This was a great read and very insightful, thank you. During your research, did you find any indication of Medicare looking to transition the whole industry away from the fee for service model and put everyone on the risk based/value based model? Or does it look like the two will co-exist? If Medicare is paying more to providers under the value based model (via distributed savings) surely that will decrease following mass adoption because they will want to reduce costs?

Also does this model only relate to Medicare patients, or can the model be applied to privatively insured patients?

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Great question - if I recall correctly, I think CMS was aiming to have all traditional Medicare beneficiaries on some sort of risk/value-based care by 2030 (or something in that ballpark).

You're right that it seems unlikely that the MA rate would remain higher than fee-for-service Medicare if the fee-for-service model died out, but if MA coverage led to more efficient treatment (lower opex), then MA rates could fall without leading to worse operating income/patient - *in theory* everyone could win. The way I think about it is that 25-30% of clinic aren't owned by DVA/Fresenius, and CMS will have to set benchmark rates under those programs such that the long tail of small clinics don't go out of business. So from an operating loss per patient (or treatment) perspective, I don't think it can get much worse for the two large incumbents *so long as the long tail of small clinics don't improve quality/cost faster than DVA/Fresenius (and I don't think they will). Maybe I'm thinking about this wrong, but my guess is that a wholesale shift in payment models is more likely to result in better-or-flat OI/patient than lower OI/patient for the incumbents.

The risk/value-based models aren't exclusive to Medicare - you see that stuff on the commercial side as well.

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Thank you for this thorough analysis!

Question on the commercial/medicare mix. The company discloses about 10% of patients are covered commercially. If I am understanding correctly that relates to the first 33 months that a patient with private coverage is on dialysis. You mention in your write-up that medicare typically only covers 80% of the cost of treatment, but with only 1% of revenues coming out-of-pocket I'm assuming the vast majority of patients have private (commercial) coverage for the remaining 20%. So I am asking: does commercial revenue reported by the company include the residual 20% not covered by medicare?

Wondering if that might skew the magnitude of the profitability difference that you have calculated on a per patient basis between medicare and commercial?

New item for my investment checklist: buy companies with CEOs that refer to themselves as "mayor" and to their company as a "village".

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Good question re: commercial mix. It's not immediately clear, but I *think* that the commercial mix they report is when the commercial payor is primary.

For the 20% not covered by Medicare, they mention that the secondary payor is either Medicare supplemental insurance, a stated Medicaid program, a commercial health plan, or someone like American Kidney Foundation - but the exact mix there isn't clear. Even still, it wouldn't add up to a lot of revenue being paid by commercial plans because A) it's 20% of the lower Medicare rate, and B) I don't think commercial is the secondary payor for the vast majority of patients covered by Medicare. You have to remember that the average age of a dialysis patient is ~65, so a lot of these people are likely already on Medicare.

So, the profitability difference between Medicare and commercial might be a little narrower than I laid out if I'm wrong about how they report the payor mix, but it wouldn't be huge.

Hope that helps!

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