Goldman Sachs Upgrades Davita, Poised To Profit From Medicare Expansion

Davita Inc DVA surged to all-time highs Friday after winning the praise of a new market advocate. Medicare is largely to thank.

The Rating

Goldman Sachs analysts led by Stephen Tanal upgraded Davita to Buy and raised their price target from $72 to $97.

The Thesis

Next year, the U.S. will expand eligibility for Medicare Advantage plans to people with preexisting end stage renal disease (ESRD). As of yet, the program captures only the ESRD patients who developed the disease after enrollment or who were eligible for special needs dialysis plans.

“The 2021 ESRD rule change carries implications across the healthcare services ecosystem, as the 516,000 patients on Medicare with ESRD represent just 1% of all Medicare-eligibles but approximately 7% of total Medicare healthcare spending,” the analysts wrote. “Only 26% or 132,000 of these patients are on MA today, a figure that could rise considerably in 2021 and beyond — especially if large MA plans find ESRD patients to be an attractive demographic.”

Davita is a certain beneficiary, with the Medicare change expected to increase revenue per dialysis treatment. Goldman Sachs suspects Davita’s Medicare Advantage rate exceeds its Medicare fee-for-service rate by 15%.

By the analysts’ base-case estimates, Davita could increase ESRD patients by four basis points and pre-tax earnings by 2.4% over prior forecasts. In a bull-case scenario, EBITDA could rise 16.6% over previous forecasts. Either increase is expected to offset regulatory headwinds related to rule changes on care delivery.