DaVita Inc (DVA) Q2 2021 Earnings Call Transcript

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DaVita Inc (DVA -0.44%)
Q2 2021 Earnings Call
Aug 3, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good evening. My name is Missy and I will be your conference facilitator today. At this time, I would like to welcome everyone to the DaVita Second Quarter 2021 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [Operator Instructions]

Thank you, Mr. Gustafson. You may begin your conference.

Jim Gustafson -- Vice President, Investor Relations

Thank you and welcome everyone to our second quarter conference call. We appreciate your continued interest in our company. I'm Jim Gustafson, Vice President of Investor Relations and joining me today are Javier Rodriguez, our CEO; and Joel Ackerman, our CFO.

Please note that during this call, we may make forward-looking statements within the meaning of the federal securities laws. All of these statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.

For further details concerning these risks and uncertainties, please refer to our second quarter earnings press release and our SEC filings, including our most recent annual report on Form 10-K and subsequent quarterly report on Form 10-Q, and any subsequent filings we make with the SEC. Our forward-looking statements are based upon information currently available to us and we do not intend and undertake no duty to update those statements, except as may be required by law.

Additionally, we'd like to remind you that during this call we will discuss some non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our earnings press release submitted to the SEC and available on our website.

I will now turn the call over to Javier Rodriguez.

Javier Rodriguez -- Chief Executive Officer

Thank you, Jim, and good afternoon. We are excited to talk to you today about our strong Q2 performance. Our 2021 financial outlook and recent development on our effort to transform kidney care. First, let me start the conversation with the clinical highlights. Kidney transplant is the best treatment option for eligible patients with kidney failure. DaVita has worked hard over the years to help our patients gain access to transplant through education and direct support for patients to get on and stay on the transplantation waitlist. The cumulative impact is meaningful. Last December, we announced a milestone of 100,000 DaVita patients who have received transplant since the year 2000.

Further advance the cause of transplantation are collaborating on a yearlong pilot aim at improving health equity in kidney transplantation with a focus on living donors. Increasing living donor transplant expands access to transplantation by increasing the availability of organ, which has been the limiting factor in the number of transplants performed annually. This pilot provides high touch and customized information to patients and families seeking a kidney transplantation from a living donor. We look forward to learning more from this pilot, improving the health equity of kidney transplant and continuing to be the leader in supporting our patients to receive kidney transplant.

Shifting to the latest update on COVID, we have made incredible progress in our efforts to combat the COVID 19 pandemic over the past several months. New COVID infections among our patients continue to drop significantly through the last week of June down more than 90% from the peak in early January. However, similar to the rest of the country, we have started to see an uptick over the last few weeks. As of last week on a rolling seven day average basis new infection, they're still down more than 90% from the peak. Thus far, mortality continues to remain low on an absolute basis as we believe that are vaccinated patient are more protected from severe cases of COVID.

We continue to educate our patients about the benefits of vaccine to reduce vaccine hesitancy and we remain confident in our policies and procedures designed to keep our patients and our teammates safe while they're in our care. Now let me turn to our financial performance in the second quarter, we delivered strong results in both operating income and earnings per share, our margin expanded as we continue to manage cost while delivering quality care. As a result, we delivered 6% year-over-year growth in adjusted operating income and 35% year-over-year growth in our adjusted earnings per share. Our free cash flow was particularly strong this quarter, we continue to return cash to our shareholders through our stock buyback.

With the first half of the year behind us. We are now increasing the midpoint of guidance for the full year. Let me transition to update our progress in our integrated Kidney Care efforts, otherwise known as by IKC. Value-based care for our patients with kidney disease is gaining momentum and appears to have reached an inflection point. We have always believed the core name dialysis care with the broader healthcare needs of KB and SKG patients with simultaneously improve outcomes and reduce total healthcare costs. For years, we've been participating in a variety of small programs and pilots to build our integrated care capability and better understand the economics we believe we are at that point now where we are ready to shift to the next stage of the evolution of integrated care.

You might be wondering why now, the trend toward value-based care is not new either in kidney care or other segments of healthcare so what's changed to make the development of scale business viable today. There's a couple of reasons. First with the growth of Medicare Advantage payers are looking for innovative ways to manage the increasing number of ESKs patients choosing MA plans these patients tend to be more complex and most of them MA patient and should benefit from tailored care management. Second, CMS recently initiated the payment models and kidney modern in kidney care. We are preparing to partner with nephrologists and up to 12 markets beginning in January of next year to participate in CKCC voluntary program.

Our participation and CKPKC model will also provide us with operational scale in more geographies to enter into other value based arrangements, we've increased our confidence in our capabilities to deliver clinical and economic value at scale and have lean in on our willingness to take risk. We believe we're well positioned to win an integrated care because of our strong partnership with nephrologists, our regular and consistent interactions with patients, a broad Kidney Care platform that spans various modalities and care setting. And a clinical data set and analytics that we used to create develop clinical interventions to support our patients holistically.

We have a demonstrated track record of improving patient outcome care, and lowering costs for patients in risk arrangement for example, in our FCOS [Phonetic], we were able to generate non-dialysis cost savings in the high single digits which translated into more than double the average savings rates compared to the rest of the industry over the life of the program. With our special needs plan we have been able to lower mortality by 23% relative to other patients within the same-center and county.

To give you a better sense of the scale of the business. As of today, approximately 10% of our US dialysis patients are in value-based care arrangements in which Tervita is responsible for managing the total cost of care. This represents almost $2 billion of annual medical cost under management. In addition, we have various other forms of value based care arrangements with payers in. We have economic incentives for improving quality and lowering costs. In 2022, we expect our integrated Kidney Care business to double inside both the number of patients in risk arrangement and the dollars under management. We also expect to see a dramatic increase in the number of CKB Live we have under risk in 2022.

To prepare for this growth. We are currently scaling up our clinical team and furthering building out our support. Because of the investment as well as the delays and cost savings impact of our model of care and revenue recognition. We expect to incur a net operating loss of $120 million in 2021 in our US ancillary segment this outcome is consistent with the OII headwinds from ITC growth, we called out at the beginning of the year and is of course included in our full year guidance. The doubling of the business next year could result and an incremental operating loss in our ancillary segment of $50 million in 2022. We expect significant improvement in our financial performance beginning in 2023 as we begin to recognize savings from the new contracts that we entered in 2021 and 2022.

Over the five-plus-year horizon, we believe that our IKC business could become a sustainable driver of significant operating income growth. Currently we serve approximately 200,000 dialysis patients across the country, we utilize over $12 billion in health services outside of the dialysis facility, including the cost of hospitalization, our patient procedures and physician services. In addition, we see an opportunity to manage the care of up streams CKD patients who currently do not dialyzed in our centers. Assuming that we are managing the total cost of care for more than half of our dialysis patients as well as others CKD patients at low-to-single digit margin, we believe that this could be meaningful financial opportunity.

In summary all of healthcare has been talking about value based for years. We are excited for DaVita to lead the way.

With that I will turn the call over to Joel.

Joel Ackerman -- Chief Financial Officer

Thanks, Javier. We had a strong quarter despite the continuing operational challenges presented by COVID primarily as a result of strong RPT performance and continued discipline on cost. For the quarter, operating income was $490 million and earnings per share were $2.64. Our Q2 results include a net COVID headwind of approximately $35 million similar to what we saw in Q1. Primarily the impact of excess mortality on volume and elevated PPE costs partially offset by sequestration relief and reduced travel and meeting expenses.

Turning to volume. In Q2 treatments per day increased by 0.4% compared to Q1. Excess mortality declined significantly in Q2 from approximately 3,000 in Q1 to fewer than 500 in Q2. At this point, we are cautiously optimistic that the worst is behind us. But we're closely monitoring the potential impact of the delta Varian especially within pockets of the country that have lower vaccination rates. Longer term, we continue to believe that we will return to pre-pandemic treatment growth levels with an additional tailwind from lower than normal mortality rate. Our US dialysis revenue per treatment grew sequentially by almost $6 this quarter, primarily due to normal seasonal improvements from patients meeting their co-insurance and deductible obligations. We also saw favorable changes in government rate and mix including the continued growth in the percentage of patients enrolled in Medicare Advantage.

Patient care costs and G&A expense per treatment in total were relatively flat quarter-over-quarter. Our patient care costs decreased sequentially primarily due to reductions in labor costs. Our G&A increased slightly, primarily due to charitable contributions and increases in personnel costs. As expected, our US dialysis and lab DSO decreased by approximately six days in Q2 versus Q1. Primarily due to collections on the temporary billing holds related to the winter storms in the first quarter. The majority of the impact of the storms on DSO and cash flow, we reversed in Q2. But we may see an ongoing smaller benefit through the balance of the year.

During the second quarter, we generated a gain of approximately $9 million on one of our DaVita Venture Group investments which hit the other income line on our P&L. We have a small investment in medical that recently went public. The value of this investment at quarter end was $23 million going forward market-to-market every quarter.

Now turning to some updates on the rest of this year and some initial thoughts on 2022. As Javier mentioned, we are raising our guidance ranges for 2021 as follows. Adjusted earnings per share of $8.80 to $9.40. Adjusted operating income of $1.8 billion to $1.875 billion and free cash flow of $1 billion to $1.2 billion. Also we now expect our 2021 effective tax rate on income attributable to DaVita to be between 24% and 26% lower than the 26% to 28% range that we had communicated at the beginning of the year. These new guidance ranges exclude the potential impact of a significant fourth COVID surge later this year. I'll call out two notable potential headwind during the second half of the year.

First is COVID we continue to expect the impact of excess mortality will be higher in the back half of the year than in the first half of the year due to the compounding impact of mortality through 2021. We're also expecting an uptick on costs related to testing, vaccinations and teammate support as a result of the delta variant. As a result, we are increasing the middle of the range of COVID impact for the full year to $170 million from $150 million. That implies a $30 million headwind from COVID in the second half of the year compared to the first half of the year. As a reminder, this is the middle of what is a wide range of possible impacts depending on the impact of the delta or other variance and any additional COVID mandate.

Second, we expect to experience losses in our US ancillary segment of approximately $70 million in the second half of the year compared to $50 million in the first half of the year. This incremental loss is due primarily to new value based care arrangements and start-up costs associated with the CKCC program that launches in 2022. Looking forward to 2022 we do not expect anything unusual among the primary drivers of the business, including RPT, cost per treatment or capital expenditures. However we expect pressure on OI growth from the increased spend on growing our IKC business, the possibility of union activity in 2022 that we did not face in 2021 and the first year of depreciation expense associated with our new clinical IT platform that we have been developing for the past several years. We will provide more specific 2022 guidance on a future earnings call.

Operator, let's open the lines for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Pito Chickering from Deutsche Bank. Sir, your line is open.

Pito Chickering -- Deutsche Bank -- Analyst

Hey guys, good afternoon and thanks for taking my questions. Lead off here on the ITC that you're talking about that you disclosed the script $2 billion of gross revenues and seen that double in 2022, can you remind us how the flows through the P&L and about the delta segments and other ancillary services. When will you begin to disclose as revenues and costs on the P&L, you can model it. And then in five years, where do you think this can go. Is that a $12 billion number you referenced in the script. And from a margin perspective after year one -- high single digit rep -- you know, margin on the $2 billion for next year and then additional drag in the $2 billion in new capital [Phonetic] arrangements?

Javier Rodriguez -- Chief Executive Officer

Thanks Pito. I hope I got all that. But please jump in if I didn't catch it. So starting off, in terms of where it is on the P&L. We've got a segment, our strategic initiatives which breaks down between US and international. The US component of strategic initiatives is an excellent proxy for IKCP&L. We've simplified what exists in that segment over the last few years as we've exited some of the strategic initiatives and other than a couple of small things, it's everything related to IKC through that line. So I think as you think about both revenue and operating income using the US component of SI's as a proxy for our IKC business is a really good way to look at it. So that's number one.

In terms of where this can go over time, look, there are a lot of questions around how many members we can enroll here, what our savings rate can be, how much of that will ultimately capture. I think a reasonably simple way to model it would be to start with something like a third of our ESKD [Phonetic] population in this user a spend per patient, especially if you're looking out a few years of $100,000 per patient, and that will give you a medical cost under management. And then the question is, what percent of medical cost under management that we think can turn into ally [Phonetic]. And I would say a reasonable number would be something in the low single digits something equivalent to what a typical MA plan would drive as margin. So 1%, 2%, 3%, maybe 4% in that range as a percentage of medical cost under management, I think is the right way to think about what the potential for this is in the out years. Okay. I'm sorry, Pito. I think you had a third question which I didn't catch.

Pito Chickering -- Deutsche Bank -- Analyst

Yeah. So there's a few progressions period in there. I guess you guys begin disclosing what those gross revenues are as all the patients under management is, they help us model this going forward as well.

Javier Rodriguez -- Chief Executive Officer

Yeah, so I don't think we're not going to disclose a number that we would call gross revenue. I think the number that we will disclose would be what the revenue would be if we used gross revenue accounting, which would be the medical cost under management. And we've seen this before they are under DMG there were components of the business that we're gross accounting and some were net and we would disclose a medical cost under management or something like that. And that's the $2 billion number that Javier talked about in the script.

Pito Chickering -- Deutsche Bank -- Analyst

Okay. And then a sort of quick follow-up here on just the treatment growth. Can you guys disclose a number, patients you had at the end of 1Q and 2Q. And so I understand what treatment growth there is in the back half of the year as the excess mortality from COVID hope is behind us. And if we assume remain these current levels. Is it fair to model treatment growth going positive in the fourth quarter?

Javier Rodriguez -- Chief Executive Officer

Yeah. So look, I think the right number to look at is not patients but treatments per day and the good news. Let me try and walk you through, first the good news is treatments per day grew in Q2 over Q1. And I think a sequential view of it will get you a better model than a year-over-year view. So sequentially treatments per day grew in Q2 over Q1 about 400 treatments per day. There is a bunch of things going on in there and so let me try and break it down for you. First, the good news is the new to dialysis treatment starts remained strong. So the question that we've gotten in the past about what has happened within the CKD population as a result of COVID. We continue to see strong new to dialysis treatment admissions. So we don't feel any pressure there right now. In terms of Q2 over Q1, Q2 did benefit from the storms in Q1, so you'll remember the storms in from Yuri led to lower treatments volume in Q1. And so the comparison in Q2 was a positive there. That said, there are few things weighing on the quarter. First acute volumes are down as you would expect with the pandemic, getting better in Q2 over Q1.

Second excess mortality remained above normal. It was well below what we saw in Q1 came down from 3,000 approximately to less than 500, but it's still above normal. And finally, the mix of treatment days in Q2 was unfavorable. We do a fewer treatments on Tuesday, Thursday Saturdays than we do on Monday, Wednesdays and Fridays and that was about a 50 basis point headwind in Q2 over Q1. So just to summarize, the good news is, we're back to a situation where treatments are growing quarter-over-quarter, the new to dialysis admissions remained strong. That said, there continues to be a bit of noise in the numbers.

Pito Chickering -- Deutsche Bank -- Analyst

Great. Thanks. I'll just go back in the queue.

Operator

Thank you. Our next question comes from Justin Lake from Wolfe Research. Your line is open sir.

Justin Lake -- Wolfe Research -- Analyst

Thanks. I wanted to follow up on the value based care. So the Pito's question the, it would be great if you can give us those numbers and is that going to be just for the government programs. Are you going to be able to. You can also put any kinds of MA value-based contracting, commercial value based contracting that you have in there that's above and beyond the dialysis slide.

Javier Rodriguez -- Chief Executive Officer

Yeah, that would include all of that. Justin, it would include MA, it would include traditional Medicare, as well as anything on the commercial side.

Justin Lake -- Wolfe Research -- Analyst

Okay. So, that number will be all profitability, I assume, does that include or exclude spending on dialysis. When you talk about the margin, are you talking about the $60,000 that's dialysis or you're talking about the 90-95 and includes dialysis when you gross-up for the $2 billion?

Javier Rodriguez -- Chief Executive Officer

It includes the dialysis number. So the patient number would be more like 100,000 or 90,000 depending on what time period.

Justin Lake -- Wolfe Research -- Analyst

And you mentioned on the call, in the trend, the press release issued say that your payer mix changed a little bit to the positive. Can you talk a little bit about commercial volume versus government?

Javier Rodriguez -- Chief Executive Officer

Justin the reality is, there's not a lot to say, this is a bit of a numerator, denominator issue, you had more mortality on the Medicare side and the commercial side held strong as people really valued their income and insurance and so is a lot more resilient than we anticipated. So that's the dynamic that we're discussing here. A couple of other things Justin, while you're asking about the value based care and how do we calculate it with dialysis and non-dialysis. Yeah, I think it's important to do the math, you're doing you subtract the dialysis. And then you have to put in there that the payer/government have participation in the savings, the nephrologists then has a participation in the savings and that's how you trickle down to the percentages. The 1%, 2% or 3% percentage roughly that Joe talked about.

Justin Lake -- Wolfe Research -- Analyst

Okay, thanks for that. And can you just give the, can you help me with the commercial treatment growth in the quarter.

Javier Rodriguez -- Chief Executive Officer

I can tell you, the commercial mix was up about 20 bps in Q2 over Q1.

Justin Lake -- Wolfe Research -- Analyst

Okay, great. And then in terms of.

Javier Rodriguez -- Chief Executive Officer

As a reminder, you don't get you don't get as much from that in COVID when you're your Medicare patients are passing away as you would in a normal time.

Justin Lake -- Wolfe Research -- Analyst

Okay and then just last question on, you mentioned 2022. I apologize if I missed this, but the tax rate change for this year, do you expect that to continue in 2022 or is this a reasonable new tax rate to assume or should we go back to the original guidance and assume that's the tax rate for 2022?

Javier Rodriguez -- Chief Executive Officer

There's still a lot we don't know about how it will play out. I think it is reasonable to assume some if not all of the benefit we are seeing this year will continue for another year, but not in perpetuity. So for 2022, yes, 2023 I'd say no.

Justin Lake -- Wolfe Research -- Analyst

Okay, thanks for that. I'll jump back.

Operator

Thank you. Next question comes from Kevin Fischbeck from Bank of America. Your line is open sir.

Kevin Fischbeck -- Bank of America -- Analyst

All right, great, thanks. I wanted to dig into this, the investments that you're making around this value based care. I just want to make sure, the numbers are right, you said 120 million this year and then it sounded like you said $50 million. Do you think $50 million incremental so like $170 million or did you mean $120 million goes to $250 million?

Javier Rodriguez -- Chief Executive Officer

Incremental.

Kevin Fischbeck -- Bank of America -- Analyst

Incremental. Okay. Is there -- I guess, as we think about that number; is that a net number? If you start to make a 2% margin on the value based care; is that an offset to that or is that kind of inclusive of any potential profitability?

Javier Rodriguez -- Chief Executive Officer

It's a net number.

Kevin Fischbeck -- Bank of America -- Analyst

Net number. Okay. And then it sounded like you were saying that the 120 included the CKCC as well is that true. And does that number, I guess just sort of think about the 120 to 170 roll out there is that all included.

Javier Rodriguez -- Chief Executive Officer

So, Kevin, the CKCC doesn't start till the beginning of 2022. But we will start investing in the back half of the year in anticipation of that growth. So it's not, it's expense that we are building in anticipation of growth related to CKCC.

Kevin Fischbeck -- Bank of America -- Analyst

Okay. And then as far as the sequential enrollment and treatment growth I guess it will look like. That's a better way to look at, it's a lot of puts and takes into that number. I guess what, once you get back to normal, what should that number look like. I guess like 0.4%, I'm thinking. 1.6% annualized like what do you think when this all normalizes, what is the growth rate and volume is at a 2% numbers or is it 3% number. What would it ultimately annualized there?

Javier Rodriguez -- Chief Executive Officer

I think at the end of the day, Kevin, one of the things as you heard from Joe. There's a lot of different dynamics and interplay for us. The positive is that we're seeing, let's call it the new stabilize pre COVID and so the best data we have right now is that will revert to the pre-COVID numbers. And so I think that that's the best assumption we keep you posted if that changes.

Kevin Fischbeck -- Bank of America -- Analyst

Okay. And it sounds like you're not really seeing anything on the labor side, a number of companies are complaining about labor pressure. I guess could you talk a bit about what you're doing there and then it sounds like you talked about union issues. I think you meant kind of ballot initiatives right not actually labor costs, but more ballot initiatives that might be a pressure next year?

Javier Rodriguez -- Chief Executive Officer

Yeah, so let me grab a couple. We're not going to complain about the pressure but it's absolutely there. It is a very dynamic and competitive marketplace. We continue to invest in a differentiated workplace and find that our teammates find great fulfillment in the purpose of the work that we do. That said, again the marketplace is quite dynamic. As it relates to the second question, yes we are talking about the union might come up with another ballot. And so we've now unfortunately, every other year have had to deal with it. We hope that there are a little more empathetic to the fact that we're in a pandemic in that, it is not a good use of the resources, but we just want to continue to talk about it. So no one surprised.

Kevin Fischbeck -- Bank of America -- Analyst

Okay. And then last question I guess as we think about the going to growth in the value based care opportunity is what you're doing differentiated. Do you think that there is going to be share shifts as a result of this or other smaller players or midsized players going to struggle to do what you're doing and you're resonate with the payers, and so that you actually see a volume from this or is this kind of where the industry is going in your push into this is largely kind of the same so that you wouldn't expect is just really more about the revenue and the margin that it is about gaining share?

Javier Rodriguez -- Chief Executive Officer

It's an interesting play. From our perspective, we believe that we're really well positioned and of course there's a lot of dynamics on volume and mix, how a patient gets to us all the way from a patient choice to a payer choice to physician. And so that dynamic is has got a lot going on, can the whole chain there really see the value that we create. I think that over time the answer will be, yes. Because of clinical outcomes will show it and there'll be transparency where people say, gosh, if I can live there longer if I can get more transplant if I can get my CKD and not be hospitalized. I want to go there. But as you know, that takes time. And so, from my perspective right now, I'm not assuming a change in sort of a shift in decision making until this plays out a bit more.

Kevin Fischbeck -- Bank of America -- Analyst

All right, great, thanks.

Operator

Our next question comes from Lisa Clive from Bernstein. Your line is open ma'am.

Lisa Clive -- Bernstein -- Analyst

Hi, thanks very much. Apologies if I missed it in the prepared remarks. So what did you say you're vaccination rate was for your patients and also what is it for your team mates and second question, have you been giving third doses for selected patients given that the immune compromised seem to not responded well to the vaccines in terms of the efficacy. And then lastly, are you still testing patients and teammates before every session and just wondering how that is going to evolve in the coming quarters?

Javier Rodriguez -- Chief Executive Officer

All right. But let me grab them and then if I miss anyone want to please come back at me. The patient vaccinated complete with two doses is around 72% or so. Teammates is in 68%, we're starting to tracking those people that intend to get a vaccine and we're tracking somewhere in the 1% or 2% that are either thinking of getting in their first cycle. To my knowledge there is nothing of significance in the third dosage yet in our population. And so I know that the physician community is discussing it but I don't have any major numbers on that. And then what was your last question.

Testing, we didn't test all the patients. I think that was in the assumed question what we do is we of course test anyone that has any symptoms. And then of course our patients get tested a lot more because they're using so much care healthcare that when they go to other physician offices or hospitals or other things they get tested. So they're disproportionately tested. But we just test when their symptoms.

Lisa Clive -- Bernstein -- Analyst

Okay, thanks very much.

Operator

Thank you. Our next question comes from Pito Chickering from Deutsche Bank. Your line is open sir.

Pito Chickering -- Deutsche Bank -- Analyst

Hey, guys. Thanks for taking the follow-up. Linking back to the IKCPs, as investors are bit confused on this disclosures my understanding today as you collect $2 billion of sort of gross revenues. About half of that look in the dialysis costs and the other half are in medical costs or other medical costs. So when you referenced of 1% to 4% margin. That's on the full $2 billion, so should we think about instead as a 2% to 8% margin on a $1 billion of non-dialysis cost?

Javier Rodriguez -- Chief Executive Officer

Either way works, we've decided to standardize on the full cost, but either way is perfectly fine. Way to do the math.

Pito Chickering -- Deutsche Bank -- Analyst

Okay, perfect. And then make hit one on patient care costs. Obviously, with our investor concern our labor inflation during 2Q, obviously your cost per treatment were down sequentially driven by a number of areas. But as I think about for patient care costs over the next couple of years. Can you give us additional color on what can drive further efficiencies here, specifically around center occupancy increasing and the shift in home dialysis? Thanks so much.

Javier Rodriguez -- Chief Executive Officer

Well, let me grab it, as it relates to the inflation, of course, we've been very good over time. If you do our CAGAR over the last five years or so, I believe we're right at 1% or so slightly below. And so we view the levers quite thoughtfully over time in there, we are managing an essence Pharmaceuticals. We're managing productivity and of course wage rate and there's other, other things like supplies and other miscellaneous items which we are very diligent on. So we don't think those dynamics will change much other than during COVID of course the PPE has gone up dramatically and we hope that that stabilizes over time. As it relates to the wage inflation, we have nothing really particular to say about it. We are another player in the real dynamic marketplace and it feels like it's shifting quite aggressively right now is that a short period or does that sustain itself. So I don't think I can comment on the multi-year, it is fair to say that we are aggressively looking at all the pharmaceutical and all the options to make sure that our physicians have the choice of their pharmaceutical, but at the best price possible.

So I don't know if they got to all of your question, I think the last part of it was around capacity utilization and of course we are watching it very aggressively. We went from a time when we were very aggressive on the de novo build to. As you can see, we really tapered that back and we're building a lot more home centers, which are a lot more capital efficient. We will keep that that sort of balance in check, because we know the patients need the interplay between the home and the center and so there needs to be capacity available and as we lost here roughly 5% of our patient during COVID. We are aggressively taking a look at our portfolio to make sure that our patients have access and that we are not having centers that are not the right capacity.

Pito Chickering -- Deutsche Bank -- Analyst

Okay. And then, sort of last follow-up question for your, on the IKC at least for now. Is it fair to think about the operating income in the dialysis segment being unchanged as you increase your penetration with IKC patients?

Javier Rodriguez -- Chief Executive Officer

I think that's fair. We are trying to present this in a way that represents the fact that the business is, they not independent in so far as they are intricately they are linked and that's why we think and we are excited about our opportunity to win in IKC but trying to present them as separate income statements, if you will. So you can assess has the core historical dialysis business doing and has the new IKC business doing.

Pito Chickering -- Deutsche Bank -- Analyst

And then last one here. Is it fair to think that kind of as a role just for third quarter results that you be able to give us additional disclosures in the press release around this sort of new segment or division?

Javier Rodriguez -- Chief Executive Officer

We are taking a careful look about what's the right level of disclosure as the IKC business grows and making sure the shareholders have a good understanding of the economics of the business, the progress, the investment, the spending etcetera. So more to come on where we land on that.

Pito Chickering -- Deutsche Bank -- Analyst

Great, thanks so much guys.

Operator

Thank you. There are no further questions in queue at this time.

Javier Rodriguez -- Chief Executive Officer

Okay, well thank you Missy, let me make a couple of closing comments. Number one, our core business is strong. Number two, we are entering an exciting and dynamic time with an opportunity to deliver a lot of value for our patients by connecting and coordinating their care with payers, nephrologist and providers. Point three, the clinical and the economic prices are absolutely meaningful and like most valuable prices. There is a lot to do to make the plan a reality. Point four, if for whatever reason we cannot accomplish the desired outcomes the economic risk is limited structurally because there are termination rights and off ramps. So in summary, there is a big price with limited downside. So hopefully that helps you think of how we're thinking about, sorry that lets you understand a little of how we're thinking about it. We thank you for your support and we enter this new chapter together. Be well, everyone.

Operator

[Operator Closing Remarks]

Duration: 43 minutes

Call participants:

Jim Gustafson -- Vice President, Investor Relations

Javier Rodriguez -- Chief Executive Officer

Joel Ackerman -- Chief Financial Officer

Pito Chickering -- Deutsche Bank -- Analyst

Justin Lake -- Wolfe Research -- Analyst

Kevin Fischbeck -- Bank of America -- Analyst

Lisa Clive -- Bernstein -- Analyst

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