德維特 (DVA) 2013 Q1 法說會逐字稿

Good afternoon, my name is Sharon and I will be your conference operator today. At this time I would like to welcome everyone to the DaVita HealthCare Partners Q1 earnings 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).

Thank you. Mr. Jim Gustafson, you may begin your conference.

Thank you, Sharon and welcome, everyone, to our first-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, Bob Margolis, the CEO of HealthCare Partners, Matthew Mazdyasni, Healthcare Partners Executive Vice President and CFO, Jim Hilger, our interim CFO and LeAnne Zumwalt, Group Vice President.

I would 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 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 Annual Report on Form 10-K.

Our forward-looking statements are based on information currently available to us and we do not intend and undertake no duty to update these statements for any reason. Additionally, we would like to remind you that during this call we will discuss some non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our Form 8-K submitted to the SEC and available on our website.

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

Thanks, Jim, and welcome, everyone, to a relatively sober quarterly call. I will first cover Kidney Care, then HCP and, (technical difficulty) finally, discuss our near-term and longer-term outlook.

First with respect to Kidney Care from a business performance point of view, another solid quarter, both clinically and operationally, and (technical difficulty) contingency reserve which, of course, I will discuss in a bit and I will also (technical difficulty).

First on to our clinical outcomes, we continue to present those clinical outcomes. We continue to present those clinical outcomes first because that is what comes first. We are first and foremost a caregiving company serving approximately (technical difficulty).

Hey, Kent, sorry to interrupt but there's a lot of static on the line (technical difficulty).

Okay, operator, could you help us out with that at all? We are in the same room that we usually are. (technical difficulty).

It may be coming from your line.

All right, I will switch chairs. I am on the same line as usual. Was Jim Gustafson's clear?

(technical difficulty).

Ladies and gentlemen, I apologize, but there will be a slight delay in today's conference. Please hold and the conference will resume momentarily. Thank you for your patience.

All right, operator, are we back in the -- on the line now?

Yes you are.

Thank you. This is Jim Gustafson again. My understanding is that you have -- were able to hear the disclosures statement that I was making at the beginning. So with that understanding I would like to turn the call over to Kent Thiry, our Chief Executive Officer.

Okay, thanks, Jim, and I am going to assume that nobody heard anything I said clearly. So I will start from the top.

First, this is a relatively sober early call, somewhat symbolic that we had telephone problems. From a business point of view, Kidney Care performed fine in the quarter both clinically and operationally. I will discuss the loss contingency reserve a little bit later as well as normal, covering clinical outcomes and a public policy update before I talk about HealthCare Partners and then ultimately our outlook.

We will continue to present our clinical outcomes first because that is what comes first and we now serve approximately one out of every three dialysis patients in America as well as about 800,000 population health members through HealthCare Partners.

On the Kidney Care side, first with respect to adequacy which is essentially how well we are doing at removing toxins from our patient's blood this quarter 98% of our hemodialysis patients had a Kt/V greater than 1.2. Second with respect to vascular access 71% of our patients have fistulas, which is the preferred form of vascular access. For these and virtually all other clinical measures including nutritional status, vaccinations, etc., our patient outcomes compare very favorably to the national averages. This quality care not only results in healthier people, but also drives reductions in hospitalizations and surgical procedures and, therefore, drives significant savings to the US healthcare system.

Now on to the issue of the reserve. This is regarding the two physician relationship investigations that we previously disclosed, now for about three years in total. We took a reserve as you have noted for $300 million. That is a part of a comprehensive offer to settle all the related civil, administrative, and criminal matters.

To be clear, we may not reach a final settlement decision estimate. An important reminder, this investigation is solely about physician relationships. It primarily relates to our physician joint ventures that, as you know, are subject to complex regulations under both [anti-] kickback and other laws. There have been no allegations concerning one, the quality of care we provide; number two, the cost to the government; and number three, the utilization of medical services.

Nonetheless the government attorneys have taken the position that some or all of our joint ventures do not comply with the anti-kickback statute. We disagree, but we are talking with the government about its concerns and perspectives. We believe our joint venture practices were consistent not only with regulations and law but with the Kidney Care community and with Healthcare Services overall. We look forward to working with the government to establish greater clarity and a level playing field for JVs in the industry.

We understand that you may have many questions on this topic. Please, we ask you to understand that we can't answer most of them until such time that the process is concluded in a settlement, hopefully.

In addition as of April 2013 our HealthCare Partners subsidiary was served with a civil complaint regarding Medicare patient [quoting] practices. The suit names HCP along with a number of defendants including several of the nation's larger health insurance companies. We also did have some good news on the legal front in the quarter as the Turner-Hooks matter, one of the previous [key cam] matters that we have previously disclosed was dismissed with prejudice which means that the matter is done with with no discovery, no trial, no settlement, no fine, no finding against DaVita at all.

On to public policy on the Kidney Care side. With respect to the ESRD Seamless Care organizations or ESCOs, as most of you know, CMMI did delay implementation a couple of months. We now have a deadline of May 15 for indicating our interest and binding proposals would be due by July 1. CMMI has continued to be a constructive partner, listening to the community, so we are hopeful that there will be some changes to the program design and our participation, as you know, is contingent on seeing some changes in the design so that it is set up to be successful, because we do believe that if we are allowed to provide integrated care on a sustained basis to that population, we can do dramatically wonderful things for the patients, their families, physicians, caregivers and the taxpayer.

On that front I will actually share one new and bright success story in the area of Kidney Care services. A recent study published by the American Journal of Kidney Disease, a peer-reviewed article, found that patients who used DaVita Rx, our integrated medication management services, are 21% more likely to live longer and 14% have spend -- 40% fewer days in the hospital each year than patients who do not use that service. And we now have over 50,000 patients on that service, something that we invested in for several years before we could get it to break even, and the wonderful clinical and economic results that we are now experiencing.

On the HealthCare Partners front, very good news and that performance in HCP's three legacy markets continues to be solid and in-line with their expectations. On the growth front we closed some tuck-in acquisitions in the first quarter.

On the reimbursement front, the bad news is that the Medicare Advantage cuts that we feared would take place and talked about at the time that we announced the combination have actually taken place. It was on April 1 that CMS announced its final 2014 reimbursement decisions. All those rates were better than the preliminary ones announced in February. They still represent a significant decline for HCP, in particular due to the recalibration of patient risk coding when you compare '14 to '13. We estimate that that final notice will represent a rate reduction of about 6% to 9%, somewhere in that range on average across our Medicare Advantage patient population.

About 10% of that will be offset through contractual pass-throughs to the provider network. We in addition expect to offset some of the remaining rate cut impact, but will not be able to give you very specific guidance with respect to that. Up to half of the remaining hit could be offset through benefit design changes that our HealthPlan partners can and may make because CMS will allow up to a $34 increase in Per Member Per Month total beneficiary costs. And since our three legacy HCP markets are currently no premium markets that means more or less the average payer could use that full $34 a month and still 75% of the current gap in benefits. In other words, the extra benefit that an M.A. beneficiary receives versus a normal fee-for-service beneficiary that you could use the full $34 allowance and still retain, on average, about 75% of the current superiority.

So, given the size of that benefit gap we do expect many plans will reduce their benefits or increase beneficiary cost, but we could be wrong. It is their decision, not ours, in virtually every case.

In addition to plan design, we will, of course, work on incremental cost and efficiency initiatives, to try to offset even more of this dramatic rate reduction. And of course, as we move forward, we will give you updates as we have them.

As to our overall outlook regarding the balance of 2014(Sic), we are increasing the lower end of our range. Our 2013 operating income guidance excluding the impact of the loss contigency reserve is now $1.8 billion to $1.9 billion. This includes dialysis and its related businesses' operating income in the range of $1.4 billion to $1.45 billion and then HealthCare Partners OI in the range of $400 million to $450 million.

As always, we could end up above or below this guidance, but it does capture the majority of the problemistic outcomes and incorporates all known swing factors.

I will now turn the call over to Jim Hilger.

Thanks, Kent. First, a few more dialysis operating metrics.

Our non-acquired growth was 4.4% when normalized for days of the week and our commercial mix improved slightly in the quarter. One of the reasons for our continued strong non-acquired growth is that we have closed very few centers of the last couple of years choosing to continue to operate a large number of centers that are losing money.

However, this could change with sequestration and rebasing and a poor rebasing result could lead us to close more centers, which would adversely impact our growth.

Next, our US dialysis revenue per treatment increased $10.28 from the prior quarter and this was driven primarily by increased Medicare rates, normal commercial rate increases, and a slight improvement in our commercial mix.

As you model revenue for the rest of the year, you should take into account the impact of sequestration, which resulted in a 2% cut in our Medicare rates which is about $20 million per quarter reduction in our dialysis Medicare revenue.

US dialysis patient care cost per treatment rose $3.52 from the prior quarter, driven primarily by seasonally higher payroll taxes and seasonally higher fixed costs per treatment due to fewer treatment days in the quarter. Dialysis G&A per treatment was up $1.29 per treatment, primarily driven by compensation expense including seasonal fluctuations related to fewer treatment days in the quarter and higher payroll tax.

During the quarter, we experienced $7 million in international losses reflecting improved international performance with the addition of our operations in Poland and Portugal. Please note we still continue to expect operating losses in 2013 to be less than $30 million, absent securing any large new contracts that would have associated startup costs.

Now, a comment about HCP's operating performance. HCP's performance was solid in the quarter with operating income of $110 million. Total capitated HCP members grew 5.8% sequentially, of which 2.1% was acquisition-related. Year on year member months grew 20.3% of which 16.2% was acquisition-related. And note that this comparison incorporates dates prior to the completion of our merger which occurred on November 1, 2012.

For the overall enterprise, our debt expense was $106 million in the first quarter. Given the current debt levels, our expectation is that debt expense will be around $430 million for the year, which includes the impact of the interest rate hedges we put in place late in the first quarter.

The effective tax rate, attributable to DaVita HealthCare Partners, excluding the loss contingency reserve, was 40.7% in the quarter. We continue to expect an effective tax rate of 40% to 41% for 2013, excluding the impact of a loss contingency reserve.

Now turning to cash flow, operating cash flow was $379 million in the first quarter. And our 2013 operating cash flow guidance remains at $1.35 billion to $1.5 billion. This guidance excludes the impact of any legal settlement we may reach.

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

(Operator instructions). Matthew Borsch, Goldman Sachs.

Good afternoon. This is Brian Zimmerman in for Matt. With the rebasing in mind, can you talk a little bit about what levers you could pull to mitigate some of the potential cuts on the cost side?

Sure. We have always tried as everyone does to run themselves pretty efficiently. So while we will be taking a second look -- second and third look at everything on both sides of the house, right now we can't offer up any material number with a degree of confidence that would warrant publicly mentioning it. So we are going to do the best we can, but right now we can't attach a number to that for you.

Okay, and regarding the CMMI pilot program, you said that you have had some positive discussions. I was hoping you could give us a bit more color on that and then when would you expect to hear any changes to the program because May 15 is coming up pretty quickly?

You are right, although in many respects it is the later date that is more relevant because that is the binding proposal.

And I should correct a mistake I made earlier evidently. I said 2014 when I was talking about outlook and guidance going forward and I should have said 2013. So I apologize for that.

With respect to CMMI, the positive interaction is a commentary unfortunately just on the quality of the process and the fact that they are listening. It is not that they have told us that they are going to change anything specifically or generally. So we have high hopes and we are just glad that they listen to us and we have had a quality dialogue. But they haven't given us any indication they actually will make material changes.

Okay, and then my last question is you've mentioned that you saw a bit of a pickup in payer mix this quarter. What percentage of your dialysis volumes were from commercial payers?

It is approximately 10% of our patients are commercial.

And it was 10% last quarter too? Is that correct?

Yes, it was. It improved just slightly from there.

All right. Thanks a lot.

Darren Lehrich, Deutsche Bank.

I wanted to ask some questions here about MA and your comments, obviously, about 2014. You talked a little bit about some of the contractual pass-throughs you expect and quantified that. I guess from the other two pieces you said, you are working on other offsets and so, I would be curious just to get your thoughts and maybe you can share with us, Bob or Matt, how you might be able to accomplish that. And then as far as the benefit design changes by the plans at this stage of the game, what kind of visibility do you have into the half of the offset that Kent mentioned from what the plans are going to be doing?

I will try to answer it pretty similar to actually Kent's answer about the rebasing and that is we always try to run a very efficient operation. There will be opportunities, we think, to be more efficient in some areas and to really look hard at our cost structure going forward. You did mention that there is a pass-through of about 10% of it. And as to the benefit question, as you have heard in other analyst analyses, it is a fairly significant $34 per member per month that CMS has allowed to be shared with the beneficiaries and there is still an enormous gap of better benefits in Medicare Advantage versus Medicare fee-for-service. Whether or not the plans will choose to pass some or all of that $34 on to beneficiaries is out of our control. They do inquire and discuss with us benefit in many of our markets, but ultimately they make the determination, not us.

I think it is relevant to point out that we are in relatively rich benefit markets, none of which have Medicare Advantage premiums. And so there is a fair amount of room and some expectation on our part that there will be movement in that direction, but again, it's something the plans will make independently and make that decision in their initial filings in May.

Sure and then, Bob, maybe a bigger picture question for you. You have seen lots of MA cycles over time. We would love to get your view on enrollment and how you think enrollment in your three core markets might be disrupted by some of this.

Again, it's not possible to be very precise on that. We believe that the M.A. program is still strong as we have seen over the last couple of years. Despite some objections of some of the people in the administration that the program would shrink, it has actually grown pretty robustly. We have seen a good new membership this past year as was reflected in the numbers that Kent offered up and it really is still a strong program.

So we are hopeful to see, but of course as you move more of the cost of the beneficiaries it is less than an incentive than they had before to join the program. So we don't expect it to be dramatically bad, but we don't have any way to project accurately what it will be.

That's great. And my last question. As it relates to the joint venture model, Kent, we have all thought about it. It is sort of a time-tested model given that JVs have been around for so long. Can you confirm for us whether part of your settlement offer is to stop doing JVs in the future and maybe help us think about the status of the JVs that you currently have overall whether the structure would need to change.

None of the specifics have been worked out at this point, Darren. And for us, the strategic imperative is a level playing field.

Okay, so we should assume then that JVs will still continue to be part of your operating model?

At this point, I'm afraid I just can't give you a definite prediction in either direction. The government has agreed that non-Safe Harbor joint ventures can be legal and we are still discussing exactly what structures qualify and which ones they think do not. We of course have been under the impression for a decade that the way we have been doing them is fine; and so, we are having to do a lot of sorting through with them, and right now there's been no resolution.

Thank you.

This is Jim Hilger, I just wanted to correct the statement I made earlier when I was discussing HCP's operating performance and describing the growth of total capitated HCP member months. I believe I just said total capitated HCP members and I intended to say member months. Next question, please.

Justin Lake, JPMorgan.

[Ike Neuschel] in for Justin. Another question on the settlement. Can you just clarify whether you are negotiating with the Colorado AG and the federal attorneys separately or are they negotiating together with you?

It is one set of multi-part negotiations.

And since you have put a dollar estimate on there, is the major point of the sessions going forward more in terms of oversight or the structure of JVs, how -- what they think is acceptable or is the dollar amount still a big part of the discussions?

Dollars are still under discussion as well.

Thank you.

Matt Weight, Feltl and Co.

Jim, I think you were talking about the non-acquired growth of dialysis. How many centers are actually operating at a loss?

It varies from time to time, but it is a minority of our centers clearly, but more than a handful.

And then -- okay, fair enough.

Could you repeat the question please? I didn't catch it.

Yes. It was Jim, I believe, unless I misunderstood it had referenced that some of your centers are operating at a loss and I was interested how many actually are.

Yes, the number varies somewhat, but it varies between 140 and 200, somewhere in that range.

Okay. And how many members did HCP gain during the annual enrollment period this year on the M.A. side?

We don't break out membership for HCP on a quarterly basis.

All right. And more big picture here on HCP. When you bring on new members, I'm assuming they come on at lower margins than what your currently more mature members have -- are -- is that correct?

Yes, that's correct. We expect that over time best practices and so on of all the years of our experience will diffuse to the new membership that we bring on.

Okay. And in regards to that and I'm sure it is a combination of both, I am wondering if you could maybe tell me, or directionally point to us, which one is more important in terms of maturing those margins, is it understanding the disease profile and diagnosis which then can be correctly used to code that patient properly? Or is it more towards the implementation of the care coordination and clinical initiatives that you have?

As has been stated before, it is a complex set of integrated care expertise that we and others like us, that involves improving the coding and diagnosis and documentation as you mentioned, the utilization by focusing on health wellness and prevention and avoidable admissions and readmissions, excellent post acute-care management and training doctors care managers, disease managers, social workers and the like into total integrated care. So it's a complex of all of those aspects that has to occur over time.

How much do you feel that risk coding and properly risk coding contributes historically to your [PMPM] growth?

You can't really break it out because you are always coding the entire population that you have, the ones who have been with you for a long time as well as the new ones. And that -- perhaps ask the question again and see if we can be more helpful.

I was just -- because you probably I'm assuming you get the two risk coded adjustments per year from CMS and so I am curious what that does as an impact of the overall growth and the revenue PMPM side. How much does that contribute?

Well, the adjustments have been positive and nontrivial, but I don't think they move around enough that giving you a single number, I don't think, would be that helpful, and of course they all are absorbed under the right basis into the aggregate business economics. So on a year-over-year basis, these things tend to even out, absent the big step function decisions like the ones the government just made.

So I don't think there's any helpful analysis in there for you beyond what we have said. Matthew, would you amend that?

No, I think what -- the other thing about coding, which is important, there is always that year delay because you have to code this as this year and you get paid next year. So, as Bob Margolis said, we try to focus on more diagnosing the patient so we can have the appropriate treatment plan for those patients and disease management programs. That is more important to us at the beginning than trying to maximize the coding.

And last question, I will jump off. Last time you faced significant M.A. rate pressures, it was probably I'm assuming 2010. Now there is a fair accumulation effect, I understand that, but is there anything that you can look back in terms of what you have learned that may help you manage the pressures that you are facing in 2014?

We all learn from history. You are probably not old enough to remember the balanced budget amendment. We learned from that. We looked and learned that M.A. cycles, we believe, that it is an excellent program that provides tremendous care to sick and fragile seniors and it has a benefit structure significantly better than Medicare fee-for-service. And that there will be fluctuations in membership growth and in margins as the government adjusts from time to time.

Gary Lieberman, Wells Fargo Securities.

Going back to some of the prepared comments in terms of ability to mitigate part of the 6% to 9% rate reduction. I just want to make sure I heard the components correctly. So I think you said 10% of to be offset through contract pass-throughs and then I guess 50% could be offset through potential benefit designs. Were there any other pieces that you have discussed or mentioned there that could help offset the rate reduction?

Those are the two sources of offset that are directly related to the issue itself of the decision the government raid. Anything else would have to be operating improvements of the normal business variety, either finding additional efficiencies, driving additional acquisitions, driving additional same-store growth. Things like that. So everything else is normal business and trying to do more of it than usual.

And have you had a chance to look and see how doable it would be to achieve other efficiencies to offset part of the rest of it?

I guess we would be very disappointed if the number was zero, but the same time no way right now to give you any assurance the additional number is certain enough or large enough to mention.

Okay and then on the JVs and the discussions, I appreciate that you probably can't share too much with us, but is there any other detail? Is there sort of a specific piece of it that seems to be at issue in terms of what -- where they think the JVs might have violated the Safe Harbor?

It is a very crucial question and I'm afraid we just can't go there. To go into more detailed on the live conversations would just not be a good idea. It wouldn't be constructive and since the conversations are still going on and we don't know where they're going to end up, we might very well tell you something that is wrong which would be really dysfunctional.

And what is the timing or your best guess for the timing of when it sort of continues down a path that is going and when it might be resolved?

It's a guess only because we are not the primary determinant of the pace and these are complicated areas, and we are dealing with multiple parties so very, very difficult to venture forth with a guess, but in the spirit of trying to be useful, if we get to appoint of a successful conclusion before it is entirely papered and consummated, my guess is it would be a few months, but again the operative word is that's a guess has a lot of variables.

And going to the rebasing, have you had any incremental conversations or any conversations at all with CMS around the rebasing and the framework for the rebasing and how they are thinking about it and your input into that?

Do the question again so I don't ramble, please.

The question is in terms of discussing the rebasing with CMS. Have you had any discussions with CMS around the rebasing? And where do you think their head is at with regards to some of the comments you made maybe last quarter about your thoughts on what the rebasing should be based on changes in utilization and changes on price, etc.?

Very fair question. We have had high-quality conversations and we have made the analytical point that the drop in utilization has been totally offset by increases in price of the subject drugs themselves. In other words the same ones that got used less had higher and higher prices, which offset a majority of the decline.

And then the other revenue linkage that was not intended to be a part of putting in our bundle, but in fact happened because of the case mix adjusters and other variables means that in aggregate, our economics have not changed on the Medicare side which means we still lose money on average on every Medicare treatment we do across America. And so we have gone in and made that point and we would love to have the government take us up on our offer to come in and do additional audits so they see that the data from the industry is absolutely spot on and timely because so many of their data sources lag in terms of timing.

And so the good news is they have had the meetings with us. They've listened, they've asked good questions. On the other hand they are staring at legislation which targets very selectively and unfairly the one part of the cost structure that did in fact go down. They, however, retain the right and in fact the legal responsibility to take into account the entire picture with respect to ESRD economics.

So put all that together and you end up not knowing where they will come out, but we have had an opportunity to make a whole lot of accurate, analytical, real world, communitywide points.

So I guess the timing is still around the beginning of July for the proposal?

That is my understanding of the current predictions. I don't know if there would be any reason to think that it would slip given the magnitude of the work, but that is what people are saying right now.

And maybe my last question on the 8-K regarding the agreement with Berkshire. I haven't had a chance -- I sort of skimmed through it, but it seems that they are agreeing not to purchase more than 25% of DaVita's shares. Is there something you are giving them in return for that or is that something they were willing to enter into?

They were willing to enter into that. Kim, would you like to add anything?

I would say we agree to coordinate the HSR filing with them.

Could you hear that?

I think so. Agree to file on HSR filing.

We agreed to coordinate the HSR filing with them. Yes.

Thank you very much.

Kevin Fischbeck, BofA Merrill Lynch.

A question here on the 6% to 9% M.A. cut that you have an ounce before. Is that inclusive of the industry fee or would the industry fee be in addition to that and how do you deal with that in relationships when the share (inaudible)? Is that something they need to pay or is that something they are going to try to pass on to you?

That is a fair question and we -- that's why we gave a range because we are still discussing that with our health planners.

So that is in the range, but not higher end of the range includes it and the lower end of the range would not?

That is correct.

And, Kent, to your commentary about the $34 cut and the 75% of the delta or [fee for] service, is that just a long way of saying that you provide about $130-$140 of extra benefits today so even if you should cut $34 you would still be providing about $100 of extra benefits. Is that the way to think about it?

That's the right way to think about it and, of course, every plan in every market is a little bit different, but if you took a bit of a weighted average that puts you in the right ballpark in the legacy markets that we are in.

And then you also said in the prepared comments that the rate cuts that you'd expect at the time of the deal unfortunately has come to pass, does that mean that when you look at these rates you think that this is basically in line with how you thought things would be trending for HCP or is this more front end loaded? Is this worse? How do you think about these rate cuts in context of how you thought about this as you entered the whole transaction?

Got it. I will take two cuts at answering and perhaps other people's answer on our team would be different. On the one hand this, doing what they did and when they did it, is worse than we thought it would be. Second, on the other hand, HealthCare Partners' operating performance has exceeded what we thought it would be and so if you look at what we said when we announced the marriage, we are still in a good position to be where we said we would probably be in 2014. We can't guarantee it, so it kind of depends how you look at it.

My first answer was no this is worse than we thought and second answer is, well, if you look at it in a broader sense, we are about where we thought or we still have a shot at being where we thought. Maybe that is a more accurate way to put it.

That's certainly more similar to the way that we normally hear things from you anyway if not it's more accurate. I guess how does it change your view if at all about consolidating the HCP side of the industry? Do you still feel like the opportunity is as robust as it was or do these rate cuts make it more difficult on the margin to make some of these acquisitions that you are evaluating work out?

Two-part answer. Again on the one hand, when you take a reimbursement hit and your margins suffer, it is tougher to invest. There's less of a margin for error and maybe some people even lose some interest that you thought were attractive partners although we are not seeing any of that since most of the world seems to think that the fundamental trends are [inexorable]. So that's the bad part where you say, gosh, that hurts us and our probabilities and prospects for what we intended to do and still intend to do.

On the other hand if you are better at something that most people and or more committed than when you take a rate cut like this, some people are going to check out. Or fail because there's no longer enough margin to support their learning curve or their efforts. And so we have certainly seen that over 15 years in dialysis that during the better reimbursement periods -- of course, when I say better I mean primarily on a private insurance site which subsidizes Medicare. The good news is you have higher margins. The bad news is you have more competition and you pay more for things.

When reimbursement is tougher you suffer on the margin front, but if you are disciplined over the long term, your return on capital may in fact be superior as well as your rate of unit growth. So I think time will tell which of those two vectors is stronger.

So when I think about that type of dynamic around consolidating industry during a period of disruption, there's two ways I could envision HCP benefiting. One would be if the managed care company that you are aligned with are gaining share within the respective markets then you would get some natural follow-through from that. And the other way would be is if other providers or other physician groups are actually exiting the market. So you then gain it from the other side of things.

Is there one dynamic that you think is more impactful than the other and how do you think about the [mergers] that you are aligned with? Are they generally the larger companies with higher margins and therefore more likely to be consolidating? Or are they more representative of the industry as a whole? How do you think about that?

I will answer the first one and let Bob answer the second. On the first one, the variable of having the payers that you are partnered with gaining share and derivatively enjoying that benefit versus on the other hand the driver of the providers against whom you are competing losing share to you and others. Which of those is more powerful? That differs by market by year and either one can be significantly more powerful than the other in any given period. We of course try to benefit from both as best we can although in some of our markets we work with so many payers if one is losing share to another, for us the net effect can be zero because we are on both sides on a Switzerland type of basis.

On the second question, as to the types of payers we deal with primarily, I will turn to Bob.

I will try to answer in a couple of different ways. First of all I think we recognize the HCP division as having some expertise and some of our payer partners would like to see us in more of their difficult markets work with them to coordinate care and work with the physicians so that is still a driver. I would say for sure that rate cuts are not pleasant anywhere, but there's a lot of forces driving physician consolidation that are unrelated specifically to these rate cuts. First of all a lot of physician groups have a serious amount of commercial business. So it is not just M.A. running the whole scenario.

And number two, even in the M.A. program, the need to align with credible partners that can help star rating which is certainly one of the offsets to these kinds of cuts is something that is driving it. The need for capital for technology continues to drive it. The advent of pay for performance and more and more transparent metrics drives this consolidation and the frustration that physicians have in a decreasing reimbursement fee-for-service world. So I think that taking M.A. cuts just in isolation is not as fulsome a way to look at this as perhaps we look at it.

That's helpful. And then, as far as the -- you guys break out acquisition spending. Do you have a breakout of the acquisition spending by decision, how much of that $91 million was spent on dialysis versus HCP?

No, we do not break that out.

And looking at this data here, around clinicians and IPAs, honestly the IPAs are up a lot sequentially, but the full-time clinicians are down sequentially even though it sounds like you have bought some things in Q1. Just wanted to see -- I don't know if this is the first time we are seeing the data. I don't know if there is any seasonality to that number around year end or what, but I just wanted to see any comments there.

No, we haven't had any changes on the clinician as far as employed clinician or contracted clinician is up. Are we having this disconnect here? Could you say the question again please just so we are as helpful as we can (multiple speakers).

Yes, in the HCP operating metrics it looks like the number of clinicians was down sequentially from 1,079 to 1,069. The IPAs were up a whole bunch, but it was just down about 1% sequentially and I wasn't sure why that would be the case if you bought a few things in the quarter it sounds like.

From time to time again for example if you have certain specialty that we end up subcontracting so they are hired by outside specialty group. So that 10 FTE that you see is just a normal business that we go through from quarter to quarter.

Last question here on ESCO, it sounds like CMS actually has already made a couple of changes from the original proposal reducing the minimum size [for your demonstration] down from 500 to 350. Also reducing I think the minimum savings rate down to 42 from 4.754 for the non-large dialysis organizations. I -- do you have any comment on those -- do those things really help you at all? Are those really meant to help the smaller players participate in this?

Good point and you are right. My statement during the earlier part of the call was technically untrue. LeAnne, do you want to go ahead and comment on those?

Yes. Those would be the first signs that there was need to the community and we have been working together, but those are both targeted at helping the non-[LDO] segment.

All right, great. Thanks.

Kevin Ellich, Piper Jaffray.

Couple of quick follow-up questions. First on HealthCare Partners, will you tell us how many acquisitions you did this quarter and also given, I think there's about 258 ACOs in the country now as of February, are you seeing any increased competition when you guys are looking at expansion opportunities?

We don't disclose the number of acquisitions typically and in this particular case, it is such a small number it's not of any particular consequence. If we ever have some sort of spurt where there's data you need to understand to avoid misinterpreting our longer-term trends we would certainly go ahead and do that. But otherwise we don't since they differ in size and timing. And then your second question again, please?

So -- Matthew has got it.

I think you were referring to ACOs and we look at the ACOs, pioneer ACOs, Medicare ACOs and commercial ACOs. What we have seen in commercial ACOs is they are some relationship that [health plan] create that is not necessarily ACO, but they call it ACO. We don't see that as a competition with us. It is our regular fee for service patients that they are more and more on a commercial health plan want to move it to a coordinated population management model. On the pioneer ACO and shared saving ACOs, again, these are your attributed Medicare patients. So we -- that doesn't create any more competition that everyday we have for our fee-for-service patients. So we don't look at that. That is a competition for us because it is all about attributed members that our physicians have.

Did that cover -- did that answer your question?

Yes, that definitely clears things up. Then just what is your outlook in terms of expansion opportunities? And Kent, can you remind us in your guidance for HCP's operating income, does that include acquisitions?

Yes it does is the answer to that latter question.

Okay. The other part was outlook on acquisitions.

We have an awful lot of people calling us, interested. Having said that exactly when we will close any deals that will add up to something material is not an area where we are going to put any kind of a stake in the ground. So the good news is lots of interest. The bad news is we are not yet certain enough about which ones we are going to be able to and interested in closing and when that will happen and what the economics will be so we would be very nervous about you baking anything significant into your near term forecast.

Did I hear someone say pipeline is still robust pretty much?

There was one person on the table who contributed that, yes.

Okay and then a question for [Hammer]. The G&A, it looked like it was a bit lower this quarter. Was there anything unusual or is 10.3% of revenue a good run rate that we should be looking at?

The G&A expense for the quarter is on a combined basis the (multiple speakers) 10.3. I would just point out that there would be transaction costs in prior quarters that would be impacting that rate. So I think it is and, also, we only had two months in Q4 of HCP, but the 10.3% is going to be a good proxy for now. It may fluctuate plus or minus, but that is a better proxy than the Q4 number.

Got it. That's all I have. Thank you.

Ben Andrew, William Blair.

You talked about the number of -- you didn't give us the number but communities in which you are closing your center or running centers at poor profitability. Can you give us some sense in your view what chunk of your centers that are in that type of condition if they were to close would cause a serious problem for patient access?

I don't know the exact number and of course the answer cannot be precise because the definition of what is whatever adjective you used is highly subjective and we take any sort of disruption to patient access to care pretty seriously and that could be driving distance. It can be the quality of the center. It can be the timing of the shift that is available, etc., etc.

There are so many ways to define disruption, but it is not a tiny number because even if there are other centers close by if someone has to move to the night shift that can be highly disruptive to their lives, which often translates into poor clinical outcomes which often translates as well into more hospitalization. So it is not a small percentage, but I don't -- it would be pretty arbitrary for me to pick a number.

And within the integrated care program for dialysis itself, have you talked any more about what you would like to see, what changes you would like to see made to the program? Because we see that there's some movement towards the SDOs, but is there anything there enough that would if it extended to the [LDOs] be helpful for you all?

LeAnne, do you want to go ahead and cover that please?

The industry has asked for a number of changes including some on the calculation of economics and so this is a first sign that they are taking notes consideration seriously, but we really couldn't be specific beyond that because they haven't given us indication.

So there is not a threshold or something that we could think about in terms of what would be enough?

Not at this time because there's several areas that they could make some movement that would really help us in how we feel about participation and so we will see we will answer that question when we see their complete proposal.

Thank you.

[Vijay Maleek], Peninsula Equity Advisors.

Good afternoon, everyone. Can you please provide some more color on the standstill you entered with Berkshire, specifically what counted DaVita to enter into it? And do you feel the market is underestimating DaVita's long-term cash generation ability, and would it be disadvantageous for shareholders to go private?

With respect to the standstill, Hammer or Kent, would one of you like to respond?

Could you rephrase that first part of the question?

Sure, just some more color on the standstill. Really what prompted DaVita, what motivated DaVita to enter into it? Was this DaVita going to Berkshire based on management's opinion that the market is undervaluing the Company and even taking out a significant premium would be disadvantageous to shareholders?

Well, Berkshire recently approached us about the option of increasing their holdings and we found them to be a supportive investor with a long-term view and we are glad to have them as a significant shareholder. So we entered into a discussion about coordinating an HSR filing in exchange for having an agreement that reflects the fact that they are a passive investor and this is a friendly relationship.

Very helpful. Thank you.

(Operator instructions). Whit Mayo, Robert Baird.

One other question on the Berkshire standstill. Can you disclose what the length of that agreement is?

I believe the total let -- do you mean the timing?

The timing.

I believe it is three years.

Three years. And my second question is any general update on the California duals program and your enthusiasm to participate in that program? Thanks.

Again, it is a bit of a moving target as you know California -- Permission from CMS to move forward with it. It is still anticipated to move forward. There's still a lack of clarity about how the rates will be set and where and how the risk will be apportioned, relative to not only the ambulatory and institutional portions, but the post acute and long-term care. And so, still a lot of moving parts. A big potential opportunity if the economic pan out correctly, but at this point I can say we are in continual discussion in both LA and Orange Counties with the health plans that will be selected or have been selected to administer the program.

Okay, thanks.

(Operator instructions).

This is Kim. I want to make one quick correction about the question regarding the length of the standstill. I would let folks know the entire agreement is on file with our 8-K so you can look at it and it is meant to be in place so long as Berkshire is a 15% or above shareholder.

And we have no further questions at this time. I turn the call over to the presenters.

Thank you all very much for your continued interest in DaVita HealthCare Partners. We apologize that we had an unusual amount of difficult news to convey. We do in fact hope to reach a satisfactory resolution with the government and put that behind us which would lead to a lot lower legal expenses and a lot less management time consumed by it. And so we are hoping that we can in fact reach satisfactory resolution there, and thank you all. We will talk to you again soon.

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