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DaVita’s Purchase of HealthCare Partners Continues Trend of Dialysis Provider Expansion of Services to Renal Patients

Posted in Healthcare Services Investing

We’ve discussed in prior posts the multiple waves of heavy dialysis industry consolidation, but another fascinating aspect of the industry’s expansion is through the largest providers’ (LDOs’) expansion into dialysis-related services and even into treatment of patients with no renal failure or those who are still in the pre-dialysis stage of their renal disease and treatment.    For example, Fresenius Medical Care and DaVita Inc., the two largest providers in the world, each own heavy stakes in companies providing patients with the vascular access they need to receive dialysis, US Vascular and RMS Lifeline respectively.  

Several of these major players in the dialysis industry have expanded their patient and physician outreach in unique investment methods, and a look at publicly-traded DaVita in particular is illustrative. DaVita operates and/or provides administrative services for more than 1,800 dialysis facilities that serve 142,000 patients throughout the United States, as well as running 15 outpatient dialysis centers in three other countries. DaVita shares rose $3.99, or 4.9 percent, to $84.80 in trading on May 21, after trading as high as $85.95 earlier that day. That approached its 52-week high of $90.42 per share reached in late March.

DaVita’s largest shareholder is Warren Buffet’s Berkshire Hathaway Inc., which holds a 6.4% stake. The Omaha, Nebraska-based firm reported in March that it had more than doubled the number of shares it owns in the first three months of the year.

Most recently, DaVita has agreed to buy HealthCare Partners for $3.66 billion in cash plus $9.38 million shares of stock, in an effort to expand the company’s scope into care for renal and non-renal patients.   It will use available cash, senior secured credit facilities and increased debt financing for the deal’s cash portion. It could also pay an additional $275 million in cash if HealthCare Partners accomplishes performance targets this year and next.   Following the closing, the combined company will be renamed DaVita HealthCare Partners Inc., according to a statement from DaVita. The purchase price is roughly 8.4 times HealthCare Partners’s 2011 EBITDA of $527 million.

Torrance, California-based HealthCare Partners, which manages and administers 700 medical groups and doctor networks, with operations in California, Nevada and Florida, had $2.4 billion in revenue in 2011. It coordinates care for over 667,000 patients, providing primary and specialty doctor care under a system that rewards reducing health costs. The emphasis on combining cost savings with improved health results gained DaVita’s interest. In a report from Bloomberg News, DaVita opines that the accountable care model (ACO) could be appropriately implemented by the dialysis industry, and this deal is one step in DaVita’s effort to be a part of any ACO opportunities.

Domestically, DaVita has ventured into a number of other service lines that are related to the delivery of care to kidney patients but are not core dialysis over the past few years, including with the development of pharmacy DaVitaRX, Village Health, in the managed care arena and Paladina Clinic , a primary-care ‘direct-pay clinic’ concept. 

VillageHealth, a product of SCAN Health Plan, is a health plan for dialysis, kidney transplant and post-transplant Medicare patients in Riverside and San Bernardino (California) Counties. Care is based on individual case management, with specially trained nurses as a resource for total patients’ health care, not just dialysis.  

DaVita touts Paladina Health, based in Washington, as an innovative approach to provide high-quality, convenient and lower-cost healthcare to patients through a membership-based primary care clinic.  Employees have access to comprehensive primary care, preventive care and basic urgent care services at a clinic within or near their employer’s site.   As with VillageHealth, we presume DaVita intends to expand the concept outside of its origination state.

Additionally, DaVita has expanded internationally at a time where the incidence of diabetes is rising rapidly world-wide. Just last month, DaVita acquired majority stake in Lehbi Care, a Saudi Arabian provider of kidney care, for an undisclosed price. Lehbi currently runs three dialysis centers in Riyadh. In January, DaVita also purchased NephrolLife Care India Pvt., a dialysis center operator. And last year DaVita purchased, for an undisclosed amount, ExtraCorp AG , the owner of two dialysis centers in Germany, the home of rival dialysis provider Fresenius Medical Care

Competitors of DaVita are also looking for unique opportunities to thrive and extend their patient and physician reach in a time where the role of an individual provider of one service specialty is changing rapidly.

 

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