
| Joel Ackerman | | (Principal Financial Officer) | | |
| | | |
/S/ JAMES K. HILGER | | Chief Accounting Officer | | February 22, 201921, 2020 |
| James K. Hilger | | (Principal Accounting Officer) | | |
| | | | |
/S/ KENT J. THIRY | | Executive Chairman and Director | | February 21, 2020 |
| Kent J. Thiry | | | | |
| | | | | |
/S/ PAMELA M. ARWAY | | Director | | February 22, 201921, 2020 |
| Pamela M. Arway | | | | |
| | | |
/S/ CHARLES G. BERG | | Director | | February 22, 201921, 2020 |
| Charles G. Berg | | | | |
| | | |
/S/ BARBARA J. DESOER | | Director | | February 22, 201921, 2020 |
| Barbara J. Desoer | | | | |
| | | |
/S/ PASCAL DESROCHES | | Director | | February 22, 201921, 2020 |
| Pascal Desroches | | | | |
| | | |
/S/ PAUL J. DIAZ | | Director | | February 22, 201921, 2020 |
| Paul J. Diaz | | | | |
| | | |
/S/ PETER T. GRAUER | | Director | | February 22, 201921, 2020 |
| Peter T. Grauer | | | | |
| | | |
/S/ JOHN M. NEHRA | | Director | | February 22, 201921, 2020 |
| John M. Nehra | | | | |
| | | | | |
/S/ WILLIAM L. ROPER | | Director | | February 22, 201921, 2020 |
| William L. Roper | | | | |
| | | | | |
/S/ PHYLLIS R. YALE | | Director | | February 22, 201921, 2020 |
| Phyllis R. Yale | | | | |
DAVITA INC.
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
| | | | | Balance at
beginning of year | | Acquisitions | | Amounts
charged to income | | Amounts written off | | Balance
at end of year | | Balance at
beginning of year | | Acquisitions | | Amounts
charged to income | | Amounts written off | | Balance
at end of year |
| Description | | |
| | | (in thousands) | | (in thousands) |
| Allowance for uncollectible accounts: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Year ended December 31, 2019 | | | $ | 52,924 |
| | $ | — |
| | $ | 21,715 |
| | $ | 66,311 |
| | $ | 8,328 |
|
| Year ended December 31, 2018 | | $ | 218,399 |
| | $ | — |
| | $ | 42,287 |
| | $ | 207,762 |
| | $ | 52,924 |
| | $ | 218,399 |
| | $ | — |
| | $ | 42,287 |
| | $ | 207,762 |
| | $ | 52,924 |
|
| Year ended December 31, 2017 | | $ | 238,897 |
| | $ | — |
| | $ | 478,365 |
| | $ | 498,863 |
| | $ | 218,399 |
| | $ | 238,897 |
| | $ | — |
| | $ | 478,365 |
| | $ | 498,863 |
| | $ | 218,399 |
|
| Year ended December 31, 2016 | | $ | 251,734 |
| | $ | — |
| | $ | 442,985 |
| | $ | 455,822 |
| | $ | 238,897 |
| |
