Earnings Call Transcript - DVA Q4 2020

Operator, Operator

Good evening. My name is Sheila, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the DaVita Fourth 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. Mr. Gustafson, you may begin your conference.

Jim Gustafson, Vice President of Investor Relations

Thank you and welcome everyone to our fourth quarter conference call. We appreciate your continued interest in our company. I'm Jim Gustafson, Vice President of Investor Relations, and joining me today are Javier Rodriguez, our CEO; and Joel Ackerman, our CFO. Please note that during this call, we may make forward-looking statements within the meaning of 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 fourth quarter earnings press release and our SEC filings including our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and any subsequent filings we make with the SEC. 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 except as may be required by law. 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 most comparable GAAP financial measures is included in our earnings press release submitted to the SEC and available on our website. I will now turn the call over to Javier Rodriguez.

Javier Rodriguez, CEO

Thanks, Jim. Good afternoon and thank you for joining the call today to discuss our 2020 performance and thoughts on 2021. For DaVita, 2020 showcased our caregivers and their commitment to patients with kidney disease. COVID created challenges that we could never have imagined one year ago. These challenges clinical, operational, and financial led to opportunities for us to harness the strength of our teams and our platforms to support our patients and our community. When I reflect on the year, three things particularly stand out. First, our caregivers’ team's focus on health and safety of our patients; second, the creativity and innovation shown by our organization to adapt to the changing landscape; and third, the love, empathy, and dedication of our teams to each other and to our patients. Despite the good work in 2020, the challenges of COVID remain. The latest surge has been particularly difficult for our patients and our care teams. The disproportionate impact COVID has on patients with underlying health issues and the elderly continues to manifest itself in the dialysis community. The high rates of patient mortality that we talked about last quarter unfortunately accelerated in November and continued through January. We estimate that our patient census at the end of 2020 was approximately 7,000 less than what it would have been otherwise absent COVID. As we look to the future, some leading indicators such as fewer new COVID cases, fewer hospitalizations, and the recent vaccination efforts give us hope. This leads me to our clinical focus on vaccine. Over the past few months, we've been engaging with the federal government, with state agencies, and the CDC to identify ways for our caregivers and patients to gain access to the vaccine. We are uniquely positioned to administer vaccines safely and efficiently in our clinics, given our infrastructure, our clinical expertise delivering flu vaccines each year, and our ability to monitor patients' health each week. Our conversations with the CDC and federal government are ongoing, and we're getting set up in their direct vaccine distribution system to be ready to start the moment we get the green light. In states like Minnesota and several large counties across California, where we have been able to secure direct allocation, vaccination rates are as high as 70%, both because we have access, but also because general acceptance rates are higher when patients see other patients receiving the vaccine. Across much of the rest of the country, the logistics of signing up and the access at separate vaccine sites have been challenging for many patients. Therefore, our ultimate goal remains to obtain direct allocation from the federal government. Now, on to our financial performance. Despite the challenges of COVID, we significantly outperformed our original financial guidance for 2020. And we knew it would be a tough year to deliver profit growth given the headwinds from calcimimetic revenue decline and the cost of fighting the ballot initiative in California. When COVID hit, the growth only increased as COVID created significant uncertainty on our financial results. Despite this uncertainty, we grew our adjusted operating income by double digits, absent the impact of calcimimetics, ballot cost, and net COVID impact. We delivered growth in adjusted earnings per share from continuing operations of 34% and generated free cash flow from continuing operations of almost $1.2 billion while returning $1.4 billion to our shareholders through our share buyback. In Q4 specifically, we experienced a net COVID impact of approximately $60 million, which was higher than we expected. Through the first three quarters of the year, the net COVID impact was reduced as the increased costs associated with COVID were offset by lower benefits, travel, and G&A spend. In Q4, we saw an accelerated impact of higher mortality coming out of the holiday season combined with fewer offsets in benefits and G&A expenses. The result was a negative COVID impact that was roughly $35 million higher than what we anticipated, bringing our Q4 earnings below the guidance range we provided last quarter. Excluding this increased COVID impact in Q4, our earnings would have been in the middle of our guidance range. As we look ahead to the coming year, our guidance range will be $7.75 to $8.75 per share, which incorporates our expected impact of COVID and demonstrates our belief in the underlying earnings growth of our business. We believe that our core performance in 2020 creates a solid foundation for us to deliver on the long-term financial goals. Before I hand it over to Joel to cover our quarter and our outlook in greater detail, let me touch briefly on our recent Medicare Advantage enrollment. As a reminder, 2021 is the first year in which existing dialysis patients have the option to enroll in the Medicare Advantage plan. Previously, MA coverage for ESRD had been limited only to patients already enrolled in MA plans before kidney failure or to certain patients in MA Special Needs Plans. By the end of 2020, the percentage of our Medicare patients who were enrolled in MA plans was approaching 30%. And based on our preliminary enrollment data, we now expect our percentage of MA patients among Medicare patients to be in the mid-30s in 2021, which is still below the national average. As you would expect, the new enrollment was predominantly for Medicare patients previously without secondary coverage, because these patients will benefit from the expanded benefit of MA and the cap on out-of-pocket expenses. The growth in the ESRD MA population created opportunities for us to build additional momentum toward value-based care that we've been investing. This is an exciting trend, and we're eager to lead the way with our payer and nephrology partners to deliver comprehensive care to our patients, which we believe will help lead to better clinical outcomes and a lower overall cost of care. Our 2021 guidance range reflects our expected cost and investments to build our model of care for our value-based agreement. Now let me hand it over to Joel.

Joel Ackerman, CFO

Thanks, Javier. I'll begin with some additional color on our Q4 results and then focus on our 2021 guidance. Our full year 2020 results exceeded our initial expectations, and the core earnings power of the business remains strong. However, our Q4 results reflect the strong headwinds from the latest COVID surge. Operating income was $382 million, and earnings per share from continuing operations was $1.67, below the guidance from our last earnings call. The middle of our adjusted EPS guidance range contemplated a net headwind from COVID of approximately $25 million. However, as Javier referenced, the actual impact was approximately $60 million. Excluding the impact of COVID, our EPS from continuing operations would have been in the middle of our adjusted guidance range. Relative to Q3, we experienced changes in mortality, which has had a compounding effect throughout the year; a reduction in expense offsets in the quarter, particularly related to the healthcare costs for our teammates, which have helped to temper the net financial impact of COVID in Q2 and then in Q3; and higher direct costs related to COVID, including certain benefits to help our frontline teammates with the hardships of COVID and higher PPE costs. Other than COVID, notable factors for the quarter include non-acquired growth of negative 0.3% due to the monthly mortality trend worsening during the quarter. Revenue per treatment was up in the quarter as a result of normal fluctuations in Medicare reimbursement and seasonality. Patient care costs increased sequentially, primarily due to various impacts of COVID that I previously mentioned; G&A decreased sequentially, primarily due to the elimination of ballot cost; and we saw continued core profit in our international business offset by a $6 million foreign exchange loss. In the fourth quarter, we purchased 4.2 million shares of our common stock. And additionally, to date in 2021, we repurchased approximately 1.1 million shares. So our share count as of today is approximately 109 million. When estimating our diluted share count in your models, you need to consider the dilutive impact of EPS of outstanding equity awards, which in the fourth quarter was approximately 4.3 million shares. Looking forward to 2021. As you can see in the press release, our guidance for adjusted operating income is $1.675 billion to $1.825 billion, adjusted earnings per share is $7.75 to $8.75, and free cash flow is $900 million to $1.15 billion. Our guidance ranges are wider than in a typical year. This is the result of the wide range of potential impact of COVID on our 2021 results. At the midpoint of our range, we have incorporated an estimate of the net cost associated with COVID of approximately $200 million. Declining treatment volume as a result of higher mortality is the primary driver of the growing impact relative to 2020. Our guidance assumes that the higher mortality will continue for the first half of 2021 and return closer to pre-COVID levels in the second half of the year as a result of widespread use of effective vaccine. However, COVID does introduce a significantly higher level of uncertainty in our forecast, and there are certain scenarios that could result in our performing outside this range. Looking through the impact of COVID, we believe that 2021 will be another year of solid underlying operating income growth with strong free cash flow, and we expect to continue to invest in our strategy and in innovation. Let me now provide a few additional details on our outlook. Ballot cost should be a significant year-over-year tailwind as we spent approximately $67 million in 2020 to defeat the ballot initiative in California. As 2021 is not a general election year, we do not expect this expense to occur. Calcimimetics should be relatively flat year-over-year, although the quarterly contribution will be evenly spread throughout 2021 rather than the declining trend we experienced in 2020. Now that calcimimetics has become a permanent component of our Medicare run rate, we will no longer call out the financial impact going forward. Other swing factors include the benefit from increasing Medicare Advantage enrollment offset by our investment in our value-based program. These investments include G&A costs associated with enhancing our model of care and start-up costs associated with new contracts. A few more quick notes on 2021. We expect our capital expenditures in 2021 to be similar to our 2020 spend. A reminder that our current run rate interest expense is $60 million to $65 million per quarter. We expect tax rates to remain between 26% and 28% absent any material changes from the new administration. And as usual, Q1 has two fewer treatment days than Q4 and higher bad debt and payroll taxes. Year-over-year, Q1 will have 0.6 fewer treatment days than last year because of the leap year. With that operator, please open the line for Q&A.

Operator, Operator

Thank you. Our first question will come from Justin Lake with Wolfe Research. Your line is open.

Justin Lake, Analyst

Thanks. Good afternoon. I appreciate the details provided. I wanted to follow up on 2021 to ensure I understand some of the moving parts. Joel, you mentioned $200 million from COVID. Is that comparable to my calculation of $60 million this year when I add sequestration, COVID costs, and all the other savings from COVID?

Joel Ackerman, CFO

Yes, and I'll remind everyone that there's a lot of uncertainty associated with COVID. So we tried to be helpful by focusing on a scenario in the middle of our range. But yes, the $200 million is apples-to-apples with a roughly $60 million number from 2020.

Justin Lake, Analyst

Okay. And so the mortality is the remainder of that $140 million. And then on Medicare Advantage, were you saying the costs are an offset? Does that mean Medicare Advantage overall is a net kind of wash, or is there still some benefit from Medicare Advantage? Any color you can add to that in terms of how meaningful it is would be helpful.

Joel Ackerman, CFO

Yes. So the way I think about the MA is the penetration rate went up, call it 5%, a couple of percent is what we would normally see in a typical year, and 3% is the result of the Cures Act and the fact that some of our patients had access for the first time. And we think about the upside from that 3%, and that's in the same range as the excess spending we're doing in 2021 related to the growth of our value-based contract business, what we call IKC or Integrated Kidney Care. So a positive from that extra 3% and an investment related to Integrated Kidney Care, and those two things are roughly in the same ballpark. So think of those as a wash in terms of impact on 2021 OI growth.

Justin Lake, Analyst

I have one last question. I have been following the stock for a long time, and I find it difficult to assess the decremental margins related to lost membership or revised membership patients, especially those undergoing treatments. I assume that mortality primarily affects the Medicare segment, can you confirm this? Additionally, could you clarify how much revenue we are losing in light of the $140 million figure? This would help us understand the decremental margin associated with that lost business and consider what it might look like as things stabilize moving forward.

Joel Ackerman, CFO

Certainly. First, I want to clarify the figure of $140 million and how we are approaching the $200 million. We can categorize our COVID impact into three areas. The first category includes direct costs related to COVID, such as additional benefits we are providing to support our employees during these challenging times and increased spending on personal protective equipment. The second category consists of offsets, including reduced travel and entertainment expenses, lower Medicare revenue due to sequestration, and decreased benefits as a self-insured employer. In 2020, although these were significant amounts, they generally balanced each other out. This wasn't consistent every quarter, which explains the substantial changes from the third to the fourth quarter. However, when looking at the entire year, those two figures tended to offset each other, and the overall impact in 2020 was largely due to the loss of treatments as some of our patients sadly passed away because of COVID. We can estimate that the mortality impact in 2020 was about $60 million, which, in the scenario we outlined, is expected to increase to $200 million next year. Moving into 2021, we expect that the rising costs will be balanced by the offsets, although both costs and offsets will decrease, and the nature of the costs will change a bit. We anticipate that PPE expenses will stay high, as the unit costs remain elevated. The sequestration will apply for the first quarter but will eventually end. We expect travel and entertainment expenses to remain low, while health benefits for our employees should decrease. Therefore, the direct costs and offsets will average to roughly zero, with the $200 million representing the impact from mortality. Now to address your main question: yes, patients who are passing away from COVID tend to be older than our average patient, which means they are more likely to be covered by Medicare, resulting in a lower commercial mix. Analyzing how this affects our cost structure is complex. It depends on the locations of these patients and the duration of these effects, but it's fair to say that our general and administrative costs can be considered mostly fixed, while a significant portion of our patient care expenses are variable.

Justin Lake, Analyst

Thanks for the color.

Operator, Operator

Thank you. Our next question will come from Pito Chickering with Deutsche Bank. Your line is open.

Pito Chickering, Analyst

Good afternoon. Thank you for taking my question. In response to Justin's question, if we take the midpoint of guidance and add $200 million to it, the latter half of the year usually accounts for over 40 to 50% of your operating income for the year. Does that suggest that the operating income for the second half of the year should be above $975 million?

Joel Ackerman, CFO

No. Well, are you saying excluding COVID?

Pito Chickering, Analyst

Correct. Correct. Because like you said that COVID is impacting in the first half of the year and then minimal in the back half of the year, so I was just curious, and kind of help me think about the back half of the year sort of excluding COVID or even actually within your assumptions kind of how the back half of the year operating income should be?

Joel Ackerman, CFO

Let me clarify what we meant by the front half of the year. We indicated that the increased mortality in our patient population due to COVID would be highly concentrated in the first half of the year. However, the lost treatments from those patients who have unfortunately passed away early will continue throughout the second half of the year and into 2022. Those treatments are lost, and while we hope to see NAG bottoming out and starting to increase in the second half of the year, it will take time for the effects of the lost treatments to become apparent. Therefore, the second half of the year will still be influenced by COVID.

Pito Chickering, Analyst

Okay. That leads us into the guidance for 2021. Since you didn't provide revenue guidance, could you help us understand what you expect first quarter treatment growth to be and what you're projecting for fourth quarter treatment growth? Has the incidence of ESRD returned to normal levels, and are you experiencing any slight benefits from fewer kidney transplants?

Joel Ackerman, CFO

Yes. When considering the various factors affecting NAG regarding treatment and volume, including transplant volume and new ESRD admissions, things have mostly returned to normal. Therefore, we are not expecting significant impact from these areas. The narrative for NAG in 2021 mostly revolves around the mortality issue. In the first quarter, NAG continued to decline, and this trend persisted into the second quarter, primarily due to increased mortality rates. It is uncertain when this decline will stabilize. Looking ahead to Q2, we might see NAG drop as low as negative 2% or even negative 3% for that quarter, but it should begin to recover afterward. For the full year of 2021, while we aren’t offering specific guidance, it might be reasonable to expect a negative NAG between negative 1% and negative 2%. NAG, being a year-over-year metric, is unlikely to return to normal levels until mid-2022. Once the effects of mortality related to COVID are fully accounted for over a year, we may start to see a favorable shift in NAG. The unfortunate losses we’ve seen due to COVID might lead to lower mortality rates in the coming years, as some patients who died from COVID might have otherwise passed away in 2022 or 2023. Therefore, while we expect a significant challenge for NAG in 2021 and to feel some lingering effects in 2022, by the latter half of 2022, assuming the efficacy of vaccines and patient access, we may see NAG improve to levels higher than normal. I recognize this may sound confusing with all the figures I've mentioned, so please feel free to ask follow-up questions if anything is unclear.

Pito Chickering, Analyst

Great. Thanks so much.

Operator, Operator

Our next question will come from Andrew Mok with Barclays. You may proceed.

Andrew Mok, Analyst

Hi, good afternoon. First, I wanted to follow-up on the MA discussion. Can you speak to some of the value-based arrangements that you were able to strike with your MA partners for 2021 both in terms of construct and materiality patient base?

Javier Rodriguez, CEO

Andrew, let me grab that. The reality is that we have a lot of different structures. So if you look at just historically, we had the special need plans and then we added the ESCO models, which were the CMMI models those are now winding down. And then, of course, CMMI came up with new models. So in that we have the four choices that CMMI has and then we had the executive order. So that's on the government side there's a fair amount of innovation on the value base. On the commercial side we, of course, are now doing more with our MA partners. And so we structured anything from shared savings to something that looks a little more like a full cap. And so as you can see, the menu is extensive. And the more important thing to grab out of it is that we're committed to moving to value-based, and we're taking bite-sized approaches to make sure that we can deliver on all the commitments that we're making. So that's why we're investing to make sure that we can deliver on whatever way the format comes. Is that helpful, Andrew?

Andrew Mok, Analyst

Yes. Do you have a patient number in terms of mix in terms of what's in value-based arrangements today?

Javier Rodriguez, CEO

We do, but that number is going to fluctuate dramatically because of the filing of all these government CMMI products. And so we are not sure how that whole process is going to play out since they start in April, and how many patients are going to enroll. So that will be the bulk and the largest size of it.

Andrew Mok, Analyst

Got it. Okay. That's helpful. And can you comment more broadly on how the pandemic and excess mortality is influencing your strategy around patient clinic optimization and home dialysis more broadly? Do you see an acceleration in both of those initiatives playing out over the next 12 to 18 months? Thanks.

Javier Rodriguez, CEO

I appreciate it. The short answer is no, because the most important thing is that we have the modality of choice for the patient and the physician, that think is appropriate for the right care. And so, that is first and foremost and the first thing that is considered. Secondly, of course, if there is an area that's severely impacted, we are looking at that to see what capacity is in those centers. And so, we're taking a close look at it. But as you can imagine, our centers are needed in most of these communities, and it's something that we have to be very responsible of because if you have mortality, there are still other patients there. And as you know for a very long time, we've carried several hundred centers that have lost money. And then it's a very difficult decision one that we don't take lightly whether we close the center or not.

Andrew Mok, Analyst

Got it. And then just lastly, you mentioned that the vaccine rates are as high as 70% among your patients in some geographies. Do you have a vaccination rate for your total patient population today? Thanks.

Javier Rodriguez, CEO

The patient vaccine rate is low, and the teammate vaccine rate is starting to reach 40%. We are working diligently with the government in hopes of securing a direct allocation. For example, with the regular flu vaccine, we achieve close to 90% coverage across the entire cohort in a very short time frame. We are making our case to the government, but as you know, there is significant demand from various groups, and we are trying to navigate through that.

Operator, Operator

Thank you. Our next question comes from Kevin Fischbeck with Bank of America. Your line is open.

Kevin Fischbeck, Analyst

Great, thanks. I wanted to ask a little bit more about the MA investments. It sounds like it's going to offset the benefit from it this year. Are these investments ones that you need to kind of get in and then that book of business will become more profitable over time? Or are you making an investment and kind of assuming that it will be another 5% or 10% of patients ultimately moving in?

Joel Ackerman, CFO

Yes. So there's a lot we're going to learn about that over the next few years, Kevin, but I think low to mid-single digits is a reasonable margin. If you think about it as using a full cap kind of accounting approach on some of these, we don't take in all the revenue. So that plays with the margin. But in terms of margin per patient, you'd wind up at about the same dollar amount.

Javier Rodriguez, CEO

Kevin, maybe let me pull up just a little because it might not be clear before kind of the investments we're making for value based. And so, there's two categories that I think of. One is sort of G&A stuff, software model of care for non-ESRD things like diabetes, mental health, end of life, those type of models that would scale in different kinds of framework. And then there's a startup cost for each individual contract that has a custom element to it. So care models, health assessments, and other things that are specific to each contract. So hopefully that helps.

Kevin Fischbeck, Analyst

Yes. No, that does. And I guess just to make sure, I'm clear about when you're talking about a little bit, so just given your point about the revenue. I think that the revenue on a typical dialysis patient in MA is about $96,000 at least in premiums, so are you talking about something like 85% of that number is kind of how you're thinking about the revenue? Or are there other adjustments that I'd have to make?

Joel Ackerman, CFO

If I were to model that, considering the uncertainty ahead, I would focus on the margin from the portion of the cost that is not related to dialysis. Think of us as a medical manager or a value-based care provider concerning the two-thirds of that $90,000 that does not go to dialysis. The cost of dialysis is mostly fixed, so I would apply the margin to that $60,000 figure.

Kevin Fischbeck, Analyst

Okay. That's helpful. And then, I guess the 7,000 patient impacts from mortality. I guess that's like about 3% treatments in the quarter. Does that mean that you think that a normalized treatment growth for the business is now 3%? I mean, you guys have been doing more like 2% or even less kind of heading into COVID. Do you is that where you think things ultimately get back to post-COVID? Or are you kind of saying that those other dynamics have normalized, but only because of COVID and when COVID goes away those factors will come back in and lead to sub-three industry growth.

Joel Ackerman, CFO

Yes. So, Kevin, I appreciate the math you're trying to do, which is use the loss treatment count to back into what our normal NAG would have been. It's a very tough piece of analysis to do. The 7,000 was an end of quarter number. So you can't just multiply that. It was actually a little bit more weighted towards November and December when the spike began. So I don't think you can back into a NAG number. Frankly, we're having trouble backing into it, because there is a lot of play in the question of excess mortality and which of these patients really passed away of COVID versus other things. So I'd avoid trying to interpolate to what our underlying NAG is.

Kevin Fischbeck, Analyst

All right. And then just last question. The guidance is, as you mentioned, a little bit wider than normal and I understand COVID creates a lot of uncertainty. Is it just really this mortality thing? Is that the thing that we should be watching most? Or are there other kind of major swing factors we should be keeping our eye on?

Joel Ackerman, CFO

Well, I think there are a bunch of other swing factors that could impact the year. So, if I were to run down the list, obviously, there's the effectiveness of the vaccine and the variants, and that will play through on the mortality line. There's the potential economic impact of COVID and how that could play through with private pay mix. Early in the pandemic, we talked a lot about that, and we were very concerned about it. We've been very pleased with the resiliency our patients have shown in terms of maintaining their coverage, but I think you can't lose sight that PPE costs are something that remain a relatively dynamic issue less in terms of volume utilization and more in terms of price. Additional government assistance is certainly a possibility extending the sequestration halt or something like that. So those are a few things I'd point out to keep your eye on. That said, yes, the mortality question is certainly the one that is dominating our modeling for 2021.

Kevin Fischbeck, Analyst

That’s helpful. Thanks.

Operator, Operator

Our next question will come from Lisa Clive with Bernstein. Your line is open.

Lisa Clive, Analyst

Hello, I have a couple of questions. First, regarding the $200 million impact from the increase due to COVID mortality, it seems like $140 million of that is additional. Based on your guidance, it appears you're fairly confident in being able to fully offset that, at least at the midpoint of your operating income guidance. I would like to understand where this additional cost savings is being derived from, especially since you've maintained a lean organization for quite some time. What other strategies are you leveraging, particularly when you anticipate NAG may be slightly down for the year? My second question pertains to home modalities. While you must prioritize what is best for each patient, have you noticed a rise in interest in home modalities since the pandemic began? Specifically, as we consider the transition to home, whether through peritoneal dialysis or hemodialysis, are you identifying these patients early enough to influence their employment status and insurance coverage? That is, are they able to retain their private insurance, rather than losing their jobs and having to resort to COBRA or directly transitioning to Medicare? I am trying to grasp the longer-term implications on patient demographics from an increased reliance on home care. Thank you.

Joel Ackerman, CFO

Sure. So Lisa, let me address the first part, and I think Javier will take the second. I understand your question about the transition from 2020 to 2021 despite the challenges. Here's my perspective: if we look at our adjusted operating income in 2021 and add back the $67 million related to ballot initiatives and another $60 million for COVID, then compare that to the midpoint of our range with COVID accounted for, you would arrive at approximately a 4% growth rate. This reflects how the core business is performing year-over-year. In my view, a 4% growth rate indicates a solid and stable year for the core, considering the significant uncertainties surrounding COVID. This aligns with what we would expect in a normal year, which typically sees low to mid-single-digit revenue growth and stable margins, supported by managed costs and RPT increases that fall below inflation. I also mentioned that the MA and IKC factors balance each other out, reinforcing my view of the 4% growth as representing a stable year affected by COVID.

Javier Rodriguez, CEO

And Lisa, let me grab the second part of that, which is on home modality. The short answer is we have a lot of excitement on the home modality because it really enhances the quality of life. And so our physicians and our patients are responding quite well. And we are innovating a lot so that our patients can feel that security of doing dialysis at home. It does continue to grow in a significant way. And as it relates to getting the patients earlier and what does that have impact on mix, the short answer is that that's work in progress. We continue to work with our physician practices to make sure that they're educating the patients and then we've developed world-class free to anyone in the community that focuses on access training so that you can know your modality selection. And the hope is that, of course, you make your selection early enough so that you can have the transition without that big spike or without any issues as you acclimate to dialysis.

Lisa Clive, Analyst

Okay. Thanks. And just one follow-up for Joel on the cost structure. Can you just remind us of where you are with your EPO contract with Amgen? I know you signed a long-term contract with them. When does that renew? And is that a potential avenue for lower costs?

Joel Ackerman, CFO

Yes. So Lisa, the contract ends at the end of 2022. As you know, we've always been a little challenged as a result of confidentiality agreements in terms of what we can say. It will certainly be interesting times as that contract ends, regarding hips and some other dynamics. So, it remains to be seen what's going to happen then.

Lisa Clive, Analyst

Okay. Thanks for your time, and it’s helpful.

Javier Rodriguez, CEO

Thanks, Lisa.

Operator, Operator

Thank you. Next we will hear from Whit Mayo with UBS. You may proceed.

Whit Mayo, Analyst

Thanks. Good afternoon. Regarding the mortality dynamic, I was considering hospitalizations that don't lead to death based on some industry data we've observed. I’m not sure if this is accurate, but it seems the hospitalization rate could be three to four times higher than the death rate. This might suggest that around 20,000 of your patients could have been hospitalized at the same time you saw an increase in mortality. I realize it's difficult to determine whether COVID contributed to the mortality or if other factors were at play. However, I am generally interested in your observations concerning overall hospitalizations and missed visits. The cumulative numbers are likely quite low.

Joel Ackerman, CFO

Early in the pandemic, we experienced a benefit from fewer missed treatments as our patients were avoiding hospital visits. This trend has mostly returned to normal, so it is not having a noticeable effect on the treatment numbers at this time. I want to emphasize that part of our platform includes a substantial acute business, which has seen some advantages from this situation. However, regarding the overall impact for the year, it is not significant.

Whit Mayo, Analyst

Right. I'll stop the mortality. I think that pretty much covers it. But maybe just one other question I had was, I think, you guys are back in network with Humana maybe technically you were never out of network. That's probably more the accurate statement, but just anything to share about that contract and maybe more broadly just an update on the network adequacy modifications. And any changes that you're seeing differently with how payers are behaving? Just kind of curious on that topic.

Javier Rodriguez, CEO

Sure. This is Javier. I'm pleased to report that the outcome of the Humana negotiation allowed us to achieve our respective goals. Both Humana and DaVita aimed to enhance patient access while fostering innovation to establish a mutually beneficial arrangement that results in better outcomes at a lower cost. However, this process involves significant complexity and a lengthy timeline due to the extensive analytics required to ensure a successful collaboration. As we mentioned previously, our Medicare Advantage book is largely contracted and has been for quite some time. The timing of the Humana agreement coincided with year-end, and due to its scale, it presented additional complexities. Nevertheless, we are very satisfied with the outcome and anticipate a long-term partnership that will fulfill the objectives of this value-based contract.

Whit Mayo, Analyst

Okay. I have one last question. Joel, I understand you may not want to provide specific guidance regarding the quarters, but can you give us an idea of what percentage of your earnings you expect to see in the first half compared to the second half? I want to ensure we have an accurate understanding of how you are viewing the timing of earnings.

Joel Ackerman, CFO

Yes. Typically, Q1 is a weaker quarter for us. We're experiencing increased bad debt and higher payroll taxes, among other factors that I can't recall at the moment. However, compared to last year, this situation will be quite different because last year's numbers were significantly impacted by the calcimimetics and the ballot initiative. Additionally, there are fewer treatment days in Q1. Nevertheless, I don't anticipate any dramatic changes; the pattern should remain similar to a typical year. Considering the mortality issues we are addressing are expected to peak in Q1 before declining, it seems reasonable to view COVID's impact as being fairly consistent throughout the year.

Javier Rodriguez, CEO

The big assumption there, Whit, is of course if the mortality is in the front end of the year, then it continues to play out which is very different than what happened in 2020 which happened to be the spike ended up in the back end of the year. And so, analytically of course that is on the premise that the vaccines work and that the fourth quarter and the third quarter look more normal than where we are now.

Whit Mayo, Analyst

Thanks for all the color. Thanks.

Javier Rodriguez, CEO

Thank you.

Operator, Operator

Thank you. Our next question will come from John Ransom with Raymond James. Your line is open.

John Ransom, Analyst

Good evening. So given that I'm always looking for simple answers to complicated questions, if we think about 2021 versus 2020, what was your MA mix in '20? I know you've said 2021, but how does that compare to 2020?

Joel Ackerman, CFO

I think what we said is that at the end of '20, we were getting close to the 30%, and we're now in the mid-30s. And remember the rest of the market is roughly around 40%, meaning the non-dialysis.

John Ransom, Analyst

Yes, but what was the average for 2020? I know you mentioned the end, but where is it? I remember it was in the mid-20s.

Joel Ackerman, CFO

Well if you assume that it moves roughly 2 percentage points in the year, you can do the math around that, but it's high 20s.

John Ransom, Analyst

I can do 30% minus 2% I think.

Joel Ackerman, CFO

You are good to simplifying things.

John Ransom, Analyst

Yes. I am simple. And then continuing on the simple theme, I know you're going to spend down some of this advantage. But I think we were thinking about the rate lift at something around $50 a treatment. Is that crazy from Medicare fee-for-service to Medicare advantage?

Joel Ackerman, CFO

Yes, John, I apologize for not commenting on that number for some time. We prefer to keep the average rate confidential while negotiating with MA plans. Therefore, we won’t provide any details on it. We aimed to assist in how to model 2021 compared to 2020, which is why we referenced the IKC investment as being of similar scale. They essentially balance out when looking year-over-year. This balance is in relation to the additional 3% growth in MA, not the complete 5%. We will benefit from the consistent 2% we see annually. However, we prefer not to discuss the rate difference between MA and standard Medicare fee-for-service.

John Ransom, Analyst

Sure. And then I feel like an underexplored theme is your heroic labor force. So if you were to hazard a guess what percent of your labor force you think will agree to be vaccinated by the end of the year?

Javier Rodriguez, CEO

It's a great question, John. We've been asking, and on the flu, we end up somewhere in the high 80s, low 90s. And so this is obviously a very unique experience they're going through, and they've seen what's going on with COVID. Our data shows us right now slightly lower than the normal flu and then the question becomes once you have the vaccine if you can make it convenient and you can get the momentum, will that number go back to the normal flu? And the short answer is, we don't know. But right now, roughly 40% of our labor force in the field has been vaccinated.

John Ransom, Analyst

Sure. Regarding labor, do you think they are past the worst of it in terms of burnout, temporary staff, and exhaustion? Is this a significant challenge for you, or do you expect it to continue into this year?

Javier Rodriguez, CEO

Well, John, first of all, I really appreciate your empathy for this team because their commitment and resilience and just dedication has been just incredible and an inspiration to the rest of us. But no, they're actually in the thick of things. This spike in the end of the year beginning of this year was steeper and more acute than anyone would anticipate. And so they've been working, working, working and trying to keep everybody safe. So the fatigue is real, the emotional drain and the attachment that they have to our patients and seeing this mortality that we've talked about is an emotional and a heavy, heavy thing to deal with. And so I think that this is going to have consequences for the entire caregiving system for years to come.

John Ransom, Analyst

Yes, I do. Lastly, considering global risk and your experience with the former DaVita Medical Group, how do you approach managing the two-thirds of the downstream that is not under your direct control? Is it related to Medicare rates or downstream risk contracts? Or do you believe that by maintaining a strong relationship with patients, you can influence their health outcomes and navigate the healthcare system more effectively, ultimately ensuring their health is better than the average you are targeting?

Javier Rodriguez, CEO

Let me grab it. And then Joel, you can supplement because I'm not sure, I understand exactly where you want to go. But at the end of the day, I think, the answer is...

John Ransom, Analyst

Not my wife ever does, either. I never know where I want to go. So that’s fine. I never…

Javier Rodriguez, CEO

We will address some of the issues in our centers where we believe we can provide significant value. In other areas, we will collaborate with trusted providers. This approach will be a hybrid model; we have gained considerable insights from our ESCOs regarding our strengths. For instance, when conducting a health assessment in the center with a patient for four hours, we can be very thorough and implement effective therapy interventions, resulting in a twofold benefit. In other healthcare areas, the difficulties are identifying the patient and then actively engaging with them for intervention. We possess a strategic advantage in accessing patients. Did this address your question?

John Ransom, Analyst

Well, but let's say, they go into a local hospital, I mean, are these Medicare rates that you're assuming? I mean I'm just trying to understand, sort of, the insurance company downstream contracting around access to the rest of the healthcare system? And how you either…

Javier Rodriguez, CEO

Okay. I think, I understand your question. Most of the time in the contract...

John Ransom, Analyst

You were saying your margins in the other two-thirds. So I'm just trying to figure out how you get that margin there with two-thirds of spend?

Javier Rodriguez, CEO

Yes. I got you now. Most of the time the contract assumes that you get the payer's network, and you're basically going after utilization and better care so you're trying to reduce utilization as opposed to price. Okay. I think, in general, the plans have paid a lot of attention to it, but they always have. And so it's a discussion, and the conversation has really gotten more into a shift of can we do value base. But the short answer is that we didn't have that many at-bats, because most of the contracts we're longer term, so yet to be seen.

Gary Taylor, Analyst

And what about as direct contracting increases, obviously, you've got professional global this year you've got a limited theoretically rollout in 10 cities of geographic direct contracting. Next year, so you're going to have the same health plans now taking risk for your Medicare fee-for-service population, would you anticipate doing risk-based contracts if direct contracting takes off and grows? Or do you have any now?

Javier Rodriguez, CEO

It's an interesting proposition. I mean, at the end of the day, I think it's unlikely, but we would be open to explore it, because if someone upstream takes the risk and the example you laid out in direct contracting, we would be receiving Medicare fee-for-service in that example of direct contracting. So unless they literally said, hey, because of your strategic advantage of actually spending so much time with the patient, we think that you can partake with us. That would be very interesting. Of course, the other way to look at it is, can we be the direct contracting entity. And so, we will be looking at all these things and see how they play out. But that's where it stands now.

Gary Taylor, Analyst

My last question. I just want to understand the magnitude of this movement you're talking about towards risk-taking with your MA population. So are there any numbers you can give around going forward x percent of the MA enrollment is in a capitated contract or a material gain sharing contract that isn't just a couple points based on quality of care and what that's looked like historically? Is it a material portion in 2021 of your MA patients that will be in something close to a capitated contracts?

Joel Ackerman, CFO

It's still relatively small, but it's growing. Fundamentally, we see this business as being aligned with the future of healthcare. It's a significant opportunity, and we believe we have the right conditions to succeed because of our ability to deliver quality care and manage the non-dialysis aspect. Currently, it's still relatively minor, and we are monitoring it closely. It's important to emphasize that we view this as a new business rather than merely a new way to finance dialysis costs. However, in terms of scale, it remains small at this time.

Gary Taylor, Analyst

Javier Rodriguez, CEO

Gary Taylor, Analyst

My last question. I just want to understand the magnitude of this movement you're talking about towards risk-taking with your MA population. So are there any numbers you can give around going forward x percent of the MA enrollment is in a capitated contract or a material gain-sharing contract that isn't just a couple points based on quality of care and what that's looked like historically? Is it a material portion in 2021 of your MA patients that will be in something close to a capitated contracts?

Joel Ackerman, CFO

It's still relatively small, but it is growing. Fundamentally, we see this business as being aligned with the direction of healthcare. It's a significant opportunity, and we believe we have a strong chance of success due to our ability to deliver quality and manage care on the non-dialysis side. Currently, it remains relatively small, and we are monitoring it closely. It is important to emphasize that we see this as a new business rather than simply a way to finance dialysis costs. However, in terms of size, it is still small at this time.

Gary Taylor, Analyst

Javier Rodriguez, CEO

Gary Taylor, Analyst

My last question. I just want to understand the magnitude of this movement you're talking about towards risk-taking with your MA population. So are there any numbers you can give around going forward x percent of the MA enrollment is in a capitated contract or a material gain-sharing contract that isn't just a couple points based on quality of care and what that's looked like historically? Is it a material portion in 2021 of your MA patients that will be in something close to a capitated contracts?

Joel Ackerman, CFO

It’s still relatively small, but growing. Fundamentally, we see this business as being on the right side of healthcare. It represents a significant opportunity, and we believe we have a strong chance of success due to our ability to deliver quality and manage care in the non-dialysis sector. Currently, it remains relatively small, and we are monitoring it closely. I want to emphasize that we view this as a new business rather than just a means to finance dialysis costs. However, in terms of scale today, it is still small.

Gary Taylor, Analyst

Javier Rodriguez, CEO

Operator, Operator

Thank you. That concludes today's conference. Thank you for participating. You may disconnect at this time.