Warren Buffett's bet against US kidney health
A growing economy, rising share prices and increased national wealth are usually the signs of a healthy country. However, in the case of US company DaVita’s soaring stock price, this ‘value creation’ is coming at the expense of healthy American kidneys.
The Medicare system provides health insurance to anyone in the US over the age of 65. However, in the case of kidney dialysis treatment, it will cover the cost regardless of age. This exception stems from legislation passed in 1972 under President Richard Nixon and means that to this day dialysis makes up around 1 per cent of the total US federal budget.
To access dialysis services, patients need to go to a clinic. In the US, the clinic market is effectively a duopoly, with over 80 per cent controlled by either DaVita or Fresenius. This lack of competition, and the fact the treatments are subsidised by taxpayer spending, has helped both companies generate steady cash flow over the last decade.
Given the monopoly-like industry, it is no surprise that Warren Buffett’s Berkshire Hathaway owns 43 per cent of DaVita’s shares. The dialysis business has been a favourite of Berkshire investment manager Ted Weschler for over a decade. Weschler invested in DaVita at his previous employer Peninsula Capital and soon took a position after he arrived at Berkshire in 2011.
When working at Peninsula, Weschler reportedly outlined the strengths of DaVita in letters to his partnership. He cited rising obesity rates in the US, which lead to increased rates of diabetes and kidney failure. He also said that DaVita’s patients “cannot live without the therapy the company provides, creating a very stable, recession-resistant business model”. For Warren Buffett, these qualities would be referred to as an ‘economic moat’.
Weschler’s analysis has proven accurate. Between 2011 and 2020, the number of Americans receiving in-clinic dialysis treatment increased 23 per cent to 480,000. Last quarter, DaVita treated 265,000 patients. It also made $390 (£290) per treatment, up 2 per cent year-on-year. Given most dialysis patients need three treatments a week, the annual cost can amount to over $60,000 a year.
The best way to survive kidney failure is to get a transplant. It is only after a transplant has failed that patients move to dialysis, and the average life expectancy at that point is five to ten years.
The best way to improve outcomes is to stop patients ever moving onto dialysis machines. In the case of type 2 diabetes, which is a leading cause of kidney failure, the risk can be mitigated by eating a healthier diet. This is what GLP-1 weight loss medications such as Ozempic are hoping to do, and continued success on this front would create a headwind for DaVita’s business.
However, even if GLP-1s do lower diabetes rates, levels of kidney failure in the US is unlikely to fall. As with almost all disease, the biggest risk factor on this front is age. As the US population gets older, it will become unhealthier. Last year, Medicare spending was equivalent to 3.1 per cent of GDP; by 2044 is forecast to rise to 5.1 per cent, according to the Congressional Budget Office.
Economists use gross domestic product (GDP) as a measure of a nation’s economic health. In general, higher GDP per capita means wealthier citizens. However, more spending on healthcare doesn’t mean healthier citizens. Including public and private spending, the US spends 17 per cent of its GDP on health, compared to 11 per cent in the UK and 12 per cent in France. Yet the average US life expectancy is just 78 years, below the UK’s 81 years and France’s 82.
In the last two years, DaVita’s market cap has almost doubled to $14bn. Management would say this financial success is a reflection of how many lives it has saved, and shareholders like Buffett will be happy. But the growth is also the sign of an increasingly old and unhealthy country.