德維特 (DVA) 2011 Q4 法說會逐字稿

Good afternoon. My name is Demario and I will be your conference operator today. At this time I would like to welcome everyone to the DaVita Q4 2011 earnings conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer session. (Operator Instructions).

I would now like to turn the conference over to our host, Mr. Jim Gustafson. Sir, you may being your conference.

Welcome everyone to our fourth-quarter conference call. We appreciate your continued interest in our Company. I am 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 the actual results to differ materially from those described in the forward-looking statements.

For further details concerning these risks and uncertainties please refer to our SEC filings, including our most recent quarterly report on Form 10-Q and annual report on Form 10-K. Our forward-looking statements are based upon information currently available to us and we do not intend and undertake no duty to update these statements for any reason.

Additionally, I 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.

Greetings. Let me first repeat Jim's thanks for your interest in our/your Company. The fourth quarter was a strong one and 2011 was a strong year, both clinically, operationally and financially.

Because we just completed a fiscal year I will cover a few more topics than usual. Number one, as always, clinical outcomes. Number two, 2011 acquisitions. Number three, a brief investigations update. Number four, a little snippet of info on DaVita Rx, our specialty pharmacy group.

Number five, the concept and potential reality of integrated care. Number six, our outlook going forward. And number seven, discuss a little bit of recent organizational announcement. I will try to be quick since there is more than usual.

First, our clinical outcomes. We always present those first because that is what comes first. We are first and foremost a caregiver company serving now approximately 142,000 patients, about one out of three in America.

With respect to adequacy, which is essentially how well we're doing in removing toxins from our patients' blood, this quarter 97% of our hemodialysis patients had a Kt/V greater than 1.2.

And with respect to vascular access, 69% of our patients have fistulas, the preferred form of vascular access. For these and virtually all other clinical measures our patient outcomes compare very favorably to national averages.

And I will take a moment to say that in 2011 for the 11th year in a row we are able to state unambiguously that we had better clinical outcomes in the prior year, which means also our best ones ever. We hope we can repeat those words to you in one more year at the beginning of 2013.

Moving on to number two on the acquisition front. As you know, most of you, we closed and are integrating DSI, which added 83 centers, net of divestitures. The integration is going solidly.

But in addition to that we closed acquisitions of an additional 65 centers. All of these transactions added more than 10,000 new patients who are entrusting us with their essential care. And we are very focused on providing that great care, as well as ensuring good returns on a significant amount of your capital that we deployed in that fashion in that year.

Third, I would like to give you a brief update on one of the litigation investigations, the 2011 US Attorney physician relationship investigation that we have discussed with you before. The investigation, as expected, is continuing. And they have now asked for testimony by some executives of the Company and some current and former members of the Board through subpoenas.

Asking for some live testimonies was to be expected. We have cooperated with their historical requests. We will continue to cooperate. At this point they are collecting information. No charges have been filed, and we look forward to beginning substantive discussions with the government, and are hoping that happens soon.

Number four, DaVita Rx had a very successful year. They grew revenue about 45% to over $300 million and are modestly in the black. They are now providing important oral medication management services for over 41,000 patients and providing strong clinical benefits to our patients and strong support services and information to our physicians.

On to number five, subject of integrated care, which we have talked about a little bit more lately. For those of you who are new to the concept, it is essentially a kidney care-focused ACO, to use some of the modern-day hospital jargon. It means we are going to hopefully manage the full $88,000 a year of total medical costs for Medicare dialysis patients instead of just the $33,000 or so that is consumed by dialysis. We have had very serious and constructive discussions with CMS discussing this and it is being seriously considered.

If we get the opportunity to do this, it will be a major opportunity to increase our value proposition to America -- higher quality, more services for patients, lower total cost primarily through reduced hospitalizations, and we think a very, very attractive return on capital to our shareholders because of that dramatically enhanced value proposition to the government and to society.

Too soon to tell. Always difficult to handicap, but we have never before been having conversations this specific and this serious.

Number six, moving on to our outlook. The message here is simple. We are maintaining our 2012 operating income guidance range, which is $1.2 billion to $1.3 billion. And that range captures a majority of the probabilistic outcomes when you take into account all the various swing factors with which many of you are quite familiar at this point.

And, finally, number seven, the Board, Dennis Kogod, our Chief Operating Officer, and me were very excited to announce the recent promotion of Javier Rodriguez to the title of President of DaVita. He will serve as a full peer to Dennis Kogod, and the three of us will work together in the future, as we have in the past as a tight team.

This promotion, not surprisingly, reflects the strong performance and leadership and growth that JR, Javier that is, has demonstrated in recent years, and in fact for many years. And with that happy ending note I will turn the call over to our CFO, Luis Borgen. Thank you.

Thanks, Kent. We had strong operating income and cash flow in the quarter driven by strong treatment growth and improved cost per treatment. Offsetting these factors were lower revenue per treatment and a continued decline in commercial mix. Here are some specifics on the quarter.

Non-acquired growth was 4.8% when normalized for days of the week. Dialysis revenue per treatment was down about $5. The primary drivers were a declining commercial mix, our new agreements with the VA, and a declining utilization of physician-prescribed pharmaceuticals, and finally declined revenue from vaccinations, which were seasonally high in the third quarter.

Dialysis patient care cost per treatment was down about $7 from the prior quarter due to two main factors. One, a reduction in utilization of physician-prescribed pharmaceuticals, mainly Epogen, and two, seasonally lower payroll costs.

Note that EPO utilization was consistent throughout the fourth quarter. And based on our conversations with physicians, we expect utilization to be at current or slightly higher levels going forward.

Our fourth-quarter dialysis G&A per treatment was up slightly from the prior quarter, primarily due to IT projects and legal and compliance spend. This fourth-quarter G&A includes approximately $8 million for DSI integration, which was similar to the amount we incurred in the third quarter. We would expect some continued spending on DSI in the first quarter of 2012.

International losses were about $20 million for the year, in-line with our previous guidance. Note that in the fourth quarter we changed the presentation of internal spending on our financial statements, moving our international results out of the US dialysis segment to be reported as a part of our strategic initiatives. Previous quarters of 2011 where recast to reflect this recording as well.

We made this reporting change to provide more clarity in the economics of our core US dialysis business.

Operating cash flow for 2011 was unusually strong at $1.18 billion. We are guiding 2012 operating cash flow to be lower, with a range of $950 million to $1.05 billion. This is because 2011 cash flow benefited from the favorability and the timing of a number of working capital items, primarily related to the timing of cash tax payments due to the bonus tax depreciation.

As we look to the first quarter of 2012, operating income is likely to be down sequentially as operating costs will increase due to fewer treatment days over which to spread fixed costs in the quarter; seasonally higher payroll taxes; and an increase in pharma costs due to reduced rebates in our new Amgen contract; and some increased G&A investments.

Looking at our guidance for the full year 2012 compared to our Q4 2011 run rate, you should consider a number of factors. Tailwinds include the Medicare market basket increase and a continued treatment volume growth, coupled with the impact of integrating DSI.

These above factors will be offset by some headwinds, including higher EPO unit costs and increased G&A investments. We expect G&A per treatment to be about $2 higher in 2012 versus 2011, reflecting increased spending in various areas, including IT, international, legal and compliance, growth in DaVita Rx, and some investments in VillageHealth. In addition, payer mix remains uncertain into 2012.

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

(Operator Instructions). Matt Borsch, Goldman Sachs.

Can you just talk a little bit more about the integrated care opportunity? And what do you think might be the fastest timeline along which that could progress? And what do you think -- what capabilities do you think you would need to build or partnerships you would need to have -- I don't know with managed care or other -- to be successful there?

Certainly. We are a little bit schizophrenic on this issue. On the one hand, so excited. We have been working on it a long time. And on the other hand, we have great trepidation in talking about it, since you can never predict for sure what the government will decide to do and when. And even if they come out with a request for proposal, will it be a quality one that we could participate in?

So with all those caveats we will attempt to answer your question. As to timing, the soonest Request for Proposal might come out for comment would be in a couple of months. We are not predicting that, but that is answering the question. As to how late it could happen, it could be never, but we think we have got a good shot.

As to capabilities, we have been preparing for some time, in part through our demonstration pilot, which we did with Medicare, with CMS, sharing all the data and design rules along the way. And so they have seen it in action. They know that medical costs go down, clinical quality goes up, and patient satisfaction goes up, as well as physician satisfaction as a matter of fact. And they have seen similar results from the work Fresenius has done, our competitor in the same area.

So in terms of capabilities we can pretty much do it on our own. And while there will be some exceptions to that, we think they will be relatively modest. Of course, I have to qualify that by saying since we haven't seen the RFP yet we can't be sure that that answer is correct. Did I hit every part of your question?

I think you did. Just on the last answer there, I gather you have the capability to do it with what is within your company in terms of maybe taking it to the optimal level with everything that is involved in population health management if you're responsible for that cohort. Again, you think primarily you have that in-house and you don't have to do significant investment to get there?

Well, two different things. We have the capabilities in-house. It will take investment to scale those activities if we get the kind of pilot that we are hoping for. So a big, big distinction to make there.

Okay, fair enough. If I could just -- one more on the commercial mix. Are you -- would you say that there is incrementally more pressure from the commercial payers on reimbursement? Is dialysis something they seem to be focusing on more heavily? And how are your negotiations, if any, proceeding along that front?

I will tackle one that one too. Before I do, as you refined your question, I feel I should add one additional note to my answer. Which is in the beginning of scaling for a big integrated care undertaking, it could be we would do some outsourcing as we build our scale.

So I was giving a longer-term answer. And recognize that you might have in-part been asking about the scaling period. And if we get to scale, we're not sure which parts we will be able to scale on our own versus temporary use of others. But now onto your last question.

On the private payer side it is super, super intense, which is the same way it was last year and the year before and the year before that. It doesn't seem like that ever changes.

So in terms of the rate of increase, you're not really seeing differences in terms of outcomes with a greater -- I don't know that we could even call it -- maybe it isn't a greater focus on cost containment, it is the same focus on cost containment. The dynamic is about the same, is that fair?

I think the dynamic is about the same. And what we have always said is every year we win some victories. We suffer some defeats. There are a bunch of ties. And it is a little bit like one football season to the next. It is real dangerous to extrapolate, because you got tough opponents out there.

And so while we wouldn't pause at any particular structural change in the world, nor any sort of systematic change in intensity, nonetheless, you never want to get complacent and certainly we don't.

Okay, got it. Thank you.

Kevin Ellich, Piper Jaffray.

Kent, going back to your prepared comments, or maybe it was Luis, I think you indicated the physicians have stated that Epogen use, or the physician-prescribed drugs would be either flat to maybe slightly higher in 2012. I am just wondering what type of visibility or why that would -- why it would go up?

That remains dynamic. We have rolled out various protocols and as we settle on the final one we think that flat to up is the most likely scenario at this point in conversations with physicians and the data we're seeing.

It is so difficult to predict, because there has been such change in the science, in the government guidance, in the debates, in the articles on anemia management that you have a lot of doctors making some changes to their prescription pattern for any of those number of reasons, and then waiting a month or two or three to see what the results are. And see if they are content as they stare at their patient population and look at the percent that is between 10 and 12, sub 10, between 12 and 13, above 13.

And so what we do is the best we can in incorporating all their opinions into any amendments into the protocols, so they essentially end up being the physicians' own protocols.

And then helping facilitating, supporting them and the results of the broader population and continue to fine-tune what they think is right for their patients. So it is pretty dynamic, but the general drift of what we hear from our doctors is exactly what Luis said.

Got it. Okay, and then I guess just shifting back to the integrated care. I think maybe a month ago we noticed that you guys opened up a primary care clinic in Tacoma, Washington. I'm just wondering what the strategic rationale is behind that? Is that a revenue driver or a way for you guys to curb your own health care expenses? And then what is the expansion plans for other primary care clinics?

The short answer is both. We have about 1,000 citizens of what we call the DaVita Village in the Tacoma area. And there, as happening elsewhere in the country, our medical costs continue to go up and up and up, placing more of a burden on our people and on us. And we're hoping this clinic can be a way to change that trend, while simultaneously providing better service to our people and their families.

Having said that, we think there could be a real business model there that we can provide to other employers of different sizes. But way too soon to make any forecasts. I would characterize it as very spirited new business R&D right now.

Understood. Then just thinking about home hemodialysis, earlier this month United Healthcare issued a medical policy for home hemo. I am just wondering if that has changed your opinion -- or I guess what is your take on home hemodialysis at this point?

I'm not familiar with the new United policy, so perhaps you could fill me in, or certainly I am sure six or seven people will once the call is over.

But our posture on HHD, home hemodialysis, and we do more of it than anyone in the world at last look, is unchanged, which is there is -- what we always say is people who say that it is going to grow, grow, grow, grow dramatically, it should be right for lots and lots of patients, we don't see yet the data to support that conclusion at all.

On the other hand, those who say that it should apply to no patients -- our data doesn't support that either. As to what percentage of patients it will be a superior form of care for is not clear yet. And then in addition there is all the complexities and subtleties around government reimbursement, what they allow, what they don't, what constitutes evidence to them, et cetera.

So the picture is pretty murky once you combine those two. We remain very, very committed to the work we're doing in that area and our collaboration with the federal government to try to figure out what the right policies are based on high-quality, objective, nonpartisan, if you will, analysis.

United's policy basically says that HHD is a proven therapy as an alternative to facility-based hemodialysis for patients who apply to four criteria. So basically I think they're basically saying the clinical data is good enough.

That is good. And, again, there is an entire spectrum of opinions on this subject, which is why we advise you to be careful about paying too much attention to people at either end of the distribution.

And clearly by the number of patients we have on it we think it is very, very justified for some patients. And better for them either in terms of quality, or life convenience, the ability to keep on working, the ability to integrate dialysis care more into their lives and their family's lives. So we are clearly supportive or we wouldn't be doing everything we are doing.

Then just one last quick question for maybe LeAnne. I am just wondering what is the latest on the doc fix? Is there anything such as the bad debt coverage that could impact you guys?

Yes, as a matter of fact, the preliminary analysis or information is out. We are reviewing that and it would appear that dialysis bad debt reimbursement will be part of the pay-for for the policy.

Do you know how much it will impact you guys? Your bad debt is only what, 3%, if that?

You are speaking to the provision on the income statement?

Correct.

Yes, it is 2.9%. That is a much -- that number encompasses more than the Medicare bad debt.

Okay, got it. Thank you.

Gary Lieberman, Wells Fargo.

Maybe just to follow up on that last question, LeAnne, in terms of thinking about the bad debt permission provision in the doc fix bill.

So the way -- could you maybe just give us a refresher on the way it works now? So 20% of the composite rate is a co-pay. And is that the piece that is going to be affected by this potentially?

Yes, so it is a little complicated. Let me see if I can be clear. Right now we are able to claim Medicare bad debt in certain circumstances on what used to be the old composite rate -- so not on the drugs.

And, yes, that would be the 20% that would not be paid by a third -- or a second-party or third-party. And that calculation is further reviewed in a way that if the dialysis facility was profitable or lost money on a Medicare basis, so a couple of filters that you have to go through before you are determined to be eligible for the bad debt.

So if that composite rate -- is it around -- it is like $135 or somewhere in that range, so is that the starting number and the way to think about it?

I have lost track. It is probably the $150. I can't remember if all the add-on was in there or not. Maybe [Jim Holter] or someone could help us out with the exact number, but it is in that $135 to $150 range.

And then what are the additional filters? So if we were to kind of just walk through the process to filter down -- so if we were to try to estimate an impact what would some of those filters be?

The primary filter is whether or not that facility lost money or made money on a Medicare basis. And so if it is making money you're going to be limited as to what you could claim and you may not be able to claim any of it.

Got it. So that is how it currently works.

Correct.

Any estimate in terms of what percentage of your facilities wouldn't be able to claim anything since they are making money?

I don't have that number handy for me.

Then on the -- I guess just on the income statement, the bad debt expense that you're currently reporting is that primarily -- is there a split? Is it half commercial, half Medicare? How do we should we think about that?

Again, I don't have that data right in front of me.

I guess maybe on another topic, Kent, there is -- for the first time this year, I guess, there is the potential that a competing ESA might come to market. And you all have signed a long-term contract with Amgen. But how should we think about the -- I would assume it is a potential benefit to you still. If a potential drug -- competing drug comes to market how should we think about that?

A very fair question. And the answer is it is not clear in the short term whether it is in our best interest or not for something new to come out. We signed a long-term agreement, as you know. We signed it with Amgen for EPO, which is the gold standard for anemia management. And we walked through the strategic and logical filters for the decision we made. And said that over the seven years on a net basis this could work to our advantage or our disadvantage.

But one thing that is very clear is that Amgen and our interests are aligned for the most part. And so I can't give you a generic answer whether a new entrant coming out soon is good or bad for us without waiting to see what happens and at what price, what pickup there is, et cetera, et cetera.

All right, great. Thanks for the help.

Justin Lake, UBS.

I guess I will just take a quick shot at this bad debt first. Can you just give us the number in terms of, LeAnne, that 100% goes to 65%, I believe. How much does that impact you by? Maybe you could just tell us how much you collect right now in Medicare bad debt?

LeAnne, do you know the number? And for the folks out there I just want to apologize, LeAnne is actually in a different city and so there might be some awkward handouts back-and-forth. But, LeAnne, do you know the number?

I can give an estimate, and that estimate would impact us about $4 million in the first year. And it does, it phases from 100% of recovery to 65% of recovery over the three-year period.

Okay, so if it goes to 30 (inaudible), LeAnne, that might be 12 -- maybe with some growth $15 million by year three?

That would be a reasonable estimate.

Okay, great. Thank you. Second question, Kent, on the integrated care you talked about specific serious conversations. I just want to focus on a couple of issues there. In terms of -- could you help us -- it sounds like you are as close as you have ever been. Clearly an exciting concept. Can you tell us what you think maybe the two or three key issues that are keeping CMS from having published this that you're working on with them, or what is keeping this from having -- come out now that they are past the eight pioneer ACOs?

Certainly, but before I do that, LeAnne did take her best cut in the spirit of trying to be responsive on the bad debt estimate. And so what you got was our absolute best estimate. I just want to emphasize that the thing came out so recently. My understanding is just today or yesterday or something, and so we are still processing away. And if those -- if the estimate that LeAnne gave in good faith turns out to be materially wrong, we will get back to you as soon as we can, but it is a first cut at it.

Then, second, on what is keeping them from coming out with it. It really is that they were so consumed by all the pioneer ACO work and related hospital stuff. And then they turn into all the rest and they have got to finish comparing and deciding on which subset of all the rest they're actually going to take action on. And so that takes some time.

We do have it on assurance from many, many people that we are among the finalists. But whether or not that means we make it into the next round, which would be imminent, or whether we don't make it into the first round and have to wait for the second round or some other subsequent round, we just can't handicap, but it really is just them managing their workflow.

Got it. So you expect in the next several months there will be another announcement with these kind of integrated care, like you said, kind of vertical ACOs in different disease states. And the question is not really in your mind whether it is going to happen or not, more so are you going to be a part of it at and you think you will?

That is too definitive. They may opt to do no verticals -- that is still potentially the case. And remember even if they issue RFPs in a vertical they may be so unattractive that no one does them.

So while the odds are they're going to come out with some other types of ACOs beyond the hospital, it is unfortunately not 100%. So we're excited because we are in the red zone, but that is a long way from spring.

Just two more questions on this. In terms of the timing between a release and when you think this would actually going to place if you can help us there. If it came in the next few months could it start by 2013? And maybe how many patients you think it would start with?

All fair questions, and I will throw out guesses as long as everyone appreciates that is what they are, but we're striving to be useful.

If it comes out in the next few months, which would be the best case, and if it is a proposal that actually can work, where we can add the value for society and share in it, there is a chance it could be implemented on January 1, 2013. There is also a good chance that they would do a later date halfway through 2013 or the beginning of 2014.

In our favor is the fact that we have been working so closely with them. And our industry works collaboratively in a very different way than many others. And so our ability to dance with them to get something done where they feel they are going to get the right level of reporting, the right level of transparency, the right amount of accountability, the right amount of systems integration, our ability to deliver that is really superior to most other health care segments. All of that says maybe it could happen January 1, 2013, and then you know all the reasons why it might not.

Great. And number of patients?

Number of patients that is anybody's guess. I am sorry that one even -- even I can't go venture and guessing on that.

And the biggest, I think, push back I get when talking to people about this chance is that in terms of just the timing. If it starts in 2013, by the time it becomes material it is fairly far out in the future, and so I think the key in terms of investor interest will probably be the level of transparency there is to further growth in the RFP.

Meaning this is not just going to be X number of patients and we will take another look for three to five years and come back. Do you expect that there is going to -- it is going to be fairly explicit in the contract that regardless of how many patients you start with, if the industry hits X outcomes data and Y savings targets then it will be very explicit that this will scale to something more meaningful without having to go back and request it? It will be kind of explicit in the contract?

It is the right question. I cannot handicap the answer. I do think that if we get something good, we and Fresenius and others will do such good stuff with it that independent of what is contractually or regulatorily stipulated, we're going to have a heck of a good story to tell. And even though penetration can take a while, if it is penetration of a relatively proven capability valuing it becomes simpler.

Right. One last question on mix. Can you tell us where you are now in terms of percentage of patients in commercial, how much that change sequentially? Is it getting worse or better.

And for 2012 can you walk me through -- the economy seems to be getting a little better from a jobs perspective. And then you have COBRA kind of expiring for some people, and maybe talk to us what you are expecting for 2012? And that will be it for me. Thanks.

This is Luis. Where we are at the end of Q4 is that we are at 10% commercial mix. On a sequential basis in Q3 to Q4 we saw a similar rate of decline. And on your third question it is one of our swing factors. It is highly uncertain of where that is going to shake out, so it is difficult to predict.

Do you expect it to go down in 2012 though to continue moderating or --?

Our guidance includes several scenarios. It is difficult to predict, and so it is something that we have factored in to our overall guidance.

Okay, great. Thanks for all the time.

Just one clarification, which may help you think about it. We're rounding down to 10% as of Q4 to be clear on that point.

Great, thanks.

Ben Andrew, sales research analyst.

Ben Andrew, William Blair. I don't know if I changed affiliations. But I wanted to ask Kent briefly about your thoughts on the risk profile of the integrated care model. Obviously, the demonstration work you have already done has given you some pretty good visibility that you have communicated. But how would you hope to treat outlier patients? And are there other parameters of a RFP that would make it more attractive or less attractive to you, you could walk us through please?

The larger the scale that they allow, the more open we can be on accepting versus not accepting outlier risk. And calibrating, regulating and administering outlier risk is actually something that CMS has to do a fair amount of, including in the bundle under which we now operate.

So that will be a highly analytical exercise between us and Medicare if it happens. And so we are not at all worried about it as long as we bring the right attention to it and they share the numbers. It should be a case where both sides can win. And they want to give us enough scale so that the outlier pool is smaller and they capture more of our potential value, and we work collaboratively with them and so they see the upside for them. But it is pretty impossible to predict ahead of time until you're doing that final serious number crunching.

Then maybe talk about any other aspects of the RFP beyond that one that would be important to you as an organization to wanting to accept or to bid for an RFP.

I would say the most important one is our ability to work with all Medicare patients in a clinic. What is very, very difficult in terms of achieving the kind of systemic, dramatic change that we are contemplating here is when a subset of the patients in a given center are involved.

Because without the upside you cannot afford to add all the additional integrated services. And without that investment you can't generate the results. And it is much, much more expensive if you're dealing with small pockets of fragmented patients who stretch across an entire country as opposed to much more concentrated patient populations within a given geography. That is one of the primary fulcrums.

Then as you think about, again, scale getting at these are the sizes of the demonstration projects that you undertook, would those be compelling enough to, again, to want to participate, or is that just it wouldn't be enough to compel you?

Could you say the question again please.

Given the size of the demonstration programs that you did and the cost savings that you appear to have seen, and more importantly the improvements in patient outcome satisfaction and physician outcome, are those scale of projects sufficient for you as an organization at this point to want to participate? If they tried to severely limit the scale would it still be compelling just to, again, collect more data, get more experience and then hope that they would expand it over time?

Well, I guess the answer -- let me grope for a moment. If we got to do -- our existing demonstration project is in one geographic area. And if they allowed us to do that same thing in 20 geographic areas, we would absolutely do it. So there is enough local scale where if we got to do multiple local things of that size and spread the fixed overhead above it that would be attractive. Am I answering the right question?

Yes, that is helpful. Thank you. I know you're not going to give a number. I am just trying to get a flavor for where your interests are there.

And then as you think about the skill sets that DaVita has today, and you talked about a transition period perhaps into a fully integrated model over time, what would be the most critical aspects for you to outsource or to add on a transitional basis if they gave you the go-ahead say for Jan 1, 2013?

I am not prepared to answer that, so I will try and you'll have to recognize that my answer could be pretty feeble. But if they were going to give us the opportunity to take care of a lot of patients we would probably have some call center issues. We might have some technology and technology development issues just in terms of interconnectedness. Those are the two areas where we might have to outsource on a transitional basis.

Okay, great. Thank you very much.

Matt Waite, Private Analyst.

One -- a couple of questions here -- going back to the EPO supply contract with Amgen. If you looked out and potentially two to three years there was price compression from competing ESA drugs, would the contact at all allow you to benefit from that?

We can't, for all sorts of obvious reasons, disclose precise contract terms. And so maybe let me stumble my way through the filters we went through in thinking about this contract. And we do feel very good about new partnership we have with Amgen and that is an important context within which to think about this.

But you have to assess the probability that a new drug comes out in the market. Then you have to predict what price it will be at -- how different from Amgen's price. Then you have to predict what percentage of physicians will actually take the risk of moving off the gold standard, given the price. Then you have to take into account the pace at which they will do that.

Then you have to take into account the price those providers have to pay for EPO on the patients and with the physicians for whom they still have to use EPO, because not all their affiliated doctors are going to want to switch to a new and unproven drug.

Then you have to take into account the fact that if a new drug successfully clears all those filters, and how long it takes, you finally must incorporate the fact that at that point it is strongly in Amgen's long-term best interest to come back and work with us rather than become too noncompetitive. Because this is a very significant net present value drug for them no matter what, because it is so important and so proven.

So if you run through that gauntlet then you can answer your own question about what dynamics might exist three or four years downstream without me talking about exactly what the paragraphs of the contract say. Is that helpful?

That is. I appreciate that. That is helpful. Two other quick questions here. Did you guys -- looking back in 2011 here -- notice -- was there any noticeable increase in blood transfusions relative to what you have experienced in the past?

First of all, we don't have good transfusion data, no dialysis provider does, because we don't get to capture it. Almost all that stuff happens outside our centers. And as much as we would love to get all that data, no one has an obligation to share it with us. So we look forward to working collaboratively with CMS, with Medicare in order to see if that is happening, and if so, to address it.

Because, as you know, doctors have this tough task in a world of very fluid science and very fluid clinical consensus around anemia management of on the one hand managing the risk on the downside, which means people get anemic and need a transfusion, against the risk on the high side of having too high a hematocrit or hemoglobin and the potential for harm in that area.

And so they had to balance those two. And the exact science and exact formulas and exact reality exact analysis to drive a formulaic answer to that that you can apply it to each patient doesn't exist.

So you have thousands of docs out there using their best judgment to balance those two things. It is a long way of saying, but hopefully a helpful way of saying, that we don't have the data. We will work with Medicare to evaluate the data and then we will work with docs so that they can strike that balance.

And then last question just switching back to integrated care. Can you talk -- how would you see VillageHealth and DaVita Rx sitting in there and what kind of potential synergies would you expect?

So the question was how would DaVita Rx fit into integrated care?

Along with potentially maybe VillageHealth or any other of your (multiple speakers)?

Right, thank you. Well, VillageHealth is, for those of you who don't know, the name of our integrated care group team effort initiative, however you want to label it.

So it was founded based on the belief that one day we would be able to do truly integrated care. And in fact it is the vehicle through which we have done the demonstrations and other analysis to show that it is the right path for American ESRD.

So for VillageHealth it is hand in glove if they give us the right architecture. And then DaVita Rx is a powerhouse capability that fits within it, because once you're managing the total patient you want to do integrated medication management. And that is what DaVita Rx does right now for our VillageHealth patients and would for any patients that came in under a pilot.

Thank you.

Kevin Fischbeck, Bank of America.

A few questions here. Just a little bit about your international growth plan. Obviously, you guys have chosen the route of de novo startups, but I have been a little bit surprised that you have done a number of things across a number of different countries all at the same time rather than focusing on a couple of geographies. Can you just tell us your thought process around that expansion?

A very fair question. It would have been safer to just go into one or two spots and focus and do that for a few years, stub our toes inevitably, since we haven't done this stuff overseas before. So that would have been safer.

We decided we would rather put incremental capital and talent at risk or in play in order to be more aggressive, recognizing we probably will make more mistakes but in the end hopefully put ourselves in a position where it is relevant sooner.

In addition, in some parts of the world we were worried that if we just sat out for the next six years in order to be conservative, that we would have significantly impaired our ability to become a leader or a co-leader. And so the extra cost and risk of doing more sooner has to be compared to the additional benefit if we pull it off.

I guess, given that thought process and the willingness to deploy some additional capital, would you expect that 2012 might be a little bit faster deployment than what you would have thought when you first announced this initiative or do you still feel like that annual spend is the right spend?

First of all, right now things are so uncertain and there is so many swing factors since we are so tiny in a number of these countries that it is very difficult to forecast.

We talked about this year we would be in the neighborhood of a $20 million loss, and we were at about $22 million. Right now if we had to estimate we would say that we will lose in the high 20s in this next year.

Now that is actually a disappointment, because we wanted to be at the same level of loss. And for us that kind of percentage difference in what looks like it is going to happen versus what we expected is really embarrassing and unacceptable. But that is where we are. And it gives you some flavor for right now the variability in our performance and accomplishments as we learn our way into the international world.

What is the delta to that? Is that because you're doing more revenue and therefore more losses or you are saying that actually -- the actual performance -- the revenue has been in-line, it is just the performance on that revenue has been disappointing?

I think that is a level of detail I won't go to since the forecast is still so lively for such a small chunk of the business. I think that level of detail just wouldn't be very educational for you. But it is the net number, so it takes into account the overhead spending and the actual operating revenue and expenses. And to start parsing through it when it is so tiny, I think, could be really misleading precision.

Then you mentioned that the VA rates were a headwind here, I guess, in the quarter. Are we now done with that? I guess obviously VA can always come back and open things up again, but to your knowledge are we done with that for the near-term or is there more to come?

I appreciate the question. And, first, I would just advise that I gave you some wrong information -- that our international losses and 2011 were 20, not 22, which then makes the difference between high 20s in our -- in 2012 versus our actual in 2011 even worse.

And now that I gave you that correction, your question was what?

It was VA. I guess you mentioned that that was a little bit of a headwind.

Right, I've got it. I have got the question, now what is the answer. It is hard to know what they might do when and how we might respond. So there is nothing dramatic happening right now, but I wouldn't want to say to you we think it is going to be stable all year, because we just don't know. And on the one hand we take care of a lot of vets and they don't want that to change. They, on the other hand, have a lot of power. So how it plays out I just think giving a micro prediction would not be helpful because it would presume a level of insight on our part that we don't have.

Suffice it to say that we are investing a bunch in trying to develop a stable, high value-added relationship with them where both sides feel that we are at a reasonable equilibrium. Maybe we are there now, maybe not.

And last question. I guess everyone is focused on budget deficits and when the next debt ceiling is going to be hit and what might be the results then. How do you think about your ability to offset rate cuts going forward? Do you feel like your business is fully adjusted to the bundled rate or is there more opportunity over time to become more efficient that might allow you to help mitigate what seems like inevitable rate cuts to most sectors going forward?

I would say three things. Number one, from an expense point of view I think we are more or less at a post-bundle equilibrium.

Number two, having said that, we strive for productivity improvements every single year. We always try to select some parts of our cost structure to focus on and see if we can innovate our way to savings. So when I say equilibrium you need to evaluate the use of that word in that perspective.

And then -- well, maybe I would just leave it at those two comments. Did I miss a part of your question?

No, no, I think that covers it. Thank you.

Gary Taylor, Citigroup.

A couple of questions. I am sorry, I must have missed right at the very beginning. I assume Luis went through the change in revenue per treatment sequentially, and obviously the VA was part of that. Did you say the VA was the biggest part of that sequential decline?

Let me repeat those phrases for you. The four factors that we cited were, first, declining commercial mix. The second one was new lower VA rates. Those rates came into effect on 10/1 of 2011 and so we had the full impact in Q4 versus just one month in Q3.

The third factor was a decline in physician-prescribed pharmaceuticals, i.e., utilizations. And finally we had a quarter-over-quarter decrease in the amount of revenue related to vaccinations. So those are the main factors of the $5 drop from Q3 to Q4.

The impact of pharma on the top line under bundling is what -- which pharma would be driving that?

Well, it would be the unbundled contracts.

On the commercial side?

That is correct.

Got it. And anything on just commercial bundled contracts in general? Any -- I know your competitors talked the last couple of quarters about some that has kind of weighed on sequential results moving unbundled commercial contracts into bundling. You guys haven't talked a lot about that. That doesn't sound like it was a material factor.

That is correct.

And on -- Kent, just on your comment about the investigation, you were referring to Colorado, correct?

Yes, sir.

Okay, I just wanted to make sure. And then on integrated care, I guess I have two questions. One, you would agree that the savings opportunity is on the incremental $50,000 or so of spend primarily, right?

Yes.

And is there -- I guess, when we look at -- we only have the benefit as far as I know of seeing publicly the first three years of those demonstration projects. And we didn't see what the savings amounted to in years four and five.

And I know, for example, in the Fresenius data they saved more in year two than year one. They saved more in year three to year two. I think they've implied to the market they saved even more in years four and five.

So the question is if this was rolled out, is there still the effect that the amount of intervention/integration you're doing means that the savings grow cumulatively or is it that you're learning through the five years of that demonstration, and the savings upfront could be more impactful than were able to be demonstrated in the demonstration projects?

A very fair question. Statement A., we have gotten better every year and that continues. Answer B., actually in my mind our rate of learning has been disappointing and we can get a lot better than we are.

And so unfortunately answer C., is the impact, both because of the challenges of scaling and because we have not done as well as we should have in terms of being more creative, more aggressive, more innovative that we have still got a lot more learning than I wish we had.

Enough to see great results, exciting results and be optimistic, but when you think about scaling it and executing, we don't give ourselves impressive grades for how well we have done the last few years.

Do you have an estimate on that $50,000, what a reasonable savings percentage might be or do not want to go there yet?

I don't think it is a good idea to talk about that.

Very last question. Luis, on the tax rate for 2012, is that primarily state/local income tax effect that is bumping up a little bit?

It is two factors. It is partially state. It also has to relate with the international losses, the deductibility of those. We can't do those in the current year, and so that puts pressure on the overall ETR.

I'm sorry, I lied. I have one more quick question. You talked about the pharmaceutical run rate having stabilized. Any additional thought to subcu? We have seen some data suggesting some of the small providers have moved a little bit more towards subcu dosing on EPO. Where is DaVita at in terms of considering the possibility of that?

I don't know of any significant movement among our physicians to use subcu, and nor has there been any discussion that I have been a part of. So I don't have an answer other than probably there is nothing going on because none of our doctors are talking about it.

If some of our doctors start to talk about that and move in that direction, we would certainly report back to folks. But I just haven't seen or heard of anything like it and so that is where we stand.

Okay, thank you very much.

At this time there are no further questions. I would now like to turn the call back over to the panel for closing remarks.

I will just pick up on one issue that came up, which was Medicare rate cuts. That while it is true that we have a lot of Medicare patients, and it is rational to expect that Congress may do something with Medicare rates, it is also true that we are about the most discrete health care service there is with 85% to 95% of our centers freestanding. They only do one thing, and all the expenses are submitted in a cost report to the government every year.

We personally have about 150 centers that currently lose money as it is. And so in our segment if the government would get inappropriately aggressive and cut rates, they could be faced with some serious center closures, in centers that didn't have enough private patients to sustain the subsidy on the Medicare side.

And so while all Medicare providers have to be worried about rate cuts, we in some ways have arguments of clarity of data and consequences of a mistake that other segments do not have.

With that final comment, I want to thank everyone for paying attention to our Company. And we will do our best for you in the next three months until we talk again. Thank you.

Ladies and gentlemen, thank you for your participation in today's DaVita Q4 2011 earnings conference call. You may now disconnect.