DaVita Inc

NYSE:DVA

Earnings Call Analysis

Navigating Challenges and Maintaining Momentum

In the face of recent hurricanes and supply chain disruptions, DaVita’s management highlighted its commitment to delivering uninterrupted care while enhancing operational efficiency. Despite these challenges, they reported a strong performance in the third quarter, reaffirming their overall business resilience.

Financial Performance Overview

For Q3, DaVita reported an adjusted operating income of $535 million, with adjusted earnings per share (EPS) at $2.59 and free cash flow reaching $555 million. The treatment volume per day remained flat compared to previous quarters, primarily influenced by weather-related mistreatment rates caused by hurricanes. The company still expects full-year treatment volume growth in the range of 0.5% to 1%.

Revenue Growth and Cost Management

Revenue per treatment saw an increase of more than $4 compared to Q2, aligning with management’s expectations. They anticipate revenue per treatment (RPT) growth for the full year within 3.5% to 4%. However, patient care costs per treatment increased slightly, attributed to ongoing labor cost pressures and higher medical benefits expenses.

Headwinds and Tailwinds Ahead

Looking into 2025, DaVita's leadership discussed several anticipated headwinds including continued elevated mortality, the ongoing impact of Baxter's facility supply disruptions, and the expiration of their 2% interest rate caps, which could pressure EPS. On the other hand, potential tailwinds include declining center closure costs and a positive operational income contribution from international acquisitions.

Guidance for Future Performance

Management reaffirmed their adjusted operating income guidance for 2024, which remains between $1.91 billion to $2.01 billion despite potential impact from hurricanes in Q4. They also preserved their adjusted EPS expectations within $9.25 to $10.05, alongside projections for free cash flow between $950 million and $1.2 billion.

Adapting to Regulatory Changes

DaVita is preparing for upcoming changes in reimbursement policies, particularly concerning the inclusion of oral medications in the bundle. While details are pending, these modifications could enhance patient access to necessary therapies, setting the stage for future growth. However, the uncertainty around pricing and reimbursement structures adds a layer of complexity.

Long-Term Outlook and Strategic Focus

Despite substantial recent challenges, DaVita appears well-positioned to return to pre-pandemic operational income growth levels, with historical growth rates ranging between 3% to 7%. They emphasize that their strong cash flow and disciplined capital allocation strategies will continue to support shareholder value through share buybacks, having already repurchased 2.7 million shares in the third quarter.

Earnings Call Transcript 2024-Q3

[Operator]

Good evening. My name is Michelle, and I will be your conference facilitator today. [Operator Instructions]. At this time, we would like to welcome everyone to the DaVita Third Quarter 2024 Earnings Call. [Operator Instructions].

Thank you, Mr. Eliason, you may begin your conference.

[Nic Eliason, executive]

Thank you, and welcome to our third quarter conference call. We appreciate your continued interest in our company. I'm Nic Eliason, Group 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 the 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 third quarter earnings press release and our SEC filings, including our most recent annual report on Form 10-K, all subsequent quarterly reports on Form 10-Q and other subsequent filings that we make with the SEC.

Our forward-looking statements are based on information currently available to us, and we do not intend and undertake no duty to update these 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 press release furnished to the SEC and available on our website.

I will now turn the call over to Javier Rodriguez.

[Javier Rodriguez, executive]

Thank you, Nic, and thank you all for joining the call today. I'm grateful for the incredible effort of our frontline caregivers as we deliver outstanding care for our patients while also navigating recent hurricanes and related supply disruption. Alongside these challenges, we continue to execute on operating efficiencies and innovate across the continuum of care. Today, I will cover our third quarter performance, which was in line with our expectations, provide an update on our supply chain, discuss our expectations for upcoming CMS 2025 final rule and wrap up with some comments about next year.

But first, we will start the call as we always do with a clinical highlight. This quarter, we'll use this opportunity to highlight the remarkable resilience our patients and teammates have demonstrated in the face of recent storms. Over the past month, millions of lives were impacted by the devastation caused by Hurricane Helene and Milton despite hundreds of centers being in the path of these storms, most were open within days of the storm relenting and all but one is fully operational today, providing care in these communities.

Many inspirational stories emerged from the dialysis community, which came together to support those in need. In the immediate aftermath of these storms, our care teams from across the country rallied to support the regions affected. DaVita deployed generators, water tankers, over 20,000 gallons of fuel, and high water crews to conduct wellness checks and search for missing patients and teammates.

Local leadership worked tirelessly to account for all patients and teammates and to coordinate transportation for urgent access to the dialysis care many patients needed to survive. Our Asheville Kidney Center opened on the Sunday immediately after Hurricane Helene, under generated power to provide the care for patients from six nearby facilities. We and others in the kidney care community open our doors to anyone needing treatment, including those who normally treat with other providers. I was proud to see the dialysis community come together in common support of patient care.

Combined with the dedication of our local care teams, our successful emergency response has again underscored the importance of scaled resources and operating discipline. Although the storms have since passed, our efforts are ongoing to coordinate humanitarian needs, including food, housing and other assistance. We continue to work with the impacted communities to rebuild.

Thank you all to the teammates who have gone above and beyond to care for one another and our patients.

Beyond the community impact, key supply lines were disrupted by Hurricane Helene due to the closing of Baxter's North Cove facility. Baxter supplies us with the majority of our peritoneal dialysis or PD solution we used for home PD therapy and the majority of our saline used during each in-center hemodialysis treatment. Baxter and other manufacturers have been able to provide sufficient supply for all our current PD patients to continue their treatment relatively uninterrupted.

While we have had to temporarily suspend new patient starts, on PD, thanks to the great efforts of our regulators, government officials and Baxter, we expect to resume new PD starts next month, and we expect supply dynamics to normalize in the first quarter.

Shifting to saline, Baxter is now able to supply us with approximately 60% of their pre-storm levels as they continue their work to bring the North Cove facility back online. Fortunately, we've been successful in securing alternative supply to ensure continuity of care and safety for our patients. Because these challenges occurred near the end of the quarter, the impact on Q3 financial results was minimal. For the fourth quarter, we estimate an impact of approximately $10 million to $20 million due to the high supply costs, lower PD patient starts and lower productivity from our home caregivers. This is now included within our 2024 adjusted operating income guidance range, and we expect a portion of this quarterly impact will continue into 2025, depending on the duration of the supply challenges.

I'll transition now to our expectations for the ESRD final rule from CMS, which we anticipate will be published shortly. While there are many aspects of the rule, we will be primarily focused on two areas. First, the market basket update, including how CMS handles the new proposed wage index and the base rate. As a reminder, the proposed rule led to an approximate 2.1% increase.

Second is the transition of oral-only drugs into the bundle beginning January 1. As a reminder, this is a statutory mandate by which oral-only drugs which are mostly phosphate binders will transition from the Medicare drug benefit over to Medicare Part B. While CMS made clear, it intends for these drugs to enter the bundle, we are waiting on information such as initial reimbursement and the treatment of unbillable items. We continue to believe this transition to the bundle will provide more patients with access to these important therapies. We recognize that some pharmaceutical manufacturers continue to advocate for the legislation to delay the implementation of this long-standing rule but urge legislators to put patient access first. We're prepared to implement this transition in support of our patients.

Transitioning to our third quarter performance. Adjusted operating income was $535 million and adjusted earnings per share was $2.59. We view our third quarter results as fairly straightforward, consistent with how we have delivered value through this entire year. Although treatment volume growth remains a challenge, our business continues to demonstrate resilience as we mitigate the volume headwinds with margin expansion, including the momentum of our IKC and international results, all while continuing to invest in our future. Cash flow remains strong, and we continue to deliver on our disciplined capital allocation strategy returning capital to shareholders through share repurchases.

Turning to the full year. We remain on track to deliver results consistent with our 2024 guidance range. We're reconfirming our 2024 adjusted operating income guidance of $1.91 billion to $2.01 billion. This forecast now includes the impact of Baxter supply shortage. It is a bit early to give specific guidance for 2025, although I know that many of you are already looking ahead to next year. Over the next few months, we'll learn more key factors, including open enrollment, oral drugs in the bundle, integrated kidney care and others, so we will provide formal 2025 guidance on the fourth quarter call, consistent with our normal cadence.

That said, some multiyear context may be helpful. After challenging years in 2021 and 2022 during the pandemic, we're now on track to deliver our second consecutive year of double-digit adjusted OI growth despite continuing volume and labor pressures. Looking forward, we expect to return to adjusted OI growth more consistent with our historic pre-pandemic multiyear guidance.

I will now turn it over to Joel to discuss our financial performance and outlook in more detail.

[Joel Ackerman, executive]

Thank you, Javier. For the quarter, adjusted operating income was $535 million. Adjusted EPS was $2.59 and free cash flow was $555 million. Let me start with some details behind the Q3 results. Quarter-over-quarter treatment volume per day was flat. This was in line with our expectations and is the result of continued strong admissions offset by elevated mortality and slightly higher mistreatment rates, resulting from inclement weather namely Hurricane Beryl in July and Hurricane Helene in September. We remain confident that our full-year treatment volume growth will fall in the range of 0.5% to 1%.

Revenue per treatment was up more than $4 versus the second quarter, in line with our expectations. Our revenue cycle performance is sustaining the strong RPT results we've seen throughout the year. We still expect for RPT growth to be within the range of 3.5% to 4%. Patient care cost per treatment increased $2 sequentially. This was primarily the result of continued labor cost pressure plus higher medical benefits expense in the quarter. G&A costs increased by $19 million quarter-over-quarter due to the typical quarterly variability and expense timing. Depreciation and amortization increased by $11 million in Q3 versus Q2 as a result of higher center closure costs.

International OI increased slightly in the quarter as the result of strong operational performance offset by $4 million of unfavorable foreign exchange impact. Adjusted operating results within Integrated Kidney Care, our value-based care segment increased $32 million sequentially due to lower costs in our special needs plans and timing of revenue recognition related to CKCC, the government value-based care demonstration program. As always, we recommend evaluating IKC performance on an annual basis given the propensity for quarterly variability. We still believe IKC will have a full year operating loss of approximately $50 million.

Below the OI line, third quarter debt expense was $37 million higher than in Q2. This was due to two main factors: first, our 2% interest rate caps expired at the end of June and our current caps have a weighted average rate of approximately 4.3% for the rest of 2024. This impact is in line with our expectations and consistent with our guidance from the beginning of the year.

The second factor contributing to the increase this quarter was the additional debt raised in August. Following our second quarter earnings call, we successfully completed two debt transactions totaling $2.1 billion. The proceeds from these deals were used hard to repay our Term Loan B maturing in 2026, now making our nearest debt maturity 2028.

Leverage at the end of Q3 was 3.17x EBITDA, a slight increase from Q2, while remaining below the midpoint of our target range of 3x to 3.5x EBITDA. In the third quarter, we repurchased 2.7 million shares, and we have repurchased approximately 600,000 shares to date in October.

Let me clear out with some comments on what remains of 2024 and our thoughts as we look towards 2025. As Javier said, we are reaffirming our adjusted OI guidance range of $1.91 billion to $2.01 billion. Despite the anticipated hurricane-related OI impact in the fourth quarter, we expect continuing operating momentum to offset the headwind. We are also maintaining our adjusted EPS range of $9.25 to $10.05 and our free cash flow range of $950 million to $1.2 billion.

Looking forward to 2025, as Javier mentioned, it is too early to give formal guidance. Regarding some of the components of earnings, I would like to call out a few unique potential headwinds and tailwinds outside of our normal dynamics. For the headwinds, first, we expect mortality will remain elevated in 2025. Second, we expect the impact of the Baxter facility closure will continue in 2025. Third, the full-year impact of the expiration of our 2% interest rate caps will negatively impact EPS.

For the tailwinds, first is the declining center closure costs in 2025 that we called out last quarter. Second is the positive OI impact from our international business, driven by our Latin America acquisitions. And finally, we expect that the inclusion of orals in the bundle would be a tailwind if the pharma companies are unable to get legislation passed to delay the inclusion. Lastly, regarding RPT and PCC growth, we expect both to be elevated relative to pre-COVID levels. We will give an update on all these factors, along with more quantitative guidance on the Q4 earnings call.

That concludes my prepared remarks for today. Operator, please open the call for Q&A.

[Operator]

[Operator Instructions] Our first caller is Andrew Mok with Barclays.

[Andrew Mok, analyst]

It sounded like there was a fair amount of operational changes to help navigate the hurricanes, but most of that would be felt in Q4. So I wanted to better understand, one, how much of an impact hurricanes had on 3Q treatment volumes, if any.

And then, Joel, I think I heard you reiterate full year treatment growth between 50 to 100 basis points of growth which would imply a fairly significant acceleration in 4Q against the presumably greater impact from hurricanes. So I just want to understand how we should think through that and square those comments?

[Joel Ackerman, executive]

Yes. Thanks, Andrew. So for Q3, I'd call out the impact from hurricanes as about 10 basis points, and that shows up in mistreatment rate. In Q4, I don't think this does much to change how we were thinking about Q4 before hurricanes.

[Andrew Mok, analyst]

So Q4 sort of the hurricanes aren't expected to have an impact on Q4 volumes?

[Joel Ackerman, executive]

Less significantly. Less than the 10 basis points from what we've seen so far. The quarter is not over, obviously. So there could be additional challenges. But so far, no, it would be less than the 10 basis points.

[Andrew Mok, analyst]

Got it. Okay. And then I appreciate the early comments on 2025 headwinds and tailwinds. Can you help us understand the order of magnitude of some of those? And hoping specifically you can comment on the potential financial impact of the inclusion of phosphate binders that, that could have on next year's results.

[Javier Rodriguez, executive]

Well, let me start with the end on that, on the phosphate binders because we really tried quite a lot to give you a useful range. And unfortunately, we can't, and it's just because there's not enough information to give you a useful number. So let me just give you an explanation of the underlying dynamics. So everybody can be on the same page.

So first of all, there is a class of drugs, phosphate binders that will be the biggest part of the orals in the bundle. The first thing is we do not know because the rule hasn't come out, although we expect to hear shortly what the reimbursement will be by the government.

Secondly, there are four products within the phosphate binders, and we don't know the mix of those products. And the pricing is quite different between those four products between branded and generic. And within that, be branded have had restrictions and authorizations and other things that once those go away, we don't know what's going to happen with the mix. And then the last thing is the volume, there's about 10% to 15% of our patients that don't have Medicare Part D and weren't participating in these oral in the bundle, and that's why we think that this is so good for access for those patients. And so we don't know what will happen with that volume.

So if you start to play with the variable, they start to get quite wide because, in essence, the volume could tighten up, but then the reimbursement has a wide range. And then the one that really throws a lot of dynamics into it is the pricing and the mix within that pricing. So unfortunately, we're going to have to wait until next quarter to give you a better number, better sense of that.

[Joel Ackerman, executive]

Yes. And Andrew, to follow up on the first part of your question. So I called out five factors, three tailwinds, two headwinds that would impact operating income. There was one additional, the interest expense, but that only hits EPS. Like the orals in the bundle, it is hard. There's a lot of swing factors that could apply to each of these. So I'm not going to quantify them individually. That said, I think a reasonable starting point for modeling would be that the headwinds and the tailwinds will offset each other at the OI line.

[Andrew Mok, analyst]

Got it. So when we think about the reference target growth, which I think is 3% to 7% pre-COVID, that's inclusive of headwind and tailwinds. So that's how we should think about it?

[Joel Ackerman, executive]

I think that's -- yes, I think that's right.

[Operator]

Our next caller is A.J. Rice with UBS.

[Albert Rice, analyst]

Thanks, everybody. I think I know the answer to this point of clarification, but I'll just make sure to get on the record. The $10 million to $20 million of hurricane impact that -- I assume that's EBITDA not revenue. And then maybe just more broadly on the treatment patterns last quarter, you said that new to therapy was back to pre-pandemic levels. It sounds like it was positive again this quarter. I just wanted -- is there any -- is it stronger? Or is it about the same? And then the elevated mistreatments, is that strictly the hurricane impact? Or is there anything else going on there? And then on mortality. It sounds like you're now extending that into 2025. Is that just because this is the first time you're commenting on '25? Or is there something new that's making you call out '25 on the mortality -- heightened mortality rates?

[Joel Ackerman, executive]

Yes. So let me try and get these in order. So first, in terms of the Baxter impact in Q4, it would be largely in EBITDA, there's the potential for a little bit in the revenue line if we lose some patients to another provider that's able to provide peritoneal dialysis and a patient for whatever reason, chooses to go that direction. But I would say the vast majority of it will not be revenue.

On the three factors affecting volume, nothing new on admits, it's running consistent with what we've talked about in the past. Mistreatment rate is it's never just storms, right? Historically, it's always been somewhere around 6% on average during the year, although not the same quarter-to-quarter, Q1 and Q4 elevated and Q2 and Q3 less so. So the 10 bps from the storms was kind of the 10 bps more than what we probably otherwise would have expected, but it's not the total miss treatment rate.

And then on mortality, I don't think there's anything new here that negatively impacts our view of 2025. I think the fact that the elevated mortality continues and having gone back to pre-COVID levels, every quarter that, that happens, it informs our views a bit. But I don't think we saw anything over this quarter that changed our views for next year significantly.

[Operator]

Our next caller is Pito Chickering with Deutsche Bank.

[Pito Chickering, analyst]

So back on the non-acquired treatment growth number here, obviously a lot of focus here. Can you just quantify the number of new patients you added in the first quarter, second quarter and third quarter. Any color on how many you lost to transplant for this year. Any color on those patients moving to other centers or geographies.

I'm just looking for sort of any other reasons besides mortalities' I'm trying to tie out the treatment growth that you guys are looking at, you're showing with the delayed USRDS quarterly data on incidence and prevalence.

[Javier Rodriguez, executive]

Thank you, Pito. Let me just grab it at the high level because there is sort of, let's call it, the restless energy of trying to figure out what's happening with volume. But the reality is that it's just as straightforward as elevated mortality, that when you look at the admit growth, it is healthy when you look at the mix, it is healthy. When you look at transplant, they are constant and moved a little, but it doesn't really move the needle at all. It goes up and down a bit. Our share of transplants has continued to be constant. So at the end of the day, we could have mistreatments move a little here and there because the storms or other things that are seasonal, but the bulk of it is elevated mortality.

[Joel Ackerman, executive]

Let me just pop on to the -- the first question was about the NAG in the quarter. And let me just give you a little bit on that. quarterly NAG has some volatility in it. If you're trying to do what I think you're trying to do, which is trying to piece out the volume trends, which we're all trying to figure out. I don't think looking at quarter-over-quarter NAG is a great number for that. Within that number is factors, including this treatment rate, a lot about timing of census during the quarter. So it's down 60 bps quarter-over-quarter. I don't think that says anything material about where the volume overall is trending.

[Pito Chickering, analyst]

Okay. Fair enough. Sort of a follow-up here on IKC, usually, you true up with your payers during the third quarter. Payers have had a lot of, we'll say, lately volatility this quarter. Just curious how that true-up went with the payers for 2023 during the third quarter.

[Joel Ackerman, executive]

Yes. So we are on track for the year. I would say -- I would encourage you and everyone as we always have, let's look at IKC on an annual basis rather than a quarterly basis. we're reaffirming our negative $50 million for the year, which has been our number all year long. And I would say the volatility that we read about in the payer market largely has not impacted us.

[Pito Chickering, analyst]

Okay. But then don't you guys do your big annual true-ups from the previous year during the third quarter. Is that the...

[Joel Ackerman, executive]

We do them in the third quarter and the fourth quarter, and they're going as planned.

[Pito Chickering, analyst]

Okay. Okay. Fair enough. Okay. And then sort of last question here, just looking at commercial and MA price increases for '25, are these tracking in line with historical levels.

[Javier Rodriguez, executive]

Yes, there's nothing interesting to call out. Going as expected.

[Operator]

Our next caller is Lisa Clive with Bernstein.

[Lisa Clive, analyst]

Just on volume growth, given the continued decline, how should we think about volume growth for the year? I think previously, you were at 0.5% to 1% and any thoughts into 2025? And also in IKC, can you give us any indication in terms of how your reimbursement is split between capitated shared savings. That would be helpful.

[Joel Ackerman, executive]

Yes. Starting on the volume for 2024, we're still thinking 50 bps to 100 bps of growth, so no change there. On the IKC thing, I think we'll have to get back to you on that one. Did I miss a question, Lisa?

[Lisa Clive, analyst]

No, no. I was just -- yes, I mean I think just trying to think through the potential growth of IKC, both on the top line and revenue, just it would be helpful at some point to get some indication of how the economics work in there. But I'll wait for you to get back on that.

[Operator]

[Operator Instructions] Our next call is Joanna Gajuk of Bank of America.

[Joanna Gajuk, analyst]

So I guess I'll just follow up on the last question here around volumes, right? So you expect to still grow slightly for the year? And then how should we think about, I guess, next year and your kind of ultimate target of growing 2% volumes same-store?

[Joel Ackerman, executive]

Yes. So for next year, as Javier mentioned, it's pretty -- most of the story is about mortality and what happens to mortality next year, to put a little more color on that. I would say, if you take the middle of our range for this year of 75 basis points of growth, if you want to think about how to model next year there's a slight headwind on treatment days for next year, about 25 basis points. And then there's one headwind and one tailwind.

The headwind would be associated with clinic closures. We called that out last quarter as a source of headwind on volume for the year. And as the clinic closures come further into the background for our history, then I think we'll see a little bit of tailwind of that. And then we could also potentially have a headwind next year associated with PD and the Baxter issue that we're having and that's pretty simple. There are some patients who might want to start PD now. We don't have the ability to start all of the new PD patients over the quarter, and they might go to another provider.

I would call those two things, the clinic closures and the Baxter PD as offsetting. So you really have next year, starting with a base of this year's 75 basis points, less 25 basis points of day mix. And so you start with a base of 50 basis points and then getting back to what Javier said, it's up to everyone to figure out what they think will happen to mortality next year versus this year. And then obviously, mistreatment rate can also be another source of variability from 1 year to the next. So that's the framework I would lay out for how to think about it.

[Joanna Gajuk, analyst]

Okay. That's very helpful. But if I may, I have another question, but before I go there, just a follow-up on the PD patients. So I guess what's your home dialysis mix and then inside that, what's the PD versus HD Home.

[Javier Rodriguez, executive]

So our mix in PD hasn't changed because it happened by the end of the quarter. And that's in the mid-15s is the range. HHD is like a 2% or so mix. And I would take this moment just to thank Baxter and the government, they've been amazing working literally around the clock to make sure that all of our patients get their supply. And so as we look at what they've told us, we will obviously see a little deterioration in that through the fourth quarter, but we will normalize by the first quarter and try to get all our patients back on track.

[Joel Ackerman, executive]

Yes. And the one thing I'd add, Joanna, is those PD patients, remember, we expect to keep the vast majority of them. The new patients, many of them, about half of them are already dialyzing in our clinics. And we think it won't be too much of an inconvenience for them to wait a little bit before they move to PD. Those new to dialysis patients who are going to go on PD have options, including postponing dialysis, assuming they have residual renal function, they could go in center and then transition to PD. And then there could be some who decide that they don't want to wait, and will go to another provider.

So what we would expect you to see is a decline, a potentially significant decline in our home mix over the next quarter but the number of patients that actually leave DaVita or don't join DaVita, we don't think we'll be that high.

[Joanna Gajuk, analyst]

Okay. That's super helpful. If I may, another question I had on next year's outlook. I guess following up on your comment around do you expect the RPT growth next year to be still elevated? So are you kind of implying 3.5% to 4% that you're guiding for this year, is the number to think for next year? Or is it a little bit less, a little bit more? How to think about it?

[Joel Ackerman, executive]

It's too early to guide quantitatively, but I would think lower than that.

[Joanna Gajuk, analyst]

Okay. So it's lot lower than 3.5% to 4%, but you're saying higher than like your historical range?

[Joel Ackerman, executive]

Yes.

[Javier Rodriguez, executive]

This is Javier. Just to clarify, the comment I said because I don't think I was clear that it should have been. 15.5% is our mix of home patients total, of which 2% or HHD and 13% and change are PD. I don't think that, that was clear.

[Joanna Gajuk, analyst]

13% is PD.

[Operator]

Our next caller is Ryan Langston with TD Cowen.

[Ryan Langston, analyst]

In the release, I think it said that 3Q advocacy costs had increased. But I think in the second quarter, those were down year-over-year. Can you just kind of give us a sense on what those are related to?

[Javier Rodriguez, executive]

We've got several things going on through the advocacy costs, but a couple of the main drivers are California and the elections there and then, of course, what we're doing with the restore of the patients in Washington, D.C. And the last one would be the orals in the bundle because you might have heard there are some campaigns from pharmaceutical companies that are trying to delay orals in the bundle. And so we're having to mobilize our resources in Washington, D.C. to make sure people are educated is to the good that orals in the bundle can do.

[Ryan Langston, analyst]

Got it. And then just last from me. I think on missed treatments second quarter in a row just elevated from weather. Assuming we don't have any more, I guess, hurricanes, other weather events, et cetera, would we expect those to revert that to sort of normalized historical levels.

[Joel Ackerman, executive]

So, There's still -- mistreatment rate is still running elevated relative to pre-COVID levels. So I think without additional storms, we would expect them to continue to tick down over time, the pace of that is to be determined. That said, remember, they do go up seasonally in Q4. So with -- even without additional storms, you'd expect miss treatment rate to be up in Q4.

[Operator]

Our next caller is Justin Lake with Wolfe Research.

[Justin Lake, analyst]

First question, just going back to your headwinds and tailwinds. I didn't hear you mention RPT annualizing the strength of 2024 annualizing next year. Just my numbers, I have you going from 2.5% to 3% to 3.5% to 4%, right? So you've guided up by 1%. A lot of that ramps in the second half of the year. So I would have thought the annualization of that strong second half '24 growth would be a pretty good tailwind to 2025. Any comment on that? Am I missing something?

[Joel Ackerman, executive]

Yes. Justin, your math is all right, and we stand by our comments. We had a lot of debates, as you can imagine, about what to call out as unique headwinds and tailwinds versus non-unique headwinds and tailwinds. So I think we stand by that, and that's why we called out RPT is going to be higher than normal next year. We just chose not to put it in the bucket of headwinds and tailwinds we called out.

[Justin Lake, analyst]

Okay. I'll take that offline. Then the $135 million of interest expense, is this a good run rate? Or does it potentially migrate higher into 2025?

[Joel Ackerman, executive]

No. I think it's a good run rate. Our caps for next year are actually slightly lower than our caps for this year. So that could work, just to be clear, the $135 million is the uptick for next year. So I think you should think about this as $270 million for the year. Hold on one second. My team is looking at me and -- let me come back to you in a second, Justin.

[Justin Lake, analyst]

Sure. Sure. To be clear, I wasn't talking about the year-over-year. I was just talking about...

[Joel Ackerman, executive]

Sorry. I'm sorry, the $135 million for the quarter, that is a reasonably good number. For next year, it could come down as a quarterly number because our caps are a little bit lower. But if you think of the two things that are driving the number up, it's more debt, which I wouldn't expect us to incur more debt over the next few quarters and then our caps aren't going to change materially.

[Justin Lake, analyst]

Okay. Do those caps expire? Or are they kind of at a reasonable rate, like you could re-up them right now. If they expired at the end of next year and interest rate seems to be fine.

[Joel Ackerman, executive]

Yes. So we changed the way we do it. We have a cliff, we had a cliff at the end of Q2 because we used to do a 3- or 4-year cap. Now we do it rolling. So going forward, you wouldn't see a big change like this. It will gradually move up and down depending on where interest rates are when the caps are put in place.

[Justin Lake, analyst]

Perfect. And then lastly, just I apologize if I missed this, but did you give a mix number for the quarter versus, I think, the 11% you talked about last quarter, commercial market?

[Joel Ackerman, executive]

Yes. There was really nothing material changes in the mix for any of our usual mix numbers.

[Operator]

Andrew Mok with Barclays. You may go ahead, sir.

[Andrew Mok, analyst]

I just wanted to follow up on G&A. It looks like that was up 7% sequentially and 10% year-over-year. What were the drivers of that in the quarter?

[Javier Rodriguez, executive]

Yes. In G&A, we have a lot going on because we're trying to really go through the entire continuum of care united all the transitions of care. But the big bulk of it is going into IT is going. And the second part is, of course, you've got wages in there. And the third part would be the reimbursement operations investment that render the increase in revenue per treatment. So those explain the vast majority of the increase.

[Justin Lake, analyst]

Got it. Okay. And then maybe on the follow-up to the commercial mix. How much is the ACA exchange mix within the commercial mix within that 11%? And how much growth are you seeing on the ACA exchanges this year?

[Javier Rodriguez, executive]

So just to make sure I've got the right language, I think on the QHPs. So on the QHPs, the country is running around 7% to 8% mix. And our population is running around 3% mix. And so we're underrepresented because in QHPs, if one of our patients pick Medicare they are out of the QHP. So that's why we're underrepresented.

[Kevin Fischbeck, analyst]

Got it. And can you give us a sense of how much growth you've seen in that payer class?

[Javier Rodriguez, executive]

We're growing exactly as the market grows. So that has been literally the lines are on top of each other.

[Operator]

Pito Chickering with Deutsche Bank. You may go ahead, sir.

[Pito Chickering, analyst]

A quick follow-up here for 2025. Will depreciation be another tailwind for next year?

[Joel Ackerman, executive]

I'm sorry, I didn't hear that. Pito, can you say that again?

[Pito Chickering, analyst]

Yes, you bet. Will depreciation be another tailwind for next year EPS?

[Joel Ackerman, executive]

It will be flat to down. Well, the answer is yes. Part of it comes from the center closure number coming down. But excluding that, it will be flat to down.

[Pito Chickering, analyst]

Okay. So sort of doing just some quick back envelope math, mortality, I get, on the lack of PD that hurts, but back to ramping up their facilities pretty rapidly. So that's pretty much all in the first part of the first quarter. To Justin's question on interest cap, that's just math, the center closures international, that's again just math. Depending upon where the bundle goes, when you put together the headwinds and tailwinds depending upon the bundle. Is this a possibility this will be more of a tailwind and headwind. But we just want to see where the bundle ends up. Is that a fair way to think of thinking about this?

[Joel Ackerman, executive]

I'm just -- help me again with the end of the question, Pito, what specifically are you asking if it's a headwind or tailwind, the bundle?

[Pito Chickering, analyst]

Yes. So the tailwinds seem -- is just putting the math together on the headwinds, understand those and understand the math of the tailwind, the biggest variable here seems to be with the bundle.

[Joel Ackerman, executive]

[indiscernible] Got it. Okay.

[Pito Chickering, analyst]

And so depending upon where the bundle goes, that will define whether the head of tailwinds are a tailwind versus maybe your commentary about a push depending upon the pricing we get soon. This could be, I guess, more favorable depending upon what the government says and we could do. Is that a fair way of thinking about it?

[Joel Ackerman, executive]

I think there's probably a little bit more variability in a bunch of these lines than you're giving credit to. So orals could be better, it could be worse, but all of these probably have a decent amount of play in them. So I think it could go either way a net headwind or a net tailwind.

[Operator]

Thank you. At this time, I am showing no further questions. I'll turn the call back over to you for closing comments.

[Javier Rodriguez, executive]

Okay. Thank you, Michelle, and thank you all for your interest in DaVita. I will end the call where we started with appreciation for the hard work of our DaVita care teams on behalf of our patients. Although we will incur some additional expenses related to recent storms, we expect to absorb these costs within the continued strong performance of our underlying business. We've covered a lot on volume. And as we said, while mortality remains elevated, our investments in people and infrastructure and capabilities has returned our operating income to the pre-pandemic trajectory. Thank you for your continued interest and be well.

[Operator]

Thank you. This concludes today's conference call. You may go ahead and disconnect at this time.