德維特 (DVA) 2007 Q3 法說會逐字稿

Good afternoon. My name is Darika, and I will be your conference operator today. At this time, I would like to welcome everyone to the DaVita third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer session. (OPERATOR INSTRUCTIONS) Thank you. Ms. Zumwalt you may begin your conference.

Thank you, Darika. And welcome, everyone, to our third quarter conference call. We appreciate your continued interest in our company. I'm LeAnn Zumwalt, Vice President of Investor Relations, and with me today is Kent Thiry, our Chairman and CEO, and Mark Harrison, CFO. I'd like to start with the forward-looking statement disclosures. During this call, we may made forward-looking statements, which can be generally identified by the comment -- excuse me -- the content of such statements or the use of forward-looking terminology. That includes statements that do not concern historical facts. All such forward-looking 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 statement.

For further details concerning these risks and uncertainties, please refer to our SEC filings included in the most recent quarterly report in form 10-Q, and annual report on form 10-K. Our forward-looking statements are based on information currently available to us, and we undertake no obligation to update these statements, whether result of changes in underlying factors, new information, future events, or other developments. Additionally, our press release and related disclosures include certain non-GAAP financial measures. These measures should be considered in addition to the results prepared in accordance with GAAP and should not be considered a substitute for GAAP results. Also included in the press release is a reconciliation of these non-GAAP measures to the most comparable GAAP financial measures. I'll now turn the call over to Kent.

Thank you, LeAnn. Third quarter was strong and I'll provide a review of the usual agenda items. Number one -- clinical results. Number two -- government policy. Number three -- anemia management. And number four, not only the '07 forecast, but a few words on a longer-term outlook. Number one -- clinical results, which we've always presented first because that is what comes first. We are first and foremost a caregiving company serving over 103,000 patients at this time. We are proud to report that our clinical outcomes continue to be among the best in America. I'll reference two of the important outcomes.

First, adequacy, which is essentially how well we are doing in removing toxins from our patients' blood. In this quarter 94% of our patients had a KtV greater than 1.2. Second, in the area of anemia management, 83% of our patients had hematocrits greater than or equal to 33. For both of these clinical measures, our patient outcomes are publicly reported and compare very favorably to national averages. They do apply to patients who've been with us 90 days or more.

Under the second subject -- a Washington, D.C., update. As you know, the House bill is done. It's called CHAMP. The kidney community has signaled to both the House and the Senate, and CMS, and anyone else who will listen, that we are willing to be a partner in real reform, including bundling. But parts of the CHAMP bill would achieve the opposite of what the House of Representatives is actually hoping for. And so we continue to work with the Senate, who are working on their version of the Bill. And if they end up completing one they will then negotiate with the House. And in addition we are trying to make clear to everyone the sense of social responsibility that we do carry and hold, including a responsibility that we've lived up to, to keep money-losing centers open rather than have those patients denied access to care. And we've done that in many cases and continue to do so.

One other thing going on in D.C. that's gotten quite a bit of press lately, and that's the coordination of benefits position -- provision, MSP, Medicare Secondary Payer, as it's sometimes referred to. There are a number of large employer -- employers and some labor groups that are opposing the extension of the number of months that private-pay patients have the right to retain their insurance. I want to be real clear that that's what it's about. It's just that these patients would have the same right that every other chronically ill patient in America has, which is to keep their private insurance if they want to.

If they don't want to, if they decide it's not in their best interests, they could drop it and go into the Medicare ESRD program. So it's simply to allow our patients to have the same right as every other private patient in America, if that's in their best interests, or their family's best interests. So it is a unique sort of discrimination is the only word for it, and Congress has three other times historically moved to reduce the level of differentiated treatment by moving it -- the number of months from 0 to 12, 12 to 18, and 18 to 30. This is the only place in healthcare where you could pay your premiums for 20 years in a row and then lose your private insurance two and a half years after you get sick.

It is just an unfortunate fact from a policy point of view, moving away from the whole patient rights issue, that because of the Medicare deficit virtually all the centers in America can't survive unless they have somewhere in the neighborhood of 5 to 10% of their patients in private insurance, of course, depending on the -- on the rate. It's just necessary to fill the Medicare deficit, and so we've got a lot of -- we, meaning the community, the industry -- have a lot of rural and inner city dialysis centers, in particular, that are right on the edge as it is. And therefore, for them in particular the extension is important separate from the importance that come from the fact that it's a basic patient right.

Third topic -- anemia management. A lot of things that most of you would know, but just important to make clear and provoke any questions that people would like to discuss. The outcome of any proposed FDA labeling change remains uncertain. They are still working it. The scrutiny and debate around what is optimal anemia management will certainly continue into 2008 as some private insurers are starting to review and be active in this area, given all of the media attention it has received and some of the CMS attention. I do want to emphasize that when the FDA convened its advisory panel, the positions taken by that panel overwhelmingly validated the perspectives that the consensus kidney care community have been representing for several months. So many of the very dramatic allegations, accusations and criticisms of the previous half of the year were debunked by the advisory panel in votes that were pretty consistently three to one.

This is not to say that there are not unanswered questions in anemia. One of the things that this whole debate has provoked is where there are gaps in having adequate data to be sure of what is the right thing. And so a lot more work is being done and new insights could and probably will emerge, which could change physician prescribing patterns in either direction. Now, no other drug in renal care or elsewhere would be getting this much attention except for this one because it is so important, so valuable and it's expensive. And please remember that most of our affiliated doctors do not follow our guideline and that makes it doubly difficult to do forecasting with respect to anemia management.

Fourth topic, our guidance. What about 2007? As you saw in our press release, we are narrowing our operating income guidance for the balance of '07 to a range of 800 to $810 million. That should capture a majority of the probabilities. And that includes the $7 million of one-time settlements in Q3. Therefore, that means that Q4 will likely be in the range of 190 to 200 million, and this drop in Q4 OI, versus Q3 OI, does reflect the negative impact of some private rate compression.

What about 2008? Our guidance is the same as it was before. In other words, that range is 790 million to 850 million. If we had to predict whether we are more likely to be in the upper end of that range or the lower end, we would predict it's more likely we would be in the lower end of that range. We also want to repeat what we said last quarter, and I think the quarter before, that this guidance range for '08 does not capture as high a percentage of the potential outcomes as our guidance historically has, just because there is more uncertainty in more areas. We are just trying to be useful to you by doing the best we can to give a realistic range. But it simply is a period of unusual earnings uncertainty.

As to 2009, just trying to anticipate questions and lay the groundwork for our capital markets day coming up in a couple of weeks in New York, we cannot provide any specific guidance. We would if we could. We just can't. All we can say is that if we do not get a Medicare rate update and there is not an extension of MSP, then '09 could very well be flat or down relative to '08. In other words, our cost increases and some continued private-rate compression could very well offset any rate increases on the private side and the normal contribution from volume growth.

You net it all out, the big fact is that the timing of private-rate compression remains difficult to predict. We clearly think it is going happen, still. And a bit ironically, the worse '08 looks, the better '09 would be on a relative basis. Big swing factors are not only private-rate compression but also ongoing labor pressures and as was already referred to, just the unpredictable fluctuations in pharma utilization and reimbursement. And the guidance does not incorporate any assumed impact from proposed Medicare legislation and, of course things are very active in D.C. now.

I would like just to try to proactively address one question that is probably in a bunch of your minds, which is, gee, you are clearly taking some hits on the private-rate side. What is different? What has changed in the dynamics of payer negotiations? And here I would say the following. First, what is happening is what we have predicted would happen, that the payer industry consolidated and then it took them a while after making their acquisitions to actually integrate them. They are now using that increased power. In addition, separate from having increased power, they are now more focused than before on trying to move noncontracted higher rate patients into lower rate contracts.

In addition to the facts I have already mentioned, this visibility around the MSP issue has and will continue to lead to more focus as well. And also separate from any prior predictions, the emergence of several private-equity funded small chains has, in a bunch of the more attractive markets -- which is to say those markets with more private patients -- has led to supply growth that exceeds demand growth and that has had its normal effect and will continue to. So, in other words, in response to the question what has changed, what has changed is that the payers are doing some things differently and with more intensity. We are doing the same things we have always done. They are altering their investment in this area and therefore the incrementally different result. And it is important to add that the absolute rates that we are agreeing to still offer a reasonable and sustainable return. I will now turn the call over the Mark, our CFO, and then I will make a couple of remarks before we move to Q&A.

Thanks, Kent. I will address a few questions about our quarter results. First, regarding the major drivers in the quarter, operating income from continuing operations was $206 million for the quarter, which excludes approximately $7 million in favorable one-time items. OI results were primarily driven by treatment growth, a $4-per-treatment decline in dialysis revenue. The primary drivers of the decline in revenue were the lower Medicare EPO reimbursement rate, lower private insurance rates, and lower pharma utilization, $1.50 per treatment decline in patient care costs, also, the drivers of which were higher labor costs offset by lower self-insurance expense, lower incentive comp, and lower EPO utilization. The $7 million of one-time settlements were included in patient-care costs. Excluding these items, patient care cost per treatment was $233.43, or 68% of revenue, compared to 67.9% last quarter.

What about cash flow in Q3 and for 2007? DSO increased one day due to a slowdown in collections as we integrate our billing departments. Operating cash flow forecast continues to be 480 to 530 million in 2007. As we have said before, the billing integration and timing of collections will be a key factor for where cash flow will end up in 2007. In addition, we are still in the process of working through the temporary $40 million increase in accounts receivable from industrywide changes in government forms and documentation requirements that were implemented last quarter.

These temporary collection delays are expected to be resolved in the next few quarters. Our CapEx forecast for 2007 continues to be 110 to 120 million in maintenance capital, and 200 to 220 million in growth capital for acquisitions and de novos, plus the $65 million investment in the home choice infusion business. We now expect stock option exercises to generate approximately 80 million, leaving approximately 160 to 220 million available for additional growth investment, share repurchase, or debt repayment.

What are we planning to do with our cash flow? Our top priority is attractive growth investment followed by share repurchase, and debt-free payment. At times, as we've said in the past, we may be holding cash opportunistically for growth.

Finally, as you know I will be leaving DaVita in approximately one month. It has been great to be a part of this team and I will continue to give DaVita my support. Thank you, Kent. I'll turn it over to you.

All right. Thanks, Mark. That was a strong quarter. Certainly we think '08 is going to be challenging. We face some strong revenue headwinds and therefore significant earnings uncertainty for you. Wish we could make that different than it is. The bad news is we are in a rough patch with respect to private-rate battles and compression.

The good news is equally significant. We think that over the long term, there is a good chance this will create an even larger competitive advantage for us versus the small private-equity chains and other small providers. We have developed, and are still advancing, an arsenal of value-added capabilities, which will allow us to offer payers a unique ability to improve quality in a demonstrable way and simultaneously to save them money in total kidney care costs, which is what they so intensely want. And we have the market share and geographic presence, which will allow us to offer payers those value-added capabilities, with a consistency and simplicity across many geographies that only one other player will be able to do. So, given all this we continue to feel very comfortable with our strong cash flows, and attractive long-term return on capital, or the prospects for attractive long-term return on capital. Can we now open it up for a Q&A, please, operator?

(OPERATOR INSTRUCTIONS) We will pause for just a moment to compile the Q&A roster. Your first call comes from the line of Art Henderson with Jefferies and Company.

Hi. Good afternoon. Kent, I noticed in your press release that you talk about discontinuing providing administrative services to a bunch of your locations. Could you kind of explain what is going there a bit?

Nothing too significant. They gave us a heads up that they might well do this a while ago, that we have been working with them for a few years and they have been becoming more and more capable every year. And at some point it just made more sense for them to do it themselves. They could do it cheaper and have more control. They are a good group and they spent a few years investing. We are happy that we were able to work with them during the time we did.

Okay. Okay. And then could you remind us again, in that -- you spoke a little about the House bill. And there were some issues in the House bill that you didn't like. Could you remind what those issues were and what you are doing with the Senate right now in your discussions?

Yes. Number one is the House bill implemented bundling at a 4% reimbursement haircut. That would be a nightmare for a huge percentage of centers in America.

Number two, the House bill would not allow ESRD patients to join special-needs plans, unlike all other chronically ill patients in America or virtually all others, which would be a terrible thing since these special-needs plans could be the answer for transforming kidney care in America where these patients would get a lot of wellness and preventative services, saving the system money and them and their families a lot of clinical grief.

Number three, the CHAMP bill had a provision whereby FMC and DaVita would get reimbursed less for EPO than anyone else, which is something that has never been done before, that we know of, in American health care. Not for large hospitals, not for large payers, not for large nursing homes, et cetera, et cetera. And I think I may be missing one other aspect that we did not like. LeeAnn, go ahead?

And yes, and the lack of an annual inflation adjustment within the bundle.

Okay. Okay. And the folks that you are sort of talking to on the Senate side, do they seem to be open to working through some of these issues?

Yes. We are having good conversations and the fact is the House had to do its work quickly so we are not assuming they are totally closed-minded with respect to the -- some of the stuff that they put in. They had an awful lot of Medicare issues they were working on. And the Senate has had the benefit of another couple months to think about things and has the benefit of looking at everything the House did. But the answer to your question is we are having good conversations, we, the community that is, with a lot of the folks in the Senate. And so there is a good chance that if they come up with something, it will be something that we will like more and perhaps the House will like more also.

Okay Great. One last question and I'll jump back in the queue. You made an acquisition of infusion business this quarter. Could you kind of tell us what your strategy is with respect to that business?

Don't have much to say that is going to be too useful yet. Clearly it's a business we have never been in, although a couple of us executives have been in parts of it before, earlier in our careers. It is a large, fragmented, de-centralized service business. That is what we do. And so we were able to buy a quality company that is very modest in size, learn the business, and if it turns out to have some significant growth opportunities as it is currently configured, or if there are some subsets of it that could grow and emerge as sort of category killers like dialysis, where we offer a truly differentiated package for a particular -- a particular subset of chronically ill patients and do so in a way with unusual public transparency and the use of disciplined and public, clinical protocols. If either of one of those two things turns tout be true, the general growth continues or their specific subsegments, then we will get an incredibly nice return from the capital required to buy a small platform. We are not predicting any of that. We just do not know enough yet. But that was the premise for making the investment.

It seems like demand for ambulatory infusion suites has gone up. Could your dialysis clinics be adapted to that in any way?

I am allowing us to break one of our rules, which is after too many questions --

I'm sorry. That's fine. Go ahead, that's fine. Thank you.

Could you come back later?

Sure, sure. Absolutely Sorry about that.

Your next question comes from the line of Darren Lehrich with Administrative Assistant.

Darren Lehrich with Deutsche Bank. Thanks and good afternoon. It sounds to me like you are just wanting to revisit this private-pay compression, which you indicated to us you thought was a little bit more deferred in the last quarter. So, based on your comments, it sounds like one of the concerns you are seeing in your business is that of noncontracted out-of-network business . And I think the last disclosure we had on this, Kent, was in 2006 that was 13% of the revenue according to the K. I am wondering if you could remind us what noncontracted revenue is as a percentage of the total year-to-date or in the current period and on the subject where you think it might go to next

Yes, Darren, we appreciate the question. But we don't think it is in your best interests for us to talk about what percent of the revenue is noncontracted versus contracted. So we are going to stay away from that, but can I be helpful in answering some other aspect of the question?

Well, I guess, just help me understand, if you think between the increasing leverage of payers and them trying to move your business to noncontracted -- which do you think is the more important one for us to think about over the near term?

With respect to the second part of the question, is the fact that payers are bringing more energy, intensity, and focus on attacking higher-rate, noncontracted business and trying to get it into lower rate contracts. That is a significant deal and that is why we mentioned it and so we do think our shareholders should be sensitive to that. And what was the other part of that question?

Well, I will just move on, then. I guess I wanted to just understand the insurance settlement that you had, where would we find that on the income statement? What line was that in, just so we can isolate that, please?

It is -- it is in patient care costs.

Patient care costs. Okay. And my last question here, we didn't see any share repurchase. I guess I just wanted to revisit that topic and understand where you are with regard to that. I think you raised it for the first time in a while last quarter. So your view of that over the next, say, quarter or two.

Yes, we are just totally open-minded on the subject. In general, as earnings become more uncertain, the offensive and defensive value of having more cash goes way up. And so, consistent with our heightened level of uncertainty around earnings, not only ours but the rest of the industry, for offensive and defensive reasons, we are going to -- we have more of a bias to hold on to cash now than we would have a while ago.

Okay. Look forward to seeing you in a few weeks.

All right. Thanks, Darren.

Your next question comes from the line of Bill Bonello with Wachovia.

Hi. Just, can you explain the insurance gains? What is that?

Those insurance, they were insurance settlements and they were associated with hurricane Katrina. And then we had a fire in one of our California facilities.

So they are truly non-recurring?

Yes.

We sure hope so.

Okay. Okay. And then, is most of the expected sequential decline in operating income related to the commercial rate contraction?

I am sorry. Can you repeat your question again?

Yes. Is most of the expected sequential decline in operating income related to the commercial rate pressure?

Yes, Bill, the sequential decline in operating income is related both to our expectation of private rates as well as increased costs in the fourth quarter, which would be normal.

So, right. Okay. Not an unusual increase in costs, though.

Pardon, say that again?

Not an unusual increase in costs, though, I assume.

Correct.

Your costs go up every quarter, right?

Right. Normal cost increases, yes.

Okay. And then, just, sort of to touch on and I will stop at that. A little bit where Darren went with his question. Last quarter you did talk about a little bit of deferral in what you expected with the commercial price pressure. And now it looks like it could whack you 6 to $16 million as soon as the fourth quarter. Do you just, since the conference call, have some big negotiations or something? How did things kind of happen so quickly?

I'd say two things. I think we -- I don't know that we actually communicated or certainly intended to communicate any difference in private-rate compression last quarter as we did the quarter before. I think if -- my guess is if you actually reread all transcripts you will see that we used virtually the identical language. So I think that is the -- that was the premise for the question might, in fact, be wrong. But then on top of that, forgetting that, we did actually and are in situations where we are taking some hits that are a little bigger and/or faster than we thought. But again, I think, literally our language was almost word for word the same.

Okay, I will check that. I must have heard you incorrectly. Thanks a lot.

Thanks, Bill.

Your next question comes from the line of Andreas Dirnagl with JP Morgan.

Good afternoon, guys. Let me start with maybe the easy part. In terms of the revenue-per-treatment decline in the quarter, I think, Mark, you highlighted lower EPO, lower private rates and lower pharma. Can you -- can you sort of give us an idea as to the importance of each of those to the impact in the quarter?

Yes, they were listed in descending order of importance.

Okay. Look, I have to go back, Kent, to something you just said in answer to Bill's question, which is -- you sort of said that the premise of the question was incorrect. I don't know whether or not you meant to communicate it last quarter, but I think it is pretty clear if you go back and read the transcript, there were discussions specifically about the fact that there is a one-year contracting cycle in this business and that you had not seen a great deal of commercial pricing pressure up until the point of the last quarter conference call. You yourself were talking about having a strong third quarter and we were talking about the fact, actually in response to one of my own questions, that there was more or less going be a delay into the second half of 2008 for commercial pricing pressure.

So my question again, is why did that change so quickly? And quite honestly, I think that is where you will get a high level of frustration from investors in terms of saying that the previous quarter and then kind of coming back this quarter after having raised 2008 guidance and then saying well, now it is going to be at the lower end. What changed so quickly?

Okay, let's try to hit it piece by piece by piece. The '08 guidance is the same, 790 to 850, although we have now, which is not unnatural to do as the year progresses, tried to provide a little bit of probabilistic guidance and that probabilistic guidance is that we are more likely to be at the lower end than the higher end.

We did talk about having a strong third quarter and we did have a strong third quarter. And we did talk about -- we made a special point last time of talking about how enthusiastic we were in coming off the integration and the fact that we are going back on offense a lot more because all of our human resources were freed up from integration activities to where they could be more externally focused again. And we talked about how our suite of value-added services was going become more and more important in the next two or three years, given what is going on in health care, period.

So those are all the things we did. I don't think we said anything about we now think private-rate compression is going be slower than we did three months earlier. So keep going. So we don't want to misrepresent anything.

Well, again, I think the biggest issue is if lower private rates did have an impact on the revenue per treatment this quarter, there was definitely an idea that came across on the last quarter's conference call that given again the -- sort of the contracting cycle and the way that you saw the contracting, that it was clear this was not going change quarter to quarter, but would be a progression over time and now you are -- you are sort of back, I think, a little bit more saying that it's going to be a little bit more front-end loaded as you, yourself, just said. It is happening a little quicker than you thought.

And I am trying to figure out sort of, again, what has changed because you talk about private payers consolidating and getting larger. The industry has consolidated in terms of your own market share and gotten larger, so it appears to be sort of this lock step movement. And we are still are always in a position in which it is a relatively small number of patients that you deal with on an individual contract basis and it is not really a big area of savings for private payers.

Okay, so restate the -- I hear you in all your sort of description of reality, much of which is accurate and therefore, restate the question, please, Andreas.

Again, I think what I am trying to figure out is -- let me try and put it bluntly in another way. I mean, do you think, perhaps in retrospect you were too optimistic last quarter in the way that you were presenting the conference call? And you wish you could have dialed it back a little bit in retrospect? Or are we dealing with something that really sort of has changed here?

No. I would not say that we would take back any optimism or pessimism from the last call. We read the transcript as we always do before a call, and I think -- I think our word choice was consistent and -- and accurate. So, as I said to Bill, we have had a couple incremental things happen in the quarter in the last few months that were worse than what we expected before. They are not fundamentally different than anything we have been talking about for a long time or -- than the kind of things that might happen in the future. So there was certainly some incremental change.

But I think the biggest fact is we tried to add value by providing '08 guidance earlier in the year because we wanted to make sure that people had the benefit of that, and we gave the 790 to 850 range, with a lot of discussion of private-rate compression. Three months later, we are updating it by saying it looks more like the lower end of the range as we get closer to the end of the year and it is also the case that we have taken a couple incremental hits, which will lead the fourth quarter probably to be lower than what we would have thought four or five months ago. So does that get to it for you?

Yes, a little bit. Let me just maybe throw in two other questions just to sort of move on. One of which is maybe coming at it from a slightly different direction. I mean, this is a very sort of understandable, theoretically, industry. There aren't a lot of -- as you, yourself, say -- it's a single DRG industry. Sort of dialysis is dialysis. So I think it is valid to make comparisons between yourselves and your other major competitor. And what I'm trying to figure out is what -- is there something structurally different in the fact that Fresenius seems to be very comfortable in saying that private payer compression is as it always has been and it does not appear to be sort of accelerating and is not something they are looking at any differently now than they have over the past couple of years? Is there something just structurally different between yourselves and them that makes you so much more worried about it?

Yes, I -- I think that is a good question to ask because that will probably help to shed light on it. I would say that we do have a different perspective. That they are more optimistic about their ability to protect current rates, given the changes that we just described earlier in the call. They are more optimistic about their ability to do that than we are. And so either they are right and we are wrong, or we are both right and they are better than we are, or we are both right and our mix of business is a little different on a state-by-state basis with us being bigger in some more intense managed-care areas, lower revenue. We will actually take a look at that before capital markets. But I think, I think you are right. There is a difference in our point of view versus theirs and I can fully appreciate how frustrating that has to be for you.

Okay. Final one before I get back into the queue then. Is the commercial pricing pressure that you are facing something that is across your universe of clinics or is it perhaps more concentrated within, let's say, historic DaVita clinics or historic Gambro clinics?

To be honest, I don't know the answer. My guess would be it is not different, old versus new DaVita, and I'm looking on a table. No one knows of any difference. As you know, after the deal we were able to, on average, improve Gambro rates significantly. And so it could be that there are still differences and therefore, more of the pressure is on some old DaVita situations because for so many years we had better rates. So it could be that would be the case. I would not think it would be a powerful part of the answer.

Okay. I will drop back in the queue. Thank you.

Well, feel free to come back.

Your next question is from the line of Gary Lieberman with Stanford Group.

Thanks. I will at least give you a brief break from some of the pricing questions. The number -- your number of patients grew sequentially, at sort of a slower rate than you have for the past number of quarters. And it looks like the number of centers went up at a similar clip. So can you give us a little more detail in terms of, I guess, some of the synergy required or opened, or smaller in the quarter? Is that a temporary trend or is that something that will persist going forward?

In the quarter, we opened 18 de novo units, which was really from -- compared to the last two quarters, about double. We did 10 and 11. So I think that is part of the answer. In terms of acquisition, we did six units. We acquired six units with about 300 patients.

Okay, so, but -- I guess the question is going forward on a -- if I look back sequentially over the past eight quarters you've increased the number of total patients by about 2,000 sequentially per quarter. Going forward, you think you are going to resume to that level or are we going to see sort of more of the your (inaudible) about 500 from second quarter?

Perhaps the best way to answer is if you look out at '08, we are thinking our non-acquired growth will be close to 4%. So you could use 3 to 4% as a range, but closer to 4 than 3. And that would be a product of our same store growth plus how this year's de novos do, plus the number of new de novos we do as we proceed through the year. Does that get to the --

A little bit. I guess the other -- the one final piece of the question is that when you look at the -- at the centers that are available for acquisition or that might be available for acquisition -- are they -- are they typically smaller now than they had been in the past? Or are -- or is it still a similar sort of pool of what is out there?

I don't know. It tends to kind of go in streaks. I wouldn't -- I don't know the answer if the weighted average size of the existing set of independents out there is different from what it was two years ago. I don't know. It is certainly not a dramatic difference and so given the relatively small number of acquisitions we made in the last six months, I would not want to look at that and extrapolate any kind of market trend.

Okay, and then, I guess just one follow-up to some of the language you used in the guidance where you say that the guidance range for '08 does not capture as high a percentage of the -- of the potential outcomes as usual. Can you just give a little bit more detail or granularity in terms of what --what that means and how we should think about that? And, I guess, should I -- should we think about that in terms of you have a weighted probability for where the operating income will come in or is there a weighted probability for different events that would cause the operating income to come in at -- at different levels? How are -- how do you guys go through that process?

I think it is -- it is both. And part of what Andreas' frustration was about is that we cannot -- when we are in a fight with a payer, they are trying to move patients -- they are trying to move existing patients, they are trying to redirect new patients. We are in a legal dispute over exactly what rate applies to what patient. So there are a lot of moving parts, and throughout that battling back and forth, which can go on for months, it is very difficult to predict the outcome. And part of the outcome is literally retroactive. Because at that -- by that point you have got three or four or five months of retroactive dispute over what was the right amount to pay for different patients at different times. That creates significantly more uncertainty and there's more going on than before.

In addition, we are just in more large negotiations than we have been in other periods. And so, if you have something like what happened recently where there are some deals that came in differently than we expected, or unfolded differently than we expected, in this particular case, in a negative direction. But once again we could not have predicted some of that ahead of time. So it fits into both of your categories. And hopefully by giving a couple of examples, that helps make sense of it.

Yes, that does. I guess there's one quick follow-up to that. If you -- if we were to look back or if you were to look back and tell us the percentage of commercial contracts that you negotiated in the prior 12 months versus the percentage of commercial contracts that you would expect to negotiate in the next 12 months.

Boy, I don't have a good answer. Perhaps, bring that up again at Capital Markets. And by that time we will have a good answer.

Okay. Great. Thanks a lot.

Thank you.

Your next question comes from the line of Matt Ripperger.

Thanks for all the details, especially about the Washington environment. A couple of questions. First, related to the administrative deals that you are discontinuing what is the financial impact from that going forward?

The revenue is in other income, our management fee revenue. And it is really immaterial.

And related to that, I understand that the regs might be changing in the state of New York which would allow for-profits to own and operate centers. Is this in anyway related to that?

No, it is not. We worked long and hard for a few years to bring about that legislative and regulatory change.

And in your opinion, does that open up a new growth opportunity in New York?

We hope so.

Okay, great. And then second question is, if -- if the physician fix is reduced to one year, could you just comment on how that could potentially impact the likelihood of MSP going into place.

I think they are pretty independent variables. However, there are some people who will say, that, gee if the physician fix goes to one year, the reasons for that are going to mean that in general conversations are going poorly enough that it is less likely that other stuff will be included at all. So that is one school of thought. Other people would just say that they are totally independent events. I think handicapping between those two perspectives gets pretty tough.

And the CVO has scored MSP to 42 months at roughly 400 million over five years?

No. They scored 30 to 60 months because it was in the President's Bill two years in a row, and that score was a little over $3 billion.

Over five years? And then the last question I had is --

Did you hear, I said 10-year score was going to 60 months.

Okay. Great. Thank you. Last question I had is you mentioned that the PE-owned companies were opening centers at a faster rate than the market growth. Is there any commentary you could provide about which specific regions that new capacity is coming on?

I think not. It is not -- there is not a pattern. I am trying to cycle through where it has happened. And I don't think there is any clear discernible pattern. They are scouring the country looking for attractive markets in the same way that FMC and DaVita do; and with a bunch of people with capital doing it, it means more of them are getting built in those markets that have a lot of private patients.

Great. Thanks very much.

And just to be clear. I think I said the management, fee revenue was in other income, It's is in other revenue.

Your next question comes from the line of Justin Lake with UBS.

Thanks. I guess I will get back to the commercial payer questions instead of parsing the conference call, maybe we can just talk about the -- the tenor of how these managed care issues are playing out. I mean, Kent, I think you gave a couple of good examples of how some of these commercial issues can come upon the company.

I guess what I would like to hear is just, you talked specifically about large payers coming to the table and trying to get in network versus out-of-network. Is that -- is that what is going on here? Or is it payers trying to do this outside of negotiating with you, like you said, actually steering patients away from DaVita centers rather than sit down at the table and try to hash out a contract?

Yes, I think it is all the above and, of course, not just with DaVita but all providers, or all providers who have rates that are higher than other providers. So it's try to move existing patients, it is redirect new patients, it is try to get rates down on existing patients, it is the normal full payer contracting menu of techniques. And we have the normal menu of provider responses, the same ones we have been using for years and discussing with you. The difference is now that payers are paying a lot more attention, and they are a lot bigger. And they are, in particular, a lot more focused on noncontracted situations.

Sure. And the payers that are normally out-of-network, I guess you would think historically have been -- would be smaller, but I guess you're saying with all the consolidation going on, those payers that didn't have scale or membership leverage do now. Are there other plans out, or should I say are there providers out there who are more willing to take a contracted patient now? Or -- and is there something going on from a provider standpoint that is -- that is changing the pricing dynamics or the contracting dynamics out there?

I don't think so. We have not seen any of that.

Okay. So they are just able to find -- where are they going to? If they were out-of-network with you and they are staying out-of-network, is your larger competitors signing a contract or are they going to the hospital or are there enough independents out there to take this patient flow?

In a lot of cases it does not take anyone signing a new contract. Let's assume that you and I are both in Des Moines and you have a contract and it's at X dollars per treatment. And you've had that contract for years. We don't have a contract, and we are at 1.2 times X and we are out of -- we are noncontracted.

So no one has to develop a new pricing approach in that market because the payer already has a provider with a contracted rate that's lower than someone else's noncontracted rate. It's just that before they did not work to get the noncontracted person into the contracted center or physician. So it does not take a provider coming in and lowering price in order to trigger the event.

Okay. So you are saying there are enough contracted facilities out there to absorb the patient flow without anybody doing anything different?

The answer differs by market, but in a lot of markets the answer is yes.

Okay, so how does that affect the patient and the physician? I know in a lot of instances the physicians that are at DaVita center are -- physicians like to favor one center over others. If the patient has to move, does the physician have to go with them? Do they have to switch physicians? Is there push back from the patients on this or the physicians on this?

Typically the physicians and patients hate it because they are both very happy with the existing center. For the physician it would be their primary affiliation, if not exclusive, but primary would be more typical. And for the patient, they are very bonded to the caregivers and so typically they hate it.

Okay, and then just one whack at trying to size this. In the fourth quarter can you give us an idea -- it sounds like this is the first time you have kind of highlighted where this is truly having an impact on results, or expected to have an impact on results in the very near term. Is there any way you can give us an idea of -- kind of -- I know you don't want to talk about the absolute number, or the absolute revenues from out-of-network patients, but as far as the impact that you are seeing, can you say if that -- if this is impacting 5%, 10%, 20% of your out-of-network patients of the contracts or the actions that are being taken by payers? Just give us an idea of how big of -- what we are actually seeing here.

The best way to think about that is to look at our guidance. And that's -- that is the ultimate manifestation of everything we are seeing, that it cuts across all types of payers and all types of revenue. And it would not be in your best interests for us to start parse publicly what you are proposing.

Okay. Thanks for answering my questions.

Thank you.

Your next question comes from the line of Mark Schoenebaum with Bear Stearns.

Hi. I really appreciate you taking my question. I just have some very brief questions. I was wondering if it is possible. I don't know if this is your policy to do so or not, but if possible to quantify the sequential unit volume change in EPO utilization across your clinics. And then if you are willing to comment on that, kind of your expectations for '08 in terms EPO unit volume?

We don't comment about unit volume changes. So I wish I could give you that answer, but I can't.

Okay. All right. And can you comment on your expectations around Medicare reimbursement rates for EPO in 2008? And that is my last question. I really appreciate you taking it.

Yes, reimbursement rates for Epogen, as you know, for the majority of our patients are driven by the Medicare program and the ASP-plus six system. Beyond that, we don't really comment on the rate.

Great. Thanks again for taking that. I appreciate it.

Your next question comes from the line of Gary Taylor with Banc of America.

Hi. Most of my questions have been answered. I did want to see if maybe I could go back to the EPO utilization question. because in the three items you mentioned on the sequential revenue-per-treatment decline this quarter, you did mention, I think, pharmaceutical utilization as the second or third. And Kent, I thought you had characterized for us in a couple prior quarters that the EPO utilization was down in the low single digit year-over-year. If that is accurate, can you tell us if we are still there in that range?

We had mentioned previously that we expected that the combination of things that are going down could affect EPO utilization in the neighborhood of 2 to 5%. And we are experiencing utilization -- from 2 to 5% down from Q1. And we are experiencing a utilization decline of approximately 5%.

Okay. Thank you. And my other question may sound antagonistic. It is not intended to be, but I don't know how else to ask it. But I just want to get a little color, Kent, if you would not mind. I guess, four folks in the CFO spot in three years, and I know you have got a lot of financial talent on the team. I am not concerned about controls but I am just wondering from your perspective, what does it take to, do you think, to get someone in there that will be with you for a while? Has it just been unfortunate personal events, etc.? Anything you could kind of give us on that would be helpful?

Very fair question. Very fair question. And each situation has been a little different. We have had three CFOs in eight years and then, of course, acting CFOs in between. And we understand and support Mark's decision to want to be with his family more, and the other situations were not the same in that sense. So, it is not -- it is not good to have three CFOs in eight years. It's appropriate for anyone to look at that and be critical. And we hope that we find someone who can be CFO with us for a long time going forward. In the meantime, it is good that a whole bunch of the rest of us have been around throughout the entire period.

Okay. Thanks. So I assume there is a search that will get started right away and you will update us as soon as you can.

Yes.

OK. Thank you again.

Thank you.

Your next question comes from the line of Justin Boisseau with Gates Capital Management.

All of my questions have been answered. Thanks.

Your next question comes from the line of Ernesto Cruz with Highline Capital.

All of my questions have been answered.

Your next question comes from the line of Mark Arnold with Piper Jaffray.

Most of my questions have been answered. I just -- just on the home infusion business that you guys purchased, do you see any other opportunities like that that you can maybe put some of your cash to work on new growth platforms that you see out there? Anything you could comment on that?

Well, even if we had something in mind we would not say anything about it, to be quite honest. But right now we are happy that we put an oar in that big ocean and we are looking forward to working with that team - well, we are working with that team to try to figure out how to grow that both conventionally and perhaps unconventionally. And so we are open to other ideas when they come over the transom and we have got a couple of ideas of our own, but they are all pretty much in their infancy.

Do you think there is an opportunity to use -- potentially to use that platform for home dialysis in the future?

Well, we do think there is going be more patients getting dialysis at home 10 years from now then there are today. And so -- and we do know that we are going to learn a lot about different ways of doing home care from the HomeChoice acquisition than we have learned necessarily from ourselves and our competitors in dialysis over the last five years. An awful lot of conventional thinking. So the answer to that question would be a yes.

And then more broadly, what is very clear in America is that the pipeline of more complex, more expensive pharmaceuticals and biologicals that are best administered from both a clinical and economic point of view in a more disciplined in protocol and evidence-based way than the historic just-let-docs-do-it-in-their-offices or force-patients-into-hospitals, those big facts -- sort of the jet stream economic facts of basic pharmaceutical and biological trends mean there could be some very nice opportunities if you have both the kind of nationwide inexpensive care distribution networks that we have in dialysis combined with a very sophisticated full-service ability to do a lot of things at home that we might be able to put some very attractive value on the table for patients, docs, payers, and pharma companies. So, up at 15,000 feet, that whole pitter patter sounds good to us and now we are busy working at ground level seeing if any of it can come true.

Okay, I just -- one other question and this may be semantics Earlier on, Kent, you had in your -- I think in your opening remarks you had talked about for 2009, if you don't get a Medicare update and an MSP extension that those 2009 numbers could be flat to down. Is it going to require both in order to see any growth in 2009? Or do you need to get at least one of them? I mean, I just want to make sure I was not reading too much into the fact that you said both of them.

Actually, I don't know exactly what I said, but it would not necessarily take both. Of course, it would depend on how big the Medicare rate increase was, and how big the MSP extension was and what all else is going on. Our objective there was just to provide people a bit of a window into a longer timeframe to emphasize the importance of having those things happen, at least one of them in a healthy robust way. So, that was the spirit.

I understand. I will not read that much into it. Okay then. Great. Thank you very much.

Thanks.

Your next question comes from the line of Mark (inaudible) with PIMCO.

Hi there, Mark (inaudible). Just following up one on earlier you were talking about managed care focusing on out-of-network people -- out-of-network patients and in one of the responses you talked about patients essentially being taken and moved to other facilities -- other providers. And so, it sounded almost like that is more what is going on than -- than renegotiated price on that particular patient. That is what I was confused about. Because it's if people were leaving your centers then it would seem to show up in organic treatment growth being down sequentially rather than price. But obviously renegotiation going on also in addition to potentially losing volume but can you maybe go into more detail on the split between renegotiating price on patients and then actually losing patients?

I don't think that would be a good idea, because the fact is all of the above goes on all the time. In any one quarter there could be more of one versus the other. Both more victories than defeats and more of one than the other. And whether someone is getting existing patients to move, or redirecting new patients, it would have the same impact within a very short period of time on our non-acquired growth numbers. And so -- and so you can see from our non-acquired growth numbers that we continue to clip along in that regard. So, I don't think breaking it out would be good because the answer in any one quarter could be misleading. And the fact is it is all a combination of the same negotiation. So how much of what happens is hugely affected by what we agree to or don't agree to with the payer as opposed to some basic trend.

Okay. Okay. That is fair. Thank you. One other thing then, I just want a sort of financial policy capital and structural policy given your CFO departure here You stated your goals before, giving essentially a leverage range as your optimal kind of target cap structure. Is that something that is really kind of a moving target with the CFO or is that something that you and the board kind of feel is in place and that would be basically forced upon the new CFO. The reason I ask is the CFO is obviously kind of the steward of the capital structure and so on. Could we expect some radical change here with who you get, or is that something that's almost set in stone at DaVita?

Yes, this is Mark, I will take question. The sweet spot of three to three and a half times leverage is a sweet spot that makes sense from a weighted average cost of capital basis. So it is fundamentally -- it is fundamentally about analyzing what brings the company to the lowest cost of capital. And that has not changed at this point. So it is really not a subjective decision, per se.

And then what changes around that, because we have been using the same number for a long time, for the reason that Mark articulated and then depending on how the external world moves around, there are times we are above or below it. We went down to as low as two or so because we wanted to keep our potter dry because we were hoping we could buy Gambro. The, we went up to five or so when we bought Gambro, but we did it in a period where we felt unusually confident in all the near-term cash flows, so we were comfortable that there was very, very little probability that we could not zoom right back down towards our range.

Okay.

Even when we were at two and even when we were at five, we said the same thing about three to three and a half for the reasons that Mark mentioned.

Okay, guys. Thanks a lot. Thanks a lot.

Thank you.

Your next question comes from the line of Balahi Gandhi with Oppenheimer.

Good afternoon. Just a question on Home Choice. I know you talked about it in the press release it being neutral to EPS. So, just wondering if it would contribute at all to operating income next year and just generally speaking what type of operating margin or range we could expect for that business?

Yes. We -- when we acquired Home Choice, we expected it to have a neutral impact on EPS. And obviously, reasons for acquiring the company were to, as Kent has articulated earlier, to learn this space and also match it up with our core competencies, et cetera. In terms of operating income, the impact right now is not -- is expected not to be material.

In terms of margins, is there even a range you are willing to hair with us to help us model out to '09, maybe?

No. I don't think that would make sense at this point, not until -- It would not make sense for us do that at this point, given the materiality of the business.

Okay. Thank you.

Your next question comes from the line of Hamlen Thompson with Westfield Capital.

Hi, guys. I appreciate you taking the call. And sort of similar to Gary, I don't want this to be an antagonistic question, but I feel the need to ask it. Kent, you talked about referring to guidance as a proxy for us to understand the pricing pressures, but for six years now you have guided to numbers significantly lower than where you have ended up on the following year. So I am understanding why this would be different than the prior six years' guidance.

Number one, the overage versus guidance has not been very significant. We can bring all the historical analysis to capital markets. That might be a good idea. But -- so that the directional factor is true. But it is not a terrifically powerful quantified point. Second is what we have tended to do is provide guidance and then continue to refine it to sort of give you a rolling set of expectations. And so, if you pick out the earliest guidance, then the long-term variance might be bigger, but that is because we try to add value by offering earlier guidance than some other people do.

Third, the fourth quarter estimate would be one reason to think that this time is different because the pattern of the fourth quarter versus the third, even though we told you the third quarter was going to be very strong is still different from than other years Q4 versus Q3. And then fourth, I think it could also be that the guidance itself of what the year-over-year numbers are is different on a relative basis, meaning the actual '08 versus '07 difference compared to '07 and '06, or '06 and '05. That might be a fourth reason. So, I think it is a very fair question, so that is why I am trying to give you an analytical and logical response to it as to why you might want to pay attention to the guidance.

Thank you. My second question would be can you help me understand how you think about trading off price for market share?

Yes, we still -- on this point, have the same point of view that we have voiced for years, which is in this business with low fixed cost, high variable cost, and some stickiness in referrals, it is not a good idea to be aggressive in thinking that lowering prices is going get you more market share. So that has been and remains our point of view. That does not mean that there is not going be across the entire country some exceptions in some particular markets in some particular years, but our basic point of view remains very firmly held and is reflected in all of our contracting strategies.

So, is what is happening here is you are not getting the same price increases that you historically have or giving up some pricing?

I -- in some cases it is giving up pricing and not getting any more volume. So, we didn't give up pricing to get volume. We gave up pricing to keep volume.

Okay. Thank you guys. I very much appreciate it.

Thank you.

You have a follow-up question from the line of Andreas Dirnagl with JP Morgan.

Yes. Just actually to follow-up on what Ham was asking, Kent, you started to answer and maybe you stopped. Are you basically seeing the commercial pricing pressure in the form of reduced pricing increases in the -- for the most part or are you actually taking pricing cuts? I realize there is both but I am trying to figure out which one is more common.

The incidents of pricing cuts is up.

And is that the majority of the decrease or is it that you are just taking smaller increases?

We have not run that number. We will by capital markets. My strong hypothesis is that the cuts is absolutely the dominant factor.

Yes. Yes. And sort of my final question for the night then has to do with what you talked about just a couple of questions ago in terms of cash. You, yourself, just highlighted that sort of the last time you saw the company sort of move towards and even well below the lower end of that sweet spot was right before the Gambro acquisition because you really wanted to buy it and saw that opportunity was out there.

I think Mark highlighted that in terms of your uses of cash going forward, clearly sort of profitable reinvestment is sort of the number one priority. You have made a small investment in a sort of -- an ancillary business in the U.S. but you are highlighting that that is very unlikely to be a major move that's going to be more of an organic growth and a progression. My question is -- is there something out there that you are building up this cash and reducing your debt level, or your debt to EBITDA? And if so, I know you are not going comment on any transaction but what is the timeframe that is involved? I mean, how much cash do you have to build up before you finally say, you know what, this is too much and there is no opportunity. Therefore, we're going to do a share repurchase.

Fair question, and we will just have to keep revisiting it every quarter. It is the case in the home business, we want to learn it and part of why we wanted to learn it is to see if we want to be bold because to do a bold move in a business you've never been in the corporate cemeteries are filled with the graves of those who've done that and the opportunity to learn with a quality team to decide if you want to do something bold is just wonderful. . It's not going to happen in three months, but hopefully we'll figure out in not too long a lot about that business. The primary reason that we have a bias to hold more cash now is from what I said earlier, Andreas, which is just earnings uncertainty. And if private-rate compression kicks in in American dialysis with more intensity than other people are expecting, there could be some significant dialysis growth opportunities as people have a tougher

That leads to the obvious question, which is are there FTC issues for any more domestic acquisitions?

Yes, but that just is a question of a mathematical issue and in some cases just a partnership issue where you recognize up front that you cannot keep everything.

Okay. Thanks.

Thank you.

Your next question comes from the line of Jill Grueninger with Mason Street Advisors.

Hi, Kent. I just wanted to ask about the rate compression. Is the rate compression an actual cut in the in-network per-treatment rates or is it from pairs trying to move patients in network, and so you take a cut when you go from out-of-network to in-network?

Yes. It is both. We have had some actual contracts that moved to lower rates and then we have had some lower rates that come from people moving from out-of-contract to in a contract because we decided we would rather have more patients at a lower rate that fewer patients at a higher rate.

And which of those is the predominant?

On that one, I would rather wait longer because in any given quarter the answer can move one way or the other. So, give us the next whatever it is, 12 days to the capital markets to see if there is a sort of consistent answer. If I had to guess for the industry over the next year, I would guess it will be more of the moving into contract than the other. But, please don't hold me to that as a promise.

And where you are finding the actual rate compressing for the in-network patient, I would assume that is where you don't have the 70 to 80% market share that you have in some markets. Is that correct?

Yes, we do find that the stronger our geographic presence, the more value we can deliver. So that often correlates with getting a higher rate. And if we are a tiny bit player in a community, you are right. That can lead to a lot less negotiating leverage. And then what can get misleading about that, however, and the reason I am sort of choosing my words carefully is in a lot of cases we deal with a payer across several markets. And, so for dealing with them across 10 markets, across five states, it could be that in three we're very strong in our geographic presence, in three we're very average, and in four we're low and then you start to get results that do not fit with sort of the paradigm of market share correlates to price.

Okay, and just one last question is what percentage of your patients would you say are in areas where you have the dominant market share?

Well, we don't have dominant market share anywhere in America. And we have about 27% overall, and it gets pretty tricky to define market. Because, let's take good old Des Moines again, or some city, Peoria. That for one payer we literally might be negotiating Southern Illinois rates. Another payer it might be part of an entire Illinois negotiation. And another payer might put those dialysis centers into the Tri-State Mid-western region. And so suddenly when we look at a dialysis center there, what is our market share? Well, it is actually a part of three different markets depending on the payer and the level of aggregation in their contracting. So that is another big sort of hurdle to giving a simple analytical response.

Okay, can I just ask one more question?

Sure.

What percentage of patients are out-of-net work?

Yes, and that is something we don't think is in your best interest for us to disclose.

Why? Why is that?

I -- once again, I just -- we don't think it is good for us to go down that path.

Maybe, then, is there a way to look at how that has changed over time on Out-of-network patients instead of looking at the absolute number?

That may be a good idea. So let us think about that between now and capital markets. Please remember when we have all these discussions, when we don't answer something, it is because we don't think it is in your best interest. Because we are in a lot of negotiations. Otherwise it would be very fun to go through the analysis together. But you would not want us to do that and think we were foolish in a way that hurt the share price.

Okay. Thank you.

Alright. Thanks.

You have a follow-up question from the line of Bill Bonello.

Just a couple more quick ones. The balance sheet allowance is a percent of gross AR, is up about 140 basis points year-over-year. Can you just comment on what is driving the need for that extra level of reserve?

Yes Bill, it is not a need for necessarily extra levels of reserve. I would not characterize it as that. It is timing more of the write up of contractional adjustments. You and I can spend a little more time off line if you like, but it will fluctuate based on the timing of write-offs.

Oh, okay. It just -- I get that. I mean the only thing about that is if I go back from December of '04, it was at 11.4% and has pretty much gone up every single quarter sequentially for the last three years.

That is fair. I think Gambro, obviously had some impact on that and we'll take a look at it and I'll get back to you with some answers.

Okay. That -- that would be --

There is really no change in our practice or policy that really is more to do with timing of write-off of balances, et cetera.

Okay. And then just two more questions. In the negotiations with the managed care payers, I guess I had been optimistic that you might take the rate declines like you are taking, but that you get something in exchange for that maybe longer-term visibility into pricing or a more comprehensive suite of services that you could provide or -- or what not. I mean, is there anything that is working out in your favor or are you pretty much just losing the battle?

No, I am glad you brought that up, Bill because we do, on some of these we are getting multi-year arrangements that are going be very stable that have a CPI, and a well-defined CPI, a fairly designed CPI. In others there's going to be the sharing of hospitalization and other data, which will allow us to take our value in the relationship to a whole other level. And so in some of those cases where rates are lower, we got some other things in the deal that we think have a very nice net-present value potential associated with them.

Okay. That is very helpful. And just the final thing, I guess it is a policy question, but just as the governments are debating MSP, aren't they going be less sympathetic to the payers if the -- if the same payers who say, hey, we don't want to provide insurance benefit to our own members also are squeezing what they are paying for the members they are paying for?

Yes.

Okay.

Your analysis is exactly right that we hope people notice that rates are coming down.

Good. Thanks.

Your next question comes from the line of Ilan Chaitowitz with Redburn Partners.

Good evening. This Ilan Chaitowitz from Redburn Partners in London. I've got, sir, just two questions. Firstly, is there any causal link between the decline in private pay rates that you are reporting and the lower utilization of EPO in your business? And secondly, we seen recently in FMC's presentation that they have got a percentage of patients of their hemoglobin level above 11 grams per deciliter, at about 80%. I think your equivalent metric is currently 83% and that has come down 1% from the last quarter. Would it be wrong assume that you have got another two or three quarters of incremental declines in EPO utilization to get to a more normalized level?

The answer to the first question is that yes, part of the reason for the decline in revenue per treatment is the drop in EPO utilization. The answer to the second question is we don't know because it is difficult to predict what the portfolio physicians will decide. But in general, our physicians have had a lower percentage of patients below 11 than other providers for a long time. And so if -- if one were to assume we were to move to the same place, that FMC is, that would be the first time that would have been the case in many years. Now, again we cannot predict how all doctors are going respond to all the different anemia stuff going on. And the gap between FMC and DaVita for all I know has remained exactly constant as both of those numbers have moved up, which is to say the percentage of people below 11.

Thank you. I don't think I asked my first question properly. Let me -- let me re-ask it. There has been a explanation that the attrition in private pay rates has come from buyer power so consolidation and using bigger purchasing power to reduce rates. My question is, is an additional factor contributing to what you are reporting as private payer rates declines from lower EPO utilization?

Right, and my answer, I did understand the question and my answer is yes. When EPO utilization goes down, both our Medicare revenue per treatment goes down and our private revenue per treatment goes down.

Thank you very much.

Thank you.

You have a follow-up question from the line of Ernesto Cruz.

I have a couple of questions actually. First, is (inaudible) experienced a sequential increase in average revenue per treatment in North America of $4 whereas you experienced a $4 decrease. And, I believe they also said they had experienced the decrease in EPO utilization on a sequential basis between the two quarters. What do you think accounts for the different directions and movement in average revenue per treatment?

We do not know enough about them to answer though it could be they are doing better. It could be that they are getting higher rates and we have higher volume growth and those two things match up somehow. It could be any number of things. I think we would probably have to watch it over a longer number of quarters. The short answer is we do not know enough about them to know.

Okay. Second question is in order to get flat to down EBITDA in 2008, given than you are getting a full year out of your de novos and your acquisitions from this year, that you are going to have de novos next year that there this natural growth in a number of patients over time, and that at worst your Medicare rates should be flat and given what happened that -- to the cardio panel, you might actually see a rebound in epogen utilization and that your margins have been growing, I would think you need a massive fall in commercial payer rates given that they are a minority of your revenue in order to drive flat to down EBITDA. Would you be willing to share the order of magnitude assumption about how -- the size of that hit in order to get that math to work?

Yes, we will do that at capital markets as we have always done. But, the short answer is yes it does take some material private-rate compression for it to happen. But, there is a lot of other stuff going on. And once you posit no Medicare rate increase and then perhaps lower private rate increases, some private rate cuts, normal labor pressure, stuff going on with pharmaceutical pricing, it does not take too long before you get to where -- where we are. So, at capital markets this will give you a satisfactory parsing of that issue.

Okay. Is the -- are either of the new epogen-like drugs going be on the market in 2008 such that they might create pricing pressure for Amgen?

We don't think so.

That is not built into your assumption that there is going to be some direct competitive activity at Amgen?

No.

No, I think that is it. Thank you.

Thank you.

There are no further questions.

All right. Well, thank everyone for your interest. And we hope to see a bunch of you at capital markets where we can go through a longer deck and so the analytics hopefully become clearer and clearer. In the meantime, we will keep working away. Thank you.

This concludes today's DaVita third quarter earnings conference call. You may now disconnect.