DaVita, Peers Under Pressure As California Passes Controversial Dialysis Bill

Shares of DaVita (DVA), Fresenius Medical (FMS) and American Renal Associates (ARA) are slipping this morning after the California Assembly passed dialysis legislation SB 1156, a union-backed bill that will cap commercial dialysis payments at lower Medicare rates and force charities to disclose donors of third-party payments. The bill would essentially create a single-payer for dialysis services in the state, but California’s Senate still has to vote it through again before it heads to Governor Jerry Brown’s desk.

RISK TO DAVITA’S EARNINGS: After the California Assembly passed an amended version of Senate Bill 1156, which, among other things, requires that entities providing charitable premium assistance to identify and disclose to the health plan the details of each person assisted, JPMorgan analyst Gary Taylor told investors that he believes this bill could impair approximately half of DaVita’s California earnings or about 10% of total corporate earnings. Furthermore, the analyst noted that he sees a risk that other states could adopt similar legislation supported by insurers, employers, and the Service Employees International Union. Taylor sees the issue as constituting significant binary event risk for DaVita shareholders, reiterating an Underweight rating and a $68 price target on the shares.

RISK ‘SEEMS MANAGEABLE’: In a research note of his own after the California Assembly passed SB 1156, Baird analyst Matthew Gillmor told investors that he estimates the gross earnings risk to DaVita is about 8%. While the stock arguably prices in significant risk associated with SEIU legislative/ballot efforts, the analyst had been hopeful the industry would be successful in combating these initiatives. While his conviction level moves somewhat lower, Gillmor argued that the risk associated with SB 1156 “seems manageable”. The analyst reiterated an Outperform rating and $90 price target on DaVita shares.

PRICE ACTION: In morning trading, shares of DaVita have plunged over 9% to $66.00, while American Renal and Fresenius Medical have dropped about 3% each to $21.64 and $51.52, respectively.