California Dialysis Legislation Pummels DaVita Shares

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The state of California has taken the first step to limit the price that dialysis centers will be allowed to charge patients. The state assembly late Wednesday passed the bill, which must now go the state senate for approval and then on to Governor Jerry Brown for signature. Senate passage is expected, but Brown has not indicated what he plans to do when the bill reaches his desk.

Shares of dialysis center operators DaVita Inc. (NYSE: DVA), Fresenius Medical Care A.G. & Co. (NYSE: FMS) and American Renal Associates Holdings Inc. (NYSE: ARA) took some punishment Thursday morning on the news. DaVita, whose primary business involves operating some 2,510 U.S. dialysis centers, has been particularly hard hit.

The legislation may obviate November ballot Proposition 8, sponsored primarily by the Service Employees International Union-United Healthcare Workers West, that would cap dialysis center profits at 15% and require clinics that post higher profits to pay rebates to insurance companies or be fined. The assembly-approved legislation caps the centers’ profits at 20%.

According to an editorial in the San Jose Mercury News, Medicare and Medi-Cal reimbursements for dialysis fail to cover the private clinics’ costs so the clinics charge patients with private insurance more in order to cover all their costs and make a profit.

Warren Buffett’s Berkshire Hathaway Inc. (NYSE: BRK-A) owns approximately 22% of DaVita. Buffett investment manager Ted Wechsler signed an agreement with DaVita in 2013 limiting the Berkshire’s open-market purchases to no more than 25% of the company. DaVita stock represented less than 1.4% of Berkshire’s total portfolio at the end of the second quarter.

DaVita shares traded down about 9% in the early afternoon Thursday, at $66.40 in a 52-week range of $52.51 to $80.71. The stock’s consensus price target is $80.44.

Fresenius American depositary shares traded down 3.5% to $51.49, in a 52-week range of $46.34 to $57.94. The price target is $58.24.

American Renal shares dropped about 2.4% to trade at $21.64, in a 52-week range of $9.91 to $24.07. The price target on the shares is $22.50.