Davita Inc. Q2 FY2020 Earnings Call

Good evening. My name is Andy, and I will be your conference facilitator today. At this time I would like to welcome everyone to the DaVita Second Quarter 2020 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. Thank you. Mr. Gustafson you may begin your conference.

Thank you, and welcome, everyone to our second quarter conference call. We appreciate your continued interest in our company. I'm Jim Gustafson, Vice President of Investor Relations. And joining me remotely today are Javier Rodriguez, our CEO; Joel Ackerman, our CFO, and LeAnne Zumwalt, Group Vice President. Please note that during this call, we may make forward-looking statements within the meaning of the federal securities laws. All of these statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. For further details concerning these risks and uncertainties, please refer to our second quarter earnings press release and our SEC filings, including our most recent annual report on Form 10-K and subsequent quarterly report on Form 10-Q. Our forward-looking statements are based upon information currently available to us, and we do not intend and undertake no duty to update these statements. Additionally, we'd like to remind you that during this call, we will discuss some non-GAAP financial measures. A reconciliation of these non-GAAP measures to the comparable GAAP financial measures is included in our earnings press release submitted to the SEC and available on our website. I'll now turn the call over to Javier Rodriguez.

Thank you, Jim, and good afternoon, everyone. Thank you for joining us for our second quarter financial results. First I want to start as I did last quarter by acknowledging and thanking all of our teammates, especially the thousands of clinicians who provide our patients with life-sustaining care each and every day. The past several months have been amongst the finest and most exceptional chapters in our history, reflecting the compassion and the dedication of our teammates. The company's strong performance this quarter demonstrates the benefits of our patient-centric, comprehensive kidney care platform, beginning with CKD all the way through ESRD and transplant. The continuity of care that we offer our patients allows us to meet the patient where they are through offering modality options in the hospital, in the patient's home, or in the dialysis center. We're now nearly six months into this pandemic. And if you were to walk into one of our centers, you would still experience a high level of energy and intensity amongst our teammates as they provide for the health and safety of our patients. We have supplemented our effective infection control policies by conducting COVID tests for patients and teammates both within our lab, as well as with special partnerships with external labs. These physician and clinician-led efforts have enabled us to maximize the number of patients treated outside of the hospital, which of course is good for patients and has helped reduce the burden on hospitals. While we cannot know for certain what lies ahead, I can say that we feel prepared to continue our work to keep our patients and our teammates safe. We had a strong financial second quarter. As a result, we're raising our adjusted earnings per share guidance for the year by $0.50 to $6.25 to $6.75. Our strong operational performance came despite investments and expenses we incurred in response to COVID offset by savings associated with COVID in the form of reduced travel and health benefit expenses, among other items, which Joel will explain in more detail. Today, I'd like to cover four additional items. Let me start off by talking about treatment volumes and commercial mix, two of the largest uncertainties associated with the pandemic that we identified last quarter. Our patient census has been negatively impacted primarily by COVID-related deaths and delayed patient starts on dialysis, and we expect our treatment volumes for the remainder of the year to fall below the low end of the range of 1.5% to 2.5% provided in September. The patients that unfortunately passed away due to COVID were primarily among our older population, and therefore, were more frequently covered by government insurance. As a result thus far, we have not seen a material negative impact on our commercial mix, although with only three months of actual data on job losses, any assessment of our commercial patient population and their ability to access private versus government health insurance are preliminary. What we do know is that our private pay census fared better than expected in the quarter as our patients worked hard to maintain their employment and their insurance coverage. While the long-term impact of COVID remains uncertain, some natural offset exist, and we believe in the resiliency of our business model. For the second topic, I'd like to share some exciting developments in our home business. As you know, we start from a leadership position in home with approximately 14% of our patient population on home modality and more than 25% utilizing a home modality at some point during their care journey. Our home growth continues to outpace our in-center dialysis growth by more than five times and during this pandemic we've seen a slight uptick in interest from patients wanting to dialyze at home. We now have over 28,000 home patients, who received training, education, lab drug and medication at over 1,750 programs across the United States. In fact, 95% of dialysis patients live within 30 miles of a DaVita home program. The scale of our home business is the result of many years of investment that we have made in capabilities, education, and technology to help give patients and physicians the option to choose home dialysis, if it is right for them. Let me provide a couple of examples. First, several years ago, we launched our home remote monitoring platform, which enables daily monitoring of vitals for approximately 5,000 of our high-risk patients. In addition, early last year, we released a robust home telehealth platform, which now has a user base of over 19,000 patients. More recently, we've continued building out these platforms to provide patient support features like virtual disease management programs, virtual patient support groups, and capabilities that promote continuity of care and support return home therapy for hospitalized patients. We believe that these capabilities have allowed us to significantly increase the frequency of home patient touches to continue to enhance the quality of care and to help extend the amount of time home patients spend on the therapy. In fact, having telehealth in place has also served as a significant advantage in our ability to keep these patients and their caregivers connected during the pandemic. A second example we're excited about is the launch of our Artificial Intelligence system that helps identify PD patients that may be at risk for hospitalization, which is one of the largest causes of home patients switching to in-center dialysis. Home growth and innovation continue to be amongst my top priorities. And we continue to pilot many new programs and ideas around the country to help support patients for whom home dialysis is the best modality. We also believe that our full suite of modality offerings enable us to help patients seamlessly access the right modality at the right time in their dialysis journeys. Our patients can continue to benefit from our national footprint, our physician partnerships, and our unique capabilities as we seek to lead the industry in growing home. My third topic is calcimimetic. As many of you know, we're now moving into the next phase of calcimimetic reimbursement as CMS proposed including calcimimetic in the Medicare bundle payment in the recently issued proposed payment rule for 2021. We believe that the TDAPA period gave CMS sufficient time to observe utilization and pricing data, especially in light of the mix of IV therapy and oral therapy. Over the last couple of years, our physicians and our clinical teams developed patient-centric protocols to achieve our high-quality standards for care, which in this instance also drove down the cost for the healthcare system because the protocol resulted in a higher mix of low-cost generic drugs and a lower mix of higher-cost IV alternatives. We believe that the new rule will result in similar economics for calcimimetics in 2021 as we have guided in 2020, which will help to offset the underfunding of the remaining Medicare bundle. My last topic is Medicare Advantage. As many of you are aware, in 2016, Congress enacted the 21st Century CARES Act to provide all Medicare-eligible patients with the option to enroll in Medicare Advantage plans, including all ESRD patients. We believe that the ending of the barriers that have prevented active dialysis patients from enrolling in Medicare Advantage will be a positive development for many patients, providers, and managed care organizations as this new rule will expand the opportunity to provide coordinated care to patients who suffer from multiple chronic conditions. Unfortunately, CMS' recent ruling that loosen MA network adequacy requirements for only dialysis services calls into question the breadth of the choices available to dialysis patients. There are many factors that will shape the eventual enrollment in Medicare Advantage plans. And although we have no clear visibility, we do continue to believe that enrollment in MA plans by ESRD patients will be gradual over the coming year. Now, I'll pass it on to Joel to provide an update on our Q2 results and to discuss our financial outlook.

Thanks, Javier. We had a strong quarter, despite the net headwind from our COVID response, primarily as a result of improved adjusted margins in our core Kidney Care business. Here are some specifics. Our non-acquired treatment growth slowed from 2.3% in Q1 to 1.6% in Q2. We believe the primary drivers of this decrease were COVID-related, as increased mortality and lower new patient starts were partially offset by a nationwide decrease in kidney transplants and lower missed treatments. We expect this net COVID NAG headwind to persist at least until this time next year. Total revenue was in line with our expectations as a result of lower volumes offset by higher revenue per treatment. RPT was up due to normal seasonality in co-insurance and deductibles, and the temporary Medicare sequestration release, partially offset by lower calcimimetics revenue. As Javier said, while the long-term impacts of COVID remain uncertain, we did not see any net impact on our commercial mix quarter-over-quarter. There are a number of factors that we believe underlie this dynamic including among other things the job loss rate for our commercial patient population was lower than the national unemployment rate. Many of our commercial patients who were initially furloughed have since returned to work or expect to return to work. Finally, we believe that our patients who were laid off have been enrolling in other commercial insurance such as COBRA and exchange plans at a higher rate than we have seen in the past. Adjusted operating income margin was strong for the quarter at 16%. On a year-over-year basis our margin expanded due to strong cost management across the P&L and an improvement in RPT. Calcimimetics contributed approximately $19 million to our operating income in the second quarter. Now let me give you some details about the impact of COVID on our financial results. For Q2 we estimate that we incurred expenses and other negative impacts on our operating income of approximately $85 million. Incremental compensation and benefits to our teammates was the largest contributor to these costs. Offsets in the quarter to the $85 million include, among other things, decreased travel, lower health benefits expenses, and lower facility and training costs. We also had the benefit of the temporary halt on Medicare sequestration that started in May. As a result of these offsets, we estimate that the net impact of COVID on our operating income for the quarter was between $20 million and $30 million. Looking forward to the second half of 2020, the impact of COVID is hard to forecast given the uncertainty and the progress of the virus and the economic impact. While extreme situations could occur that are beyond our range, we have incorporated a wide range of scenarios in our updated guidance including scenarios in which the net financial impact of COVID-19 in each of Q3 and Q4 could be similar to what we experienced in Q2. Let me next turn to our 2020 guidance. Given the strength of our first half performance, we are updating our guidance ranges. We are raising our adjusted diluted earnings per share guidance range by $0.50 from $6.25 to $6.75. We are raising the guidance range for adjusted operating income margin to 14% to 14.75%. We're increasing our cash flow guidance from $800 million to $1 billion, an increase of $200 million over our previous guidance range. We are maintaining our guidance range for revenue of $11.5 billion to $11.7 billion but we now expect to be below the midpoint of the range due to the anticipated slowdown in volume growth. For capital expenditures, we provided an estimated range of $700 million to $750 million. We now expect to come in at the bottom end of that range as the pandemic has delayed some project spending. While we will not provide specific guidance on 2021 today, I do want to highlight some of the larger anticipated headwinds and tailwinds compared to our 2020 non-GAAP adjusted operating income. Primary anticipated headwinds are the volume and mix implications of COVID. The primary anticipated tailwinds include the assumed lack of valid initiative defense costs and hopefully a reduction in net COVID-related direct impact. On calcimimetics, while we still need to wait for CMS' final rule later this fall, we do not expect for calcimimetics to be a large headwind or tailwind to adjusted operating income. Finally, on share repurchases. We had indicated in March that we are temporarily suspending share repurchases. We did not repurchase any shares during Q2 or during the month of July. We are carefully considering when to restart our share repurchase activity and will do so at the discretion of management and within the authorization provided by our Board of Directors. With that operator, please open the line for Q&A.

Thank you. We will now begin the question-and-answer session of today’s conference. Speakers, the first question is from Pito Chickering from Deutsche Bank. Your line is now open.

Good morning, guys. Thanks for taking my questions. If you can talk a little bit more about operating income guidance. Looking at the first half of the year at 16.2%, despite all these COVID costs and looks as though the implied margin for the back half of the year is sort of between 12% and sort of 13.4%. So a pretty big decline. Can you sort of walk us through sort of how we would get there? Is it from the treatment growth sort of slowing down? Just walk us through the details of sort of how we get to sort of pretty big margin contraction in the back half of the year?

Sure. Hello, Pito. This is Joel. If we consider the midpoint of our range, while we aren’t providing specific guidance on operating income, you could estimate a decline of about $175 million in operating income from the first half of the year to the second half. The primary factors contributing to this are the decrease in calcimimetics profits, which we previously indicated would be between $40 million and $70 million, and we anticipate that figure to be in the upper half of that range, mostly impacting the first half of the year. The second factor is the ballot initiative in California, which we have indicated will cost about $0.50 per share, occurring mainly in the latter half of the year. Thirdly, the costs related to COVID may decrease over the year, but so will the offsets. We have a broad range of estimates for the impact of COVID in the second half, which will cover two quarters, while the first half included only one quarter. Combining these three factors accounts for the majority of the $175 million decline. Additionally, there were some small one-time benefits in the first half that helped operating income, and there could be some negative one-time effects in the second half. Lastly, due to COVID and other factors, there are some costs we did not incur in the first half that we expect might arise in the second half, including general and administrative projects and facility maintenance, which would contribute to that $175 million decline in adjusted operating income at the midpoint of our guidance range.

Okay. And then as a follow-up can you talk a little bit more about the final Medicare Advantage rule? Can you sort of walk us through sort of how that impacts your negotiations with MA plans? When do you think you'll start seeing an impact from the changing rule? Is it a 2021 event? Because of the multiyear contracts is it more spread out? And in your discussions with MA plans, have you had conversations around bonus payments for better managing patients or is it too soon? And then finally what's the checks and balances on the MA plans? They don't certify a network that is too narrow?

Pito let me grab that. And Joel if you want to supplement it and you had several pieces if I miss anything please come at me again. The short answer is we don't know what the implications are. What we do know is that from a network adequacy there used to be an objective standard that had time and distance and now its subjective standard. It might mean nothing. It might mean that the plan's just now attest and life goes on as it did in the past. It also might mean that some plans might get aggressive and not have adequate standards in networks. So it's too early to tell. But from our perspective it is pulling out and discriminating against the ESRD patients because if you don't have the proper network adequacy you in essence are discouraging enrollment. And so from our perspective it's just an unusual thing and it goes against the patient's rights. We waited for a very long time to have the ESRD patients be on equal footing to everyone and they deserve the right to pick MA just like anyone else. And so that was a disappointing part. As it relates to negotiations, as you said, we have multi-year contracts with most of our MA plans. We are working with them. We think that we combined can work well together, can work on MLR, and could do really good things for the patients as it relates to coordination of care. But it is too early to tell as not many contracts have occurred. Did I miss any of your question?

No. But I mean I guess the last one would be what are the checks and balances? So if the MA plan has to self-certify what's the balance to make sure that they don't self-certify a network that is too narrow?

Yes. I mean that's part of the problem. But right now it goes into some kind of subjective attestation that they have a proper network. And from our perspective of course what we're doing is keeping our radar up to make sure that the spirit of the law is adhered to. But we don't know how it will be enforced.

Great. Thank you so much.

Thank you.

Great. Just wanted to maybe follow up on that I guess you mentioned most of your contracts are multi-year contracts. So does that mean that you're entering 2021 with relatively similar economics within your MA plans as you have today in 2020?

I think it's fair to say that. Yes, on any given year you have renegotiations, but it's the same every year. Once in a while they overlap. But it is a fair assumption. At this juncture, of course, we still have the back end of the year to do negotiations. And there is a big appetite from us and from the plans on trying to do something that is useful and creative to the system so that we take more risk and provide higher-end services to the patients. So we're still in the conversations. We'll see how it pans out.

Yes, it just occurred a couple of months ago, so not many contracts may have been put into effect yet. Are you currently having discussions with health plans? Do you think they are considering making significant changes at this time, or do you have any insights?

Yes. I think the reality, Kevin, is that everybody is trying to do something constructive as it relates to this opportunity for the patients to have coordinated care. And so the plans and us are trying to see what risk appetite they have, what can our systems do, what can their system do, but both sides have a big appetite to do something that's useful for this patient population. And so we'll see how that pans out over time.

And is there a point in time this year where you think you would have a better sense of this on the Q3 call? Will you pretty much have good visibility as far as 2021 goes or do we have to wait until Q4 results?

I think it will take a little longer to play out because of the interplay of expirations and when contracts come up coupled with the fact that I don't know how COVID is going to impact negotiations. So if I had to guess, I think it's going to take a bit longer than that.

Okay. And then Joel, I guess as far as your calcimimetics point, I guess you're saying that next year it will be neutral to earnings. So if you're making close to $70 million this year, the thought is that it should be a similar number next year. Is that the right way to think about it?

Yes. So look there remains some uncertainty for next year, but there was certainly a scenario where the operating income went to zero. So relative to that, we feel like we're in much better shape and I'd say $70 million is a reasonable midpoint of the range. That said, I would highlight one thing that's important for the way we're thinking about operating income going forward, which is we have called out calcimimetics as something that I guess, I'd call nonrecurring because of the TDAPA period and the nature of TDAPA reimbursement it is not permanent. As this enters the bundle next year, I would consider the operating income that we are generating from calcimimetics to now be part of our core operating income because it has permanent funding. It's a permanent component of the bundle. We're going to stop calling it out and in my mind, it will become part of our core earning power of the business.

And Kevin, I'll just add one point in case it's not clear for some. The reason why we don't have a precise number and Joel will give you a bit of a range is because CMS is going to adjust the amount with Q4 ASP and we don't have an exact number, we have an estimate.

Okay. That all makes sense. And I guess the way to think about it is that in the first half of next year, it will be a headwind. But in the back half of next year, year-over-year it will be a tailwind because it will be uniformly spread out throughout the year, sort of front-end loaded this year.

I think that's a good way to think about it.

Thanks for the question. I was a bit surprised when you mentioned that you might not know how the Medicare Advantage networks look by your next call. My understanding is that the plans need to release their products by mid-October. At that point, shouldn't they have to publish their networks? Wouldn't you be able to tell if you're in or out of the network for 2021?

Yes you're absolutely correct, Justin. So maybe I was answering a different question which is I think what I was answering is will you understand the sustainability of there's going to be macro changes. In the short-term networks, I don't anticipate anything major changing. I could be surprised, but I don't anticipate that. What I was answering is how it will change over time. And I thought that, by then we would not see how it will behave over an extended period of time.

Got it. So the takeaway is given your conversations and given how late we are in the year already, you don't think there's much likelihood of DaVita being removed from a network in Medicare Advantage for 2021. But there could be some evaluation over time into 2022 and 2023, in terms of pricing and network design?

Yes. I mean, I said it differently. You have some add backs, but you won't have a significant part of the portfolio or anything. And so that will play over time. And so you are correct in your assumptions that in the fall, we will have clarity. But as you know, you could be in the network in the fall and then a month or two later you can be out of network. So I don't know how much you can bank on that fall in network statement holding for the future.

Thank you. I wanted to ask about your revenue per treatment, which increased quite a bit sequentially. Can you provide more details on this, especially since calcimimetics seem to be declining? Excluding calcimimetics, what is the number and the sequential increase? Also, what key drivers should we focus on?

Sure. So, ex-calcimimetics it's between $5 and $6. We're talking quarter-over-quarter RPT change. A lot of that is seasonal. And think of coinsurance and deductibles and some lower bad debt associated with patients flowing through those, that is by far the biggest factor. The other stuff is just some, I'd say, typical bouncing around of MA mix and commercial mix and a little bit of pricing. It's mostly a seasonal impact.

Yes. Joel, the only thing I would add to that is, there's a little sequestration in there as well.

Yes. Yes. I forgot about that. Thank you, Javier.

Yes, me too. So that's a seasonal impact.

I am sorry, Justin, just to be clear, the number I gave backed out the sequestration. So that $5 to $6 was without sequestration. Sequestration is worth about $1.5.

Okay. And what was calcimimetics worth? Since we're on this topic.

I know, someone was going to ask me that. I think it was $0.50 although, I'll get you that exact number.

Is that revenue or profit?

No, I'm sorry. Ignore the $0.50 number. The RPT from calcimimetics went from $9.55 to $7, so about a $2.5 decline as a result of calcimimetics RPT. The OI, so the dollar number went from $35 million in Q1 to $19 million in Q2.

Okay. And then, in terms of commercial mix and commercial treatment growth, you're saying mix was flat and therefore commercial patient growth was similar to overall patient growth? And mix didn't have much to do with this, in terms of that $5 to $6?

Right.

Is this a reasonable number to start from regarding ex-calcimimetics? Do you think this is a good estimate for the third and fourth quarters that we should consider?

I think it is a reasonable starting point, although, I think, you'll see that negative seasonality in Q1, you'd expect to see that next year. So don't use it as an annual run rate, but use it as a number for the next couple of quarters.

Thanks. I'm still trying to wrap my head around the implied core growth in the quarter. You guys usually have tremendous visibility into a lot of the expenses as you set your original plan. And now, we're looking at a number that's much higher. So it certainly seems to imply that something got much better. So I'm really kind of curious what that is, because as we net out the COVID cost in calcimimetics to sequester, everything you've laid out, I mean, it implies, by my math, that the core operating income was up 8% year-over-year. So I'm just trying to take a crack at this from a cost structure standpoint again. Is there anything else that you can point to that has come in meaningfully below what your original expectations were coming into the year?

So, Whit, to explain why the numbers are better than we anticipated, it's primarily due to core margin. The core business is performing well, and I would highlight that productivity is somewhat better than expected. Facility costs are also somewhat better than anticipated. RPT is slightly better, but this is somewhat counterbalanced by lower volume. Essentially, core margin is largely driven by effective cost management.

Okay. Is there any way to put numbers around either the COBRA or the exchange uptake? I mean, I presume you have a lot of data internally around your patients and their coverage. And I'm just sort of trying to wrap my head around the conversion rate into COBRA, because I presume that it's fairly high. So I thought, I'd just maybe ask a little bit more directly the question.

I looked at the question you're asking we don't disclose it in detail. But I think what you're trying to get to directionally is, do we have a big spike in COBRA that in 18 months or in some date in the future that will come to roost. Is that fair where you're going?

No, that isn't the premise at all. The debate in the marketplace, to be honest, is that you are very dependent on your commercial mix, which has raised concerns. My point is that many patients discover they have alternative options, and a significant percentage of them are obtaining coverage through COBRA. So, the premise was actually the complete opposite.

Yes. I think what I would say is what we mentioned earlier, which aligns with your perspective. Our business significantly depends on that patient population. We have been greatly impressed by our patients' commitment to maintaining their commercial coverage in various ways. As Joel pointed out, there is a clear difference between being furloughed and experiencing permanent job loss, and we have observed that a substantial number of our patients who were furloughed are back at work. Additionally, among those who faced permanent job loss, which was fewer than we expected, many have found alternative coverage. I believe that addresses the entire situation.

No it's helpful. And maybe one last one and this is perhaps an impossible question but I thought I'd ask it. Javier what does a hypothetical Biden administration mean for DaVita and the industry? I mean the charitable premium rule has been sitting out at the OMB forever. I mean that was obviously there under the prior administration who knows if that revives itself I have no idea what the status of it is. And we rarely talked about public option Medicare expansion on these calls maybe we're all just smart enough to be more skeptical on policy like this. But I'd just be curious to hear your general thoughts about what Biden would mean?

It's a great question that we've discussed. Generally, we strive to communicate with both Republicans and Democrats because our issue affects both sides. The most significant change regarding policy probably revolves around tax matters, particularly in relation to a Biden administration and the control of the Senate, which will greatly influence tax policy. Regarding health care policy, as you mentioned, it's a much larger challenge to alter, and we will certainly be involved. However, our focus is to continue advocating for our patients and for integrated care, regardless of who is in the White House.

Okay. Thanks, a lot.

Thank you.

I wanted to just come back to one topic that's been asked about a few different ways and I'll ask it a little bit different see if I can get a little more help. Obviously, an amazing job on expense management maybe 2Q is turning out to be the amazing cost management quarters. But when you had laid out last quarter up to an incremental $100 million of COVID expenses, which is like $13 a treatment certainly didn't think patient care costs would go up $0.62 sequentially. So I've heard the comments about the productivity, the facility costs health benefits. I guess, could we just talk a little more about the source of the productivity? I know you would even for a period of time I think were paying an extra $100 a month to a fair number of your teammates and it's kind of the opposite of productivity you had set up some split shifts to sort of isolate COVID positive and suspected patients. So the whole orientation, I guess was this is going to be the opposite of a really strong productivity quarter and yet you've performed really, really well. So maybe just some examples of how you're finding this productivity and what sort of facility costs? And was the health benefits piece just your own employees consuming less health care and that was quite material. I know you've been asked several times. So just anything incremental would just help us sort of think about modeling going forward.

Yes. There's a lot going on and we're very proud, Gary, of the cost management situation. So let me try to be as helpful as possible because there are several things. First a clarification yes on our health care expenditures our teammates just like everybody else used less benefits on non-essential care. So that is one. Number two our caregivers' sense of purpose was really passionate and so therefore we had less turnover because people felt that sense of obligation to take care of our patients. And so the combination of economic need and appreciating a job, while so many people were furloughed and laid off and the sense of commitment to our patients had less training expense. And then the last thing that I would say is that also there were some of our teammates that were COVID positive. And so what we ended up doing is having to have basically in some places like New York and others where staffing was really at a premium. And so when you cohorted centers, et cetera which is what you're alluding to earlier sometimes those shifts were not as inefficient as we anticipated, because those shifts tended to be more full than once anticipated. And so if you have a full COVID positive shift even though it's cohorted, it's not inefficient. When it's really inefficient is when you have one or two patients in it. And so the cumulative math compounded over the quarter and we were very diligent in trying to manage it all.

That's helpful. Two more quick ones. On the $35 million legal charge was that related to any legal issue that had been historically disclosed in your filings? Or was this a professional liability issue? Or is there any other color on that?

Yes, I'll take that one, Gary. It was related to shareholder litigation that's been hanging out there for a bunch of years related to CPA. Our view is what we did was appropriate, but to just clean this up and move on we thought it was worth settling this. So it's related to that issue.

Thank you. And then just last one for me. And I've just forgot the difference between your 0.7% increase in treatments per day and your 1.6% normalized when you have the exact same number of treatment days 78.0, 78.0 so the calendar isn't driving that and I don't think there's been divestitures. So I'm just trying to recall how we square that difference?

Yes. There's a bunch of noise associated with divestitures and some other things, but there is one big movement that I would highlight there, which is we had a bunch of clinics that we deconsolidated as of the first of the year. And those are treatments that we would back out of NAG, but we don't back them out of the treatment count. And that's worth I think about 50 bps of the difference.

Okay. Thank you.

Hi. Good afternoon. I wanted to ask a little bit about the footprint. I think we heard on the first quarter that in terms of the footprint build, I think you said maybe wait and see in terms of what happens with industry volumes and what happens on the home side, and obviously 28 new centers. And then maybe added on to that after a couple of years of kind of a stagnant OUS number, I know there's a lot of rationalization going on. You've now added about 40 new centers OUS in the last four quarters. Maybe just an update in terms of development both on the U.S. and OUS side?

Yes. I'll take that one, Javier. So most of the action is on the U.S. side as you would expect, the number there is a bit of a lagging indicator, because it depends on when we get certified by CMS. If you wanted to think about a number that tracked more carefully with the decision-making and the CapEx number, it would be based on when the clinics are completed what we call a certificate of occupancy, and you'd see that number much lower. So for next year, I don't want to give a range yet, but you'll see that number come way down again. And I think going forward people want to understand how we're doing in terms of building capacity and being capital efficient. I think the development CapEx number is going to be a better indicator of that than the clinic number that we've disclosed historically. And that's driven partly by this timing issue. It's also driven by the fact that we're building more home-only clinics, which tend to be cheaper and aren't in the clinic count that we've historically disclosed. So the message is the de novo continues to come down as NAG comes down as we move more to home. There could be kind of an additional delay associated with COVID partly because of a temporary decline in NAG, partly because it's just hard to build clinics in the context of COVID. But relative to the commitment we made around capital efficiency, I think we're continuing to deliver on what we said we would.

Got it. That's helpful. And then I just wanted to ask a little bit about the comment you made around missed treatments. I know you mentioned that commercial patients tend to be higher in terms of transplants. But what do you see in terms of discrepancies amongst different payer classes for visit patterns? Did patients in the Medicare population tend to have higher missed treatments during this period and wasn't missed treatments much lower with commercial? I guess just what does that look like amongst payer classes?

Yes. We didn't differentiate by payer class, but we're pleased that missed treatments decreased during this period. This indicates that our patients are taking the virus seriously and taking care of themselves, allowing us to provide care outside of the hospital. While I can't confirm this with certainty since I didn't break it down by payer class, it seems that the trend was similar across all payer classes. Overall, we were very encouraged to see a significant reduction in hospitalizations for our chronic population.

And then was there any change in terms of referral origin throughout the quarter? Or anything you see from COVID, I know normally about half your patients start dialysis in the hospital setting, but just curious as COVID has progressed and hospital visit patterns have changed a little bit, what you're seeing in terms of origination?

So I think your question is the way that we get our patients change meaning if there's less crashers into the hospital and going into our center first. And the short answer is that we have not seen a change a noticeable change in the way that our patients come.

Okay. Fair enough. Thanks.

Hey. Just a follow-up on a couple of things. I guess first you obviously were at the low end of your treatment guidance for the quarter. It sounds like you're certainly below that for at least a few more quarters. How confident are you that this is purely COVID-related and not a continuation of the decline I guess that we've been seeing in the last couple of years and you had a much higher growth rate. A few years ago, you've taken that down a couple of times. What amount of visibility do you have for this? Is this a temporary thing and we'll get back to the 1.5% to 2.5%?

Yes, Kevin, I can share some variables with you. The quarter showed an increase in mortality, particularly among the older population. Acute treatments decreased, likely due to delays in nonessential care, which we believe is related to COVID. The incidence of new patients dropped. While we often think of kidney failure as an immediate need for dialysis, it's more complex. Nephrologists sometimes choose to wait, considering the patient's remaining renal function. During the pandemic, their decision may lean towards delaying the start of dialysis. Additionally, there were no visitors due to travel restrictions, and transplants were temporarily halted. This also contributed to the decrease in volume. When we consider all these factors, we expect things to normalize over time, except for the long-term effects on mortality.

So all that makes sense. Does that then mean like just kind of in response to the last question about how patients are coming in that you're not seeing more patients crash now, but you think that if this continues that we will then see that and not that that's a good sign at all, but it would be at least a good sign that fundamental demand is higher than what you're seeing?

Yes. And that would be all speculative. I'm just telling you what our nephrologists are telling us about their practices. And most of the practices for a little while obviously were shut down for the nonessential care that we're still rounding in the hospitals. So what we're anticipating now that we're talking to our nephrologists and their practices are back open is that they have not seen any dramatic change. And of course that's not scientific. We're just telling you what we're hearing from our nephrology practices.

Got it. And then I guess you talked earlier about how this quarter is coming better because productivity has come in better than expected. Is there a reason to think that these productivity gains cannot be maintained into a more normal operating environment if COVID starts to go away next year? Can you keep this productivity going? I don't think you mentioned that as one of the headwinds to 2021?

Yes, productivity will be interesting. Some factors will eventually reverse, leading people to return to the doctor and our benefit expenses will increase again. Regarding training expenses and retention, I believe these will be closely tied to the economy and how individuals feel about their jobs and the purpose we provide. Overall, it could remain stable, but there's also a possibility it could revert to previous levels. However, I believe this will be significantly influenced by the broader economy and the effects of COVID.

All right. Great. Thanks.

Thank you.

Thanks. A few follow-ups here. One, Joel your corporate and ancillary segments look down pretty materially 2Q versus 1Q. Just curious, if you can note anything there and how to think about those numbers in the second half?

Yes. I am trying to remember, if there's anything in particular. We had a severance charge built in. It was about $12 million, and I'm trying to remember if that was Q1 or Q2. I'll get you the news on that.

I'll answer it Joel. That was Q2 and that was in the corporate segment. Q1 had a large benefit in international, which is in the strategic initiatives segment from exchange rates, and it swung a little bit the other way.

Yes, thank you, Jim. I appreciate it. We experienced $10 million of positive foreign exchange in the first quarter due to international factors, which then turned into a $4 million negative in the second quarter.

Thank you for the explanation. To follow up on Whit's question about your comments regarding the increase in COBRA and exchange take-up, this seems to be a significant factor given the current economic conditions. It appears to be performing better than anticipated. It would be beneficial for us to understand the historical context and the current status. Could you provide us with some approximate figures?

Yes. Well, I won't give you round numbers, and let me make sure I'm answering the right question, Justin. Are you asking mix of COBRA versus other commercial insurance?

No. I'm asking if there's been a significant increase in the number of people signing up for COBRA exchanges when they lose their job compared to previous periods like this.

Yes. What I would say right now, without getting into details is I'll just reinforce what I've said that our patients are very passionate about keeping their commercial insurance for a variety of reasons including their family coverage and some believe that it enhances their odds of getting a transplant. And in some instances, it's obviously the cheapest coverage with the most flexibility. And so, they're making those decisions carefully as they know it impacts their life in a nontrivial way since they consume so much health care. Yes, that's a great question that we've discussed. Generally, we aim to engage with both Republicans and Democrats since our issue spans both sides. The most significant change we anticipate regarding policy is likely in tax matters. If a Biden administration is in place, whether they also control the Senate will be a crucial factor influencing tax policy. As for health care policy, as you mentioned, it presents a much larger challenge to modify, but we will certainly be involved. Our goal is to continue advocating for our patients and for integrated care, irrespective of who is in the White House.

Okay. Thanks, a lot.

Thank you.

I wanted to just come back to one topic that's been asked about a few different ways and I'll ask it a little bit different see if I can get a little more help. Obviously, an amazing job on expense management maybe 2Q is turning out to be the amazing cost management quarters. But when you had laid out last quarter up to an incremental $100 million of COVID expenses, which is like $13 a treatment certainly didn't think patient care costs would go up $0.62 sequentially. So I've heard the comments about the productivity the facility costs health benefits. I guess, could we just talk a little more about the source of the productivity? I know you would even for a period of time I think were paying an extra $100 a month to a fair number of your teammates and it's kind of the opposite of productivity you had set up some split shifts to sort of isolate COVID positive and suspected patients. So the whole orientation, I guess was this is going to be the opposite of a really strong productivity quarter and yet you've performed really, really well. So maybe just some examples of how you're finding this productivity and what sort of facility costs? And was the health benefits piece just your own employees consuming less health care and that was quite material. I know you've been asked several times. So just anything incremental would just help us sort of think about modeling going forward.

Yes. There's a lot going on and we're very proud Gary of the cost management situation. So let me try to be as helpful as possible because there are several things. First a clarification yes on our health care expenditures our teammates just like everybody else used less benefits on non-essential care. So that is one. Number two our caregivers' sense of purpose was really passionate and so therefore we had less turnover because people felt that sense of obligation to take care of our patients. And so the combination of economic need and appreciating a job, while so many people were furloughed and lay off and the sense of commitment to our patients had less training expense. And then the last thing that I would say is that also there were some of our teammates that were COVID positive. And so what we ended up doing is having to have basically in some places like New York and others where staffing was really at a premium. And so when you cohorted centers, et cetera which is what you're alluding to earlier sometimes those shifts were not as inefficient as we anticipated, because those shifts tended to be more full than once anticipated. And so if you have a full COVID positive shift even though it's cohorted, it's not inefficient. When it's really inefficient is when you have one or two patients in it. And so the cumulative math compounded over the quarter and we were very diligent in trying to manage it all.

That's helpful. Two more quick ones. On the $35 million legal charge was that related to any legal issue that had been historically disclosed in your filings? Or was this professional liability issue? Or is there any other color on that?

Yes, I'll take that one Gary. It was related to shareholder litigation that's been hanging out there for a bunch of years related to CPA. Our view is what we did was appropriate, but to just clean this up and move on we thought it was worth settling this. So it's related to that issue.

Thank you. And then just last one for me. And I've just forgot the difference between your 0.7% increase in treatments per day and your 1.6% normalized when you have the exact same number of treatment days 78.0, 78.0 so the calendar isn't driving that and I don't think there's been divestitures. So I'm just trying to recall how we square that difference?

Yes. There's a bunch of noise associated with divestitures and some other things, but there is one big movement that I would highlight there, which is we had a bunch of clinics that we deconsolidated as of the first of the year. And those are treatments that we would back out of NAG, but we don't back them out of the treatment count. And that's worth I think about 50 bps of the difference.

Okay. Thank you.