DaVita Inc. (DVA) Q2 2012 Earnings Report, Transcript and Summary

Good afternoon. My name is Candace and I will be your conference operator today. At this time, I would like to welcome everyone to DaVita's Q2 Earnings Conference Call. [Operator Instructions] Mr. Jim Gustafson, you may begin your call.

Thank you, Candace, 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 CEO; Jim Hilger, our interim 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 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 on our Form 8-K submitted to the SEC and available on our website. I'll now turn the call over to Kent Thiry, our Chief Executive Officer.

Okay. Thank you, Jim, and welcome to everyone. Thank you for your interest in your company and our company. The second quarter was a rock solid one as probably you already know from looking at the release. We did perform well, clinically, operationally and strategically. And I'll cover a few topics here before we turn it over to Jim. As usual covering clinical outcomes, I'll provide an update on legal proceedings as well and then talk a little bit about our outlook. First, clinical outcomes. We always present those first because that is what comes first. We are first and foremost a caregiver company, serving now approximately 150,000 patients in the U.S. and some elsewhere, as you know. Rather than provide the normal clinical metrics, I'm going to take a little bit of a different path today and give you a sense of the dynamism and living our core value continuous improvement and just give you a sense of some data that I shared with about 3,000 of our leaders from across America just a few weeks ago. June was our best month ever in 3 categories: fistulas placed, fistulas in use and day 90 catheters. And looking at Q2 overall, it was the best quarter -- excuse me, the second best quarter ever -- excuse me, the second quarter was the best ever, I can't read my own handwriting, for Kt/V less than 1.2 and URR less than 65. So in addition to us still looking very good on the normal metrics we report, just wanted to give you a sense of how closely we monitor our continuous improvement for some of those categories we have had improvements every single quarter for over 2 years. And one of the great things about this is not only does it mean that our patients are experiencing the benefit of higher quality care and better outcomes, but also those improvements in those outstanding absolute and relative levels of clinical performance drive reductions and hospitalizations and surgical procedures and therefore, drive savings to the U.S. health care system, improving our value proposition each and every quarter. On to the second topic, which is not nearly as positive. Just a brief update on our recently announced legal settlement. We did, as most of you know, agree in principle to settle the Woodard case for $55 million plus attorney's fees and some other related expenses. This was an exceptionally frustrating situation because we do not believe, we nor the physicians prescribing EPO to patients in our clinics to this period, did anything wrong. Please remember, the government thoroughly investigated these allegations on their own and decided not to intervene. But the individual that had filed this suite still had the right to pursue their claims on their own. And the sad fact is that sometimes agreements like this are in your best interest and we respect that. Third category, our outlook. And here I'm going to take a few minutes to put a fair amount of color around it. Although there is nothing new in what I'm about to say, just important to refresh it every now and then. We are increasing our 2012 operating income guidance to a range of $1.275 billion to $1.325 billion, excluding that second quarter legal accrual. This guidance captures a majority of the probabilistic outcomes, of course, we could fall above or below. Maybe one doesn't fall above, but maybe might fall below and reach above. Looking out further however, let's restate some of the more significant business risks that you should worry about, because we do, as well as the strengths and upsides that we derive comfort from and you should too. On the risk side, I will cite 4: a, government reimbursement, no one needs any significant elaboration there; b, commercial patient reimbursement, because it does not only account for 100% of our profits but in fact more because the private patients unfortunately much more than Medicare in order to subsidize the losses we sustain on the 90% of our patients that are government reimbursed, not an optimal system for society but it's the one we live in. This commercial patient reimbursement remains an area of risk. As a reminder, we just want to say that we may be forced in some cases to turn away patients rather than accept new patients at unacceptable rates and there remains a lot of uncertainty around the impact of exchanges on our private patients as it does for lots of other health care service segments. Item 3 under risk factors, oral drugs will be added to the bundle in 2014 at a currently unknown number. And item #4 under the risk category, our new models of care such as ACOs, Accountable Care Organizations, that everybody's talking about and changing affiliation models for physicians like employment by hospitals, that also everyone is talking about. The bad news, is that when you have new dynamics like this, is that they may well create downside for us. The good news is that they may well create upside and only time will tell. Moving away from those 4 significant business risks, I'll cite 6 strengths and upsides that you can balance against those risks. Number one, excellent and continuously improving clinical care. That does significantly reduce shareholder risk separate from its consistency with our mission. Second, our steady volume growth. Third, the history of solid cash generation and deployment. Four, a strong national market position. Five, our capability to provide integrated kidney care, which significantly increases quality while decreasing cost and customers more and more open to that kind of improved value proposition and willing to do the administrative work to put it in place. And then finally, number 6, an extension of MSP, although we make no prediction about when that might happen. So moving away from outlook, maybe give me a 1 moment to cover HealthCare Partners, which we expect to close in the fourth quarter of this year, consistent with what we said before. As we discussed at our Capital Markets Day, integrated care is where we believe the health care book is heading. This is not exactly an insight anymore. It's where a lot of a people think the puck [ph] is heading too and remain very excited about the potential. As we had hoped, the announcement of our combination has precipitated significant additional interest from a bunch of organizations across America and we are working with our wonderful new teammates, the HealthCare Partners, leaders to respond to all that interest. And I will now turn the call over to Jim Hilger.

Thanks, Kent. During the quarter, we experienced strong operating income and cash flow driven by strong treatment growth. Our non-acquired growth was 4.7% when normalized for days of the week. Dialysis revenue per treatment was consistent with the prior quarter and our commercial mix was flat with the first quarter. Dialysis patient care cost per treatment was up about $1.50 from the prior quarter. This increase reflects higher compensation expense, higher travel expense due to our annual national leadership meeting and increased unit cost for Epogen. Please note that EPO utilization was flat with the prior quarter. And based on our conversations with physicians, we continue to expect utilization will be at slightly higher levels going forward. These increases were somewhat offset by lower accruals for self-insurance reserves in the quarter. Our second quarter dialysis G&A per treatment was down about $1.50 from the prior quarter. This decrease was primarily due to lower professional fee spending and a continued decrease in DSI integration costs as the DSI integration is almost complete. Note that in the second quarter, we had approximately $10 million in HealthCare Partners transaction related expenses. These expenses and the $6 million of transaction expenses that we incurred in the first quarter are now reflected in our corporate level charges and not in dialysis G&A. Despite the fact that we had some nonrecurring transaction costs in the quarter, we review -- we view our Q2 operating income to be a fairly representative run rate as we had some other operating items, including favorable insurance accrual true-ups previously mentioned in the quarter to offset these transaction related costs. On to international. Our international losses in the quarter were $12 million, reflecting higher legal and professional fee expense related to our development efforts. We now expect international losses to be in the mid-$30 millions for 2012. The main drivers for this change are the higher legal and professional fee expenses that I just mentioned, delays in closing certain transactions and our decisions to do -- to not do some deals due to their valuations. As an update on our international activities. We have recently entered Saudi Arabia, expanded the number of centers in India, and were awarded a second management contract in Singapore and also received a license to operate in Malaysia. In addition, we expect to be operating centers in China in the third quarter. All this underscores what we have said before. While international expansion is a long-term growth opportunity, it will require investment and continued losses in the near term. Now turning to cash flow. Operating cash flow was $202 million in the second quarter. We still anticipate full year 2012 operating cash flow will be in the range of $950 million to $1.05 billion. This range includes the expected payment in 2012 of the $78 million legal contingency that we recorded in the quarter. Now with respect to HCP. After HealthCare Partners' second quarter results are finalized, we will include them in our planned S-3 filing, which hopefully will be filed in the near future. HealthCare Partners continues to perform according to plan and its results are consistent with the 2012 and 2013 EBITDA outlook that we provided in June. First quarter results were strong and we do have an indication that EBITDA in the second quarter will be approximately $135 million. We repeat, this is on-plan and consistent with expectations. But as always, our outlook captures a majority of likely outcomes, but actual results could fall above or below this guidance. And in regards to the DaVita merger process with HCP, I'm happy to report that the transaction remains on plan. In fact, we're launching our bank financing this week and the bond financing, hopefully later this month or potentially in early September. Demand for this offering appears strong. In fact, we have already received commitments for 95% of our Term Loan A. And with that, operator, let's go ahead and open it up for Q&A.

[Operator Instructions] And your first question comes from the line of Gary Lieberman with Wells Fargo Securities.

I guess maybe just to step back to some of your comments on the G&A line. Was the $10 million that was included in G&A or that was not included in G&A? I'm sorry, that just wasn't clear.

Gary, that $10 million is reported in our G&A line in our financial statements. But in the supplemental data, in our press release, what you'll see is the $10 million is now reported in our corporate level charges and not in dialysis G&A and that's for purposes of segment reporting.

Okay. And then what was the amount of the med mal true-up?

We're not breaking out the different insurance trips. It was in a couple of different categories, Gary. But in aggregate, it offset a bunch of the transaction expenses.

Okay. And then I guess big picture since you announced the HCP acquisition, obviously the Supreme Court ruled in favor of healthcare reforms. I guess can you talk about the HCP acquisition in that context and do you feel better or worse or any different about the acquisition post that decision?

I think the most important response is that it wasn't a big deal either way. There were some upsides and downsides in each direction. And we think independent of the specifics of that decision, that the trend is clear. The demand is clear, the need is clear. Having said all that, reforms staying in place probably means that ACOs and some other organizations that we think reinforce the need for what HealthCare Partners does differentially well, probably accelerates those. And so is a net incremental positive. On the other hand, if it had been repealed, there were some immediate P&L pickups that would've been kind of nice, but not strategically essential. So I think it's a slight positive. We've got, Matthew, the CFO of HealthCare Partners, here. Matthew, I don't know if you want to add anything to that?

That was perfect. That's the way we look at it based on that decisions.

Your next question comes from line of Darren Lehrich with Deutsche Bank.

Two things. I wanted to just talk a little bit about international. I understand you've increased your losses. Can you just share with us the revenue and loss contribution from international in the second quarter? And I guess just maybe some forward-looking comments on the number of clinics that are in the works here for the back half of the year just so we can put the international losses into more perspective.

Well let me talk about the number of centers and then Jim will respond to what you asked about the revenues and expenses, to the extent we're prepared to do that. I think the number of centers we had approximately in Q1 was about 15. Now it's about 19. And there's some more in the pipeline. But with deals, particularly international deals, when you're learning, like we are, you can never be too sure if and when they're going to close. And so there's more variability than we're used to in the domestic side of the business. So on the center level and patient level, the growth is chugging along with some fits and starts. Is that responsive for you on the center and patient volume side?

Yes. No, I think so. I mean, I guess you've given us a flavor for some new countries that you'll be in. So I think that's good. Maybe just some numbers on international and then I just had a question on HCP if I could?

Okay, we will come back to HCP.

Darren, the -- on international, still very early days as we've just getting under -- our feet underneath those. But our revenue in the second quarter was approximately $4 million. And we had a heavy professional fee expense that really the transaction that we're working on, that resulted in the approximately $12 million in losses in the quarter.

And maybe, Gary, before we go to your HCP question. If I read into your questions about international, a broader, higher-level question, which is are we happy with the level of P&L expense versus the current reality and trajectory of revenue and operating contribution from centers. The answer to that question is no. On to HCP.

All right. Fair enough. So HCP, I guess the question, thanks for giving us the EBITDA numbers, which look pretty much in a band with what we saw from Q1. But I guess the question here, is this somewhat volatile reporting season for managed care? And we did hear a little bit about some volatility in the MA books of the some of the other companies in the managed care space. So I guess just maybe a broad comment or 2, if you would, on HCP's performance in the context of what you saw relative to how you priced PMPMs. Matt, I know you're in the room, so any sort of broad brush commentary you can say about the performance of HCP and what looks to be a little bit more of a difficult operating environment for your managed care partners there.

Let me take a cut at answering and then Matthew will correct any mistakes. That some of the trends being discussed by others are a result of their PPO books of business. And our book of business is dominantly on the HMO side, which has very low out-of-pocket expenses, et cetera. And therefore, utilization tends not to be as affected either way. Meaning, it didn't go down in the last few years because of recessionary effects or any of the other effects that are often cited, nor would it therefore go back up to much more steady state because the economics of our base of business just don't change in the way that the books of business that are being commented on by others change. Having said that, I will now turn to the person who taught me all that, Matthew.

Thank you, Kent. I think that's accurate. And the way we look at this is in the managed care, even the very small co-pay and coinsurances that these patients have and some of the health plans, as you know, have changed their benefit. That even hasn't changed any utilization and we tracked that. Especially for the Medicare Advantage population because the Medicare Advantage population normally have very, very small co-pay and coinsurance. And they're really -- the physician is in control of the utilization. So we have not experienced any trend like what these health plans have been reporting. Our exposure to -- we don't have any PPO that's capitated for us or we take any risk, whatsoever, on that book of business. Those are all based on fee-for-service.

I'll make one other point, Gary, because it's so important and we made in our Capital Markets Day but this kind of underlines it, which is one of the reasons that we chose HealthCare Partners is because how strong their clinical emphasis is. And they proactively pursue trying to identify what chronic conditions patients have and then proactively try to get them more time with the doctor. And that's all because keeping people healthy is the most powerful long-term economic driver. But this is yet another reason why some of these microeconomic or microbehavioral factors that other plans or delivery models refer to, don't affect us because what our doctors think is right for the patients and our care manager thinks is right for the patients is totally unaffected by anybody's deductible or co-pay.

Your next question comes from the line of Ben Andrew with William Blair. Ben Andrew - William Blair & Company L.L.C., Research Division: I was wondering, Kent, if you might give us some insights into some of the potential partners that have approached you after the HCP deal, whether it relates to size or geography and if there's things there that are of -- whether near-term or maybe 2013 -- interest?

I think I can't give a useful answer because we've been contacted by organizations from all geographies and all sizes, contacted by both payers and delivery organizations, both hospital-oriented and physician-led. So it's pretty much runs the whole gamut along all the categories you cited. Which ones of those will turn into partnerships and done deals and new business, of course, time will tell. But it's been very encouraging nonetheless. Ben Andrew - William Blair & Company L.L.C., Research Division: Kent, do you view that as more sort of partnerships as opposed to acquisition opportunities or also again, same answer?

Same answer. It's just so early on. It's certainly, some of both and we're certainly open to both. But, boy, it's way too early in the game to start getting more specific. Ben Andrew - William Blair & Company L.L.C., Research Division: Okay. And one other question, if I may. I know in the past, you'd invested aggressively in IT infrastructure in an attempt to build out your capabilities on the accountable care side. Have you been able to get a better understanding of how HCP may allow you to taper some of that or are you still learning how those 2 systems will dovetail and what you may need because we didn't see a real change there in trajectory on those investments it appears this quarter?

Yes. Fair. Very fair observation. The short answer is no. We do not expect the combination of the 2 companies is going to lead to any change in IT spending in either company. There's too many differences and both of them are so busy adding to their capabilities for their different businesses that it would not make economic nor strategic sense to divert talent to try to pick up minor synergies. So you're not going to see any relief in the IT math on either side.

And your next question comes from Matt Weight with Feltl and Company.

Kent, last quarter, EPO utilization was flat. It was flat again here in the second quarter. It sounds like you're still expecting it to be slightly up. Is this continuing just to be from what physicians are saying or is there some hard evidence this is occurring?

I know it's what physicians are saying. I do not know of any actual trend but there could be one because it's not something that I'm necessarily conversant on over the last 4 to 8 weeks, particularly given the general consensus from what a lot of docs are saying, which tends to typically end up being true. We, with our physician community, have been experimenting and exploring and comparing different anemia management protocols and since that work continues even as we speak, it's kind of hard to get any more definitive. But the answer to your question is, it's from my point of view, totally based on what doctors are saying, perhaps just someone else in the room that as the call proceeds, will be able to answer more specifically with respect to any hard data trends.

Fair enough. And then just the only other question here with the Woodward settlement there. Is there any potential to see some reduced G&A spend with presumably lower legal compliance?

Well, certainly. The spending on that lawsuit will go way, way down and away very, very quickly and so that's a definite pickup and a nontrivial pickup. Whether or not anything else is going to ramp up and keep us at the prior level, I actually don't know for sure because each of the different major legal issues tends to ebb and flow. And so, I can definitely assert there will be a pickup in nice savings. I just don't know if anything else is going to pop up to offset it.

Your next question comes from Kevin Fischbeck from the Bank of America Merrill Lynch.

I appreciated the numbers on HealthCare Partners for the EBITDA this quarter. Do you have the number for the previous year quarter? I don't think that was disclosed in the proxy?

We have not disclosed the Q2 2011 numbers yet nor have we disclosed other than giving you an indication of how Q2 2012 was going to result. We will have that in our S-3 filing, but that is still being prepared and those numbers are still being finalized.

Okay. And then I guess, Kent, in your comments, you made some comments about integrated kidney care and how that more payers are open to that type of structure. I guess that it would include commercial payers. Are you seeing -- or do you actually have more kind of larger bundled type contracts with commercial right now, is that something that's going on, or is it in discussion stages?

Nothing significant has happened. And I would assert that you shouldn't presume that anything material will happen on the commercial side within your investment timeframe. So it's really good for hopefully reinforcing the fact that we're differentially effective in managing total cost. And hopefully, that will buy us some incremental patient volume and security on our current rates with the right annual inflation increases. So I think most of the economic value tied to that conversation is going to be embedded in those 2 things as opposed to expecting any big, commercial, globally capitated contract anytime in your investment time frame.

Okay. And then it sounds like you're experiencing [ph] A little bit more losses in the International business now, but you obviously raised the guidance. What were the drivers to the guidance range?

Well, I don't have a good concise answer for that one. Why don't you let us play with it a little bit while we answer the questions and see if we can be useful and organized. It was pretty broad based, which is why we didn't cite any 1 or 2 drivers. But let us reflect a little bit as we move through the call.

Okay. And then last question, capital deployment. Obviously, you have some pretty big capital deployment by year-end. Should we just assume that cash kind of builds up on the balance sheet after you do some of the smaller U.S. and international deals that you kind of always do? Or is there room to do things like share repurchase, et cetera, between now and year end or is just cash building up for that the most logical use?

Yes. A very fair question. I think we just can't answer anything other than the normal generic way we have for 10 years, that we take deployment -- the generation and deployment of cash as your sacred trust in us. And every quarter, we look a lot at how much leverage is appropriate given the near-term outlook and debt rates, whether or not this is the right time to repurchase stock. Are we likely to do a bunch of acquisitions? How much cushion should we have? And so, I just don't think that it's a good idea for us to start predicting what's going to happen with our cash balance over the next x months. Because the fact is, whatever prediction we have today could change tomorrow because of all those other factors and our desire and long-standing inclination to be nimble and responsive. So I don't mean to avoid the question. But I think we just better stay away from it because it's so darn situational.

And your next question comes from Gary Taylor of Citigroup.

Two quick ones on dialysis, first. Other revenue was up $20 million sequentially. Were acquisitions a part of that or what else was driving that sequential revenue growth?

It's principally DaVita Rx.

Okay. So that's a big sequential jump, was there a new contract or something that...

DaVita Rx just continues to expand at a pretty steady rate. We're very pleased with our performance.

Okay. Understandably. And then the other dialysis question is really since, I guess, the bundled payment rules got finalized, you've really had some much higher acquisition activity that just continued last quarter, this quarter, another 33 centers. Is your outlook that you can continue that really substantial pace through the rest of this year. And is the primary driver still just the change of payment model and small guys getting out?

Well, first, what we expect for the balance of this year is incorporated into our adjusted guidance with all the normal caveats around it. Second, it is so difficult to predict when more people are going to want to sell and with what intensity are they going to want to sell it, at what prices are they going to be willing to sell. So I don't know that we've demonstrated a lot of confidence in predicting that over the last few years. It is certainly the case, however, that what you said is true. That lots of the smaller players with everything that's going on in the country and everything that's going on with government spending and everything that's going on with health care, that you have more of the small players who are saying this is a reasonable time to exit and/or find a stable and value-added partner. So I think there's going to continue to be deals, but whether or not it's going to continue at the pace that we've enjoyed for the last 1.5 years or so, we just don't know.

Got it. Last question is on HCP and maybe I'll direct this towards Matt. We're just trying to understand the risk contracts a little better, particularly the California contracts that you've disclosed in the filings, where Europe bookings shared savings but not really booking the gross per member per month revenue. And so I kind of have 2 questions around that. One, do you have the same risk in those contracts as you do on the capitated contracts? So if total medical expense exceeds the per member per month, do you take losses on those contracts? Or are you broadly capped? And secondly, there's about $800 million of managed revenue under various shared saving type contracts that is not being booked as revenue. I guess how much of your booked revenue represents shared savings earnings from that $800 million of managed revenue?

Just give us 1 second here to confirm before we respond. Hold on 1 second.

Gary, those are fair questions so in California, because we don't have what's called a [indiscernible] license, we are not capitated by the health plan for what's referred to as institutional risk. So those risks are being capped by the HMOs. And then, we have various risk share arrangement with them that those are confidential information at what risk we have. As far as the number you quoted for the managing the institutional, that number is what we are still managing that care. However, what you're recognizing in our financial statement for California is the net results.

And is that a figure as it impacts your revenue line that you'll ever disclose for us? I guess we're -- obviously, we're just trying to be in a position to model that better.

We're still sorting out what's going to be the right way for us to report so that you guys get all the information you need to make your decisions. And at the same time, we don't sacrifice any competitive advantage or limit our ability to add future value for you in how we contract. So we're still sorting that out and, of course, the deal is not even closed yet, even though we're working very closely together in driving towards the future together. So I think on that one, you just have to wait a few more months.

And your next question comes from John Ransom with Raymond James. John W. Ransom - Raymond James & Associates, Inc., Research Division: Just following up on Gary's line of questioning. Generally speaking, how direct or not is the relationship between the gross rates received by, say, a Medicare Advantage payor and the rate that HealthCare Partners gets, either in a traditional model or what you're doing in California and other places?

All of our Medicare Advantage contracts are as a percentage of what CMS pay the health plans. So I would say it has a very direct relationship or correlation with that. John W. Ransom - Raymond James & Associates, Inc., Research Division: Okay. And generally speaking, in years past, let's say, when pricing was not so good, what did -- what's the -- because you guys look like you just performed right through all cycles. But what steps are -- what levers are there if -- let's look at 2013 with sequestration or 2014 with MLR regs and what have you. What -- generally what levers are there for you? Because you're already operating at a very high level with your cost performance. What additional levers are there on the margin side to manage through a negative pricing cycle?

As far as our activities, I mean, every single day, we have ideas by our providers and physicians and care management and clinical people how we can do this with a higher quality service and reduced cost. So we still are very bullish at our ability to reduce cost for Medicare Advantage patients. So from that point of view, I think we feel and I think we have Incorporated that in our projections, that fee for service equivalence reduction on the Medicare, we still -- the results are we continue doing very well on Medicare Advantage.

And what I'll add to that is, you are pointing towards some of the sort of structural and programmatic risk on the revenue side. Parts of our cost structure are directly contractually linked to CMS reimbursements. So the cost structure adopts proportionate to the revenue structure for a subset of the business. In addition, when Medicare revenue economics are bad, that tends to affect the entire health care arena, hospitals, nurse and other caregiver and physician compensation expectations, et cetera. So there is a less direct, meaning, not contractual linkage between revenue and cost structure. But nonetheless, a very real one. None of this, in what Matthew said and what I'm adding, means that we're totally buffered. We don't mean to suggest that. Rather, there are some significant offsets and those are 3 of the categories in which you find them. John W. Ransom - Raymond James & Associates, Inc., Research Division: Sure. And that is a great help. Just a couple of little additional things. In your mind, generally speaking, if you looked at the 100 largest markets in the U.S., are there structural -- because 1 of the critiques we hear is well, they've done great in laboratory perfect conditions with high Medicare rates and physicians willing to play ball. But as you look across the U.S. you think about exporting this model, you think about your M&A. Do you find any huge structural barriers? Is it going to work in 25% of the markets, 50% of the markets, 10%? How do you think about the opportunity to export the model beyond the states that you're in?

Well, that's a fair question, John. So I'm going to answer it from 2-point of view. One is that Medicare Advantage and managed care in your traditional HMO. We still feel that there is tremendous opportunity there and also the population health. We also are trying with this Accountable Care Organization, which is basically incorporating the population health and all the things that we do with evidence-based medicine in a fee-for-service environment. That's both Medicare and the commercial. So we look at the opportunities are endless out there, both in the markets that they are not producing the kind of quality service and cost that we're producing on HMO and the markets that they this fragmented fee-for-service and there is no metric on equality and service. So we see the potential is incredibly rich out there for what we do. John W. Ransom - Raymond James & Associates, Inc., Research Division: Okay. And is the -- I think you mentioned this before, but please remind me. I guess in our simplistic mind, the 85% MLR mandate should increase the demand for what you do because you're able to solve a problem with your customer, your upstream customer? Is that a good way to think about it, or is that -- are we missing something?

I think I'd look at it a little bit differently. I'd look at it that we're at this position, that anything that health plans pays us is calculated towards their MLR. We are not under any MLR rules or restriction. Therefore, the opportunity is to give us even more opportunity to take the entire risk. And for that, the HMOs can include that in part of their MLR.

Yes. So I think the -- what Matthew is saying is, your assessment is correct and he's talking about some of the reasoning why it is. At the same time, we don't think it's any reason to start dramatically changing forecasts of anything. The world is too complicated for that. But directionally, your hypothesis is correct and then he's talking about the next level of detail as to how they think about it. John W. Ransom - Raymond James & Associates, Inc., Research Division: And you guys mentioned before that I think maybe some of us made the mistake of thinking you're like this captive Kaiser model and all the doctors are employed. And you mentioned that a lot of the doctors are essentially just contract. Have you -- did I miss this, have you provided a breakout of employed versus contracted doctors? And is that something that you have a preference for one way or the other?

We actually love both. The fact is it's wonderful to have a foundation of employed doctors because that means the level of operating integration and mission alignment and all the rest is just so, so tight. At the same time, in order to have a superior value proposition to the patients and to the payors, having network physicians around and in between employed leads to just a higher value products. So we're always going to have both because it works best. In addition, in many instances, the affiliated docs who end up subsequently becoming employed docs once they have gotten comfortable and familiar with the mission alignment and the basic operating competence and economic fairness. So that would be my response. Matthew?

Yes. And I would add to that the difference is Kaiser employed all of their physicians. We appeal to both group of physician. The physicians who want to be employed and the physician who wants to stay independent and just contract with us for all of the services that we bring to them, the hospital list, the after-hours care, all kind of things that we do. So we are comfortable, as Kent said, with both group, and we don't mind growing in each segment from that point of view.

And your next question comes from the line of Whit Mayo with Robert W. Baird. Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division: I don't think I heard a direct comment on this, maybe you gave it. But can you elaborate more on the second quarter EBITDA number with HCP, just the 135, when I square that with the 150 it's obviously lower on a sequential basis. So anyway to put that number in context for us? We obviously don't have the benefit of seeing some of the details behind that.

Well, we're not prepared to go into a detailed breakdown on the differences between the quarters. But suffice to say, that we did view Q1 as a strong quarter, but within plan. And our full year of guidance remains unchanged. Q2 is in line with what we had expected. And again, our guidance for the year remains unchanged. Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division: Okay. And you mentioned that you plan on launching the financing pretty soon, maybe this is public and I've missed it. But any details with how you're thinking about the structure of the debt financing between bank debt and bonds at this point?

Yes. We hope to raise approximately $3 billion in bank debt. And some of that in Term Loan A and some Term Loan B. And then in addition to that, we expect to raise roughly $1 billion in notes. And the term -- the split between the Term Loan A and Term Loan B will be somewhat dependent upon demand. But we are currently expecting a little more Term Loan A than B. Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division: Okay. And it's probably a little too premature to ask sort of what the indications of interest are in terms of rates.

Well, in our S-4 filing, which I point you to, we had to use pro forma rate of 5.24%, including swap rates for the overall debt that we'd be raising from the new debt. Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division: That's helpful. And maybe one last question here, maybe fair, unfair, not sure how you want to look at it. But not to undermine or belittle Jim's contribution. But, Kent, maybe, can you talk a little bit about where you are in the search for a full-time CFO and what the timetable looks like to bring someone onboard? I'm sure there are a lot of kind of variables at play there.

No. I appreciate the straightforwardness of the question. And the fact is we've just started the search. And actually, let me go back and you may want to ask a follow-up question, but I want to go back to a question that was asked maybe 15 minutes ago and try to be a little more helpful. As you look at our cash and our balance sheet, perhaps the way to shed some more light on where that question was going, is post deal close, our leverage ratio will be 3.7, that is slightly outside our historical range of 3 to 3.5. But of course we've always said there will be times when we're below and times when we're above. That is a fairly small amount above and even if we do quite a few acquisitions, we will delever to be beneath it relatively quickly. This means our ability to have the full spectrum of options with respect to cash deployment, which means acquisitions versus debt paydown, versus share buyback, will continue to exist throughout this entire period because in the right situation, we're not averse to being above 3.7. However, we love the fact that absent any significant opportunities for cash -- deploying cash elsewhere, we'll delever beneath that quite quickly. Now back to the CFO question. Did I -- I think I answered the one you asked, is there anything else you wanted to know? Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division: Well, you said that the process has really just begun and I was kind of curious if there is -- the board if you had a conversation with the board in terms of timetables with which you'd like to bring someone onboard?

Yes. Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division: Any way to elaborate any further on that?

No, I don't mean to be cute. Yes, the board and I have had lots of conversations. And yes we've talked about different timetables. And no, I don't think it's a good idea to share it. It's so unpredictable to figure out when you're going to make decisions in an important search process. And so I just don't think there's any particular upside in doing that and a lot of downside.

Your next question comes from Kevin Ellich with Piper Jaffray.

Just a couple of questions. Kent, I was wondering if on the dialysis side, have you seen any integrated care pilot programs with any of the commercial payors?

Can you ask the question again I missed the first part. My bad.

Are there any integrated care pilots that you guys are participating in with the managed-care payors?

On the commercial side?

Yes.

Well, yes, is the short answer, and have been for some time doing some work with some commercial payors on integrated care. It's not globally capitated, but a number of different arrangements where we do stuff beyond dialysis to manage the patient in a more holistic way and one way or another we get compensated for it.

So that's been going on for some time. Can you say about how long these pilots have been going on?

I wouldn't call them pilots because they're just basic contractual arrangements with a small number of commercial payors. And it's been years. The good news is it's been years and we've generated good results for those payors. The bad news is it's never really caught on and grown to be material enough to talk about to you. But we appreciate the question.

Okay. Got it. Now your big competitor mentioned it today on their call and I thought there might have been some new pilot that rolled out but I guess not. And then, I know someone else asked the question about the integrated care RFP from Medicare. Do you have any idea on the timing? And what about the size, have you caught wind of anything new out of Washington?

Short answer is no. It's still very little guidance on what the specs will be and that's, of course, just discussing the first draft and then what emerges subsequent to a comment period or all the interaction even more difficult to predict.

Okay. And then, what about the home therapies? It sounds like -- can you give us any update on how home dialysis is trending for you, specifically PD versus home hemo?

Both PD and the home hemo are growing and we will repeat what we've said for quite some time, which is that there are folks who have a vested interest in pushing one or the other of those modalities and talk about glorious clinical and economic results from increased utilization and forecast amazing growth. And then there are others who have a vested interest in other modalities and are very critical of what those outcomes are and issues of self-selection and are quite skeptical of any differential economic or clinical performance across the broad patient population. We are totally impartial. We do more of them than anyone in America and we are still learning a lot every quarter about what subsegments of the patient population benefit. And if there is a clinical benefit for the patient, at what cost to society does that benefit come, is it higher, lower or the same? So they are both growing and we remain incredibly curious and eager to keep generating clinical insights and economic insights every year. Did I answer the question?

Yes, yes. That's helpful. And just one last one on HCP. We understand that HealthCare Partners is a standalone business versus the dialysis business. But is there anything within HCP's integrated care model that you can take out and maybe apply to the dialysis business, especially when we've seen an expanded bundle or integrated care program rolled out from Medicare?

We are going to have a very intense session very soon comparing what we do in integrated care with kidney care patients to what they do because they have over 1,000 of those types of patients in their delivery model already. So there'll be some very rigorous idea sharing there at a superficial level, we do a lot of the same things, which is no surprise. But there could be some nice learning at the second or third level. Beyond that, there is nothing obvious that jumps out and would be economically material. But who knows as we go through the next year or 2 of what learnings might flow in each direction as we work in different ways with the same payers, some of the same doctors, some of the same integrated delivery systems. So we are sure there's going to be some more real insight sharing back and forth. We're just not sure when and in what area.

[Operator Instructions] Your next question comes from Matt Weight with Feltl and Company.

Just one follow-up question on HCP for Matt here and it's more of a process question. Matt, when new members come on during the annual enrollment period, Medicare Advantage fully capitated, how long does it typically take you to cycle through these members so you can understand their health status, get the risk code accurate, send it on CMS so you can ultimately get a higher risk score or higher reimbursement for those members?

That's a fair question. So what we try to do in the first 30 days that the member has signed up, we want that member to come to our physicians, whether those are employee physicians or contracted physician, and have a full physical on -- at the same time, while we are asking for the medical record from the previous providers for those new patients to be transferred. So usually, is much shorter than 30 days. But our goal is within the first 30 days, have that patient has a very comprehensive physical exam done.

So would you say that after the first year, those new members are running profitability rates similar to what you would, say, existing members are?

I think it's hard to predict. Every market, every population is different. So I wouldn't say it might -- some patients, it might take us day 1, some patient it takes us a little but longer. What we care about is what I refer to as if they are deferred care that we need to provide and sometimes, recovering, if you will, for those deferred care might take 3 months, or 6 months, or 1 year. But the key is to find out all the issues with the patient and have a treatment plan and refer them to the right specialist or right treatment plan and caregiver and care education.

Okay. I was just surprised because I was under the assumption that CMS only updates risk scores twice a year. So if somebody came on in January. I would've expected that maybe it would be difficult to get an updated risk score that quickly in March.

You are absolutely right as far as the risk score for the purpose of paying us, but we like to capture all the -- because risk score is a proxy for all the conditions, chronic conditions, that the patient have. That is the most important thing for us, which is capturing those chronic conditions so we can develop a treatment plan for these patients.

And there are no further questions at this time. I'll turn the call back to our presenter for closing remarks.

All right. Thank you very much for your interest in DaVita HealthCare Partners. We will work hard for you over the next 90 days and look forward to talking to you again then. Thank you.

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