德維特 (DVA) 2014 Q3 法說會逐字稿

Good afternoon. My name is Kim and I will be your conference facilitator today. At this time, I would like to welcome everyone to the DaVita HealthCare Partners' third-quarter 2014 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 period. (Operator Instructions) Thank you.

Mr. Gustafson, you may begin your conference.

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

I'd like to start with our forward-looking disclosure statement. During this call, we may make forward-looking statements within the meaning of the federal securities laws. All of these statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. For further details concerning these risks and uncertainties, please refer to our SEC filings included in our most recent Annual Report on Form 10-K and Quarterly Report on Form 10-Q.

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 in our Form 8-K submitted to the SEC, and available on our website.

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

Thank you, Jim, and greetings to all. Thank you for your consideration of our Company. In Q3, we had solid results in Kidney Care, in HealthCare Partners and overall; Kidney Care OI being $408 million adjusted for nonrecurring items, and HealthCare Partners being $47 million. As always, we'll talk about clinical outcomes first, because we are first and foremost a caregiving entity.

On the Kidney Care side in America, we take care of 35% of all the dialysis patients. 98% of our patients achieved a Kt/V of 1.2 or better, and 73% of patients have a fistula in place.

Turning to HealthCare Partners and our 836,000 human beings for whom we provide integrated care, I'd like to talk a little bit about 2013 HEDIS clinical metrics, which most of you are familiar with. There are 12 clinical measures in HEDIS, all of which feed into the STAR rating system.

And I'm looking at a page right now that has those 12 rows, and it has three columns, one for each of our legacy markets. So a total of 36 cells; 24 of those 36 are five-star rankings; 7 of them are four; and then there's only five left that are at three with none below. There are very few providers of any scale in the entire MA program that would have anywhere close to a rating system like that.

And we're proud of it. It's good for patients and it's good for our payer partners.

The clinical outcomes for both Kidney Care and HealthCare Partners compare very favorably to national averages. We have healthier patients. We have higher patient satisfaction. And both of those things, beside being good in and of themselves, save money for taxpayers and employers.

Now, a little elaboration on HCP's operating performance, which was solid. You'll note that the guidance assumes lower margins in the fourth quarter. This is a normal trend because of the fact that sicker patients with higher risk scores expire; as the year proceeds, younger, healthier patients age into MA. And there's typically some uptick in medical utilization as we enter the winter months.

Onto HealthCare Partners business development. We've increased the level of activity modestly. And it's a lot of high-quality conversations that have been started. We still have a long way to go in terms of capabilities and the sales cycle itself is long. But the way we think about it is pretty much dividing it into two categories, mainstream and new models partnership.

On the mainstream front, as most of you know, we recently announced an exciting acquisition of Colorado Springs Health Partners, the leading group in Colorado Springs, Colorado. And we look forward to growing with them -- not only leading them into a world of coordinated care, but also growing on the fee-for-service side.

And then separately, we've got a number of creative and exciting hospital partnerships at the very serious stage, one of which was announced today -- a 50/50 joint venture with the Centura Health System here in Colorado. It's the leading health system in the state.

These two different Colorado deals are entirely separate. We are the 100% owner of the Colorado Springs HealthCare Partners Group, but we look forward to having our group work with the joint venture with Centura, and moving forward, pursuing and managing global cap contracts.

We'd also like to initiate 2015 guidance. The enterprise guidance is $1.75 billion to $1.9 billion. In other words, relatively flat to the current reality. Underneath that, the Kidney Care operating income, $1.525 billion to $1.625 billion. This reflects the sad fact that it will be the second year in a row with no Medicare increase, and we'll face normal cost increases.

Things are getting more intense because of stuff like this. We expect to have 15 center closures by the end of the year. That's more than any other year I can remember. And we are still carrying 200 unprofitable centers after that point, and that's excluding any new de novos. It's also a tougher commercial pay environment. The growth in more restrictive narrow network plans means that we may very well lose some market share on the commercial side, as we will be unwilling to accept lower commercial rates. We need, unfortunately, high commercial rates to subsidize the losses that we incur in the 90% of our patients that are government.

Moving on to HealthCare Partners and guidance of $225 million to $275 million, this also reflects relatively flat MA reimbursement in the face of normal cost increases. And on top of that, we are investing in infrastructure and capability improvements. And finally, we will once again always have some losses in new markets -- or at least, hopefully, always -- as we hope to enter some new markets each year. And in many cases, the most capital-efficient way to do that is with low capital models that therefore have losses -- operating losses in their early years.

Moving on to 2016, we'd like to go beyond providing 2015 guidance in this case, because we have two serious headwinds that are potentially quite material. The first of those and the biggest is Medicare reimbursement on both sides of the house. And then secondarily, the tough commercial pay environment that I already cited on the Kidney Care side is not going to go away in 2015.

And so, that, or those two, combined with the earnings headwinds that will come from the new markets we hope to enter, means that, while it's too early to provide any specific guidance for 2016, the factors I just mentioned lead us to need to communicate to you that there is a real risk that 2016 operating income could be lower than 2015.

I'd like to segue into a quick editorial on Medicare Advantage in particular, and just the incredible importance of CMS needing to get those rates correct. America needs the sickest patients to join Medicare Advantage and those likely to become the sickest, because those are the patients where we add the most clinical value for the patient and economic value for the country. And we are at risk of moving into a danger zone where the economics of making the right investments in those two sets of patients become unsustainable.

If I step back from 2015 and 2016 for a moment and just quickly look at the strategic position of our primary businesses, US Kidney Care is well-positioned, as we've talked about in the past. We have strong clinical outcomes, and that increasingly matters. We are growing faster than the market. It's a life-saving therapy, and our ability to manage total patient cost, not just dialysis cost, is increasingly differentiated. However, we do live in the uncomfortable world where we rely on higher private pay rates to subsidize the government.

On the HealthCare Partners front, despite a rocky first 18 months, the fundamental value proposition remains intact. Integrated care and population health management are what we do well and that's what lots of people want to move to. We have a solid foundation in our legacy markets. And I'd like to talk about what I'm focused on in the near-term, since I've now been quite engaged for four or five months.

Not in order of importance, but number one, adding to the team; number two, adding to the capabilities; number three, fix the problem spots; number four, explore new partnership models, a couple of which I've already talked about; and number five is pursue selective growth. All of this is, in the context for HealthCare Partners, good news, which is that everyone expects MA growth to continue, because it is a superior way of taking care of people and taking care of America's economics.

On the international front, I'll just say we are continuing to make solid progress. Of course, there is risk in that venture, but the potential is huge, as Healthcare Service is a growth industry across the globe.

Now, Garry Menzel, our CFO, will cover some more stuff.

Thank you, K.T. Starting with Kidney Care, non-acquired dialysis treatment growth in the quarter was 4.9% when normalized for days of the week. Profitability was up $6 million sequentially. Our international losses were $13 million for the quarter, and we now expect those losses for 2014 to be slightly above $40 million.

For the overall enterprise, our debt expense was $100 million in the third quarter. This is a good run rate for debt expense going forward. Our income attributable to noncontrolling interests was $36 million in the third quarter, which is also a good run rate going forward. Next, the effective tax rate attributable to DaVita HealthCare Partners was 38.7% in the quarter. And we now expect the full-year rate for 2014 to be in the range of 39.5% to 40%.

Turning to cash flow, we continue to generate strong cash flows, as operating cash flow was $848 million in the third quarter and $1.88 billion over the last 12 months. This was unusually high due to, one, the timing of cash tax payments; and two, the timing of various working capital items, in particular, a reduction in Accounts Receivable DSO, which we do not expect to repeat next year.

We now expect operating cash flow to be between $1.7 billion and $1.8 billion in 2014, excluding any payments associated with the settlement with the government. We expect 2015 operating cash flow to be between $1.5 billion and $1.7 billion, lower than 2014 but in line with our historical trends.

The reason for this year-on-year decline is that 2015 will not benefit from the two factors that helped 2014. Number one, the cash tax benefit related to our refinancing; and again, number two, the timing of various working capital items, in particular, the reduction in Accounts Receivable DSO. As always, this guidance range captures a majority of probabilistic outcomes, but we could be above or below (technical difficulty) the range.

Finally, some comments on capital deployment. Even after making the $400 million government payment last week, we have a very strong cash balance today. We are in the fortunate position of having various opportunities where we may be able to deploy our capital in each of our business lines. We are constantly reviewing our capital allocation to make sure that we sustain the long-term health of the organization, and achieve appropriate after-tax cash returns on capital.

To put our historical practices in context, in the five-year period prior to the HealthCare Partners transaction, we allocated 40% of our capital to acquisitions, 23% to internal development, 26% to share repurchases, and 11% to debt repayments. We favor a situational approach to capital deployment, and will continue to review our options.

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

Brian Zimmerman, Goldman Sachs.

I guess my first question is around 2015 guidance. And just hoping to get a bit more color on what sort of assumptions you're making in heading into next year? And just especially, if you look at the dialysis side, guiding down year-over-year. Just curious to get a bit more insight into what's behind that number.

I don't know that we have much to add, because it really is driven by the stuff we mentioned -- the absence of a Medicare increase for the second consecutive year, and we did an awful lot of expense squeezing in the face of the first flat year, and can't do that again with the same kind of return. And then just what's happening in the commercial pay side and some of the dynamics there. Those are the big issues, those are the drivers. It's not a lot more complicated than that.

Okay. And can you remind us what percentage of your commercial volumes are -- what percentage is commercial volumes on the dialysis side?

About 10%.

About 10%? And then you mentioned that some of the issues on the HCP side. And since taking over leadership, you've identified some areas you want to address. Could you give us a bit more on just sort of what you mean by fixing problem spots and pursuing selected growth?

Sure. In the case of fixing problem spots, I'm referring to the two deals that were done right after the close by some of the prior executives that didn't work out well. And we've, in fact, made strong progress in the last five months on each of those. And we referred to that in our last call, where we said we were going to be -- we're still confident that we are highly likely to be more than $25 million better in 2015 versus 2014 -- I should say $25 million more or better. But $25 million is probably the best number to remember.

So, that's the fixing problem spots I was referring to. And that's going quite well.

On the selective growth, I think the two best examples to make that more tangible are the deals that we've talked about this week, which is, one, the purchase of a leading physician group in a substantial American Metro area; and second, a health system joint venture, where we still have to sort through all the terms of the definitive.

But we're -- both sides are very committed to driving it to closure and moving forward. So, those are two examples of selected growth. Am I answering the right question?

Yes. I was just curious to get a bit more detail behind that in those initiatives. Thanks a lot.

Thanks, Brian.

Justin Lake, JPMorgan.

I wanted to follow-up on the question on dialysis and maybe come at it from just a different angle in terms of 2015 outlook. Kent, over the last few years, your actual dialysis results have been significantly better than what you've guided to initially. I'm just curious if you could look back at the actual versus expectations, and give us any color around what those upside drivers were? If there's any consistency there?

A fair question. I don't know that I can spontaneously do a good job of going back two or three years, but let's play with it for a moment and see if we can add some value. I know in this past 12 months, the concerns we had about exchanges turned out to be much greater than the reality. And so, that was one very big dynamic and one very big variant. I'm trying to go back to the prior year and I'm just not sure on that one, Justin.

Okay. So I guess you're saying that -- and I think payor mix and just private pay, whether it's mix issues or reimbursement pressure in general, seems to have been, in addition to whatever rate pressure you are facing on Medicare, has been something that the Company has faced and obviously done a good job over time. And we'll see how we go for 2015.

I guess my question is, when you look at those -- if we just direct it at the commercial pay side -- that's been an area of potential pressure, and ended up being better than expected or less significant than expected, if we can use those words. Then, is there any reason for us to believe -- is there a higher level of conviction that this time it's going to be different versus the last two or three years, where it's been less meaningful than you thought?

Yes.

Or do you feel like this is just the typical level of prudent posture going into a new year?

Yes. Very fair question. Maybe let me use an analogy. If you win the first two games of the World Series and you are about to start game three, and you are up against a superb team that made it all the way to the World Series, you don't look at the rearview mirror and say, well, we won the first two, and therefore it's 80% probable we are going to win game three. You say, against a tough competitor, you win some, you lose some, but you don't win them all.

And I think we have to look at our never-ending battle, if you want to call it that, with private payers to say that, yes, we've been able to hold the line, in part because our entire industry needs to subsidize the government, and so it's a common plight. But whatever the reason, we've had a couple of good years.

We just think it would be inappropriate to therefore, based on that rearview mirror pretty view, get overly confident about next year. But separate from that metaphor -- which I think is important -- but beyond that, it is also just the case that there's a lot going on in the commercial sector. And many of you are more facile in discussing it than me.

But it's -- employers are getting more and more creative with what they are doing on benefit design. They are getting much more open to doing different things with exchanges and narrow networks, just being one example. And so, when 10% of your patients drive whatever -- 115% of your profitability -- I'm not going to get the exact number right, but the subsidization of the Medicare program is substantial from the private sector -- that you've got to pay a lot of attention. Because relatively small changes can wreak a lot of havoc in your year-over-year momentum.

And so, I would posit, and we would posit, that the world is different in 2015 versus what it was in 2014. And if you had to say, does it lean different harder or easier, you would lean harder. And in particular for us, because the way it could show up is not that we lose rate; it's that we lose share to other people who are willing to cut rates. And that's something that we can't control.

Got it. I'll jump back in the queue. Thanks for all the color.

All right. Thanks, Justin.

Gary Lieberman, Wells Fargo.

Thanks for taking my question. Garry, maybe could you give us a little bit more color on the reduction in the DSOs? Is that just a timing thing? Or was there one specific payor or something that's going on?

It isn't one specific thing, Gary. It's just a trend that we've had over the last 18 months or so. But it's not something that we expect to continue.

Okay. Is it around a specific item or a specific dynamic? Or is it just a whole bunch of different things?

Gary, this is Jim Hilger. It is a number of different things. It's improved collection processes and results. We've also had some higher write-offs. You can see our Medicare bad debt expense percentage was increased in the quarter. But we feel very good about the quality of our AR. But in aggregate, all of these things are driving our DSO down.

Okay. Wouldn't collection -- more proficiency with collections, wouldn't that carry forward, though?

Yes, but the structural impediments to improving DSO from 50 days are quite large when you look at the fact that our biggest payer, Medicare, pays us about 22 days after the end of the month. So when you factor that into the math, it's going to be very hard to significantly lower DSO from here.

Okay.

But it doesn't mean that we can't try. But it will be hard to do big strides.

Got it, that's helpful. And then, Kent, the other large national dialysis provider said they'd begin doing tests with Micera in the US this quarter. Do you guys have any plans to do that?

Not right now, but we are very open-minded on the topic.

Okay. And then assuming that that -- the drug is available in the US at some point in 2015, have you baked that into the guidance at all?

Well, I would say that we baked everything into our guidance. And trying to predict -- and especially, you know the history in this arena, that trying to predict when something, in fact, is going to be introduced and how it's going to be introduced, and how it will be priced and how penetration will evolve, is really hard.

So, I don't think we presumed anything particularly bullish or world-changing in that regard. However, we do think the fact that competition is highly likely in the near and intermediate term, is a good thing for everybody.

Okay. And then I guess even as you go into 2016, the potential for perhaps three competitors on the market for the drug, have you taken that into account when you are thinking about 2016?

Yes. We've taken into account, but again, while not sharing our different probabilistic scenarios and the math associated with each, because obviously, there's a range of outcomes in all the variables I cited before, that we are hopeful for meaningful change, but within the timeframe of a year or 15, 18 months, we're not presuming that life is fundamentally altered in a dramatic way.

Okay. I mean, maybe just to go down that route a little bit more, I mean, if in 2016, there were three drugs available and you -- isn't it conceivable you could see a 20% decrease to price on cost that's over $1 billion for you?

Well, we do think that new entrants are going to have to offer lower prices to get penetration -- just period. There's no two ways around it. And it's going to have to be significant. We also think strategically that Amgen is going to want to stay competitive, as they have in other countries around the world in similar situations. And so, that all directionally is very good news.

And at the same time, we just want to remind people that the entire community realizes certain benefits from cost reduction that, ultimately, that will appropriately be reflected in the Medicare reimbursement. Now, since we are at a deficit, we still should come out ahead. Because part of what Medicare hopefully will do is start to reduce the deficit. But the notion that they would let anything along the lines of what you mentioned just flow through permanently, I think that's unlikely.

Okay. And then maybe could we get an update on the Tandigm partnership and how that's doing?

It's doing fine, but it's so early that that doesn't mean so much. We've had a wonderful response from the physicians in the community. We are in high-quality conversations with a bunch of the hospitals. IBC and us and Tandigm are working very well together. But it's a little bit like the pre-season. The real tackling doesn't start until January 1. So, we don't want to get too excited about winning some of the pre-season games.

Okay, great. Thanks very much.

Thank you, Gary.

Kevin Fishbeck, Bank of America.

This is actually Joanna Gajuk filling in for Kevin today. Just a question follow-up on the comments around 2015 guidance again. I guess specifically the comments around loss from I guess new deals. So are you including additional transactions on top of what you just recently did?

And I guess in relation to that, can you comment on your comments from prior calls around planning to enter two or three new markets next year and then more after that? So is that what you are sort of bake into your outlook when you talk about 2015 and then I guess 2016 as well?

We would be disappointed if we didn't do, on the HealthCare Partners side, two good new deals next year. And by saying new, that probably means in new markets as opposed to an additional one in existing market. Anything done in those places will probably be best material. And then we are presuming that one or both of them could be of a similar structure to the ones we're doing now, where we are launching a substantial population health management initiative.

And therefore, in the beginning, you've got operating losses just like when we build a de novo on the dialysis side. So, that's how we think those 2016 losses will emerge.

Thanks. And then again on HCP, I guess then in the quarter that you just reported, the G&A costs of I guess $86 million versus $77 million in Q2, and I guess as a percentage of revenues also increased. So any comment on that?

Yes, it's Garry. First of all, on the margin, you have to remember it varies by quarter because of a number of different factors -- seasonality. There were nonrecurring items and there were government true-ups. And so, I will point out, though, that across the year, we have maintained consistent cost trends.

Great. Thank you.

Thanks, Joanna.

Darren Lehrich, Deutsche Bank.

So, I did want to just come back to part of what you are asked before, just about the investment that you're making in some of these activities. And I guess I was just hoping if you could bucket them a little bit better for us for 2015, just so we can maybe isolate some of the underlying trend in both segments? So, just taking them apart.

In international, can you give us some flavor for how you are thinking about the investment there? And duals, I know that that's something that you will be ramping up your lives in California, I think. So is that an investment? Is that a positive? And then to the extent that JVs, and other new markets that you've just announced here with HCP, require investment, what does that look like?

Yes. Fair question, Darren, and maybe we'll lay out more math next time. I don't think I'm well-prepared to do that right now. But I would say international in 2015 will be comparable to 2014, with the ramp-up in Saudi and the rest of our growth. So that will be comparable.

And then duals, I wish we could tell you exactly what that number is going to be. But we've got to watch that population very carefully. And we'll keep you posted. But right now, it wouldn't be right to speculate.

And then, on the joint venture side, given they are so young, it's really hard for us to go very far in a satisfactory way, because there's so many variables that we just don't know. We can feel good about where it's going to be two years from now, three years from now, four years from now; but the notion that we can predict operating losses in months one through 15, that would be -- while we have our pro formas that we are managing against, there is a pretty significant range of possible outcomes.

Okay. So, well, I guess the default then is just when we think about maybe how you've communicated around Tandigm. And I think there have been some numbers floating around. But the sizing of that, so 50,000 or so lives in that type of JV versus what we're reading about today -- Centura, 1.2 million lives over time, obviously a very different type of situation -- but just trying to understand a little bit more about how some of the investment flows might be related to these different types of JVs. So we can at least just frame that in the model from a new market perspective.

Yes. I think we have to get better at working with you on that, Darren -- you and your peers. And I will not make any great progress in that area on this call today. And then on the Centura, we cherish our partner's optimism. And they have far more experience in this market than we do. Nonetheless, our pro forma does not have 1.2 million lives in year-five. And so we would hate to have you bake that in. But we sure as heck hope they are smarter than we are.

(laughter) All right. Last thing for me, just -- you know, you brought up 2016. You're obviously cautioning us. I guess what is it about 2016, if you could maybe list one or two things that keep you up the most, and that we ought to be rethinking about in our models?

Okay. I'll be redundant, and then we can go back and forth and see if we add some incremental value. Game one is just Medicare on both sides of the house. What are they going to do with rates? And in some cases, what are they going to do with certain architectural rules and regs that equate to significant math?

But it's Medicare and it's rates. And then second is this commercial side, just given how darn leveraged it is. And when there's so many things going on in that space, it's just a little nerve-racking for us, particularly when it could come down to us, as I mentioned before, losing share out of our control because we can't run around offering discounts.

Okay. All right. Thanks very much.

All right. Thanks, Darren.

Vijay Malik, Everest.

Thanks for taking the question. I just wanted to circle back on capital allocation, which you discussed earlier, specifically mentioned, prior to the HCP acquisition, 26% of your free cash flow used for repurchases. About six months ago on the call, I highlighted, at the end of the year, you might have $2 billion in cash on the balance sheet. And the question of capital allocation and what to do with that cash is becoming increasingly important every quarter.

Can you talk a little bit about how you evaluate share repurchases? Obvious, relative to other opportunities you see out there, but it's hard to believe a company trading its cash at 10 times free cash flow might not be your best investment opportunity is just repurchasing stock.

So, thank you. It's Garry. First of all, I do want to point out, we won't have $2 billion in cash at the end of the year. So, I'll highlight that.

Secondly, I think it's important as you listen to the call that whenever you enter into a period of uncertainty, which we are flagging today, that you do owe it to the shareholders to ensure that you maintain a strong cash reserve to go through that period of uncertainty. So that's certainly informing our thinking.

And then, beyond that, we look at all of the opportunities that we have in front of us, both for internal development, both for acquisition growth; and then, as you point out, share repurchases or debt paydowns. And we take a very situational approach with each one of those to determine what is the appropriate option for us to follow. I don't think we can disclose much beyond that, other than to let you know that this is something we do, month-by-month, intensely study.

Thank you.

And the only thing I'll add to that is when we talk about times of uncertainty mean, logically, that you should hold more cash -- very simplistic, obviously. That's not just for defensive reasons. It's also in times of uncertainty that there is a way above average probability of offensive opportunities popping up. And so we are equally defense and offensive-minded as we stare at that decision.

Understandable. When I see the cash on the balance sheet, I -- and I don't see share repurchases, it makes me excited about the opportunities you must be evaluating. I, obviously, think very highly of the management team. And you know, frankly, I think it's an asset that Wall Street might be missing.

Well, we hope you are right. And we will do our best to make you right. (laughter) Please don't put anything in your model.

All right -- there's no model. It's in my head. (laughter)

Gary Taylor, Citi.

A couple of questions. One, I just want to go back to EPO unit costs for a minute. You know everyone knows you have the exclusive contract with Amgen through 2017. It seems obvious there is no EPO unit price reduction in the kidney operating income guidance that could be flat two years in a row. So I guess to get to it, what is the scenario that you can benefit from EPO unit price declines before the Amgen contract expires?

There's some elements of the contract that we are not allowed to disclose. What is publicly known is that we have the right to buy 10% elsewhere. And what is known in the sense of sort of common sense in business wisdom is that they are going to want to remain competitive. And in a contract, in either direction, if one party takes excessive advantage of a short-term provision, that typically has really fundamental implications for the long-term relationship.

And so, the contract has certain things that we like and certain things that they like. And separate from that, we have a long-standing business relationship. And in general, it's our expectation that they will remain competitive.

Do you want to -- I don't know that I can shed any more light on it than that. Do you want to come back at it again?

No, I won't. I mean, it sounds like you hope to renegotiate, but I won't put words in your mouth. And I don't know if you'd want to respond to that or not? Probably not.

No, thank you.

If not, I will -- my next question, just go into the commercial rates, a couple of questions. So, it's November 6 today. When do you -- when are 2015 commercial rates finalized? Don't you have pretty significant visibility as we stand today?

No, the way it works is, we are negotiating contracts all year long, every week, every month, every year. And lots of times a contract expires and people just extend it because the negotiations go on another month to 12 months. A lot of times there's notice provisions and so they automatically renew for a certain period of time, but it's not another year. We have agreements that end every month of the year, even if they are one-year contracts.

So, the practical reality is that we are negotiating with payers all the time. And often, it goes months past the technical expiration of the prior contract, and we just -- everything is just held in a steady-state while the to-ing and fro-ing is going on. So there is never really a time when you say, okay, we've now sort of nailed down what's happening next year. I bet it's only a tiny fraction of our contracts that even have a January 1 effective date or renewal date.

And my one follow on that would just be -- it sounds like you are suggesting competitors willing to discount rates. I guess kind of our view of the construct of the industry is that you might have a third national market share, but your local market shares are actually often significantly higher than that. And generally, the industry operates at pretty high capacity utilization.

So, the opportunity for discounters to move share would suggest perhaps there's some significant capacity adds in the industry, although maybe that just means being open on Saturday and Sunday. But are you suggesting that you are seeing capacity adds, and that's going to create this opportunity for competitors to provide the service at a lower rate? Or is there something else?

The short answer to the question you asked is no. We are not positing any immense capacity adds. Having said that, incremental capacity is quite straightforward to add, because you add a third shift or you had the Tuesday/Thursday/Saturday to your Monday/Wednesday/Friday. But more often, it's adding a shift or, in some cases, adding another station or two to an existing shift.

So, there's a lot of capacity that can be added quickly at relatively low cost. But that's actually not the number one issue. The number one issue is when private pay is only 10% of your patients, it doesn't take very many bodies to be moved to someone discounting before you materially affect your year-over-year contribution, but don't put any serious incremental burden of capacity on the system.

Okay, that's helpful. Thank you.

All right. Thank you.

Lisa Clive, Bernstein.

Two questions. Just another on the private rates on the dialysis side. A year ago, you had mentioned your frustration that a competitor was apparently giving a bit more on price. And it sounded like it was around one particularly large contract. And when we last got a comment on this, I think your words were something along the lines of both sides were equally unhappy. And it sounded like you'd sort of stuck to the status quo.

Can you just give us an update on that particular situation? And is that perhaps part of your seemingly more downbeat view on commercial pricing for 2015?

And then a second question on private rates -- actually not commercial rates but Medicare Advantage. You talk a lot about MA in your HealthCare Partners business. But as MA overall has increased as a proportion of all seniors, I would imagine this should have some potentially positive mix affect for the dialysis business. Could you just perhaps talk about MA patient count, how that has changed? And whether that does, in fact, have a bit of a margin benefit?

Let me answer the second one first, and then I'll probably ask you to ask the first one again, because it had sort of two parts to it. I want to make sure I don't ramble -- or at least reduce the probability.

But on MA, MA growth is good for HealthCare Partners and it's good for Kidney Care. We love it in Kidney Care because those customers -- talking about MA plans as customers -- care about total cost. And we are really good at that. And so, both from an immediate margin point of view and from a value-added point of view -- and therefore, that informs future rates -- we really do like MA growth in the ESRD population.

That answered your second question, correct?

Yes.

Well, go ahead.

Yes, I was just -- actually one second -- maybe a second add onto that second question is, you mentioned the MA's focus on total cost. Could you also just provide a comment on Fresenius's recent agreement with Aetna on their MA patients? And is that something that you could see moving forward with, with any major commercial players?

We don't know all the details of what they did with Aetna. We know some stuff. And we certainly believe in integrated care and pay-for-performance. And so, we are in those sorts of conversations as well. And we would expect FMC to be -- continue to do that sort of stuff.

And the good news -- and it is more and more payers are interested and willing to spend the time in actually going through all the hours of discussion and negotiation that are required. A few years ago, Kidney Care just wasn't high enough on the radar screen to get the attention to actually do more sophisticated contracts, where everybody can win. So that's the community-wide good news inherent in announcements like that. And beyond that, I would just have to guess that we are both doing similar things.

Okay, thanks. And yes, on my first question, it's really -- I guess a way of rephrasing it is, you seem a bit more downbeat on commercial pricing. Clearly, exchanges are one part of that, but I remember you very specifically had mentioned a year ago that there was one major contract where it sounded like your big competitor had taken a bit of a rate cut. And you had resolved that issue by sort of sticking with the status quo.

And I'm wondering whether you've had to shift away from that status quo? And that's one of the reasons why you are potentially a bit more negative on the commercial outlook for the next 12 months?

Yes. We did have a situation -- as we've talked about and had an obligation to inform you of -- where we had serious concerns about a competitor offering serious volume-related discounts. And that would affect industry structure in a way that shareholders would need to know about it. So, that did happen.

And then, second and totally separate, we've maintained pricing discipline, rate discipline. And we are willing to give up market share in order to do that. Because it's very difficult to see a path where we are able to continue to innovate, and drive the transformative parts of what we are about, in terms of reducing total costs. We just can't do that without some margin.

Okay, thanks. That's very helpful.

All right. Thank you.

At this time, I show no further questions.

Okay. Well, thanks very much. I mean, I will add, I guess, one other point that is related to what we were just talking about with Lisa. That is -- our patients are uniquely discriminated against. American dialysis patients are uniquely discriminated against in two ways -- that if their kidney has already failed, they cannot join an MA plan, which is an absolute terrible policy, because it robs them of extra services that improve health and save the system money.

So it's an artifact of a legitimate concern from 25 years ago that doesn't apply any more. And we really hope it gets changed.

And secondarily, our patients are uniquely discriminated against in that they -- no matter how many years they've paid private insurance premiums -- because they wanted insurance in case they got quite sick -- they are kicked off of it after 30 months, in a situation that no other American faces. And so those are two policy areas where we do hope for change.

And thanks, everyone, for your kind consideration. And we'll do our best for you between now and the next earnings call. Thank you.

Thank you. And this concludes today's conference. You may disconnect at this time.