DaVita Inc. (DVA) Q3 2013 Earnings Report, Transcript and Summary

Jim Gustafson - Vice President of Investor Relations Kent J. Thiry - Co-Chairman of the Board and Chief Executive Officer James K. Hilger - Interim Chief Financial Officer, Chief Accounting Officer, Vice President and Controller Matthew Mazdyasni - Chief Financial & Administrative Officer and Executive Vice President Robert J. Margolis - Chairman and Chief Executive Officer

Kevin K. Ellich - Piper Jaffray Companies, Research Division Justin Lake - JP Morgan Chase & Co, Research Division Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division Gary Lieberman - Wells Fargo Securities, LLC, Research Division Darren P. Lehrich - Deutsche Bank AG, Research Division Kevin M. Fischbeck - BofA Merrill Lynch, Research Division Matthew Borsch - Goldman Sachs Group Inc., Research Division Gary P. Taylor - Citigroup Inc, Research Division Frank G. Morgan - RBC Capital Markets, LLC, Research Division Lisa Bedell Clive - Sanford C. Bernstein & Co., LLC., Research Division

Good afternoon, ladies and gentlemen. My name is Ryan, and I will be your conference operator today. At this time, I would like to welcome everyone to the DaVita HealthCare Partners Q3 2013 Earnings Call. [Operator Instructions] I would now like to turn our call over to Jim Gustafson. You may begin.

Thank you, Ryan, and welcome, everyone, to our Third Quarter Conference Call. We appreciate your continued interest in the company. I'm Jim Gustafson, Vice President of Investor Relations. And with me today are Kent Thiry, our CEO; Bob Margolis, the CEO of HealthCare Partners; Matthew Mazdyasni, HealthCare Partners' Executive Vice President and CFO; Jim Hilger, our Chief Accounting Officer and interim CFO; and Garry Menzel, our incoming 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 meanings of the federal securities laws. All of these statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. For further details concerning these risks and uncertainties, please refer to our SEC filings, including our most recent 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.

Thanks, Jim, and welcome to everyone. This quarter, we performed consistent with our overall enterprise guidance for 2013, in fact, near the high end of the range that consisted of continued solid performance in our kidney care business and HealthCare Partners performing at the lower end of the guidance range. On a separate subject, we continue to generate strong aggregate cash flows. While this quarter was unusually strong and therefore should not be extrapolated from, our trailing 12-month operating cash flow is representable and is $1.6 billion, or has been $1.6 billion. I'll discuss 5 topics: Clinical performance, HealthCare Partners' performance, public policy update, an update on our legal issues and then the outlook. Now first, as always, our clinical outcomes, because we are first and foremost a caregiving company, we now serve in kidney care approximately 161,000 dialysis patients in the U.S. alone, about 1 out of every 3 in America. With respect to adequacy, 98% of our hemodialysis patients had a Kt/V that would be greater than 1.2. With respect to vascular access, 72% of our patients have fistulas. And our 2012 patient gross mortality rate was down to 13.9%, a drop of 9% over the prior year, and you can do the math and see how many human beings that kind of drop affects. And in fact, our gross mortality rate has now dropped 27% or so over the last 12 years, both a big number cumulatively but particularly impressive number recently. Our patient outcomes continue to compare very favorably across the board to national averages, which also means we're setting [ph] money for payers and taxpayers. With respect to clinical metrics for HealthCare Partners. Medicare Advantage plans are benchmarked against the HEDIS measures, as many of you know. Last quarter, we talked a little bit about our 2012 performance in California at HCP. This quarter, we'll compare our results in Florida to that same national data for Medicare HMO patients. And our MA patients in Florida, once again, scored near the top across a wide variety of metrics, I'll just cite a couple. We were above the 75th percentile with respect to screening for colorectal cancer and diabetic LDL numbers. In the first case, 72% of patients being screened, and the second, 61%. And then we're above the 90th percentile with respect to female patients being screened for breast cancer with 85%. So these and other clinical outcomes at HealthCare Partners continue to compare very favorably to national averages. And once again, not only result in better clinical outcomes, but also higher patient satisfaction, higher physician satisfaction and savings. Also HealthCare Partners in California was named the top performing medical group for the 10th consecutive year by a reputable Integrated Healthcare Association. Next, I'll turn to HealthCare Partners operating performance. It did improve $17 million sequentially, as you, no doubt, have already noted. It's due primarily to an annual Q3 premium reconciliation for our MA members, secondarily, from increased patient volume from acquisitions and same market growth. As our Medicare capitated member months were up 5% over the prior quarter. One specific aspect of this growth was our acquisition of Arizona Integrated Physicians, a leading IPA network in Arizona with over 700 physicians that currently provide integrated care to approximately 20,000 MA patients in Arizona. And as many of you will recall, this is our second step following our partnership with SCAN, a plan, where we began providing integrated care to 13,000 MA patients earlier in the year. And in this market, we look forward to working collaboratively with local hospitals to do good work for those patients and payers. Next onto public policy. The government has announced that they are reopening the ESCO application process, that's the kidney care integrated care pilot process. And so we want to offer our heartfelt applause to CMS and CMMI for doing that, and we are eager, eager, eager to work with them to find a way to make that program work. As many of you know, we have demonstrated how this model can work. And in fact, our Special Needs Plan in California received a 92% patient satisfaction rating, which was the highest among all Special Needs Plans in California. So it's not only working clinically, it's not only working economically, but it's generating an unusual and distinctive patient satisfaction score. In kidney care, we do expect the final 2014 Medicare reimbursement rates to come out later this month. I want to remind you that if there are significant cuts, we will be forced to close a number of centers. We will do this in a responsible way, of course, to ensure continuity of care for our patients. But these changes could impact our treatment growth numbers year-over-year in the way that you would expect. In addition to the Medicare cuts that may happen, we also have potential hits due to increased commercial rate pressure and the potential impact of the exchanges, and so we will be looking to do some expense pruning wherever we can, although we cannot put a number on that at this time. Next, an update on our investigations and lawsuits. Based on our continuing settlement discussions with the government, we have increased the legal contingency reserve for the physician relationship investigations by $97 million. This, of course, reflects our current assessment. To be clear, we're seeking resolution of these related matters and we may or may not be able to reach a settlement. And it just won't be appropriate to provide any further details on this as these discussions are ongoing, highly confidential and we've not yet reached resolution. Next our outlook. Looking beyond 2013, staring at 2014, we look forward to discussing this with you in much greater analytical and strategic detail at our Capital Markets Day in New York City on Monday, December 9. But let's cover a few things now in order to try to be helpful to you. 2014 will be a challenging year. HealthCare Partners operating income will be down significantly. Kidney care operating income is almost certain to be down, perhaps, significantly. In our HealthCare Partners business, we face large MA rate cuts, as you know. And in general, payers are not doing a lot of adjusting down of benefit design, therefore, making it more difficult to offset the cuts. The silver lining in that particular fact is that this should lead to stable MA volume growth. From kidney care, it's worth talking in more depth about the pressures we face on 4 fronts. Number one, potentially large Medicare rate cuts, as you know. Number two, commercial rate pressure. We have been told by a large payer that they have convinced a large provider to trade price reductions for volume and aggressively so. This is something our investors and prospective investors need to know and be concerned about. It is unclear if these recent actions will provoke a period of pervasively lower reimbursement. But given the economic reality of our community, this is concerning. We operate in a low fixed cost and high variable cost business, where the higher commercial rates from the 10% of our patients who are commercial are essential to subsidize the losses from the 90% of our patients that are Medicare, and so it's a very dangerous trade-off to make. Item #3, exchanges and the policy surrounding exchanges. Well, on that, we've said for the last 2 years that there's more downside than upside. And this appears to be even more so the case now than it did several months ago. And then fourth and finally, in addition to those 3 items of clear earnings headwinds that were just described, it's worthwhile for all of us just to step back and look at some of the tectonic plate shifting going on in American health care that will affect kidney care. The exchanges, the physician acquisition, binge or surge by hospitals, the emergence of ACO risk seeking organization, all of that and other factors probably not worth enumerating in detail create a formidable and historically unusual amount of uncertainty. The good news is that these dynamics will likely create some attractive opportunities. The bad news is they will also create some negative impacts which could be quite material and could happen before the opportunities manifest it -- themselves in any kind of new earnings trajectory. In addition to just dealing with the new dynamics, we'll consume substantial time and capital. So in summary, for kidney care, we are entering into a distinctively challenging period ahead. Stepping back in a final comment regarding the overall enterprise, we have strong assets, we have strong capabilities in many areas that are relevant for health care and where it is going or where it needs to go and we have strong cash flows. And as an enterprise, we look forward to pursuing the opportunities. We also have a lot of respect for the challenges that we face. I'll now turn the call over to Jim Hilger, our interim CFO.

Thanks, Kent. First, I'd like to cover a few more dialysis operating metrics. Our non-acquired growth in the quarter was 5.4% when normalized for days of the week. And our U.S. dialysis revenue per treatment was up $1.13 from the prior quarter. This was impacted by annual patient vaccinations, as well as an improvement in average commercial rates, partially offset by a slight decline in commercial mix. Our dialysis patient care costs increased $1.49 per treatment from the prior quarter, driven primarily by higher compensation costs, slightly increased pharma utilization and the seasonal administration of flu vaccines, offset by certain other costs, including the expenses related to our annual leadership meeting, which was held in the second quarter. Our dialysis G&A cost per treatment increased $1.41 from the prior quarter, primarily due to a $9 million write-off of certain obsolete IT assets. And during the quarter, we experienced $8 million in international losses. We continue to expect international losses for 2013 to be less than $30 million, excluding any impact of ramping up operations for the following government tenders we have recently been awarded. In Saudi Arabia, we've been notified formerly by the government that we have been awarded a contract that will increase our participation there, but we have not yet negotiated final terms of this contract. In Colombia, we've been awarded a contract that will result in our building 10 new centers to serve more than 1,000 additional patients, nearly doubling our presence in the country. Next, with HCP. HealthCare Partners operating income was $98 million in the quarter, up $17 million from the prior quarter, as Kent previously discussed. For the overall enterprise, our debt expense was $108 million in the third quarter, consistent with what we guided last quarter. The effective tax rate attributable to DaVita HealthCare Partners was 38.3% in the quarter. This excludes the impact of the increase in the loss contingency reserve recorded and the effects of a FIN 48 adjustment related to tax assets, which were created through the HCP acquisition escrow provisions. This Q3 adjustment resulted in an $8 million increase in corporate G&A expense offset by an equal reduction in income tax expense. You should expect similar adjustments will be likely to recur in the third quarter of the next few years. Note that we now expect a tax rate of 39% to 40% for 2013, excluding the impact of the items mentioned above and the HCP earnout adjustment. Next, we've made some changes to our 2013 operating income guidance. Kidney care operating income is now expected to be in the range of $1.5 billion to $1.52 billion. And the guidance range for HealthCare Partners operating income is now $380 million to $400 million, and there is a chance we may fall below this range. The net impact of both of these results in a slight increase on our overall guidance to a new range of $1.88 billion to $1.92 billion. These guidance ranges exclude the impact of any legal settlement to the physician relationship investigations, impact from the change in value of the 2013 earnout associated with the HealthCare Partners' transaction and the just mentioned Q3 tax-related adjustment. As always, our guidance ranges capture the majority of probabilistic outcomes on a number of swing factors. Now turning to cash flow, operating cash flow in the quarter was strong at $733 million. Cash flow in the quarter benefited from the timing of compensation payments, other working capital items and cash taxes. Please note that some of these items are likely to reverse in the fourth quarter. And due to the strong continued cash -- this continued strong cash flow, we have increased our cash flow guidance. Our updated expectation for 2013 operating cash flow is now between $1.6 billion and $1.7 billion. This guidance excludes the impact of any potential legal settlement payment we may make related to the physician relationship investigations. And before we go to Q&A, I would like to welcome our incoming CFO, Garry Menzel, who is with us today. As previously announced, Garry will assume the CFO role after our third quarter 10-Q is filed. It's been a pleasure to be your interim CFO. I will be remaining with the company in my ongoing role as Chief Accounting Officer, and I look forward to working with Garry. And with that, operator, let's go ahead and open it up for Q&A.

[Operator Instructions] Your first question comes from the line of Kevin Ellich from Piper Jaffray.

I guess, Kent, wanted to go back to your comments about reimbursement and the exchanges. Just wondering, do you think this will be a net positive impact for you? And then on top of that, with some policies being canceled, do you think you're going to see any impact on payment for treatments?

Thanks, Kevin. As we've said for a year or 2, there is more downside in the exchanges than upside for us for reasons that we can go in to if people want. And our assessment of that has only increased in the sense that we now see more downside in the way exchanges are unfolding than we did 6 months ago or whenever other recent times for a whole bunch of different factors. So we see much more downside in exchanges, both in terms of probability and amount, than we did earlier in the year.

Okay. And then I think today or yesterday, we came across an article about a strategic partnership with a little company called CVRx. I think they went through some financing. Could you give us little bit more details of what's behind this partnership?

In general, in the years to come, we intend to do more partnership with medical device companies in particular, and in some cases pharma, to help new technologies come in and penetrate the kidney care and HealthCare Partners space in a way which will allow us to do an even better job of population health management. And that's the strategic context within which we did the CVRx deal. And I would think over the 2, 3 years -- I would hope over the next 2 to 3 years, you'll see us do a couple more things like that to continue to drive medical innovation and hopefully improve our value added to all stakeholders.

Got it. And then lastly on HCP, saw capitated membership increase sequentially this quarter. Obviously, the -- you guys moved into the Arizona market. Just wondering if you could provide an update how's that going? And I guess, what's your view on expansion into other markets at this point?

I would say on HCP and growth, we are making steady but unimpressive progress on building our growth capability. In part, we say unimpressive because we have so much interest from so many different actors, both payers and hospital systems and physician groups that we measure our capability against the amount of opportunity that's presented itself. So I think that's how I would characterize our progress right now and our rate of progress. And then separate from that, even as we improve our capability, when you take on a new book of business, there is some lag time in introducing our capabilities into that new environment, building relationships, sometimes closing contracts, changing operating processes, et cetera. And so unfortunately, we can't point to any near-term pickup in anything other than the expenses it will take in order to enhance our capability. Is that responsive, Kevin?

It is. I just noticed your tone tonight seems more pessimistic than we've heard in quite some time.

Your next question comes from Justin Lake from JPMorgan. Justin Lake - JP Morgan Chase & Co, Research Division: I'll jump right in first on HCP. Kent, you mentioned HealthCare Partners is likely to have operating income down significantly. So looking to see if you could share any more color on that in terms of should we be thinking double digits? And then secondly, you mentioned that payers are not cutting benefits to the extent you hoped they might to help offset the rate cuts to your bottom line. I'm just wondering, on the long-term implications here for the business in terms of these payer negotiations and specifically on the capitation percentages that they are giving you, does that all have to be revisited given the way these negotiations went?

Okay, let me take a cut, Justin, and I might ask for help from Bob or Matthew whom are both right here and you can come back at me. The primary driver of the reduction in HCP operating income is really straightforward. It's the changes to Medicare Advantage reimbursement, and that was a big number as we talked about as soon as it came out. And there's just no way to mitigate all of it. So that's, by far, the biggest driver. And then, of course, we're going out and negotiating as best we can with our different payers to try to get some shared investment as we deal with that rate cut. And we'll have some successes and some failures, but there's just no way that we'll do anything with any other entity that will allow us to offset the magnitude of those cuts. Is that -- did I respond, Justin? Justin Lake - JP Morgan Chase & Co, Research Division: Sure. I guess, the -- maybe if I -- specifically on the magnitude of the cut, when you say significantly, I think we all expected the margins to be down here. But I'm just wondering, is it significantly down double digits in terms of operating earnings?

I think the bulk of that conversation should be left for the Capital Markets, Justin. But when we say significantly, I certainly wouldn't rule out double digits. But I think, we are going to shed a lot more light on this when we can go through a lot more analysis, as well as have the additional data from the intervening month. Justin Lake - JP Morgan Chase & Co, Research Division: And then the other part I was asking is just strategically, the -- given the value that you -- that HCP brings to the table in terms of the plan relationship, one might have thought that the plans might have been willing to lower benefits a bit and allow you to keep some of your economics rather than take most of it to your bottom line. And I'm just curious, given that doesn't seem to have happened or happened to the extent you might have hoped, are -- is there something you can do beyond that in terms of what I was asking is, can you renegotiate your capitation rates or do you even think strategically about potentially even offering your own plans in the market?

Well, with respect to rates, I'll just repeat. We -- in times like this, we do go back and see what we can get. And we will have some victories and we will have some defeats, but there's no sort of systemic reality to share with you that would help you evaluate anything beyond what we've already said. And then what was the second part, Justin? Justin Lake - JP Morgan Chase & Co, Research Division: Would you even think strategically of kind of pivoting to offering your own plans given the amount of value you bring to the table relative to the health plan?

Yes. We would never preclude being our own plan strategically. At the same time, in most places, what we want is to have an excellent partnership with our existing plans, and so that's where we start. Having said that, over the course of time, we wouldn't be at all surprised if in some situation, it made sense for us to be a plan, either in equity partnership with some other plan or alone. But job 1 for us is to become great partners for our existing plans that we work with. Justin Lake - JP Morgan Chase & Co, Research Division: Okay, great. Just my last question is on the payer contract. Can you give us any color here on maybe the size of the payer that is talking about shifting payments for lower -- patients for lower rates or any color on the geographies that might be impacted?

It's a large payer who's talking about a large provider. And it's a broad geography. Justin Lake - JP Morgan Chase & Co, Research Division: Is this similar to what you saw in, I think, it was 2008, 2009 in that time period where there was some instance like this and then it seemed to moderate, or is this even bigger?

If we're thinking of the same one, Justin, that was in a single state and this is not.

Your next question comes from the line of Whit Mayo from Robert W. Baird. Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division: I was just curious, the original HCP guidance was $400 million to $450 million, and I thought the earnout was somewhere in that range. Can you just maybe help me understand what triggered the payout of the full earnout when it looks like you guys might be running below $400 million now? And certainly the outlook for 2014 is less than optimistic currently?

Okay. Let me see if I can clarify a couple of things. What we negotiated halfway through the year when the probability of hitting the earnout target appeared to be about 50-50, and not having it resolved was getting in the way of some decision-making. We negotiated with HealthCare Partners, their shareholder representative, a 50-50 split. So the entire earnout was not paid for 2013, just half of it. And that amount was about $68 million or something like that, which is about a 1.5% increase of the aggregate consideration. So that's the math and that's the logic. Can I shed any more light on it for you? Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division: No, that's helpful. And maybe just back to the conversation around the exchanges, and it does seem like you have some strong feelings now versus prior calls on the potential downside risk for -- with regards to how this will all work. But maybe elaborate a little bit more on some of the specific details that have come to light to, perhaps, change your stance on this risk factor?

Right, very fair question. The dominant reason is just that there are more people, both companies and individuals, with private insurance talking about going on the exchanges. Now we all know of the travails that they're having, and that might change reality a lot for us, depending on how all that comes out, which we don't have any particular insight into. But if you just ignore the technical difficulties that are currently being experienced, that the data that preceded these technical glitches was that there were going to be more people with private insurance checking out the exchanges with great interest or being put into them than was originally thought by just about anyone. And then in addition, as some narrow networks have taken shape, we want to respect the fact that some of those narrow networks may not include us and could lead to a loss of patient -- new patient volume. Is that responsive? Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division: Yes, so it sounds like it's a 2-part answer. There's some concern about the go-forward degradation in the existing individual market, and I suppose that ties into MSP, and then the second is just the evolution of narrow networks. Is that fair?

Yes, that is fair. Although, my first point just had to do with more people going on the exchanges period, more people with private insurance as opposed to being anything in particular with respect to MSP, which is a little bit of a different issue, although it overlaps.

Your next question comes from Gary Lieberman from Wells Fargo.

Just maybe to follow up on the last question on the exchanges. I guess, that would mean you would expect to get a lower rate from a plan on the exchanges is that -- where the detriment would come from, or is there another way to think about it?

With us, it is more likely that we won't see the patient because we wouldn't agree to a lower rate. And so if somebody else does, we won't see that new patient, somebody else will.

Okay. So is that tied into the comment you made about a -- another provider potentially competing on price, is that, in some way, related to the exchanges, do you think?

Not clear yet, not clear at all.

Okay. Is there -- I guess, did the payer give you any inkling on timing for, I guess, when the contract would come due or when would you expect the timing to be when you might feel some impact from it?

We're in the mix right now. But I think it would not be a good idea for us to go into more detail. What was important for us fulfilling our responsibilities to you, our shareholders, was to let you know that this was going on and what this large payer had told us was underlying some of it. And so we felt an obligation to share that information. At the same time, going into a lot more detail is probably not a good idea.

Okay. What's changed, I guess, to make you maybe more concerned about what the outcome might be from the past? Because, I guess in the past, you've spoken of similar issues and it seems like the company has always come through it fairly well for whatever reason, whether it's your negotiating ability, your market share, or a combination of the 2. Has something changed that would lead you or lead us to believe that it might have a different outcome this time?

Well, I think, whenever something like this has happened in an intense way, we used to share it with you because it's our job. And because for us, to be sort of blithely confident that it will all work out fine seems inappropriate. We will certainly do absolutely the best we can. And the good news is we have just this wonderful quality story to tell, both in terms of clinical outcomes and the care and concern demonstrated in our centers. But we can't take something like this lightly when it's happening in such an intense way. And then, I think you put it in the context of everything else I referred to, which is just stuff going on at the same time with exchanges and employers doing new things and physicians doing new things and hospitals buying more physicians and multi-specialty groups growing and the list goes on and on, that in the context of such a dynamic environment with so many crumbling boundaries and moving parts, the same type of thing that maybe has happened once or twice in the past is, I think, even more potentially disruptive.

Okay, that's helpful. And then on your comments about HCP. Certainly, the tone seems more negative. I guess, compared to last quarter when maybe the tone wasn't quite as negative, is there anything specific you could point to? Is it the -- that you see -- you haven't seen the benefit designs change as much as you thought or has something else changed to lead you to believe that you're not going to be able to abate as much as maybe you had in the past?

No. Let me try on that one because there's never been a need to abate or mitigate against something of this size, or at least not for a long time, so there's no good analog for it. And the fact is, without this big rate cut, which was larger than anyone expected in that space, we would be, I think, all quite happy with the conversation that we're having today. And so it's important to separate out this extreme reimbursement change from the underlying recurring economics of our business. At the same time, we want to make sure that while shareholders understand the tremendous interest there is from lots of parties to work with us. We also simultaneously want to remind you that one doesn't just partner with somebody, flip a switch and start generating the same kind of results in new markets as in the historic legacy markets. And so that story is both a big positive and, as we build our capability, an achievable positive, but it has quite a lag time associated with it. So is that helpful? You got the big rate cut story and then you've got this big growth issue. And underneath growth, part A is not a demand and part B is slow implementation time.

So I guess, if I could just follow up on that, the -- it's not new news that there was going to be a rate cut. We've known about that for some time. And even last quarter in terms of the growth regarding HCP, your comments were somewhat negative. I guess, I'm just -- If there's something specific or is it -- because, I guess, it's hard just to discern the difference in the negativity of the tone versus something material that you could discuss that has made you more negative about it.

Let me go ahead and just say we hadn't provided 2014 guidance earlier, so this is the first time, really, talking about it. And in the interim period is where we experienced the disappointing reality of payers not making material adjustments to their benefit design. So that's a big piece of incremental news, which, unfortunately, was a negative. Now again, it's a negative with that silver lining of had they done a bunch of benefit design cuts, that might have actually reduced MA volume growth. And so there's an interesting strategic trade-off there. Nonetheless, we didn't expect them to do so few benefit changes and that's where you get a lot of serious incremental short-term math, because that -- those economics hits you right away day 1, whereas any economic benefit of growth is significantly delayed.

Okay. And if I could sneak one final one in. There was a comment about a write-off of $9 million of the IT asset. Which line did that flow through on?

Amortization expense in our G&A.

And that's kidney care, by the way.

Your next question comes from Darren Lehrich with Deutsche Bank.

Few things here. I guess, I wanted to just start with a question on HCP. Obviously, you we're about a year into the ABQ situation. And I guess I wanted to get an update, given that open enrollment for MA is upon us. Has your contracting strategy been resolved there? Can you just update us on how you think that looks going into 2014? And have you been able to stabilize the patient base there?

Well, fair question, Darren. We are -- at this point, we would predict that we are going to complete a new deal that will significantly improve our performance there. But it is not done yet.

Okay. And so, fair to say you're still in negotiation or have you reached some tentative terms on that deal, I'm assuming you're referring to, with Lovelace?

Yes, I don't -- not appropriate to go into detail for all the reasons you know, Darren, as frustrating as it is for both of us not to be able to talk about them. And we certainly have the reason we're predicting we're going to get something done is because we've reached agreement on a lot of important stuff. But as you know, until something is done, it's not done. And so we have to give you kind of the unsatisfying answer that we are.

Okay. Well, that's a helpful status update that you're optimistic you'll have a deal. All right. And then, I wanted to switch gears to just DaVita Rx, if I could. There was a big transition of some of the Fresenius patients using your, I guess, infrastructure DaVita Rx. And I'm wondering if you can just update us, has any of the transition started to occur? I think you originally referred to second half of this year. And how will that play out, I guess, over time? And maybe any general sizing of your DaVita Rx business at this stage of the game.

The implementation of our relationship with FMC is underway. And, of course, it -- our relationship with FMC is multifaceted, with Rx being one piece of it. And so that implementation is going smoothly. And as to expected to aggregate Rx economics, I think our custom has been not to share those, and I wouldn't want to start doing that on an ad hoc, ad lib basis.

Yes, I know, I guess I wasn't looking for economics related to this specifically, just a general sizing of Rx at this point.

It is -- what would be the right qualitative way to summarize? It is significant. And let me just sort of let people confer a little bit and see what additional information we can safely provide, okay? And -- but go ahead with another question while they're doing that.

Yes, just maybe a couple other things here, and I'll jump. I appreciate you conferring there. So in Footnote 5, you've got the total care dollars under management for HCP. And it looks like the institutional capitation amounts have been pretty stable the last couple of quarters, but we obviously saw higher risk-sharing revenues in the third quarter. I'm just wondering, Matt, maybe if you can help us think about that and how it sort of moves sequentially what fourth quarter typically looks like relative to that line item? I just -- we're still all getting a hang of HCP quarter-to-quarter.

Yes, Darren. So part of the MA capitation reconciliation and what we did in the third quarter also reflect on those hospital funding that you're referring to, so that's obviously moves with enrollment. But it should be stable for the fourth quarter.

Okay. And so it would be stable with third quarter levels, is that what you're suggesting?

Yes.

Okay. All right. And then the last question is just more along the lines of what I think you mentioned before there was $9 million write-off and there was $7.7 million, or call it $8 million of tax adjustments in HCP. So $17 million that got flowed through OI, just the way you've reported it. Are those things that you typically would x out? Because, I guess, when I think about it, it's $0.08 or $0.09 of EPS that you just haven't called out in your press release real clearly.

Darren, this is Jim Hilger. Just to clarify, the $9 million was a write-off of IT assets in kidney care. And I misspoke before, I said it was amortization. It's in the G&A line, although it's a noncash charge. We did not non-GAAP that $9 million. We have puts and takes in every quarter, but we did want to use -- to give you that explanation so you could understand the increase in G&A cost per treatment on a quarter-by-quarter basis. The $7.7 million tax adjustment, that was a -- there was a 0 impact on EPS related to that matter. However, the $7.7 million was distortive to the income tax rate, and we called it out so that you wouldn't get the wrong idea and extrapolate a lower income tax rate as a result of that adjustment.

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

Want to go back to HCP for a minute here. I think earlier in the call, you kind of said that you hadn't really given 2014 guidance. But in a response to my question in the Q1 call, I kind of asked you guys how you felt about 2014 opportunities within HCP, given the finalization of the rate cut. I think your response was that it hasn't changed a whole lot because 2013 was coming in better than you thought. And 2014, the rate cut was going to be more accelerated than you thought, although directionally probably where you thought things might go eventually. And that net, you felt about the same as you did when you first entered into the transaction about what 2014 would look like. It sounds like -- well A I guess since then we've had 2 disappointing quarters around HCP. But it sounds like now that things have really changed around your view for what HCP will look like next year, so it does sound like something has really changed. I mean, how do we think about the, A, I guess, the performance this quarter and what kind of makes you feel more comfortable at the low end of the range? Is there a specific geography, is it still New Mexico or is there something else going on there? And then, B, how do we think about your ability to address rate cuts within the business? Because I think that on our side, at least the view was that this was a little bit better business than most provider businesses because you had that cushion of benefit design changes above you, you had the ability for you to improve your own operations, the ability to impact bonuses you ultimately gave the doctors, as many levers that could be pulled. But it sounds to me like you actually don't really influence the benefit design changes above you and that you're still beholden to someone else deciding what your rates will be, and just want to understand that. Because I thought there was more flexibility there. But it sounds like you're saying that you really don't influence the actual rates that you will get. It's more of a function of what the government does at the very top.

Okay. Kevin, that -- could you go ahead and then just take a stab at saying one of the questions again and so we don't ramble?

Sure. Yes, sure. So I guess the first question is what happened in Q3 versus your reduced Q guidance last time? Is there a certain geography that was impacted? Because this is the second straight quarter where things -- where you seem to be talking down HCP. So I just want to understand incrementally where the -- this shortfall is coming from.

Well, I don't know that -- let me take a stab. I don't know that anything has changed with respect to our view on HCP other than the material new data on benefit designs and the fact that they didn't change much.

Well, [indiscernible] there with Q3, because Q3, you went from -- you're now at the low end of the range versus a range before?

Okay, correct. And so the question is why now do we think we'll be -- why are we at the low end of the range and...

Below. Yes, yes, why are you now at the low end of the range or below for HCP versus the other range last quarter?

Oh, okay. All right. Well, it's getting down to pretty small numbers that, given the old guidance and the size of that range and sort of moving from just saying the range to saying the low end, you start to talk about movements of $10 million plus or minus or so. And in HealthCare Partners, that kind of volatility in medical utilization and claims costs and other things can easily create that kind of swing. So I don't think there's a specific answer to your question as to one thing, which led us to say, instead of just saying, oh, it's the same range, saying that we're going to be at the lower end probably or even fall below is more sort of a composite result, not a single thing.

Okay. So as far as you're concerned, because $10 million -- I mean, you would think that ratably, that would be 10% to the number for Q4. There's no specific geography or anything that stands out as being dramatically different than what your guidance was last quarter.

Correct, correct. It may be more, 5, 6, 7 things that just have us tweaking the numbers down a bit.

Okay. And then as far as just how to think about rate pressure in general. It sounds very much to me like you guys did not really have or do not really have much influence with managed care companies and how they set the benefit design. It was my impression, maybe it was mistaken that you guys had a partnership with the health plans and how you structured benefits. But it sounds like you really didn't know what the benefits looked like until after July and after they had already been set and we're ready to be posted. So I mean, when you think about rate pressures in that business, although it's always possible that a managed care company could cut benefits above the line and be a buffer for you, it sounds like that's not something that you should ever -- or we should assume will happen. So how do you think about your ability to offset those cuts? Is it basically the same way that you have the ability to offset cuts and [indiscernible]? Is it just you executing better? Because I thought there was an extra buffer in there, but it sounds like there really isn't. Am I reading that wrong?

Kevin, Bob Margolis here. You're reading it generally correct. As you know -- because you cover, I know, the managed care companies as well. They file their benefits in a confidential manner in the summer, and they don't become public until October. And during that time, they are extremely sensitive to the fact that they're in a competitive environment with other health plans. So they do not share the specifics. They did talk and do talk about the fact that they had allowance from CMS to reduce by some $30 or so their benefits if they chose. So it was a presumption in our conversations with them, not denied, that they had that latitude and would perhaps do that. Clearly, in their view, I think it's clear, they made the decision that they would like to maintain their competitive advantage with other plans and their market share, perhaps, over their margins. And because, as you know, they're sharing, of course, and their portion of that benefit, not being adjusted as well. So we do have great relationships that have these strategic conversations, but at the end of the day, you're correct. The plans make their own decisions.

And so when we think about that from your context, you're relying on their desire to maintain their own margins as a buffer for your own margins, and that may not be the case from one year to the next? Or is it possible that they are, in fact, maintaining their margins. They're just shifting more of it on to you?

Recognize again that we're only one portion of their network and their relationships with all their network, I'm quite sure, vary. So they -- they're more or less of the risk of those benefit changes based on individual relationships that they may have with the rest of their network. So I think you'd have to ask the plans directly about their decision process on maintaining margin versus growth.

But I guess just directionally, if you see them not change margin, you're pretty comfortable -- or not change, I'm sorry, benefits in a rate cut scenario, you're pretty comfortable that they are accepting lower margins themselves. It's not that they're able to pass it entirely on to you guys.

Correct. They do have some portion responsibility for those revenue costs.

Okay. And then just to -- -- I guess for my last question here. On HCP, the commentary around the opportunity to buy things and overlay your cost structure on to things, it -- obviously is a huge opportunity, it makes sense that you wouldn't be able to do it all at once. I mean, could you give us a sense of how long it takes to kind of feel like you're getting an acquisition up and running the way that you would want it to, so that we can kind of more appropriately think about margin ramp-up? And then just also understand if there's a certain margin profile that you're looking at or you're looking to buy things that are well-run and humming already? Or are you perfectly fine buying something that's got a lower margin profile with the expectation that over time you're going to get it there?

Well, first, I think we'll provide a much better answer at Capital Markets than we will in a snippet right now. But on the specific second question you asked, we're absolutely open to buying things with low margins or negative margins or partnering with people who have low margins or negative margins. Often those can be the best return on capital deals if we turn them around. At the same time, we're not all averse to paying a normal multiple on a recurring stream of earnings, but we have 0 preference between those 2 situations. It's all about risk-adjusted long-term return on capital.

And then -- but then, I guess, maybe just to follow up on that, how do you think then about the rate cuts for 2015 that are kind of standing out there in your context of doing deals? Does it make sense to be doing a transaction in the next 4 months before you see the preliminary rate for 2015 if you're thinking about HCP being down significantly next year? How do you think about what an appropriate risk-adjusted return is on something over the next 4 months?

Well, that is a tough one to answer. I mean, certainly, we think a lot about what we believe the range is for long-term MA reimbursement, as well as, of course, commercial rates and Medicaid. And as always, when you're thinking of buying something, you've got to put on your 5-, 6-, 7-, 10-year hat and you pay disproportionate attention to what's going to happen soon. And that, in particular, can have a lot of influence on some terms you might impose or the price that you might offer. But the real rubber meets the road over the subsequent 7 to 10 years. So we're certainly worried about the government's physical situation, what that implies for Medicare rates. At the same time, because, we deliver fundamentally superior product, superior value to society with what we do underneath the MA plans that our premise -- our strategic premise is that there's going to be a robust MA market for a long time independent of what happens in any given 12-month period. Am I missing the mark?

No, I think that, that makes sense. It's about as good as you can do when you're dealing with the government.

Your next question comes from the line of Matt Borsch from Goldman Sachs.

If I could ask you just again on HCP, maybe you can remind us what the concentration is by payer, if not identifying the payers, just give us an approximate breakdown in terms of how many represent how much revenue or earnings, however you want to break it down. And then, I guess a related question is, is what you're seeing or expected to see relatively consistent across those payers? Or are you seeing some -- are you expecting to see some divergence with significantly greater pressure from some payers than others?

I'll answer the second. At this point, well, a couple of plans have diverged from the norm. That's about it at this point in terms of decisions that have been made. The aggregate reality is dominantly most payers doing more or less the same thing. On the other issue of how concentrated or fragmented are our plan clients, I don't think we've shared that. I'm looking across the table.

Okay, okay. And I assume you mean with respect to a couple that stand out, those are the ones that adjusted benefits the least and therefore, where you'd expect to see the most pressure?

No. Actually, most did very little adjusting benefits. One outlier actually increased benefits, so that was the -- it was a small player that was the most striking divergent episode.

And then there was another outlier?

Well, I've just -- I haven't looked at the entire distribution curve, so I just don't want to [indiscernible] there was only one. But I can tell you, whether there was one outlier or 2 or 3, out of all the different plans we deal with that the dominant reality was as we've characterized it.

And maybe just a last question on a different topic, which is on the commercial pricing front, not on the exchanges, but as you referred to a large provider and a large payer and the arrangement that may have developed there on commercial pricing. Is there anything you can speculate that's changed in the industry dynamics between providers and payers that might explain why this is happening now, particularly in light of the fact that it's not as if there is more room going into 2014 to give a big pricing concession, I don't know what size it was, but there's less room.

We agree.

Your next question comes from Gary Taylor from Citigroup.

Just a couple of questions left. First is on the Arizona IPA acquisition. My understanding, that's not a global capitated network. It's really capitated for the physician component. I was wondering if you could ballpark run rate revenues in that business?

We don't do the -- we won't break out the revenues. But as to the former question...

Gary, Bob here. You're right that, that was the current relationship that existed. We are in discussions with our health plan partners across Arizona. SCAN was a global risk relationship and we hope to move the others to our preferred global relationship over time. We do not have a specific date that, that will occur by.

Okay. And then secondly, I was wondering if you -- for the third quarter, if you could give us HCP's EBITDA contribution. I think we've had that quarterly in the filings disclosed for a number of trailing quarters.

All right. I'll -- let me just have the team determine if that is something that we've provided as a matter of course. And if we can go on to the next one and come back to it, that would be much appreciated, Gary.

Okay. I have $187 million as the 3Q '12 EBITDA figure, if that's -- which I think we've plucked from a filing. So if there's a number that's comparable to that, but I'll let you look for that.

People are searching furiously, so we'll get back to you.

Your next question comes from the line of William Alex [ph] from Peninsula Equity.

To turn the mood of the call maybe a little more positive, obviously, very robust cash flow generation going on, $1 billion of cash on the balance sheet, it looks like maybe $80 million to $100 million accruing a month. Capital allocation, what, if any, priorities are there for the management team going forward? Also, the stock trading down since this past summer, is the company continuing evaluating the merits of a share repurchase?

Sure, appreciate the question. And we've pretty much given the same answer now for 14 years, which is that we look at that capital allocation question very regularly and intensely, and at different times, have been quite aggressive in buying back stock. Other times, we've opted to pay down debt. Other times, we've held cash because we thought we might have a shot at doing a significant acquisition. And so we've made highly customized decisions across the spectrum of capital allocation alternatives, depending entirely on our assessment of our internal and external situation within our markets and then integrating that with our view of the capital markets. So right now, we are hoping that we'll reach a settlement with the government, which will then consume a significant subset of that cash. And beyond that, we are staring very much at how to think about what to do with our excess cash in '14 and '15. We hope that we get to buy some really good stuff. But if that doesn't happen, then we'll be staring a lot at the 2 other alternatives.

Your next question comes from the line of Frank Morgan from RBC Capital Markets.

I just wanted to confirm on that most recent Arizona acquisition, the composition of the physician base there, was that more primary care or more specialist-focused?

That was a combination. Not all of those 700 are primaries, but a good majority of them are.

Okay. And then, I guess, totally unrelated, switching back over to the dialysis side of the business. Any additional mitigation steps that you have identified going into this final re-basing? And I'll hop off.

No, nothing specific that we can offer up, Frank.

Your next question comes from Gary Lieberman from Wells Fargo.

I guess on the re-basing, is there any additional insight that you guys can provide us or any insight into any discussions with the CMS? I guess, the way this is, that they said it would be out by about Thanksgiving. Is that your understanding, or do you think it might be out sooner than that?

That's all we've heard is late November.

Your next question comes Lisa Clive from Sanford Bernstein. Lisa Bedell Clive - Sanford C. Bernstein & Co., LLC., Research Division: Just a question on the private insurance rates on the dialysis side of your business. On your comments around the discussions you've been having with a large payer, does this relate to a structural change in the methods of payment here? I'm specifically thinking about the private plans that have moved to a similar bundled pricing structure that Medicare did in 2011 and whether that has potentially an impact on the rate dynamics moving forward. And then just a follow-up question on that is whether you have any further work to do in general in bundling private patients or whether you're satisfied with the proportion of your private patients that are bundled?

On the second question, most of our stuff on a dollar value basis is bundled on the commercial side. And we will probably continue to increase that a little bit over time, but not dramatically. And could you go back and do the first question again, please? Lisa Bedell Clive - Sanford C. Bernstein & Co., LLC., Research Division: You mentioned that one payer has said they've gotten better pricing for larger volumes. Was that the only thing that happened or was there also a structural change where that payer was moving over to bundling?

That was not a structural change. Well, I don't -- I can't -- I can only comment on our arrangement with that payer. I have no idea with the other provider, whether that was... Lisa Bedell Clive - Sanford C. Bernstein & Co., LLC., Research Division: Okay, okay. But the pressure you're getting from them is -- has nothing to do with any sort of change in the way that you're currently getting paid by them?

Correct, not for us.

We have no further questions on line.

This is Jim Hilger. I just want to come back to you, Gary Taylor, on your question about our EBITDA. Our Q3 EBITDA was $137.2 million, and that compares to Q2 2013 of $120 million. Hopefully that answers your question.

Okay. Well, thank you...

Excuse me, that was HCP EBITDA.

Okay. Thanks, everyone, very much. We look forward to seeing you at our Capital Markets in a month's time and having a much more in-depth discussion to some of these issues. Thank you.

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