德維特 (DVA) 2011 Q3 法說會逐字稿

Good evening and welcome to today's DaVita Q3 earnings conference call. I would now like to introduce today's host, Mr. Jim Gustafson. Please go ahead, sir.

Thank you and welcome, everyone, to our third-quarter conference call. We appreciate your continued interest in our Company. I'm Jim Gustafson, Vice President of Investor Relations, and with me today are Kent Thiry, our CEO; Luis Borgen, our CFO; and LeAnne Zumwalt, Group Vice President.

I would like to start with our forward-looking disclosure statement. During this call, we may make forward-looking statements within the meaning of the federal securities laws. All of these statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. For further details concerning these risks and uncertainties, please refer to our SEC filings, including our most recent quarterly report on Form 10-Q and annual report on Form 10-K. Our forward-looking statements are based on information currently available to us, and we do not intend and undertake no duty to update these statements for any reason.

Additionally we would like to remind you that during this call we will discuss some non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our Form 8-K submitted to the SEC and available on our website.

I will now turn the call over to Kent Thiry, our Chief Executive Officer.

Okay. Thank you, Jim, and thanks for all of you to your interest in DaVita.

Third-quarter, as you all already know, was a very strong quarter. We performed well in both the clinical and operating areas. I will cover four topics -- clinical outcomes, government reimbursement, litigation and our outlook.

First, clinical outcomes, which we always present first, because that is what comes first. We are first and foremost a caregiver company serving approximately 138,000 patients. With respect to adequacy, which, as many of you know, is essentially how well we are doing at removing toxins from our patient's blood, this past quarter 97% of our hemodialysis patients had a Kt/V greater than 1.2.

Second, with respect to vascular access, 69% of our patients have fistulas, the preferred form. And for these and virtually all other clinical measures, our patient outcomes compare very favorable to national averages, and this quality clinical care not only results in healthier patients but also drives reductions in hospitalizations and surgical procedures and, therefore, significant savings to the US taxpayer.

On to government reimbursement, it is pretty obvious to everyone there is a lot of pressure to reduce costs in Medicare. The bad news is that could mean at some point they reduce our rates. That would hurt.

A little bit of a silver lining in that cloud is that could lead to increased acquisition opportunities at attractive prices, and it will generate more interest in our proven ability to reduce hospitalizations through our Integrated Care product. So we are not trying to argue that the bad news is masked by the good news, but there are some silver linings in that cloud if and when it arrives.

Also, we have been talking with you for a while about our ongoing negotiations with the VA. This past quarter we came to a significant agreement with them for new and lower rates, and these rates are effective October 1, and their impact has already been incorporated into our guidance for 2011 and 2012.

We have been hearing some questions about whether CMS will rebase our rates and if so when, and the answer is, well, at some point they will and we don't know when. Typically they wait three to five years and would only be inclined to accelerate if there was a compelling reason to do so, and we are barely 10 months into the bundle with an awful lot of dynamism still going on. And do keep in mind that when we entered the bundle, not only did we take the 2% straight haircut on reimbursement, but in addition, components of the bundled calculation were based on the lower of the different drug utilizations in 2007, 2008, and 2009, not the exit rate. And so that was an additional cut. And then on top of that, you know that we have got the issues with the case mix adjusters where it is impossible for us to acquire the information that they are requiring, thereby meaning we are not getting paid for case mix adjustments we should be paid for, even in their own minds, although they have not relaxed the administrative standards. So the actual haircut we took was well above the 2% that was obvious and linear, and we still lose money on Medicare on average. However, on average is not always the most relevant way to think about it since across our 1800 or so centers is, of course, a portfolio, a normal distribution of economic outcomes. Some are high profit, some are low profit, some are breakeven, and some operate at a loss. And so when CMS looks to re-base rates, they have to wait for actual data, look at total reimbursement and also have to pay a lot of attention to not putting the very substantial percentage of centers that are operating slightly above breakeven or in that area into a position where they get closed.

And then finally, the government investigations -- or not finally but next to finally -- the government investigations and litigation. Luis, our CFO, will provide more color. I will just make a few important points.

Of course, we take these matters seriously, always have, always will. But we are literally eager to get to have substantive conversations with the government. Unfortunately that typically takes several quarters or even a couple of years for that to really start happening. And in the meantime, we just deal with the fact that they are interested in checking us out.

As we have discussed before, if you look over the last 12 years in our massively regulated industry, our track record of compliance is well-established and very strong compared to virtually any other major healthcare service provider and many other health care providers companies as well. Our business practices have gone through extensive internal and external review, and we work hard to create and sustain a culture of compliance at our Company, as well as policies and systems to support that culture. We literally look forward to defending ourselves vigorously in all these matters. But I repeat it always takes a long time, and in the interim we just all have to wait. We have gone through this a couple of times before in the 12 years and it is no fun waiting, but there is nothing we can do about it.

On to our outlook. We are raising our 2011 operating income guidance range to be between $1.125 billion and $1.155 billion. This guidance excludes the non-cash goodwill impairment taken last quarter, and we are maintaining our 2012 operating income guidance range from $1.2 billion to $1.3 billion. And this 2012 guidance incorporates a majority of the probabilistic outcomes based on our assessment of a myriad of swing factors.

Longer-term there's just some important considerations to keep in mind. We have a strong nationwide position. This is a discrete, highly discrete healthcare segment with discrete center level economics. It is not a controversial service. There is consistent demand. Our outcomes are outstanding, and we are very well positioned to bring value to both private and public payers by reducing hospitalizations, and we are looking at increasing interest in that, although it is not something that one can use to get a loan from a bank tomorrow. Nonetheless, we all are reading the newspapers and know how focused people are getting on trying to reduce the overall cost of healthcare.

Thank you and I will now turn the call over to Luis Borgen, our CFO.

Thanks, Kent. Before I discuss the quarter, let me say a few words about the government inquiries and the private civil litigation, all of which have been previously disclosed. You will have to forgive me, but given the sensitivity of these matters, I will be reading these points.

First, the 2011 US Attorney physician relationship investigation. As we disclosed in August, we learned that a federal grand jury investigation is pending. As announced, we did receive a subpoena for documents in this matter. The subpoena was expected as part of a typical process in such an investigation, and it is the first request for information that the Company has received in this matter. The scope of the document subpoena substantially overlaps with our previously disclosed 2010 US Attorney physician relationship investigation and appears to be limited to physician relationships. We believe this investigation is still at a very early stage. We are actively discussing the scope of the subpoena with the US Attorney's Office and cannot comment further.

I do want to offer a few words about grand jury investigations in general. A grand jury is a way by which the US Attorney investigates and obtains evidence in order to determine if they want to pursue a matter. A grand jury does not determine the guilt or innocence of a person or company. As far as we know, there is nothing unique or unusual about the process here. The mere existence of an investigation does not mean that something negative must follow. No charges have been brought in connection with this investigation.

Second, the 2011 US Attorney Medicaid inquiry. We recently informed that the US Attorney's office in the Eastern District of New York is looking into a Medicaid matter. A few points on this. Number one, we were initially informed that we would receive a subpoena and that other providers in New York were receiving a subpoena. We then learned that, in fact, another provider had already received a subpoena.

Number two, thereafter, we talked with the US Attorney office and agreed that we would provide documents without a subpoena.

Number three, we do not know the time or scope of this inquiry, other than it is regarding Medicaid billing for some non-EPO pharmaceuticals. We always take these matters seriously and intend to continue cooperating with the government. In all these matters, we are eager to share our practices with the government.

Recently there has been a lot of speculation on these matters. We would advise you to read our disclosures.

Now let me turn to some discussion of the third quarter. We saw very solid trends in the quarter reflecting strong treatment growth, a slight improvement in revenue per treatment despite a declining commercial mix, and decreased cost per treatment due primarily to a decline in utilization of physician prescribed pharmaceuticals. All this resulted in continued strong operating income and cash flows.

Here are some specifics for the quarter. Non-acquired growth was 4.6% when normalized for days of the week. The dialysis revenue per treatment was up $1.56. The primary driver was an improvement in commercial rates and seasonally higher revenue for patient vaccinations. This is partially offset by a decline in commercial treatment mix and a decline in revenue from physician prescribed pharmaceuticals.

Dialysis patient care costs per treatment was down approximately $7 from the prior quarter due primarily to a reduction in utilization of physician prescribed Epogen.

A few words about physician prescribing trends. Some physicians have been adapting their prescribing practices to the new FDA label for EPO, and we are seeing declines in utilization. Anemia management practices have been quite dynamic for the past few years as physicians incorporate new research and perspectives in their prescribing practices. This evolution has been especially apparent this year as the FDA has made changes to the EPO label, and CMS has made changes to QUIP reflecting the emerging science. Physicians are still weighing the most appropriate practices that lead to good clinical outcomes, while ensuring that patients are not subjected to inappropriate risks from either being maintaining too high or too low a hemoglobin level. All this means anemia management continues to be a very dynamic, and it is unclear where utilization will settle longer-term.

Our G&A was up $2.36 within the dialysis segment. This reflects costs for the DSI transaction and integration of about $9 million. Higher legal and compliant expenses in the quarter and as previously reported we expect G&A costs will be higher in the fourth quarter as we experienced ongoing DSI transaction and integration costs of a similar amount as in the third quarter, as well as increased expenses in several areas, including legal and compliance, IT and continued investment in international growth.

Operating cash flow year-to-date was strong at $1.029 billion. We continue to expect strong operating cash flows this year and are raising our 2011 guidance to the range of $1.02 billion to $1.1 billion. Given that 2011 cash flow benefited from the favorability and the timing of a number of working capital items, including the timing of cash tax payments due to bonus tax depreciation, we currently project that our operating cash flows in 2012 are likely to be flat or slightly down from this year.

In the quarter, we deployed $46 million on development CapEx, $724 million on DSI, and $52 million on other acquisitions. As to the DSI acquisition, the acquisition closed in early September, and the DSI centers are reflected in our numbers effective September 1. In the acquisition, we acquired 113 centers and divested 28 centers during the third quarter. We also divested another two centers on October 31, 2011. These divestitures are consistent with our previously disclosed estimates. We continue to forecast the 2011 operating income contributions from the DSI acquisition will be approximately zero due to the transaction and integration costs in the third quarter and fourth quarter.

Operator, let's go ahead and open it up for Q&A.

(Operator Instructions). Gary Lieberman.

I was wondering on the grand jury investigation, there was an article in the Denver Post today, if you guys had any comments on that article?

I have not read it. I guess the only comment that I can make based on what I have heard about it, but again I have not read it, is that it is common sense that the value of a business can change dramatically if the market and/or competitive conditions change. It is common sense, and of course, you guys see it all the time.

Okay. That is very helpful. And then maybe if you could give us an update on how the negotiations with Amgen are going on the contract for EPO?

Gary, you know the answer to that. I would say they are constructive and thoughtful, and they continue.

And then maybe just finally, it looked like you guys discussed the decrease in the cost for treatment. Is there any further detail you could provide us with? Is 100% of it due to reductions in pharma, or is that some -- is there anything else driving the reduction in the cost per treatment?

For the current quarter, Q3, that is essentially it. It is primarily pharma.

[Matt Slate].

With the revenue per treatment up sequentially here, and I know you referenced some managed care contracts, is it safe to assume that commercial contracting, a majority of that is already bundled in terms of the contracts?

We have not been disclosing what percent of the portfolio is bundled versus not, just that it has been going up steadily. And part of that is there are so many different metrics you can use to define the denominator, it gets really difficult. So it is continuing to increase steadily.

As you look towards next year, outside of anemia management, can you give us any sense what other maybe levers that are out there to pull, whether it is looking at vitamin D, subQ or other areas in terms of potential protocol changes?

Well, first predicting protocol changes is difficult because they are driven by changes in science and physicians' perspectives. So it is really a difficult one for us, although, of course, at any moment in time, we know what our docs are telling us. And right now I don't know of anything that our docs are telling us of major consequences that could change if there is some new article or study. But at this point we -- at least I don't know of anything dramatic our physicians are saying beyond the ongoing debate in the anemia area.

Last question here and I will jump off. Non-acquired growth strong for the second consecutive quarter and outpacing your larger competitors there. Is there anything you want to highlight to what is driving that? Is that a sustainable kind of run-rate do you think right now?

We hope so, but I don't think we are ready to sign up for that as a commitment, and relative to our competition, who knows? It could be that we are carrying more centers that have a lower product mix, or we are carrying more centers that are losing money. So any single metric can be a little misleading, but we are hoping we can maintain the current rates.

Justin Lake.

The first question, just a quick follow-up on the Denver Post article. Is there any commentary you can give us in terms of whether you believe the Denver Post has it right in terms of this is the main crux of the issue as far as you understand, that it is around this one joint venture agreement?

We know that they are not limiting their inquiry into that one transaction. All we know is that they are looking at a small number, but it is not just one.

Okay. And just one more question along those lines is, in terms of having a transaction where you are selling a significant number of centers because of some kind of market destruction at a rate that might look unusual, would you call this a one-off, or is this a single instance, one of a handful, or is this something that happens fairly regularly?

I cannot comment on that specifically. It is just not in your best interest. But just generically, unusual things don't happen often, and so I just cannot go any further and cannot really talk about the specific thing at all. I just want to go back to the commonsense statement that if there is a situation or scenario where there is a dramatic change in marketing or competitive positions, then the value of a business can change dramatically.

Understood. Just next question on capital deployment. I'm curious if -- I noticed you did not buy back much stock third quarter. Was there any reason for that, and did you buy back anything thus far in the fourth quarter?

Hold on one second, please.

We are considering several capital deployment opportunities, one of which is obviously acquisitions. That, coupled with the recent volatility in the debt markets, we thought it would be prudent to conserve cash and deployment for potential acquisitions heading forward. So that is how we are thinking about it.

Okay. So right now you would say that you have an interesting M&A pipeline, and therefore, you expect to build up cash over the next couple of quarters? Would that be fair?

We continue to look at various opportunities, one of those would be deployment towards M&A opportunities.

Justin, I think what led us to hesitate is just since you said for the next few quarters or several quarters or something. And since we look at our cash deployment, as you know with great rigor every quarter, we get real nervous when you ask us to say what is going to be true two or three quarters down the line on that topic because reality can change a lot quarter to quarter. So I think that is what you felt a little pause there.

Kevin Fischbeck.

This is [Joanna Gadjuk] today for Kevin. Can you just clarify for me, I heard you said there was additional costs for DSI integration of $9 million. And is that correct that you said you expect a similar amount in the fourth quarter?

In Q3 we had about $9 million related to transaction and integration costs for Q3, and in Q4 we expect a similar amount for DSI as well. Is that clear enough for you?

Yes, thank you. And on a completely different topic, I have actually a question about the debt ceiling negotiations because one of the proposals calls for a reduction or even a complete elimination of Medicare bad debt payments for providers. So the question I have for you is whether it is actually impacting dialysis providers? And then if that is the case, how much money do you receive or have you received in, for example, 2010 for Medicare bad debt?

Yes. So the bad debt policy, if it were changed, could impact dialysis, and we just have not disclosed our range of recovery there from Medicare to date.

All right. Because when I was reading your 10-K, I found there was a disclosure about Medicare that receivables of $46 million in 2010. That is obviously on the balance sheet. So the question I had was whether my estimation here is right because this would be on the receivables side, but then you have to consider Medicare payment cycles and also the process you have to go through to demonstrate to CMS that you actually tried to collect and failed. So is that fair to assume that maybe the revenue number would be something in the range of 3 to 4 times the receivable amount?

No, that would not be a fair assumption to presume that multiple.

Would you be willing to share with us another multiple that is more appropriate here?

Let me tell you what it does do. For Medicare the process under which we go through, it takes us a year to two to collect bad debt, so I think that should be helpful for you.

Frank Morgan.

Two questions for you. On the DSI acquisition, I'm wondering if you could compare your organic volume growth there compared to your recent company averages disclosed in the quarter?

And then secondly, on the VA contract, any more details -- I think you mentioned pricing had dropped there -- any level of magnitude or is it -- is this more like a bundled payment contract? Could you just give any more details on how the VA contract works?

Let me hit the second one, and then someone else will hit the first. With respect to the VA, it is not in our shareholders best interest for us to start talking about what the rate is nor the structure of the rate. So we will stay away from that to protect you. And, as to the first question, I will turn it over.

Yes, DSI is not in our non-calculation, it is acquired growth.

But I guess if you just looked at it on a standalone basis, was it growing volume at about the rate of growth organically that you were seeing?

I'm 90% sure that their NAG was significantly lower than ours, the non-acquired growth that is.

Okay. And just with regard to your very strong same-store organic growth in the quarter, were there any particular pockets regionally, geographically where you saw better growth, and that is all I have?

There is always some element of differentiation according to different segmentation, including often geographic. But we don't disclose it because that is competitively useful.

Kevin Ellich?

Just -- (technical difficulty). Hello?

Kevin, you were cutting in and out for us. Nobody else has been. Could you try it again, please?

Okay. Can you hear me now?

Yes, you are very clear now.

Sorry about that. So, on the share buyback, you guys repurchased 7 million this quarter. So are we currently at 350 million left on the buyback?

Our remaining authorization is 358 million.

358 million? Okay. Got it. And then Kent, I am just wondering if you could give us your thoughts or commentary on the final Medicare regs that came out a couple of days ago. I think the market basket rate update is 2.1%. Should we expect anything more with the case mix adjusters and the size of your company? And then also thoughts on the QIP that came out as well?

You are right. We did receive a 2.1% update on the Medicare base rate. The transition adjustment, as you know, stayed at zero, and they actually made no movement to help us with case mix. So we still will go into 2012 struggling to document those case mix adjusters. We plan to work with CMS on it, and I think they are open to solutions. But so far, it has not proven to be successful.

With respect to the QIP, as you know, 2012 was finalized previously with three metrics. What this will address is really 2013 and 2014. 2013 will now be two metrics. You are at adequacy and a greater than 12 hemoglobin measure. So those two were, I think, pretty expected, and they will be weighted 50-50.

And to 2014, so to give you a little bit of color and if you want more details, certainly we can do this off-line. But there are two categories. There is going to be outcomes metrics, and there is three in that area, which are URR, hemoglobin greater than 12, and then a new measure, which is the combined catheter and fistula measure. Then there is another category which is reporting, and that is going to be worth 10% of the QIP dollars, and then reporting there will be an infection measure, a patient survey measure, and then a calcium phosphorus monitoring if we do those. So that is pretty much the high-level.

Would you like to ask a more detailed question?

No, I just generally wanted your thoughts if you think these are good for you or I guess what is your take?

Yes, we won the 2012 payment role. It was pretty much as we expected and I think as you would have expected. And moving forward into the QIP, I think there's still a few things that as we add more measures in 2014 we will be working with CMS to improve. I think we very much agree on the principle of being paid for delivering good quality. The unfortunate reality is that the method that CMS can deploy right now is pretty simplistic, and there does need to be a more robust calculation, and we are hopeful that over the next few years we will be able to work with them to implement that.

Understood. And then just switching over to anemia management, I'm wondering if you could comment on where your EPO reduction stands at this point? And then also I believe in early October, the National Kidney Foundation put out some draft clinical guidelines that might actually suggest lower hemoglobin targets. I am just wondering what you thought about that? Any comments?

Sure. On your first point on the EPO reduction, we expect -- it is very dynamic, and so we don't know exactly where it is going to settle out. We do -- yes -- the key is what the physician adoption is and exactly how physicians are going to prescribe Epogen relative to the label change and all the emerging signs. So it is still a very dynamic area for us, and we will see where it settles out.

Okay. Any commentary about the National Kidney Foundation draft guidelines?

You hit it on the head. They are a draft. We will see where they finalize. Certainly they were looking at in exploring a lower limit for hemoglobin, but I think it is best to put that on hold until such time that they are issued.

Okay. And then the last question here is, I am just wondering is there any protocol when you have a joint venture with physicians in determining the fair market value? I mean I guess do you use a third-party? Is that very consistent throughout the industry?

Hold on one second, please. Yes, there is a protocol, but we cannot go into any detail in a public conversation given all the different litigation.

Understood. Thanks, Kent.

Darren Lehrich.

Luis, I wanted to go back to the comments about revenue per treatment. You guys have highlighted the case mix or rather the managed-care mix, I should say. Can you tell us where it was on a percentage basis or how much it moved sequentially, and what were the main drivers of that? Was it mortality? Was it any kind of different dynamics in the quarter that you saw?

On the managed-care mix, I'm assuming you are referring to the commercial treatment mix. That was down quarter over quarter, and I can tell you that it is the same two factors that we have seen all along. Number one is the macroeconomic factors -- lower employment, less people who have higher paid insurance. And number two would be our improvement in mortality rates.

And where is the mix at this point percentagewise?

We don't disclose the specific percent.

Okay. Well, I think you have been disclosing the number directionally. I think we were headed at one point towards 2011. Are we closer to 2012? That would be helpful to us.

We are still rounding to 11%.

Okay. And then your commentary about G&A costs, you highlighted the integration costs of DSI. I missed one other point that you made that was a factor. I think obviously international spend is in there. But was there another point that I missed, and can you just maybe go back to your comments about the rise in G&A?

So the key factors are, in addition to be DSI transaction and integration, it is legal and compliance spending, coupled with incremental IT and international. Those are the four key drivers of our G&A.

Okay. Just on international, I would love to get a brief update what new geographies you are now in. I think there has been a fair amount of activity in Europe as well. Just can you update us in regards to the amount of spend that is flowing through G&A at this point in relation to the range that you put out probably about a year ago?

On the geographies, we are thinking still that the less we talk about that, the better since we are competing with folks. But, suffice it to say, we are active in a few parts of the world, and we have closed a couple of little deals, and we have built up a team that is significantly more coherent than the one we had five months ago, six months ago. And it is expensive from a G&A point of view. I think we are pretty much on track with what we said nine months or a year ago, but I'm going to defer to others on that.

On the spend levels for 2011, our annual spend is expected to be about $20 million for this year, and I would say a little more back-end loaded than front-end loaded in terms of 2011 spend.

Okay. That is helpful. Then, LeAnne, I had a question for you. I know you have been talking about the inability to capture case mix adjusters. But I think at one point in the conversation, there was some progress that you thought you had been making. So, if my memory serves me, you are leaving maybe $2 of treatment on the table or somewhere thereabouts. Have you been able to cut into that number? Is it the same? Maybe just a brief update on the value of what you are not able to capture at this point?

Yes, the range would still be $1 to $2 per Medicare treatment that we are not capturing. We have made a slight amount of headway, but it is cumbersome and costly. We are really spending a pretty fair amount of what we get paid back in obtaining that documentation. So still a pretty costly process.

Okay. And then my last question for you is just any update at all that you can provide on your ability or success to get paid for more frequent dialysis for home therapies with the Medicare contractors? Is there anything new or different in terms of how you are finding success with that?

No, they are pretty status quo there.

Ben Andrew.

Given that we had expected DSI to hurt payer mix a little bit as you've integrated that and you commented that you did see negative payer mix again this quarter, can you isolate for us the effect of DSI and talk about what trends you are seeing in the core business -- if those accelerated, stayed the same?

There is a de minimis impact in the quarter. DSI only contributed to one-third of the quarter given that we closed in early September.

What was the second part of your question, please?

So, on a full quarter basis then, the payer mix for DSI is not materially different than the core business?

We are not going to break out the DSI mix versus our core mix. I will say it is immaterial to our results in the third quarter.

Okay. And then is there any comments you can make on whether the trends on payer mix are getting worse or stable?

It is declining. Last quarter it was up, this quarter it was down, so it's hard to predict where that is going to shake out.

(Operator Instructions). Gary Taylor.

A couple of small ones, I think. The first is, given that you guys raised your guidance recently in response to the lower pharmaceutical intensity after the label change, does it still make sense to you that the second half of 2012 and 2013 would also demonstrate lower pharmaceutical intensity, or is that too difficult to predict at this point?

Can you say the question again, please, Gary?

I guess what I'm trying to understand was, the Street obviously for a long time has thought that movement to a bundle we would see a change in terms of lower EPO dosing, and clearly the label change accelerated that versus Street expectations. I guess I'm wondering if it accelerated it versus your own expectations, and does it make sense that that trend would continue once we anniversary the second half of 2012 and into 2013?

Well, first of all, it is just pretty hard for us to predict because we get hundreds, literally thousands of doctors out there reacting to CMS changes in guidance, reacting to the FDA label, reacting to the conferences they go to, reacting to the articles they read, reaction to what is going on in their patient population each month as they change their practices.

So it is just very, very difficult to predict. We certainly don't think that there is going to be as big a change over the next 12 months as the last 12 months because that is not what we are hearing from physicians. But to go a lot further and start talking about whether or not we can extrapolate this month's trend, we just cannot -- we just have no ability to do that. There is too much dynamism, too many doctors drawing different micro decisions about what to do with their patients.

Thank you. The second one is maybe for Luis more. Excluding changes in pharmaceutical intensity in 2012, what would be your underlying operating expense growth per treatment in 2012? What would be a reasonable range, excluding any change in pharma?

That is a hard one to predict because it is so integrated in our model.

I mean it guess it is primarily labor I'm talking about, so maybe we narrow it down to labor. And it is a 2% year-over-year number, or is there a reason to think that with productivity it could be better than that?

Some people will try to strip out the numbers to answer your questions. Let me come back to it in a minute or two.

And my last one, if you wouldn't mind, just a technical one. Given that you have a blackout around earnings reporting dates, did the pre-announcement on October 18, did that free you up, I guess, from the blackout? In other words, were you able to repurchase shares between the pre-announcement and today's full release?

I will let Kim Rivera, our General Counsel, handle that question because I don't know for sure what the answer is.

For a period of time, yes, that would have allowed us to repurchase shares.

(Operator Instructions). Art Henderson.

Luis, we saw an uptick this quarter in minority interest, and I was just curious if you could explain that and what we should expect going forward with respect to that line item?

Sure. It was driven primarily by two factors -- increased profitability of our overall enterprise, and number two, a higher proportion of JVs as part of that mix. Going forward you can expect it to be similar to our operating income as it was this quarter. That would be a good way to think about it.

Okay. That is helpful. And then, Kent, can you talk a little bit about commercial contracting dynamics? I know a year, a couple of years ago, that was a hot topic, and I just was curious what the current environment is when you go to the table with managed care? I know it is always difficult, but can you talk about that a little bit?

The environment, I guess, it is the same and different. It is the same in that we have got lots of intense battles going on every single month of the year. In aggregate, things have been a little bit more stable the last 12 months than the 12 months maybe two years ago or three years ago, but it does not feel like a trend to us. It just feels like a temporary relative lull in the battle.

Okay. Going back to the cash flow, I guess, comments that you made earlier, I just want to make sure I understood this correctly. With respect to near-term cash flow deployment, you are saying that you are just building cash at the moment looking at the fourth quarter. Is that the way to think about it near-term?

We did what we did in the third quarter because it seemed like the right thing to do, and we have not decided what we are going to do in the fourth quarter.

Okay. Last one, just in terms of the DSI integration, I know you have quantified expenses around that. Can you talk about what you are doing right now with the DSI integration?

When you say what we are doing, let me take a stab at it, and then you tell me if I am not being useful. The integration is going quite well. We have got, I think, everybody on the same IT platform. We have got to get everybody on the same benefits and other human resource policies. We have got to rationalize reporting relationships because some of their folks are going to switch and report into regions and divisions of old DaVita and vice versa. So that is the kind of integration stuff that is going on. Is that responsive?

Yes, that is why I was curious. I assume that some of the IT integration takes longer than some of the other things. Is there a way to think about what gets done first? I know they are all working in tandem, but anyway to think about that, Kent?

It does take longer. To be honest, I don't know when this one is scheduled to be done. I'm going to guess -- I'm just going to guess six to nine months. But somebody maybe will be able to before the call is over to get the real answer, although we may not have it here at the table.

(Operator Instructions). Justin Lake.

I just wanted to go back to my question originally around fourth-quarter share repurchase. I cannot remember if you actually answered that specifically or not. Did you buy shares during that open window you had in the fourth quarter?

No, we did not.

Okay, great. And then just last question, any update on the potential for a greater bundle or an ECO type of payment from Medicare?

No, we continue to get some positive feedback, but there is nothing you can take to the bank.

And back to the DSI IT integration question, it is scheduled to be done by March. So six months since we started it.

And one other follow-up, Gary Taylor I believe had a question regarding cost structure. The answer to that is, you can roughly think about it as inflation growth. Labor would have some productivity, but all the other lines just think about growing within inflation.

Is that helpful?

Gary is not on, so he cannot respond. I will go back to another point that someone brought up. I said I was 90% confident or some percentage confident that DSI had lower NAG, non-acquired growth, than we did, and we have that confirmed. Theirs was lower than ours.

Darren Lehrich.

Just a quick follow-up. In the ancillary services strategic initiatives segment, it is still growing nicely. You did cross over to a slight operating profit here. Do you think that is the inflection point? Was there anything unusual to call out that got you over that hump, and should we be thinking about more consistent profitability over the next 12 months in that part? You have had guidance out there, so I'm thinking it is somehow incorporated into the guidance.

Well, you are right. That is incorporated into the guidance, and there is no reason to expect anything dramatic there one way or the other. Because it's a portfolio of five, six, seven little things, some not so little, some quite little, some pretty pure R&D and, therefore, designed to be money losers versus others that are designed to do get to profit, and some of them have. It is so tough to predict. But there is nothing dramatic going on, and it is incorporated into the guidance.

(Operator Instructions). We have no further questions at this time.

Okay. Well, thanks, everybody, for your interest. We will work hard for you until the next call three months from now. Thanks.

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