德維特 (DVA) 2015 Q3 法說會逐字稿

Welcome, and thank you for standing by.

(Operator Instructions)

I will turn the call over to Mr. Jim Gustafson. Sir, you may begin.

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

I'll start with our forward-looking disclosure statement. During this call, we may make forward-looking statements within the meaning of the federal securities laws. All of these statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. For further details concerning these risks and uncertainties, please refer to our SEC filings, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q. Our forward-looking statements are based on information currently available to us, and we do not intend and undertake no duty to update these statements for any reason. Additionally, we would like to remind you that during this call, we will discuss non-GAAP financial measures. A reconciliation of these measures to the most comparable GAAP financial measures is included in our Form 8-K, submitted to the SEC and available on our website. I'll now turn the call over to Kent Thiry, our Chief Executive Officer.

Thank you, Jim. And thanks to all of you for your interest in our enterprise. In the third quarter, we had solid to strong results in both Kidney Care and HCP. But as always, we'll talk about clinical outcomes first, as that is what comes first. We are first and foremost a caregiver Company. We have about 177,000 patients in the US now. That's about 35% of the total dialysis patients, and 97% of those patients had a Kt/V of 1.2 or greater. 73% of those patients had fistulas placed for their access. For the second year in a row, DaVita is the clinical leader in the CMS Five-Star Ratings System. 46% of our centers are 4- or 5-Star rated compared to 23% for all other providers. Truly noteworthy.

HealthCare Partners -- we continue to take care of over 800,000 patients on a globally capitated basis, and several hundred thousand others on a fee-for-service basis. To give you another snippet of clinical information from HealthCare Partners, using the 2014 HEDIS results, in Florida, one of our three legacy markets, we once again exceeded the Medicare fee-for-service benchmark on all metrics. And we are 4- or 5-Star across all MA patients on all nine HEDIS metrics. That is outstanding. You stare at these and other numbers, you see that clinical outcomes for both Kidney Care and HCP compare very favorably to national averages. Healthier patients, healthier patient satisfaction, savings to taxpayers -- that's the result.

On to operating performance. On the HCP side, $83 million in OI -- that number is a bit misleading, in that it includes a net benefit of $22 million from the recognition of some risk-sharing settlements that we do not expect to recur. So it's real money that we earned, but it shouldn't have been centralized or concentrated in this particular quarter. But certainly very good news. And even independent of that, a solid operating quarter. The big news on the HCP side, as many of you already know, is the announced combination of DaVita HealthCare Partners with the Everett Clinic. The Everett Clinic is one of the most respected multi-specialty practices in America, with a strong primary care focus, more than 350 physicians currently, and we and they believe there is wonderful potential for highly robust growth in their market in the years to come. Already they take care of over 300,000 patients. That's mostly fee-for-service today, but there's exceptionally strong interest in that geography by all parties to work with us in moving further down the value-versus-volume spectrum. We look to close in early 2016, and we're awfully excited. The balance of the business pipeline is strong. I'll leave it at that, unless people want to talk during Q&A.

On the Kidney Care side, operating income, on the other hand, was adversely affected by a non-recurring incident -- $23 million reserve for refunds related to prior reimbursements received by our DaVita RX pharmacy business. So we had a $22 million non-recurring pickup on one side, a $23 million non-recurring hit on the other side. So the net is, the quarter is the quarter, but it's got those puts and takes. Our non-acquired dialysis treatment growth was 3.5%. Usually, I don't cover that. I'm covering it this time because it was the lowest in some time. A lot of different causes. Just to discuss a few of them, we referred to hospital contracting changes as of the last quarter or two. That continues to impact our numbers. We're also experiencing significant delays in some states where we are more concentrated than others, due to delays in state certification and other regulatory issues. We have nearly doubled the number of de novos, the waiting certification, compared to this same time last year. And in addition, so far this year, we're not picking up any tailwind in terms of treatment growth from decreasing mortality. Nonetheless, we still expect total treatment growth over the intermediate term to remain between 4.5% and 6%, as we have previously discussed at our Capital Markets Day, although we could be a bit below this year. And we expect non-acquired growth to remain between 3% and 4.5%, although the near term is likely to be at the lower end of that.

Overall 2015 guidance -- enterprise guidance is now $1.87 billion to $1.915 billion. In Kidney Care, we are raising the guidance just slightly. Operating income from $1.63 billion to $1.655 billion now. In HCP, we are tightening the range, the operating income expectation of $240 million, to $260 million. We're not giving quantitative 2016 guidance at this time. We'll be doing that type of 2016 guidance on the Q4 call. But we do want to provide some directional guidance for both HealthCare Partners and for Kidney Care.

On the HCP side, we have two definite earnings headwinds, and one potential earnings headwind. Number one is a definitive headwind in the form of reimbursement cuts. And these have been previously discussed for the most part -- a net $50 million hit in MA reimbursement because of the completion of the 100% move to the new HCC model, which has been previously disclosed, and that number discussed. In addition, we expect about $20 million in Medicaid cuts, as the State of California adjusts to the data on the Medicaid expansion population that came in earlier in the program, and them settling that out at this time.

The second earnings headwind is actually, we intend to make good news for the long-term, which is some significant infrastructure and next-generation investments on the HCP side. We're at the point now where we can execute on these kinds of strategic moves with more confidence. The biggest chunk of that is on the IT and technology side. And we think from improving the point-of-care information for our delivery system, significantly improving the depth and breadth of our mobile applications, significantly enhancing our website presence and features, both for internal and external use. And when we talk about external, we're talking about IPA physicians, we're talking about brokers, we're talking about patients. Significant improvement in our data mining capability and our clinical data warehouse, improvements in patient scheduling, things like that. The second largest area of increased investment will be in compliance legal. One of the other large ones is in increased physician recruiting, as our growth potential continues to unfold. But the general title is a lot of infrastructure and next-generation investment. One would reasonably want to ask for a lot of rigorous discussion of any such investment, and at our Capital Markets Day, we will provide just that. We intend to do Capital Markets in the first half of the year.

The third headwind is the potential headwind, which is the potential of the non-renewal of a payer contract due to the fact -- right now, the rate offer is unacceptable. We hope it doesn't happen, as it will cause significant patient and employer disruption, but it could. That's a potential.

The good news to weigh against all of those two real headwinds for next year and the one potential headwind for next year is our expectation of continued strong performance in our legacy markets. If you look over the last three years, the growth in our MA population in those legacy markets has been 15% on a CAGR basis. And if you eliminate the MA rate reductions on the RAF model side, on the HCC model side, then the CAGR of EBITDA growth in the last few years is approximately 4% or so. So without those headwinds, we would be looking at some more favorable numbers. Nevertheless, when you put all that together, the net is that 2016 OI in HCP is likely to be lower than 2015. Stepping back from that one-year fact, our investment thesis still stands. We have a strong and substantial foundation, where we are good at doing at-scale what others want to be good at. And we are working hard to enhance the team and value proposition as we move forward.

On the dialysis front, I think we can be quite concise that it would be a year with the typical puts and takes, in terms of upside and downsides, if not for the fact that our Medicare reimbursement will be near flat. And that is just a difficult headwind to overcome on that side, as so many of you know. A few words on capital deployment -- from an enterprise perspective, perhaps three points. Point number one, in the quarter, we did significant capital deployment, with substantial acquisitions in both US Kidney Care and HealthCare Partners. And we also did significant share repurchases, as our earnings press release reflected. The second point is we still have a healthy cash balance and continue to generate strong cash flows. And the third and final point is that we look forward to continuing to deploy that cash over the next several quarters in the same way that we deployed that capital in this past quarter, evaluating the relative opportunities on an ongoing basis. Now I'll hand it over to Jim Hilger, our Chief Financial Officer, who will walk through some more details on some of the numbers.

Thanks, Kent. Starting with Kidney Care, operating profits increased $17 million sequentially. This includes the increase in refund reserves recorded in Q3 at DaVita RX. This improvement is driven primarily as a result of two main positive factors. One, an additional treatment day in the third quarter. And two, solid cost management of both patient care costs and G&A expense, with each down over $1 per treatment in the quarter as compared to Q2. International losses were $15 million in the quarter, and this is consistent with the last quarter. We continue to expect international losses in 2015 to be close to $50 million.

Now on to the overall enterprise. Our debt expense was $103 million in the third quarter, which is a good run rate for debt expense in future quarters. Our income attributable to non-controlling interest was $46 million. We expect non-controlling interest to be slightly lower in Q4. Next, the effective tax rate attributable to DaVita HealthCare Partners in the third quarter was 40.5%. We expect the full-year tax rate for 2015 to be in the range of 39% to 40%, excluding the impact of the Vainer settlement. Also, we purchased $341 million of our common stock in the third quarter, which brings our total year-to-date repurchases to $425 million and 5.6 million shares. As you think about modeling the fourth quarter, here's a few things to keep in mind. Q4 is typically the weakest OI quarter of the year for HCP. And dialysis G&A tends to increase in the fourth quarter. Both of these are factored into our full 2015 operating income guidance.

Now turning to cash flow, we continue to generate strong cash flows. Operating cash flow was $679 million in the quarter. We now expect 2015 operating cash flow to be between $1.675 billion and $1.775 billion. This range excludes the approximately $300 million after-tax impact of the Vainer settlement. Please note that the strong cash flows in 2015 are borrowing a bit from the 2016 operating cash flows, due to the timing of cash tax payments and other working capital items. As always, this guidance range captures the majority of probabilistic outcomes, but we could be above or below this range. And with that, operator, let's go ahead and open it up for Q&A.

(Operator Instructions)

Our first question is coming from Mr. Kevin Ellich. You may begin.

Hi, thanks for taking my questions. Kent, just wanted to start off -- could you talk a little bit about -- you named a bunch of headwinds, and also the $22 million of reassuring settlement for HCP. Just wondering if you could give us a bit more color on that, how we should think about that in regards to a one-time item?

Okay. When you -- you're referring to the $22 million positive pickup?

Yes, that's right.

Jim, why don't you go ahead and cover that?

Kevin, that amount is -- did occur -- let me start over. That amount covers multiple periods, not just all in this quarter, and it was out of trend. That's why we called it out. I wouldn't expect the same level of impact in future periods.

It was a positive development in large part after a whole lot of back and forth between us and the payer, where the payer agreed that we actually deserved additional revenues, and settled up in one fell swoop.

Great. And then I know you guys have had -- the non-acquired treatment growth has been a little bit lower, and you called out a number of things, Kent. How long do you think this will persist, and when do you think we'll see normalized growth back in the 4% to 4.5% range? Thanks.

It's the right question, Kevin. And I'm unfortunately going to disappoint you in the answer, which is, it's not clear. We know, as we continue to prune our hospital portfolio, that we'll put that behind us, and then the year-over-year comparisons will start to be different than the way they look right now. But the certification and regulatory delays are very hard to predict, and particularly in places like California, where we have a lot of centers and a lot of centers waiting to be built and/or certified and/or occupied. We're really getting hurt. And if we were more adept in this area in terms of predicting, we would have told you ahead of time that it was going to happen. Clearly, we didn't tell you ahead of time. And then the mortality front, we've done so well the last four or five, six years in a row, and this plateauing was not something we expected. And so we, at the same time, or in the same way, are not good at saying what's going to happen over the next year to that trajectory. So in two out of the three that I mentioned -- and then there's a few other drivers that just aren't worth going into. But as you can see, in two out of the three that I did mention, we just don't have the ability to predict, unfortunately.

Great, thank you.

All right, thanks a lot. The next question please, operator?

Yes, our next question is coming from Mr. Matt Borsch. Your line is open.

Just directionally, it seems that you would still be pointing to the Kidney Care side having positive operating income growth for 2016. Can you comment on that?

We actually are not commenting on that, and we only wanted to comment on HCP because we felt there might be a growing gap in the perception of what was likely to happen. Because you couldn't have insight into how aggressive we intend to be in terms of infrastructure investments and next-generation investment, reflecting a real bullishness on how differentiated we could be a few years downstream. And so because of that, we said: gee, there's no reason to wait, because we know we're going to do it. It's not dependent on any intervening development. And we know we're going to have to do a lot of explaining, and we're eager to do that explaining. But absent that, we just felt it's not appropriate to go into further quantified guidance at this time.

Let me back up, if I could, and just ask a high-level question. As we think about the HCP model -- and certainly I think there's a very compelling case that the physician-led delegated model is -- has historically and will continue to outperform the hospital-centric model. But as you look at the markets where, in essence, you're competing with the hospitals for the hearts and minds of physicians, do you think what the hospitals are doing -- I'm sure it varies by system. But is it real here? Or you know, in most cases we really haven't gotten into real risk-taking in a lot of these markets. It's upside-only bonuses and, you know, window dressing and bells and whistles around ACOs. I just want to get your sense of your assessment of the hospital systems, and what they are really doing on integration?

Well, let me grope around here for a minute, and then we can see where you want to take it, Matt. First of all, not surprisingly, the answer differs a lot by institution, that some are far more committed, far more adept, have been working on it for far longer, allocate more talent and capital. And those entities are doing some real stuff, real population health management, really bending the cost curve. That is a small minority of the overall pool. A lot of other folks are acquiring practices and recruiting doctors where -- with 85% of the motivation being to just to cure their referral flow, and they are not making the tough decisions and tough investments associated with actually getting very good at that. And so for us, however, in either case, we look at it with a fresh set of eyes. Some hospitals and health systems are becoming great partners to us. And we will work with them to succeed in both population health management and fee-for-service at the same time. In other cases, we are in fact competing with hospitals as they seek to move down the path, or just try to gain control of their referral flows. So for us, whether a health system is really committed and getting good at it, or actually not committed, is independent of our decision of who is friend or foe. And sometimes it's kind of in the middle.

Okay, that's great. I'll get out of the queue.

All right. Well, you're welcome back, as always.

Thank you.

Thank you. Next question is coming from Mr. Kevin Fischbeck. Your line is open.

Okay, great, thanks. Please just explain a little more what the pharmacy item was?

It was just a case where we had billed for some items, and we got paid for them, and as part of our normal compliance reviews, we uncovered that we should not have been paid for them, or paid the wrong amount. I'm not going to know all the details. And so we went back in time, identified all of those instances -- in some cases, I think, going back four or five years -- and made re-payments to the government. But because we did it in one fell swoop across three different issues going back in time, it added up to a pretty significant number and so we felt we'd better carve that out and let you know.

Okay. When you gave the guidance on HCP, you didn't mention as a tailwind the deal. You guys have been pretty active on the deal to -- you've obviously been ramping up some de novo starts. I guess there was some thought there Arizona and New Mexico would start to look better next year. So just wanted to see directionally, are those things not going to be contributing into next year, or how do we think about that?

It's a very fair question. The problem with the business model is, A, right now, some of these assets are expensive, because so many people would like to have them as their partner. And B, in many instances, day one, step one is actually to add expense to start building the capability and start negotiating the contracts that are going to lead to the incremental value and the incremental profit. But it means you're adding expense before you're adding revenue with positive contribution margin. And it takes time to get some of the contracts and execute. So while a number of those different investments we've made are right on plan, those plans are not going to contribute any significant incremental profit in 2016. In the cases like the Everett Clinic, which have a long track record of strong operating performance, nonetheless, the growth opportunity is so substantial, we are eager with them to invest, to go pursue that growth opportunity. In the short-term, that means a bunch of expense. So we understand that it's our responsibility to delineate this with good conceptual and analytical rigor at the Capital Markets Day. In the meantime, the net number is nothing to get excited about from a short-term profit point of view.

Okay, I guess that makes sense. What about the Arizona and New Mexico? I thought those were kind of on a multi-year rebuild?

Yes, I think our policy is not to go through every individual market on every call. What I can tell you is that if you look at our portfolio of new markets and joint ventures -- some of which are two years old, some are one, some are six months -- that the 2016 versus 2015 results in aggregate are going to be about the same. And that's a mix of some moving into profitability, some moving into bigger losses, and everything in between. But the portfolio is basically a non-story in terms of helping or hurting 2016 versus 2015.

Okay, and then last question. the CMS reg was finalized, I'm wondering if your interpretation of the provision in there is to include drugs more quickly into the bundled rate? I think there's been some hope that as EPO goes generic, there could be a little bit of period of time where you guys benefit from the lower-cost drug for a while. It seemed like what CMS was trying to do was trying to narrow that window. And so I just want to understand your interpretation of that. And then also, if in fact AMGEN waits a while to match, and one of these other drugs that's currently out there starts to get used a little bit, is that going to put you -- is that a headwind potentially into 2017?

Let me turn that one over to LeAnne.

Yes, well, there was a couple of questions in there. So let me just restate what CMS is doing. One, they have categories which they have identified for when a drug or service would be new, and so how that would come into the bundle. And number two, as you're specifically referencing, I think the introduction of IV Sensipar -- they have accepted the industry's recommendation that, that product be outside of the bundle for a transition period, at which time they will be able to establish the costs and clinical efficacy, et cetera, of that product. And then as they suggest that, that period be a minimum of two years. After such period, both that product, as well as the oral equivalent, will come into the bundled payment system. They don't go through much more detail than that -- a little bit more detail. So I'm sure we look forward to working with them over the next couple of years through the detailed implementation. I'm not sure if that answers your question, but if you want to be more specific, I can certainly provide a little more data.

No, that's definitely helpful. Does generic to the biosimilar EPO get thrown into that same --?

Yes, so in my first statement, they have identified categories where a new entrant would just come in under existing payments. So yes, the biosimilars we would expect would be under the bundled payment system when the FDA approval is complete.

Okay, and they are just going to weighted average, the use of those drugs versus the average, to come up with what the new rate for that drug will be?

Yes, so remember for the ESRD payment system, there's no particular, quote -- rate -- for any single component of the bundle, with the bundled payment system. I haven't thought through for you how non-ESRD clinics would be reimbursed for a product like that. I can give it some thought and certainly get back to you.

Sure, okay. That's helpful. All right, thank you.

Thank you. The next question is coming from Mr. Gary Lieberman. Your line is open.

Good afternoon. Thanks for taking my question. The first question on the HCP expenses for the infrastructure and investments. The way you were speaking, it sounds like most of that's going to be expensed. Is there some portion that would be capitalized? Or are you still trying to figure out how much of that would get capitalized versus expensed?

Some will be capitalized, but not a big percentage.

Okay. And so excluding sort of some of those upfront investments, you didn't say specifically, but you insinuated that operating income would be positive without that. Is that a fair statement?

Well, let's see. What I did say was that because of the expected headwinds netting against the organic growth, et cetera, that we expect OI to be down. I actually -- trying to do all the math in my head -- without the investments -- I can't answer your question spontaneously. But in aggregate, given the two definitive headwinds and the one potential headwind, and given our current sense of organic growth, et cetera, we expect the net to be, unfortunately, one that leads OI to be down 2016 versus 2015. I realize I just restated what I said earlier, but I think I just have to leave it at that.

Okay. And then maybe on the third potential headwind, is there any more detail you could give to us on that? Is that a large contract? Is that somewhere that you've had issues before?

I think that would be not in our shareholders' best interest to go into any more detail on an active negotiation.

Okay. And then maybe turning towards the Kidney Care business and just getting an update, to the extent you can give it, on your ESA strategy -- specifically, the 10% of the drug that you could use, not of EPO, based under the current contract. Are you doing any of that? Are you thinking of doing any of that? And then also maybe comment on -- it sounds like AMGEN is trying to move some customers onto Aranesp -- to see if you are doing that, or what your thoughts are on that?

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

Can you repeat your question, please? Sorry.

Sure. The first part of it was just an update on your ESA strategy, and specifically the 10% of your contract that you're allowed to use outside of Epogen? And then the second piece of it was, any comments or thoughts or anything that you're doing regarding AMGEN's apparent move to try to get some dialysis operators to move to Aranesp as opposed to Epogen?

Sure. We do intend to do a pilot on the long-lasting Mircera agent in 2016. And certainly we do have availability with that 10% to try both a long-lasting agent, as well as one of the biosimilars for Epogen that would come in. And we certainly will consider both options. As for AMGEN's specific actions with respect to moving the industry to Aranesp, clearly that seems in some way for them to be competing with Mircera as a long-lasting agent and making sure that they have an opportunity for the marketplace to test their product. We are not presently doing anything significant with Aranesp. Does that answer your question?

That answers my question. Just to follow up on that, any questions -- not any questions -- any thoughts or comments on the FDA's letter on Retacrit?

No, just we've seen what's in the public marketplace the same as you, and we wish them the best as they answer the questions with the FDA.

Okay, great. Thanks very much.

Thank you.

Next question comes from Margaret Kaczor. Ma'am, your line is open.

Good afternoon. Thanks for taking the question. So I know you guys don't want to talk about specific partnerships, but you've seen Tandigm, you've seen Tandigm running at a $500 million run rate. Just broadly speaking, as we go out into year three, four and five, what should we think of the top-line growth rate, as well as the profitability profile? And then just to follow up on that, as we think of other partnerships that you guys are doing, are you expecting a more similar profitability in top-line growth rate? Thanks.

We are not in the practice of giving that kind of market-by-market guidance. And even if we were, we would hesitate, because there's so much uncertainty in exactly how it will unfold. As you know, we ramped up from nothing to $500 million imputed top line in a very short time. There's an awful lot going into market. So the range of outcomes over the next year or two is quite wide. And so we're excited about it, and we have a high-quality partnership with the big physician IPA, and with IBC. But to go any further would just not be prudent. There's just too wide a range of outcomes.

Okay, great. And in terms of the NAG growth, I know you touched on the impact of the acute care contracts, and maybe those patients coming in. But can you give us any clarity in terms of what the chronic non-acquired treatment growth was in the quarter?

I'll have to turn to my partners here. I don't know if that's a number we've disclosed before or not. We have not done that in the past. Let us reflect on it, given our NAG is down, and that's one of the reasons. It's a very fair question, so let us reflect, and maybe starting next quarter we'll put split it out.

Okay. And then I'll sneak one more in, if I could. In terms of the regulatory delays in opening some clinics, do you expect that to move into different states as well? Are you prepared for that? And is it just you guys that are seeing some of these delays, or competitors as well? Thank you.

No, we think everybody is experiencing the same delays on that front. However, we have a significantly higher percentage of our de novos in some of the states that are the slowest right now, California being prominent among them.

Thank you.

Thank you, Margaret.

Thank you. Our next question is coming from Mr. Chris Rigg. Your line is open.

Good afternoon. With regard to Everett, you commented that it serves mostly a fee-for-service population, and that you hope going forward it becomes more of a value-based enterprise. How do we move from the fee-for-service model today to where you want to be in the future? And is that primarily going to come in the Medicare Advantage space or commercial partnered with hospitals, or how do we think about the conversion there? Thanks.

Got it. Three points. Point number one, we think good multi-specialty groups can make significant contribution margins in a fee-for-service world, as Everett Clinic and others have demonstrated. So we never want to confuse profitability as being only the result of having globally capitated contracts. That's our premise, that exactly the opposite is true, especially when we start partnering with a group and they have more access to capital to do some of the things that are quite leveraged, even in a fee-for-service world. Second, that the -- one of the powerful levers to pull to enhance the value proposition and profitability of a major medical group is to actually sign some global risk contracts, and begin to invest in eliminating waste from the system and improving health. And then third, there's all sorts of less dramatic value-based contracting that can go on in between, with shared savings and bonus plans and new market incentives and combined ancillaries. And so that the menu of intermediary steps that can be taken with plans in a market or with a health system or with other medical groups, is quite long. And so with the Everett Clinic, we're excited because our five-year strategy encompasses all three of those fulcrums.

Got it. And then just a follow-up on HCP. You touched on this generally, but investors, I would say, have been patient with the business and profitability trends. And I think a lot of people were optimistic that 2016 would be the inflection year, where things generally start to turn for the better. Clearly, some of the things that are going on next year are true business things that will come up. Other -- some of it's going to be discretionary. What would you say to people that -- when should we really start to think about an inflection and that the investment in the patience really begins to pay off for the shareholders? And I'll leave it at that. Thanks.

That's the X hundred million dollar question. And right now, we just can't give a date where that happens, although we certainly respect the fact that patience can run thin. And part of why we look forward so much to the upcoming Capital Market session, where we can spend a significant block of time going through this with more analytical rigor. I would remind folks that absent the change in the RAF model, which certainly we've mis-handicapped, but absent the change in the RAF model, we would all be sitting here quite content with our margins and returns and the trajectory. That just so happens to be a major issue and not to be ignored. And government policy can continue to change, although that model, of course, is 100% implemented, and the MA program has an awful lot of political support in terms of supporting the benchmark rate. But we do want to make sure people continue to parse through the impact of that single MA model change from the performance of the legacy market, from the performance of the new market. And at Capital Markets, we'll attempt to do a real good job of parsing through those different components, and so you can assess whether your patience should be sustained or jettisoned.

Great. Thanks a lot.

Thank you.

Thank you. The next question is coming from Gary Taylor. Your line is open.

Good evening. Couple housekeeping items first I want to make sure I have correct. The refunds of the pharmacy payments in the ESRD segment, that was a revenue item?

Yes, that reduced revenue.

Okay. And the new revised guidance for consolidated Company on operating income, the $1.870 billion to $1.915 billion, that is versus the $1.421 billion nine-month figure, or is that nine-month figure actually being adjusted in some way?

People are reflecting and staring at pieces of paper, Gary. So can you go on to your next question and I'll come back to it?

Sure. On that, I'm getting to -- I'm trying to understand, is the implied fourth-quarter operating income, which I think is 449 to 494, which was tie to Kent, your comments sequentially. I want to make sure I'm apples to apples there. And --

Gary, you said year to date, $1.421 billion, that's correct. Yes, that's the non-GAAP adjusted.

Okay. And revenue per treatment in dialysis has been stronger year to date than we thought. I know on the last couple calls, you talked about commercial mix being a surprising positive trend factor. Obviously that number was stable sequentially, so it couldn't have done much. Maybe the growth year over year narrowed a little bit. Is that the right conclusion, commercial mix holding stable with that year-over-year improvement?

Well, there's two dynamics. One is mix. And of course, even small increments and decrements can move the dial. And I'm trying to remember at what level we round on the numbers that you've seen. But if it's a full percentage point, which is my memory, then there can be significant movement within that. And then second, as you know as well as any of us, that we're always winning and losing some battles on the payer front, in terms of rate negotiation. And right now, we're having a few more victories than defeats in that realm, and so some of that's contributing.

Okay. Last question. Just trying to understand a little bit going to the HCP segment, capitated member month down -- no, actually, pure enrollment, I think, down about 18,500, or a couple percent sequentially, and down a little bit year over year. I know you call out in your text legacy market member month is approximately flat. So we're to conclude you intentionally dropped some membership in some of the newer markets? Or is that the right conclusion?

We do have one of the new markets where we very intentionally dropped a plan that led to a significant drop in membership. And that was a good thing for our P&L and for our strategic position. Now having said that, I'm not sure that explains exactly what you're bringing up, so let me look around the room here. Yes, that is the explanation. It was very conscious and negotiated, and has significantly enhanced our P&L.

Okay, thank you.

Thank you. Next question's coming from [Steven Errico]. Your line is open.

I just want to follow up on the HCP questions. I think the key word was patience. And we've been in your stock for a couple of years and patient. Is there any way we can get some outlook prior to the Analyst Day in May? Certainly you guys have made a decision to budget higher expenses. I would just like to get an idea of what type of return you're looking for to get on those expenses, and not have to wait until April or May of next year. Thank you.

All right. We will think about it. We are contemplating moving the Capital Markets up relative to last year. And in addition, we're going to give actual quantitative guidance after Q4. So I think you'll have two good bites at the apple of getting more information and being able to test it relatively soon. Am I answering the question or am I missing it?

No, I think you got it. That's fine. And the other questioners addressed it, so I won't belabor the point. Thank you.

Okay, thank you.

Thank you. At this time, there are no further questions.

Okay, well, thanks, everyone, for your consideration of DaVita. And we will do the best we can in the intervening months until we talk again. Thank you.

Thank you. That concludes today's conference. Thank you for participating. You may now disconnect.