DaVita (NYSE:DVA) is a leading provider of kidney dialysis services in the U.S. for patients suffering from chronic kidney failure, also known as end stage renal disease. The company has everything an investor could look for, high returns on equity, a strong competitive position and excellent capital allocation. However, secular headwinds have gradually eroded the attractiveness of this business over time and the company looks like it is going to continue struggling.
DaVita has a whopping 37% share of the U.S. dialysis market based upon the number of patients they serve. They continue to grow the number of dialysis centers in the United States and increased their footprint by around 5% last year, adding 160 new centers. The company has been able to grow its share of U.S. dialysis patients, the quality of its care, reduced patient mortality rates and the reputation it has with referring physicians. Moreover, DaVita's business is stable and predictable as the total U.S. dialysis patient base is a relatively stable and growing factor. With an ageing population, there is a growing need for dialysis service, and statistics show that the industry has an annual growth rate of around 3.5%.
DaVita ticks all the boxes for an outstanding healthcare company. It provides a superior quality of care, saves the United States healthcare system money and earns very high returns on equity. That is probably why Berkshire Hathaway's (BRK.A) (BRK.B) Ted Weschler decided to invest in the company.
Over time, though, DaVita has seen its unit economics worsen. Rising cost pressures from a tight job market have meant that the company has seen its margins slip. Additionally, as a result of across-the-board spending cuts that took effect in 2012, Medicare payments were reduced by 2% which has been extended all the way through fiscal year 2027. These across-the-board spending cuts have affected and will continue
