By organizing their operating model to drive success of their business model, DaVita Healthcare Partners, Inc. has found a winning strategy for dialysis care.
DaVita provides dialysis services to patients with kidney failure. In the US, Davita operates 2225 dialysis units caring for 177,000 patients who represent one third of the nation’s dialysis patients. DaVita also manages 104 dialysis units in 10 countries abroad.
Most patients on dialysis require the service to live, and need it three times a week.
DaVita’s business model can best be described as a franchise model. The company owns and operates numerous small and medium size dialysis units, each servicing 50-200 patients. Each unit requires its own staff of qualified nurses, technicians, dieticians, and social workers.
In 1972, Medicare coverage was extended to cover most dialysis patients. Today, 70% of dialysis patients are insured by Medicare at $240 per treatment. Commercial insurers cover the remainder, paying 2-5x the Medicare rate. With relatively uniform pricing across patients, DaVita makes small profits from Medicare patients and larger profits from commercial patients. DaVita’s pre-tax pre-interest earnings = (profit per treatment) x (number of treatments per center) x (number of centers). In 2013, this was approximately: $51 x 11,737 x 2014 = $1.2 billion.
DaVita’s operating model is organized around: 1) driving patient loyalty, and 2) minimizing costs.
Each dialysis patient endures a 3-4 hour treatment appointment three times per week, while coping with other medical issues such as diabetes and heart disease. DaVita has identified that proximity of the dialysis unit to the patient’s home and the quality of patient experience during the dialysis treatment are the major drivers of patient loyalty. Hence, the company uses smaller and more numerous dialysis units to provide patients with convenient options for care near their homes.
Having highly motivated and empowered employees is crucial to the success of DaVita’s operating model. These employees (branded as “teammates”) service and interact with the patients during their stay, acting as the face of the company from the patient’s point of view. Accordingly, management has developed an ethos that DaVita is a “village” where the employees take care of each other while striving to provide the best patient care. The company hosts national and regional meetings where teammates bond with each other and learn best practices for quality patient care. DaVita University is a continuing education and leadership program that offers a variety of classes on clinical and management skills free of charge. The DaVita Village Network is a program in which teammates donate money to help each during periods of crisis such as natural disaster, accident or illness and the company matches every dollar donated one for one. All combined, DaVita’s culture and its employee-focused programs serve to develop motivated and empowered employees who are energized to provide patients a quality experience, driving patient loyalty.
Given that the majority of DaVita’s prices are fixed according to Medicare reimbursement, the company has found success by minimizing its costs. A centralized Office of the Chief Medical Officer (OCMO) continually examines each step of the dialysis treatment process, searching for opportunities for quality improvement and cost-containment. Last year, for example, it identified a new type of plastic cap for the dialysis catheters that was less expensive but more effective in preventing infection. This cap is now a standard offering at DaVita locations nationwide. By having a central office with tightly linked dialysis units, DaVita is able to quickly disseminate and scale best practices across its network. Indeed, DaVita meets and exceeds all federally-mandated measures of quality.
Having optimized its ability to provide dialysis treatment below Medicare’s reimbursement rate, DaVita’s main growth strategy is through acquisition of private dialysis units, which are commonly established by individual physician practices. Because DaVita has standardized its operating model within an individual unit, it is able to easily replicate its formula from unit to unit. And this strategy has proven successful so far. Since its inception in 1999, DaVita’s market cap has grown from $200 million to $15 billion today, with a gross profit of 30%, and EBIDTA of 20%.
Poised for the Future
DaVita continues striving to align itself with the evolving path of the nation’s healthcare system. The Patient Protection and Affordable Care Act of 2010 encourages formation of Accountable Care Organizations (ACOs) that would take on the risks and opportunities of providing comprehensive medical care to patients from outpatient to inpatient settings. Soon after passage of the bill, DaVita made a $4.42 billion acquisition of HealthCare Partners, an operator of over 2000 physician practices, to fuel its growth from a dialysis company towards a comprehensive healthcare delivery business. With an energetic employee base that is trained in delivering value to patients, and a reputation for minimizing the cost required to provide quality care, DaVita is well-poised to embrace this next chapter.
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