Entrepreneurial Leadership

Article # 7

Intrapreneurship at DaVita Health Care Partners.

Summary

DaVita Healthcare Partners Inc. (DaVita) is one of the U.S.'s leading dialysis
providers, a process whereby persons with end-stage renal disease (ESRD) are connected to a
machine that performs the functions of a healthy kidney. Kent Thiry, DaVita's CEO, has
expanded the company's scope of activities since he first arrived in 1999. He initially focused
on consolidating the company's dialysis business, which included acquiring the company's
primary U.S. competitor, before expanding into related businesses such as pharmacy services
for people with ESRD.

DaVita’s Mission is to be the Provider, Partner and Employer of Choice. DaVita’s

Core Values Service excellence, Integrity, Team, Continuous improvement, Accountability,
Fulfillment and Fun We enjoy what we do. Paladina grouped its competitors into the
following buckets: (1) Providers with clinics located on- site at clients’ offices, such as
HealthStat, CareHere!, Marathon Health, Take Care Health Systems, and Community Health
Systems; (2) concierge/direct primary care providers, such as MDVIP, Qliance, and
Crossover Health; (3) large physician groups such as HealthCare Partners—prior to its
acquisition by DaVita—or CareMore; and (4) occupational health providers, such as
Concentra or U.S. HealthWorks Medical Group.

Thiry’s Healthcare Vision

Kent Thiry, DaVita's CEO, has expanded the company's scope of activities since he
first arrived in 1999. In the 2010s, Thiry again broadened DaVita's scope by moving into
primary care via the acquisition of Health Care Partners (HCP, a company that owned
medical practices and health care facilities) and by forming Paladina Health (Paladina), a
company that sells primary care services to self-insured employers. Thiry's strategic decisions
reflect several considerations, including his belief that value- and performance-based
reimbursement will become the norm in the U.S. health care system, a commitment to
extending DaVita's ability to execute on its mission, and DaVita being excessively reliant on
a single medical condition for revenue.

DaVita’s core business was dialysis, and it created Rx to provide pharmacy services
to its patients. Rx was on track to exceed $600 million in revenues for 2013, and 60% of
DaVita’s eligible patients received medications through Rx. The path to success, however,
had been tortuous: Rx grew too fast, incurred large financial losses, and struggled to deliver
the quality of service that DaVita expected. Golomb recognized that lessons from Rx could
help Paladina avoid mistakes and reach scale more efficiently, but he wondered how much
could—or should—be translated to Paladina’s experience.

DaVita had shifted from being a pure dialysis provider to a comprehensive healthcare
company during Thiry’s tenure as CEO. DaVita’s acquisition of HCP provided it with an
integrated healthcare provider outside of ESRD. By the end of 2012, HCP was treating
724,000 patients. HCP directly employed 1,000 doctors and had another 10,000 doctors at
its facilities that were part of independent physician associations. With a cost per ESRD
hospital admission at $18,858, there was significant value to be gained from driving better
care. Golomb said. “Our value was not in distribution, but in helping patients adhere to
treatment regimens.”

Thiry committed $25 million to the venture, which was branded as StarRx. Rx
maintained a close relationship with DaVita along three dimensions: administrative,
commercial, and cultural. We were growing revenue, but this was more than offset by our
operating losses.” Service quality declined, but managers attributed the concerns of some
DaVita teammates about service to their high expectations. Rx let teammates go, suspended
implementation of a complex information technology (IT) platform, reverted to manual
processes, and revamped the patient on-boarding process. New metrics were introduced or
more rigorously tracked on patient impact, order fulfillment, and relative performance
against competitors. Medication adherence rates for dialysis patients using competitor
pharmacies stood at 32%, compared to 82% for patients using Rx. Improved adherence
rates contributed to better patient outcomes.

Marathon Health, Inc.

Founded in 2005, Marathon Health was a Vermont-based company that operated

on-site primary care clinics nationwide.38 According to Paladina’s analysis, the company
had 99 clinics serving 17 clients with over 35,000 patients. The company had estimated
annual revenues of $10 million. Unlike Paladina, Marathon Health’s clinics were staffed
by nurse practitioners and physician assistants, and it outsourced some services such as
after-hours telephone- based care.
Golomb said. “Our value was not in distribution, but in helping patients adhere to
treatment regimens.” Thiry committed $25 million to the venture, which was branded as
StarRx. Rx maintained a close relationship with DaVita along three dimensions:
administrative, commercial, and cultural. We were growing revenue, but this was more than
offset by our operating losses.” Service quality declined, but managers attributed the concerns
of some DaVita teammates about service to their high expectations. Rx let teammates go,
suspended implementation of a complex information technology (IT) platform, reverted to
manual processes, and revamped the patient on-boarding process.

Conclusion

New metrics were introduced or more rigorously tracked on patient impact, order
fulfillment, and relative performance against competitors. Medication adherence rates for
dialysis patients using competitor pharmacies stood at 32%, compared to 82% for patients
using Rx. Improved adherence rates contributed to better patient outcomes. The relationship
with DaVita proved beneficial in multiple areas but challenging in others. “We were not
always clear enough on where to copy or leverage DaVita, versus where to create things
ourselves. The DaVita team charged with investigating growth opportunities believed that a
renewed focus on primary care was the best way to drive down costs. By not managing
patients’ emerging health problems, the healthcare system incurred higher costs later on to
treat diseases after they had progressed.

Ms. Steinfort serves as COO, with responsibility for service delivery, marketing,
finance, IT, and human resources. She joined parent company, DaVita, in 2009 as its chief
strategy and marketing officer. Dr. Doucette serves as leader with overall responsibility for
the long-term growth of the venture. He has worked with personal physicians and healthcare
corporations in a variety of capacities through his development of ModernMed, an innovative
primary care services firm acquired in 2012 by Paladina Health and DaVita. Mr. Pyne leads
Paladina Health’s service delivery functions, including field operations, account
management, and member services.