德維特 (DVA) 2009 Q1 法說會逐字稿

Good morning. My name is Patrick, and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter DaVita conference call. (Operator Instructions). Thank you.

I would now like to turn the call over to LeAnne Zumwalt.

Thank you, Patrick. Good morning, everyone, and welcome to our first quarter conference call. We appreciate your continued interest in DaVita. I'm LeAnne Zumwalt; and with me today are Kent Thiry, our CFO, and Rich Whitney, CEO. I will start with the forward-looking statement disclosure. During this call, we may make forward-looking statements which can generally be identified by 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 annual report on Form 10-K.

Our forward-looking statements are based on information currently available to us, and we undertake no obligation to update these statements, whether as a result of changes in underlying factors, new information, future events, or other developments. Additionally, our press release and related disclosures include certain non-GAAP financial measures. These measures should be considered in addition to the results prepared in accordance with GAAP and should not be considered a substitute for GAAP results. Also included in the press release is a reconciliation of these non-GAAP measures to the most comparable GAAP financial measures. I will now turn over the call to Mr. Kent Thiry, our CEO.

Okay. Thank you, LeAnne, and welcome to all of you. Thank you for your interest. It was another solid quarter. I will provide a review of, one, clinical results; two, the economic and public policy environment; and three, talk a little bit about the '09 forecast and some longer term outlook perspectives. First, clinical results. We present them first -- that is what comes first -- we are a care-giving Company, serving nearly 114,000 patients at this point.

With respect to adequacy, which is essentially how well we're doing at removing toxins from our patients' blood, this quarter we once again had 95% of our hemodialysis patients with a Kt/V greater than 1.2. Second, with respect to vascular access, we now have 62% of our patients with fistulas placed received dialysis -- fistulas being the preferred form of vascular access, as many of you know. And third, in the area of anemia management, we now have 87% of our patients between -- hemoglobin levels between 10 and 13 over the last three months across all modalities. These and other clinical measures compare very favorably to national averages. I would like to try to anticipate a few questions you may have for us just to make this maximally efficient for you. Question number one, potentially, is how is unemployment affecting our payer mix? To date, there's not been an impact. There's some reasons why this is not surprising for our segment; and we can go over those again in Q&A if you'd like, as Rich did last quarter.

Now that said, we also want to repeat what we said last quarter, that no one is totally insulated from an economic recession, and we're likely to see some impact if the recession continues for a long time. And as was discussed in the last quarter, the offset to any of that is this also means that competitive wages equal lower numbers in this world than they would have in a healthier economic world.

Question number two, what benefit would the dialysis industry see from any expansion of coverage for the uninsured? Answer is simple. It would be a positive if it increased the number of insureds with private insurance, and neutral if the expansion were entirely Medicare.

Question three, what about that public insurance option? What would that do? Well, if it would decrease the number of people in private insurance plans, that would be a negative unless they paid the similar rates to what private insurance companies certainly pay; and as many of you know, that debate rages in a lively fashion in the Capitol as we speak.

Question number four, what about the potential impact of patients being able to elect Medicare at a younger age? Well, in our segment, that's already the case that people can elect Medicare at a younger age. So something else would to have change in the dynamic for that to be relevant.

Fifth and final question, does the government realize that this segment relies on private patients to subsidize the Medicare patients? And the answer is, to a limited extent, yes. We've been getting better at educating them with each passing year. Our job is to continue that endeavor in the next few months, because the fact is, if we lost any significant number of private patients, there would be a bunch of dialysis centers that would close, because we're a single DRG business with 85 to 95% of the centers being discrete. And so the good news is the government realizes that you can't get it wrong in our case, because there's no averaging across a whole bunch of procedures, a whole bunch of payer classes, a whole bunch of DRGs. There's just one thing that we do in lots of small discrete centers.

Lastly, on to the '09 outlook, the short characterization is that it is unchanged. We do have to conform our guidance to reflect current changes in accounting practices, and Rich will describe the specifics of that in his section. Private reimbursement and government policy are the big swing factors; and on the private side we are prepared to accept some patient losses in order to maintain private rates that are sufficient to offset that Medicare deficit. But we've been saying this, of course, now for several quarters. So far we've not had to incur any patient losses in order to maintain adequate private rates, but we are prepared to.

So absent the threat of any major government policy discontinuity, right now a lot of things are going right, and we should continue to generate healthy growth and cash flow. Rich?

Thanks, Ken. The first quarter was characterized by consistent volume growth, stable private pricing -- as Kent mentioned -- and strong cash flows. Year-over-year, treatments per day up 5%, revenue up 7.7%, operating income up 7.2%, earnings per share up 15%; and our balance sheet continues to be strong, with 2.8 times net leverage and approximately $400 million of cash on hand. Now a few more details about these results.

In Q1, we had the typical seasonal decline in treatment days, as Q1 had three fewer treatment days than Q4. Non-acquired growth in the quarter was 4.0%, consistent with recent quarters. As of late April, we have about 53 centers completed and awaiting certification. So the good news here is that the number has not grown over the past three months. The bad news is that we are still experiencing significant delays in certification of our de novo centers, which is impacting our non-acquired growth. We continue to expect non-acquired growth of around 4% for the year. Dialysis revenue increased about $4 per treatment sequentially from Q4. About $1.50 of the increase was due to the 1% Medicare composite rate increase and the ASP changes, both effective January 1st. Another $1.50 per treatment relates to a lab Medicare rate increase, also effective January 1st, and seasonally higher lab testing in Q1.

The remainder, about $1 a treatment, was due to private rate increases and CPI increases on contracts, partially offset by the decrease in physician prescribed Epogen. As we had expected and noted in our capital markets presentation in February, EPO utilization did decline from Q4. However, as we exited the quarter, it was trending back up; and right now where we are is about a few percent lower than where we were in Q4. Dialysis operating expense increased about $3.60 per treatment sequentially. About two-thirds of this increase was labor. A majority of that related to higher payroll taxes in Q1, a seasonal effect that we see every year. The balance of the increase was primarily the impact of spreading fixed operating expenses over fewer treatment days in the quarter, offset somewhat by lower physician prescribed EPO.

On a year-over-year basis, operating costs increased by about $5.70 per treatment, or about 2.5%, due to the normal labor increases across the year, somewhat offset by improvements in productivity, higher pharma costs -- primarily EPO and Heparin pricing increases -- costs related to the higher number of new and uncertified centers, and one fewer treatment day in 2009 versus 2008, which was a Leap Year. Dialysis G&A at 7.4% of segment revenue was consistent with the full year 2008, and with our expectations for 2009.

As for the adoption of FAS 160, as we noted in our press release, this quarter we implemented FAS 160, which relates to the accounting for minority interest, which is now called non-controlling interest. This has changed the geography of certain items on our financial statements, but did not impact DaVita's net income or earnings per share.

The two most important changes to point out -- non-controlling interest is now reported below the operating income line on the P&L; and on the cash flow statement, distributions to minority partners have moved from operating cash flow down to cash flow from financing activities. So this adoption had the effect of increasing our Q1 reported operating income by approximately $12 million, and increased our Q1 operating cash flow by approximately $14 million as compared to our previous reporting. All previous periods have been adjusted for comparability. For more details, please refer to the reconciliations to our previous accounting methodology contained in our Q1 earnings release.

Now, as for guidance, adjusting for a new accounting presentation, our 2009 operating income guidance is now 870 to $930 million. Excluding the accounting change, our guidance remains unchanged. Similarly, our 2009 operating cash flow guidance is now in the range of 550 to $600 million. Again, adjusted for the accounting change, the guidance on operating cash flow remains the same. Finally, after incorporating the effects of FAS 160, our effective tax rate for 2009 is now expected to be 37 to 38%. Again, no change fundamentally from the previous guidance of 39.5 to 40.5%; just the change in the way the calculation works with minority interest now being below the pretax line on the P&L. I will now hand the call back over to Kent for a few closing remarks before Q&A.

Okay, thanks, Rich. Another solid quarter. Equally important, our operating and offensive capability is getting stronger each quarter. However, the biggest questions are healthcare reform and private payer activity; and let's just step back a little bit on those big ones. Without predicting exact timing, the payer world is now moving irrevocably and steadily towards broader bundles of integrated care. It just is and it's no longer long-term futuristic. This will be very much to our advantage. There are three reasons for that -- one, our size; two, our share; and three, the capabilities that we've been working on for the past few years with CMS, and with the private insurers.

I will just give two examples. We have a globally capitated at-risk demo project with the government that's been running for over three years. There's over 400 members, $32 million in annual revenue, has achieved substantial cost savings compared to fee-for-service Medicare using rigorous actuarial tables, hit 20 of 23 CMS-defined quality incentives, reduced catheter usage by 35% in an area where they were already around the national average, has happier patients, and happier physicians. It is a window into what the future will look like; again, without predicting exact timing. It took a lot of work and a lot of money to get there, and we are there.

Second example, our focused kidney care pharmacy now delivers all the oral drugs to 16,000 kidney care patients -- the only place where that happens in the world. This is powerful because for the first time, each specialist -- the cardiologist, because most of our patients have cardiovascular issues -- the endocrinologist, because 50% of our patients are diabetics -- the internist, because a third of our patients are hypertensive -- et cetera, et cetera, et cetera -- each doc can know not only all of the drugs the patient is taking, but whether or not they're taking them, and have that integrated with the facility electronic medical record. Again, it's what you read about and hear about people wanting in much of the rest of healthcare and we've spent the last few years and a lot of your money preparing for this, and we are competent and credible. So I repeat -- without predicting exact timing, the payer world is moving irrevocably towards broader bundles of integrated care. This will be very much to our advantage.

Finally, if economic or political pressures do adversely affect the conventional fee-for-service dialysis industry in the short-term, we will likely have the opportunity to make some acquisitions at attractive prices. The need for dialysis will not go away. Our strong clinical outcomes will go away, and the attractiveness of being able to reduce the $90,000 in total cost of these patients per year as opposed to focusing on the $30,000 which is spent on dialysis, only a third -- and that includes pharma -- of the actual dialysis costs are only about 20%. So the leverage of us doing our job right will not go away either. Operator, let's open it up for Q&A.

(Operator Instructions). Your first question comes from the line of Justin Lake from UBS.

Thanks. Good morning. Couple questions here. First on the patient care costs, those were up about $3 in the quarter. Given that the EPO dosing sounds like it declined sequentially, I'm just curious what's driving that and if that's a sustainable run rate, or if we might see some decline as we go through the year.

Yes, Justin, you're referring to the sequential increase in operating costs?

Correct.

Yes, it's -- a big part of it is the impact of Q1 and the short treatment days. And so, I think as I mentioned in my comments, that about two-thirds of the increase that you are seeing there is related to labor increases. We do have some fixed labor costs -- about a third -- so you are seeing some impact just spreading the labor cost over fewer treatments; and then we have the seasonally higher payroll taxes, which are material in the quarter. So that is the biggest part of the story, as well as fixed facility operating costs -- rent and things like that -- that are spread over fewer treatments. So there was some offset of the EPO, but I think we experienced sequential operating cost increases in line with what our expectation would be for this time of year.

Perfect. And then just a couple quick of numbers questions. The revenue per treatment breakdown was very helpful. It sounded like most of that was sustainable, Rich. Am I missing anything there, or is this a good run rate to think about going the rest of the year?

Yes, based upon the drivers of the revenue per treatment increase, I think this is a sustainable run rate, absent any changes on the private pay side.

Perfect. And then just on M&A. You spent $40 million, acquired seven centers. Can you just give us a patient count there?

Yes -- and I guess the one thing as I'm reflecting, Justin, the $1.50 of increase was the lab related to the seasonal testing, as well as the Medicare rate increase. About two-thirds, a little bit more, of that relates to the seasonal testing; so I think you can think about a little more than $1 per treatment of the sequential increase, all else being equal, as not being sustainable as we move through the year.

Perfect. That's what I was looking for. And then just that M&A question? How many patients did you acquire? And does that 40 million match up to the seven centers you acquired?

We acquired centers treating approximately 500 patients.

Perfect. Thanks a lot, guys.

Thanks, Justin.

Thanks, Justin.

Your next question comes from the line of Gary Lieberman from Wachovia.

Thanks. Good morning.

Hi, Gary.

Hi. I guess just to follow up a little bit on the revenue per treatment questions, it would appear that -- based on your comments -- that EPO utilization is slowing in the quarter, along with the other comments. It would look like the commercial rates were up nicely in the quarter. Is there any more color you could give there? Were there any specific contracts that I guess in the past you would have characterized as having been contentious that you were able to renegotiate, or anything along those lines?

We have a number of contracts that have CPI rate increases that tend to be more weighted towards the beginning of the year. So I think that's a big part of what you are seeing here, not out of line with expectations.

Okay. And then maybe if you could give us some more color on some of the start-up losses at the new initiatives. I know at the Investor Day, Kent, you talked about maybe being a little bit disappointed or behind target in terms of what some of those losses were. Where were you in the first quarter, and has the outlook for the full year change at all?

Gary, could you say that question again, please, so I don't ramble?

I guess in terms of at the Investor Day, just going back to some of the comments on the operating losses that you had accrued and were anticipating on the new initiatives, you had talked about maybe being a little bit behind schedule, and so I was just looking for an update along those --

Yes, yes. So far in '09 we're on track.

Okay. Anything specifically that you were able to do differently in the first quarter?

Operate with more confidence.

Okay. All right, thanks a lot.

Your next question comes from Darren Lehrich from Deutsche Bank.

Thanks. Good morning, everyone. I wanted just to first ask you about some of the recent changes you made with your advocacy efforts. I noted you have a new person in the legislative affairs group, and I also noted that KCP did a reorganization. Can you just discuss your advocacy efforts in general and how you think DaVita organizationally and how the community is positioned right now in Washington?

All right, I'll take a quick stab, and then you redirect me in any place you want to go. Number one, we are very excited that John Schaeffler joined us from GE Medical Systems, and we've known John for a while -- tried to recruit him before, and glad we got him now; and I guess enough said there.

Second, the Kidney Care Partners Coalition, the KCP-1 for those who aren't familiar that Darren is referring to, we got that going -- oh boy, five, six years ago now. It seems like a lifetime. And it's level of awareness and credibility on the hill for a segment our size is very healthy. It is one of the few segments in American healthcare in the real world where the leading patient groups, nursing groups, physician groups, provider groups, large and small, profit and for profit, pharma and device, actually get in the same room every three months and work through agonizing processes to deliver a consensus recommendations to the hill. That literally doesn't happen in most of health care, and we've done it four or five years in a row, and it's not a small part of why we've been successful on a relative basis; and it's -- at the same time, in any given year, things always look very difficult -- keeping the coalition together and getting stuff done with a Congress that's preoccupied by some of the larger policy aircraft carriers out there, like physician fee increases and hospitals and public insurance, stuff like that.

That's responsive. Can you also maybe just touch on your views on MSP? And everybody is going to be thinking about pay fors as we get further into the reform legislative drafting, and how important you think that is in terms of your lobbying priorities.

Yes, I was in an office on the hill just a week ago, and a staff person I had not met was with her member and brought up that she had now finally gotten familiar with MSP, and it was on her short list, and that's just an anecdote to reinforce the broader assertion that with respect to the policy merit of extending the private pay period, as well as the magnitude of the pay for, the awareness has never been higher since it's been scored by the CBO. And so that is very attractive in a world where sooner or later, they're going to have to start paying for some of the checks that they're writing, and things will get very, very intense very, very quickly when that moment arrives. And the policy point of view, the fact that our patients are uniquely discriminated against -- there are no other patients in America where you are told you cannot keep your private insurance, even if you think it's in you and your family's best interest. More and more members of Congress are finding out that that is actually true, and don't like it.

In addition, what that does is create a totally perverse incentive where private employers don't want to provide value-added services to kidney care patients and dialysis patients because they're hoping they drop their insurance and flip to Medicare early. And so from all perspectives, it's bad policy and it's a big pay for; therefore, we have a very solid shot at eliminating that unique discrimination from our patients' lives.

And what is the scoring framework that you are working within right now?

Well, I'm not going to remember for sure. The CBO scored it at maybe 1.2 billion over 10 years. But Darren, if you call us and follow-up, we'll check the right number, but it's -- the CBO number on the record is something like that.

Fair enough. Let me just ask one more question, if I could, on the ancillary piece. And the revenue is backed up, it looks like, just a tiny bit sequentially; but you did improve the operating loss there, just a touch. Could you update us a little bit more on how you see those collection of businesses trending and what your view is on operating losses there and for the balance of the year?

Yes, Darren, we're -- as Kent mentioned, we're feeling that we're on track here as we finished Q1; and will you recall in capital markets that we had indicated that we expected the operating losses for that collection of businesses to be about 22 million in 2009, and we expect it to be on track to be around about 14 million as we moved into 2010.

Okay. But in -- just in terms of the revenue, it's not a big difference, but we've seen sequential -- pretty substantial sequential growth over the last several quarters, so I just wanted to get a sense for what that $71 million in revenue is relative to the $73 million in fourth quarter. Is there just less sequential growth now that the business is maturing, particularly in the DaVita Rx side? Just talk about the level of growth, perhaps.

Yes, the biggest difference that you are seeing from Q4 to Q1 is simply the shorter quarter.

Fair enough. Okay, thanks very much.

Your next question comes from Kevin Ellich from RBC Capital Markets.

Good morning. Thanks for taking my questions. Kent, I was wondering if you could talk about pharma utilization trends. We talked about EPO, and maybe you could give us an update on Heparin?

There's nothing new on Heparin. We are still eagerly awaiting new suppliers and are optimistic that that will happen. We continue to think that Fresenius -- not the Fresenius that does dialysis and dialysis products, but I think it's -- FSE is the correct letters -- made a really poor business decision by engaging in the aggressive, monopolistic pricing. They made a really poor business decision for the long-term. But right now, nothing new has happened there, good or bad; and I don't know if you wanted me to go beyond that or not, so I will stop.

Well, I guess I was wondering if you had any specific -- any timeframe in mind as when you would expect those new suppliers to come on line?

It's in the FDA's hands, I believe; and, therefore, only a fool would go into the predicting world.

Okay. That's helpful.

-- someone a lot more experienced than us.

Sure. And then going back to the comment, you gave good color on what you are seeing and whatnot, but I was wondering if there's any other impact on the business in regards to the pricing environment on the commercial side or cost deflation given the -- maybe a larger supply of medical professionals in the field?

There's nothing else beyond what Rich said. The good news is private rates have been stable, and we've been getting the annual upticks that we hoped for and depend on. The bad news is that could change tomorrow. And the good news on the cost front is that we do have a number of suppliers that are more accommodating on prices to try to maintain market share. And on the wage front, just as everyone knows, competitive wages are not going up at the same rate that they were -- and maybe in some places, they're going down, but not really in healthcare. So the Yin and the Yang of each of those two -- private revenue and labor -- Rich pretty much hit, and there's nothing dramatic going on right now.

Okay. And then the last question is, going back to your comments about the demo with CMS on the capitated patients, could you give us a little bit more color on the margin differential and the cost savings that you're demonstrating to CMS?

No, at this point, we actually would prefer to keep all that private. It is still basically a big, big R&D project that's going well. We also have some limitations. When you are working with the government on a demo, there's some of the data that they co-own with us, and we can't share it without their permission; and I'm worried if I start throwing out too many numbers spontaneously I might cross that boundary. The big -- the important takeaways are that it's taken a bunch of work, but it's going well. We've figured out a lot of stuff. We've developed some systems. We've developed operating insights. We've figured out how to approach some of this stuff, because every single aspect of what you do has to change somewhat with the doctors, the hospitals, the patients, their families, the centers; and so it's going nicely, and I probably should just leave it there.

Okay, then if I could ask one last question. Rich, interest expense was a little bit lower. Obviously, you guys have some debt tied to LIBOR. Could you give us your expectation as to where interest expense should be for the year?

Well, kind of depends upon what happens to the LIBOR rates. If you -- so maybe the way to answer that question is to indicate that our debt as we sit here right now is about two-thirds fixed and one-third floating, and the floating rate debt is at LIBOR plus 150. So it really depends upon your prediction for LIBOR rates going forward. It's a pretty flat yield curve right now, but.

Okay. I guess I'm trying to figure out, is your expectation that LIBOR is going to increase for the remainder of the year?

Well, the yield curve would say that it wouldn't; but I don't know that we would necessarily predict one way or another which direction LIBOR would go in, which is why we tend to have some fixed rate debt and some variable rate debt.

Okay, fair enough. Thanks.

Although maybe the final thing I will say on that, even -- after I said I won't predict, the final thing I would say is we are at -- in an amazingly low interest rate environment; and so I think if you did just step back and said our interest rate is likely to go up over time, I think it would be hard to answer that question any other way than to say yes, over time, they're likely to go up.

Okay, thanks.

Your next question comes from Mark Arnold from Piper Jaffray.

Good morning. Great quarter, guys. Can you just elaborate a little bit more on the cost per treatment line? I just want to clarify the answer to a question just a minute ago. You guys talked a lot about hopefully we would see some wage pressures abate a bit this year given the economy, but it sounds like -- and by looking at the numbers -- that you didn't really benefit a whole lot from that in Q1. Am I reading that correctly? And kind of, what is your outlook for -- do you expect to see maybe some savings, or at least not as big of increases here for the rest of this year, or is this something maybe going forward we see a little bit of benefit on?

I think it's fair to say that we didn't experience much of that benefit in the first quarter of 2009. However, I do want to reiterate that the sequential increases are primarily driven by the fewer treatment days in the quarter, the higher payroll taxes that you get at the beginning of the year; and those two factors we see pretty much every year in the first quarter just the way the calendar falls.

Okay. And then I guess I wanted to -- maybe, Kent, if you could elaborate a little bit more on the health reform discussion that you -- that you talked about in your prepared remarks. As it relates to the dialogue you're having with lawmakers on the healthcare reform legislation that's being kind of crafted right now, is -- I'm sure the discussion about broader bundles of integrated care is part of that discussion, but how is it part of it? Is it something that would be laid out in the legislation, or is it something that over time with CMS maybe having more power to implement projects on their own? Is that something -- I guess I'm curious on the timing of something like that, given CMS is still yet to implement any bundled care, even with the pharmaceuticals here, and we're still a few years away from that.

Right. We're not anticipating that government is going to do anything dramatic with respect to broader bundles of integrated care beyond that which they already decided on dialysis last year in the short-term. But that's the way that they want to take the whole system, and with it, at some point in the not so distant future, we will go; and it will be much to the benefit of all constituents. With respect to what's going on this year with the KCP, the kidney care community, and the healthcare reform discussion, what we're trying to do is get them to eliminate some of those unique discriminations. So in particular what I was talking about before was the fact that our -- the only citizens in America that can't keep private health insurance in a world where they're trying to get more people insured are ours -- and it's a historical anomaly that it used to be -- in the 1970s it was zero months, and then Congress moved it up to 12 and then 18, and now it's 30. And so there's strong historical precedent, and it's just a historical artifact. And so the entire kidney care community wants that discrimination eliminated, creating tremendous incentive for investing in wellness -- or virtually the entire community, just to be safe.

And then also, the community is advocating that the -- that CMS and HHS and Congress start to encourage more care coordinating -- care coordination experimenting along the lines of which I have talked about. Nothing dramatic; but to have the broader kidney care system start to experiment with care coordination, and so that we can bring the virtues of that in a cost-effective way to big chunks of the population in the years to come. But it's not going to be this year. There's not going to be some big dramatic kidney care reform bill this year. That's not what we're pursuing.

Just one more question on health reform. You mentioned in your prepared remarks the understanding -- or at least the limited understanding -- by lawmakers of the private subsidization that occurs here in the dialysis sector. How is that part of the discussion right now, and -- particularly with some of the things like a public plan option being thrown out there? And how are you guys talking to lawmakers about that issue?

Well, how it is being talked about is just by presenting the data that demonstrates that 87% of our patients are government pay; 82 of those 87 are Medicare. On average, we take a loss on them, and therefore rely on the other 13 when we have for 30 months only to subsidize, which is why they have rates that are much higher than they would otherwise. So how we are doing it is just laying out the facts and providing them enough information so that they can comfortably attempt to triangulate those facts and validate them with CMS, MedPAC, the CBO, OMB, et cetera, et cetera. So it's a highly imperfect process because these are people who aren't set up to do audits of every provider segment P&L, nor do they have the time. So that's the how. And then you asked the more qualitative question before that. I think overall on this, the community is doing a solid job. It is not superb or excellent or pervasive yet, but it has been solid as of the last 24 to 30 months. Prior to that, it wasn't even solid; so the good news is we're making progress. The bad news is we're not excellent yet. Is that responsive?

Absolutely. Great. Thank you, guys. Nice quarter.

Your next question comes from Arthur Henderson from Jefferies & Company.

Hi, good morning. Kent, in your opening remarks you mentioned that unemployment wasn't really having an impact on the payer mix, and I wanted to follow up on that. You said that there might -- that you had some additional details -- or we could ask for additional details, and I thought I would.

Very fair. I will turn it over to Rich. We'll see if he can be entirely consistent with the last call.

I'll try. Art, the -- what we talked about at the capital markets day was that there are a number of structural factors that lead one to believe that we might have some insulation from the rising unemployment that we're seeing out there, And the two most important are, number one, the availability of COBRA for our patients, and subsidies for patients to be able to afford the COBRA premiums provided through a particular not-for-profit foundation. So there are very, very, very few patients that do not elect COBRA because they cannot afford to pay it, because of the availability of the assistance.

Secondly, about half of our patients qualify for the particulars under a disability program that allows them an extra 11 months of COBRA on top of the initial 18 months. And so because of the existence of those two facts, we believe that we have some mitigation against what other provider segments might experience more significantly or maybe more rapidly when the economy turns and loses as many jobs as it has. I guess third, it's our view that ESRD patients and other patients with chronic conditions are those that are much more likely to want to try to keep their private insurance when they experience a job loss or a job change, and that has, at least anecdotally, borne out in our experience.

Okay, okay, that's helpful. That's helpful.

With that said, I think we should reiterate, we are worried about it, we are watching it closely, and we are assuming that we will experience some impact. It's just prudent and reasonable to view that it way.

Okay. That's fair. On the free cash flow side, or uses of free cash flow, it looks like you've consistently had about $400 million of cash on the balance sheet. You are buying back stock. The debt seems relatively stable. Is that the way we should think about going forward? I know you haven't bought back any shares in the quarter so far, but is it acquisitions kind of first, and then share repurchases, then debt repayment kind of the way to think about it?

Yes. Really no change to the way we view it, other than we take into account every quarter the specific facts and circumstances and make a judgment about how to allocate our capital. But to reiterate, it's first to fund attractive growth investments, to the extent that we have those opportunities; and second, we then look at the trade-off between buying back some stock and paying down some debt. And then specifically in this environment, as of -- for the last -- some period of time, as opposed to paying down debt, that trade-off is buying back stock or holding onto some cash for liquidity; really just because if we paid down debt right now, we don't have the ability to re-borrow it at anywhere near the same rates. So same trade-offs. We still view the business the same way, that it should have a certain amount of leverage on it over the long-term. We'll at times be above that level. At times we'll be below that level. And if you sort of look at our capital structure and note the relatively short weighted average maturities, and overlay what's been a pretty volatile debt market over the last six, nine months, I think those are two factors that would, all else being equal, cause us to be more conservative with our cash than otherwise.

Okay, last question, and I'll get back in the queue. The treatment -- the number of treatments per patient decline, I assume -- is that because of the fewer days? I would imagine that's what it was. And then secondly, Kent, on the private payer side, it strikes me that things are -- while you're still cautious there, you're not quite as seemingly nervous about the outlook of private pay rates as you were maybe a couple of quarters ago, and I just -- I wanted to make sure that I was reading that correctly. Maybe I wasn't, but I wanted to ask.

I'm glad you bring it up. I think our anxiety, tension, uncertainty level there is ever constant; and so any fluctuations in the word choice in any given call are very coincidental. The structural reality of the fair fight between big payers who would like to not subsidize Medicare so much and us, that's pretty unchanging every quarter.

Okay, okay. And then, Rich, on the treatments per patient?

Yes, the answer to your question is, yes, it's from the fewer treatment days in the quarter. The other impact -- although less of an impact, but still important -- is that there were fewer Monday-Wednesday-Fridays in the quarter. So the quarter started on a Thursday and ended on a Tuesday, and typically we treat more patients on Monday, Wednesday, Fridays than we do on Tuesday, Thursday, Saturdays, just because of the weekend.

Okay, thank you. Very nice quarter.

Thank you.

Your next question comes from the line of Andreas Dirnagl from Stephens.

Yes, good morning, guys. Basically just a little bit of follow-ups in terms of just trying to get some more detail. I can't remember, either Kent or Rich, when talking about Heparin you said that the cost was up. Obviously the cost is up year-over-year. I was wondering, can you give any comment -- are we still seeing an acceleration of the costs sequentially, or have we sort of stabilized at these new higher levels?

Andreas, in Q1 we stabilized. So we have not seen additional increases or decreases. You recall that there was some offsetting utilization reduction.

Right. And then Rich, on labor costs, every time you mentioned the $1.50, I guess it was, in the quarter -- no, I'm sorry, two-thirds of the $3.60 -- you kept saying that it was related to payroll taxes. Have you seen, regardless of the payroll tax part, sort of labor costs begin to moderate at all?

In the first quarter, we have not seen labor costs moderate. However, it is our expectation that going forward that they would moderate somewhat, just given the environment and that the change in the labor markets and labor rate increases across all segments of healthcare.

Great. And then just --

But they are trending somewhat down.

Okay. And then -- but again, to date you haven't seen any of that. And then in terms of treatment days for the second quarter, is there any change from year-over-year and sequentially there?

Well, there will be more treatment days sequentially. I don't have it -- I'd have to look at the calendar. I don't have it in front of me, but there's always a pickup from Q1 to Q2, and I haven't looked at Q2 versus the prior year to note the calendar differences.

Okay.

The best way to look at it is the number of Sundays -- the fewer Sundays, the better. We don't treat on Sundays. And then the more Monday, Wednesday and Fridays the better, because we have a heavier load on Monday, Wednesday and Friday.

Great. And in terms of the share repurchase program, what's left under your current authorization?

Around 125 million.

Okay. And then when it comes to -- you were talking about the various mitigants versus the possible pressures from unemployment. Do you track -- I mean, I'm sure you track it. Can you share with us sort of whether you've seen an increase in the number of the percentage of your patients that are on either COBRA or that are getting subsidies from kidney fund, or has that remained fairly steady?

We do track it, and I would sort of hesitate to give you specific numbers because, frankly, we track it a lot better now in the last four to six months than we had previously, just because of the situation, so.

But again, without specific numbers, I mean, general trend -- is it relatively flat? Have you seen a slight increase? A slight decrease?

Yes, we haven't seen any dramatic change in that, and that's one of the factors that would influence our thinking, having said to you that we haven't seen at this time any change related to the unemployment.

Wonderful. And then final question, maybe for Kent. Kent, we're in a period right now when it comes to sort of DC where there's obviously a lot of things going on; and one of the things that's going on is there's, I guess, a deadline out there for establishing a new bundled rate, and a new -- entire new sort of reimbursement structure. In your discussions with CMS, I mean, have they even started on this? Do they have the bandwidth to look at in this time to sort of put it in place by sort of mid or end of next year?

Yes, CMS is working very hard on the bundle that was outlined by Congress ten months ago, and we and other members of the community are coordinating to provide them with a lot of information to help them get it right.

Okay. And then final question, when it comes to that bundling, I guess it's legislated that the bundling will be at 98% of spending. Can you just refresh us in terms of what timeframe that they're using to establish the base off of which they will base the 98%?

Yes, hi, it's LeAnne. Two components to that -- and let me be certain you understand that -- pharma utilization will be set on the lower of '07, '08, or '09. Once that is established, 98% applies to the bundle of services that they would put together. They will take a 2% haircut.

And then -- that's on the pharma utilization. What about on the composite rate?

No, 2% across all of the services. Lab services, pharmaceutical, composite rate, et cetera. Once that group of services is established, what they would have otherwise spent with the adjustment to utilization will be cut by 2%.

And that's based off of the lower of '07, '08, or '09?

Correct.

Just for pharma --

Just for pharma.

-- in the lower '07, '08, '09. For the non-pharma, what is the period that they use?

It would be what otherwise would have been spent in the first year.

The first year of the bundle that is, Andreas.

Okay, so for example, it will be based off of the 2010 Medicare composite rate?

Yes. Basically that's correct.

Okay, so it's the 1% increase in effect that you're getting in '09 and '10 basically taken back?

Correct, along with a haircut against the pharmaceuticals.

Right. Okay, great, thank you.

Your next question comes from David McDonald from SunTrust.

Good morning, guys, just a couple. One I missed, Rich. Can you give us the number of de novos awaiting approval again? I know it was 56 last quarter. What was it this quarter?

53.

Okay, and is -- I know Texas was a state that kind of stood out last quarter. Is there any change there? Any states that are overly problematic besides Texas?

Still Texas and California are our problems.

Okay. And then Kent, can you just give us a little bit more detail on what would be kind of the next steps with the pilot program in terms of bundled care with CMS? What do we look for over kind of the next six to 12 months in terms of that moving forward and moving towards implementation at some point?

And you're talking in this case about the bundle that was legislated by Congress last year?

No, I'm talking about the demonstration project where you guys -- and it sounds like Fresenius, working on the capitated plan.

Right. Over the next six to 12 months, you shouldn't expect anything dramatic -- nothing operationally material.

Okay, and so when we think about timeframe, I mean, is this more kind of an '011, '012 opportunity? Is that -- a couple years down the road is a more realistic timeframe to think about this?

Certainly more reasonable than anything sooner, and we'll keep you posted. As we mentioned earlier, this movement has picked up irrevocable momentum at the federal level, at the state level, and in the private payer world; and it's just so difficult to handicap whether it's one year before it's a big change or four years, or something in between, which is why we are trying to emphasize that predicting timing is just not -- unfortunately, it's not something that we think we can do well. So all we can do is keep you posted; and when that door opens, as it is starting to, we are very well-positioned to stride through it.

Okay. Thanks very much.

Your next question comes from John Ransom from Raymond James.

Hi, I have one picayune question and one broader one. What's the ending share count in the quarter?

We will look it up for you. Do you have another question?

Sure. What was the subsidy in the quarter to specialty Rx and DaVita Village? And are you still on track for your number for the year that you mentioned at your investor day?

I'm sorry, people are passing around paper to try to hand over that share count. Could you repeat the question?

Sure. What was the -- subsidy is probably the wrong word. What was the loss on the quarter from Village and specialty?

The loss for the entire ancillary service business segment -- which is how we disclose it -- there were other things in there --

Okay.

-- was $5 million for the quarter.

Okay. And are you still on track? Has that changed for the year or are you still on track for that number for the year?

We feel at the end of Q1 we are on track for what we told you we would do three months ago. Yes.

Okay.

And the ending share count is 103,409.

Thank you.

And that's not a diluted number. The diluted number is 104,409.

Okay. And I guess the -- I don't even know how to ask this question. I'm probably going to stumble, but in the debate about the public plan versus private plan, Nancy-Ann DeParle indicated that the public plan could take a lot of different shapes. There's a Medicare option, there's a hybrid, there's a private plan option. I guess you've hired a new industry guy to go talk to Washington. How are you going to track this debate, and how are you going to weigh in to make sure that the [so-ons] who are divvying this up understand the difference between $230 a treatment and $900 a treatment and the requisite insolvency of the dialysis industry if you end up with Medicare for everybody? I mean, I think the Lewin Group said 130 million people would drop their private plans and run to Medicare -- Medicare is 30% cheaper. It just seems like you have an irresistible political wedge to get people to go to Medicare if you get a hard left healthcare plan. But you guys are going to be in the uncomfortable position of trying to argue up your rates with the government, and it's just not clear to me -- how do you get a seat at the table, and how do you make your case, and how are you following this? And I don't know if I asked that right, but --

No, it's a fair question. And of course, there's no incredibly definitive answer; but it's important to point out that right now all our private patients have the right to go on Medicare. So we're the only segment in America for whom if that option existed, it's not a change. Now that doesn't mean that sort of the whole environment could change in some way if more people started making that decision; but we are the only segment in America where that already exists and has existed for 20 years, and our current business model reflects it.

And then second, we're doing it the old fashioned way -- just very straightforward blocking and tackling, going office by office, walking through the economics. Every member of Congress has dialysis centers in their district, and does not want them to close. And there's a lot of third-party data supporting in rough terms the description of our economic reliance on private pay, which is why there have been a lot of decisions made as they have been made over the last four or five years. So we just to have work it a lot. The people in Congress are loath to implement something that could blow up in their face. That's the great fear when they start talking about this reform stuff.

Okay.

So we're confident that we have a very good shot at having a nice seat at the table, but that doesn't mean you get the outcome you want. It's just not how the process works. It's pretty sloppy.

Well, I mean, I understand it's sloppy, but the uncertainties this year are obviously magnified tenfold. So it's interesting. Okay, thank you very much.

Thank you.

Your next question comes from Bill Plovanic from Canaccord Adams.

Great. Thank you for taking my question. Just, how does home therapy fit in with your strategy in preparation for bundling?

Our doctors and patients pick home therapy whenever they think it's in the best interest of the patient. We do more home therapy than anyone else in America, and so -- help me out if I'm not being useful here.

As you see bundling coming at you, would you expect increase in usage of home therapy? Decrease? What would be -- does that actually help you save money? Is it more profitable for you? Just, is there any benefit for you? I know there's a benefit for the patient.

Well, there's benefit for some patients; and as to the bundle, whether or not one is better or worse off depends on a bunch of variables, like what the equipment is priced at and what your local scale is things like that. There's no black and white answer on that. And in fact, on the home hemodialysis, we actually lose more money on Medicare at home than we do in the center. So it's worse.

Okay, that's helpful. Thank you.

Your next question comes from Chuck Ruff, Insight Investment.

Hello, good morning. You talked a little bit about capital allocation with the volatile debt markets and near-term maturities. Is part of the reason for the buildup in cash that you see a lot of acquisition opportunities? Is that also part of it? And is the uncertainty with Congress and healthcare change, is that part of it, too? Can you just go into a little bit more the decision process to build up cash rather than buy back more stock?

In a time of uncertainty, we go to cash. We go to cash for a defensive and an offensive reason. The defensive reason is times are uncertain, and we're worried they might turn out poorly, just as you outlined in your question. In addition, it also means things might turn out more poorly for other people less well-positioned than us, and therefore we also like to have cash for offensive reasons, because we might get to buy them at a more attractive price than otherwise. So the funny thing is, the uncertainty creates equally powerful defensive and offensive reasons to err on the side of having more cash rather than less.

Okay, that's fair. It also creates a good opportunity in your stock, too.

Yes, hopefully so.

Okay, thanks a lot.

Thank you.

And there are no further questions at this time.

All right. Well, thank you all for your thoughtful consideration of DaVita, and we will work hard between today and the next day we get on the phone with you. Thank you.

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