德維特 (DVA) 2017 Q4 法說會逐字稿

Good evening. My name is Eric, and I'll be your conference facilitator today. At this time, I would like to welcome everyone to the DaVita Fourth Quarter 2017 Earnings Call. (Operator Instructions) Thank you. And Mr. Gustafson, you may begin your conference.

Thank you, Eric, and welcome, everyone, to our fourth quarter conference call. We appreciate your continued interest in our company. I'm Jim Gustafson, Vice President of Investor Relations. And with me today are Kent Thiry, our CEO; Joel Ackerman, our CFO; Javier Rodriguez, CEO of DaVita Kidney Care; Jim Hilger, our Chief Accounting Officer; and LeAnne Zumwalt, Group Vice President.

Please note that during this call, we may make forward-looking statements within the meaning of the federal securities laws. All of these statements are subject to known and unknown risks and uncertainties that could cause the actual result to differ materially from those described in the forward-looking statements. For further details concerning these risks and uncertainties, please refer to our third quarter earnings released earlier today and 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 upon information currently available to us, and we do not intend and undertake no duty to update these statements for any reason.

Additionally, we'd like to remind you that during this call, we will discuss some non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our earnings press release filed with 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 out there for your continued interest in our enterprise. We are, first and foremost, a clinical caregiving company. And as is our custom, I'll start with talking about our clinical spotlight before I move into a high level summary, and then Joel and Javier take care of the follow-up.

Flu, as we've seen in all the major media, is the leading cause of hospitalizations in general and even more so in the ESRD population. The current flu season is especially severe. Vaccinations significantly reduce the risk even in a difficult year like this, and we vaccinated over 94% of our patients, which is a very distinctive percentage, and many years in a row where we have outperformed the norm in this all-important category.

Now on to a high-level summary of the quarter itself. It was a good quarter for DaVita Kidney Care, and we carry solid momentum into 2018 and '19. There's a lot of noise in this quarter's numbers due to a bunch of factors, including the DMG sale and tax reform and Joel will step through a bunch of that to help you navigate. But the bottom line is it was a good quarter, we have good operating momentum, and we continue to generate strong cash flows, and we will deploy a significant amount of those cash flows towards share repurchases as the quarters roll on.

On to Javier for DaVita Kidney Care.

Thank you, Kent, and good afternoon. Let me dive right in. I'll provide some details on the main drivers of the business, and Joel will cover the financial results in more detail.

First, our non-acquired growth for the quarter was 3.5%, approximately flat versus the third quarter of 2017 after normalizing for the impact of the hurricanes.

Next, net dialysis revenue per treatment came in consistent with recent quarters. As we think about 2018, I'll break it down between government and commercial revenues. As you know, 2018 Medicare rate update is essentially flat and would be — and will be a headwind for margins for all dialysis providers.

As it relates to commercial revenues, there tends to be 2 questions: is there anything new on charitable premium assistance? And how is the commercial environment? We believe that there's very little going on around the country on charitable premium assistance. And as it relates to the contracting environment, the conversations are back to the normal puts and takes.

On to the cost act. Like many other companies, we're experiencing a tight labor market with upward wage pressure. We continue to expect a 2% to 3% annual increase, and don't see a significant opportunity to offset this with productivity improvement in the near term. With labor cost inflation — sorry, with labor cost inflation continuing to update Medicare reimbursement, we will continue to feel margin pressure in the traditional Medicare fee-for-service business in 2018. With normal Medicare updates scheduled to resume in 2019, we expect these margin pressures to subside.

Finally, we continue to be excited at the prospect of transforming patient care in the dialysis industry through PATIENT Act. We currently have an unusual amount of bipartisan support in both chambers of Congress with more than 150 cosponsors. We believe we have a real shot in getting this bill passed this year, but as always, it's significant lift to get transformative legislation passed.

To wrap up 2017. We ended the year with adjusted operating income for Kidney Care of $1.616 billion, above our most recent 2017 adjusted guidance of $1.57 billion to $1.6 billion. Joel will go into more detail on this in a moment.

On to 2018 guidance. Because of the pending DaVita Medicare — Medical Group transaction, our Kidney Care guidance effectively becomes our guidance for operating income from continuing operations. For 2018, we continue to expect operating income of $1.5 billion to $1.6 billion for Kidney Care business.

As a reminder, we have a 1 year-over-year accounting headwind of up to $100 million as we finish the transition from profit share program to a 401(k) match program. With the old program, we accrued for the expenses in the calendar year before the payout. With the new program, we will accrue for the expenses as we pay it out. This accounting change created a 1-year gap in 2017, when we did not need to accrue for such payouts.

To close out my remarks, I would like to follow up on 3 variables that we discussed last quarter that could swing 2018's forecast.

First, open enrollment period was in line with our initial expectations. We will continue to monitor as the numbers float throughout the year, and we'll keep you posted.

Second, on to pharmaceuticals. As we have discussed before, calcimimetics, a drug that's taken by many ESRD patients to treat mineral bone disease, has just moved into our dialysis reimbursement with the introduction of an injectable drug called Parsabiv. The reimbursement and the cost of calcimimetics are coming in line with expectation, but it's still too early to understand the full picture until we get more data on volume and product mix. Physicians make individual prescription decisions based on each of the patients needs, so how they will view the new drug option is very difficult to predict. Our view of the most probable range of outcomes continues to be included in our guidance, and we plan to provide an update when we gain better visibility.

Third, on to the ballot initiative being pursued by the union in California. We won't have much to report until later this year, and we have not included potential advocacy costs in our guidance range. If the initial — if the initiative does pass, we believe that it would have material adverse impact on the entire industry in California. It would likely make a large number of centers in California financially unsustainable, which would severely limit patient access to outpatient dialysis care. We have also become aware that the union is pursuing a similar initiative in Ohio. We have not included any potential advocacy costs in Ohio in our guidance range either.

Now on to our CFO, Joel, for financial results and details.

Thank you, Javier. I will start with an overview of the financial results for the Kidney Care business as reflected in our continuing operations. Adjusted operating income for the fourth quarter was $430 million, up approximately $26 million or 6% versus the third quarter, although the fourth quarter benefited from a couple of items that are outside our run rate. First, we recognized $14 million shared savings revenue that our DaVita Health Solutions business earned throughout 2017. Second, we had a $9 million onetime benefit in insurance expense due to a revaluation of our reserves.

As a reminder, adjusted operating income for the third quarter was $404 million, but this figure was negatively impacted by approximately $14 million due to the hurricane season. The fourth quarter was shorter by 1/2 treatment day relative to the third quarter, which accounts for most of this difference.

For our U.S. Dialysis and Lab business, our reported revenue per treatment net of provision for bad debts was up $0.49 per treatment quarter-over-quarter. Underlying this are 2 largely offsetting unusual items. First, we recognized approximately $20 million in cash receipts that we had previously reserved that flowed through the gross revenue line. This was offset by a $23 million increase in our provision for bad debts to address our higher estimates of patient pay receivable write-offs for all of 2017.

To comply with the new revenue accounting standard, starting with the first quarter of 2018, you will start to see a few changes and additions to our disclosures. I want to highlight 2 in particular. First, we will only be reporting revenue per treatment net of provision for bad debt. Second, we expect to recognize a benefit of approximately $30 million in the first 4 months of 2018 from a change in how we account for Medicare bad debt recoveries. Prior to 2018, we recognized these recoveries only after attempting to collect, which takes approximately 4 months. Under the new rules, we will estimate and recognize estimated Medicare bad debt recoveries at the time of treatment. I refer you to our Form 10-K to be filed later this month for additional details.

Our patient care costs were down approximately $0.11 per treatment quarter-over-quarter. As a reminder, our patient care cost in the third quarter of 2017 was higher by approximately $1 per treatment due to the hurricane impact.

U.S. Dialysis and Lab segment G&A costs were down approximately $1.69 per treatment sequentially due to lower outside professional fee expense and normal quarterly fluctuations. For fiscal 2017, G&A was approximately 3% per treatment — was down approximately 3% per treatment year-on-year. As G&A always had some quarterly variability, the annual G&A per treatment is a better result to use for your go-forward modeling.

Lastly, please keep in mind that our first quarter tends to be the weakest quarter of each year due to seasonality, with 2 fewer treatment days in Q4, flu impacts and higher payroll taxes.

A few words on the DMG sale. As a reminder, we announced in December that we entered into an agreement to sell DaVita Medical Group to Optum. We're working with Optum on the required regulatory approvals and continue to target closing in 2018. It has been a very productive working relationship, and we look forward post-close to the additional long-term benefit that the business will get from our relationship with Optum and United. Because of the pending transaction, the DMG business has been reclassified as "held for sale", and the results of operations are reported as "discontinued operations". In addition, prior period presentation had been revised to conform to current year presentation.

In the fourth quarter, DMG generated operating loss of $23 million. This includes operating results which were negatively impacted by a bad flu season and both direct and indirect financial impact from the transaction, including the shift to held-for-sale accounting. In addition, we recognized a tax benefit of $164 million in order to recognize deferred tax assets required upon the classification of DMG as held-for-sale. The net impact of all these items is that we reported $144 million gain as one line on the income statement as a discontinued operation.

On to International. Our strategy is evolving under the direction of the new leadership. The result is an increased focus on core markets where we are well positioned to achieve scale and drive clinical and financial value. Also, as we discussed last quarter, we restructured our international organization to streamline our reporting structure and reduce administrative cost and anticipate this will save $6.5 million in annual G&A expense in 2018. As a result of these strategic changes, including changes in expectations concerning the JV's available market opportunities, we are taking a noncash write-down of our investment in the Asia Pacific JV of $280 million, which reverses much of the $381 million noncash gain we booked in 2016 and 2017 from the creation of this joint venture.

Adjusted operating losses from our international business was $46 million for fiscal year 2017, which included $2 million in impairment charges, $4 million in prior period adjustments and $8 million in foreign currency losses. This was in line with the revised guidance that we had previously provided for 2017.

As we have discussed in recent quarters, we expect to achieve breakeven operating income in late 2018. This is incorporated in our enterprise guidance for continuing operations for 2018.

Next, some information on taxes. To account for the impact of U.S. tax reform legislation passed in December, we recognized a one-time reduction of tax expense of $252 million in the quarter. This is the net gain to remeasure our deferred tax assets and liabilities to reflect our expected go-forward tax rate. Excluding this and other onetime items, our adjusted effective tax rate on continuing operations was 40.4% in the quarter and 39.1% for 2017.

As we continue to review the impact of the recently announced tax reform, we now expect our effective tax rate from continuing operations in 2018 to be 26.5% to 27.5%. Despite moving up the bottom end of the range by 50 basis points, we continue to expect a 2018 income tax expense reduction of $110 million to $130 million from tax reform.

Now cash flow. Enterprise operating cash flow for 2017 was $1.907 billion, within our previously provided guidance. For 2018, we will provide cash flow guidance for continuing operations in light of our expectation that the DMG sale will close this year. We expect operating cash flow from continuing operations to be $1.4 billion to $1.6 billion. This guidance reflects the benefit of tax reform from both the lower effective tax rate and the accelerated depreciation of certain capital expenditures. This cash flow guidance excludes any cash flows from DaVita Medical Group, although investors should keep in mind that we will still own the cash flows from this business up until the date the transaction closes.

In 2018, we expect to spend $925 million in CapEx on continuing operations, roughly evenly split across maintenance and development CapEx. This is an increase of approximately $100 million from 2017, but most of this increase is due to expenditures we do not expect to recur in 2019. So holding all else equal, we expect our CapEx in 2019 to be closer to our 2017 levels.

For the full year 2017, we repurchased 13 million shares of our common stock or nearly 7% of our shares outstanding at the beginning of the year. During Q4 2017, we repurchased 7.4 million shares. We have also repurchased approximately 900,000 shares this year through February 12, 2018.

Now I'll turn it over to Kent for some closing remarks.

If you'll excuse a little bit of redundancy, I'll make 3 points before we turn to Q&A. Number one, it's early in the process, but the DMG transaction is proceeding on track. Number two, it was a good quarter for DaVita Kidney Care, and they have good operating momentum. And this reflects the fact that we continue to have a very solid platform in DaVita Kidney Care, our U.S. Kidney Care business. Third and finally, we expect to continue to generate strong cash flows, and we expect to be thoughtful in the deployment of this cash to benefit you through a combination of share repurchases, substantial, continued kidney care growth and a limited number of investments in other health care service areas.

On to Q&A, please.

(Operator Instructions) Our first question comes from Kevin Fischbeck.

I wanted to maybe follow up on that last comment about capital priorities. I guess, specifically the commentary about investments in other health care services. Any color you can provide there about the types of things that you might be looking at or how limited those investments might be? I think it's an area of some questions based upon how DMG didn't play out. Trying to understand how far afield you might be looking to go with these other investments.

Sure. So I'll take that, Kevin. It's Joel here. So a few thoughts. First, we're thinking about this from a sector perspective, not from a deal perspective. We want to find sectors where we think we can evolve them over the next few decades the way we have helped shape the Kidney Care sector over the past few decades. Second, we are hyper focused on opportunities where we can add value, where we can take the core competencies we have developed over many decades and apply them to new sectors and new businesses. Third, we know some things we don't want to do. We are not going to become a health insurance company. We're not going to get into drugs or devices. We're not going to get into the hospital business. So health care services, a bit more narrowly defined than you might otherwise think. And finally in terms of your question about scale, we're not looking at multibillion-dollar deals. So we don't have a specific range, but I think it is safe to say you're not going to see something at or near the scale of the DMG transaction.

Okay. That's helpful. I guess, is there a way to think about it from the DMG proceeds? Is there, say, that the majority of it will be spent on share repurchase? Or is that not something that you can really definitively say at this point?

Sure. So what we've said and continue to believe, first is we will pay down debt. We haven't changed our guidance around the range, and we expect to pay debt down to get back into our traditional range. Second, the majority of the remainder will be used for share repurchases.

Okay. I think you talked about 3 to 3.5x leverage, but then I think you also talked about being comfortable at the higher end of that range. Is that the 3.5x that you're talking about or the midpoint of that range? How do you think about that?

So it's a complicated number because after the deal closes, there may be a period of distortion. How the share buybacks play out in reality remain to be seen, and there's certainly a possibility that we will keep cash on the balance sheet to facilitate that over time because the leverage level that we've talked about are always net of cash, that excess cash on the balance sheet could create some distortion. But normalizing for that, we — again, we expect to be in that 3 to 3.5 range. Where exactly in that range we wind up remains to be determined over time.

Okay. Last question from me. The sale of DMG. Is there anything that we should think about as far as stranded costs or things that couldn't be put in discontinued operations, that either costs that can come out once the sale actually happens or that might be a drag prospectively after the sale happens?

So I think it is safe to think of the continuing operation number that we are guiding you to as the forward runway — forward run rate, excuse me. We have worked hard, and we will continue to work hard to ensure that there are no material stranded costs or dissynergies associated with the sale of DMG.

And Kevin, I would add on the leverage ratio that we have made statements over the prior 6 months, 9 months, whatever, saying that within the context of our historical statements and guidance that we were leaning in a more positive way towards being higher rather than lower within that range. I think, at this point, given everything that's going on in the markets the last month or 2 with respect to interest rates, et cetera, I don't know if that particular refinement to the guidance is really still — is still really still in place. So I think what you're looking at is basically we're going to bring the same attitude and flexibility to it that we've brought for a long time.

Our next question comes from Justin Lake.

So first question. I just wanted to try to get as much color as I can on CapEx now that you're in the process of divesting DMG. You talked about CapEx of $925 million. I guess, $825 million is more the run rate you want us to think about longer term. I compare that to a depreciation number that's closer to $500 million. And I just want to understand the use of cash here. Can you break that down, that $825 million run rate for us in any way in terms of maybe U.S. versus International? Maybe some numbers around the cost to develop new centers versus just other areas beyond maintenance and developing new centers that we should be thinking about.

Sure. So let me see if I can help out. We're not going to break out International. But as I've said in the script, that number splits roughly evenly between maintenance and development. I think an important component to understand about the development is we have done more and more self-development of our clinics over time. And what that means is we build the clinic, and then we sell it. We believe that, that drives a cost saving on the construction of the clinic. What I would point you to in the cash flow statement is a line called Proceeds from Asset Sales, which is a positive cash flow number associated with the sale of these self-developed clinics. And as you're thinking about the total picture of our cash flow, I think it is fair to incorporate that positive piece of the cash flow into the overall thinking.

Okay. So is there — in terms of the development dollars, can you tell us what those development dollars are? I'm just trying to understand what — like how do you think about capital from the perspective of returns on capital? Just given how much more significant the CapEx is here versus your run rate depreciation and relative to your total cash flow you're generating.

So in terms of how we think about capital deployment, look, we've got a very structured approach to how we think about capital and whether it drives a wide growth and appropriate return on capital. The development — the biggest component of that is building new clinics. And those historically have been a high return on capital investment for us. So I don't know that a whole lot has changed around that.

Okay. Just last question on this. What is the cost of developing a new clinic right now?

Roughly $2 million.

Okay. So that's what runs through CapEx for every new clinic you build?

Roughly.

The next question comes from Frank Morgan.

My question surrounds the growth in the International. Obviously, you had the charge on the Asia Pacific JV. But does that, in any way, change your view over international growth? And when do you really start to see the international business grow? Thanks.

So no. It doesn't change the view of international growth. I would split the growth into 2 components: revenue growth and OI growth. The revenue growth, as you can see from the reported results, continues to be relatively high. From an OI perspective, which is probably what you're more interested in, we stand by what we've said — what we said last quarter, which is we expect to get to breakeven in the latter part of 2018. So from a year-over-year perspective, you'll see significant growth.

Got you. Maybe one more. Kent made reference to commercial pricing. And I'm just curious, as you go through the commercial pricing and contracting, are there any significant contracts that are left out there that need to be negotiated? And then, are you seeing any change in the appetite of these commercial payers to look at value-based elements in their contracting? Thank you.

Thank you. There is nothing to highlight as unresolved on the payer contracting. We have normal renewals that come up, but I wouldn't point anything out. If anything, we are more contracted right now, meaning that there's less renewals than usual. And as it relates to value based, it really depends on the payer and their appetite of how to structure the contracts that we're seeing the wide range of nothing all the way to P4P, et cetera. So there's not been a material change in the structure of our contracts.

Our next question comes from Whit Mayo.

Maybe just starting on the Kidney Care business. The cost per treatment was down over $4 year-over-year, one of the lowest numbers we've seen in 2 years. Aside from perhaps the Amgen purchasing contracts, are there any other factors worth mentioning? I think you referenced some hurricane distortion from the third quarter but anything else to call out?

There's 2 pieces. The Amgen thing that you mentioned on Epogen and the 401(k) $100 million that we discussed on the front end of the call. We did not incur approximately $100 million of what we used to call profit share and now 401(k).

Correct. Okay. Helpful. And then G&A, same thing down 10% year-over-year on a per treatment basis. And I think I've heard you reference lower professional fees. Any more color you can share and just how sustainable that number is as we look at 2018?

The number we have is a little different on a per treatment basis. But what we're seeing is that when you annualize the number, it's roughly in the $27 per treatment, and we expect that to be in that range. I don't think there's anything to call out on professional fees.

Okay. Must just have a bad number here. And maybe 2 other quick ones real quick. On the topic of calcimimetics. I'm just kind of curious what the feedback has been from your nephrology partners at this point. And do you have any sense of preference at this point where they're leaning, what the pros and cons of the IV versus the oral drugs are?

We do not. We have very little data right now. And as you know, there's going to be a lot of variables in this one category because we have both an oral going into IV, it's going to go from Part D as in dog to Part B as in boy, and then the oral is going to have an introduction of generics. So there's going to be a lot of moving pieces right now, and I think physicians are wanting to see publications and seeing how this plays out in the marketplace. So right now, we're not seeing a lot of change yet.

Right. And when this — because the drug is now reimbursed under Part B, can DaVita Rx play a role in dispensing this drug?

DaVita Rx is dispensing the drug now. And just to clarify, that's the oral drug that Rx is dispensing.

Our next question comes from John Ransom.

A couple of things from me. I may have missed it, but did you call out the pharmacy — how should we think about the pharmacy year-over-year comparisons in your '18 guidance versus your '17, which I know was a tough year for that business?

Yes. I think the way that we've talked about Rx right now will hold, which is the changes we had from '16 to '17 will be in our run rate. And then, of course, because of all the things that we've explained in the past, I won't go through each and every other category. And so we, of course, are monitoring all the things that are happening in the pharma space. And as you know, some drugs will go generic and so on and so forth, so we will monitor what that does to our economic model. But we, of course, keep going back to the clinical piece of it and how much we like it when our patients have 10 prescriptions and 20 pill medication management is a real, real gift to them. But of course, we have to make the economic model work.

So in other words, very minimal EBITDA in '18, not much different than '17, so the macro environment, you're really not able to make much of (inaudible) just given some of the issues in the macro environment? I don't mean to put words in your mouth, but that's what I think I hear you say.

No. What I'm saying is that the environment is quite dynamic, and we will continue to monitor it and adjust, but we continue to like the story that it's for the patient and managing this, and of course, we have to make the economics works for all our constituents here.

Sure. Okay. The second question is — I mean, this is a tougher-sounding question than I mean it. But just looking at the pharmacy, looking at international, looking at DMG, looking at international — yes, I said international, it's hard to conclude that any of that has just been a wonderful success. So when you stray outside your core. So I guess I'm just wondering why do you think the fourth time will be the charm as you start looking at other areas of health care services. I know you've ruled out a bunch of stuff, but it doesn't look like that has been a great experience so far. But look, I know people have been married 5 times so there's always hope. I was just wondering what lessons learned and why you want to get back to that particular well.

It's Kent here, John. A very fair question, and I'm going to go ahead and throw out some thoughts, and then you feel free to further follow up. First, DMG was a very disappointing performance. Having said that, we took a lot of cash out along the way and also had some nice benefits in the Kidney Care side during the period in which we owned it in terms of enhancing our integrated care capability. But it doesn't change the fact that it was disappointing in the end. The — it's important to remind people, by far, the primary driver of the disappointing performance were reimbursement reductions, not operating performance. And clearly, very thoughtful, other people felt it was still a very valuable asset with a lot of upside potential, and people who know the business as well or better than anyone. But the short-term and the immediate operating performance was what it was, largely driven by the reimbursement cuts. And then we decided it was in your best interest rather than continue to pursue what we still think was some very substantial long-term potential in which several other people thought had a lot of long-term potential because it was reflected in the multiple they paid. Rather than do that, it was, on a risk-adjusted basis, better for us to take the return on capital now in addition to the return on capital we earned along the way. And then on Rx, it has been a big clinical success and has had a run of several profitable years in addition to being a strategic asset. We will see what happens now, but by many measures, up to this point, it's been a very good success and a very important part of our Kidney Care portfolio. And now there's an awful lot going on in the pharma space that wouldn't have been predictable 3, 4, 5 years ago. And then just as the more conceptual question, without going into international in detail, that we do think we've learned a lot from the experiences we've had, and it's important to look at the root cause of why they turned out where they did. And just as there are times that you can buy something and have it do quite well, and it's not a reflection of exactly what your deal premises were, what your operating performance was, and you don't want to persuade yourself that you're brilliant at that point. So we think it's in the best interest — the best long-term interest of our shareholders to deploy a fraction of our cash flow towards sort of looking at new long-term growth opportunities in the same way that 18 years ago, we decided that dialysis, despite the fact it had a lot of works and some people had lost a bunch of money, was worth sticking with, and our business model was worth sticking with. And we're very happy that we made that call 16, 17, 18 years ago, where it would have been easy to cut our losses and leave it.

Thanks, Kent. My other question is just going back to the question on CapEx. I guess I was thinking wrongly as it turned out that given that you're selling DMG and given that you're kind of narrowing your focus in on international, we had thought maybe CapEx would perhaps step down a bit from where it had been. So should we think about you're taking what you were spending international and DMG, you're doubling down on those things? Because it looks like CapEx doesn't — I mean, obviously you said it's going up this year then it's going to stay flat. It's just surprising to me that it's staying flat given that you're paring down in there in your focus.

Well, I'd maybe just make one comment. Just recall that DMG was a business with very positive cash flow characteristics, meaning they're net cash flow relative to CapEx, et cetera.

Yes. So I don't think we come at it from that angle of saying how are we going to redeploy cash that we might have deployed somewhere else. It's much more of a question of what are the options for this cash flow between paying down debt, returning it to the shareholders, making new investments or investing in Kidney Care. So that's the angle we come at it from. And with all those angles, we use kind of a similar lens which says, is this going to drive OI growth, and is it going to drive attractive risk-adjusted returns on capital?

So I mean, the CapEx of DMG was not 0. I don't think you've ever disclosed it. I don't know why I had $100 million number in my mind. Is that — am I thinking about that wrong?

I don't know that we disclosed it, and off-hand, I don't think any of us know, and we wouldn't say anything without wanting to confirm its accuracy and that we had the right definition. So I'm afraid for both reasons that we'd have to make sure we nail down the definition and not sure what we've disclosed historically, we can't answer right off the cuff here.

It's a lot easier to shoot from the hip without regard for facts, Kent. I've done it in my life, but I understand.

Our next question comes from Lisa Clive.

Two questions from me. Could you give us just an update on where your ACA sign-ups actually came in? How many were on the exchange? How many off the exchange? Am I right that you had about 3,000 patients on and off exchange once the Medicaid patients sort of went away, and something like 1,800 of those had premium support? I'm just curious as to what the latest numbers compare versus those historicals? And also, are you expecting any clarity through a new rule from CMS on the guidelines or on premium support for the ACA plans?

Yes. Thanks, Lisa. Your numbers that you recited are the numbers that we disclosed several months ago, and we're not going to keep updating those. Those numbers are pretty stable, so there's not a big story in those numbers is probably the right way to think about it. And as it relates to a rule, as I said in the earlier comments, we're not seeing a lot. The one thing — the one dynamic that really appears to have momentum is that both providers and government would like clarity as to how we provide the education. And so we all want to do it the right way, and so we will see how — what vehicle that comes in. But we don't have any additional information as to whether there's going to be rule-making or not.

Okay. And then a final question, could you just give us an update on your thinking about ESCO? Clearly, the financial structure is not ideal. It's retrospective, and Medicare has a lot of leeway in terms of what the benchmarks are. But the initial results you've achieved have been pretty good. And I know the Patient CARE Act is making its way through D.C., but I'd imagine that probably wouldn't establish a new payment framework for several years. So what you do in the meantime around integrated care?

Yes. We would like the PATIENT Act, and if the bill passes, actually it has a start in '19, so it would be pretty much a very quick ramp-up. If the PATIENT Act doesn't pass, we of course will stare at the options whether we want to grow the ESCOs or not. Right now, the ESCO enrollment is not open, and so we will have to see what CMS guides us on and where we stand if we don't get the PATIENT Act.

Our next question comes from Gary Taylor.

Just a couple of quick tie-ups and then one question. Back to Parsabiv, is that in the 2018 guidance, as a good guy?

Yes.

And if — I mean, care to quantify or not?

No. And for all the reasons I cited earlier in the conversation, which is there's a lot of variables right now for us to be helpful. But it is included in our guidance with all the normal handicapping we do to the numbers.

Just want to make sure you were ripping through some numbers pretty quickly. I want to make sure I got them correct. But in the fourth quarter, you were saying OI benefited from insurance reserve adjustment of $9 million and then $14 million of shared savings. That was all 4Q numbers, right?

That's right.

And have you ever had shared savings numbers that you've quantified before? And I guess, we're just trying to think about should we think about next year in the fourth quarter contemplating there might be something there?

I would not. First, we have never reported anything like that before, and I would not model in this as being kind of a Q4 recurring event.

Okay. And then on the bad debts, I'm trying to understand. You said there was about a $20 million good guy to gross revenue and $23 million bad guy on bad debt, both from some reconciliations. Were those — is there any color on what was driving those? Were those in commercial revenue accruals or any help?

Yes. So the bad debt was associated with — largely driven by an increase in uninsured patients. The cash receipts, the offsetting item is associated with a reserve we typically take associated with commercial revenue, and it has proven that our reserve was a bit conservative so we had a bit — a one-time reserve release there.

Got it. And then my last one. I mean, given that you are saying you think commercial mix is pretty stable, and you're back to a normal commercial rate environment, can you share what your expectations are for revenue per treatment growth in 2018? What's built into the guidance? We know Medicare is basically flat. So on an overall basis, what are you looking for?

Yes. We have not guided on revenue per treatment, and we're not going to start right now. So I think the best thing to do is just keep to the OI range for now.

Our next question comes from Justin Lake.

A bunch of things here. First, just deployment of the cash. Are you going to get a significant amount of proceeds post this deal plus you'll generate some cash in '19, or I should say, '18? And if you think about deploying that to share repurchase, is there any way to do that just given the magnitude of it in an accelerated manner whether it's an ASR, or a Dutch or something like that? Any contemplation there?

So Justin, those are certainly 2 options available to us as well as open market purchases. We are thinking through our strategy now. It will depend on a whole bunch of factors. And I don't expect that we will be giving a whole lot of color on how we anticipate doing this. It's just something you'll — we'll report on after it's done.

Okay. Any of those factors specifically that you — we should be thinking about going into the decision?

Look, there are a lot of factors, including price, timing, other use of proceeds, but I don't think we have a formula or an algorithm we can guide you to.

Okay. And you mentioned the $30 million one-time benefit on Medicare recoveries from a timing perspective, right? So that's going to be a benefit of $30 million to OI in 2018?

Correct.

Okay. And that's a good guy versus what you previously expected, obviously, you give a range. So is that the reasonable way to think about it? Is there any other bad guy that we think should be offsetting that? Or should this move us to the higher end of the range, all else being equal?

So this isn't a good guy relative to what we had been talking about before. Given the magnitude a dollar of RPT, it's not something we would necessarily typically call out. There's a bunch of things like this that flow through from a year-to-year basis on any given year. The reason we wanted to call it out this quarter was because it will drive a roughly $3 RPT increase in Q1 because that $30 million will be concentrated largely in the first 3 or 4 quarters of the year. So we just wanted to make sure you and everyone else knew it was coming.

Okay. And then on the provision for doubtful accounts, can you tell us which drove the increase in the number of uninsured patients you're seeing in the quarter? And do you expect this to be the new run rate going into 2018?

Sure. So that flows through the bad debt line. The other adjustment that I referred to flows through the gross revenue line. And because they offset and because of the new revenue accounting standards going forward, we're no longer going to report that gross number nor the bad debt number. So you'll only see the net number. So it's — I think, it is safe to use that — the net RPT that we delivered in Q4 as a starting point for modeling 2018.

Got it. But you're saying the 2 aren't correlated, right? One, it won't — or they don't have anything to do with each other, right? One is collection of commercial, and the other is an increase in uninsured patients. So just curious, what's driving the increase in uninsured patients? Or am I mistaken here?

They're not connected insofar as they're not necessarily driven by similar underlying business dynamics, if that's your question.

Well, no, I'm just curious what's driving the increase in uninsured patients in the first place. Is that something that just you feel like it's happened and it's white noise? Or do you feel like this — it sounds like you feel like this is the new run rate. So you're going to collect commercial at a higher rate, and you're going to have more uninsured patients going forward as well, is that correct?

Right, that is our view going forward. I think if you want to think about this bad debt number, it's a few things. It's underinsured. It's uninsured. It's higher patient pay deductibles. So I think some of these are broad trends you're seeing within the health insurance industry. That's probably as helpful as I can get.

Okay. And I just got a few other numbers questions here to run through. The advocacy costs, you said there was nothing in for California and Ohio. Is there a number that you can think of that we should be prepared for if you do need to start advocating against the stuff in the back half of the year?

No, it's a little early, and of course, there's a lot to play out before now and then. And as you know, these things can heat up or die down. And so the number could be quite drastically different depending on the scenario.

Okay. And then lastly, on the PATIENT Act. Have you gotten a CBO score yet on this?

No. We've not.

Any idea what's holding that up? I know the government, there's a lot going on, and they're passing stuff day by day. But is there a reason why, given how long this has been out there, that we haven't got a CBO score?

It really is a couple of reasons that are quite straightforward. First, the CBO prioritizes stuff. And with all the major legislative disputes and issues, the tax reform and all the stuff around Healthcare and some are under rest and these people coming up with proposal after proposal after proposal, every one of those sucks all the oxygen out of the room. And when there's not regular order, most of this stuff is typically done in very sort of hectic, frenetic ways. And then there's a huge amount of organizational fatigue and a huge queue of proposals. So that's one. The second is that the PATIENT Act involves some pretty significant numbers and pretty significant complexity. It's really transforming an entire segment. It has that potential. And so it just deserves extra levels of rigor and sort of analyzing all the interdependencies from both the policy and predicted behavioral point of view. It's not as simple as a lot of other legislation about changing something with a drug or changing something on readmission, reimbursement or whatever else. And so it requires a lot of iteration, and I guess, that's the third thing I'll say. It's not as if they haven't been working on it or they haven't been communicating. There's been a huge amount of interaction between our congressional champions and the CBO and between us and our congressional champions. And so it's getting a huge amount of high-quality attention. It isn't sitting in the closet.

That's great to hear. Just is there — just lastly, is there any way that this has a cost component to it? Do you think it scores as a cost to the government over whatever period they're looking at that, I guess, 10 years?

Justin, you've been around a long time also. Predicting what the CBO is going to do is not something that we're foolish enough to do. I mean, yes. The answer to your question, I guess, is yes. It's not — one can see a scenario where they presume cherrypicking and some other stuff and say, it would be a cost. We think very much it's going to be a tremendous saver for the system over the relevant time frame, but we're not the ones doing the ultimate model, and they've got to protect themselves and tend to lean a little bit conservative. So yes, they could come out with a cost. No, we don't think they should. But it wouldn't necessarily be low-quality shoddy work if they did because they've got a tough job of predicting all this stuff. So is that helpful?

It is. I appreciate it, Kent.

We show no further questions in queue at this time. (Operator Instructions)

All right, operator, that's good. Thank you all very much, and we look forward to talking to you again next quarter. Thank you.

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