Good evening, and welcome to today's DaVita Q3 Earnings Conference Call. I would like to introduce today's host, Mr. Jim Gustafson. Please go ahead, sir.

Thank you, Keshia, and welcome, everyone to our third quarter conference call. We appreciate your continued interest in our company. I'm Jim Gustafson, Vice President of Investor Relations, and with me today are Kent Thiry, our CEO; Luis Borgen, our CFO and; LeAnne Zumwalt, Group Vice President. 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, and thanks to all of you, for your interest in DaVita. Third quarter, as you all already know, was a very strong quarter. We performed well in both the clinical and operating areas. I'll cover 4 topics: Clinical outcomes, government reimbursement, litigation 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, serving approximately 138,000 patients. With respect to adequacy, which as many of you know is essentially how well we are doing at removing toxins from our patients' blood, this past 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, the preferred form. And for these and virtually all other clinical measures, our patient outcomes compared very favorable to national averages. And this quality clinical care not only results in healthier patients, but also drives reductions in hospitalizations and surgical procedures, and therefore, significant savings to the U.S. taxpayer. On to government reimbursement. Pretty obvious to everyone, there's a lot of pressure to reduce costs in Medicare. The bad news is that could mean, at some point, they reduce our rates, that would hurt. A little bit of silver lining in that cloud is that it could lead to increased acquisition opportunities at attractive prices, and it will generate more interest in our proven ability to reduce hospitalizations through our integrated care product. So we are not trying to argue that the bad news is masked by the good news, but there are some silver linings in that cloud, if and when it arrives. And also, we have been talking with you for a while about our ongoing negotiations with the VA. This past quarter,…

Thanks, Kent. Before I discuss the quarter, let me say a few words about the government inquiries and the private civil litigation, all of which have -- we've previously disclosed. You have to forgive me, but given the sensitivity of these matters, I'll be reading these points. First, the 2011 U.S. Attorney physician relationship investigation. As we disclosed in August, we learned that our federal grand jury investigation is pending. As announced, we did receive a subpoena for documents in this matter. The subpoena was expected as part of the typical process in such an investigation. And it is the first request for information that the company has received in this matter. The scope of the document subpoena substantially overlaps with the previously disclosed 2010 U.S. Attorney physician relationship investigation, and appears to be limited to physician relationships. We believe this investigation is still at a very early stage. We are actively discussing the scope of the subpoena with the U.S. Attorney's office and cannot comment further. I do want to offer a few words about grand jury investigations in general. A grand jury is a way, by which the U.S. Attorney investigates and obtains evidence in order to determine if they want to pursue a matter. A grand jury does not determine the guilt or innocence of a person or company. As far as we know, there is nothing unique or unusual about the process here. The mere existence of an investigation does not mean that something negative must follow. No charges have been brought in connection with this investigation. Second, the 2011 U.S. Attorney Medicaid inquiry recently informed that the U.S. Attorney's office in the Eastern district of New York is looking into a Medicaid manner. A few points on this. Number one, we were initially informed that…

[Operator Instructions] Your first question comes from Gary Lieberman.

I was wondering on the grand jury investigation there was an article in the Denver Post today. If you guys had any comments on that article?

This is Kent, I have not read it. I guess, the only comment than I can make based on what I've heard about it, but again I haven't read it, is it is common sense that the value of a business can change dramatically if the market and our competitive conditions change, that's common sense. And of course, you guys see it all the time.

Okay, that's very helpful. And then, maybe if you could give us an update on how the negotiations with Amgen are going on the contract for EPO?

Well, Gary, you know the answer to that. I'd say, they're constructive and thoughtful and they continue.

Okay. And then maybe just finally, it looked like you guys discussed the decrease in the cost per treatment. Is there any further detail you could provide us with? Is 100% of it due to reductions in pharma or is that some -- is there anything else driving the reduction in the cost per treatment?

For the current quarter Q3, that's essentially -- yes, it's primarily pharma, Gary.

Your next question comes from Matt Weight.

With the revenue per treatment up sequentially here, and I know you referenced the managed care contracting, is it safe to assume the commercial contracting, a majority of that is already bundled in terms of the contracts?

We haven't been disclosing what percent of the portfolio is bundled versus not. It's just said that it's been going up steadily. And part of that, it's -- there's so many different metrics you can use to define the denominator, it gets really difficult, so it's continuing to increase steadily.

Okay. As you look towards next year, outside of anemia management, can you give us any sense what other maybe levers that are out there to pull, whether it's looking at vitamin D, subcu or other areas in terms of potential protocol changes?

Well, first, predicting protocol changes is difficult because they're driven by changes in science and physicians' perspectives. So it's really a difficult one for us. Although of course, at any moment in time, we know what our docs are telling us. And right now, I don't know of anything our docs -- that our docs are telling us have major consequences. That could change if there's some new article or study. But at this point, we, at least, I don't know, have anything dramatic, our physicians are saying beyond the ongoing debate in the anemia area.

Last question here, and then I'll jump off. Non-acquired growth, strong for the second consecutive quarter, outpacing your larger competitor there. Is there anything that you want to highlight to what's driving that, is this a sustainable kind of run rate do you think right now?

We hope so. But I don't think we're ready to sign up for that as a commitment. And relative to our competition, who knows it could be that we're carrying more centers that have a lower private mix or we're carrying more centers that are losing money. So any single metric can be a little misleading. But we're hoping we can maintain the current rate.

Your next question comes from Justin Lake.

First question, just a quick follow-up on the Denver Post article, is there any comments or you can give us in terms of whether you believe the Denver Post has it right in terms of this is the main crux of the issue, it's part of you understand that it's around this one joint venture agreement?

We know that they are not limiting their inquiry into that 1 transaction. All we know is that they're looking at a small number, but it's not just one.

Okay, and then just one more question on those lines. It's in terms of having a transaction where you're selling a significant number of centers for -- because of some kind of market disruption, at a rate that might look unusual. Would you call this is a one-off or is this a single instance one of the handful or is this something that happens fairly regularly?

I can't comment on that specifically, Justin, it's just not in your best interest. But just generically, unusual things don't happen often, and so I just can't go any further and I can't really talk about this specific thing at all. Just want to go back to the common sense statement that, if there is a situation or scenario where there's a dramatic change in the market and our competitive conditions, then the value of a business can change dramatically.

Understood. Just next question on capital deployment. Curious if -- I noticed you didn't buy back much stock third quarter. Was there any reason for that, and could you buy back anything thus far in the fourth quarter?

Hold on one second, Justin, please.

Okay. Justin, we're considering several capital deployment opportunities. One of which is obviously acquisitions. That coupled with the recent volatility in the debt markets, we thought it would be prudent to conserve cash and deployment for potential acquisitions heading forward, so that's kind of how we're thinking about it.

Okay. So right now you would say that you have an interesting M&A pipeline and therefore, you expect to build up cash over the next couple of quarters, would that be fair?

We continue to look at various opportunities, one of those we're deploying towards M&A opportunities.

Okay, great.

Justin, I think what led us to hesitate is just when you said for the next few quarters or several quarters or something, and since we look at our cash deployment as you know, with a great rigor every quarter, we get real nervous when you ask us to say what's going to be true 2 or 3 quarters down the line on that topic, because reality can change a lot quarter-to-quarter. So I think that's why you felt a little pause there.

Your next question comes from Kevin Fischbeck.

This is actually Joanna Gajuk today for Kevin. Can you just clarify for me, I heard you said there was additional cost for a DSI integration of $9 million, and is that correct that you said you expect similar amounts in the fourth quarter?

In Q3, we had about $9 million related to transaction and integration costs for Q3, and in Q4, we expect a similar amount for DSI as well. Is that clear enough for you?

Yes. And on a completely different topic, I have actually a question about that selling negotiations. Because one of the proposal calls for a reduction or even a complete elimination of Medicare bad debt payment for providers. So the question I have for you is, whether it's actually impacting dialysis providers? And then if that's the case, how much money do you receive or have you received for example in 2010 for Medicare bad debt?

Yes, so the bad debt policy, if it were changed, could impact dialysis. And we just have not disclosed our range of recovery there from Medicare to date.

All right. Because when I was reading your 10-K, I found there is -- there was a disclosure about Medicare bad debt receivables of $46 million in 2010. That's obviously on the balance sheet, so the question I have is whether my estimation here is right, because this would be on the receivables, right? But then you have to consider Medicare payment cycles and also the process you have to go through to demonstrate to CMS that you actually tried to collect and failed. So is that fair to assume that maybe the revenue number would be something in the range of 3x to 4x of that reasonable amount?

No. That wouldn't be a fair assumption to presume that multiple.

Would you be willing to share with us another multiple that's more appropriate here?

Let me tell you what it does do. For Medicare, the process under which we go through takes us 1 year to 2 to collect a bad debt, so I think that should be helpful for you.

Your next question comes from Frank Morgan.

Two questions for you. On the DSI acquisition, I'm wondering if you could compare your organic volume growth there compared to your recent company averages disclosed in the quarter? And then secondly, on the VA contract, any more details? I think you mentioned pricing had dropped there, any level of magnitude? Or is it a -- is this more like a bundled payment contract? Can you just give me at least more details on how the VA contract works?

Let me hit the second one, and then someone else will hit the first. With respect to the VA, it's not in our shareholders' best interest for us to start talking about what the rate is, nor the structure of the rate. So we'll stay away from that to protect you. And as to the first question, I'll turn it over.

Yes, DSI is not in our non-calculation, it's acquired growth, Frank.

But I guess, if you just looked at it on a stand-alone basis, was it growing volume at about the rate or the rate of growth organically that you are seeing?

I'm 90% sure that their neg was significantly lower than ours, the non-acquired growth that is.

Okay. And just with regard to your very strong same-store organic growth in the quarter, were there any particular pockets regionally, geographically, where you saw a better growth? And that's all I have.

There is always some element of differentiation, according to different segmentation including often, geographic, but we don't disclose it because that's competitively useful.

Your next question comes from Kevin Ellich.

Just [indiscernible] Hello?

Kevin, you were cutting in and out for us. [Technical Difficulty]

So on the share buyback, you guys repurchased, I think, $7 million this quarter. So are we currently at $350 million left on the buyback?

Our remaining authorization, Kevin, is $358 million.

$358 million? Okay, got it. And then Kent, just wondering if you could give us your thoughts or commentary on the final Medicare regs that came out a couple of days ago. I think the market basket rate updates 2.1%. Should we expect anything more with the case mix adjustor given the size of your company? And then also thoughts on the QIP, that came out as well?

Sure, Kevin, it's LeAnne. You're right, we didn't receive a 2.1% update on the Medicare base rates. The transition adjustment as you know, stayed at 0 and they actually made no movement to help us with case mix. So we still will go into 2012, struggling to document those case mix adjustors. We plan to work with CMS on it, and I think they're open to solutions, but so far, it's not proven to be successful. With respect to the QIP, as you know, 2012 was finalized previously with 3 metrics. What this really address is really 2013 and 2014. 2013 will now be 2 metrics: URR adequacy and a greater than 12 hemoglobin measures. So those 2 were pretty expected, and they'll weighted 50/50. Into 2014, just to give you a little bit of color, if you want more details certainly we can do this offline. But there are 2 categories, there's going to be outcomes metrics and there's 3 in that area, which are URR hemoglobin greater than 12. And then a new measure, which is the combined catheter and fistula measure. Then there's another category, which is reporting and that's going to be worth 10% of the QIP dollars, and in reporting there'll be an infection measure, patient survey measure and then a calcium phosphorous monitoring if we do those. So that's pretty much the high level, would you like to ask a more detailed question?

No. I just generally wanted your thoughts, if you think these are good for you or I guess what's your take.

Yes, we won the 2012 payment rollers, pretty much what we expect, and I think as you would've expected. And moving forward into the QIP, I think there's still a few things that as we add more measures in 2014, we'll be working with CMS to improve. I think we very much agree on the principle of being paid for delivering good quality. The unfortunate reality is that the method that CMS can deploy right now is pretty simplistic, and there does need to be a more robust calculation, and we're hopeful that over the next few years, we'll be able to work with them to implement that.

Understood. Okay. And then just switching over to anemia management, wondering if you could comment on where your EPO reductions stands at this point. And then also, I believe in early October, the National Kidney Foundation put out some draft clinical guidelines that might actually suggest lower hemoglobin targets, just wondering what you thought about that, any comments?

Sure. On your first point on the EPO reduction. We expect it's very dynamic and so we don't exactly when it's going to settle out. We do -- the key is what the physician adoption is, and exactly how physicians are going to prescribe EPOGEN, relative to the label change and all of the emerging signs, so it's still very dynamic area for us, and we'll see where it settles out.

Okay. Any commentary about the National Kidney Foundation draft guidelines?

Well, you hit on the head, they are draft. We will see where they finalize. Certainly, they were looking at and exploring a lower limit for hemoglobin. But I think it's best to just put that on hold, until such time that they're issued.

Okay. And then the question here is, just wondering is there any protocol when you have a joint venture with physicians in determining the fair market value? I mean, I guess, do you use a third party, is that very consistent throughout the industry?

Hold, on one a second please. Yes, there's a protocol, but we can't go into any detail in a public conversation, given all the different litigation.

Your next question comes from Darren Lehrich.

Luis, I wanted to just go back to the comments about revenue per treatment. You guys have highlighted the case mix, rather the managed care mix, I should say. Can you just tell us where it was on a percentage basis? Or how much it moved sequentially, and what were the main drivers of that? Was it mortality? Was is it any kind of different dynamics in the quarter that you saw?

On the managed care mix, I'm assuming your referring to the commercial treatment mix, that was down quarter-over-quarter. And I can tell you that it's the same 2 factors that we've seen all along. Number one, is the macroeconomic factors, lower employment, less people who have higher paid insurance, and number two, would be our improvement in mortality rates.

And where is the mix at this point percentage-wise?

We don't disclose the specific percent.

Okay. Well, I think you have been disclosing the number directionally. I think we were headed at 1 point towards 11, or are we closer to 12? That would be helpful to us.

We're still rounding to 11%.

Okay. And then, your commentary about G&A costs, you highlighted the integration costs of DSI, I missed one other point that you made that was a factor. I think, obviously, international spend is in there. But was there another point that I missed, and can you just maybe go back to your comments about the rise in G&A?

Sure. So the key factors are, in addition to the DSI transaction and integration, it's legal and compliance spending, coupled with incremental IT and international. Those are the 4 key drivers of our G&A.

Okay. And then I guess just on international, I would love to get a brief update what new geographies you're now in. I think there has been fair amount of activity in Europe as well. And just can you update us in regards to the amount of spend that's flowing through G&A at this point in relation to the range that you put out, probably about a year ago?

On the geographies, Darren, we're thinking still that the less we talk about that, the better, since we're competing with folks. But suffice it to say, we're active in a few parts of the world and we've closed a couple little deals and we've built up a team that's significantly more coherent than the one we had 5 months ago, 6 months ago. And it's expensive from a G&A point of view. I think we're pretty much on track with what we said 9 months or 1 year ago, but I'm going to defer to others on that.

On the spend levels for 2011, our annual spend is expected to be about $20 million for this year. And now, it's a little more back-end loaded than front-end loaded in terms of 2011 spend.

Okay, that's helpful. Then LeAnne, I had a question for you. I know you've been talking about the inability to capture case mix adjustors, but I think at one point in the conversation, there was some progress that you thought you've been making. So if my memory serves me, you're leaving me with $2 a treatment on the table or somewhere thereabouts. Have you been able to cut into that number? Is it the same? Maybe just a brief update on the value of sort of what you're not able to capture this point.

Yes, the range would still be $1 to $2 per Medicare treatment that we're not capturing. We've made a slight amount of headway, but it's cumbersome and costly. We're really spending a pretty fair amount of what we get paid back in obtaining that documentation, so it's still a pretty costly process.

Okay. And then my last question for you, is just any updated at all that you can provide on your ability or success to get paid for more frequent dialysis for home therapies with the Medicare contractors, is there anything new or different in terms of how you're finding success with that?

No, they're pretty status quo there.

Your next question comes from Ben Andrew. Ben Andrew - William Blair & Company L.L.C., Research Division: Given that we had expected DSI to hurt payor mix a little bit as you integrate that. And you commented that you did see a negative payor mix this quarter, could you isolate for us the effect of DSI, and talk about what trends you're seeing in the core business, if those accelerated, stayed the same?

There's a de minimis impact in the quarter, DSI only contributed to 1/3 of the quarter, given that we closed in early September. And what was the second part of your question, please? Ben Andrew - William Blair & Company L.L.C., Research Division: So on a full quarter basis then, the payor mix for DSI is not materially different than the core business?

We're not going to break out the DSI mix versus our core mix. I'd say it is immaterial to our results in the third quarter. Ben Andrew - William Blair & Company L.L.C., Research Division: Okay. And then is there any comments you can make on whether the trends on payor mix are getting worse or kind of stable?

It is declining. Last quarter, it was up. This quarter it was down, so it's hard predict where that's going to shake out.

[Operator Instructions] Your next question comes from the line of Gary Taylor.

A couple of small ones, I think. The first is, I mean, given that you guys -- you raised your guidance recently in response to the lower pharmaceutical intensity after the label change, does it still make sense to you that '12 or the second half of '12 and 2013 would also demonstrate lower pharmaceutical intensity or is that too difficult to predict at this point?

Could you say that question again please, Gary?

Yes. I guess, what I'm trying to understand was the street, obviously, for a long time, has thought that movement to a bundle, where you'd see a change in terms of lower EPO dosing. And clearly the label change accelerated that versus street expectations. And I guess I'm kind of wondering if it accelerated it versus your own expectations. And does it make sense that, that trend would continue once we anniversary the second half of '12 and into 2013?

Well, first, it's just pretty hard for us to predict because we get hundreds, literally thousands of doctors out there reacting to CMS changes and guidance, reacting to the FDA label, reacting to the conferences they go to, reacting to the articles they read, reaction to what's going on in their patient population each month as they change their practices. So it's just very, very difficult to predict. We certainly don't think that there's going to be as big of a change over the next 12 months as the last 12 months, because that's not we're hearing from physicians. But to go a lot further and start talking about whether or not we can extrapolate this month's trend, we just can't. We just have no ability to do that. There's too much dynamism, too many doctors drawing different micro decisions about what to do with their patients.

Thank you. Second one is maybe for Luis. Excluding changes in pharmaceutical intensity in '12, what would be your underlying operating expense growth per treatment in '12, what would be a reasonable range excluding any change in Pharma?

That's a hard one to predict, because it's so integrated in our model.

Yes. And I guess it's primarily labor I'm talking about, so maybe we narrow it down to labor and it's a 2% year-over-year number or is there a reason to think if productivity it could be better than that?

Some people will try to strip out the numbers to answer your question, let me come to it in a minute or 2.

And my last one, if you wouldn't mind. Just a technical one. Did your -- given that you have a blackout around earnings reporting dates, did the pre-announcement on October 18, did that free you up I guess, from the blackout. In other words were you able to repurchase shares between the pre-announcement and today's full release?

I'll let Kim Rivera, General Counsel, handle that question because I don't know for sure what the answer is.

For a period of time, yes, that would have allowed us to repurchase shares.

[Operator Instructions] Your next question comes from Art Henderson. Arthur I. Henderson - Jefferies & Company, Inc., Research Division: Luis, we saw an uptick this quarter in minority interest, and I was just curious if you could explain that, and what we should expect going forward with respect to that line item?

Sure, it's driven forward by 2 factors, increased profitability of our overall enterprise, and number two, a higher proportion of JVs as part of that mix. Going forward, you can expect it to be similar to our operating income as it was this quarter. That would be a good way to think about it. Arthur I. Henderson - Jefferies & Company, Inc., Research Division: Okay, okay. That's helpful. And then, Kent, can you talk a little bit about commercial contracting dynamics? I know a year or couple years ago that was a hot topic, and just was curious what the current environment is when you go to the table with managed care. I know it's always difficult, but can you kind of talk about that a little bit?

The environment, I guess, its the same and different. It's the same in that, we've got lots of intense battles going on every single month of the year. In aggregate, things have been a little bit more stable the last 12 months, and the 12 months maybe 2 years ago or 3 years ago. But it doesn't feel like a trend to us. It just feels like a temporary relative low in the battle. Arthur I. Henderson - Jefferies & Company, Inc., Research Division: Okay, okay. Going back to the cash flow, I guess, comments that you made earlier, I just want to make sure I understood this correctly. With respect to near-term cash flow deployment, you're saying that you're just building cash at the moment, I guess, looking at the fourth quarter, is that the way to sort of think about it near-term?

We did what we did in the third quarter, because it seemed like the right thing to do. And we haven't decided what we're going to do in the fourth quarter. Arthur I. Henderson - Jefferies & Company, Inc., Research Division: Okay. Last one, just in terms of the DSI integration, I know you quantified expenses around that, can you talk about what you're doing right now with the DSI integration?

When you say what we're doing, let me take a stab at it, and then you tell me if I'm not being useful. The integration is going quite well. We've got to get everybody on the same IT platform, we got to get everybody on the same benefits and other human resource policies. We've got to rationalize reporting relationships, because some of their folks are going to switch and report into regions and divisions of old DaVita and vice versa. So that's the kind of integration stuff that's going on, is that responsive? Arthur I. Henderson - Jefferies & Company, Inc., Research Division: Yes. That's why I was curious. And I assume that some of the IT integration takes longer than some of the other things, is there a way to sort of think about what gets done first? And I know they're all working in tandem, but anyway to think about that, Kent?

It does take longer, to be honest, I don't know when this one is scheduled to be done. I'm going to guess -- I'm just going to guess, 6 to 9 months. But somebody maybe will be able -- before the call is over to get the real answer, although we might not have it here at the table.

[Operator Instructions] And you have a follow-up question from Justin Lake.

I just wanted to go back to my question originally around fourth quarter share repurchase. I can't remember if you actually answered that specifically or not, did you buy shares during that open window you had in the fourth quarter?

No, we did not.

Okay, great. And then just last question, any update on the potential for a greater bundle or an ACO-type of your payment for Medicare?

No. We continue to get some positive feedback, but it's nothing you can take to the bank. And back to the DSI IT integration question, its scheduled to be done by March. So 6 months since we started it.

And one other follow-up. Gary Taylor, I believe had a question regarding cost structure. The answer to that is you can roughly think about it as inflation growth, labor would have some productivity but all the other lines, think about growing with inflation, is that helpful?

Oh, he can't, Gary's not on the line, so he can't respond. And I'll go back to another point that someone brought up, I said I was 90% confident or some percentage confident that DSI had lower neg non-acquired growth than we did and we have that confirmed, theirs was lower than ours.

And your next question comes from Darren Lehrich.

Just a quick follow up. In the ancillary services strategic initiatives segment, it's still growing nicely. You did cross over to a slight operating profit here. Do you think that's the inflection point? Was there anything unusual to call out, that sort of got you over that hump? And should we be thinking about more consistent profitability over the next 12 months in that part? You've had guidance out there, so I'm thinking it's somehow incorporated into the guidance?

Yes, you're right, it's incorporated into the guidance. And there's no reason to expect anything dramatic there, one way or the other, because it's a portfolio of 5, 6, 7 little things. Some not so little, some quite little, some pretty pure R&D. And therefore, designed to be money losers versus others that are designed to get to profit, and some of them have. It's so tough to predict. But there's nothing dramatic going on, and it's incorporated in the guidance.

[Operator Instructions]

Operator, I guess that's it.

And we have no further questions at this time.

Okay. Well, thanks, everybody, for your interest. We will work hard for you until the next call 3 months from now. Thanks.

This concludes today's conference call. You may now disconnect.