Public Healthcare Operators: Valuation Trends Summary
June 21, 2022
The Coronavirus (“COVID-19”) pandemic is likely to impact the operations of businesses in the U.S. long after the economy reopens. For certain types of healthcare provider organizations, the outbreak has resulted in significant business interruptions due to restrictions on elective care. Other healthcare providers, such as dialysis clinics and cancer treatment centers, who provide life-saving services to patients, have remained opened alongside hospitals as they cannot defer or cease treatments without considerable risk to the patients they serve.
Facilities such as these have had to implement substantial short-term measures to continue to provide critical care while ensuring patient safety amongst the pandemic. Over the long-term, however, the COVID-19 pandemic may accelerate significant changes within an already shifting dialysis industry.
Dialysis clinics treat individuals with End Stage Renal Disease (“ESRD”), which is diagnosed when a patient has lost kidney function and must receive a life-sustaining form of treatment to survive. These life saving measures currently include ongoing dialysis treatments or a kidney transplant. Two forms of dialysis, peritoneal dialysis and hemodialysis, are available to patients and both forms have technology allowing for administration of treatments at home or in a free-standing dialysis facility (i.e. in-center dialysis). Although both forms are available, the vast majority of home treatments occur currently with peritoneal dialysis as home hemodialysis is a less widely available option (1). There are also many instances in which home dialysis in either form is not an option for the patient for medical or other personal reasons. Of the 124,500 ESRD patients in the US, greater than 80% of those patients received in-center hemodialysis as of 2017 (2).
The CDC has identified dialysis patients as one of the greatest at-risk populations for developing severe illness from COVID-19 (3). Additionally the European Renal Association-European Dialysis and Transplant Association (ERA-EDTA) has published recent studies indicating that kidney disease has developed in severe COVID-19 cases with the mortality rate among dialysis patients being approximately 20% compared to the worldwide mortality average of 6.9% as of April 19, 2020 (4,5).
As in-center dialysis requires the assistance from professional medical staff, often within close proximity to other patients and support staff for extensive periods of time, one would expect the COVID-19 pandemic to lead to increases in the proportion of patients electing to undergo alternative forms of treatment to reduce their exposure. As mentioned prior, a kidney transplant is the only alternative form of treatment to dialysis. Due to limited supplies of available donor kidneys, receiving a kidney transplant is less prevalent than dialysis and almost entirely outside the control of the patient due to waitlists and other necessary conditions which must be met before a donor can be provided. Home dialysis, when available to a patient, does allow for better adherence to social distancing guidelines and quarantine measures as it can be performed in the patients home with the help of a family member or, in many cases, with no outside help at all.
Although verified data regarding shifts in treatment protocols due to COVID-19 are presently unclear, there is reason to expect these standard treatment protocols will indeed trend to home dialysis over the short term and continue in the long term. Recent press releases from the largest US dialysis operators, DaVita, Inc. and Fresenius Medical Care, have primarily focused on how to best keep their fragile patient populations safe under their current treatment methods. Additionally, with transplant surgeries being delayed indefinitely for certain donors, dialysis operators will need to continue to focus on the safest methods of continuing treatments for the foreseeable future (6).
In March 2020, the Centers for Medicare and Medicaid Services (“CMS”) granted dialysis clinics more flexibility to fight COVID-19 under the Section 1135 Waiver Authority (“Waiver”) and Coronavirus Preparedness and Response Supplemental Appropriations Act. CMS is increasing access to telehealth in Medicare to ensure that patients have access to physicians and other clinicians while at home and expanding in-place testing to allow for more testing at home or in a community based setting (7). The overarching goal from CMS is to keep high risk patients at home and away from public spaces as much as possible.
It is important to note that prior to this Waiver, there had been previous efforts by CMS to encourage patients to utilize home dialysis. President Trump issued an Executive Order in July 2019 referred to as the Advancing American Kidney Health Initiative (“AAKHI”) which outlined certain ESRD objectives to ensure better early detection and preventative measures for ESRD patients. One of the main directives within this order outlined the desire to have 80% of ESRD patients either receive home dialysis or a kidney transplant by 2025 (8). While the AAKHI has since been delayed, both DaVita, Inc. and Fresenius Medical Care who collectively owned 73% of all US dialysis facilities have taken significant steps in recent years to increase home dialysis use. Although we are early in the process and little data is available, the COVID-19 pandemic could very well further accelerate the industry transition to the alternative home dialysis treatment option.
This industry shift towards home dialysis treatments becomes even more likely if no cure or vaccine is developed over the next year. Faced with this ongoing uncertainty and fear of future outbreaks, patients and their families may be more likely to consider the alternatives to in-center dialysis treatments over the long term. This is a key difference worth noting and has been a direct result of COVID-19. In the past, many patients were only marginally aware of home dialysis as an option, had preconceived notions about the everyday hassle to perform their own treatments, or had simply developed a comfort level with the routine associated with going to a facility and being treated by professional healthcare providers. For many elderly and other non-independent patients, these were good reasons to be willing to drive to a facility and have a three hour hemodialysis treatment three times per week, but with a persistent risk of viral infection, such opinions may change.
Studies have also shown that, aside from providing more individual autonomy in terms of timing and frequency of treatments, patients who receive home dialysis often report an overall better quality of life then those who choose in-center treatments (9). Due to reported patient satisfaction compounded with the government’s initiative to shift towards home dialysis, industry operators have begun to modify their long-term operational and growth strategies.
Among industry participants, DaVita Inc. has communicated expected reduced capital spending for facilities offering predominately in-center treatment options via reduced acquisitions and less in-center de novo development. There is reason to believe that this decision was likely influenced by their expectation that growth will be disproportionately moving towards home dialysis (10,11). Additionally, since its merger with NxStage Medical Inc. in early 2019, Fresenius Medical Care North America has seen a growth rate for home dialysis at eight times the rate of in-center dialysis (12). Both organizations have regularly communicated through earnings calls and press releases prior to the COVID-19 pandemic that ample capacity exists for them to accommodate a shift towards home dialysis over the coming years.
As these prevailing industry trends are likely to be accelerated by COVID-19, dialysis operators should be prepared to transition or enhance their home dialysis offerings to thrive in the wake of COVID-19 and compete in an environment where healthcare is increasingly being pushed to a home-based setting. Failure to adapt may put an operator at risk of losing market share to more nimble, well-capitalized competition. The largest US dialysis operators are already in the midst of transitioning to more prevalent home dialysis offerings, however smaller facility operators, commonly comprised of a single individual or small group of physician owners, may not be as capable in responding to changing market conditions that require a shift to home dialysis. Faced with the potential for declining market share, such operators may quickly become obsolete or become acquisition targets, ultimately driving even further consolidation in the dialysis marketplace.