DaVita Among Dialysis Outlets Facing 9.4% Medicare Cut

DaVita HealthCare Partners Inc., the second-largest dialysis provider in the U.S., fell the most in 21 months after the U.S. Medicare system proposed cutting payments to the industry by 9.4 percent in 2014.

DaVita tumbled 5.9 percent to $114 at the close in New York, its biggest one-day decline since Sept. 29, 2011. Fresenius Medical Care AG, the world’s biggest provider of kidney dialysis, declined 8.7 percent to 49.71 euros in Germany, where the company is based.

Much of the $1 billion reduction is the result of a federal budget agreement that targeted overspending on anemia drugs such as Amgen Inc.’s Epogen for patients in Medicare, the U.S. health plan for the elderly and disabled. The Health and Human Services Department said yesterday in its proposal it will consider phasing in the reduction over more than one year, citing concern that the cuts may “impact beneficiary access to care.”

“This is a very dramatic cut,” Robert Sepucha, Bad Homburg, Germany-based Fresenius’s senior vice president for government affairs in the U.S., said by telephone. “We’re concerned it would push dialysis clinics under the cost of care, which is not the right thing for Medicare to be doing.”

Medicare profit margins for dialysis payments are 3 percent to 4 percent this year, the Medicare Payment Advisory Commission estimated in March. Sepucha said that level is “very thin” and the proposed cuts would be too aggressive.

The proposal is subject to public comment and may change before taking effect.

Significant Shock

Fresenius reported a profit margin of 9.6 percent before extraordinary items in 2012, according to data compiled by Bloomberg. DaVita’s margin was 7.84 percent last year.

Medicare’s proposal focuses on drug spending “while ignoring broader components of the payment system and advances in quality outcomes for patients,” Skip Thurman, a spokesman for Denver-based DaVita, said in an e-mail. “Unfortunately, the proposed cuts may ultimately threaten access to one of America’s sickest patient populations.”

“Yesterday’s news comes as a significant shock to the investment community,” Lisa Bedell Clive, an analyst with Sanford C. Bernstein & Co. in London, wrote in a note to investors today. If the proposed cut is made final, Bernstein would reduce its earnings-per-share estimates for both companies for 2014 and beyond, Clive said.

About 414,000 people in the U.S. in 2010 were on dialysis, a procedure in which waste is periodically removed from the blood in patients with malfunctioning kidneys. Diabetes and high blood pressure are the most common reasons for kidney failure.

Losing Money

“The agency has missed the mark here and has cut too deeply into the program,” Cherilyn Cepriano, the executive director of the Kidney Care Council, the industry’s Washington-based trade association, said in a phone interview.

About 35 percent of U.S. dialysis centers already lose money on Medicare patients, according to Cepriano. The centers that lose money on Medicare stay afloat on payments from commercial insurers and individuals, which comprise about 15 percent of the industry revenue, she said. Large dialysis chains also “cross-subsidize” money-losing centers with profitable ones, she said.

Peter Grauer, the chairman of Bloomberg LP, the parent company of Bloomberg News, has served on DaVita’s board since 1994.

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