November 22, 2017 / 9:03 PM / in a month

Exclusive: DaVita explores sale of physician network business -sources

(Reuters) - DaVita Inc (DVA.N), the largest U.S. provider of kidney care services, is exploring a sale of its physician network business, DaVita Medical Group, that could value the unit at up to $4 billion, according to people familiar with the matter.

The deliberations are still in their preliminary stages, and DaVita may decide not to go through with a sale, the sources said on Wednesday, asking not to be identified because the matter is confidential.

DaVita Medical Group could attract interest from a variety of bidders, including private equity firms and health insurers, the people said.

DaVita did not immediately respond to a request for comment. The company is working with investment bank Goldman Sachs Group Inc (GS.N) on the potential sale, the sources added. Goldman declined comment.

DaVita Medical Group has been a significant drag on its parent company’s performance in recent quarters. DaVita has attributed the decline to delayed payments from federal healthcare program Medicare Advantage, and a recent uptick in the costs of treating some of their patients.

“We recognize that the business is not achieving our capital return expectations nor is it contributing to [operating income] growth,” Davita Chief Financial Officer Joel Ackerman said on an earnings call this month.

In its most recent quarter, DaVita Medical Group reported an adjusted operating loss of $5 million.

To boost profits and hold down costs, DaVita recently announced it was slashing 350 non-clinical positions at Davita Medical Group, which it said could produce annual savings of around $40 million in 2018.

    The company also said that it is “pursuing strategic alternatives for underperforming assets across our businesses and across markets.”

    The outsourced physician services sector as a whole has been under pressure in recent months, with major players, including DaVita Medical Group, Mednax Inc (MD.N) and Envision Healthcare Corp (EVHC.N), all struggling to adjust to changes in how healthcare providers are reimbursed.

    Federal reimbursement programs such as Medicare and Medicaid, for example, have been increasingly trying to shift to a so-called “value based” payment model, where in some cases fixed payments are given to providers, who are then incentivized to control costs.

    Envision announced plans to explore strategic alternatives in November. It had earlier attracted investments from activist hedge funds Starboard Value and Corvex Management.

    Last week, Elliott Management, another activist hedge fund, announced a 7 percent stake in Mednax and said it should explore a potential sale. It joined activist Blue Harbor Group, which had previously bought into the stock.

    Reporting by Carl O'Donnell in New York; Editing by Bill Rigby and Susan Thomas

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