by Andy Obermueller
Pharmacies, labs, billing agencies and insurers all say business is down from the same period a year ago. Recent earnings reports show Americans are seeking less medical care.
The reason is twofold. The most obvious is that unemployment remains high, at 9.6% of the workforce. Jobless workers don't have employer-sponsored health plans, and after a while (15 months), COBRA benefits -- group health plans that allow previous workers to pay for their own coverage out of pocket -- expire.
The second reason is that more Americans are opting for high-deductible plans. These policies cover eligible medical services only after the patient pays for a certain amount of care. McKinsey, a consulting firm, says 18 million Americans bought such plans this year versus 15 million last year, a meaningful rise of +20%.
A weak economy is also contributing. It turns out that how Americans feel about their personal financial situation is every bit as important as how they feel physically, and many are postponing or simply doing without nonessential elective procedures. Consumer confidence, as tracked by The Conference Board, fell in June and took another dip in July. The University of Michigan Consumer Sentiment Index also fell in July -- to the lowest level since November.
Health care, as we have all heard, has grown faster than the overall economy for years. A protracted recession with iffy consumer spending could slow that trend. Consumers may well opt to forgo cosmetic surgery or a knee replacement, preferring to keep the money in the bank in uncertain times.
That might spell trouble for health-care investors.
And yet one company looks to be immune from the trend. This company not only provides a medical service that cannot be postponed, it's also -- in almost all cases -- paid for by the government. It is the only medical condition for which both things are true.
We might grouse about health-care policy in this country, but not only do Americans benefit from the best care in the world but the United States government, in its benevolence, makes sure that patients who need a certain kind of medical treatment always get it, regardless of whether they are covered by insurance or not. If doctors diagnose this condition in a patient, then -- regardless of age -- that patient will be enrolled in Medicare, with Uncle Sam picking up the tab.
That condition is renal failure. If you have kidney disease -- and a growing number of Americans do -- then Medicare will cover you. As I said, this is the only medical condition for which that is true. Happily, dialysis can keep patients alive for decades until they die from other medical causes or, as is to be hoped, they are able to find a donor kidney and undergo a transplant -- which carry very high success rates.
DaVita (NYSE: DVA) is a leading provider of dialysis services -- not only the treatment itself, which removes certain elements from the blood, but also of the drugs needed in the procedure, which some patients may need twice a week. The $6.4 billion company has more than 1,500 treatment centers in 43 states. It generates a reliable $1.5 billion in revenue each quarter and manages a net margin of about 8%, relatively high for the health-care sector, where a well-run hospital typically clears between 2% and 3%.
With a life-or-death essential service, a nationwide footprint and a customer -- Uncle Sam -- who absolutely always pays the bill, DaVita has a strong business model in an industry with relatively high barriers to entry. That's why this pick, which I shared with the subscribers of my premium Government-Driven Investing newsletter, has outpaced the market in the past year and beaten the S&P 500 almost five to one this year.
Kidney disease is more prevalent than most Americans would guess -- about 11.5% of adults (those 20 or older) have some form of it. More than half a million Americans, National Institute of Health data show, are in some sort of treatment for it -- most as a result of diabetes or hypertension, both of which are also on the rise.
Action to Take --> Health-care investing can be volatile for a variety of factors: A number of these companies saw large swings during the health-care debate, for instance, as Wall Street wondered how policymakers would change the system. Through this, though, DaVita shares remained not only strongly resilient but in fact outperformed the market.
Regardless of the degree to which Americans make or begin to make discretionary medical decisions, this is one company I think will continue to help hundreds of thousands of patients live normal, active lives and also generate meaningfully significant returns for its investors.