Davita CEO Kent Thiry: What a Values-Based Turnaround Looks Like
June 22 2009 by ChiefExecutive.net
Imagine working at a place where one out of five clients you are working with dies every year. Such is the work environment of the frontline care givers of DaVita, the second largest provider of dialysis services to patients suffering from chronic kidney failure, also known as end-stage renal disease, or ESRD. DaVita currently operates or provides services to about 1,400 outpatient dialysis centers in 43 states, serving approximately 110,000 patients. Today, the $5.6 billion El Segundo, CA, company manages a decent 20 percent return on equity despite low margins. How it manages to do this when 87 percent of its patients depend on Medicare and Medicaid coverage, which doesn’t cover the true cost of the care involved, is even more remarkable.
When the board picked Kent Thiry to run the business in 1999, the company, then known as Total Renal Care, was on the ER gurney itself. TRC’s rapid early growth wasn’t matched by corporate oversight. It was heavily leveraged-in fact, technically bankrupt. Employee turnover was almost 50 percent. The company faced legal challenges as well. It was being sued by shareholders and was the target (along with other dialysis providers) of several SEC investigations. This was not the happiest of places for a former Bain consultant, who had once run a not-for profit 761-bed hospital in Galveston in the early 1980s, to walk into. In fact, his wife, Denise, a former venture capitalist who sits on several corporate boards, including Medtronic and US Airways, was livid when she learned that he even thought about interviewing for the job. The fact that the Thirys lived near San Francisco and the company was headquartered near Los Angeles didn’t help.
Thiry, now 52, had run Vivra, a San Mateo, CA, public dialysis company for six years. But the Stanford graduate sensed he had to throw out the standard management turnaround playbook and try something different. Raised in a small Wisconsin town, he came up with the idea that the only way to save the company was not to restore a “company” but to create a “village community” instead. He and his senior colleagues realized in the initial months that close attention to building the kind of culture and organization needed meant making the mission and values real. They looked to Southwest and Disney, but eventually hit upon the idea that belonging to a village where people looked after one another was the right metaphor to ensure that a mission-and values-based approach would work. The challenge was making it believable to a cynical work force.
Benchmarks, policies and performance were built around mutual accountability and people’s obligations to one another. Terms like “worker” or “employee” were dropped. People became “teammates” or “citizens.” In a program called “Reality 101,” every manager had to spend a week working in a dialysis center, learning firsthand the challenge of removing toxic wastes from the body. (This generally takes four hours and some patients must do it three times a week.) If the company thinks of itself as a village, Thiry, or KT, as he is known internally, is its mayor-that is, when he isn’t uniformed as d’Artagnan, brandishing a sword and shouting “all for one, one for all” at DaVita Academies and other meetings. The phrase underscores the obligation of every employee to the group and the group’s obligation to help individuals develop and succeed. Symbols of hierarchy and perquisites of rank were systematically removed. Decision taking was pushed down to frontline caregivers, who were consulted on equipment maintenance, inventory management and cost cutting. Thiry even invited employees to rename the company. (DaVita comes from the Italian for “he gives life.”)
By 2005, employee turnover had dropped in half, patient outcomes improved and a loss of $147.3 million in 1999 on revenue of $1.45 billion was turned into net income of $222.3 on 2004 revenue of $2.3 billion. According to a Stanford business school case study-several business schools have conducted their own since-improvements in labor-hour management were significant. It took 2.72 labor hours for each dialysis treatment in 2005 compared to an industry norm of 2.9 hours. Although the 0.18 hour difference appears small, each 0.01 savings in labor-hour-per-treatment across the company achieved about $1.8 million, most of which goes directly to the bottom line. DaVita’s purchase of Sweden’s Gambro AG’s U.S-based dialysis centers in late 2004 almost doubled the company’s size. In May of this year, the government closed its investigation of the industry with no charges made or fines assessed against the company.
CE’s J.P. Donlon caught up with Thiry during one of his many visits to Washington, D.C., keeping a watchful eye on the government’s plans to reform health care.
In 1999, this company had one foot in the grave. What were you thinking?
First was the challenge, the fun of turning something around and taking something that’s broken and fixing it. Second was the opportunity to try to build a community in the workplace; to try to build a place that’s fulfilling for the team that works within it.
But that hardly existed at the time.
In fact, it was quite an alienated place to work because it was technically bankrupt and sued by shareholders and investigated by the SEC. People were angry because the previous CEO had taken a lot of money out of the company. Morale had imploded. People were angry, alienated, scared and depressed. The good news was having people’s attention. This is like getting a Superbowl commercial for free, which for a leader is precious. The bad news was that it was for a negative reason. When everyone is listening to you and you are able to begin with a success on the business side, you begin to earn leadership capital that you can deploy to build a healthy business. This later creates shareholder capital, which then builds more leadership capital that allows you to create a different kind of workplace.
What was the genesis of your turnaround strategy?
We started with an intent. We learned that if you state the intent out loud, most people feel a huge obligation to do what they say; and, therefore, if you get people to talk about ideals or values or a mission out loud, they’re far more likely to want to pursue it. We simply turned this into an operating function of pursuing a mission of values and building a community, just like you would, say, create goals and timelines to improve productivity. Every year, we came up with planned activities and timelines for building a village-although it wasn’t called a village yet.
For example, I have a call with the top 1,000 people every eight weeks and in every call I’m asked to answer the following question, “What is the incremental evidence since the last call that we are sincere and competent in terms of pursuing the mission and values?” I am expected to have a real answer.
We’d come up with one program-scholarships. Then another program-medical missions in the U. S., then medical missions overseas. Think of it like brainstorming for product enhancement ideas to improve iPod. We brainstormed about how to create a better working community and then we’d assign people deliverables and keep metrics on all of our village programs. So we set out to create a community and treat it as a true business objective, using the same kind of management process.
But surely your first challenge was to generate profits, because at the time you were in the tank, right?
The other good news-a gift, really-was that only the basic stuff was broken. Fixing a number of core operating functions was just a matter of setting clear objectives, replacing some people and recruiting new ones, and having a disciplined management process. It just required a rededication-perhaps a maniacal attention to it-so that the discipline of the management process would ripple through the organization and start to affect the aspects of the operation that were less broken than some of the core ones that threatened the financial future.
How long did it take you to get to the point where you could do all the other stuff that you’re referring to?
We decided early to “begin with the end of mind,” which is one of our favorite village aphorisms. If you care about trying to create a different kind of place, you must start working on it this minute, because if you allow yourself to delay it for any reason you’re never going to get there. So, in the beginning, some people thought we were crazy because we’d spend two-thirds of the time on core operating functions, like can we bill correctly and collect cash? Then we would spend the remaining time on how to create a special workplace. If we had put it off it would have been marginalized forever.
How did you overcome the initial cynicism that people normally have in such an environment?
First, some people will not share the objective or buy into our premise of creating a village-like community. It doesn’t mean they’re bad people, but unless they make that commitment and indicate they care about it they should not stay. We won over the skeptics and neutrals bit by bit, by adding programs, by communicating how our mission and values directed decisions we made. Each case would serve as an example. So in time most people made the decision to buy in. We called it “Crossing the Bridge.” Each person had to come to believe that it was important to try making this a special place to work, for others and for oneself.
Your business is limited to how many patients need dialysis. So, where did growth come from? Was there a sudden spurt of kidney failure?
The primary causes of kidney failure are diabetes and hypertension, which are disproportionately present in African American, Hispanic and elderly populations. So, we’re sort of in the demographic jet stream of America. As the population ages, more people are likely to have their kidneys fail, unfortunately. In addition, we’re keeping people alive longer now, which also means that you have more growth and volume.
Two-thirds of your income comes from Medicaid and Medicare payments, but most of the profits come from the commercial side. At the same time, third-party private payers are trying to limit what they’re willing to cover. How do you build revenue and earnings around such a business model?
We’re in an awkward position. Actually, 87 percent of our patients are dependent on government paying the costs. We lose money, on average, across that entire patient base. There aren’t that many businesses where you lose money on 87 percent of your customers, so to speak. So, the bad news is, we have to charge enough for the other 13 percent to cover the Medicare/Medicaid deficit.
Private insurance companies would prefer not to subsidize the government and want reduced rates; and so, it’s a very intense tug of war that we have with them and have had for years. All dialysis providers are in the same position, so it’s, unfortunately, the case where no dialysis provider could accept Medicare rates from private insurances, because everyone would go bankrupt at that point.
What we’re trying to do is reform the system so that instead of paying us $28,000 a year to do dialysis on our patients, which is consuming $90,000 a year in total costs because they’re in the hospital so much, we’ve proven that if we add more services on top of the core dialysis, which would increase that $28,000 cost to $32,000, we can reduce the $90,000 total cost down to $70,000 because we can keep people out of the hospital.
As a result, we’re investing millions of dollars in the service equivalent of R & D, just like any medical device or pharma company invests in R & D. This is our unique selling proposition going forward. Private payers and government agencies will start to see that we’re a profit center for them, not a cost center, and that’ll relieve some of that stress on our system.
Treating kidney disease is very labor intensive. Is there any prospect of a medical or technological breakthrough that would bring the cost of treatment down?
We’re very optimistic over the long term that, first of all, new drugs and better applications of those drugs will delay the onset of kidney failure for many people or, perhaps, prevent it. Separate from that, there are two areas that offer great hope, both clinically and economically for society. First, there are a lot of existing insights out there about how to manage diabetes and cardiovascular disease in a patient who also has kidney failure. Second, there are advances in dialysis machines and dialyzers, coupled with advances in biologicals and pharmaceuticals, all of which are for the people whose kidneys do fail, which could make quite a difference in how well or sick they are. And lastly, the number of transplants available to people will go up. More people are willing to donate their kidneys at the time of death, which together with improvements in technology that increase the success rate of the kidney operations themselves, mean there’s reason for big hope.
Solving the healthcare crisis is very much on the President’s agenda. What’s your view?
Ninety percent of the political conversation is around financing of healthcare-who should pay for what? That’s not going to solve very much. What we need to do is reorganize how delivery works so that the delivery of health care becomes more rational and produces more value for society. For example, the only way we can solve America’s health care problems is by addressing the 5 percent of the population who are chronically ill but who consume about 50 percent of the cost. All the talk about financing for the other 95 percent is a bit of a joke. What matters economically is the 5 percent that consume most of the resources and the next five percent that’s coming down the pipeline.
There are a number of things that can be done, particularly in two areas: one, for the chronically ill, the creation of focused, special needs plans where you create a health plan that just takes care of diabetics or dialysis patients or kidney care patients. With long-term contracts and total transparency, we can re-engineer the system to dramatically increase the investment in prevention and core wellness management, as opposed to the current system, which allows people to get very sick and end up in the hospital, where society pays a lot for an acute event.
Two, we must address the end-of-life issue. America spends a wildly disproportionate percentage of its health expense on people in the last six months of their lives. Some say it’s at least 10 percent of the total cost. Much of this is spent in a way that’s not consistent with what the patient actually wants or would choose if they had a choice. We need to develop a more thoughtful national dialogue or consensus guidelines around the management of the use of incredibly expensive technology, when all it does is prolong life for a couple of weeks, even though the patient indicates that he didn’t want life-sustaining care of that type used.
Has your wife Denise forgiven you for taking this job?She’s actually thrilled, because she says I’ve grown to be a better person than I was in 1999. There’s no higher compliment from your spouse. My kids are going to pick their careers differently than I did, because they’ve been exposed to something that’s far more fulfilling and philosophically robust because I took it.