DaVita Inc. (DVA) Q2 2011 Earnings Report, Transcript and Summary

Good afternoon, my name is Ali, and I will be your conference operator today. At this time, I would like to welcome everyone to the DaVita Second Quarter 2011 Earnings Call. [Operator Instructions] I would now like to turn the conference over to your host, Mr. Jim Gustafson. Sir, you may begin your conference.

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

Okay. Thank you, Jim. Second quarter was a strong one as most of you of have no doubt noted, both in terms of our results and our momentum going forward, both clinically and financially. I'll try to quickly cover 4 topics before turning it over to Luis: Clinical outcomes, government reimbursement, government inquiries and our outlook. First, clinical outcomes, which we always present first because that is what comes first. We are first and foremost a caregiver company, now serving approximately 131,000 patients. With respect to adequacy, which is essentially how well we are doing at removing toxins from our patient's blood, this quarter 97% of our hemodialysis patients had a Kt/V greater than 1.2. Second, with respect to vascular access, 69% of our patients have fistulas, which is the preferred form of vascular access. For these and virtually all other clinical measures, our patient outcomes compare very favorably to national averages. This quality of clinical care not only results in healthier patients but it also drives reductions in hospitalizations and surgical procedures, and therefore, brings significant savings to the United States healthcare system. Second topic, government reimbursement. Luis is going to report on a bunch of the details there but I'll just make 4 contextual comments. A, no doubt, downward pressure will be greater going forward than it has been looking backwards. B, nonetheless, dialysis centers are unusually discrete within the context of the Medicare program, with 87% of our patients being either Medicare or Medicaid and almost all centers being freestanding, which means that if government reimbursement becomes inadequate, centers close. There are virtually no parts of American healthcare where cause and effect is as clear. Point C, with all the pressure on government deficits, there's always the chance that over the next few years, MSP will be extended. And fourth, Point D, is that we have significant hopes that the pressure on government spending and the government deficit will finally get us over the finish line in terms of the government implementing a bigger bundle than currently, where we already have the proven ability to drive quality improvements and total cost savings for our patient population, if they only put in place the architecture for us to do it on a scale basis. Again, Luis will cover some of the government reimbursement details but those are some of the broader perspectives. The third subject, government inquiries. We did learn from the U.S. attorney's office from the District of Colorado that it has opened up a grand jury investigation. I'll make 3 specific comments and then 3 generic ones that you've heard before many times if you've been with us over the years. But the first specific comment is, it is clear that this is very preliminary at this stage. Second, however, we always take these things seriously and we look forward to cooperating with the government. And we mean that, literally, when we say that because we are eager to educate them as to exactly what we have done or not done. And then point 3, it appears there's a lot of overlap with subjects covered, particularly physician relationships, by the old St. Louis investigation, which was started in 2005. They looked into those subjects, spent time with us and it's been quiet for over 2 years. But separate from the specific comments, I'll make 3 generic points and again, I ask the forbearance from those of you that have been with us for a long time. We do thousands of transactions, including hundreds with physicians, and we work very hard to get every one right, technically and in terms of spirit. We are comfortable and confident with our business practices, and these practices regularly go through extensive internal and external review. And finally, none of those words would mean much of anything except our track record of compliance over the last 11.5 years is exceptionally well established and documented. And we did not design the system whereby instead of having discussions, the review process starts with publicly announced investigations, but we've dealt very successfully with that system for 11 highly public and transparent years. Fourth and finally, on our outlook. As our press release indicated, we are raising our 2011 operating income guidance to be between $1.08 billion and $1.12 billion. Importantly, this guidance does exclude the noncash goodwill impairment that we took this quarter. We are also increasing our 2012 OI guidance range. That new guidance for 2012 is $1.2 billion to $1.3 billion. We recognize that this is an unusually positive adjustment to guidance and as always, there is risk we could be wrong. But also as always, our guidance contains the overwhelming majority of probabilistic risk-adjusted outcomes. In addition to the fact that there's some one-time bundling and other adjustments that are going positively for us, our base business, the operations and strategic initiatives are in fact, going well, both in terms of near-term results and momentum. I'll now turn it over to Luis.

Thanks, Kent. I'd like to start with a few words about government reimbursement. CMS released the preliminary 2012 reimbursement rule, which includes our first market basket increase, which was proposed at 1.8%. Also the transition adjustment, our bundle phase in tax, as we have referred to it, remains at 0 in 2011 and for the remainder of the 3-year transition period. Under the terms of the recently signed government debt deal, there is a scenario where Medicare rates to providers could be cut up to 2% a year beginning in 2013. This of course, depends on whether the super committee can develop an alternative proposal, which itself could also contain Medicare cuts. In other government reimbursement, 9 states have already reduced Medicaid rates this year, and California has passed a budget reducing rates 10% across-the-board to all providers. This California cut will likely be approved by CMS retro to June 1. We expect these Medicaid pressures to continue into 2012 as many states are looking at rate reductions and some are even looking to reduce or eliminate secondary coverage for dual-eligible patients. Also in the government front, the Veterans Administration is still seeking to recontract at lower rates. We continue to talk to the Veterans Administration in an attempt to come to agreement on mutually acceptable rates, which will likely be below our current VA rates. Now some discussion of our operations. We saw very solid trends in the quarter, reflecting strong treatment growth, improving revenue per treatment and commercial mix and solid cost controls. All this resulted in continued strong operating income and cash flows. Here are some specifics on the quarter. Non-acquired growth was 4.6%, normalized for days of the week, an improvement for 4.2% normalized in Q1. Dialysis revenue per treatment was up about $6. The primary driver was the Medicare transition adjuster fix. Also, we saw an improvement in commercial rates that were partially offset by declines in lab revenue following seamlessly higher lab revenue in Q1. It is notable that commercial treatment mix improved very slightly in the quarter. While this is good news, it is too soon to tell if this is the beginning of a trend. Commercial mix continues to be a swing factor, especially in light of the challenging macroeconomic conditions. Dialysis patient care costs per treatment was flat with the prior quarter, as increased compensation benefit costs were offset by seasonal declines in the payroll tax expense line. We took an after-tax noncash goodwill impairment charge of $14.4 million in the quarter. This is related to writing down the value of HomeChoice Partners, our Home Infusion business. We wrote down the goodwill because the performance of the business has declined over the past year, leading us to believe that at this point, the fair value of the business was less than our book value, thus, accounting rules mandate that we write down the value of the business. Despite this write off, we have seen some positive trends in the business. The business continues to be profitable and all of its growth has been funded with its own cash flows thus, DaVita has not made any additional capital investments beyond the initial purchase price. We still believe home infusion is an attractive market and HomeChoice is a well-positioned asset. Operating cash flow year-to-date was solid at $534 million. We continue to expect strong operating cash flows for 2011 and are raising our guidance range to $900 million to $980 million. In the quarter, we deployed $39 million on development CapEx, $70 million on acquisitions and additionally, we repurchased 3.5 million shares of stock worth $302 million, $25 million of which settled subsequent to quarter end. Finally, an update on DSI and international. On the international front, we are pleased to announce that we are now dialysing patients outside of the U.S. We are managing one center in Singapore and we have a minority stake in a company with 2 centers in India. As to the DSI acquisition, at this time we still expect to close in the third quarter. We're in the final stages working with the SEC on divestitures and they have determined that we will have to divest approximately 30 centers. We still expect approximately 0 net OI contributions from DSI in 2011 after transaction and integration costs. Operator, let's go ahead and open it up for Q&A.

[Operator Instructions] Your first question comes from the line of Justin Lake with UBS.

The first question I had was on the guidance change. If you could give us some color there in terms of any specifics on what the improving outlook is for 2012 -- 2011? And then for 2012, maybe you can break it down between the expected DSI contribution and the improving internal operations?

Yes, I'll give you a general, the reason we raised guidance for '11 and '12 are the following: Obviously, we have 3 more months under our belt this year and we've experienced solid operating performance. We've had our improvement in NAG of stabilization in our commercial mix. The second factor, Justin, is that we have more clarity in our 2012 reimbursement rate levels. Part A of that would be obviously the elimination of the transition adjuster fix. And number two, we have a market basket increase of 1.8%. Those are 2 additional clarifying factors. And third is the change of the EPO label, we believe, will lead to lower pharma utilization levels as physicians respond to the new label. Those are the 3 main factors that led us to increased guidance for this year and next.

If I could just grab on to that last piece, the impact of the new EPO label. I think Amgen has put out numbers that indicate they expect this new label and the QIP associated with it to drive about a 10% decline versus their previous estimates in EPO dose. Just curious, your opinion on what that change might be.

Justin, clearly, it will depend on physician prescribing patterns and how they react to the label. But we don't think that estimate of 10% is out of line.

And then just a couple of other quick ones. Commercial mix, you noted, improved slightly in the quarter. Any other detail you can give us there and what was the assumption here for the back half of the year '12. Did you move the assumption to now being flat to improving? Or do you still expect that to just continue trending downward and this is just white noise in between?

Our outcome -- our operating guidance assumes reasonable range of potential mix scenarios heading into the balance of this year and into the next. It was slightly positive in the quarter and that's how we can say. It's too early to determine that to be a trend.

And last question on other ops. Can you walk us through that. The losses seem to be increasing. I assume that's a lot of international investment. So can you walk us through the increasing losses there, and if you could spike out how much was spent on international on the second quarter, that would be great.

Our second quarter G&A was up. It was due to various factors. One factor was international, which had increased spend for our plan through Q2. Another factor was the 123R expense. And the third factor was some increased spend on the legal and compliance area. Those are the factors year-over-year.

Yes, and Justin, I think your question was more specifically to the other operating break out that we have in the supplemental data. That $25 million there was primarily the impairment charge looking in that line item.

Sure. But even X that, it seems like it's gone up the last couple quarters. I'm just curious, is this a good international run rate for the year now?

I would say, no. We had guided earlier to about a $150 million operating income investment. Our best estimate now is it's closer to $20 million for the year and that is incorporated in the guidance for 2011, Justin.

Just one more clarification. The international operation for dialysis are in the Dialysis segment, they are not in the other operating lines.

Got it. So international is not included in that other operating?

Correct.

Your next question comes from Kevin Ellich with Piper Jaffray.

Just a couple of questions. Luis, just to clarify, the guidance in 2012 does include DSI Renal now?

Yes, it does.

It does. And how much contribution did you bake in for 2012?

We're not breaking that out but it does include a full-year of DSI.

And then thinking about -- just going back to the Amgen discussion, have you guys finished renegotiating your contract for EPO yet?

No, we're in discussion with Amgen.

And have you given any color in the past about how long you would like to extend that contract?

We have not.

And then looking at the non-acquired treatment growth, it picked up a little bit higher than what we've seen historically, the 4.6. Is that just normal fluctuation or is there anything driving that, do you think?

We think we did a good job executing and we hope it continues.

And then, Kent, since I got you, what's your belief on the MSP extension? I know there is a lot of moving parts going on in Washington now. But what's the likelihood or what probability would you put on that and I guess over what time frame?

I think it's pretty impossible to handicap because employers are opposed for all the obvious reasons. They benefited from this unique subsidy for a long time. On the other hand, in the last 20 years, it's been extended a few times. So I think predicting in the current political and economic environment, a little bit of a fool's errand, it's not predictable. So it might happen, it might not happen. It might happen to some degree. Anybody's guess.

Understood. And then just thinking about EPO utilization trends, Justin touched on this a little bit. But can you talk about how much lower you really believe it can go, maybe not getting too specific, but Amgen said 20% to 25%. Is that kind of ballpark where you think it will fall on?

No. We are making no prediction. The Amgen knows a lot more than we do. Perhaps, for us, we wait and see what kind of prescription decisions our doctors make in light of the new label and any other emerging conversations and evidence. So for us, we're just executing on physician orders.

Your next question comes from Matt Weight with Feltl and Company.

Curious on your comments, Amgen has made the comments they were not in favor of CMS's proposal to retire the matrix and QIP of penalizing less than 10 grams per deciliter. How do you -- just interested in your comments in that regard?

What CMS means, the clarification that they believed it was no longer consistent with the new label, so that's their rationale, and we would tend to agree with that. I think the reality is that there will be a hemoglobin level and range that emerges over the next year or so as physicians adopt this label change. And we'll wait to see what that is.

And then in terms of the proposed 2014 QIP, is there anything in particular the new proposed 7 matrix that give you cause of concern?

None of the major, specifically. But clearly, our concern all along has been CMS adopt standard definition and account for lab variations and things like, which they've yet to do. So we'll have to continue to work with them to improve the methodology.

Last question here. Any update from last quarter? You referenced difficulty in capturing all the keys in mix adjusters and quantify it as a $2 per treatment lost opportunity. Anything that you can even share with that?

Unfortunately, it continues to be a challenge and we are continuing the dialogue with CMS to understand how they can help us obtain that data.

And then last one here. In terms of your patient, can you remind me what percent of your patients are treated at home?

Yes, about 10% between peritoneal dialysis and home hemodialysis.

Your next question comes from Gary Lieberman with Wells Fargo.

Did the prior guidance include DSI or is it in there for the first time in both periods?

The prior guidance did include DSI for both periods.

Was there any significant change from what was in there previously that you can share with us?

No, it would be -- no changes that would be material.

So it was about the same amount. And then, can you talk about any pressure that you saw on commercial, overall commercial reimbursement from any of the contracts that weren't bundled in the quarter due to former utilization or is that not an issue for you guys?

If you had a prior period relationship that was not bundled and so it was still fee-for-service, pharma separate from treatment, and if your pharma utilization went down, you would have revenue compression. But am I answering your question or not?

Let me ask it in another way, so in the aggregate, did that dynamic negatively affect you at all in the quarter?

Since we have some fee-for-service private revenue, the answer is, yes.

Was the amount material?

I don't know. I guess again, we can get in debate as to what material is or not. It's incorporated in our results. And of course, we have other private revenue which is bundled and some reductions in utilization benefit, our economics, and so it's 2 different numbers and I think we'll just leave it that they're incorporated into our results. And we're very glad that we bundled a lot of the business that we bundled over the last 18 months.

And then just on Medicare revenue per treatment, did it effectively go up for the change to the transition adjustment or were there any other notable changes to Medicare revenue per treatment?

Just the transition adjustment.

And then finally, Kent, just your initial comments about seeing increased government pressure going forward. Can you elaborate on that at all? It would seem like the proposed rule was generally favorable and while I guess everyone is nervous about what Medicare reimbursement might be like going forward. Is there anything specific that led you to those comments?

No, nothing specific, just the same reality that we're all reading about in the newspapers.

Your next question comes from Kevin Fischbeck with Bank of America.

Question, Kent, on your commentary in discussing the guidance. You mentioned that there were some one-time items or positives related to bundling and other adjustments in your outlook. Can you elaborate on that?

By that I mean, I just things like one-time changes in pharma utilization, things like that, as opposed to acquiring businesses or opening up de novos, which recur every single year and lead to incremental growth. Some of these other changes are recurring, but they only happen once.

And the cash flow guidance for 2011 was raised a little bit more and operating income. Anything in here that makes 2011 not a good base if you think about 2012. Normally, I just take last year's number and add free cash flow -- I mean, add net income to this year's cash flow to get the next year outlook. Any reason why that's not a good analysis to do?

No, it's a good base line. As we go into the year, we may give you some more detail on that, but it's a reasonable starting point for 2012.

And the company was very aggressive in share repo in the quarter, which is a good thing, I think. But you still have a lot of cash in the balance sheet even after DSI just because of the free cash flow. I mean, do you look out at the share repurchase in Q2 as a way to think about how you might deploy capital going forward or is there something during Q2 that make you feel like it was a better time to be in the market?

It's a very fair question and we'll give the same answer we have given for about 11 years now, that every quarter brings its own unique analysis to what we should do with our cash and with our net debt position. And all the generic factors go into it. What business opportunities we have, what business opportunities we anticipate, what we think is going to be happening with the capital markets, what we think is going to be happening with the government. So every single quarter is unique and we think that's the way we can serve you best.

And then I guess staying on the capital deployment side here, any thoughts on the percentages -- field activity, any opportunity to pick up some asset, I assume, they'd have to divest?

Certainly, they will have to divest some and we would hope that we would get a shot, don't know if we will or not.

And I guess just words of the deal, would you guys spend $70 million on deals? Is that a good way to think about it? Has the environment caused the one-offs to reconsider selling?

Could you say the question, again, please, sir?

I guess as far as the acquisition outlook, are you seeing any change in the one-off providers looking to sell in the face of all the regulations going on right now?

I think the data suggests that there is an increase in the number of people interested in selling. But I'd have to go back and take another look and maybe somebody in the call will confirm it. We can come back and say that it's right. But if you look at now, the last 12 months compared to the prior 12 months, and then in particular if you compare it the last 24 months to the prior period, that the number of deals is up. And I've got a number of people nodding their heads up and down. So I think the answer is, yes, and a lot of that is because of the -- all of the regulatory uncertainty and pressures.

And then last question here. Congratulations on the international expansion. I just want to get a little more color there. I mean one site and one market and a couple of sites and another market seems like a small footprint. Obviously, it's the beginning, but is there some way to think about that as if you put a flag in a market, there's a backlog of X sitting there behind them. How quickly should we think about these markets starting to grow?

Yes, again, very fair question. I'm afraid our answer is going to be pretty worthless because we're so new at this. That while it is true, we would not have started in either of those geographic areas unless we thought there was a lot more opportunity. We're not nearly competent enough at it yet to start predicting exactly what's going to happen when. So we continue to feel very good about the growth prospects, but we always have to immediately follow that by saying, this is a long-term strategy and that's not going to start probably adding to shareholder value for quite sometime, and so the time will tell.

Your next question comes from Ben Andrew with William Blair. Ben Andrew - William Blair & Company L.L.C.: Maybe just if you could talk a little bit about the organic growth in the quarter for patients. It was a little bit above kind of our target for the population, generally. Was there anything in particular there that you saw that give you reasons for optimism they can stay at those sort of levels or might we expect it to drop back down?

When you say organic, I assume you mean non-acquired growth? Ben Andrew - William Blair & Company L.L.C.: Yes, sir.

And we do think we earned the number. We don't think it was a fluke, and we've been working on nudging it up. And so it's an earned number. Having said that, we're not sitting around saying that it's in the bag, that it's going to stay where it is. So we're continuing to pedal away with a lot of intensity, and so I'm afraid we can't offer up any distinctively bullish point of view going forward. Although certainly, our point of view is embedded in the guidance we gave for '11 and '12. Ben Andrew - William Blair & Company L.L.C.: Okay. And then in terms of the cost side, I mean, we've had some checks in the field in terms of -- there's a view that there might be an opportunity for some facility consolidation in particular markets. Is that a path that you move down regularly or that you see as an opportunity?

We are always open to consolidating facilities when it makes sense. It doesn't happen very often, only a few times a year. In a lot of those instances, it's only because one center is quite old and would require a whole bunch of renovation. And so I don't see anything that's going to lead to any material increase in that happening over the next year or 2. Ben Andrew - William Blair & Company L.L.C.: Okay. And then finally, on the reimbursement side. You discussed the pressures as kind of growing a little bit on the privates in Medicaid and the VA. Is there a time frame that you think about perhaps some of these issues can be clarified and you'll have visibility? Or is this more of a just terribly durable process there's no getting away from and you're just trying to manage it as you go along?

It's a fair wording of the question. It's much more of the second category for the first. It's impossible to predict, in some of these cases, not only what the resolution is likely to be, but when it's likely to be resolved and we just persevere. Ben Andrew - William Blair & Company L.L.C.: And again on the private side, is there a geographic kind of localization? Is it national? Because we've heard a fair bit of variability from market checks in terms of where it is growing. And are you seeing that spread?

Could you go ahead and ask that one again so I don't ramble in responding? Ben Andrew - William Blair & Company L.L.C.: Sure. We've done specific checks where certain geographies, say, California paid private rates very close to Medicare, and other geographies like the Northwest pay multiples of them in terms of the privates. So are you seeing the pressures on the private side expanding geographically to regions that are historically have been strong? Or is this a national issue that's growing in importance?

Well, first of all, we talked about downward pressure when we're talking about Medicare. I don't know that we implied at all about any particular difference in what's going on in the private side. And on the private side, I would say that the pressure we feel there is the same that we've always felt, no more or no less. Some years we do better in fighting it than others, but there hasn't been any demonstrable change in that sphere in this quarter versus other recent quarters. And then I guess building on that with respect to geography, while there are differences in average revenue per treatment across different geographies, even though within every geography there's quite a spread of rates, nonetheless, the average rate per geographic area can be quite different. We have not picked up on any sort of systemic new trend in any particular geographic area.

Your next question comes from Darren Lehrich with Deutsche Bank.

A couple of things. I wanted to just ask about cost per treatment first. I think, Luis, you mentioned in your script increased benefit costs relative to maybe last quarter. I know the payroll tax starts to wane. But can you just maybe give us a little bit more there? Was that -- anything unusual relative to medical costs in the period? Or is this a benefit cost that's going to carry with you in the next several quarters as well?

There was nothing unusual on that. We do have fluctuations quarter-to-quarter in how the claims come in, and therefore, how much expense we have to book. But the patient cost per treatment was relatively flat as we had guided previously.

Okay. And then if I could just ask about Lifeline and DaVita Rx, I mean, one question I had just on Lifeline is, we obviously had a big transaction announced yesterday in the access market. What's the business model that you guys have there at this point? Is this still a management model or are you tweaking that? I just wanted to get a brief update on that. And then anything you could say about DaVita Rx by way of an update in terms of its performance would be great.

With respect to Lifeline, we're still primarily a management model. And with respect to DaVita Rx, it continues to grow. It continues to have some profitability, and it continues to add a lot of clinical and service value for patients and savings for the taxpayer.

What is the run rate at this point in DaVita Rx?

I don't think we've disclosed that. So if I do it spontaneously, I'll probably get lectured after the call. So let us reflect and see if we need to start parsing that out for you.

Okay. And then as it relates to international, I think Kevin really got most of it. But in India, with this minority stake in a company, can you just maybe give us a little bit more insight into who or what that local partner is? Do they have experience in the marketplace? Or is this a completely new entry for both of you into the country?

Okay. Maybe I'll preface the answer by just saying that there isn't anything that's economically material that is likely to happen in India for our shareholders for a long time. However, if you look 7, 8, 9, 10 years out, we think there is significant prospects for that, but it's a long time for all the reasons that you could list as well as us. Having said all of that, the answer to your specific question is it's a small startup company, and the primary owners of the company are experienced business people and they're running a couple of very high-quality centers, particularly in the context of the overall Indian reality. And some are looking forward to hopefully some very nice growth there, but it's obviously coming off an incredibly tiny base, and the revenue per treatment is quite a bit smaller than America.

Sure. I get that. Last thing just, LeAnne, the anemia management metrics, we usually get those in the releases or these calls. I'm just wondering if you can help us with that?

Yes, with the changes in the label, I think we're definitely going to see some movement in hemoglobin, et cetera. The stat that we've historically provided is our percent of patients between 10 and 12, and that's remained really pretty constant this year at about 79% of the patients.

Your next question comes from Gary Taylor with Citigroup.

A couple of questions. I noticed that bad debt ticked up a little bit sequentially and year-over-year. Would you just attribute that to general economic conditions? I'm just a little curious why we didn't -- we haven't seen that maybe a year or so ago, but curious to your thoughts.

I missed them, sorry, Gary. What ticked up a little bit year-over-year?

I think bad debt as a percent of revenue ticked up maybe 30 bps sequentially and 20 bps year-over-year. Not a big movement, but it's been a pretty stable number for a couple of years.

Yes, we did increase that by 25 basis points in the current quarter, and that's our new run rate going forward as we look at the portfolio and how those receivables were coming in. We thought it was appropriate to reserve at that higher level, which is about 25 basis points higher than the prior quarter.

And I mean, I know it's a small change, I don't want to belabor it, but it sounds like your commercial mix was a touch better. So I guess presumably in some of that commercial mix, there's still movement towards higher cost sharing. Would that be a component of this change, or am I overthinking it?

Gary, could you run that one by us again? We're all a little -- we all have quizzical expressions on our faces on this end.

Yes, I guess I'm just thinking what would be the factors driving slightly higher bad debt. At this point, you've had some pretty adverse payer mix shift for a couple of years, and now it sounds like you were saying your commercial mix was a little better this quarter. Some I'm just wondering if even though commercial mix is getting better, within that mix, is there higher cost sharing by the patient that is probably driving a higher co-pay, or am I just over thinking 25 basis points here?

Yes, it's a long revenue cycle. We're looking at a big portfolio. We're very thorough processing exactly what the right level is, and we determined this quarter that the 25% to the 25 basis point increase is the appropriate level to reserve that. But it is a very multiyear revenue cycle.

In other words, Gary, I don't think we have any single hypothesis about a particular change in the environment or our mix or our operating performance. It's -- and maybe one will emerge. Right now, all we have is that slight change in our aggregate outcomes reflecting, and therefore, leading to an accounting change. Maybe we'll be able to say more in another 3 months. But in the meantime, it was just clearly something we should do given the aggregate result.

Got it. My last question is just around this Colorado investigation. Can you help us maybe understand? I know in some states, grand juries are required, some states they're not. It doesn't sound like there was just a subpoena from the U.S. Attorney here initially but kind of straight to grand jury may be that will be the tool to compel some document production. But is there anything in your mind that differentiates why this is a grand jury investigation as opposed to just a subpoena from the U.S. Attorney's office?

Unfortunately, we've told you just about everything we know. It's very preliminary, and we're eager to get some time with these folks and find out more about what they're thinking and let them find out a lot more about practices and our compliance standards. But right now, we pretty much know nothing.

Okay. Do you happen to know if a grand jury is required in Colorado, or is that -- or not necessarily?

I do not know.

[Operator Instructions] Your next question comes from the line of John Ransom with Raymond James. John Ransom - Raymond James & Associates, Inc.: Is there any interest at all from commercial pay at more of a global type of sub capitation? And if not today, do you think any time in our future that will start trending in that direction that you manage the whole patient and take all risk?

John, this is Kent. In our dreams, yes; in our plans, no. It may happen -- because of the 30 months rule and therefore, private payer's ability to have these patients shift to Medicare, their incentive to invest in the kind of things that could significantly save money and improve quality are really limited. And so, yes, we continue to talk with some people about it. But the fact that the patient base is so small, so fragmented and so short term means that they typically end up wanting to allocate their management resources to other tricky deals, not ours. I want to go back to the first thing I said. We have hopes, and we're getting better and better at proving how much value we could add on both the private side and the Medicare side every single year. But unfortunately, I don't think there's anything material and imminent for you guys. John Ransom - Raymond James & Associates, Inc.: Right. And my second question would be, if you were some sharp, young analyst at CMS and you were looking at the bundle, what would you think you would say prescription uses -- with the new label and with the industry behavior changes, how do you think prescription uses change relative to the assumptions that went into the bundle when they were designing it 12, 18 months ago?

All right. Now say that question again. Are you asking us how we think the actual results have matched up to what they predicted 1.5 years ago? John Ransom - Raymond James & Associates, Inc.: Yes, in terms of -- I mean, it seems to us like pharma uses a good 10% or so, 10% to 15% or below maybe what was predicted, particularly with the label change, and not just DaVita but industrywide. And so the concern would be that they take another bite at the apple and redesign it based on reality today versus what was predicted. But I don't want to tilt at windmills if that's an unreasonable concern.

Yes, I think the only honest answer to that one is we don't know how they're thinking about that. And we do know that no one knew what was going to happen and that there was an incredible confluence of a policy change, meaning a move to bundling, and a whole bunch of new scientific evidence and new clinical debates and in many cases, conclusions. And so there was this totally -- not totally but largely coincidental confluence of major changes. And trying to separate out what happened for one reason and what happened for another reason is pretty impossible. And I'd also go back to saying no one knows exactly what they predicted. And I doubt that they could have had any basis for really making a prediction. So I think it's just unknowable. The fact is as long as Medicare revenue is less than Medicare expense, they've got to be very careful about cutting Medicare reimbursement because centers will close. And so independent of what's going on with any one variable, they've got to end up looking at the aggregate. And it remains the case that if it was only Medicare reimbursement out there, you have hundreds and hundreds, well, literally, thousands of dialysis centers closing. But a very fair question. We just don't know the answer. John Ransom - Raymond James & Associates, Inc.: And I guess my -- I don't expect you to answer this question, but maybe conceptually how you're thinking. If I'm DaVita, why would I have any managed care contracts, assuming you get through the cycle and things are always moving? But if I look a year out, 2 years out, why would you have any managed care contracts that weren't bundled? So that the incentives are all kind of in the same place between private and public payers?

Because there's some payers who don't want to bundle or don't have the ability to bundle, and they don't want to allocate the IT resources or operating resources to change to a new system. John Ransom - Raymond James & Associates, Inc.: And so it would be more resistance on their end than your end at this point, I would say.

Absolutely. And sometimes there's differences in data that you talked about bundling with someone, and they think they're paying a certain amount and we think they're paying something else because it's spread across different states and different billing systems and all the rest. And so even if you agreed conceptually on neutrality, so to speak, you can't achieve it because you have different definitions of what reality is. That will just be another real-world answer to the question that you asked.

Your next question comes from Andreas Dirnagl with Stephens.

Kent, actually I just want to follow up on one of those questions just now in terms of -- given your experience with CMS over the years and sort of insight into how they think, have you ever seen them be concerned with sort of specific fluctuations in margin? Or are they more concerned with, specifically, what their spending, in other words, the budget? In other words, are they going to look at margins in the industry maybe going up? Or are they going to look at the fact that their spending went down 2% year-to-year?

Andreas, very fair question. My experience is they periodically look at both. So they will look at aggregate results. But they know that the average margin for a Fresenius or for a DaVita or for any one is different from their distribution of margins. So we are still sitting here with -- I'm not going to get the number exactly right up -- 150 centers that are losing money. And at some point, if Medicare economics become worse, we have to give up on a fair number of those. While at the same time, clearly on average, we are profitable. So A, they do look at margins overall, but they recognize that margins are an average. Second, they do look at performance versus budget. And the fact is the new science, combined with the incentives and innovation prompted by bundling, have led to some nice savings versus the baseline that used to be on and that does make them happy as it would make you and I happy if we were in their shoes. Is that helpful?

Yes, actually quite. And sort of maybe building on that, sort of moving back to DaVita for a second then. If you look at the work that you and even the rest of the industry have done, a lot of it and a lot of investor questions are always centered around EPO utilization. I wondering, can you give any color on sort of other areas that you're potentially looking at? I mean, are we going to see potentially sort of some slight margin increases coming from putting pressure on other drug manufacturers? Are you looking at labor productivity, improvements that you can push through now that you're really motivated with this fixed price reimbursement?

Well, on the labor side, Andreas, if I'm understanding the question, we were bundled before since all our labor costs were captured in the bundle of the prior dialysis treatment amount. So I'm worried that I might be misunderstanding the question. Can you come at it again?

Well, I'm just thinking, you're -- clearly, you and the industry are now spending a lot of time thinking how can we reduce our cost across the board. And I'm wondering whether that focus, whether it be on other drugs beside EPO, whether it be on labor or even some other things I'm not thinking of, whether that sort of renewed focus is bearing any fruit in terms of saying, "Okay. You know what? We could be more efficient here."

Okay. I would say, yes. There are other areas where we've been able to innovate, and those successes or the expectations of those successes has been baked into our guidance which we discussed earlier. And this is also why at the top of the call, I talked about 1 of the 4 important government contextual factors being our desire in the increased chance of getting an even broader government bundle that will start to incorporate things like vascular access or some other items that are outside the current dialysis bundle. But we are confident that if we were given that revenue and that accountability, we could come up with better ways of doing it. And so yes, there are some successes and they're baked into the guidance. And yes, we hope the bundle gets broader yet, so we can do more of that.

Okay. Great. And then just maybe before I move on to Luis, quickly. I'm just curious, Kent, and again, in the international arena, again, a single management of a single clinic in Singapore. You've got 2 footprints in 2 clinics with a minority interest in India. I'm kind of curious, first of all: A, who you've chosen to kind of run this operation and run the investigation? Are you taking someone, an existing DaVita person and kind of moving them to Asia? Are you looking to local talent so to speak? And then quite bluntly, at this rate, how do you expect to spend $20 million on this, this year?

Yes, Andreas, and we do recognize the ratio of overhead dollars to treatment is a little hefty right now. We have hired a local executive based in Singapore, a former American Express executive. He starts, I think -- I think he started yesterday or the day before. And we have other people on the ground in a couple of different places around the globe, including that equity investment in India. And so right now, of course, we have -- we labor under tremendous diseconomies of scale, not only because the operations are small, but the legal expenses and compliance expenses are very, very high as we get to know each new market and its regulations. So it's going to be pretty closely inefficient for a while, and this new executive is, hopefully, going to drive enough growth so that in X number of years, we can manage the fixed cost infrastructure to your satisfaction. Am I giving you the information you want, or am I missing the boat?

Well, I think so. I think mainly -- let me restate it and see if I'm understanding it correctly. Basically, you have an infrastructure and are building an infrastructure that is disproportionate to the number of clinics that you're either managing or have an interest in at the moment, and it's not just people on the ground in Singapore and India?

That is true. But one big qualifier, most of the losses that you're seeing are not because we've got legions of people lined up taking care of a smaller number of patients in 1 center in Singapore and 2 in India. It is because of very high legal, regulatory and compliance expenses associated with getting started. So a whole lot of those expenses are not recurring in that sense once we get our local entities set up in a legal fashion, once we get our deal templates down. Now those nonrecurring, deal-related, legal-related and compliance-related expenses will go down. But at the same time, assuming we're adding a whole bunch of centers, the actual recurring operating expenses and G&A expenses will go up. But the good news is they'll be going up because we're running dialysis centers, not because we're paying a lot of attorneys for a lot of hours of work.

Great. That actually clears it up quite a bit. It's very helpful. Just one quick 1 or 2 for Luis then. Luis, whenever you talk about the guidance for 2011 and 2012, you've been very clear that your estimate of 0 OI contribution from DSI for 2011 is net of transaction and integration costs. Have you made a decision as to whether or not you're going to be breaking those out? And if so, were there any one-time transaction or integrations costs in this quarter?

We -- our plan is to break those out next quarter once we firmed those up. We have very little that we've taken in so far, so not really material to the results.

Okay. Great. And then finally, in your discussion about the sort of government reimbursement outlook, you talked about a number of states reducing rates including, potentially, in California of 10%. You also talked about the VA rates. Can I assume that those are incorporated in your guidance with your normal sort of probabilistic outlook?

The answer is yes. We've been very thoughtful about the range of outcomes for both '11 and '12 on that point.

And sir, you have no further questions at this time.

Okay. Well, thanks to everyone for your attention to our enterprise. We were very content with the quarter, both in terms of its results and its momentum both clinically and financially, and we will do our best in the quarters to come. Thanks, again.

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