德維特 (DVA) 2012 Q2 法說會逐字稿

Good afternoon. My name is Candice, and I will be your conference operator today. At this time, I would like to welcome everyone to DaVita's Q2 earnings conference call. All lines have been pretty placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

Mr. Jim Gustafson, you may begin your call.

Thank you, Candice, and welcome, everyone, to our second-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; Jim Hilger, our Interim CFO; and LeAnne Zumwalt, Group Vice President.

I'd like to start with our forward-looking disclosure statements. During this call, we may make forward-looking statements within the meaning of the Federal securities laws. All 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 on information currently available to us. And we do not intend, and undertake no duty, to update these statements for any reason. Additionally, we'd 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 on our Form 8-K, submitted to the SEC, and available on our website.

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

Okay, thank you Jim, and welcome to everyone. Thank you for your interest in your Company and our Company. The second quarter was a rock-solid one, as, probably, you already you know from looking at the release. We did perform well; clinically, operationally and strategically. And I'll cover a few topics here before we turn it over to Jim. As usual, covering critical outcomes, I'll provide an update on legal proceedings as well, and then talk a little bit about our outlook.

First, clinical outcomes -- we always present those first, because that is what comes first. We are, first and foremost, a caregiver company, serving now approximately 150,000 patients in the US and some elsewhere, as you know. Rather than provide the normal clinical metrics, I wanted to take a little bit of a different path today and give you a sense of the dynamism, and our living our core value of continuous improvement, and just give you a sense of some data that I shared with about 3000 of our leaders from across America just a few weeks ago.

June was our best month ever in three categories -- fistulas placed; fistulas in use; and day-90 catheters. And looking at Q2 overall, it was the best quarter -- excuse me, the second-best quarter ever. Excuse me, the second quarter was the best ever -- can't read my own handwriting -- for Kt/V less than 1.2 and URR less than 65.

So, in addition to us still looking very good on the normal metrics we report, just wanted to give you a sense of how closely we monitor our continuous improvement. For some of those categories, we have had improvements every single quarter for over two years. And one of the great things about this is, not only does it mean that our patients are experiencing the benefit of higher quality care and better outcomes; but, also, those improvements and those outstanding absolute and relative levels of clinical performance drive reductions in hospitalizations and surgical procedures; and, therefore, drive savings to the US healthcare system, improving our value proposition each and every quarter.

On to the second topic, which is not nearly as positive. Just a brief update on our recently announced legal settlement. We did, as most of you know, agree in principle to settle the Woodard case for $55 million, plus attorneys' fees, and some other related expenses. This was an exceptionally frustrating situation, because we do not believe we, nor the physicians prescribing EPO to patients in our clinics in this period, did anything wrong. And please remember, the government thoroughly investigated these allegations on their own and decided not to intervene. But the individual that had filed this suit still had the right to pursue their claims on their own. And the sad fact is that sometimes agreements like this are in your best interests, and we respect that.

Third category, our outlook -- and here, I'm going to take a few minutes to put a fair amount of color around it, although there is nothing new in what I'm about to say; just important to refresh it every now and then. We are increasing our 2012 operating income guidance to a range of $1.275 billion to $1.325 billion, excluding that second-quarter legal accrual. This guidance captures a majority of the probabilistic outcomes. Of course, we could fall above or below. But maybe one doesn't fall above, but maybe we might fall below, and reach above.

Looking out further, however, let's restate some of the more significant business risks that you should worry about -- because we do -- as well as the strengths and upsides that we derive comfort from, and you should, too. On the risk side, I will cite for -- A., government reimbursement, no one needs any significant elaboration there; B., commercial patient reimbursement, because it does not only account for 100% of our profits, but in fact more; because private patients, unfortunately, have to pay much more than Medicare, in order to subsidize the losses we sustained on the 90% of our patients that are government-reimbursed. Not an optimal system for society, but it's the one we live in. This commercial patient reimbursement remains an area of risk, as a reminder. We just want to say that we may be forced, in some cases, to turn away patients rather than accept new patients at unacceptable rates. And there remains a lot of uncertainty around the impact of exchanges on our private patients, as it does for lots of other healthcare service segments.

Item 3 under risk factors -- oral drugs will be added to the bundle in 2014, at a currently unknown number. And item number 4 under the risk category, our new models of care, such as ACOs, the Accountable Care Organizations that everybody is talking about; and changing affiliation models for physicians, like employment by hospitals, but also everyone is talking about. The bad news is that when you have new dynamics like this, is that they may well create downside for us. The good news is that they may well create upside. And only time will tell.

Moving away from those four significant business risks, I'll cite six strengths and upsides that you can balance against those risks. Number one, excellent and continuously improving clinical care, that does significantly reduce shareholder risk, separate from its consistency with our mission. Second, our study volume growth. Third, the history of solid cash generation and deployment. Four, a strong national market position. Five, our capability to provide integrated kidney care, which significantly increases quality while decreasing cost. And customers are more and more open to that kind of improved value proposition, and willing to do the administrative work to put it in place. And then finally, number six, an extension of MSP; although we make no prediction about when that might happen.

So, moving away from outlook -- maybe giving me one moment to cover HealthCare Partners, which we expect to close in the fourth quarter of this year, consistent with what we've said before. As we discussed at our Capital Markets Day, integrated care is where we believe the health care puck is heading. This is not exactly an insight anymore. It's where a lot of other people think the puck is heading, too. And we are, and remain, very excited about the potential. As we had hoped, the announcement of our combination has precipitated a significant additional interest from a bunch of organization across America. And we are working with our wonderful new teammates, the HealthCare Partners leaders, to respond to all that interest.

And I will now turn the call over to Jim Hilger.

Thanks, Kent. During the quarter, we experienced strong operating income and cash flow, driven by strong treatment growth. Our non-acquired growth was 4.7% when normalized for days of the week. Dialysis revenue per treatment was consistent with the prior quarter, and our commercial mix was flat with the first quarter. Dialysis patient care cost per treatment was up about $1.50 from the prior quarter. This increase reflects higher compensation expense; higher travel expense, due to our annual national leadership meeting; and increased unit cost for Epogen. Please note that EPO utilization was flat with the prior quarter; and based on our conversations with physicians, we continue to expect utilization will be at slightly higher levels going forward.

These increases were somewhat offset by lower accruals for self-insurance reserves in the quarter. Our second-quarter dialysis G&A per treatment was down about $1.50 from the prior quarter. This decrease was primarily due to lower professional fees spending, and continued -- and a continued decrease in DSI integration costs, as the DSI integration is almost complete.

Note that in the second quarter, we had approximately $10 million in HealthCare Partners transaction-related expenses. These expenses, and the $6 million of transaction expenses that we incurred in the first quarter, are now reflected in our corporate-level charges, and not in dialysis G&A. Despite the fact that we have the nonrecurring transaction costs in the quarter, we view our Q2 operating income to be a fairly representative run rate; as we had some other operating items, including favorable insurance accrual true-ups previously mentioned, in the quarter, to offset these transaction-related costs.

On to international -- our international losses in the quarter were $12 million, reflecting higher legal and professional fee expense related to our development efforts. We now expect international losses to be in the mid-$30 millions for 2012. The main drivers for this change are the higher legal and professional fee expenses that I just mentioned; delays in closing certain transactions; and our decisions do not do some deals due to their valuations.

As an update on our international activities, we have recently entered Saudi Arabia, expanded the number of centers in India, and were awarded a second management contract in Singapore, and also received a license to operate in Malaysia. In addition, we expect to be operating centers in China in the third quarter.

All this underscores what we have said before -- while international expansion is a long-term growth opportunity, it will require investment and continued losses in the near term.

Now, turning to cash flow -- operating cash flow was $202 million in the second quarter. We still anticipate full-year 2012 operating cash flow will be in the range of $950 million to $1.05 billion. This range includes the expected payment in 2012 of the $78 million legal contingency that we recorded in the quarter.

Now, with respect to HCP -- after HealthCare Partners' second-quarter results are finalized, we will include them in our planned S-3 filing, which hopefully will be filed in the near future. HealthCare Partners continues to perform according to plan, and its results are consistent with the 2012 and 2013 EBITDA outlook that we provided in June. First-quarter results were strong, and we do have an indication that EBITDA in the second quarter will be approximately $135 million. We repeat, this is on plan and consistent with expectations. But as always, our outlook captures the majority of likely outcomes. But actual results could fall above or below this guidance.

And in regards to the DaVita merger process with HCP, I'm happy to report that the transaction remains on plan. In fact, we're launching our bank financing this week; and the bond financing, hopefully, later this month or, potentially, in early September. Demand for the debt offering appears strong. In fact, we have already received commitments for 95% of our term loan A.

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

(Operator Instructions). Gary Lieberman, Wells Fargo Securities.

Thanks. I guess, maybe, just to step back to some of your comments on the G&A line. Was the $10 million -- that was included in G&A? Or that was not included in G&A. I'm sorry, that just wasn't clear.

Yes, Gary, that $10 million is reported in our G&A line in our financial statements. But in the supplemental data in our press release, what you'll see is the $10 million is now reported in our corporate level charges, and not in dialysis G&A. And that's for purposes of segment reporting.

Okay. And then, what was the amount of the med mal true-up?

We're not breaking out the different insurance true-ups. It was in a couple of different categories, Gary. But, in aggregate, it offset a bunch of the transaction expenses.

Okay. And then I guess, big picture, since you announced the HCP acquisition, obviously the Supreme Court ruled in favor of health care reform. So can you talk about the HCP acquisition in that context? And do you feel better or worse or any different about the acquisition, post-that decision?

I think that the most important response is, it wasn't a big deal either way. There were some upsides and downsides in each direction. And we think, independent of the specifics of that decision, that the trend is clear; the demand is clear; the need is clear. Having said all that, reforms staying in place probably means that ACOs and some other organizations that we think will reinforce the need for what HealthCare Partners does differentially well, probably accelerates those. And so, is a net incremental positive. On the other hand, if it had been repealed, there were some immediate P&L pickups that would have been kind of nice, but not strategically essential. So I think it's a slight positive. We've got Matthew, the CFO of HealthCare Partners here.

Matthew, I don't know if you want to add anything to that?

Sounds perfect. That's the way we look at it, based on that decision.

Okay. All right, thanks a lot.

Darren Lehrich, Deutsche Bank.

Thanks. Hi, everybody. Two things -- I wanted to just talk a little about international. I understand you've increased your losses. Can you just share with us the revenue and loss contributions from international in the second quarter? And maybe some forward-looking comments on the number of clinics that are in the works here for the back half of the year, just so we can put the international losses into more perspective.

Let me talk about the number of centers. And then Jim will respond to what you asked about the revenues and expenses, to the extent we're prepared to do that. I think the number of centers we had, approximately, at the end of Q1 was about 15. Now it's about 19. And there's some more in the pipeline. But with deals, particularly international deals, when you're learning, like we are, you can never be too sure if and when they are going to close. And so there is more variability than we're used to in the domestic side of the business. So on the center level and patient level, the growth is chugging along, with some fits and starts. Is that responsive for you, on the center and patient volume side?

Yes. No, I think so. I guess you've given us a flavor for some new countries that you'll be in. So I think that's good. Maybe just some numbers on international, and then I just had a question on HCP, if I could.

Okay, we'll come back on HCP.

Yes, Darren, on international, it's still very early days, as we're just getting our feet underneath us. But our revenue in the second quarter was approximately $4 million. And we had heavy professional fee expense related to the transactions that we're working on. And that resulted in the approximately $12 million in losses in the quarter.

And maybe, Gary, before we go to your HCP question -- if I read into your questions about international, a broader, higher-level question, which is -- are we happy with the level of P&L expense, versus the current reality in trajectory of revenue and operating contribution from centers. The answer to that question is no.

Okay.

On to HCP.

All right, fair enough. So HCP -- I guess the question -- thanks for giving us the EBITDA numbers, which look pretty much in a band with what we saw from Q1. But I guess the question here is, is a somewhat volatile reporting season for managed care, and we did hear a little bit about some volatility in the MA books of some of the other companies in the managed-care space. So just a broad comment or two, if you would, on HCP's performance in the context of what you saw, relative to how you price PMPMs. Matt, I know you are in the room, so any sort of broad-brush commentary you can say about the performance of HCP in what looks to be a little bit more of a difficult operating environment for your managed-care partners there.

Yes, let me take a cut at answering -- and then Matthew will correct any mistakes -- that some of the trends being discussed by others are a result of their PPO books of business. And our book of business is the dominantly on the HMO side, which has very low out-of-pocket expenses, et cetera; and, therefore, utilization tends not to be as affected in either way. Meaning it didn't go down in the last few years because of recessionary effects, or any other of the other effects that are often cited, nor would it, therefore, go back up. It's a much more steady-state because the economics of our base of business just don't change in the way that the books of business that are being commented on by others change.

Having said that, I will now turn to the person who taught me all that, Matthew.

Thank you, Kent. I think that's accurate. And the way we look at this is, in the managed-care, even the very small copays and coinsurances that these patients have, and some of the health plans, as you know, have changed their benefit. That even hasn't changed any utilization, and we've tracked that, especially for the Medicare Advantage population. Because the Medicare Advantage population normally have very, very small copays and coinsurance. And they're really -- the physician is in control of the utilization. So we have not experienced any trend like what these health plans have been reporting.

Our exposure to -- we don't have any PPO that's capitated for us, or we take any risk whatsoever on that book of business. Those are all based on fee-for-service.

I'll make one other point, Gary, because it's so important. And we made it on our Capital Markets Day, but this kind of underlines it; which is, one of the reasons that we chose HealthCare Partners is because of how strong their clinical emphasis is. And they proactively pursue trying to identify what chronic conditions patients have, and then proactively try to get the more time with the doctor. And that's all because keeping people healthy is the most powerful long-term economic driver.

But this is yet another reason why some of these microeconomic or micro-behavioral factors, that other clients' plans or delivery models refer to, don't affect us. Because what our doctors think is right for the patients, and our care managers thinks is right for the patients, is totally unaffected by anybody's deductible or copay.

Great. Thanks so much.

Thank you, Gary. Or, Darren, excuse me.

Ben Andrew, William Blair.

Good afternoon. I was wondering, Kent, if you might give us some insights into some of the potential partners that have approached you after the HCP deal? Whether it relates to size or geography, and if there are things there that are of -- whether near-term or maybe 2013 interest?

I think I can't give a useful answer, because we've been contacted by organizations from all geographies and all sizes. Contacted by both payors and delivery organizations, both hospital-oriented and physician-lead, so it pretty much runs the whole gamut along all the categories you cited. Which ones of those will turn into partnerships and done deals and new business, of course, time will tell. But it's been very encouraging, nonetheless.

Kent, do you view that as more sort of partnerships, as opposed to acquisition opportunities? Or, also again, same answer?

Same answer. It's just so early on. It certainly some of both, and we're certainly open to both. But, boy, it's way too early in the game to start getting more specific.

Okay. And one other question, if I may. I know in the past, you had invested in aggressively in IT infrastructure in an attempt to build out your capabilities on the accountable care side. Have you been able to get a better understanding of how HCP may allow you to taper some of that? Or are you still learning how those two systems will dovetail, and what you may need? Because we didn't see a real change in there in trajectory on those investments, it appears, in this quarter.

Yes. Fair, very fair observation. The short answer is no, we do not expect the combination of the two companies is going to lead to any change in IT spending in either company. There's too many differences, and both of them are so busy adding to their capabilities for their different businesses, that it would not make economic nor strategic sense to divert talent to trying to pick up minor synergies. So you're not going to see any relief in the IT math on either side.

Thank you.

Matt Weight, Feltl and Company.

Thank you. Kent, last quarter EPO utilization was flat. It was flat again here in the second quarter. It sounds like you're still expecting it to be slightly up. Is this continuing just to be from what physicians are saying? Or is there some hard evidence this is occurring?

I know it's what physicians are saying. I do not know of any actual trend. But there could be one, because it's not something that I'm necessarily conversant on over the last 4 to 8 weeks. Particularly, given the general consensus on what a lot of docs are saying, which tends to typically end up being true. But we, with our physician community, have been experimenting and exploring and comparing different anemia management protocols. And since that work continues even as we speak, it's kind of hard to get any more definitive. But the answer to your question is -- it's, from my point of view, totally based on what doctors are saying. Perhaps there's someone else in the room that, as the call proceeds, will be able to answer more specifically with respect to any hard data trends.

Fair enough. And then just had another question here, with the Woodard settlement there. Is there any potential to see some reduced G&A spend with presumably lower legal compliance?

Well, certainly, the spending on that lawsuit will go way, way down; and away very, very quickly. And so that's a definite pickup, and a non-trivial pickup. Whether or not anything else is going to ramp up and keep us at the prior level, I actually don't know for sure. Because each of the different major legal issues tends to ebb and flow. And so I can definitely assert there will be a pickup, some nice savings; I just don't know if anything else is going to pop up to offset it.

Okay, thank you.

Kevin Fischbeck, Bank of America.

Okay, thank you. I appreciated the numbers on HealthCare Partners for the EBITDA this quarter. Do you have the number for the previous-year quarter? I don't think that was disclosed in the proxy.

We have not disclosed the Q2 2011 numbers yet; nor have we disclosed, other than giving you an indication of how Q2 2012 was going to result. We will have that in our S-3 filing. But that is still being prepared, and those numbers are still being finalized.

Okay. And then, I guess, Kent, in your comments, you made some comments about integrated kidney care and how more payors are open to that type of structure. I guess that would include commercial payors. Are you seeing, or do you actually have more larger bundle type contracts with commercial right now? Is that something that's going on, or is it in discussion stages?

Nothing significant has happened. And I would assert that you shouldn't presume that anything material will happen on the commercial side within your investment time frame. So it's really good for, hopefully, reinforcing the fact that we are differentially effective in managing total cost. And, hopefully, that will buy us some incremental patient volume and security on our current rates, with the right annual inflation increases. So I think most of the economic value tied to that conversation is going to be embedded in those two things, as opposed to expecting any big, commercial, globally-capitated contract any time in your investment time frame.

Okay. And then it sounds like you are incurring a little bit more losses in the international business now, but you obviously raised the guidance. What were the drivers to the guidance range?

Well, I don't have a good, concise answer for that. Why don't you let us play with it a little bit while we answer other questions, and see if we can be useful and organized? It was pretty broad-based, which is why we didn't cite any one or two drivers. But let us reflect a little bit as we move through the call.

Okay, and then last question, capital deployment -- I mean, obviously, you're going to have some pretty big capital deployment by year end. Should we just assume that cash kind of builds up on the balance sheet after you do some of these smaller US and international deals that you always do? Or is there room to do things like share repurchase, et cetera, between now and year end? Or is just cash building up for that the most logical use?

Yes, very fair question; I think we just can't answer anything other than the normal, generic way we have for 10 years. That we take deployment -- the generation and deployment of cash as your sacred trust in us. And every quarter, we look a lot at how much leverage is appropriate, given the near-term outlook and debt rates; whether or not this is the right time to repurchase stock; are we likely to do a bunch of acquisitions; how much cushion should we have?

And so, I just don't think that it's a good idea for us to start predicting what's going to happen with our cash balance over the next X months. Because the fact is, whatever prediction we have today could change tomorrow, because of all those other factors and our desire and long-standing inclination to be nimble and responsive. So I don't mean to avoid the question, but I think we'd just better stay away from it, because it's so darned situational.

Okay, makes sense. Thanks.

Gary Taylor, Citigroup.

Can you hear me?

Yes, sir.

Okay, sorry, don't know what happened. Two quick ones on dialysis first. Other revenue was up $20 million, sequentially. Were acquisitions are part of that? Or what else was driving that sequential revenue growth?

It's principally DaVita Rx.

Okay. So that's a big, sequential jump. Was there new contract or something that --?

DaVita Rx continues to expand at a pretty steady rate. We are very pleased with their performance.

Okay, understandably. And then the other dialysis question is, really, since I guess the bundled payment rules got finalized, you've really had so much higher acquisition activity that just continues -- last quarter, this quarter, another 33 centers. Is your outlook that you can continue that really substantial pace through the rest of this year? And is the primary driver still just the change of payment model, and small guys getting out?

Well first, what we expect for the balance of this year is incorporated into our adjusted guidance, with all the normal caveats around it. Second, it is so difficult to predict when more people are going to want to sell, and with what intensity are they going to want to sell, and at what prices are they going to be willing to sell. So I don't know that we've demonstrated a lot of confidence in predicting that, over the last few years. It is certainly the case, however, that what you said is true, that lots of the smaller players -- with everything that's going on in the country and everything that's going on with government spending, and everything that's going on with healthcare -- that you have more of the small players who are saying, this is a reasonable time to exit, and/or find a stable and value-added partner. I think there's going to continue to be deals. But whether or not it's going to continue at that pace that we've enjoyed for the last year and a half or so, we just don't know.

Got it. Last question is on HCP, and maybe I'll direct this towards Matt. We're just trying to understand the risk contracts a little better, particularly the California contracts that you've disclosed in the filings, where you are booking shared savings but not really booking their gross per-member per-month in revenue.

And so I have two questions around that -- one, do you have the same risk in those contracts as you do on the capitated contracts? So, if total medical expense exceeds the per member per month, do you take losses on those contracts? Or are you broadly capped? And, secondly, there's about $800 million of managed revenue under various shared saving-type contracts that is not being booked as revenue. I guess how much of your booked revenue represents shared saving earnings from that $800 million of managed revenue?

Just give us one second here to confer before we respond. Okay, hold on one second.

Sure.

Gary, those are fair questions. So, in California, because we don't have what's called a Knox-Keene license, we are not capitated by the health plan for what's referred to as institutional risk. So those risks are being kept by the HMOs. And then we have various risk share arrangements with them, that those are confidential information at what risk we have. As far as the number you quoted for managing the institutional, that number is what we are still managing, that care. However, what we are recognizing in an our financial statement, for California, is the net results.

And is that a figure as it impacts your revenue line that you'll ever disclose for us? I guess we are -- obviously, we're just trying to be in a position to model that better.

We're still sorting out what's going to be the right way for us to report, so that you guys get all the information you need to make your decisions. And at the same time, we don't sacrifice any competitive advantage, or limit our ability to add future value for you in how the contract. So we're still sorting that out. And, of course, the deal is not even closed yet, even though we're working very closely together, and driving towards the future together. So I think, on that one, you just have to wait a few more months.

Okay, fair enough. Thanks.

John Ransom, Raymond James.

Hi. Just following up on Gary's line of questioning. Generally speaking, how direct -- or not -- is the relationship between the gross rate received by, say, Medicare Advantage payor and the rate that the HealthCare Partners gets? Either in a traditional model or in what you're doing in California and other places?

All of our Medicare Advantage contracts are as a percentage of what CMS pay of the health plans. So I would say it has a very direct relationship or correlation with that.

Okay, and generally speaking, in years past, let's say when pricing was not so good, what did -- because you guys look like you just perform right through all cycles. But what steps, what levers are there, if -- let's look at 2013 with sequestration, or 2014 with the MLR regs and what have you -- but generally what levers are there for you? Because you're already operating at a very high level with your cost performance. What additional levers are there on the margin side to manage through a negative pricing cycle?

As far as our activities, every single day we have ideas -- by our providers and physicians and care management and clinical people -- how we can do this with a higher-quality service and reduced cost. So we still are very bullish on our ability to reduced cost for Medicare Advantage patients. So, from that point of view, I think we feel -- and I think we have incorporated that in our projections -- the fee-for-service equivalence reduction and the Medicare, and we still -- the results are, we continue doing very well on Medicare Advantage.

And what I'll add to that is, you were pointing toward some of the structural and programmatic risk on the revenue side. Parts of our cost structure are directly contractually linked to CMS reimbursement. So the cost structure adopts proportionate to the revenue structure for a subset of the business. In addition, when Medicare revenue economics are bad, that tends to affect the entire healthcare arena -- hospitals, nursing and other caregiver, and physician compensation expectations, et cetera. So there's a less direct, meaning not contractual, linkage between revenue and cost structure; but, nonetheless, a very real one. None of this, in what Matthew said and what I'm adding, means that we are totally buffered. We don't mean to suggest that. Rather, there are some significant offsets. And those are three of the categories in which you find them.

Sure. This is great help, thank you. Just a couple little additional things. In your mind, generally speaking, if you look at the 100 largest markets in the US, are there structural -- because one of the critiques we hear is, well, they've done great in laboratory (technical difficulty) physicians with high Medicare rates, and physicians who want to play ball. But as you look across the US, and you think about exporting this model, and you think about your M&A, do you find in this huge structural barreled barriers? Is it going to work in 25% of the market? 50% of the market? 10%? How do you think about the opportunity to export the model beyond the states that you are in?

Well, that's a fair question, John, so I'm going to answer it from two point of view. One is, that Medicare Advantage and managed care in your traditional HMO, we still feel that there is tremendous opportunity there, and also the population health. We also are trying with this accountable care organization, which is basically incorporating the population health, and all the things that we do with evidence-based medicine in the fee-for-service environment -- that's both Medicare and the commercial. So we look at the opportunities are endless out there, both in the markets that they are not producing the kind of quality service and cost that we are producing on HMO. And the markets that, they are this fragmented fee-for-service, and there is no metric on the quality and service. So we see the potential is incredibly rich out there for what we do.

Okay. I think you mentioned this before, but please remind me. I guess, in our simplistic mind, the 85% MLR mandate should increase the demand for what you do, because you're able to solve a problem with your upstream customer. Is that a good way to think about it, or is that -- are we missing something?

I think I look at it a little bit differently. I look at it that we are at this position, that anything that health plans pay us is calculated toward their MLR. We are not under any MLR rules or restriction; therefore, the opportunity is to give us even more opportunity to take the entire risk. And for that, the HMOs can include that in part of their MLR.

Yes, so that -- I think what Matthew is saying is, your assessment is correct, and he's talking about some of the reasoning why it is. At the same time, we don't think it's any reason to start dramatically changing forecasts of anything; the world is too complicated for that. But directionally, your hypothesis is correct. And then he's talking about the next level of detail as to how they think about it.

And you guys mentioned before, that, I think maybe some of us made the mistake of thinking you are like this captive Kaiser model, and all the doctors are employed. And you mentioned a lot of the doctors are, essentially, just contracted. Did I miss this? Have you provided a breakout of the employed versus contracted doctors? And is that something that you have a preference for, one way or the other?

We actually love both. The fact is, it's wonderful to have a foundation of employee doctors, because that means the level of operating integration and mission alignment and all the rest is just so, so tight. At the same time, in order to have a superior value proposition to the patients and to the payors, having network physicians around and in between, employed, leads to a higher value-added product. So we're always going to have both, because it works best. In addition, in many instances, the affiliated docs who end up subsequently becoming employed docs, once they had gotten comfortable and familiar with the mission alignment and the basic operating competence and economic fairness. So that would be my response. Matthew?

Yes, and I would add is that the difference is, Kaiser employs all of their physicians. We appeal to both group of physicians. The physicians who want to be employed and the physicians who want to stay independent and just contracted with us for all of the services that we bring to them -- the hospital list, the after-hours care, all kinds of things that we do. So, we are comfortable as Kent said, with both groups. And we don't mind growing in each segment, from that point of view.

Good. Thanks a lot.

Whit Mayo, Robert W. Baird.

Hey, thanks; afternoon. I don't think I heard a direct comment on this. Maybe you gave it. But can you elaborate more on the second-quarter EBITDA number with HCP? Just the one $135 million, when I square that with the $150 million, it's obviously lower on a sequential basis. So any way to put that number in context for us? We obviously don't have the benefit of seeing some of the details behind that.

Well, we're not prepared to go into a detailed breakdown on the differences between the quarters. But suffice it to say that we did view Q1 as a strong quarter, but within plan. And our full-year guidance remains unchanged. Q2 is in line with what we had expected. And, again, our guidance for the year remains unchanged.

Okay. And you mentioned that you plan on launching the financing pretty soon. Maybe this is public and I've missed it, but any details with how you were thinking about the structure of that debt financing, between bank debt and bonds, at this point?

Yes, we hope to raise approximately $3 billion in bank debt, and some of that in Term Loan A and some in Term Loan B. And then we, in addition to that, we expect to raise roughly $1 billion in notes. And the split between the Term Loan A and Term Loan B will be somewhat dependent upon demand. But we are currently expecting a little more Term Loan A than B.

Okay, and it's probably a little too premature to ask what the indications of interest are in terms of rates.

Well, in our S-4 filing, which I point you to, we had used pro forma rate of 5.24%, including swapped rates for the overall debt, that we'd be raising for the new debt.

Yes, no, that's helpful. Maybe one last question here. Maybe fair, unfair, not sure how you want to look at it. Not to undermine or belittle Jim's contribution -- but, Kent, maybe can you talk a little bit about where you are in the search for a full-time CFO? And what that timetable looks like, to bring someone on board? I'm sure there are a lot of variables at play there.

No, I appreciate the straightforwardness of the question. And the fact is, we've just started the search. And, actually, let me go back -- and you may want to ask a follow-up question -- but I want to go back to a question that was asked maybe 15 minutes ago, and try to be a little more helpful. As you look at our cash and our balance sheet, perhaps the way to shed some more light on where that question was going, is post-deal close, our leverage ratio will be 3.7. That is slightly outside our historical range of 3 to 3.5. But, of course, we've always said there will be times when we are below and times when we're above. That is a fairly small amount above. And even if we do quite a few acquisitions, we will delever to be beneath it relatively quickly.

This means our ability to have the full spectrum of options with respect to cash deployment, which means acquisitions versus debt paydown versus share buyback, will continue to exist throughout this entire period. Because in the right situation, we're not adverse to being above 3.7. However, we love the fact that, absent any significant opportunities for deploying cash elsewhere, we'll delever beneath that quite quickly. Now back to the CFO question. Did I -- I think I answered the one you asked? Was there anything else you wanted to know?

Well, you said that the process has really just begun. And I was kind of curious if there was -- the Board, if you've had a conversation with the Board in terms of timetables with which you'd like to bring someone on board?

Yes.

Any way to elaborate any further on that?

No, I don't mean to be cute. Yes, the Board and I have had lots of conversations. And yes, we've talked about different timetables. And no, I don't think it's a good idea to share it. It's so unpredictable to figure out when you're going to make decisions in an important search process. And so, I just don't think there's any particular upside in doing that, and a lot of downside.

No, that's fair. I appreciate it.

Kevin Ellich, Piper Jaffray.

Good afternoon. Just a couple of questions. Kent, I was wondering if, on the dialysis side, have you seen any integrated care pilot programs with any of the commercial payors?

Can you ask the question again? I missed the first part. My bad.

You bet. Are there any integrated care pilots that you guys are participating in with the managed care payors?

On the commercial side?

Yes.

Yes, is the short answer. We -- and have been for some time, doing some work with some commercial payors on integrated care. It's not globally capitated, but a number of different arrangements where we do stuff beyond dialysis, to manage the patient in a more holistic way. And one way or another, we get compensated for it.

So that's been going on for some time. Can you say about how long these pilots have been going on?

I wouldn't call them pilots, because they're just basic contractual arrangements with a small number of commercial payors, and it's been years. The good news is, it's been years, and we've generated good results for those payors. The bad news is, it's never really caught on and grown to be material enough to talk about to you. But we appreciate the question.

Okay, got it. Now your big competitor mentioned it today on their call. I thought there might have been some new pilot that rolled out, but I guess not. And then, I know someone else asked the question about the integrated care RFP from Medicare. Do you have any idea on the timing? And what about the size? Have you caught wind of anything new out of Washington?

Short answer is no; there's still very little guidance on what the specs will be. And that's, of course, just discussing the first draft. And then, what emerges subsequent to a comment period or all the interaction, even more difficult to predict.

Okay. And then, what about home therapies? It sounds like -- can you give us any update on how home dialysis is trending for you, specifically PD versus home hemo?

Both PD and home hemo are growing. And we will repeat what we've said for quite some time, which is that there are folks who have a vested interest in pushing one or the other of those modalities, and talk about glorious clinical and economic results from increased utilization and forecast amazing growth. And then there are others, who have a vested interest in other modalities, and are very critical of what those outcomes are in issues of self-selection, and are quite skeptical of any differential economic or clinical performance across a broad patient population.

We are totally impartial. We do more of them than anyone in America. And we are still learning a lot every quarter about what subsegments of the patient population benefit; and, if there is a clinical benefit for the patient, at what cost to society does that benefit come? Is it higher, lower, or the same? So they are both growing. And we remain incredibly curious and eager to keep generating clinical insights and economic insights every year. Did I answer the question?

Yes, yes. Understood. Thanks, that's helpful. Just one last one on HCP -- we understand that HealthCare Partners is a stand-alone business versus the dialysis business. But is there anything within HCP's integrated care model that you can take out and maybe apply to the dialysis business? Especially when we see an expanded bundle or integrated care program rolled out for Medicare?

We are going to have very intense session very soon, comparing what we do -- in integrated care with kidney care patients -- to what they do, because they have over 1000 of those types of patients in their delivery model already. So there will be some very rigorous idea sharing there. At a superficial level, we do a lot of the same things, which is no surprise. But there could be some nice learning at the second or third level.

Beyond that, there is nothing obvious that jumps out and would be economically material. But who knows, as we go through the next year or two, of what learnings might flow in each direction; as we work in different ways with the same payors, some of the same doctors, some of the same integrated delivery systems. So, we are sure there's going to be some more real insight sharing back and forth. But we're just not sure when, and in what area.

Got it. Thanks.

(Operator Instructions). Matt Weight, Feltl and Company.

Thanks, just one follow-up question on HCP for Matt here, and it's more of a process question. Matt, when new members come on during the annual enrollment period, Medicare Advantage fully capitated, how long does it typically take you to cycle through these members so you can understand their health status; get their risk code accurate; send it on to CMS; so you can ultimately get a higher risk or higher reimbursement for those members?

That's a fair question. So, what we try to do in the first 30 days that the member has signed up, we want that member to come to our physicians, whether those are employee physicians or contracted physicians, and had a full physical. At the same time, while we were are asking for the medical record from the providers for those new patients to be transferred. So usually is much shorter than 30 days. But our goal is within the first 30 days, have that patient have a very comprehensive physical exam done.

So would you say that, after the first year, those new members are running profitability rates similar to what you would see existing members are?

I think it's hard to predict. Every market, every population is different, so I wouldn't say -- some patients, it might take us Day One. Some patients, it takes is a little bit longer. What we care about is what I refer to as, if they are deferred care, that we need to provide; and some time recovering, if you will, for those deferred care might take three months or six months or one year. But the key is to find out all the issues with the patient, and then have a treatment plan, and refer them to the right specialist or right treatment plan and caregiver and care education.

Okay, thanks. I was just surprised, because I was under the assumption that CMS only updates risk scores twice a year. So if somebody came out in January, I would have expected, maybe, it would be difficult to get an updated risk score that quickly in March.

You're absolutely right, as far as the risk score for the purpose of paying us. But we like to capture all that. Because risk score is the proxy for all the conditions, chronic conditions, that the patient has. That is the most important thing for us, which is capturing those chronic conditions, so we can development a treatment plan for these patients.

Okay, thank you.

And there are no further questions at this time. I'll turn the call back to our presenters for closing remarks.

All right. Thank you much for your interest in DaVita Healthcare Partners. We will work hard for you over the next 90 days, and look forward to talking to you again then. Thank you.

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