德維特 (DVA) 2008 Q3 法說會逐字稿

Good morning. My name is Clara and I will be your conference operator today. At this time I would like to welcome everyone to the third quarter 2008 earnings call. All line 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. LeAnne Zumwalt, you may begin your conference.

Thank you, Clara. And welcome everyone to our third quarter call. We appreciate your continued interest in our Company. I'm LeAnne Zumwalt and with me today are Kent Thiry, our Chairman and CEO, and Rich Whitney, our CFO. I will start with the forward-looking statement disclosure. During this call, we may make forward-looking statements which can generally be 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 10Q and annual report on Form 10K. Our forward-looking statements are based on information currently available to us, and we undertake no obligation to update these statements, whether as a result of changes in underlying factors and new information, future events or other developments. Additionally our press release and related disclosures conclude certain nonGAAP 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 nonGAAP measures to the most comparable GAAP financial measures. I will now turn the call over to Kent Thiry.

Thank you, LeAnne. Q3 was a good quarter and our near term operating prospects look solid. I will provide our view of the following items, first clinical results, second public policy, third our COO transition, and fourth our '09 forecast and longer term outlook.

Clinical results first and we continue to present them first because that is what comes first. We are first and foremost a caregiver company now serving approximately 111,000 patients every week. Before getting into detail, it is useful to state one fact, you can in a crude way divide the dialysis segments into three thirds, one-third is DaVita, one-third FMC and the final one-third is a lot of small providers. The clinical outcomes of the first two-thirds, DaVita and FMC are better than the average of the final third which is not to say that there aren't a lot of wonderful, wonderful outstanding providers in the third third, but the average is the average. In addition, DaVita's and FMC's ability to report truly standardized clinical outcomes through a standardized methodology is also differentiated from the final third and a great asset that they bring to Medicare. Now on to the specifics.

First, with respect to adequacy which is essentially how well we are doing at removing the toxins from our patients' blood. This quarter 94.3% of our hemodialysis patients had a Kt/V greater than 1.2. That's 90 day data. Second with respect to vascular access, 61% of patients have fistulas placed to receive dialysis which is of course the preferred form of vascular access. That's 90 day data also.

Third, on the subject of anemia management, where there has been so much noise for so long and we are trying to figure out the best way to categorize our clinical outcomes, we provide the following. First the percentage of our patients where their average outcome over the last three months is between 10% and 13%. That's the hemoglobin of course and that number is 87%. And the data suggests very strongly better than most in America. Second, only 5% of our patients over the last three months were below 10%, very, very generally acknowledged threshold below which hospitalizations go up and people are less healthy.

On to public policy and -- I forgot one, clinical outcome. In many ways it is the most important. Our 2007 mortality rate was 17.0%, and that compares very favorably to the average of the rest of the nation, most particularly the third third. Second, in regard to public policy and legislation, Congress will be looking for savings in Medicare in 2009. We hope we are better positioned than most segments given that we already have clear Medicare deficits and because major reform was passed earlier here in '08, it was legislated to be implemented between now and 2011, and it would be dangerous to muck around with the train already being redesigned. That said, no segment should think it is immune to the fiscal pressures that exist.

Somewhat ironically for us, Medicare's need for money increases the probability of a patient coverage extension also known as MSP. More congressional members and staff than ever realize now that our patients are the only citizens in the United States who can pay private insurance premiums for 15 years and then get kicked off private insurance when their kidneys fail shortly thereafter. This policy also creates a big disincentive for private plans to invest in the same kind of prevention and wellness for these citizens as they do for other chronically ill people. So, enough on public policy pending Q&A session.

Third subject, our upcoming COO transition. After more than eight years, Joe Mello will be stepping down as most of you have already heard, his contributions are as obvious as they are big. The succession has been worked on over the last couple of years with Joe and the Board of Directors and myself, and others. And Joe in fact is going to continue working full-time for six months after the hand off and then part time for a number of important functions for some time thereafter.

And we are excited to be adding Dennis Kogod into the COO role. He has been in dialysis more than eight years, five with Gambro at a senior spot, and at DaVita every since we bought Gambro and his experiences are extensive. Not only has he been running more than $1 billion of the base business, he has also been in charge of de novos, he's also been in charge of purchasing, he's also run clinical operations, he has run compliance operations, he has run recruiting, he's run the vascular access business, he has been responsible for DaVita clinical research and medical informatics, could list other items but the point is he's had a very, very broad exposure now ever since he came to DaVita.

And if anyone wants to ask any questions more broadly about the topic of the instances of planned succession in the C level over the past three or four or five years or looking forward we will be happy to provide that additional color in Q&A. We've had an awful lot of nice, orderly planned successions over the past few years.

Number four, our outlook, we expect to be near the midpoint of our '08 operating income guidance range which has been $800 million to $840 million. Our operating income guidance for '09 also remains the same that we provided three months ago, namely $820 million to $880 million, and this guidance assumes a loss of a fair number of private patients in order to defend rates that allow us to subsidize the government deficit. I will now turn the call over to Rich Whitney, the CFO who will share more details and analysis with you.

Thank, Kent. The third quarter was characterized by solid and on plan operating income, lower reported volume growth, stable private pricing, and strong cash flows.

A few key details about these results. First, volume. Reported nonacquired growth of 3.8% was adversely impacted by the calendar and by two hurricanes. Normalizing for the number of Monday, Wednesday, Friday treatment days, our nonacquired growth was 4.2%. Hurricane Gustav and Ike had a 0.2% adverse impact on our treatments in the quarter so further normalizing for this impact our nonacquired growth would have been 4.4% in the quarter. We still expect nonacquired growth in the range of 4% to 4.5% for the year.

Next, revenue, dialysis revenue increased $0.44 a treatment sequentially from Q2. This is primarily a reflection of improved commercial mix and rate as we continue to be successful in maintaining our price discipline with private payers. Other revenue increased $3.10 per treatment sequentially due to the growth of our nondialysis businesses including the continued growth of our specialty pharmacy.

As for expenses, overall operating expense increased $3.62 per treatment sequentially. A majority of this increase was due to the growth in our nondialysis businesses which adds expense without adding associated treatment count. Expenses for these businesses have been generally in line with the revenue growth, though they do as a group have lower margins than our core dialysis business. The remainder of the increase was due primarily to increased labor costs driven in part by the two hurricanes as well as training related to the implementation of a new Medicare conditions of coverage. The impact of this implementation on our costs will continue into Q4. And the heparin price increases also had an impact on Q3 costs as expected.

Our G&A remained at 8.9% of revenues. As in prior years you should expect somewhat higher G&A in Q4 due to seasonal spending trends. For the full year we still expect G&A to be approximately 9% of revenues.

As for our cash flow, rolling 12 months operating cash flow was $595 million which is above our expected go-forward run rate. We still expect that 2008 operating cash flow will be between $480 million and $530 million. This is lower than our rolling 12 months number because Q3 of this year was about $50 million higher than expected due to the timing of tax payments, and because Q4 of 2008 cash flow will not match the very high levels of Q4 2007 due to the timing of various working capital items.

A few other comments, through September 30th we certified 61 de novos, and we have an additional 58 centers that are built and are awaiting Medicare certification. Based upon this pipeline we continue to expect to certify 80 centers this year, although this number could vary depending upon the timing of Medicare certifications.

Our growth CapEx estimates for both acquisitions and de novos combined is now $300 million to $350 million for 2008. This compares to $259 million spent year-to-date. I will now hand the call back to Kent for a couple of closing remarks.

Just a few comments before we switch to Q&A. The quarter was solid. Our strategic position is stronger than ever. Our organizational capability is the strongest it has been, A -- because we are really quite done with the integration of Gambro, and B -- because a lot of our strategic new products and businesses are through the painful adolescent period where they tend to be more dilutive of management time. So that's good news.

Nevertheless, the new macro economic environment has got to raise questions. It is our thinking that the dialysis sector is better positioned in a downturn than most of the segments of health care, not because we are differentially talented or anything but because number one, 87% of our patients are already government reimbursed, already at a deficit and if you cut you are at risk of significant center closures. Second, we have a minimal uninsured population.

Third, as a segment we advocate and embrace transparency.

Fourth, as a segment, we advocate and embrace accountability to levels quite unusual in American health care, and fifth, we are willing - the major players are willing to invest in creative and aggressive disease management with the Medicare program to bring down hospitalizations and improve the management of comorbid conditions. And believe that we can do that within the current baseline of long-term Medicare ESRD forecasted expenditures.

So, it is just a whole bunch of differences. Having said all of that it would be foolish to assume they're completely insulated if there's a prolonged recession and a whole bunch of radical change, whether it is in the macro economics of the national or global economy or in government policy. But absent any massive discontinuity a lot of things are going right, and we ought to be able to generate steady growth and steady cash flows. Operator, could you please open it up for Q&A?

Certainly, sir. (OPERATOR INSTRUCTIONS) Your first question comes from the line of Justin Lake. Your line is open, sir.

Thanks. Good afternoon. Just a couple of quick questions first on the maybe just on the economy since you just finished talking to that. Specifically, Kent maybe you can give us an update on what you are seeing as far as maybe your commercial mix in the quarter and walk us through how much visibility you have on the payer mix side as far as patients maybe losing their job and having the ability to move on to COBRA for a little while and then move off of it.

We are tracking it very, very closely meaning patient by patient, and have not picked up on anything material yet because it appears that even though some companies have gone away, most of the people are now working for someone else. While the lay-offs are really big from a macroeconomic policy view for the American government, and for the American economy, the fact is it is not as if half the people are terminated or anything. And in addition those who are laid off, it is very, very common for them to take COBRA. And so, those two qualifiers right now appear to explain the fact that we are seeing virtually no impact. We don't anticipate that that is going to continue, but I am, it is, those are the facts so far.

Okay. And so, it is fair to say that you are tracking this to a level that you would probably know six months in advance, given the length that most people can stay on COBRA, as far as when these patients will be falling off the commercial side?

It is kind of a unique situation, so your words suggest a level of certainty that we are uncomfortable with, which is why I prefer to just stick to the facts, that we have seen virtually no change so far, and therefore you would think given we are watching it patient by patient and we have seen no change so far that there's a very good chance we could have that kind of notice period you are thinking of. But we are all kind of in uncharted territory here and certainly, any certainly new administration or Congress is going to be hypersensitive to a world in which a lot of people are losing their insurance.

Sure. That's helpful. Then just on the commercial pricing side, is there anything you can tell us as far as seeing potential for increased visibility into these, I think you kind of framed it as two or three contracts that are the most sensitive for the '09 guidance? Is there anything you can give us as far as have any of those contracts been completed? Do you have rates in place, things like that?

No, there is no new news. All of those conversations continue, and from our point of view, we are unhappy that we are not getting better increases. From their point of view, they're probably unhappy that they're not getting decreases, and we are still mucking around in the middle.

Okay. But that number at least hasn't changed, the two or three. That is still kind of the number of contracts you are looking at as far as being problematic?

I think that's reasonable, but at the same time, there's a spectrum, there's two or three that are bigger than others and you drop down a significant tranche in size and there's a few there and then you drop down and there's some more there, because do remember that the overwhelming majority of our private book of business is renegotiated every year. So we always have -- there's never been a quarter that we have reported to you where there weren't a lot of negotiations going on. So, with that qualifier, it is still the case that two or three are much bigger than the rest.

That's helpful. Thanks for all of the clarity.

Thanks, Justin.

Your next question comes from Gary Lieberman, your line is open, sir.

Thanks. This is maybe just a follow up on the last point on the commercial pricing. It sounds like some of those problematic contracts, are they unresolved or you resolved them but the rates you've gotten were not as high as you wanted?

They're unresolved, but life goes on in between. Again forget the big ones and let's just pick out a normal typical renegotiation, typically spans a number of months. While the negotiation is going on, the rate stays the same. Does that count as resolved or unresolved, I don't know. But it is not as if there's a battle going on or something; it just means that the two sides have a different point of view as to whether the rates should go up, down, stay the same or some subcomponents of the rates should go up, down or pay the same.

In addition it gets a little difficult when we talk about the two or three in resolved or unresolved. Because when you talk about the biggest ones, they're often national payers, with whom we have historically had 20, 30, 40 contracts, and so when we talk about them - that being one, in fact in many ways it is actually more like 20 or 25, and there's some efforts in some years to do some aggregation across those, and in other cases, there's a decision to go back to just dealing with it as 20, 25, 30 different subcontracts. So yes, there's a couple of payers that are bigger than everyone else but it's not clear whether the best way for they and us to work together is on a highly aggregated basis, or a more decentralized basis. Is that helpful?

Yes, that's helpful. Just to follow up on that, as you have said your '09 guidance assumes you can't come to terms on some number of those contracts, so you lose commercial patients. Have you gotten to the point yet on any of those contracts?

No, we have not.

Okay. And then maybe just a quick follow up on the patient care costs. Rich, you discussed the increase sequentially in the patient care costs, and you listed a number of reasons going from the growth in the nondialysis businesses, the hurricanes and heparin, is there any way to sort of quantify that $3.62 either in list of what had the most impact or if you could specifically quantify, that would be very helpful.

Yes. More than half of it really is, it is just the math of the per-treatment equation. Our costs increases, our nondialysis business rose. And yet they're not characterized as us providing treatments. So in the denominator you don't have the treatments growing at that same pace. More than half of that is related to the growth of the nondialysis business, and that's why per-treatment costs were up $3.62 sequentially. So more than half of it nondialysis.

The other half really is a mix of things but the most important would be the labor cost increases sequentially again related to the hurricanes and just a bolus of training related to the implementation of the conditions of coverage.

Okay. So would it be reasonable to think that other half sort of other than obviously heparin but the other half, some of that subsides in the fourth quarter and going forward?

Well, you have got heparin of course that is going to continue in the fourth quarter. In fact it might increase a little bit because we did have somewhat of an offset by the use of lower priced inventory at the beginning of the quarter. Recall the price increase is effective July 1, so we did have some lower priced inventory around at the beginning of the quarter. As you push into Q4 you will see that continuing and maybe increase a little bit, and then on the labor side, we expect to continue to have a somewhat higher training over time levels in Q4 as we continue to work through the conditions of coverage. So, I don't think it would be fair to say it wouldn't necessarily subside sequentially.

Okay. Great. Thanks a lot.

Thank you, Gary.

Your next question comes from Darren Lehrich. Your line is open.

Thanks. Good afternoon, everyone. A couple of questions here. The cost per treatment increases which you just talked about, I guess two things I wanted to ask you there, first, what would be your threshold for materiality, I guess in terms of breaking that out on the income statement or the way you report in your press releases? I know you are starting to list it out in the segment reports in the 10Q, but I guess I just want to get your thought process there because it is having a big skewing effect on those results. And then my second part of the question is if you can just comment a little bit on your hoop initiative and whether you have had any impact on heparin utilization and I guess the early pilots of that and what your expectations would be?

Darren, just to make sure that we understood the first part of your question, were you asking what our thresholds of materiality of breaking out in nondialysis business is in our press release?

Yes.

Yes. We actually talked about that, and thought that we may be getting at the point in time where it would be helpful. Obviously we reported in the Q that way which was a new development last quarter. So we will take another look at how we adjust our -- in particular our supplemental information to see if we can provide you a little more useful information earlier in the process as opposed to waiting for the Q.

That would be great. Kent, do you have any comments on heparin?

Well, Rich relayed sort of the math, the current math and expectations of math, and we are eager to find alternative long-term sources to bring down prices a bunch. I don't know where I can go beyond that. We have done a very nice job of implementing new protocols to more efficiently use heparin while maintaining the exact same clinical outcomes. So those are probably the three points that I think are relevant and material unless you have any others you want to ask me about?

Yes. I guess where I was going was, do you see any opportunity to bring utilization down beyond what you have been able to thus far? I think you have some opportunities perhaps. And if you can just comment on what those might be, whether it is fourth quarter into '09 from a utilization standpoint.

Yes, I think we are pretty close to the optimal level of utilization. It was a very comprehensive implementation across 1,400 locations in five months. It was very impressive in its breadth and depth and success, but it is pretty much done now, and so I don't see a lot of incremental pick up. Although I, leading into this call, didn't ask the question of exactly how much of Q3 had the full success versus all of Q4 will have it. So you get a little bit incremental quarter fold in, but not enough to make a big difference.

Yes, particularly when you count for the inventory issue that I mentioned. I guess the only other thing to note Darren is that when we, our expectation in terms of the annualized impact of the heparin price increases that occurred this year, is still the same as the original range we gave, the $20 million to $30 million annualized. In fact that range did include some estimates of our ability to, to rationalize on heparin utilization. So we still expect to be around about that range.

That's real helpful. And then if I could just follow up, as far as the ancillary services, the other revenue, what were the what was the segment loss in that division, I guess?

We will look it up for you. I just have to quickly check the info here.

Okay. While you look that up I guess my last question would just be, if in fact it did increase as we saw a surge in sequential revenue growth, what are your views, Kent, on how and when you might see those businesses moving to profitability? Thanks.

Yes, thanks, Darren. Well, first I will do an aggregate level that we talked about a couple of the big ones in '08 costing us about $32 million in OI. So a very, very large number. And we said it was going to get better in '09, and we still think that's the case, and we would hope in '09 that number would go down in the neighborhood of $20 million or so. So quite a significant drop.

In addition we are continuing to accumulate a whole lot of capability and track record in terms of improving clinical care in a way that reduces total costs, which of course is the key to coming up with a long-term arrangement with the government where we get good reimbursement and they get overall savings. That's the long term, the Holy Grail, that we feel like we are on track for in a reasonable kind of way.

In addition, some, some of that money would have to be spent anyway. In other words, even if you weren't trying to do special needs plans or you weren't trying to do a specialty pharmacy, you nevertheless would be doing some R&D working with others to try to reduce hospitalizations, to try to improve pharmaceutical compliance etc., etc. And so, some amount of the $32 million or $20 million would be spent anyway, it just so happens we took the more aggressive route in trying to turn them into ongoing products that added a lot of value to the mother ship as opposed to just incremental R&D.

Great. Okay. Thank you.

Thank you, Darren.

Your next question comes from Kevin Fischbeck. Your line is open, sir.

Okay. Thank you. You talked a little bit about the impact of the negative economy on the company as a potential outcome in 2009. Were your comments more about the implications for government reimbursement being cut or was it more concern about patient shift from managed care into Medicare?

Yes, I would say it is 50/50, it is just so hard to know what's going to happen. The more obvious threat is the fact that the government is going to have big deficits and it's going to look for savings. So, that is, that is an easy one. And the whole Medicare program faces it. We think less so than others for the reasons I cited. But in addition if there's a long-sustained recession, you just know at some point that's got to affect the ranks of the commercially insured and the decisions they make. It doesn't happen quickly but at some point it would have to.

Can you give us a little bit of historical perspective about what happened in the last downturn, how that impacted patient mix?

Well, I can, and that is it didn't affect it much at all. So the question is, is the world different or is what's happening worse? Because in the past, since 1991, these kinds of dislocations have not led to any change. But I wouldn't ever, for a moment, submit to you that this dislocation is the same as the other ones that have been, that have taken place in the last 17 years.

Okay. That makes sense. Are you factoring any patient mix shift in your guidance besides the defending the managed care pricing?

I would say all risk factors have been [probablistically] included in the analysis.

Okay. And then last question. About your cost structure, to the extent that the economy does worsen is there anything in there that you feel you have the flexibility to adjust down or any cost like labor where you might expect to benefit from such an economy?

I will take a stab at that. You could argue this one either way. If it becomes easier to unionize, that could create more labor pressure. On the other hand, historically what has often happened when unemployment goes up is more nurses return to work and there are fewer jobs available for the people that pursue technician jobs and social worker jobs and dietitian jobs. So I have heard people argue it in either direction and I think we just have to wait and see how the macroeconomic forces play out. It could cut either way.

In addition we buy a whole lot of stuff as you know, and a whole lot of the suppliers that supply to us and a whole lot of the landlords who have buildings, those segments are also under a lot of economic pressure. So we are hoping that we pick up some very nice opportunities on purchasing both services and products and renting and leasing things over the next 18 months. But none of those markets are immediately fluid of course - you don't suddenly move a dialysis center because you got a 10% better rent offer some place else. On the other hand, when you are building 35 de novos a year and doing a bunch of other stuff, the math can start to make a difference.

So those are some of the puts and the takes if we had a more definitive analytical picture with more upside, we would have said more about it. It is pretty early in game and we are all over it.

Okay. Great. Thanks.

And if I can take one second to get back to Darren's question here; I was waiting for a break in the action here. The segment loss, the nondialysis business you will see broken out in the Q is around $5 million in the quarter. And that is down from $10 million in Q2. So you can see there has been some improvement which is more or less what we expect for the balance of the year.

Your next question comes from Mark Arnold. Your line is open, sir.

Good morning. Just a couple of questions here, just to clarify, I think in the last conference call, Kent, you gave a run rate on the specialty pharmacy being close to $100 million. I just was wondering if you can give us an updated number there.

I will get back to you in a minute with it. I don't have it.

Okay. And then, you have opened a large number of de novos so far this year. To what extent have your existing facilities been capacity constrained leading up to these new openings? And is it likely we could see a bit stronger nonacquired growth the next few quarters because of the new capacity?

I would say there has not been a material change in our weighted average utilization over the last quarter. Is that the answer to the question you are asking?

I guess what I am curious about is whether you have had to turn away any patients as you wait for some of the new capacity to come online with the de novos, or whether you are looking at that as more of a growth opportunity with capacity not being in the existing facilities not being the issue.

Yes, I would say that situation is rare. If over the last four months we had to turn patients away, it is for one of two reason, either the payer mix is so bad in that area we can't afford to build a new center and that would probably be half of the situations, or the other half is when we blew it and didn't start building a center in time, which typically also means that the center is not opening up this month to relieve us of that pressure.

So while we always make some mistakes and there are some markets where we don't want to add capacity because we can't afford to, there's no change in the amount of that going on now versus what was going on a year ago, and so there's no big upside or downside on that front.

Great. That's helpful. Thank you. Just one more question. LIBOR rates are now kind of back down to where they were a couple of months ago. Can you guys give us a sense for the timing of when some of your larger term loan tranches reset, and kind of how you have decided to, to reset them using the variety of interest rate options available to you? And the reason I am asking that is I am just trying to get a sense as to whether you guys had to lock into some higher rates here in the beginning of this quarter in Q4, or whether you have kind of maintained your flexibility there with your prime rate option or other means to kind of mitigate the big spike that occurred here at the beginning of the quarter?

Okay. Well, the first thing is the good news and that is that in the quarter we weren't impacted by the spike in LIBOR rates just because we had already reset our LIBOR rates the month before the spike. Since then, as you know, LIBOR is back down, and as of Friday, I think it was at 2.6% which is back down to where it was for Q3 of '08. I think, the average rate for Q3 '08 was right around 2.6%. In fact, it was down a bunch from last year when we were more around 5.5% at this time last year in terms of average LIBOR rates. So, we don't anticipate from the recent dislocation we don't anticipate much of an impact. At the current rates of LIBOR we estimate that Q4 would be impacted by about $0.01 of basically as a result of the impact in October of those higher rates on our unhedged credit facility.

Rich, can I --

That's the first part of it.

Okay. I just want to follow up. Have you historically used three months LIBOR as your benchmark?

We have at times used three months, at times used one month, at times gone a little bit longer on the unhedged portion of our credit facility. We always do have the prime rate option you mentioned so if we were to see another dislocation like we saw in October, and in fact we were poised to implement that prime rate option. We do have that ability that still exists in our credit facility.

And then in terms of what part of our debt is hedged, right now, about 70% of our gross debt is fixed both through the bonds that we have as well as the hedges we have in place on our credit facility. If you net that against our cash balances it is more like 78% fixed. And then as you look out through 2009, that fixed rate will trend down closer to 60/40 as the existing portfolio of hedges roll on and off. So absent any additional hedging activity you will see our fixed percentage on a gross basis before cash move down toward 60%.

Great. Thank you very much.

Your next question comes from Dawn Brock. Your line is open.

Good afternoon. Kent, I wanted to touch upon revenue growth for a minute. Really talk about how you are looking at it going forward, based on the two primary components of pricing and volume, and specifically, I think we all know there has been a market and quite frankly a welcome shift after years of concern on the commercial side. That should be a nice driver. Yet, you commented in your remarks earlier that you anticipate a fair loss of patients embedded in the 2009 guidance. Could you clarify at all, net of de novo and acquisition patient growth, what range assumes -- what that range assumes as far as total patient growth is concerned? What I am trying to determine is within your 2009 range, where volumes sit.

Okay. Let me take a stab at it. And first of all, we the last thing we want to do is eliminate concern about private rates. The - so, enough said there.

Second, in order to help on trying to figure out the volume that's assumed, we do have a guidance range for our nonacquired growth, and we expect acquisitions to be at a comparable level to what they have been this year and last year, absent the discontinuity of buying one of the medium size chains, which could happen and also may not happen. And we also provide reasonable ranges around our expectations of increases in cost per treatment, and so given all of those guidance ranges you can end up with inducing a reasonable estimate of what we expect on the revenue front and the volume front. So, does that work? The nonacquired growth plus the normal acquisition amounts gets you a pretty narrow band on treatment volume?

Yes, I mean look, I can go back and look at, at the guidance ranges. I guess maybe a different way to ask it is from a development and acquisition perspective are you looking for 2009 to replicate 2008, which was a bit stronger and then we should be taking our own level of discount from there?

Yes, okay. Fair point. We are in very active debate in deciding the number of de novos we are going to build in 2009 and 2010 right now. As of today, it looks like the '09 number of de novos will be comparable to the guidance we provided in '08. And our expectation for 2010 is a little -- is less clear because we are going know a lot more five or six months from now than we do today. But for '09 it looks comparable to the range we guided to in '08.

Is it fair to say you are tracking ahead of that so far in '08?

No. We are pretty much right where we expected to be.

Okay. Thank you.

Let me amend that actually. We are doing better than what we guided with respect to a number of de novos. So I misanswered that question. We actually hoped to beat our guidance. I was answering that question. It is where I wanted us to be, but we weren't at all sure we would get there. And so the fact is we are doing better than what we guided in term of the number of de novos.

Much appreciated. Thank you.

Thanks.

Your next question comes from Bill Bonello. Your line is open.

Hey, Bill.

Yes.

Bill, before you go. If I can just slip back to a question about 10 minutes ago, in this second quarter we reported that DaVita Rx, our specialty pharmacy operation was at about $100 million annual revenue run rate. The answer to that question of what is it now, is that it is at about $110 million annual revenue run rate. So, the run rate increased by about $10 million quarter-over-quarter. And I will add we are seeing some very exciting data in term of clinical outcome improvements and hospitalization reductions now that we have got enough patients and enough maturity in the data, too soon to publish, but not too soon to be excited that we are adding value to the system. But Bill, back to you.

Thanks. Actually I will follow up right on that. Is there anymore color you can give us in terms of what that represents in terms of penetration of your patient base or what you think the potential revenue of that business is?

I think the short answer is no, Bill. That we are pioneers here. We have been learning a lot every quarter and it is too soon for us to put any big stakes in the ground about what it could be.

Okay. Fair enough. The second question is just it looked like there was nothing new in the final position rule. Is that a correct reading?

Yes.

Okay. And then finally just in the past you have talked a little bit about some of the issues where you are out of network and I am just curious if you have seen any changes on that front. In particular, are you aware of anyone doing anything on benefit design that would penalize a patient if they were out of network, or are you seeing anymore aggressive efforts on the part of the managed care payers to keep patients in network?

I would say there's been no change in the quantity or intensity of activity on that subject.

Okay. And then the follow up to that, it is a long shot, but in the past you were willing to disclose the amount of revenue that was out of network. Any chance you would do that now?

No chance.

All right. That's all. Thanks.

Thanks, Bill. I will say, because I think my tone of voice demonstrates by excitement about the DaVita specialty pharmacy business, and the good stuff it is doing and could do, and that just needs to be tempered by the fact it still loses money, which is a real problem. So that's the yin and yang of that.

Sure.

Your next question comes from John Ransom. Your line is open.

Hi. I was wondering if on your private contracts, approximately what the mix is of bundled contracts versus unbundled contracts? And will we expect the mix of bundled contracts move higher as Medicare moves toward bundling?

The percent that's bundled will continue to go up as it has for a couple of years. I don't think we have ever disclosed what that percentage is. We are all looking at other each across the table. Maybe we will going forward because it is not a religious issue to us, but I would hate to do it spontaneously. But suffice to say it is not a tiny percentage and it has been growing steadily, and we fully anticipate it to continue to grow, and we had the same position now as we've had for the last couple of years. We are totally agnostic on bundling versus not bundling. It is all about what the rate is.

My clever trap didn't work to trick you into more disclosure. Darn.

The other question I had as you look out three years toward perhaps diversifying your supply base on the noninnovative drugs like the vitamin D and iron and heparin, and maybe you look to some strategies to reduce EPO utilization, what is the outer band of what you could save if you had some time as you do to work on that on a cost per treatment basis? Is it bigger than a mousetrap?

There's a wide range of potential outcomes.

Would you care to elaborate?

I'll turn it over to Richard or LeAnne, but for me I am too fearful to go beyond that because in fact it is a reasonable summary.

It is possible that you might be referring to the note that came out earlier this quarter about suggesting that there could be rather large reduction in EPO utilization?

Well I guess there's the debate about how much of the population could be moved to [subcu] and how much diversification we might see in the heparin supply a couple of years out, how many alternative suppliers could be coming into the Vitamin D and iron market, if any, that sort of thing. I know there are a lot of outcomes but maybe you could just describe some of the things you are thinking about and what might be possible?

Okay. So you are looking for a little more color around the dynamics around --

Yes.

-- those areas. I think, as it relates to the potential for lower utilization, as Kent has said many times before, once you turn a reimbursement system from a situation where pharmaceuticals are effectively free from the standpoint they don't have to be traded off against other cost inputs, it is reasonable to assume that providers will find ways to innovate clinically and achieve the same outcomes for the least amount of pharmaceutical utilization. However, that takes -- likely takes time, and we would caution that people shouldn't assume that there are the opportunities to make simple practice changes and achieve substantial reductions, in particular EPO utilization.

So, it is the [subcu] thing has been talked about for decades now, in dialysis, and it is just not as easy as being able to switch large numbers of patients to subcutaneous administration. [There are] more clinical and risk issues related to it. There are numbers of patients depending upon their dosing that it is just not feasible to administer the EPO subcutaneously, etc, etc. So it is quite a bit more complicated I think than just a simple practice change.

Similarly with the often talked about trade off between iron and EPO, we don't believe that there is simple changes that can be made there that would have material impact on our EPO utilization. That said, will intensities go down when we are forced to make trade-offs against all of our other cost inputs? Likely over time, providers will find ways to maintain outcomes and reduce utilization.

As far as some of the other drugs, EPO and heparin are really the two that are sole-sourced, and so in the other areas, we obviously will have some opportunities to work with suppliers to find the best combination of pricing and clinical outcome achievement.

And on heparin we really don't have any news in terms of new entrants and alternative sources of supply at the moment.

And let me break in because I misunderstood the question. I thought you were focused on nonEPO pharmaceuticals and biologicals. On EPO, there are some people that are dramatically wrong in estimating the changes that could occur in EPO consumption for the reasons Rich said. [Subcu] has serious issues around it, the iron thing has played itself out we think clinically very thoughtfully already over the last five years, and [I] could list one or two other examples. And so it is inappropriate for anyone to think that there's a couple of simple things to do and EPO use goes down a bunch. That is simply wrong.

And then just last question, we've had going from this grandiose discussion to a very picayune question. Rich, is the share count number for the fourth quarter as simple as taking the ending share count and factoring in your buyback adjustment for the time-weight of that or is there anything else going on there?

Yes, there's nothing else major going on in the share count.

In the absolute count versus the fully diluted count. So which are you referring to?

Fully diluted.

Yes. Fully diluted you would be taking into consideration as always, the option grants and implications there.

Right. Right. Okay. Thank you.

Thank you.

Your next question comes from Francoise Giacalone. Your line is open.

My question has been asked and answered. Thank you.

Your next question comes from Chuck Ross. Your line is open.

Hi. Mine was asked and answered, too. Thanks.

Thanks, Chuck.

(OPERATOR INSTRUCTIONS). Your next question comes from Andreas Dirnagl. Your line is open.

It is Andreas Dirnagl. I can change firms but the name still gets slaughtered. Most of my questions have been answered but just a couple of follow ups, Kent, Maybe on the comments you made. You did mention that sort of a fiscal environment as we see it in DC probably bodes potentially a little bit better from MSP extension. Would you care to take a shot in terms of early handicapping on whether you think they'll go for a six or 12 month? We sort of had both last time around.

No, impossible to handicap, Andreas, but I was worried I wasn't going to hear your voice again. Nice to hear it.

Thank you very much. It is good to be back. A question on the repurchases, both for Rich and for you, Kent. Rich, from a numeric perspective can you confirm are you about $220 million through the current $250 million authorization? Is that right?

Yes, I think that's right, Andreas, I am just looking back to check.

And Kent, if you approach as it is clear you are probably going to at some point soon, completing that authorization, would you expect sort of a normal course to go back to the board for an additional authorization?

Absolutely. In my mind it is prudent for us to always operate with a significant authorization in order that the authorization decision itself is never perceived as a signal one way or another, and that management with the right guidelines and trust from the board, is always able to pounce on any opportunities that are good for the shareholders.

Okay. Good. Then another comment you made, Kent which maybe it was in the one conference call that I missed, but I think it is the first time I have heard you say it specifically recently. In term of DaVita potentially acquiring one of the medium size chains you said it might happen, it might not happen, obviously. Is there anything in the current environment, and I am thinking specifically the credit crisis we have been seeing, that might make for more motivated sellers in that space?

Well, I think the short answer is yes. If you just at a very macro level - because each of these are individual companies and there are several of them, and they can make all their decisions and do make all their decisions on their own, nevertheless, the question is, are the probabilities higher or lower because of what has happened. I would say they are higher for a couple of reasons. One is because the financing market has changed so much and a bunch of them are private equity backed, and second, the big payers are now subjecting those medium sized chains to the same kind of rate scrutiny and out-of-network scrutiny that they put us through the last 18 months and that will be a new thing for some of them.

Okay. And then just finally I think it is probably pretty clear and inherent in the fact that just we are even discussing it, but I want to confirm because there's a little bit of a belief out there that given the fact that when you did the Gambro acquisition, there were some required divestitures. I mean sort of a FTC issue is not something that would preclude any mid size acquisition, right?

The only one we can't buy is the one we divested.

Okay. Great. Thank you very much.

All right. Thank you, Andreas. Welcome back.

Thank you.

Your final question comes from Gary Tyler. Your line is open, sir.

Hi, good morning. Just wanted to follow up on one question, on commercial bundling, if we presume we see more commercial bundling and you're agnostic, does that introduce any new risk into the equation or in your view is it just the same systemic renewal risk that's always inherent in the pricing negotiations?

My intuitive answer is it reduces risk. But to be honest we haven't had a debate of that specific twist of the question, but I don't see any reason why it would increase any risk.

So historically as you have seen contracts move you have been able to preserve your total economics?

Say that again, please.

Historically as you have seen contracts move from a la carte into a bundled payment on the commercial side, you have generally been able to preserve the total economics of that contract?

It has been a while since we have run that number because in a way it doesn't matter. Every situation is contract specific. What we are trying to figure out is given the situation we are in, is it better to bundle or go or stick with a fee for service, and we are very confident in each individual case we pick the one that is better, but comparing an aggregate all the times we pick sticking with fee for service versus pick bundling is not something we have done. My guess it is probably a distribution where in some we have done better, many the same, some worse, and maybe there is a slight -- maybe I should leave it at that, because I don't know the data.

For us it is not a pattern of decision making. It is not like we go out to do one to do the other. It is very situation-specific, us picking the one we think makes the most sense with that payer. Sometimes payers come in with a very significant head of steam, either saying I don't want to bundle because I can't, my system is not really supported, I am too worried I won't get the number right, I care more about other things, and conversely other payers come into the conversations saying they only want to bundle. And if a payer is maniacal one way or the other, we just go with it because we are agnostic and so that would skew the data too.

And are there situations where you present an option to the payer? You could have it this way or that way?

It is more and more common for us to have an open discussion about which both sides would prefer. That's going on in a few places right now. Two years ago, three years ago it was much more often that a bundle would only happen if one side came in with the very intense intent to make it happen. Now it is much more common for there to be a, Gee, which way should we go, both sides carefully watching the other trying to figure out if it's to their advantage to go one way or the other.

Yes. But I guess on a forward basis then you don't see payers kind of following Medicare and using a movement toward bundling as a source of renewal pressure in and of itself?

We think more private payers will want to bundle because Medicare is doing it. We don't really see how that translates into any change in leverage one way or the other.

Okay. Good. Thank you.

There are no further questions in queue at this time. Do you have any closing remarks?

No, just thank you for your consideration of our efforts, and we will work hard between now and three months from now when we get to talk again. Thank you.

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