德維特 (DVA) 2008 Q2 法說會逐字稿

Good afternoon. I'll be your conference operator today. At this time I'd like to welcome everyone to the DaVita second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there'll be a question-and-answer session. (OPERATOR INSTRUCTIONS) Thank you, Ms. Zumwalt you may begin your conference.

Thank you, and thanks everyone for joining our second quarter conference call. We appreciate your continued interest in our Company. I'm LeAnne Zumwalt, Vice President of Investor Relations; and with me are Kent Thiry, our CEO; and Rich Whitney, our CFO.

I'd like to start with our forward-looking disclosure statements. During this call we may make forward-looking statements which can be generally identified by the content of such statements or the use of forward-looking terminology and 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 statements. For further details concerning these risks and uncertainties, please refer to our SEC filings including our most recent quarterly report on Form 10-Q and annual report on Form 10-K. Our forward-looking statements are based on information currently available to us. We undertake no obligation to update these statements, whether as a result of changes in underlying factors, information, future events or development Additionally in our press release and related disclosures include certain non-GAAP financial measures. These measures should be considered in addition to the results prepared and 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 measure. I'll now turn the call to Kent Thiry.

Okay, thank you LeAnne. Second quarter was a good quarter and our near term operating prospects also looked very solid. I'll go through three items to kick the call off. Number one, clinical results, two, public policy and number three, our '08 forecast and a little bit of talking about the longer term outlook. With respect to clinical results, as always, we will present them first because that's what comes first. We are first and foremost a care giving company taking care of over 109,000 patients. In addition though, from a purely capitalistic point of view, it's a good thing that clinical outcomes are being discussed more and more and hopefully will become increasingly relevant in the shareholder world as well as in the clinical world. We remain advocates of that public discussion, the very public discussion of clinical results.

We'll quickly reference four different measures this time. The first is the same one we've done for a long time. Adequacy. Essentially how well we're removing toxins from our patient's blood. This quarter 95% of patients had a KTRV greater than 1.2. FMC, the other large dialysis organization, or LDO has a very comparable performance and the two LDOs do much better than the rest of the industry, meaning all the small independents and hospital-based centers. The second clinical area, the placement of [fistulents]. We had 60% of our patients with fistulas placed, once again the combined LDOs doing better than the rest of the industry.

Third area, anemia management. 81% of our patients had hemoglobins greater than or equal to 11 in the quarter. Here it's worthwhile to make a small national editorial note that there is a growing number of U.S. dialysis patients who are seeing their hemoglobin models below 10, literally over 9% of patients in America now being below 10 which is concerning to many nephrologists. The fourth clinical area is mortality rate. Here we had a very nice drop in our mortality rate year over year. Gets very difficult to do apples to apples comparisons on this metric right now to other organizations, but you can look at the national data and draw certain conclusions. One being that we had a very nice drop in our year-over-year mortality from about 17.9 to 17. The last national data by the way, 2005 versus our 2007 showed them at 18.6%. So very nice difference and once again, even though you've got to be very careful on the apples to apples comparing, the LDOs certainly appeared to have mortality that's significantly better than the rest of the community. So that's a consistent theme across these clinical measures. I do want to repeat again that we remain a fervent advocate of public transparency and standardized measurement methodologies with respect to clinical outcomes.

Finally, we're also very excited to point out the joining of DaVita a Chief Medical Officer, by Allen Nissenson. He's ben working with us for a few years, and he is simply one of the best known and most respected nephrologists in the world.

Moving onto public policy and legislation, as most of you know, in July Congress passed big Medicare legislation with a number of features for kidney care, most notably, bundling effective 2011 and an annual update in 2012. The bad news is, our Medicare economics are still under water. So we have got to charge private patients a lot more in order to fill the Medicare deficit. The good news is the legislation that passed had some increases in it and is much better than the bill that passed the House of Representatives last year, much better. Looking forward, the dialysis community is going to have a lot more issues and is gearing up to work with CMS to ensure that bundling implementation is as smooth and successful for all stakeholders as it can be.

Third and finally, from my perspective, the outlook, we are narrowing our '08 operating income guidance. The new guidance is 800 million to $840 million versus the previous 790 million to $850 million. We're also providing initial guidance for '09 with all appropriate qualifiers. That guidance is 820 to 880. When you stare at that guidance, private reimbursement remains the biggest swing factor. This 2009 guidance that we just relayed does in fact assume a nontrivial number of patient losses in situations where payers and DaVita cannot agree on rates and we do in fact lose a fair number of patients. The guidance takes that into account. I'll now turn the call over to our Chief Financial Officer, Rich Whitney.

Thanks, Kent. We had a good second quarter characterized by our typical strong and stable cash flows. Some improved revenue trends and solid cost control. In particular, we have taken no price decreases or material patient losses in the quarter and in fact are getting increases in certain circumstances. Here are a few key details about our second quarter results.

First, the major drivers of operating income results in the quarter. Dialysis revenue for treatment increased about $7 per treatment versus Q1. Half of this increase was due to the increased utilization of physician prescribed pharmaceuticals. The balance was an improvement in our commercial mix and rate. I should note that margins on pharmaceuticals are considerably less than they were four or five years ago due to the changes in the way Medicare reimburses for these drugs and because of this, increased bundling of our contracts and our product portfolio increases and decreases in drug intensities just have a much smaller impact on our operating profit than they may have had in the past. Other revenue increased $1.40 per treatment sequentially primarily due to growth in our specialty pharmacy business. Overall, operating expense was stable at 69.2% of total revenues, increasing $5.78 per treatment sequentially.

Now this increase, about half of it was due to the increased expense for physician-prescribed pharmaceuticals, including increased pharma utilization and the first rounds of the heparin price increases. I should note that Heparin prices have increased fourfold so far this year. While we saw some impact in Q2, the largest increase will hit us in Q3 and this expected impact is incorporated into our 2008 guidance.

Operating expenses also increased about $1 per treatment this quarter because of the growth in our nondialysis businesses, primarily our specialty pharmacy which has larger margins than our core dialysis business. G&A was at 8.9% of revenues increasing little less than $0.50 per treatment. You should continue to expect G&A for the full year to be around this 9% of revenue level. As for our balance sheet, accounts receivable days sales outstanding, or DSO increased two days sequentially and one day year-over-year to 70 days due to some billing and payment delays for certain Medicaid and other government payers. As for cash flow, rolling 12-month operating cash flow was strong at $545 million. Q2 cash flow was on target and we are reiterating our operating cash flow expectations for 2008 of 480 million to $530 million.

Through June 30, we had certified 39 de novo centers and we have an additional 47 centers that are built and awaiting Medicare certification. Based upon this de novo pipeline we now expect to certify about 80 centers this year, versus our original guidance of 60 centers. Although this number could vary depending upon the timing of Medicare certifications which have been slower than normal in some areas. Accordingly we are also increasing our growth CapEx estimates for both acquisitions and de novos combined to 250 million to $300 million for the full year 2008. This compares to $176 million spent year-to-date.

A few other comments. Q2 non-acquired growth of 4.5% was within our stated range of 4 to 4.5% for the year. Point number two, our lower tax rate in the quarter was noted and described in our earnings release and we should point out that we expect the rate for the balance of the year to be in the 38.5 to 39.5% range. And then finally, year-to-date, we have spent $170 million of our available cash to repurchase approximately 3.5 million shares or about 3.3% of our outstanding shares at an average price of approximately $49 per share. I will now turn the call back to Kent for some closing remarks before we go to Q&A.

As we look out a little bit longer into the next couple quarters which looks solid, I think there are three worthwhile elements to keep in mind. We've talked about them for years. Unit demand looks stable. Number two, cash flow looks wonderfully stable. And number three, our ability to add more value to both private and government payers continues to go up every year. Our ability to bring down total healthcare cost continues to become more and more extensive, tangible and applicable. As the quarters roll forward, hopefully we'll become economically more and more materially relevant. And let's go on to Q&A please.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Darren Lehrich.

Thanks, good afternoon, everyone. I do have a couple questions here. The first one I wanted to ask was just in reference to some of your prepared remarks about a nontrivial number of patients, I think that you expect to lose, could you just share with us your comments on what's driving that and was that the result of some of the bigger payer recontracting that you had, I guess during the second quarter?

No, not at all. It's just that as we provided '09 guidance, we wanted to let you know that that guidance does assume, and in some cases we're not going to reach agreements on rates and therefore we are going to lose some patients rather than sacrifice too much on the rate side. Therefore, if we're able to avoid that, we can do better but you're not at risk of a surprise where we were assuming somehow a world in which rates held up and volumes continued to grow and then had any unpleasant surprises if those two conditions didn't hold. So it's just to let you know that we had baked in the assumption that in some cases we're going to be throwing to the mats and losing some patients.

That's helpful can you, so we can think through that a little more, can you help us think about a range of what this volume loss might be? Just so we can put that into context, Kent?

Sorry, Darren, I think at this point, it only being early August, it's just not a good idea. Obviously the forecast is the combination of about 10,000 different variables and we're trying to let you know that we're not sitting here forecasting that every single thing is going to go perfectly, so hopefully that's value added in the guidance, but to throw out a specific range, which is prey impossible given the number of payers we're talking to and the number of ways in which it could roll out.

That's fair, but can I just clarify the fact that you called it out as a risk factor here now, are we to assume that this is the biggest of the swing factors for 2009?

Yes, that's -- it's certainly way up there. I mean, it could very well be the biggest and it's certainly in the top three.

Okay, and a question for Rich, please. As you've discussed and we can see the expense per treatment did jump almost $6 sequentially, can you just share with us a little more of your thoughts on what's driving that in the second quarter? It's certainly a lot more than we would have expected just to be even with the pharma mix going off, so a little bit of color on that would be helpful.

Sure, Darren, right around half of it is related to the increases in the physician prescribed drugs and then in the neighborhood of $1 is related to growth in our new businesses. And in the balance you start to get into kind of a long list of, of items, which one, one significant one would be the increase in the number of certified de novos that we have and the number of de novos in our pipeline that are built but not yet generating revenue. We also had our nationwide leadership meeting in Q2 as we do every year. That contributed to some of the sequential increase. Of course, operating expenses is one of these categories that is growing year-by-year and the biggest components are pharma supplies and labor.

Okay, thanks. I guess one more and then I'll jump back in the queue. Can you just share with us, Kent, just your thoughts about some of the ancillary initiatives and maybe just update us on any bigger developments with those few business lines that are noncore and can you remind us what the investment in the income statement is relative to the original amounts that you, I think shared with us at the capital markets day?

Yes, yes, fair question. Let me take a stab at it and you and subsequent questioners can probe more if I don't hit enough of it. Last part first, we told you that in '08 we were going to invest about $32 million meaning that would be the P&L hit from the two biggest ancillary initiatives, that being the integrated care management, which we call Village Health, something different pharmas and DaVita RX which is our oral pharmacy and we are on track to have the investment be about exactly that number here as it goes through the year. So just on the pure '08 mathematical front, we're on plan with what we told you at capital markets. And then, on sort of the business front the good news on Village Health is that we're learning a lot and adding more and more value for patients in terms of improved clinical care and the taxpayer, payers in terms of reduced total care. So the value-added capability we wanted to develop and refine is growing. The bad news on Village Health is we haven't grown enrollment in the way that we wanted to. That's the yin and the yang there and of course we're happy about it, we're still pushing onto value added and not happy and pushing on the low enrollment.

The other big one, the Oral pharmacy unit is currently running at about $100 million, almost $100 million in annualized revenue is on plan. Doing some good things for patients and hopefully generating the proof that it can be a good thing for taxpayers. Doctors love it. Patients love it. It's more work for our caregivers. I can't claim they always love it. We're also able to offer pharmaceutical companies data that they can't get anywhere else around compliance, effectiveness, et cetera. So that's the cryptic summary of the two biggest areas of investment from a dollar perspective.

And with Village Health, you, I mean, I think you've been investing a lot in your infrastructure there, just maybe in contrast to the enrollment growth that you site as disappointing, should we expect that infrastructure to remain intact? Even if the enrollment isn't there for you?

Well, no, no way. If enrollment wouldn't grow, there's no way to make that infrastructure. It's the job of the infrastructure to be good enough to grow the enrollment. There's no way we would, there's no way the two statements would be true at the same time. That number one, enrollment doesn't grow a bunch and number two the infrastructure stays as it is today. And at this point, kind of anticipating the next question, as you look at '09, we are anticipating that the combined economics of those two business units will be a smaller drain on operating profit than they are here in '08.

That was my next question, thanks a lot.

All right. Thank you.

Your next question comes from the line of Gary Lieberman.

Thanks, good afternoon. You mentioned in the prepared remarks that part of the revenue per treatment increase was from improved commercial mix, can you just give a little bit more detail about that? Is that, and what's driving that?

Sure. I mean, basically just higher percentage of patients that have better paying plans. Basically PPO plans or other plans that would, or better paying plans, a change in the mix of Medicare patients versus non-Medicare patients, et cetera.

Is there anything you can sort of put your finger on that's driving that or is that just sort of a random event?

No, it bounces around quarter-to-quarter, I wouldn't ascribe any particular long-term trend to it.

Okay, and then on the commercial rates which helped you out in the quarter, in the past you have sort of talked about a number of contracts that you were I guess in somewhat tenuous negotiations. Could you sort of quantify or have you gotten through all of those, have you gotten through half of those? Help us out there?

Yes, the payers that we have referred to, nothing has been settled with those in the quarter. And so, the, the rate increases are not attributable to financial settlement of any of those contracts.

Okay. And would, and so is the current course of negotiations with the other commercial payers still the same, sort of spread out through the year, or was there an abundance of contracts that were either renegotiated or saw increases in the quarter?

We saw increases in a number of different parts of our portfolio. I would say it's not -- there was not any bolis of contracts. As you probably know, a lot of our contracts are short-term and can be changed by either side on relatively short notice.

Okay. And then I guess, just going into on the and the guidance, with I guess, regards to Heparin specifically, are you baking in any decreases in heparin or the continuing pricing as of July 1?

Right now we are, we are baking in the assumption that we're able to improve our utilization in that area. Now that this line item has gone from a very small one to one that is material to us. And so that would be the only assumption that would be factored into our guidance going forward. As it relates to Heparin.

Okay, great, thanks a lot.

Your next question comes from the line of Justin Lake.

Thanks. Good afternoon.

Hey Justin.

Just first on regards to the '09 guidance, you did mention the commercial, the commercial pressures. I guess first, the, obviously we've got a fairly wide guidance range there, at the high end of that guidance, does that still embed some pressure, just maybe not as much, or is that kind of a continuation of '08 being kind of a nonevent?

Some pressure, not as much.

Okay, and you mentioned that it's up in the top three, what are the other two, or one or two issues that you think are as meaningful as commercial pricing to the '09 guidance?

I believe the specific question was about patient losses. Was that the biggest driver? That's the question I answered if I misheard it. Because the second one in the big three would be rate, as opposed to volume. And the third would be significant shifts in government reimbursement or policy. For example, an extension of the private pay coverage time. That's a positive development, a negative development would be well I guess we can all imagine our nightmares there would be done negatively, but those would be the top three.

Got it, so one would be whether you're accepting a contract at a lower rate. The second would be walking away and actually just losing the volume.

Exactly. Private volume is one, private rate is two, government policy is three. That, that would be my answer to the question of the top three economic swing factors.

That's helpful. And then just in the quarter, you mentioned changes in prescription drugs as a driver of revenue per treatment. Was there any other factors fl in there that I might have missed? As far as maybe commercial pricing or anything else that drove that $7 sequential increase?

Yes the three factors, Justin, were, were the pharmaceuticals, which is around half of that, and the balance was commercial mix and rate.

Perfect. And as we look at that 236 -- I'm sorry, the 336 in the quarter, is that a new, is that a good run rate to kind of use for the as we look into Q3 or was that something that was ramping, that maybe the run rate coming out of the quarter might have been higher or lower?

I don't think there's any run rate impact. That's a good representative number of the way we reacted in the quarter.

And last question on bad debt, looked like you saw a very small take up but given how extremely consistent that number's been over time as a percentage of revenue, is there anything you might be able to give us color on there as far as what you're seeing?

Yes, as you point out, it's a small increase, but as it happens, the underlying core dialysis business was actually pretty stable at that number and we had some small increases in bad debt provision for some of the nondialysis businesses. There's really not much action in that line in this quarter.

Perfect, thanks for the help.

Sure.

Thanks, Justin.

Your next question comes from the line of Bill.

Good afternoon, guys. Just a couple of follow-up questions. Just a couple things on the balance sheet. Rich, this is the second quarter in a row now where DSO has been up sequentially and you talked about some timing issues around government pay. Is there anything at all that we should be concerned about there? Any payments that are in dispute or anything like that?

No, I don't think so, Bill, it's and it's only up a day versus last year and as you know this kind of bounces around quarter-to-quarter depending on timing of collections and various payment delays et cetera. The ones that I referred to in my prepared remarks, a bunch of that appears to be related to the national provider identification implementation and then the balance is various state Medicaid programs. We don't think any of those are at risk, it's just a timing delay. And while we're talking about this, I probably should bring up that as of July 1, Medical, the California Medicaid program, because they haven't been able to reach a budget resolution has suspended our payments, not just our payments, payments to most all healthcare providers as of July 1. Now everybody anticipates that that will be resolved at some point soon, but assuming it wasn't, you'd see about a two-day impact on Q3 if that situation remained unresolved.

Sure, okay, and then just on that, can you discuss Medicaid in general? Any states of concern there?

Concerns regarding?

What happened with rates?

Yes, well, definitely state budgets are continuing to get tighter. And California is the state that is, we have the most exposure to. And they are, as you probably know, talking about a 10% or as high as a 10% rate cut on Medicaid and that would be about $12 million per year for us, if that was fully implemented and of course we don't know whether it will be fully implemented and where that will end up, but we certainly do have some provision for that in our guidance as we move forward throughout the balance of the year.

So it is considered in the guidance. And then I apologize for this question, but I didn't understand, I think it was just my listening, I didn't understand exactly your answer, to the Heparin question. Are you saying that you have some modest offsets to the cost inflation or you expect the cost inflation to only have a modest impact?

From an impact standpoint, I think a couple people have written about, maybe even you Bill, I don't remember, have written about a 5 million to $7 million estimated impact per quarter. That's a pretty reasonable estimate of the situation and so my comments were, were simply meant to say, someone was asking about our assumptions for how that would progress from here and of course we cannot predict what success we might have in, -- in reducing prices or in fact the other way, but we do have a pretty strong initiative going on right now to tighten down our utilization of Heparin. As you can imagine it went from a very small line item, any time you increase the price fourfold that even the smallest line item becomes a material line item. That's the only thing that was baked into our guidance going forward.

Okay and then just, on the comment you made about the patient losses. I appreciate that you're putting that into your guidance for next year, it makes a lot of sense, but at this point have you actually, I know you didn't see any impact in the quarter, are there any contracts you're aware of at this point, where you're at that impact and you are walking away, and anticipating losing patients, or is it just considering that that is a possibility of what could happen?

It's the latter because we're talking about '09 guidance. So it's nothing that's happened already or that we know will happen. It is simply a probabilistic assessment of what may very well may happen that would affect '09.

Okay, that is, that is, that's very helpful. And then, just the last question, on the EPO, last quarter you talked a little bit about that there's some volatility as the, doctor's still getting used to sort of how they're dosing under the new guidelines and because they're afraid of going over the high end and they maybe don't dose appropriately and then the patients get too low, they hematocrit and then they have to be dosed up and there's a little bit of bouncing around. Obviously the trend is towards increased utilization in general, but do you think we've sort of hit a point of stability or do you expect a lot of sort of quarter-to-quarter volatility still going forward around that item?

Yes, what makes these predictions in this area with great trepidation, who knows exactly how, how the docs are going to make their decisions, but on a relative basis, we'd guess that the next few quarters would be far more stable in terms of utilization trends than the last few.

Okay, thank you very much.

Thank you, Bill and I'm going to go ahead and add to one answer that Rich already provided. Which is on Medicaid, a slightly higher level answer. On the one hand, if you look at the macro environment, lots of states are in tougher budget situations today than they were two years ago. On the other hand, if you think about how dramatically we improved our communities ability to advocate for reasonable reimbursement and other policies on the federal level over the last five years, we're in the process of doing that same work at the state level. Already right now, our community is much better today than it was two years ago, in terms of making sure that our patient's concerns and our caregiver's concerns are taken into account on some sort of informed basis at at state level. So there's somewhat of a community competence offset to the worsening macro environment on the Medicaid side.

Great, thanks for that color.

Your next question comes from the line of John Ransom.

Hello?

Hey, John.

Hello, I couldn't hear if that was me or not. My thunder got stolen on the last question. My question is, as we move to the bundle rate, where are we in negotiating with the Feds on what's in and what's out of the bundle? And what -- what are sort of the high level concerns or small victories at this point? Thanks.

Where we are is at the starting line. They've got a huge amount of work to do over the next couple of years and we are eager to be a good partner with them and FMC and we have databases that ought to be able to help them a lot and we're willing to share them with them on a very open basis so that they don't step on any of the land mines that could hurt everybody. Most particularly the patients. So we're at the starting line, but it is a massive undertaking and there's an awful lot of complexity to it, even as the legislation reflects just ethnic issues and comorbidity issues and outlier issues et cetera.

Then going through the macro to the micro, I guess it's for Rich, what should we think about what was in the numbers in the second quarter that maybe wasn't in the numbers in the first quarter except maybe a little better payer mix and maybe a little more expensive Heparin? Is there anything that was in the numbers sequentially that may or may not be in the numbers in the back half of the year from a timing standpoint?

Let's see. Well, pharma was the big one, right. The sequential increase in the pharma utilization had the impact on the revenue per treatment as well as on the operating expenses.

Right.

And then a little bit better mix as we mentioned, also, rate increases in certain parts of the private portfolio. And then, Heparin really didn't have that much of an impact in Q2. It's really Q3 where the big part of the Heparin increase will kick in.

Then when you say pharma, we've been postulating in our little research that some of the non-EPO drug categories look like they're going up. Was that mostly the rebound in EPO or were there other drugs contributing to that increase in pharma utilization?

It was mostly EPO.

Okay, thank you.

Your next question comes from the line of Gary Taylor.

Sorry.

Gary?

Yes, can you hear me?

Now we can.

Okay. First the easy one. Have you guys announced a capital markets day for this year?

We haven't.

Okay, is one contemplated or still uncertain?

We're still working on calendars.

Okay.

But yes, we will do one.

Okay, going to Heparin thanks for the comments you've had already, outside of your own ability or attempts to try to get a handle on utilization a little better, do you feel like at this point you have any visibility whatsoever on supply, in, terms of Baxter re-enter, they don't re-enter, another supplier comes in, are you optimistic? Is it too early to tell?

We are not optimistic. We are pretty ignorant of exactly what some of the people are thinking that are going to make those decisions including Baxter. And so we're just not in a great position to do any handicapping. We're certainly eager to be a good customer to anyone who offers good quality at a reasonable rate. And, we're also eager to talk to the government if anyone is being abusive of a temporary monopoly situation.

Were there any potential drug substitutes that make sense here? Or nonobvious?

Excuse me?

Are there any potential drug substitutes here? Or is that nonobvious?

We have no substitutes right now.

Okay, moving onto EPO. I understand your outlook for a little more stable utilization over the next few quarters from where it's been, I have a question that kind of goes back to the FDA panel, an issue that was raised just around hypo responders and how physicians are dosing hypo responders, is there any discussion, debate within DaVita amongst the docs that gives you any pause that there's any potential change in physician dosing on hypo responders or any potential data that could come out that could change that?

Yes, there's been a lot of healthy conversations about folks that are EPO resistant and I think the single area, the data I've seen, the single area where you've seen the most logical change is, it used to be some doctors who continue to prescribe significant dosages of EPO to people who are hypo -- EPO resistant. And that has changed a lot because there's more concern there than anywhere else that someone requiring a lot of EPO and was achieving a level above average should in fact have significant downward titration. The good news, I don't know of any protocol, including ours, that ever encouraged that in the first place. Our protocol had downward titration starting right at 12 and dramatic titration if you cruised above that. But the answer to your question is yes, that lots of the doctors, out of the small number of doctors who would still prescribe high dosages for people at high hemoglobin levels, most of them have changed. Is that, does that answer the question you asked?

Well, I think it's helpful. I think you're saying you've already seen some changes. I thought the issue the FDA was looking at more was maybe people that were very high doses, but low hemoglobin levels, and was taking really substantial doses just to get them to the low end of an acceptable range. A question about whether the dose itself was creating--?

That's also true. That there's been a lot of change in that area as well. And whether it's more or less than the first category, I couldn't say for sure, but certainly those are the two where I have seen the most doctors change their prescribing patterns. We'll check in with LeAnne and see if she'd say the same thing.

Yes.

My last question and I'll let you go. As we move towards bundling in 2011, what are the obvious investments you guys need to make that would interest us as financial analysts, primarily thinking about the income statement. Are there some obvious technology people training, costs that come through into 2011, just to be ready to operate under a bundled payment system?

I think there'll be investments in all of those areas. And, as we sit here in 2008, it would be difficult for us to quantify that for you if that's what you're looking for, but I think, it is a major change in the reimbursement system and and so we're going to have to spend a lot of time working through that, but again, we don't, as Kent mentioned earlier, the first step here is getting clarity as to what the new reimbursement system will be. We know big picture what it will be, but we don't yet know how that will be operationalized until the detail is worked out with CMS it's almost impossible to think about how you operationalize it.

Okay, thank you.

Your next question comes from the line of Mark Arnold.

Mark, if you could hold off just for one second. This is Kent again because I'm having to quell a minor revolt here in the conference room. I've been informed that the calendar work has been pretty brutal on the capital markets. And my blithe assurance that we would do that one this year is inappropriate, so if we miss it, by the end of this year, it will be very early in next year, my bad. All right go ahead, Mark.

No problem. Just a couple of cleanup questions. You guys mentioned the tax benefit in the quarter. Can you elaborate a little bit more as to what that was and I think you mentioned in your prepared remarks that you expect that to move back up in 2009, but can you just give us a little more color on that?

Sure, in the quarter the tax rate was impacted by FIN 48 fluctuations as well as the realization of certain tax benefits and I think the, the issue is on this line item, it's going to bounce around more than it has historically because of the new requirements, surrounding FIN 48. But in particular, in this quarter there were a couple of FIN 48 items and some other tax loss benefits.

Okay, and then one thing that stood out to me was, it looked like about a $4 million reduction sequentially in your debt expense, even though your debt actually ticked up slightly. Can you help me understand that? I don't think the rates would have changed that much, the underlying LIBOR rates that much between the quarters. Was there something that was going on there?

No, it's just, it's just rate.

Okay.

It's just changes in the LIBOR rate on our unhedged , on the unhedged portion of our

Okay, one thing, I guess it's been almost a year since you acquired Home Choice last year, can you give us any color in terms of what you've learned about that business and how does it fit into DaVita going forward?

What we've learned, we've learned a lot. I don't know how to easily capture it, but first year of owning any business, you learn a lot. We still like its comparability to what we're good at, centralized field management, centralized service management, negotiating with payers, working with hospitals and discharge planners, so we still like the fact that it involves a very high overlap in core competencies although again, at the same time there's a whole bunch of differences. It's also creating for us a whole new look on the home world, since that's where it's focused as opposed to us who are primarily center-focused but do some home and that was one of the other reasons. So on the learning front, I can just say we've, we know more about all those things I just talked about. Overall, we've done a mediocre to lousy job of working with a good team there. And hopefully we worked through the kinks of having them be a part of DaVita but I give us a poor grade for how we've worked for them operationally in the first year.

Okay. I just have one last question. I think last week CMS posted a list of potential national coverage determination topics which included a number of items affecting dialysis including the use of BSAs. I'm curious if you have any thoughts on what this means and how involved will DaVita be in any potential review?

Those were a list of topics that they plan to tackle and yes, we'll be commenting particularly on the ESA section.

Were you guys surprised at all that that was included or is it just a continuation of the same scrutiny that's been going on for the last two years?

I think it's fair to say it's a continuation of the scrutiny.

Scrutiny of our ESA practices has now gone on for seven years. We expect it will continue as long as it is a really expensive drug and/or as long as we're not in a bundle environment at which point they think about it as being our problem not theirs.

Great, nice quarter guys.

Thank you.

Your next question comes from the line of David McDonald.

Good afternoon. Couple questions. First I apologize, I got disconnected for a bit. Kent, can you just run through the de novo numbers again? I missed them.

This is Rich, I'd be happy to. Through June 30, we opened 39 new de novos and we had another 47 that are built and awaiting Medicare certification. What we said about our expectations for the balance of the year, is that originally we anticipated opening 60 centers and now because of the performance for the first half of the year, and the pipeline of centers waiting for certification, we are expecting more like 80 centers for the full year.

Okay, and then, and then, Rich, I know you guys last call talked about, maybe a little bit of a mixed bag in terms of performance from some of the newer de novo's that were just going up. Can you give us any more color on how those are performing and anything further there?

A little bit better than what we were seeing last quarter. It's still a watch item for us.

Okay, and then just one question on, on the -- on the commercial renegotiations that are going on. Can you give us any sense, when you take a look at all the contracts you guys are kind of wrestling with a little bit right now, some sense of what percentage of your profits the entire book that you're negotiating with represents right now? Do you guys, can you give us that number?

No, we would, we wouldn't be able to give you that number, and it's also such a hard thing to do because what costs do you allocate to any one particular contract, but as we said for eight or nine years now, the nongovernment, the private side of our business represents all of our profits.

Yes. Well, then I guess to ask it a different way. Is there any one particular contract that's north of say 10% of your profits that you guys are negotiating with right now?

Well, let me take it kind of, see if this is helpful. Very few of our contracts exceed a year in duration. So, almost all of our private profit is renegotiated every year, including this year, last year, the year before, next year, et cetera. So the real answer to your question, from an analytical point of view is the overwhelming majority of our private profit that subsidizes in Medicare deficit is renegotiated every single year.

Okay, thanks.

Your next question comes from the line of Balaji Gandhi.

Good afternoon. Just two questions about the pharmacy and infusion business. One is, could you maybe give us a sense of what percentage of the patients that you serve are being served by those businesses? And then second, just trying to understand, I think Rich you had quantified it as about $1.40 a treatment increase for the first quarter. Just trying to understand if that's a function of more patients using those services or a mix, or an increase in drugs?

I can tell you the increase is primarily from more patients on this service and we haven't historically disclosed the number of patients on service and I'd rather not spontaneously establish a new policy. If you can let us think about it and do it next quarter or call us in a few days, but I just hate to go jumping into new disclosure territories without having our act together.

Okay, well then, maybe another thought on that, $57 million in revenue, how much of it is infusion versus, I guess specialty pharmacy?

The numbers, the revenue number I gave before for the run rate for our oral pharmacy, which is in the 90s, close to 100, that's all oral pharmacy, that's not an at home IV. The home IV business is totally separate from the number I was talking about.

All right, great, I'll follow-up with the other stuff later.

Sorry for the confusion.

Your next question comes from the line of Mark Afrasiabi.

Thanks, I'm all set, thanks.

Your next question comes from the line of [Paul Lee].

Hi, I have a question regarding the private contract negotiations. If you look back second half of last year, comparing that with this year, would you say you're doing a little bit better than second half of last year or do you think it's at par?

Given what we disclosed that we did a lousy job the second half of last year, it, I can-- the answer to the question is we're doing much better, we can't really swagger since we did poorly the second half of last year, but the answer is, we're doing better.

Thanks, great. Thank you.

And you have a follow-up question from Darren Lehrich.

Thanks for taking my follow-ups. I just wanted to dig into, Rich, one of your prepared statements in the prepared remarks, about M&A CapEx moving up a little bit and maybe if you could just help us with that comment in context of where you're seeing M&A opportunities in kind of order of magnitude?

Yes, the, the numbers that I gave were for, just to clarify were for both de novos and acquisitions combined. That range is 250 million to $300 million. And that's up from, I believe, 200 to 220, if I'm not mistaken. So it's, it's an increase that's primarily driven by the fact that we are spending more and expect to open more as a result, new centers, as well. We've, through the first part of the year, we've spent a little bit more on acquisitions than we had anticipated, in part because of acquisitions of minority interest.

Okay, and then an earlier caller had asked about the tax rate outlook for 2009. I guess just going back to '03, your tax rate's been closer to 39% for quite some time. Can you just share with us your outlook on tax rate next year?

Yes, and to reiterate for the balance of the year, we are estimating that our tax rate would be in the range of 38.5 to 39.5 and then, our best estimates for 2009 would be round about the 40% range.

Okay, I guess the question then is what's driving the tax rate outlook to go up versus longer term tax rate closer to 39%? I just want to make sure we're not missing something that may have changed with regard to your tax planning, thanks.

I don't know if there's anything that's changed in the last quarter or two, but we certainly are getting more a lot pressure from various states that are taking more aggressive positions about Nexus and things like that. So there's just a lot more action on the stake front in the various parts of our portfolio.

Okay, and then my last thing--?

I think you were seeing that in the current year if you sort of back out some of the FIN 48 benefits that we experienced.

Okay, that's helpful and my last thing, just for Kent, you called out sort of the big three swing factors for '09. I guess I just want to make sure, I'm thinking about it right, because the first two sound pretty logical, patients and rates, volume and rate, but the government side, it seems like it's pretty much set given the legislations passed and so, is there something that we're missing as it relates to the Medicare outlook? Or is it just the omen of potential surprise?

Yes, two things. Number one, always the element of potential surprise, number two the potential for private pay extension.

Okay, thanks very much.

Thank you.

Your next question comes the line of Dawn Brock.

Hi there. Kent, I've got two questions for you. And maybe I'm just going to give another try at the, at the patient volume side. So, on the patient losses, are you seeing new pressures in your contract talks and negotiations from the commercial payers or have your parameters for a successful contract negotiation changed?

No we're not seeing new pressures, pressures versus the last six, eight months. It's different pressures versus two years ago, but not versus the last couple quarters that we have reported.

Okay and maybe the reason I ask it this way is that, obviously commercial pricing pressure is something that you've highlighted for some time, but the losses seem new. So, is a piece of the message that we should shift our focus from rev per treatment to volume or patient count as the more volatile potential variable?

I think the message is that we ought to look at them both equally and the orientation has been more in the past purely on the rate. And what we're trying to do is say that gee, there's two levers of potential upside or downside and they're equally important and they're equally in play. Is that helpful?

Yes, it is, that's fair enough. And the second thing is, could you talk a little bit about your conversations with the managed care providers around the Village Health offering? Is it a timing issue where they need more prompting or more data? Is the conversation just less fluid? There's more of a hard stop where they're not believing or understanding the financial or clinical value add. I'm just trying to understand why enrollment isn't moving?

Okay, well actually there's two, you're touching on two very different subjects because the enrollment in Village Health is Medicare patients. And the private plans for private patients is a very different conversation with respect to disease management. Now Village Health does both. We have private clients and then we have our operation that enrolls Medicare patients. And then there's never overlap of course which would be Medicare Advantage patients within a privately-owned Medicare Advantage plan which is kind of the--.

The snip side of it.

Yes, and so, and so, we've got those two different buckets or three different buckets. Can you say the question again so I do a good job?

Sure, I guess I was trying to hit on both. If we're looking at the investment in Village Health and we're also looking at the snipped plans, if we go onto Village Health and we look at enrollment, it's been a little bit irregular is maybe a good term for it. And I guess, as we move toward bundling, I guess the question is, is there going to be, or do you anticipate being able to work with the commercial guys on the snip side and being able to work with Medicare on the Village Health side and hopefully be able to forge some, mutually enjoyable benefits on -- in both where you're able to actually provide services to this patient population for less than either of the current providers can and there might be some sort of profit sharing that could go on.

Yes, let me tackle them in sequence. I I hear where you're coming from. On the government side, the good news is, and, the ironic news is, in many ways there's more people in Medicare and Congress who are intensely interested in more innovative and integrated care management as a way of improving quality and bringing down taxpayer costs than you find in the private sector. It's actually rational. Because, as most of you know on the private side, in 30 months the government takes over these patients and so, private payers don't have the same number of chips on the table and so, we find ourselves, in the ironic position that there's a lot more government senior people who see that, gee, we've got less than 1% of Medicare enrollees consuming 7% of the dollars and it looks like that 14 hospital days per year could come down quite a bit. Because some people have pulled that off in the real world.

So with respect to the government, we are, with all the right qualifiers that one has to use when working with the federal government, and they've got a tough program to administer, we think there's some truly exciting upside in improving quality and reducing taxpayer costs. If you recall, we're only about 30% of the total cost of the kidney care ESRD patient. We have a tremendous ability to influence the other 70 if they'd just let us do that. The one countervailing factor to that is that Congressman Stark doesn't like the private approach on some of these chronically ill patients. So hopefully with all the data that we have, that it's a great thing for patients, families and taxpayers, that we can actually make a lot of progress in the next couple years.

On the private side, we already have several private clients who despite the fact that they give up these patients after 30 months are interested and/or they've got significant Medicare Advantage presence and accountability and so we are picking up a lot more interest in the private side now than we did a couple years ago. None of this stuff happens quickly so I want to make sure that my enthusiasm, sort of strategic commitment doesn't somehow imply that in two quarters we're going to have some dramatic uptick in profitability because of making money on these product lines, but the level of interest and the sophistication of interest is up a bunch.

Okay, that's very helpful. Thank you.

Thank you.

Your next question comes from the line of Art Henderson.

Hi Kent, could you kind of give us your thoughts on home dialysis? Have the prospects there diminished in any way near term with anything that's happened legislatively?

When you say home, are you referring to PD or home hemo?

Home hemo.

I wouldn't say that the legislation changes prospects in either direction, but what were you thinking?

Well, I know about a year-ago, this was a topic that was discussed more actively and it seems to have died out a bit. I just wasn't sure whether there was something specific on the reimbursement front, when we were talking about the MSP extension that that might have facilitated home hemo more. I just was more curious about what your outlook was for that particular--?

Our outlook is pretty much the same as it was a year-ago. This is an area to quote ourselves, from a year-ago where you hear some people who are intense sort of evangelists and others who are intense critics. Both of them marshalling there own clinical and economic arguments. We're neither, we're totally agnostic, but we're doing a bunch of it. We're collecting data we think with great rigor on both the clinical and the economic front. We're learning a lot. And so, as CMS has to make the big policy call here over the next couple years, we think we're going to be well positioned to be there absolute best partner in crafting a policy that's thoughtful for the taxpayer and the patient. So we are no more or less optimistic or pessimistic than a year-ago and anybody who's totally certain of which way that puppy should go, you should ignore.

Okay, great, thanks very much.

(OPERATOR INSTRUCTIONS) You have a follow-up question from Gary Taylor.

Hi, thanks, just a real quick one. On the 80 new de novos contemplated for this year, will there be overlap of medical directors or will you have to recruit 80 new medical directors and when you answer that can you just talk about generally, just kind of the market and the outlook in terms of recruiting and supply of nephrologists in general?

In the majority of our de novos we are working with physicians with whom we have worked before and are working with currently in existing centers. And then there's a nontrivial minority of de novos where it's a doctor were whom we have not worked. That's, and a non-quantification of the mix but it's a clear strong majority versus minority. Then overall on the physician recruiting front, most of the macro data says that the number of nephrologists is not growing as quickly as the number of patients. I'm not so sure the macro data is right. I'm not so sure the difference is big enough to really create any significant change in supply and demand. There is a whole lot of competition to earn being chosen as the provider with whom a physician wants to be affiliated. So that's intense. But not dramatically different than any time in the past. Did I hit all the parts?

Yes, I think so. Just doesn't seem to be a barrier to de novo growth basically, competitive but not a hindrance.

I would word it slightly differently. It's a barrier in some cases. Because you could have a geography that you think would be a good spot, but you don't have a quality doctor to be the medical director and help you take care of the patients, but it's no more a barrier than the past, that's what I would say.

Okay, thank you.

Your next question comes from the line of Paul Lee.

Yes, I have a follow-up question on project Village Health. You talked about the enrollment being under expectation. I'm just trying to get what's the reason behind it? Was it because the regulatory environment or the private pay, payers not very enthusiastic about it or the patients not enthusiastic about it? Or is your -- on your side, your execution has been not very good? I just want to get between the three parties, which one you would say is the reason behind under expectation. The recruitment under expectation.

Yes, we've done, I appreciate the previous questioner using the term irregular, it was very polite. We've done a lousy job and the reasons for it are several. One is it's hard. Two is we were not thoughtful enough. Three, you have got to just be exceptionally careful from a compliance part of view because the government has a lot of concerns about providers marketing stuff like -- anybody marketing stuff like this but particularly providers and so you have to just bend over backwards to make sure that there's never any inappropriate pressure and only the most positive steps taken in terms of education and invitation et cetera. And then, fourth, is some of our best people had to spend a lot of time in Washington, D.C. fighting to preserve special needs plans as opposed to being in the trenches accelerating the cycle time of our learning about how to do enrollment with all the right conservatism.

For those who aren't familiar, there were a bunch of people in Congress who wanted to kill special needs plans and in some, special ERD needs plans, which would have just been a clinical crime. These special needs plans can be beautiful things for the patients and the taxpayers. Hard to imagine America's Medicare problem being solved without them. Of course simultaneously what DaVita always says, is those plans have to be totally transparent and accountable. Clinically and procedurally with respect to practices and outcomes. And we're prepared to pay that price in order to deliver integrated care to this population and to the taxpayers so forgive the sermon, but it was relevant -- for the soliloquy, but it was relevant to your question.

Thank you very much.

You have a follow-up question from the line of Justin Lake.

Just a quick question on minority interest. It looks like it's running about 5% of operating income, Is that about right?

Yes, Justin, I don't have the numbers in front of me, but I think that sounds right.

Is that about the same as far as the minority, the percentage of your centers that have a minority partner? With the physicians? Would that be higher or lower?

I believe the percentage of centers with minority partners is slightly higher.

Okay. And then, as far as the new centers, I'm just curious as to how many are being done in minority partnerships? And then, just a quick comment on what you're seeing there as far as physician interest and whether you expect to be doing more or less of them?

Yes, there's a mix in that 80 of both wholly owned and joint venture partnerships as there has been for a number of years. I'd say if anything, maybe there's a trend towards -- a small trend towards more, but we're still doing a mix like we always have.

Okay.

Justin, I would also, I've not run these numbers, but if I had to guess, I'd say the percentage that have minority investors is higher than it was two years ago, not lower.

Okay, just curious too, of that 80, is it double the amount? I'm just curious -- trying to find out how this minority interest would trend over time?

We don't have it in front of us, Justin, and we just quickly looked at the map because we don't normally look at it this way, the way you posed the question, but the minority interest is more like 10%, not 5%.

Of centers, of centers.

And in terms of the trending, it is on minority interest, it bounced around, it was a little low in Q1 as we had pointed out. We expected it to go up in Q2 which it did and then, this level is indicative of a normal level going forward. Though, as Ken pointed out, we're doing somewhat more joint ventures than we had over a couple years ago. So maybe you'd see slow growth in that number over time. Does that answer your question.

I think so, thanks a lot.

And there are no more questions at this time.

All right, thank you all very much for your interest in DaVita and we will work hard to serve you well over the next three months. Thank you.

This concludes today's conference call. You may now disconnect.