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Matt Winkler
Matt Winkler
Articles (125) 

Why Fresenius Is the Initial Winner From Trump’s Kidney Disease Overhaul

Fresenius appears better prepared than DaVita for market transition from outpatient to home dialysis caused by the Trump kidney initiative

July 12, 2019 | About:

Over 100,000 people are currently waiting for a kidney transplant. In a small step towards ameliorating this situation, President Donald Trump earlier this week issued an executive order for Federal government to begin reimbursing kidney donors for lost wages and child care, the economic equivalent of paying for kidneys, at least by the government, if not private people.

To the extent that this move lowers the overall demand for kidney dialysis, both market leaders DaVita (NYSE:DVA) and Fresenius (NYSE:FMS) will suffer somewhat. Longer term though, Fresenius looks to be more prepared for this move by Trump than DaVita. Here’s why.

Aside from incentivizing more kidney transplants, which would lower the demand for the services of both companies equally, the Trump kidney initiative aims to also incentivize home dialysis over outpatient dialysis on the assumption that it is more cost effective. Research conducted by the National Kidney Foundation back in 2011 confirms this.

Medicare subsidizes 80% of outpatient dialysis costs, and the vast majority of people on dialysis go to a clinic, usually owned by either DaVita or Fresenius. Medicare also subsidizes home dialysis by the same percentage, but the difference is that it does not currently cover (page 17) lost wages incurred during the three-month training period required for home dialysis. Medicare also does not reimburse for paid home dialysis aides or extra blood that may be required during the sessions. Dollar for dollar, then, outpatient dialysis is cheaper for many people. This is what Trump’s plan is trying to change.

The details of the plan are still blurry, but “new payment models” were mentioned, which probably include similar subsidies for home dialysis over outpatient clinics like the lost pay being offered for kidney transplants. If the plan does increase the relative popularity of home dialysis, Fresenius looks to be better prepared than DaVita for meeting the demand shifts more quickly and efficiently. Looking at DaVita’s latest annual report, 79% of dialysis revenues came from outpatient hemodialysis services, and 5% from inpatient hospital dialysis. Home dialysis revenues accounted for the remaining 16%.

Last year, DaVita increased its outpatient clinics by 6.1%, representing 154 new clinics, which is going to make revenues even more lopsided toward outpatient clinics. The market shift toward home dialysis, if it happens, may end up catching the company a bit flatfooted. Fresenius, however, has already signaled to shareholders that it intends to increase investment in home dialysis, and has followed through on this by acquiring NxStage. That deal was finalized back in February. NxStage specializes in home dialysis equipment with its flagship System One portable daily dialysis machine. This acquisition should help Fresenius transition more smoothly with any market shifts should they occur due to the Trump plan.

In the words of CEO Bill Vale:

"By combining NxStage's capabilities with our broad product and service offering, we can help patients to live even more independently. In addition to broadening our product portfolio, this acquisition positions Fresenius Medical Care to benefit from the growing trend toward home-based therapies."

Over the medium term, DaVita will adapt, but Fresenius seems to have a head start. Over the long term though, say 10 to 15 years out, both companies may encounter significant trouble because both rely heavily on Medicare reimbursement for their revenues. If the federal budget were stable, then this model could be sustainable long term. But, if federal deficits continue to grow at the current pace, or accelerate significantly when the next recession hits, these revenues could become endangered as government spending exceeds any and all limits, and the bond market responds negatively. So far it hasn’t, but that may be only a matter of time.

Disclosure: No positions.

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