德維特 (DVA) 2015 Q1 法說會逐字稿

And with that, I'll turn it over to Kent Thiry, our CEO.

That was my mother. Yes. Why anyone puts our annual sacred Capital Markets Day in a largely black room, I don't know. Certainly, that's not our mood. It's good to see many of you again that have been with us for a long time, and welcome to those that are newer. As usual, I'll cover a lot of stuff and then we'll do Q&A until either you drop or we do.

Mission and Values come first, particularly, poignant almost to make this point given the recent settlement and how in some people's mind that can call the question how seriously we take this stuff.

But we absolutely -- and if you talk to a huge percentage of our 67,000 teammates across all the countries would tell you how much our behavior, how much our decisions are driven within the context of our Mission and Values. And we're so proud of the fact that the data supports the notion that in many, many, markets, the many things that what we do, we are the provider, partner, employer of choice, the place that most doctors choose to affiliate, the place where more teammates are likely to come and to stay, and the partner that many others want to work with.

And so the data supports this otherwise sort of nebulous conceptual pitter patter. And this includes our seven Core Values where, as many of you know, I get scored every single year by the people I work with, and my scores are made public across what we call the DaVita Village. So we take this stuff incredibly seriously which is why some of our settlement issues are all the more appalling to us personally.

Hammer went over some -- Hammer, Jim Hilger, Hammer's his nickname -- went over some of the numbers, but this is a quick recap at the aggregate level of our revenue and OI and guidance numbers that many of you are familiar with. I think for the future, though, far more important to think about is the significance of our platforms.

Now, they're platforms that are producing cash flow right now, so there's nothing tenuous about them, quite the opposite. But in addition to the platforms, we're doing a lot of different things in this country and elsewhere in the decade to come. And I won't torture you with going through all the different sort of strategic stuff listed on this slide.

But our ability to do conventional fee-for-service medicine, our ability to drive clinical outcomes through a distributed physical environment, our ability to do sophisticated contracting, performance-based contracting of different varieties and types with different types of entities whether they're ACOs or payers, these are affordable capabilities which can allow us to pivot in a lot of directions in the years to come and on all sides of our company.

Just to quantify aspects of the platform, again, separate from its cash flow generating capability, separate from its clinical capability, if you just look at some of the assets, it's pretty formidable. On the Kidney Care side, 35% of Americans on dialysis, we take care of now. We're in a lot of different places, over 2,000 locations. In addition, our ability to manage care holistically is unmatched. Whether you're talking about our pharmacy, whether you're talking about our vascular access centers, whether you're talking about our global cap capability, et cetera.

And then on to HealthCare Partners, which, although a different business, a different sport, has very comparable athletic requirements around payer contracting, clinic management, physician partnering, working with physicians, nurses, and other clinicians to drive clinical outcomes, purchasing for a lot of the same characters so that -- while these are different sports-- the athletic requirements, the core capabilities, the core competencies are highly, highly parallel that you can move talent back and forth. And then just the assets themselves in terms of number of physicians, number of clinics, et cetera, relatively unique in America.

For all this to work, to grow a number of businesses and to grow size, some of you have been with us since we were back $1 billion in revenue, kind of $140 million in equity market cap. But a part of how that works is through creating a sufficient talent acquisition, retention, development capability. And this is something we take very seriously, because otherwise, when we go off and do new things or old things in new places, we put your capital at greater risk. So we have taken very seriously, for 15 years, the notion of creating talent at a rate which is proportional to our capitalistic aspirations.

And at this point, for example, kidney care, conventional legacy kidney care has contributed almost 100 executives to HCP, 100 people of whom about two-thirds are managers and above, to HealthCare Partners, to International, to Rx, to Paladina, et cetera, which allows us to be more aggressive, to be more experimental, to be more innovative with your capital in a way, while at the same time reducing risk because of our ability to export talent, export philosophy, export management process discipline, et cetera.

Compliance. Let's talk about this first since it's the new news. And I think our overwhelming feelings about this -- forget the thoughts -- are just we're very disappointed in ourselves and really humbled by the fact that we are having to write a check this big. And we can go into more detail on some of this if you'd like when we're in Q&A.

But this is not how we ever envisioned ourselves spending time or your money. We did make some mistakes and we're accountable for that. It is not representative at all. In fact, it creates a wildly inaccurate perception around how seriously we take compliance. And if anyone ever wants to come in for a separate three-hour session, I mean, we should put a group meeting together and just overwhelm you with the depth and breadth of our efforts in this regard.

The unfortunate reality is, given the way multipliers work in the False Claims Act, you can get to very, very big numbers with a very, very small number of instances for which you may be at some risk of a negative finding. So for us, from a compliance point of view, the strategic imperative is very straightforward -- we want to earn the government's trust going forward.

And therefore, we are -- despite the fact that we are incredibly proud of the breadth and depth, the intensity and the integrity of our historical compliance system -- staring at the data, stepping back and trying to relook everything. We're going to have our board of directors far more involved in compliance oversight going forward. That's at our request. It doesn't really matter if we would request it or not because they would want to do the same thing at this point. But we're changing our management process, we're adding formidable resources, we'll be spending upwards of $25 million, $30 million a year just on this, separate from any other ancillary activities that are related to it. And we're also going to ramp up our proactive degree of communication with the government. So we are stepping back and saying this is simply unacceptable performance. And it has an unacceptable perceptual impact as well.

We do have a subpoena that's been disclosed. It's in the HealthCare Partners part of the business, largely pertaining to things that happened before we owned it. We are going to very proactively cooperate with the government in this effort. And as virtually all of you know, there's a substantial escrow established for -- including covering healthcare regulatory issues like those in question.

On to HealthCare Partners. If you think back on the past couple of years, there's just no other way to cut it. It would be straightforward. It was a bad start, and we'll talk about that a little bit and then put it behind us. Because we're at a whole different phase now, a whole different place than we were 12 months ago. And in every way, I mean that in a good sense.

The foundation of HealthCare Partners is formidable. In terms of the assets in contracts and the assets in market presence, the assets in individual talent, the assets in collective capability, the assets in terms of reporting capability, these are formidable assets, a formidable foundation for us to build on. The OI growth, however, will be slower than you would have hoped. Having said that, cash flow is strong because of the health of the business and because of the structure of the business. And our original investment thesis stands.

What is the bad stuff? Well, of course, having $150 million, $200 million in rate cuts is a tough way to start anything. There were two bad deals done that distracted attention and consumed some capital. And then there's just the normal organizational stress of doing a big acquisition and then eliminating a bunch of senior folks and moving on to that next phase. And so that part is inevitable, but it necessarily, on top of the other stuff, creates some difficulty.

However, the good stuff list is longer, and involves a whole bunch of stuff that's happened over the last year. So very different from the types of things that happened in the first year, where just not enough got done in terms of building new capabilities and pursuing a path of coherent, disciplined growth.

The legacy markets, however, throughout this period, have performed well -- a beautiful, beautiful foundation I referred to before. We turned around both of the bad deals picking up some very serious incremental math.

And a bad deal does not mean a bad asset. A bad deal can do with, kind of has to do with what you paid or how you conducted yourself or what happened immediately after you did the deal. These are some good assets but they were done through bad deal structures. They've been turned around to a very significant degree.

We now are at a trajectory of adding capabilities to fuel our growth long-term, growth in our value proposition and growth in our market footprint at a very nice clip. Still not the kind of rocket speed we want to be at, but way different than a year ago.

We did acquire the leading group, actually the leading independent group in all of Colorado, but in particularly a strong group in Colorado Springs that we're excited to be partnered with. And we're making some nice progress in what we call our new business model R&D, and we'll talk more about that downstream. So more good news at HealthCare Partners today versus nine months ago than has been the case ever since we announced the deal.

And just breaking through all the sort of noise in the bad stuff, good stuff paradigm, through all the noise, when we signed the deal, when we signed the letter of intent, the EBITDA run rate was $470 million. Let's just put this all in context. So when we decided to pay what we paid and the terms that we paid it, the EBITDA run rate was $470 million.

If you take the midpoint of 2015 guidance, which of course has risk on the downside and upside on the upside, but if you take the midpoint of 2015 guidance, that'll be $420 million. But as many of you recall, we have a very substantial, hard dollar guaranteed tax benefit that we save $100 million in taxes every year, which is equivalent of course to about $160 million in additional EBITDA, guaranteed,15 years.

And so that number is to be adjusted, the real life cash-on-cash return, because in the long-term, businesses can only eat that which they can purchase through the cash they generate versus the cash of yours that they have deployed. That is the law of capitalistic gravity and which we have a lot of respect for. And, therefore, the adjusted EBITDA on the deal is currently running about $587 million at the midpoint '15 guidance. And just so despite all the noise and some of the disappointments, the basic fundamental terms and economic structure of the deal are very healthy.

Having said that, there are challenges and, of course, opportunities. On the challenge side, internally, we have to get better and better at exporting that which we are very good at. It is one thing to take care of 200,000 lives very well in a globally capitated basis. It's another thing to go and help someone else, a new partner, do that in a new city where that kind of infrastructure is not yet set up.

It's a totally achievable thing. We're making very good progress on it, but we are not done. We are not practiced at it yet. We're not close to perfecting it. And to do so, it takes some new capabilities which takes some time and effort.

Externally, of course, there're a lot of people going after the same risk pools. So the good news is that creates demand for our capability, the bad news is that means there's more competition for delivering that capability of -- such is life. We'll see how we do in terms of playing that football game over time.

And then, of course, with MA, there's still reimbursement risk in the future, although, in general, the political context in which these decisions are being made is healthier for MA today than it was a few years ago.

On the opportunities side, we have significant growth potential in our three substantial legacy markets. As big as they are, they can get bigger. We have a demonstrated ability to scale, which very few others can put on the table. And we're a desirable partner to a lot of different folks.

And then externally, we think this decline in commercial HMO lives is something that we're going to attack and hopefully be able to make some relative progress on. And the case for continued MA growth is very strong, as many of you know as well or better than we do.

A reminder, at HCP at a Glance, it's just kind of the infrastructure that exists, the scale that exists, the market footprint that exists. I think the hospital number is incorrect. I guess probably hospital contracts, not hospitals. So please ignore that.

Onto the business overview here, we're now in these states. And we are the leading independent medical group in America. This is a big deal. There are insurance companies who have moved into the physician provider space. There are health systems that are buying physician practices and employing physicians. But when you think about independent medical group, something that has physician, caregiver DNA, not insurance company DNA, not hospital DNA, we are the leading independent medical group in America. A lot of doctors are interested in becoming associated with someone like us.

This is what we do. I won't go through it because so many of you know it so well. But it's a reasonable characterization and a concise way of the construct of what we do -- that we work in commercial Medicare and Medicaid, what we believe in is performance-based contracting, it does not have to be just global cap. And then we eliminate waste, we improve quality, which reduces cost. And sometimes we have some influence over downstream rates. And as long as you provide a patient with distinctive access and care, and physicians with a distinctive place to work, you can have a heck of a scalable model.

We have differentiated capabilities. You don't have to believe us on this. You can talk to the folks we work with in the different markets and see that, both from a clinical quality point of view and a cost management point of view, we are in fact on average differentiated.

And the numbers reflected using the government's star rating system, I don't know if there's any other organization in America that can put up a slide like this one where you see an unusually consistent level of star rating accomplishment which, of course, correlates to two things -- one, actual clinical quality.

If you wrote down those measures, and if you were looking at five organizations that are managing 800,000 people in a global cap basis or 320,000 MA patients, and one group across five markets can put these kind of numbers on the table and another one has lower numbers, you would not hesitate as to where you recommended for your mom or dad to go be taken care of. In the same time, it's not surprising, therefore, that this leads to fewer hospitalizations and fewer re-admits. And we continue to get better, and plan on doing so, and think there's a lot of opportunity in the years to come.

And we are regarded as an excellent place to work, very comparable to what you are used to on the kidney care side and, in particular a good place for clinicians, physicians, to spend their career.

We're a leader. You can see here across our markets just how substantial our local physician presence is -- physicians and extenders in this case, and in some cases how extensive the IPA physicians are. Some of the IPA numbers are actually low. This is actually probably just IPA PCPs. And in most markets we are, in fact, the leading independent medical group, the leading independent physician network.

We're growing in the team physicians, which is our term for employed physicians. So when you think of team physicians and extenders, we're growing in legacy markets, we're growing in new markets. We're hoping we can accelerate this.

And the team overall, leadership team, is now getting increasingly nicely balanced. So at the corporate level, led by Tyler and Chan, our lead MDs for the entire enterprise, 18 years and 13 years at HCP respectively.

Then moving to some of the folks who are seasoned veterans, both former COOs of our kidney care business who have moved over, Joe Mello, who just returned to us as of a few months ago and is in the room here today. Earlier in his career before he started with DaVita Kidney Care, was the COO of Friendly Hills Clinic and some other operations which were some of the pioneers of doing global cap back in the days before MedPartners, Ficor, et cetera. And so very, very deep roots. In fact, a whole bunch of people at HealthCare Partners used to work for Joe when he was COO of some of the larger global cap organizations in LA 20 years ago.

And then you can see the rest of the list where we're taking a group that was largely all home-grown, and injecting a mixture of folks from Kidney Care as well as a mixture of people from payers and other organizations to enrich the intellectual and experiential diversity of the place.

And on the market side, you see, again, a strong physician leadership representation. And again, an emerging mix of people with diverse experiential backgrounds. They are going to make us more nimble, more innovative and, hopefully, ever better growers and contractors.

On to the building blocks of the business. So you could take your number of members -- of course, there's some mix issues there, but simply stated, members. And then you get your margin. And then you have what's going on in the new markets, which is to say those markets we've already added to the legacy, and then future markets which are those we're not in yet.

Let's talk about each in turn. The basic fundamentals of MA growth are an exciting part of the investment thesis. There is a growing recognition among the part of seniors that you get more service, you get more care, you get more attention.

If you look at the demographics and the percentage of people who, when they age into Medicare, are open-minded and who are positive about this type of care -- managed care, integrated care -- the numbers today are very different than even seven or eight years ago, because of the demographic issues and because of just the momentum that's been picked up. When you start getting more and more communities where 38%, 39% of the human beings are in Medicare Advantage, it's not the new program. It's become more and more the norm. And so just the environmental fundamentals of demand are very, very favorable.

And in D.C., you've seen a very significant sort of subtle tectonic plate shifting, where the number of moderate Democrats who five years ago would have gone along with any ideas about cutting MA because of the discomfort among the more liberal Democrats with the private sector presence and strength and vibrancy in Medicare Advantage -- you've seen a whole bunch of them shift now to be far more favorable because such a high percentage of their beneficiaries are in Medicare Advantage and happier than the other folks. And we're generating the kind of clinical improvements more and more systemically that people care about.

So you've seen, again, this sort of subtle shift to the tectonic plate, but nonetheless, fundamental and very significant for the long term. It doesn't mean it will be a smooth path at all, that's not what tectonic plates necessarily do. But when they start moving in one direction, they're pretty hard to stop.

In our legacy markets, you can see that the penetration of MA overall is pretty substantial. And two of them above the national average, one right above the national average. But you can see they're still growing at a good clip. If you look at the '12 to '14 CAGR and the growth in market MA lives, a very nice clip still, 8% to 9 %, despite those penetration levels. And then if you look at our performance in that same period, gaining market share in a significant way despite the turmoil, despite the changes.

In fact, we grew more than we were prepared to handle which led to some serious operating issues. But we would have rather had the more robust growth and have to deal with improving our operations around it than if we'd operated perfectly and had no growth. And so, obviously, we don't want to end up choosing between those two alternatives. But in this case, this is what we would have chosen. But also, these aren't sustainable growth rates, so I don't want to create any inappropriate perceptions because some of this had to do with spurts of growth in those markets that we just can't -- there's no way competitively to sustain that kind of difference.

But overall, you can see our total lives are up. Down in commercial because of some of the basic trends around people moving to self-insured status and high deductible health plans and the rest. But overall increasing, although, that in and of itself is not necessarily the best indicator of how we're doing.

So on membership, if you just had to take away and talk to your investment partners back at the office, good news, MA growth looks attractive. Commercial is declining, and DaVita hopes to do something about that to at a minimum decline less than other folks. And we'll see if we can pull that off.

On the margin front, I'm not going to go through in great detail everything that's going on with MA reimbursement because so many of you are so conversant. However, during Q&A, we're happy to take questions on that and Ted Halkias, our HCP CFO and LeAnne from D.C. can talk about this as well as I.

But a lot of different components. And the good news is, a bunch of the very difficult stuff that's been going on in the last couple of years is petering out or is hopefully done in terms of the new model being phased in. They transition to fee-for-service levels, et cetera, et cetera.

In terms of star ratings, I've already talked about that a little bit. You're quite familiar. We do very, very well here which is good for our payer partners, good for our patients, et cetera. This does create a dilemma for the government because the government can look at this as sort of structural inflation, as more and more people get better.

If you believe in your measures, if you believe in your metrics, you should be thrilled that more and more people are hitting those higher levels, because society should be getting an economic return on those additional reimbursement levels that are achieved. It's not always the way they look at it, however. Sometimes they look at it as sort of a structural inflation that needs to be offset. And that's a political conceptual and data battle that we need to fight in the years to come.

On the commercial rates, in general, what we're seeing is that what we get paid is matching what's happening with cost increases. So of course, there's a distribution curve on what we get in rate increases, there's a distribution curve on what we're experiencing in terms of cost increases. But, on average, those things appear to be staying reasonably parallel, and in our legacy markets it feels like that reality might be sustained in the near term.

However, there are things going on in the distribution channels with the emergence of lower cost products. There's a lower cost, at this point, primarily driven by providers willing to sign up for discounts in exchange for the hope of incremental volume. And we all know in the past how often those hopes have been dashed and, therefore, that those product lines have not been sustainable. And up to this point, we have basically not participated. And so we've been able to grow despite turning down most of the lower reimbursement networks.

We, now, as all those products reach their second stage of their second year or third year -- sort of the next chapter in their existence -- our intent on engaging a conversation is around achieving savings through a more thoughtful and coordinated utilization management, product design, benefit design, et cetera, as opposed to just provider discounts. And as long as we can do that, as well as deliver distinctive service and geographic coverage, we may be able to participate in some of those and fuel some additional growth in a way that is attractive economically. Proof will be in the pudding, of course.

One of the things that we inherited, as we've talked about the last couple of years, is we had a lot of contracts with payers that were not very aligned, so that if benefits went one way, we benefited almost exclusively, if benefits went the other way, the payer benefit almost exclusively. In general, that's not our philosophy. We prefer with the people we work with most intensely to be smiling or frowning at more or less the same time.

And so, although it's a highly imperfect rating system right now, we can tell you that we moved from a 100% not aligned to about two-thirds somewhat aligned. And I would say we haven't yet, with perhaps one exception, achieved full strategic alignment in a way that we're really doing some positive, some stuff together. So maybe we have 10% or 20% of that. But we've moved a lot of the stuff away from just inappropriate, distracting, zero-sum terms.

We'll probably be able to clarify and refine the precision of these categories as the years roll on.

Historically, on the cost side, if you look at everything together across geographies, across our plan mix, et cetera, et cetera, the costs have been going up 2% to 3%. And at this point, it's difficult to do any serious forecasting out the next few years. A lot of dynamics and the realities are different market by market. But certainly, this has been the historical trend and there's nothing that looks like it's going to be different tomorrow on that.

We are, however, going to add a whole bunch of expense than we been to create a fundamentally different growth capability, a fundamentally more robust value proposition in existing markets, and an intensely more aggressive growth trajectory elsewhere. And so that's going to cost money, that's going to add to our fixed cost so to speak.

Our centralized capability is not centralized geographically but centralized in terms of the ability to deploy to new markets and the new products. And so, separate from operating margins looking relatively stable with all the normal qualifiers about who knows what in fact will happen, separate from that, we will be investing some of your capital in building our capabilities.

So margins, overall, look kind of flat, except you've got to subtract out the investment in new capabilities.

With respect to new markets, these are the markets that we've entered in the last couple of years. So this is Colorado, this is Tandigm in Philadelphia, and this is Phoenix and Albuquerque. But with respect to those four, in every case we're seeing significant improvements in capability. And in a couple of those cases, very significant improvements in the math, the two profit turnarounds that we did in Albuquerque and Phoenix.

So the capability trends are good, the growth is good, and the economics are good. But exactly what's going to happen over the next year two, we're not prepared to put a stake in the ground. We think the economics are going to get better over the next couple of years. Might not be enough to affect your investment assessment, but the trajectory is positive, just not dramatic. And we can take more questions about that in Q&A.

And so in '16, it's hard to say incrementally what exactly will happen across that portfolio of new markets versus '15. In '17 and '18 we feel quite comfortable that, one way or another, the economics are going to be better.

Then on to future markets -- and here, this is repetitive. That has its own virtue. We like acquiring leading medical groups, partnering with the leading medical groups, that's Power Alley for us. That's Colorado Springs. We love to do that and we're in some other conversations as we speak.

But in addition, we're still very interested in this payer and partner, this health system and payer partnerships. Payer partnerships like we're doing with Independence Blue Cross in Philadelphia, in the form of Tandigm, and health system partnerships like the ones we've talked about with Centura and are talking to some others.

And so if you look at future markets -- sometimes if you buy a group, you pick up some immediate OI or EBITDA if you're buying that at a multiple. In other cases, you might be buying a group with no retained earnings and you're going to transform it into an entity that can take risk and generate profit that way. And so buying medical groups, you might get an OI bump in the next couple years or you might not, you might have the opposite.

And with respect to health system and payer partnerships, again, depending on the nature of the deal, it may be that you incur operating losses for the first couple of years which can be economically far more attractive than paying a seven times multiple on buying EBITDA, because you can generate it for far less than seven times, but it does take two to three years to move along that path. And so it's difficult to predict. But in the future markets we move into, they're going to be short term additive to OI or dilutive to short term OI. It depends on the nature of the deal.

And so an aggregate, you're looking at to sort of baseline growth. If you look at a whole bunch of things not changing from their current trajectory, you're looking at 0% to 3% baseline growth. But then it's plus or minus whether or not we outperform our competition in legacy markets or underperform our competition in the legacy market. So it's plus or minus that competitive performance and how much local growth we capture. And then it's plus or minus new and future market growth.

Cash flow, however, is an interesting story. Kidney Care, we've talked about the attractive cash flow characteristics of this business for 16 years now. And that's what you see represented on the left. These are numbers that are comparable to those that we've talked about and we've used to fuel our growth for the last 16 years.

What is perhaps less evident but noteworthy is the cash flow characteristic of HealthCare Partners, which we talked about the time that we announced the deal. But it's worth that we now then step back and look at it. And of course any year or two can be a little bit up or down, but the fundamental cash flow characteristics of the business where a lot of your revenue is globally capitated, and you get paid before you end up having to pay stuff out in many cases, and is very low maintenance CapEx, et cetera, you can see that while it was 12% of our adjusted OI, 16% of our adjusted EBITDA, there's 28% of what we're calling normal growth cash flow. So it's before doing acquisitions, before de novos, et cetera.

And so, I repeat, for those of you who are newer in evaluating us, we are very much about long term after-tax cash-on-cash returns as the ultimate fuel that one needs to keep a corporate engine going.

On division strategy, our platform with HealthCare Partners has tremendous optionality and potentiality for downstream. Right now, our hands are full growing what we do now. However, the types of things that we're actively contemplating -- are managing MA plans for medical groups and health systems, doing practice management for health systems, we are already doing some direct to employer work which is exciting, to offer very extensive ambulatory care under performance-based contracting that can be largely fee-for-service, and just in general doing more and more performance-based fee-for-service not unlike what we're doing more and more of in Kidney Care. So this business platform, once we've got it to the spot we want it to in terms of management process and the right additional talent so we can do new things, this business platform has a lot of potential.

And what we want to be known for in this room with you, five, six, seven years from now, we would want our HealthCare Partners brand, throughout much of America, among physicians, among patients, among members, among payers, to be about differentiated clinical outcomes, to be about differentiated patient experience, in a way that healthcare has rarely seen. Not just when you're in a clinic, in an exam room with the doctor and nurse, but throughout the entire year. And you and your family's interaction with your provider, we want that to be a quantitatively and qualitatively different type of experience.

We are just at our absolute even conceptual infancy, and there is now -- although we can do some very nice service relative to conventional healthcare right now -- but in terms of being differentiated and having brand loyalty like a Starbucks, like a Nordstrom, like a Lexus, we are just at the beginning of that journey, incredibly excited about what it could mean for patients, for our teammates, and for our shareholders.

Thirdly, physician experience. We would like to be known as one the best places for a physician to spend his or her career in America, so that when people come out of med school, when they come out of residencies, when they come out of fellowships, even in cities that we're not in, they think about calling us to interview for a job. That the employment market for physicians is going to be very different world five to six years now.

People graduating from those different programs look at their careers very differently, look at their options very differently. And just as in virtually every other arena in America there are certain organizations that have a reputation for being a better place to work, a more respectful place to work, a healthier place to work, a more thoughtful place to work, we think in healthcare that's going to become more and more relevant. And for us, from our Kidney Care experience, that speaks to our strengths and our sweet spot. And lastly, we want to be a great place to work for all the folks.

So these are the four things that hopefully we'll get to talk about with you six years from now in a slightly less black room than this one.

And on the value proposition front, this is just a sampling of some of the clinical initiatives that we're working on right now. It's serious stakes in the ground on serious issues. We truly do population health. Which is to say, we've got about 800,000 Americans where we've accepted responsibility for their holistic longitudinal care, and we actually invest in it, we actually do it. These are some of the areas where we are very excited about how we might be able to get a lot better this year versus last year. Even though in many of these categories we're already quite differentiated.

On to Kidney Care. First, at a glance, these are the high level numbers, and this is a typical center. I think this is the same picture you've seen for years.

And on to investment highlights. So, you know much of this: stable demand growth, steady cash flows, significant government engagement, that this is an area, where because we are such a discrete service that the transparency between us and the government, between us and Medicare is very high, we think that's a good thing. Because as long as we bring a superior and ever-improving value proposition to the table, we can get good stuff done together, and so we like that. So those are all industry characteristics.

On the DaVita side, our clinical outcomes are simply outstanding and the gap is getting bigger, not smaller. We have scale, I guess, that's relatively obvious. We've been doing this for a while with some consistency. The team has been around for a while, although we also infuse it regularly with some new folks from outside. And we think, again, we have this platform that's very well positioned and very able to take advantage of new care models.

The demand curve is well-published. There's a lot of government data. We are located in a demographic jet stream of America given the increased prevalence of kidney disease among those that are elderly Hispanic or African-American.

At the same time, we have every hope that care for diabetes and hypertension improves across America and begins to affect this pipeline. But so far, the demographic jet stream is offsetting any clinical improvement that's happening across the population. How those two forces net out, however, is very hard to say.

We take care of about a third of the patients in America, a little more than that, which is very exciting for us. You pick your metric, whether it's public data or private data or a combination, we are the leader or among the leaders. And we've got 55,000 folks who are incredibly excited about the fact that those words are true.

And we have what we call our quality pyramid, which has the different building blocks of truly doing population health. It is worth noting that in Kidney Care we're -- whatever -- 97% fee-for-service, probably 92% conventional fee-for-service without any sort of performance kicker. I'm just making up those numbers, but it's very high.

But nonetheless, for years we have managed this in our population health sense before the phrase existed. And that's driven our clinical improvements. And this paradigm sort of captures what's the ultimate peak, which is the quality of life for that patient and their family, and then all the building blocks underneath.

The government is taking a number of cuts. No cut is perfect. Most cuts are useful. This is the most recent one. It's a forced curve, one of the first times, maybe the first time that CMS said we're going to have a forced curve. So just like a professor saying only 10% of you up there -- my math students -- can get an A, and only 20% can get a B, and then 40% get a C, the classic old school forced curve, that's what they decided to do.

And a reasonable set of metrics -- again, no set of metrics is perfect, but when you start talking about where you want to put 170,000 patients which is how many we have, or 500,000 like America has, you would pay a lot of attention to any serious differentiation according to those metrics, that's the bottom line. And here, you can see in the top -- in terms of who got As, 18% of our centers got As, which means that only 6% of the rest of the community centers could get As. And you see 33% of ours got Bs, and et cetera, et cetera. So the skew is absolutely dramatic in a way that no one would ignore despite the data's imperfections.

And if that were the only data source, it would be less significant. But the government also has what they call the QIP system -- quality incentive payments, which is a bit of a misnomer since there are only penalties. And you can see that, for us, the percentage of clinics that had any penalty, dramatically lower. Again, this is tied to metrics which are clinical in nature or would correlate with clinical operating discipline.

And then, once again, if you took a multi-year cut and compared -- you get the same answer. So these are three different ways to cutting the data, but this is relevant for your capital, because, over time, quality is mattering more and more and more. And the demonstrability of quality, the transparency of quality, the reliability of quality, the vitality of quality -- these are all becoming ever more important.

We've invested in this for years because of our mission. Maybe in the next 10 years it'll become more and more relevant for our margin. And on this score there're lots of data that can make you feel better about your investment on both those dimensions of mission and margin.

We love showing the adjustment in gross-mortality over on the left. We don't think there's any other organization of scale that can show data like that, that kind of drop. The one blip you see back in, 8 or 9 years ago, that's when bought Gambro, which added about, I'm not going to get it right, about 9,000 employees, so maybe 20,000 to 30,000 patients, probably about 30,000. And they were not as clinically good, and so our numbers all went up until we could bring them back into line.

But this is cumulatively about a 29% drop in mortality in a population that's getting older and sicker, and where our population skews to the slightly more acutely ill than the overall American population.

And then separately, if you forget us for a moment and just look at the large dialysis organizations, the LDOs, and compare us to everyone else, you can see that as much as some people would prefer it not to be true, the for-profit LDOs are higher quality than the small independents. And there is just no way around it, as much as some folks ideologically are uncomfortable with it. It is absolutely true. And as many of you know, we've published papers that show the average quality of the centers we buy versus where they are three years later, there's zero ambiguity about the difference.

And switching to another aspect of our track record which is just going back to 2003, or we could go back a little bit further, as to whether or not we were in or above a range of OI estimating, so far we've hit that mark.

On to the building blocks, in this business it's the same trilogy that you're used to seeing. A number of treatments times revenue per treatment minus the expense for treatment. On the non-acquired growth normalized, you can see we're staying in that same general pocket of four-and-a-half to five right now at the slightly lower end.

The census of acquired centers has dropped off dramatically in the last couple years. It's not that we've lost market share of deals getting done, it's because there are fewer deals getting done, period.

So on the treatment side, you're looking at 4.5% to 6% growth. That's a reasonable guesstimate as you look out over the next two to three years. Obviously, again, there's upside and downside in that, but that's the fat part of the curve in terms of probabilistic distribution.

On the revenue side, we face the same quandary we've faced for 15 to 16 years which is that 83% of our patients are Medicare, 7% are Medicaid, 10% are private, and we lose money on average on 90% of the patients we take care of. Pretty frustrating system, but it's one that we've operated in for some time where, the private sector subsidizes the government.

It's a very clean math since virtually all our centers are discrete economic entities. And so there's no ambiguity about this economic fact, it is just true.

ESRD, as you know, went through a whole bunch of reimbursement conversations and modifications over the past couple of years. Here's how it netted out in the end as to what we're going to get.

And now with respect to center closures, the problem is that if you do not have any private patients, it's very difficult to keep a center open on average. And we closed more centers this past year than in any year in a long time. And the industry closed 50 centers.

Now, new centers are being opened up. But those are in demographically differentiated places that had enough commercial pay to offset the government deficit. So these closures are primarily happening in places that are lower income, lower education, because there aren't commercial patients around.

We have another 50 or so that are on our watch list. We have 200 where we operated at a loss. And in some cases, we have high hopes that that'll change. In other cases, we don't really have that hope, but from a sense of mission, we're just not comfortable closing those doors, and so we're going to carry them on for as long as we can.

And of course in those cases where we do have to close a center, we let everybody know, we go through a very extensive planning process trying to ensure that there's continuity of care. It is inescapable, however, that for a lot of patients and physicians, it is less convenient, and in some cases, inevitable that it's lower quality care because they're moving from us to somebody else.

In other cases, lower quality care, because they're moving from a day shift to a late night shift. That leads to all sorts of issues with respect to the nature of the clinical personnel who work in those shifts, the percentage of missed treatments that happen in life when you work in those instances, and even just the physiological challenge of getting dialysis when you're far more fatigued because it's late in the evening. So for all sorts of multivariate reasons there're serious quality implications when centers close in some cases.

I've already talked about this, the good news is that there's no illusion around the economic structure of kidney care in America. And so everybody that runs a dialysis center knows that they've got to rely on those commercial pay to subsidize Medicare unless they live in one of those small pockets in America where you can actually make it on Medicare alone.

One the commercial side, separate from the conventional negotiations, there's a lot of new stuff going on with narrow networks and different product designs and employers doing different things, et cetera. And so given we rely on commercial lives as our economic lifeline to subsidize the 90% of our patients that are government pay, given we rely on that, we get very nervous when there's change. And you can argue there's upside in the change, you can argue there's downside. There's certainly some of both. But we get very nervous when there are structural changes to our economic lifeline.

What has not changed is the quality that I've talked about, the fact that there still is a life-saving therapy that's not likely to be replaced anytime soon, that many of these referrals are pretty intensely made for clinical reasons and are relatively network independent. There is a tight bond between patients and their center, their caregivers, their physician.

There are some serious network adequacy issues being sorted out so that people can't build narrow networks with schlock dialysis. And we still have a relatively fragmented patient base when a payer is evaluating their geographic distribution of dialysis patients. It's not that they have thousands of them in each city.

Other commercial contracting set aside, given some of those structural changes going on, we can ask the question, well, so have the fundamentals of payer contracting changed? And the answer is no. I mean, this is a low fixed cost, high variable cost business. So it's radically different than a hospital, a nursing home, et cetera, or a surgery center, et cetera.

This is not a place where you can cut price and make it up on volume because of your pure variable cost. It's exactly the opposite of a hospital. And there's some serious stickiness, of course. And so in general, in response to the questions we get, we're not oriented to try to, despite our size, think that we're going to lower price and get a bunch of incremental volume. That doesn't seem very plausible.

On the revenue per treatment side, therefore, you put it altogether, and the bad news is, flat is all too real a scenario. And maybe we get 1.5% growth. But this is, of course, a function of doing better than this on the commercial side, but it being weighted down by the 90% of our business that's on the government side. And so what you're seeing here is the weighted average result. And once again, of course, there's downside and there's upside, but this is the fat part of that probabilistic curve.

On the expense per treatment side, this is the same breakout we have shown you historically. There's been no dramatic change. We'll talk a little bit later about some potential for change going forward. But right now, this is historical trends continued.

On to ESAs. There's a lot going on here. It's a new world emerging where Amgen and EPO will have competition. In Europe, this led to significantly lower prices. And Amgen has retained its market leadership overall. But it did have to do some price-reducing to do that. And we, of course, are hoping for a replay of that basic story in the intermediate future.

Our agreement, just to remind you, goes through 2018. We knew when we signed the long-term contract that it was likely there would be new entrants along the way. A lot of different predictions about when. I think probably it's ended up happening right about the midpoint of what we expected when we did the scenario analysis back then. But there's just a lot of uncertainty here.

And what typically happens and what we're hoping happens here is that increased competition leads to lower prices. And of course, people like FMC and DaVita and others, we, in our positions, have a significant ability to move from one drug to another when they're clinically equivalent. So hopefully, that happens. Or we don't have to move to a clinically equivalent drug because we get a better price than the existing one.

So on the expense side, you see a slightly different distribution than the revenue side. And so if you had to bet, the odds that our margins compress are greater than the odds that they expand, but it doesn't look so dramatic in either direction in the near term.

On to talking about population health, yet again, that despite the kidney care, just to remind you, these patients cost about $90,000 a year for Medicare. There's a lot of hospital days. We have accumulated a unique portfolio of capabilities to actually improve health and manage down total cost for this population.

And in addition, it's more technology enabled and empowered than ever before, with both our electronic health record which we call Falcon and what we do in the patient portal and patient interaction front. So it's a lot of fun. It's high value for doctors, it's high value for patients, it's high value for patients' families, and we're getting better every year. It's very exciting.

If all those words are true, you would expect to see it showing up in the numbers in our globally capitated pilot, our single biggest pilot. You can see the kind of numbers VillageHealth, our Special Needs Plan, is generating. There's a substantial drop in hospitalization, a substantial drop in readmission, a substantial drop in things like catheter use which is a proxy for incredible quality improvements and cost reductions, and so our capability becomes ever more tangible in this regard.

Good news is more and more payers want to buy some of that capability. So over on the left, you see that out of a 170,000 patients or so, we're up from 5,000 to 24,000 that are in some way touched by our VillageHealth capability and typically tied to some form of performance-based reimbursement. Sometimes not very exciting math, but nonetheless, the trend is more payers are going to do more performance-based comp, and we've got the portfolio of products and services to match up to that.

And we're really proud of the fact that our patient experience is improved as our care model is widened. And there's one data point on that, in Southern California, where we were number one in 2013. I think we stayed up at number three for 2014 in actual patient satisfaction.

When you can get a group of dialysis patients to rate their integrated care provider, us, higher than a whole bunch of other special needs plans that deal with patients who are younger and/or healthier and in general have more robust day-to-day lives because their condition is not as debilitating, when we can get higher scores than those groups despite our patient mix, that means we are doing some beautiful things for those people, not just clinically but in terms of how we interact with them as human beings.

On the medication management front, like much of the rest of America, this is a big deal. A kidney care patient: eight to nine prescriptions outside of what we infuse during the treatment, typically multiple co-morbidities, the majority have diabetes, a third have hypertension. A majority at some point have some form of cardiovascular disease -- that's why they have all those prescriptions.

A lot of people can't keep track of all that. Their doctors can't keep track of all that, as their senior cardiologist and an endocrinologist, and a nephrologist, and their internist, et cetera. And so our DaVita Rx just continues to do beautiful work. You can see 14% fewer days spent in the hospital, 21% improvement in survival. These are numbers that at first we thought couldn't actually be true and there must be a methodological mistake, but they've held up.

And in part, it's because we create tremendous prescription adherence, the likes of which is not achieved in normal PBMs because of our bond with these patients and their families and their doctors and the glue of our electronic health record. And as a result, we're growing. You can see that we actually did our 15 millionth prescription in May of 2014.

If you look at the different ways in which our investment in VillageHealth, which is a non-trivial allocation of your capital, you look at the return, it can come in a lot of different ways. It can come because a private payer realizes that we help keep people out of the hospital. That then helps us on the commercial rate renewal, independent of creating a global cap contract, independent of creating shared savings or a bonus plan tied to hospital days because sometimes the data is not available.

But nonetheless, if the payer knows it's there, that will increase when we show up in the rate renewals itself. Obviously, for the growth in Medicare advantage, those folks all care about what happens with these patients, and we have a whole bunch of them in our HealthCare Partners unit as well. So nobody has anywhere close to as many globally capitated ESRD patients as we do. And we do wonderful work on both sides of the house.

It has also enabled us to be a better partner with CMS. And as much as we've had the humbling and disappointing experience with our settlements and some other areas, but we are getting better and better at working with CMS at creating a better kidney care system in America. And that, everybody wins over the long term if you do that.

We are increasingly the preferred partner for ACOs and physicians. And of course, what we love is when we have truly capitated relationships in this sphere because that allows us to deploy all of our capabilities, all of our gifts, in one fell swoop.

There's some stuff going on here. ESCOs probably will come out soon unless we can get the right government waivers, the same waivers that ACOs and MA plans have, so we're not asking for anything special. But if we don't get the right kind of waivers, and then we may very well not be able to participate in that program at all. We've always said we would, even if it wasn't a good scale of a program, just to be good citizens, but we can't be a good foolish citizen and do it unless we get the same waivers that they have everywhere else, or something that approximates it.

Special needs plans, we still believe in those as well. And then of course, there's normal capitation contracts.

Moving on to the outlook, then, you put it all together, all the different numbers. You can see, again, margins, more or less the same. A little more downside than upside. And some steady growth, not dramatic but awfully wonderful and steady in its own regard.

And if all that is true, then the aggregate is 3% to 8% percent of OI growth. And as you look out over the next two to three years, again, of course, there's downside. It could be lower than that. It could be higher, but this captures the majority of probabilistic outcomes and hopefully provides some useful guidance for you.

We just wanted to summarize on the kidney care front, what's the same? Clinically, we're good and we're going to get better. Capital-efficient treatment growth, very big deal cumulatively. Commercial mix, commercial rate -- lot going on there, that's a little scary, I feel like there's more downside than upside. And fewer acquisition opportunities.

So that's all more or less the same as when we talked a year ago. What has changed? The ESA picture has become a lot more real in terms of new competition. Some of these changes in how insurance is done are more significant out there in the marketplace than a year and two years ago. The regulatory compliance issue as we know, has not changed in our attitude around it, but we want to show respect for the fact that is has to change in how you assess us in this regard because of the settlements we've had to sign.

And then the quality of conversations around population health in all its permutations are way up. There's just more and more organizations and more and more focus on actually doing stuff and executing on stuff as opposed to just talking about it. So those are all different, a mixture of positives and negatives.

Let's talk about international for a little bit. We're now in 10 countries, 93 clinics, over 7,000 patients. We didn't exist of course five years ago. The trajectory is going up into the right. Our investment in international is very controlled, and hopefully this is something you've been able to observe.

And we believe that strategically the risk/reward ratio is exceptionally attractive. But as we said from the moment we got into it, it's a very long term picture, it's a very long term story.

Along the way, however, you want to see the right leading indicators. One of those would be quality improvement, and we could show this in virtually every country -- maybe at this point, every country out of the 10; dramatic clinical improvement, a level of operating discipline, metric discipline, data analytical use that most of these places just do not have in dialysis.

And so we could show this, I think, for all 10 countries. Eight of them I know for sure -- just dramatic clinical improvement. That leads to a healthier brand, that will lead to more new business downstream. That circle is unfolding in real life in some places. Nonetheless, right now, this is a tiny thing, only about 1% of our overall revenue.

I wanted to give you three examples. I mean, first, to establish the context, that when you're going to enter multiple countries, you're going to be a subscale in each country. In order to do a decent job, you have to create a certain minimum overhead in order to create new business and execute well on it so that you have a reputation and capability to do more. That's all common sense, you know that.

But then, how does one get comfortable that you're on the right path? And so what we've done is try to make sure that our microeconomic unit, our building block, our individual centers, that if we look at the actual operating performance, the clinic level EBITDA performance of the actual building blocks, how are we doing there? And once one achieves profitability there, how many of those units must you have in order to reach breakeven, and then profit, and then a reasonable cumulative after-tax cash-on-cash return?

So how many of those units do you have to accumulate in order to get there with the right assumptions about the size of overhead becoming a lower and lower percentage of the total cost? And then what market share does that equate to? Because if you're at a pace where you're making so little per clinic, that you have to end up with 70% of the centers in the entire country for a reasonable return, that's a bad model.

On the other hand, if with their a relatively low market share you can get there through what you've actually established by actual center level EBITDA performance, you start to say, "Although it will take a while, we are on the right path." That we can dissect the high level loses in a way that has us feel optimistic or pessimistic.

And so we're doing three examples here. One is in one of the more extreme examples of an emerging market. So, a low reimbursement market. And here you can see that the progress we made, you can see that where the G&A stands, and you can see that we've cumulatively now hit positive center level EBITDA across our entire little network of centers. So that includes the losers.

And we probably took out all centers less than 18 months old, something like that. But you can see the clear progress in what our 2016 and '17 plan has us doing.

But you can see this one is going to take a long time because that's just country level G&A. And so you still have to go further before you're generating to a profit. So you say, this is in the category of, "Whoa, better be a big country," and you can see that, at the bottom, it is. That we can start getting the clear profitability at tiny, tiny market shares. All right?

So there's room to run, and that's good because we need a long runway there. This is a country with a higher GNP per capita.

And here you can see that we've already, this year, reached a level where our center level EBITDA is covering all the country G&A. Not yet covering, in this case, the Asia Pac G&A, not covering any part of my salary. But you can see that the trajectory is very healthy. And once again we are talking about very reasonable market shares. Enough said.

And then lastly, a more mature country with significantly higher GDP per capita. And here you can see we're already very significantly profitable at center level EBITDA, well above the country G&A, covering a huge percentage already of the macro-regional G&A and still at a very low market share.

And so all of this is to say that as you look at the aggregate number of our investment, you've got to divide it by 10 countries. And then recognize that in each of those countries we're putting it through this type of analysis to make sure that we're not fooling ourselves for some beautiful picture of what international is going to look like six years from now, but deluding ourselves as to what the linkages between today's reality -- today's operating reality, actual operating reality - and that picture.

So, this is where we are. We're subscale across 10 countries, on purpose, all right? We could have done fewer countries. We decided that was not strategically all we wanted to do. And we are delivering seriously differentiated clinical value. Challenges, you know as well or better than we.

On to the enterprise summary. Capital structure, I think I'll turn this over to, Chet.

Thanks, Kent.

You're welcome.

Okay. I'll just go through a few quick slides on our capital structure.

You've seen this slide before. This is a 12-year history of our leverage ratio. You know we've articulated for over 10 years now that we expect for the long periods of time, our leverage to be in the 3 times to 3.5 times net debt to EBITDA. We believe that's optimal for shareholders, plus, at the same time giving us the flexibility to pursue strategic opportunities as they arrive.

You can see twice we've gone above 3.5 times, the first time to acquire Gambro. And we rapidly de-levered to under 3 times within three years, and then more recently to acquire HealthCare Partners. And within four quarters, we were once again at 3 times.

This is our pro forma capital structure. Pro forma for the financing we did about a month ago. You can see that there's about a 50/50 mix between bank debt and bond debt -- long-term bond debt. Most of that bank debt is hedged through a combination of swaps and caps. So our our overall weighted interest rate is just under 4.5%.

And then finally this gives us some comfort that we have no looming large maturities. Our revolver comes due in 2019, and then the first large tower of refinancing is not until 2021. And you can see that in almost every year where there is a refinancing hurdle, it's well under our one-time EBITDA. And the one that's above is slightly above one-time EBITDA.

And with that all, I'll hand it over to Jim.

Thanks, Chet. Now, a few words about capital deployment and cash flow. Our historical cash deployment has been pretty balanced between growth, share repurchase, and debt repayment, with extra emphasis on growth, looking at it on a longer term as well as the medium term.

During the quarter, we repurchased about 890,000 shares of stock, valued at about $70 million. And we have an updated Board authorization for share repurchase which stood at $1 billion as of March 31st. We have strong operating and free cash flows. Free cash flow can be used to redeploy into the business, for growth, share repurchase, or debt repayments.

Looking at our cash flow, particularly in 2013 and 2014, those two years benefited from bonus tax depreciation and improvements in working capital. And we don't expect those two benefits to be repeated in 2015. However, our free cash flow is quite strong, and our conversion of net income and EPS into free cash flow just underlines the quality of our earnings.

And with that, I will turn it over to Kent.

Okay. So what's the bad news and good news? As you know, those of you have been with us for a while, we try to give you a reasonable summary at the end -- if you had to grab your partners back at the office for 6 minutes or 2 minutes and say, "Just give me the highlights of the arguments against investing in this enterprise or investing in it," that, "Boy, you've got to look at it, on the bad side, there's rate risk." And it just is and that stuff hits hard and fast.

And say, "Boy, HealthCare Partners, thought the OI would grow faster. International, that's outside of our time investment, of our time horizon for investing. And couple of big settlements. So you got to worry about this compliance thing, and whether they just talk about it versus really doing it." So those are reasonable conversations to have and we're happy to discuss of course any of those.

On the good news side -- clinical excellence, of course for us within DaVita, we love it for our mission reasons but it is also highly capitalistically relevant. And ever more so. Not going to add $30 million to OI tomorrow, but we think it could add hundreds of millions to OI over the next decade.

We are in stable demand in what we're about. We're in good demographic spots from a demand point of view. And the structure of the business, as long as prudently managed, generates ongoing cash. We're a leader, nationally, locally, and in one or two cases, internationally, while being prudent on how we get there.

Population health capability is significant and we take it seriously, and we're investing in it to make it better and better and better, more robust. And then we have these business platforms upon which one can -- hopefully, from which, one can launch rockets over time, not unlike in Kidney Care where we launched the rocket of DaVita Rx, where we launched the rocket of our Lifeline Vascular Access Centers where we launched the not-so-rocket but formidable plane of VillageHealth. So we look at our business in that way. That we have the ongoing sort of core capabilities, but you also have a platform of which you can launch adjacent products and services.

And so I'll finish with this slide which is just the scenario that if you say overall our OI growth is 3% to 8% and there's downside, it could be lower than that. There's probably more downside than upside, but there's both. So if you say, then we're going to grow that 3% to 8%. And you pick up little financial leverage and that nudges it to 4% to 10%.

But at that rate, that means you got money left over, because your net cash flow will be non-trivial. And so with that cash you would either buy back stock on a prudent, steady basis, or you would do more deals. And if you presume that they're reasonable, you would get some return on those deals.

And so that nudges it up to 5% to 12% with all the normal qualifiers around this is not being a prediction. But if you look at all the current trends, this scenario is not at all an unreasonable one in terms of thinking what the next two or three years looks like.

So that's our update. And now it's time to ask questions and give us advice. And there's a couple of mic runners, but you can always yell.

Darren, looks like you're putting your hand up right away.

Thanks. This is Darren Lehrich from Deutsche Bank. So I wanted to talk a little bit more about HCP and get your input and your outlook on the investment piece. I think when you talked about your International you described it as a controlled investment, and I think we can see that. But I think when you described the building blocks of HCP and you talked about investment, I think it's hard for all of us in the room to really understand and envision how that investment might look, what it might deduct from your OI outlook in that business. Maybe give us some examples of how you think that will be deployed through the income statement over the next couple of years.

Yes, let me take a stab and then you tell me if I'm missing the point. I think there's sort of three chunks.

One chunk is we got this $3.5 billion of legacy market positions. And if we do our job right, we will grow those market positions. And as we grow them, that growth will drive incremental profit growth at the same time. No delay.

We will get additional MA lives. We will get additional commercial HMO lives. We will grow in terms of number of physicians. We will improve some of our contracting. We will improve our utilization. And so gaining share and becoming more capable on medical management and, in some cases, some contracting pick-ups.

So bucket number one could have nice dialysis-like incremental profit growth tied to incremental unit gains. Boom. And that's where you're going to have to pull in another chunk. Of course there's downside there too, but that's the one that looks certainly nice and orderly.

Then, second, is you get those situations where we're doing, where we're exporting our capability and transforming. So taking somebody, like a Tandigm in Philadelphia, where suddenly you have $500 million worth of medical management across 50,000 lives overnight. And you know you're going to incur operating losses, and your're banking on the fact that you're going to be able to crack through all the normal neighborhood frictions, and create the right confidence and have the right tenacity and turn that into a profit stream X years downstream.

And then third, would be the potential for actually buying things that have EBITDA. And so you're picking up some incremental OI at a reasonable return on capital through acquisition. And so the problem we have right now, the problem that we have, you and we together, is that bucket two and bucket three are very unpredictable.

And right now, even bucket one, we're so young in it that we can't speak with the same sort of -- and there so much dynamism -- we can't speak with the same level of confidence or tightness of the distribution of probabilities as we can in Kidney Care. But those are the three buckets.

And hopefully, in a year or two, bucket one will be much more apparent to everyone, whatever trajectory that's on, and we'll also have some serious evidence in two and three. Right now there's a certain level of ambiguity.

And if you could just maybe help bracket numerically, because there's obviously some investment in Tandigm that you just described here incurring operating losses. So think what I'm getting at is really just what is the appetite of the organization to incur losses, to pursue these types of opportunities? And I would sort of match that question up with the organizational capabilities to actually do multiple of these new markets per year, in a given year.

Yes. Great question. I'd say, in HCP, we are conservative in terms of the amount of losses we want to take, because until we do more new market exporting and until we've added more capabilities, it's not prudent to suddenly say "we're going to go take $180 million in operating losses because we're so sure -- if you give us 1 million lives, we'll take the operating loss because we know we're going to turn that into a gem in three years." We'll say, "no. That's just too much, too big a chunk of risk for us right now."

And so you'd see in Tandigm and the potential for what we are doing in FullWell with Centura in Colorado, and in other areas where we're talking about losing $10 million, $18 million, chunks like that, as what we're willing to pay for developing those skills and tools and enhancing our ability to diagnose, ahead of time, exactly what it takes to make something work in a new market.

So we're into more of those smaller bite-size chunks and having a portfolio then, whereas in Kidney Care, if someone was willing to hand us 30,000 globally capitated ESRD lives, we would take it in a second and tell you, "Yes, we're going to lose $90 million next year. And we can't wait because we know what we're going to do with those dollars and in year two, three and four you're going to be happy with us." So maybe that relative comparison is useful.

I'll let someone else go.

We got over here. Let's go there.

Yes. Thanks. It's David Callum, JP Morgan. I wanted to refer back to the slide where you share potential margin pressure in Kidney Care. And I think it was based on the unit costs rising just a few basis points more rapidly than revenue per treatment. But I wasn't clear -- does that take into account the potential operating leverage of additional treatments? So it seemed to me that was so close to being just marginally negative that that could slip to being EBITDA accretion.

Yes. And I think if I got the numbers -- if I recall the numbers correctly, the revenue per treatment was 0.0% to 1.5%, expense per treatment was 0.5% to 2%. Yes. The bad news is we already took into account the leverage of fixed cost. We have one here, and then there is a guy there, and then one in the back there.

Hi, guys. Kevin Fischbeck from BofA. Just a couple of questions on the outlook that you guys provided today. As far as the quarter itself went, I didn't see a lot outperformance in the quarter. And yet you raised the dialysis guidance. Can you talk about what was giving you the confidence to raise the operating income guidance for dialysis?

I know your real voice is a little quiet, Kevin. So the question is in Q1, didn't look like there was a lot of outperformance going on, so how do we feel comfortable improving the guidance in the way that we did.

Let me give an unsatisfactory answer first and then we'll try to see -- which is because we have really good insight into how our economics are unfolding. And Q1 is always a little different than other quarters for a whole bunch of reasons, we can go to seasonality and the tax things and the employee expenses, and the other teammate expenses.

So the aggregate answer is this -- we do update every month our micro forecast, and there's enough that's going well that we're pretty confident that bottom part is not, a very low probability. As to which, the subsets of our economics, revenue versus cost, exactly are going better than we thought they might five months ago. That I would not do a good, crisp job of.

Anyone who want to try to tackle that?

As we noticed, our revenue has improved in the quarter. And so while our cost per treatment did go up commensurate, $5 versus $4 in cost increases, a lot of the cost increases were really due to the fewer days in the quarter.

So we expect improved performance. And I'll just point out that we don't give individual quarterly guidance. So Q1, while may not have been has robust as some may have modeled, was in line with what our expectations were.

JR, do you want to add anything? But we did not move up the bottom lightly. Trust me.

So, maybe just Jim, on the revenue per treatment being better. You mentioned one of the things being commercial mix was better. Are you seeing signs of a change in commercial mix, actually start to improve now?

Commercial mix has moved up modestly which after a few years of California-like drought is wonderful.

Okay. And then just last question on HCP. You provided guidance saying that HCP was going to be at least $25 million better on the New Mexico and Arizona markets this year. Any update on where are you there, is it still at least $25 million or are you doing better than that? What kind of line of sight do you have then?

It appears virtually definite we will achieve what we said, at least $25 million. But I'm not going to provide a new number.

Okay.

But we will do what we said.

Okay. Is there a thought about when that business becomes net positive to the company?

Yes. A lot of thoughts, but not a good answer. We're hoping that those two books of business can be profitable within, I'd say, two years. But in each case, things have to happen. But we pulled up $25 million and it wasn't $25 million and $0.10. I mean, we will comfortably beat the $25 million.

Let's go back there. Next, please.

Hey. Thanks. Whit Mayo with Robert Baird. My question really goes back to HCP in the slide you had around the two-thirds and one-third of the contracts now being aligned versus not aligned. How does that translate into kind of an OI conversion? So does that means that roughly two-thirds of your OI now is aligned with the health plan partners or is that another simple sign that's easy to tease out?

Yes. And, Whit, thanks for your help in coordinating today and setting it up. I believe that the two-thirds -- and I should have said this -- is actually a representation of percentage of dollars. The percentage of contracts is actually lower, but we did it, we converted it to dollars. At least that's -- now, is that true? Yes, it's true.

Okay. Maybe just one other follow-up question, just back on the quarter. I mean, you cited I think some elevated legal costs in the quarter. Was there anything that you would care to call out if perhaps not exactly non-recurring or run rate that we should be putting in our models going forward?

I don't think so, because we are so resolved to not have more of these settlements, that you should just assume some of these higher levels of expense are going to go on for a good long time. I mean, they have these things come back up from 2003, '04, 2005, things of 10 years ago. It's really frustrating for everyone, you know less than us. And so making sure were doing everything we can, everything we can to be correct and avoid this is just such an imperative.

The way these things work, I'll give one example. On this Vainer case, the medication waste in that issue was about $4 per treatment -- $3, $4 per treatment. As you know, the average cost of a dialysis treatment is about 250, 260. So it's a little 1.5% plus, it's a tiny, tiny, thing and its $3 per treatment. The mandatory penalty for some of these categories can be anywhere from $5,500 to $11,000 per treatment. So the penalty is 3,000 times the dollars at issue -- 3,000 or 4,000.

So in that world, given we do the dialysis treatments and we do 26 million a year, the way that the structure of the penalties works is a tiny mistake leads to a massive number. And so that's one reason why betting more on legal now is just going to get us a very good return as well as keep us in a position of trust with the government, not the opposite. Is that, hopefully, responsive?

I mean, over here. Go ahead, sir.

Yes. William Jung from Sansome Partners. I have a question on dialysis and HCP.

So on dialysis, in light of the competition in EPO coming on, especially for you guys after 2018, do you see in the future a new rebased revenue per treatment number from CMS and so expect to fully give up most of the economic benefit there?

And then, on the HealthCare Partner side, obviously the margin has gone down and a lot of that has been kind of outside of your control. What are the factors that you can control on the margin side and what impact with each of those factors have? And of the impact, how much of the economics can you keep in the improvement versus having to give it up to a third party or the government?

Yes, on ESAs, on EPO. Yes, if there are significant drops in the acquisition cost of a drug, the government will rebase. Having said that, it takes some time for numbers to settle out. And second, we would hold ourselves to the standard of achieving a differential new level of pricing versus others because of our size and strategic value, et cetera. And so hopefully, one wouldn't lose a 100% of it.

And what you tend to find in the real world of policy decision-making, if a cost goes down and the government going to save, it relieves pressure on some other things. Like they know right now we're underpaid for outliers in dialysis. They know were underpaid for some stuff we're doing when we take a new acute Kidney Care people out of the hospitals.

There's a number of areas where they -- and what they're going to reimburse for new oral drugs and things like that. So when a part of their cost structure goes down, it relieves pressure on a lot of other reimbursement decisions that the government's making. Correspondingly, if costs are going way up, they get tighter on other reimbursement decisions.

So whereas on the one hand, you can look at it and just have a microeconomic sliver and that's part of what goes on. But it also either makes it more difficult or easier all other related reimbursement decisions. And so, therefore, it is still good for society and for us, the people, if prices go down. But quantifying it is impossible.

On HCP, out of our control, yes. But still, I did a poor job of handicapping government reimbursement for which it'd be appropriate to criticize, and it was a poor performance on my part. Period. And there should have been parts of the deal that were contingent on some aspects of government reimbursement. And now it's just a miss on my part. Period. So it's out of control, but not in that sense. And I apologize.

As to other ways where we can improve margin, there's a huge amount of complexity and richness in contracting on the revenue side. First of all, these are pretty titanic battles, not unlike what we have in Kidney Care. When we're talking with Humana or Anthem, or United about what percentage of premium we should get and what happens with the premium tax and blah-blah. What's included, what's excluded, all that stuff. So there's margin improvement in improving payer contracting. And thus, so margin risk, it's being outperformed there.

And then on utilization management which is just the eliminating waste component, of eliminating dumb hospitalizations, and keeping people healthy and avoiding hospitalizations. We can get better at both of those.

Then there is managing all your downstream referrals: specialists, hospitals, everything else. And there, we're moving towards becoming much more strategically aligned with a number of folks, health systems in particular. And so we work to together reduce cost and share in the incremental savings.

And then lastly is share gain. Share gain will lead to margin enhancement because we have serious fixed costs in our markets. So there's a lot of levers to pull on margin improvement. We'll just have to wait and see how good we are at it.

I mean, let's say you do have that margin improvement, how much of the economics would you actually be able to keep versus having the --

The good thing here, you get to keep -- because they are the payers in between us and the government, or us and the employer. And so you get to keep lots of it or lose lots of, it's pretty much out there on the hook.

In the back?

Hi. Is it possible, I would like you to explain a little bit more, how do you take over a clinic, a group of physicians that's not working for profit? And if you tend to make profits out of that, how is the transformation process and so forth?

Yes.

Some (inaudible).

I've never seen a physician group not run for profit. But I get your point -- without retained earnings, because they distribute all their profit. It is also amusing to me when people talk about the for-profit sector and that includes physician-run entities.

But if it's good (inaudible) to distribute all those earnings, you just have to have -- as we had to do with Colorado Springs -- very serious conversations about how the physician compensation pool will be set, and then what earnings are outside that that create profit for us in exchange for the capital that we put it.

So it's a negotiation like everything else. But there's some -- in general, you keep intact the aggregate size of the pool. So you say to your doctor you have the ability to make the same amount of money, and then you're going to have upside if together we achieve certain things. That's the basic conversation. And then underneath it, you actually put some of their current compensation in a structure where they're incentivized to do some of the stuff that you want around population health management.

But in general, if one goes into this, you will assure the doctors that you're not going take any profit by reducing their pay. Instead, you're going to work together and share the upside. That's the basic context.

So you don't reduce their pay day one?

Correct. Correct. It'd be a tough deal to sell.

How much do you decide that you're going to pay for this potential profits? Because it's very intangible.

Yes. And that's highly situation-specific, all right? There's no formula. But they used to have a short attempt to characterize it, that if you have done due diligence and you think you can get to where you have 50,000 lives, so like we have it with Tandigm. And the CEO from Tandigm, Tony, is here with us today.

If you think you can get that and you say we think we can manage that $500 million at risk to the point where we have a 7% margin. So it's $35 million in profit created, that would be the way you'd start to calculate the numbers as you would forecast your ability to achieve a certain revenue level and certain MLR, and then you decide how the split's going to work in terms of profit.

And where does that profit come from? Where's the improvement that brings the profit?

It would come from two things, improving the star rating and so that the revenue goes up, and eliminating wastes and reducing... and improving quality so that the costs go down.

Thank you.

Thank you. Kevin Ellich in the back.

Hey, Kent, I just wanted to follow up on the Q3 call. I believe you got on the call and you said there was a risk that operating income would be down year-over-year in 2016 versus 2015. And here, you just came out and you gave sort of a long-term guidance for consolidated operating income. So should we now assume that we're forecasting growth in 2016 for operating income?

I believe you even said the three risks. So if you could just go over, I believe Medicare risk on HCP which we've now quantified as $50 million, and the two unknowns would be Medicare and commercial rates in dialysis. So if you could just clarify, reconcile the long-term guidance to the 2016 commentary in the future call, that would be appreciated. Thanks.

Yes. Very fair, and Gustafson, you tell me how I'm doing here. So the odds of '16 being down from '15 are certainly significantly lower than they were before. And Gustafson, do I stop there or...

I mean it's fair, because we still have headwinds from HCP (inaudible - microphone inaccessible).

And we moved up I think the $25 million on the high end of Kidney Care. And so the '15 bars going up is part of what I'm processing. And now, '15 is different on a probabilistic basis. So I'd safely say the probability that '16 is down is much lower than before.

So basically, let's just say hypothetically '16 is flat. So we're basically saying --

Could you grab the mic, please? Sorry.

If we just hypothetically say '16 is flat, so we're just saying that '17, '18, we should start seeing a nice acceleration in earnings growth at DaVita HCP. That's basically the takeaway?

Well, I don't want to go beyond what I've said. So probability of'16 being down is much lower than before. And '17, '18, as you saw, there's some seriously solid probability that we're going to be in that 3% to 8% OI growth range which will then translate into incrementally higher EPS. So I know I'm just being repetitive but --

I just want to clarify. So the long-term, the 5% to 12% EPS outlook, what years is that range? It's a three-year --

Yes, I'd say, roughly speaking, it's a way to think about '17, '18.

'17 and '18?

Yes.

Okay. Thank you.

If you just think about '16, we're taking a significant hit on HCP. And so if you do CAGRs, '16's sort of a funny year. And we'll see how much we can offset those cuts. That's why the hesitation. But absent any discontinuities once we get through the bullet we're taking in '16, then you get into the outlook model that we presented here today where you're talking about that 3% to 8% OI growth.

Thank you for clarifying. I'm sorry, I wasn't more clear. Let's go over to this side.

Thank you.

Let me just ask, does anybody want to add, Gustafson, Hammer, to what I said? Okay. Give it some more thought and go ahead.

Thank you. Stephen Alt from[Share Global]. Typical question also on the kidney area. When you talk about pricing, it seems things might be a little conservative. Medicare, the path is set. The Doc Fix basically made that happen for everybody and it's quite nice. It looks like maybe 0.5% to 1% at a minimum '16, '17, '18 and onwards. We don't have to worry about basically orals that's thrown out to 2022 or '23 or what-not, so nothing to worry there.

And on the commercial side, again, I don't understand why you're being conservative, because I would imagine the bundles were reset probably in '12, '13 for contracts with commercial payers. And they probably have inflationary clauses, and we're already in '15. So the comparison, you may have been flat for a number of years, but now, those inflationary clauses should be coming in. So what am I missing?

Yes. On a commercial side, those guys are mean.

Not at FMC, it looks like.

And so there's two issues on the commercial. One is just that these negotiations are intense. These are powerful organizations with a lot of market share. And some of them are mean. And so those are very serious tussles. And to get overly optimistic on how they come out is just inappropriate, especially as they get increasingly frustrated with having to subsidize 90% of our patients from the government side.

And then second is just what's going to go on with all this change in the distribution channels. What's going to go on in their networks, what's going to go on with all these local ACOs, commercial ACOs? What's going on with employers and do we design how they think about the benefits and the rest?

It's a lot of change. And they sort of blindly look at that and say it's all going to be fine. Everybody's making all those changes to try to save money. And so they're not setting them up for fun. And so I think we have to show a lot of respect for the potential challenges on the commercial rate side. We're quite serious about it.

Is that adequate?

Who we've got over there? Okay.

It's Margaret Kaczor from William Blair. Kent, just a couple of questions for you. First, anything that you can tell us outside of the new ESA drugs coming out for other new drugs like [Tripera]? Is that going cost savings for you?

Similar question on Outset Medical, could that be a good in-center device for you, and also a cost savings module you could look at over the next five years?

Yes. I'll Outset is a new piece of equipment and it's approved for in-center use. They're pursuing approval for home use. It's a potential competitor to NxStage. And in a center, it could theoretically allow one to move towards a lower use of labor, more self-care.

And we have high hopes for Outset. We hope they do well. And we hope they get approved at the home because we would love to buy a lot of their home products if they get it approved.

There's a lot of operating complications on the in-center side. But that's got some upside if it's at the right price. Doing home hemo equipment for too high a price wipes out the economics and you can't do a sustainable quality program because you can't get the scale. And there's no way to create something economically viable.

So Outset, we're a fan of, wishing them the best, and hope we get to buy a bunch of their stuff for home use in particular.

And then for the other drug, who can opine? Jim?

Right now, as you know, iron is relatively inexpensive. So I don't think that would ever bear any real fruit in terms of margin improvement.

Can I get a little more water please?

We'll go in here. We'll keep switching.

Tony Rosenthal from TimeSquare Capital. Kent, thanks very much. Can you tell us how much the legacy markets in HCP will contribute to your operating income guidance of $225 million to $275 million in OI for 2015?

Practically speaking, basically all of it.

Can you be more specific?

More specific. Can you help me with more specific? Because I said basically all of it.

I would like to understand what the losses are in the new markets.

Okay. Thank you.

What is the dollar amount of losses in the new markets?

Yes. I don't think we've disclosed that. I don't know the number off-hand. Let's bring it -- we'll check it out and talk about it in the next earnings call. But if now we want to be showing that or not, off hand, I think it probably could be fine, but I don't want to do it spontaneously.

Good morning. Chris Rigg with Susquehanna. A couple of questions here and a follow up to our year on 2016. I'm not trying to put you on the spot with regard to specific changes, but if you think about HCP, you kind of got the worst case scenario with regard to the risk model. I'm just trying to figure out what is sort of making you feel better about the year-to-year changes. Is it just core MA rates, kidney business, sort of what sort of qualitatively makes you feel better about next year?

About '16?

Correct.

It's pure and simple. It's the hit we took in the final rule was smaller than what we feared.

And is that driven by just the overall core rate change versus the risk model?

Yes, sir.

Okay. And then I'm still relatively new to the story, and I can't get my head around this concept where you sort of described in the kidney care business the good bucket, the commercial side, where you make all your money and the bad bucket, the government side. And then when you think about sort of demographics in the good job you guys are doing, keeping people alive longer who are in sort of that bad bucket, why is there not sort of long term margin degradation in the kidney care business, just given sort of the way the mix from good to bad is going long term? Thanks.

Yes. The answer is there will be. That we're getting better and better at keeping people alive. On average, as you keep people alive longer, a higher percentage of them are Medicare, and you lose money. And so, ironically, as we continue to succeed in clinical improvements, we will bring our margins down. You're absolutely right.

Thanks. Gary Lieberman from Wells Fargo. There's one competing ESA in the market. Is that enough for a catalyst for price competition from Amgen or do you think there needs to be a second competing drug?

Number one, we hope it is. Number two, more is better.

Okay. And then can you give us any kind of guidance based on maybe what's going on in Europe with competition on ESAs or what an expectation for a discount from current pricing might be?

Yes. And let me say on the first one is I don't mean to be flippant. In other spaces, you often need more than one new entrant to achieve a breakthrough. But in our space, which is so consolidated, there's the opportunity for a single entrant to move serious market share. And nonetheless, one would like more than that.

And then on the European example, it's just -- it's so hard to extrapolate, because, first, there's not a monolithic European reality. I mean, the market shares and prices differ by country. And so I think the only prudent takeaway from an investment assessment point of view is that there was some serious price reduction and Amgen stayed price-competitive to maintain market leadership. And so they did fine and so did everybody else. That's why numbers I think would be sort of pointless because I just wouldn't know which number to pick as one that is likely to happen here.

And then if perhaps Amgen doesn't compete on price, is there anything in your contracts with them to protect you from that or are you just -- do they just sort of have you against the law?

We have some conditions. If certain market conditions occur, we have the right to go off and do other things. If they don't occur, we don't. So could there be a scenario where other people are pricing below them and we don't get to go there and we don't get a price break? That that could happen depending on which market conditions. And that was part of the calculated risk of us picking up guaranteed savings in the early years.

But from a competitive and strategic point of view, if that ever happened where there was a significant gap, then Amgen would know that the day the contract was over, we would be moving to someone else in a very substantial way. Even it was to our economic detriment at that point, it would be too late. We would want to inflict the equivalent damage back. And in addition, we could cut that contract two years before the expiration of our Amgen contract.

And so we expect to have -- we have a good working relationship with Amgen. It is a wonderful drug for our patients. We're very used to working with it. And so we have every intention of continuing to work with them, we just wanted it to be reasonable economics.

And I think they will want a long term relationship with us. Our sense is they want a long term relationship with us as well hence we did the six-year contract. And at some point, in the latter distant future, we'll be sitting down to talk about what the next period of time looks like. But in this case, it will be with alternatives out there unlike the last time.

And maybe one more question on the ESCOs. It seems like that's been slower to get going than you expected. Can you tell us where you are?

The what?

On the ESCOs.

ESCOs, yes.

Can you tell us where you are in your conversations with CMS on getting on the same page of making that work?

Yes. It's taking a long time.

But first, on ESCOs, we just want to applaud CMS. They've taken it very seriously from the beginning. They chose us to be the first sort of especially ACO. As you know, the first model, there's no one who joined except us. We were willing to do it out of citizenship and trying to be a good partner. But nobody else did because the model was so bad, and they went back and reworked it and they made serious changes.

It is still not a scalable model. It's still something that you could only make work in certain places. And it was our hope to do it well enough in those places, to persuade them with more credibility what a scalable model it was because we could save taxpayers billions of dollars and dramatically improve quality for 500,000 Americans. Because if we did it at scale, it would transform the way lots of care works across America.

So we're staring at this amazing opportunity to transform, the first time to transform in America how a serious chronic condition is treated -- clinically, economically, patient service -- and be a poster child for what should happen in other chronic states. But they've got to work out their model.

Some of them are very worried about us making a profit. They just have an aversion to that. And in addition, without the waivers that the other ACOs and MA has, it could be very difficult for us to do much of anything for fear of being accused of doing something against the rules.

And so CMS is working very hard on it and we applaud them. And we just hope they can get to the right spot, and predicting that is very difficult. Andy, the new interim administrator is very smart, and very much believes in this sort of thing. But they got to work with a lot of different agencies.

Is that responsive, Gary, or did I miss it?

No, that's very helpful. Thank you.

So we have high hopes. It would be an amazing story for American healthcare, and would only take about four years. And we could change it across America with total transparency -- total clinical transparency. It would be stunning.

Okay.

Darren?

Just I had a few other questions. The one is just back to HCP, and you could maybe update us on how you're thinking about the dual eligible opportunity. That was not a big part of your commentary today. And consistent with how I sort of asked the prior question about HCP investment, do you see your participation in the duals as requiring investment? And give us kind of a two to three year outlook on that.

Yes. So duals strategically remain a big upside for us, for HCP. Actually, similarly on dialysis but let's just stick with HCP. So, big, big strategic opportunity. However, in California, where we're doing the bulk of it, the state government continues to issue such an unrealistic set of rules and expectations that right now, as the current regulatory set of rules exists, it's not an exciting opportunity.

So we're still doing a bunch of duals and we're getting better at it. But to really do duals, you would want to invest to transform more of the ecosystem of care around these patients -- to work more on behavioral health, to work more with area community service organizations, to do more in the home, to attack other aspects of life like food in the refrigerator and education on eating and things like that. This is where you really break the cycle of excessive care cost for that population and the long term care issue.

And right now we can't -- the model won't allow us to invest that which we could invest to transform it. And so we're doing more incremental things. And so it's valuable, but not exciting. And depending on what happens with funding, could become the opposite of it, it could become exciting in a bad way.

And so now separate from California, which is where we're doing our work, if you look over the next five to seven years, the work we do in other markets, duals remain an area of great promise. Nothing to bake into your model, but an area of great promise.

That's great. And then just as it relates to the commercial piece of HCP, I know you've articulated a desire to grow again in commercial and alluded a little bit to some strategies that you have to do that. The commercial lives have obviously shrunken inside the HCP business. I think some of that was lives moving around due to changes in Medi-Cal. But maybe can you just talk a little bit about how you're thinking about that opportunity to grow the commercial book inside HCP and what that might look like?

Yes. It's the right question. And I'll turn to Jim in a second. Right now, my answer is unimpressive. It's going to be generic, because it's only about nine months ago I took over, and X months ago we made the decision, X being less than nine, to say that we think there's some real value in us changing the current trend in that area if possible. We can't change the market trend but we can change our share within the remaining market by getting out there and promoting ourselves to the normal distribution channels, promoting ourselves more over some of those payers.

And in general, it's been -- the commercial HMO business has been sort of a second-class citizen within the context of HealthCare Partners in Southern California. So we're going to change that and make it a priority with the payer and with the distribution channels and with our own clinics, et cetera.

So I think there's only probably one more level of detail we have right now, that's why I'm saying it's quite superficial. But we're going to take it from an area we're getting virtually no emphasis to serious emphasis. And over the next two or three years we'll see if we can make a material difference.

Jim, do you want to add anything?

I think that pretty much --

Please stand up.

I think that summarizes it well. The only thing that I would -- the two things I would add. One, most of our emphasis on commercial is in Southern California. That's where most of our lives are. So part of this is simply putting more emphasis on it in Las Vegas and in Florida where we've just really never made an effort before.

And then within Southern California, most of the degradation in lives has been a little bit losing lives to Kaiser, and a little bit the emergence of some of these low cost plans. The low cost plans right now are largely coming through provider discounts, which we don't see as being sustainable. There are other ways to get to low cost plans much more driven through benefit design and utilization management efforts. And so part of what we are looking to do is begin to partner more directly with health plans to create solutions that kind of address that part of the market in a different way. That's something we haven't done before.

By way of introduction, Jim just joined us after 13 years at Bain. He joined us as our SVP of Strategy and is now also running payer contracting and hospital contracting on the HealthCare Partners side. I think he's our 31st Bain person.

Darren, if we could go here first and then come back to you, is that okay?

Just one last question I had related to the dialysis business. And that was, I think you confirmed in your comments that the vast majority of your commercial contracts are still fee-for-service. So maybe just update us on your kind of two to three year outlook on how you think payer contracting might evolve. Are you starting to see some more fully integrated, fully capitated types of contracting that's being done, and is that something you would consider doing?

On the commercial side of kidney care?

Commercial side, yes.

Of kidney care? Yes. There are five times as many commercial payers engaged in serious conversations with us about performance-based reimbursement in kidney care than 18 months ago. And so quantitatively and qualitatively, their commitment, their allocation of talent, their nimbleness around it, also five times greater. So directionally, it's a very, very positive story, not necessarily for global cap, but for serious performance-based contracting.

Having said that, it takes time. I mean, the cycle time is long because of the complexity of trying to come up with the right data set. And it's still not the biggest cost item and so it's not like them negotiating a contract with the largest hospital in the city or something.

But the national payers are becoming increasingly national, and that has some negative implications sometimes for providers. For us, a lot of it is positive because it's dealing with us on a national basis, it's a scale thing. It suddenly takes something that locally is the fifteenth most important thing, it rises to seventh if you can do it nationally as opposed to a lot of other contracts that they do which have to be market by market.

So there's really nice tailwinds there, but it's nothing that's going to show up and dramatically change overnight. And it's part of -- I want to link this back to the whole quality thing which is this is where being better overall systematically ends up having real mathematical implications for us finally after many years where it didn't make any difference.

And of course, JR, again if you want to add anything just tell me.

Hi. I just need a clarification. Earlier, you were talking about you would receive the -- this is on a legal issue. HCP, I guess you said that it received a subpoena. But if you could just clarify, so there were some reserves against that or is there potential for some call back? Could you just -- I'm not familiar with that, could you just elaborate on that a little bit?

Yes. And for more of a write-up, it's in our SEC filings from the deal. But just for the high level, there's about $600 million -- $611 million in escrow right now. And that escrow includes in the scope of its coverage healthcare regulatory issues, the likes of which are covered in that subpoena. And most of the practices that are covered and incidents were pre-deal. But not entirely complex, but at the high level -- that's the high level story.

Kevin, at the back.

It's dangerous to tell a roomful of analysts that you'll answer questions until you drop.

I said until I drop or you.

I guess, I wonder if you can give more color on the contracting with -- you mentioned the new business model contracting potentially with managed care companies or with health systems. Is there one that's preferable or one that seems to be gaining a lot more momentum versus the other? If you were to say I'm going to do 10, how would you think about what percentage might be in this area versus --

Is this payer partnership versus health system partnership on HCP side?

Yes.

Short answer is no. Right now, we haven't drawn any conclusions about which are superior. And that's why we called it R&D, we really are probing.

Is there an expectation that the margin profile will be the same? I think that the margin you get would be part of the value that you add. You might add different amounts of value to a health partner versus a health system. So how should we think about that?

Yes. It's a fair question. First of all, it's very market-specific, fact-specific as to how one assesses the upside versus downside, the capability of the partner, the commitment of the partner, what the market is like, how much market friction there will be. So the answer could be in one market, you very much for a payer, and another market, you very much prefer the health system.

And in all markets, in many cases, you'd rather have them both. So for example at Tandigm in Philadelphia, Tony is the CEO, and we with IBC, immediately, we basically did the deal with 300 of the leading primary care physicians in the market already pre-wired to sign up as our instant physician network, all of them interested in integrated care.

So even though nominally the deal is between us and IBC, there really is a third partner at the table with is the physician community. In another case, with Centura in Colorado, we're working simultaneously with them and some payers. And so in general, if you say there's physicians, there's the health systems, there's payers, and there's us, the more we can complete the square and have all four of us working on it together, that's actually best. Of course it also means you're splitting the upside with four people.

So it's incredibly market-specific, Kevin. And we have not drawn any conclusions about fundamentally whether or not we prefer one or the other across the board.

Okay. But I think you guys gave guidance, you (inaudible) announced one or two, I think, "big deals" or new arrangements this year. Is that still the way you're thinking about it?

We would be disappointed if we didn't do two more deals this year. I don't know about big, but we would be disappointed if we didn't do two more deals this year.

Okay. And then going back to Gary's question about the ESCOs and the waivers. Is there a reason why CMS wouldn't be as willing or view this different than other ACOs as far as they're willing to give waivers and structure the contract in the same way here as they do in the other ways?

Not that we know of. And I don't know if I may have any other data, but not any reason that we could think of.

Yes. So when you --

I mean, and just unless it would just be because they're worried because we and Fresenius are so big. That would be -- if that bothers them with respect to waivers, or because we're for profit. I don't know if there's some ideological or philosophical issues at play there. But, logically, there doesn't appear to be any basis for a difference.

Okay. Thanks.

LeAnne, would you amend those words at all?

Going once. There's Justin, under the wire.

Kent, just a couple of quick follow up --

You don't get to ask questions in your new role.

I don't really have a role right now. I'm in between roles.

Okay.

Just a couple of follow ups on the ESA stuff. One, specifically in the numbers you gave on the dialysis segment in the 2015 earnings and the three year forward, can you confirm whether there's any benefit or any meaningful benefit from lower ESA prices in that or does that assume the ESAs continue along the prices that you have in the Amgen contract right now?

I'm hesitating because I don't know if it's in our shareholders' best interest for me to answer that. So let me not. And you could process through, I think, why I'd be uneasy answering. So that's my spontaneous answer.

And we'll think about it and maybe we could decide by the next earnings call if we want to amend it. But we're very serious about wanting to get savings. And I just don't know that going public on a particular assumption would be helpful.

Okay. And then you mentioned the analogy to Europe and what happened there when there was a couple of new introductions of ESA equivalents. The people I've talked to over there, I get the indication that the pricing went down somewhere in the 20%, 25% range. Is that your understanding as well in terms of whether Amgen lowered price by -- I'm sorry, that was Amgen's price that went down by 20%, 25%.

Yes. In several places, that number is correct.

Okay, great. Thanks.

All right. Okay.

All right. But that kind of triggers another question in a way. In your contract with Amgen, are you at all allowed to trial Mircera? Obviously, your physicians have to get comfortable before even having the threat that you will be able to switch. So are you willing or are you thinking about trialing? Obviously their launch is quite imminent. It's going to be helpful for negotiations in 2018 or before then. But, again, will there be a trial with you?

Right. We can do 10% of our business with somebody else. And so that's 10%, that's a lot, since we're 35% of the market -- 3.5% of the market. That's $77 million. So it's serious. So, yes.

Okay. Going once, going twice.

It's so good to see many of you again. Thank you very much for your interest in our Company and we will do our best with your capital that we can in the coming year. Thank you.

COMPANY DISCLAIMER

Note: There were technical issues with the first few minutes of audio. This transcript and the webcast replay begin with slide 9 - the full presentation document is available as a PDF download from the DaVita HealthCare Partners Investor Relations website