DaVita Inc. (DVA) Q4 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 Robert J. Margolis - Chairman and Chief Executive Officer Garry E. Menzel - Chief Financial Officer Craig E. Samitt - President of Healthcare Partners Division James K. Hilger - Chief Accounting Officer, Vice President and Controller

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

Good evening. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the DaVita HealthCare Partners Fourth Quarter 2013 Conference Call. [Operator Instructions] Mr. Jim Gustafson, you may begin your conference.

Thank you, Chris, and welcome everyone to our fourth quarter conference call. We appreciate your continued interest in our company. I'm Jim Gustafson, Vice President of Investor Relations; and with me today are Kent Thiry, our CEO; Bob Margolis, CEO of HealthCare Partners; Craig Samitt, President of HealthCare Partners; Garry Menzel, our CFO; Jim Hilger, our Chief Accounting Officer; LeAnne Zumwalt, Group Vice President. I'd like to start with our forward-looking disclosure statements. During this call, we may make forward-looking statements within the meaning of the federal securities laws. All of these statements are subject to known and unknown risks and uncertainties that could cause 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 measures is included in 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. We had solid clinical and operating performance in the fourth quarter. I'll cover 4 topics: clinical performance, operating performance, an update on our government settlement and our outlook. First, clinical outcomes, which we always present first, because that is what comes first. We are, first and foremost, a caregiving company. On the DaVita Kidney Care side, we serve approximately 163,000 dialysis patients in America, about 1 out of every 3. On the adequacy front, 98% of our hemo patients had a Kt/V greater than 1.2. On vascular access front, 72% of our patients have fistulas; and 2013 was our best year ever in catheter rates with about 13% of our patients only using catheters. With respect to clinical metrics for HealthCare Partners, MA plans are benchmarked against national clinical outcome measures from the Healthcare Effectiveness Data Information Set, commonly called HEDIS. In the last 2 quarters, we discussed our 2012 performance in California and Florida. This quarter, we'll compare our results in Nevada, our third legacy market to that national data from Medicare HMO patients. Our Nevada MA patients once again scored near the top across a wide variety of metrics, including being above the 75th percentile with respect to the percentage of patients screened for colorectal cancer and the percentage of diabetics with LDL less than 100 and being right underneath the 75th percentile, at 74%, in terms of female patients screened for breast cancer during the measurement period. So you can see, for these clinical outcomes across both Kidney Care and HealthCare Partners, our outcomes compare very favorably to national averages and this quality care results, not only in healthier patients, but higher patient satisfaction and substantial taxpayer savings. Next, I'll move on to operating performance. Of course, we report on the 2 major components of the enterprise: Kidney Care on the one hand, HealthCare Partners on the other. Kidney Care 2013 adjusted OI, $1.513 billion; and HealthCare Partners 2013 OI, $385 million. Both of those in line with our most recent guidance for 2013. Dialysis G&A in the fourth quarter included $8.5 million in dialysis center level impairments. This was required by Medicare rebasing, which requires us to impair certain assets that were no longer -- no longer had any hopes for being profitable. In addition to this impairment, it looks like we will be closing some centers. As most of you know, we carry quite a few money-losing centers but there does have to be some limit; and with the breadth and depth of the Medicare cuts, both incurred and contemplated, we simply have no choice in markets where there aren't enough private patients to subsidize the federal government with respect to the Medicare patients. Next, on to our settlement with the government. As most of you saw today in our press release, we have agreed to a framework for a global resolution with the government. We are pleased to have this framework in place. And the final settlement remains subject to negotiating specific terms, but we do anticipate it will be finalized in the coming months as they do. The settlement amount is the same as we have talked about in the past. In addition, we will unwind a limited number of joint ventures and face some other business restrictions. Gary will describe those in more detail in his section. But we repeat, we are pleased to have this framework in place and think you should be as well. Finally, our outlook. We are updating our 2014 operating income guidance. We now expect Kidney Care OI to be between $1.475 billion and $1.550 billion. This is an increase of $50 million at the bottom end and $10 million at the top end. The primary driver of this change is the slower rollout of exchanges and so that will create less rate headwind for us, we think. Over the long term, we still see more downside than upside in the exchanges. On the HCP front, guidance remains unchanged at $250 million to $310 million, but we are now more likely to be at the lower end of that guidance range than we are to be in the middle or higher end. The primary driver of that new reality is the New Mexico merger of the Lovelace-Blue Cross Blue Shield combination that, that approval by the government has been delayed and that has a negative effect on our economics. Our outlook is unchanged in the 3 HCP legacy geographies. And in general, the guidance excludes the potential impact of entering new geographies, which, depending on the type and structure of new marketing entries, could either be a positive contributor or a negative contributor to OI, depending on the nature of the beast. As always, our guidance captures a majority of the probabilistic outcomes, but not all and the actual outcome could be higher or lower. An additional thought on HCP is that we have had some positive signs in our open enrollment. We're looking at mid- to high-single-digit growth in our major geographies, which is good news directionally although, of course, we need to prove that over the next 1 or 2 or 3 years, that we can improve the care of those patients such that we capture, not only the clinical benefits for our patients, but the economic benefits for our shareholders. I'd like to now turn the mic over to Dr. Bob Margolis.

Thank you, Kent. Good afternoon. I've had just the great honor and privilege to lead HCP for almost 40 years. But as has been previously announced, I'll be stepping down as of March 1 and my role will be handed over to Dr. Craig Samitt. Craig's been learning, listening hard, orienting, leading the HCP teammates in all of our markets for close to 6 months now and we are now ready to proceed with this planned transition, as I say, on March 1. Craig has an enormous background in both M.D. training and business training, a great commitment to our clinical leadership culture necessary to move HCP to even greater heights. And I personally look forward to supporting him in my new role as a strategic adviser to the company, as I remain actively involved, especially in growth initiatives, as well as remaining Co-Chairman of the board of DaVita HealthCare Partners. I'll now turn it over to Garry Menzel, our CFO, for more detail on the numbers.

Thank you, Bob. First, some additional comments on our Kidney Care operating metrics. Non-acquired growth in the quarter was 5.2% when normalized for days of the week. Kidney Care adjusted operating income was $386 million, which was flat sequentially to the fourth quarter as U.S. dialysis revenue per treatment, dialysis patient care costs and G&A were all in line with the prior quarter. During the quarter, we experienced $11 million in international losses, slightly higher than our expectations. As previously communicated, we expect international losses in 2014 to be around $25 million, excluding any ramp-up costs for new government tenders. Next, we know some of the questions you no doubt have on the government settlement, so we will now ask and answer them proactively. Question: What does it mean to unwind a joint venture? Answer: It means that we will have to buy out or sell to our joint venture partner at fair market value. In most cases, we would anticipate being the purchaser. Question: How many joint ventures have we agreed to unwind? Answer: Most likely 11 transactions containing 28 centers. Nothing is remarkably different about the size or operations of these centers. Question: Were there any allegations relating to quality of patient care? Answer: No. Question: Is our business model reliant on joint ventures? Answer: No. More than 70% of our centers are wholly owned. Question: Will we still be able to do joint ventures that are not partial divestitures? Answer: Yes. And we look forward to working collaboratively with the government to ensure we are doing joint ventures in a way in which the government is comfortable. Next, HealthCare Partners. HCP operating income was also flat sequentially in the fourth quarter at $98 million. For the overall enterprise, our debt expense was $108 million in the fourth quarter. The effective tax rate was 39% in the quarter, although we expect this to be in the range of 40% to 41% for 2014. I would also like to provide a few reminders as you model the normal seasonality for the first quarter of 2014 in our business. In Kidney Care, the first quarter of 2014 contains 3 fewer treatment days than this past quarter, so you should expect lower revenues and higher fixed cost per treatment. Also, our payroll tax cuts reset at the beginning of the year, which leads to higher cost of approximately $1 to $1.50 per treatment. At HCP, the severity of a flu season can have a material impact on medical costs. Finally, turning to cash flow. Operating cash flow in the quarter was solid at $354 million and operating cash flow for the year was particularly strong at $1.77 billion. The strong cash flow in 2013 was due in part to favorable working capital, which borrowed from 2014. We have initiated operating cash flow guidance for 2014. This coming year, we expect operating cash flow to be between $1.45 billion and $1.55 billion, excluding any payments associated with the government settlement. With that, operator, let's go ahead and open it up for Q&A.

[Operator Instructions] Your first question comes from the line of Matthew Borsch from Goldman Sachs.

This is Bo Brandt on for Matt. Just had a question on HCP. And I was wondering how you are positioning yourself with payors to handle the potential rate update in 1.5 weeks?

This is Craig Samitt. Afternoon, everyone. We are certainly waiting for feedback from the government regarding the impact of rates in 2015. As we discussed in December, we've been renegotiating contract terms that provide us greater protections and inputs in plan design. We've renegotiated a contract with a large payor partner in one of our legacy markets that provides us new protections in 3 dimensions: first, in the event that benefits are increased, revenue to HCP will be increased by an independently determined value of the enhanced benefit. Second, in the event that benefits are decreased, we and the payor will seek to mutually agree on any reductions of revenue to HCP. And third, in the event that there is a material change in CMS funding or funding structure, HCP will have a 90-day notice period to drive a renegotiation of the revenue terms with the payor prior to arbitration. The third scenario is more in line with the circumstance that we faced in 2014 in terms of rates and benefit preservation. And so this is where we find our efforts in renegotiating contract terms with payors going into 2015.

But Matthew, let me hasten to add, that is an example of the type of work we will do going forward. We still have a number of legacy contracts that do not have those provisions and exactly what we do and what the payors do if and when there are additional rate cuts is unclear and will be determined out in the marketplace.

Okay, great. And just looking at sort of the 2014 HCP guidance and you mentioned how it will tend to be towards the lower end, is that based off of uncertainty around these -- the 2014 preliminary rates? Or have you sort of seen, sort of have a view into 2014 as to what's driving that?

No. Brian, the change in our perspective on '14 is almost entirely driven by the fact that the FTC has been slow on approving merger to plans in that market and some of our new contractual provisions are not triggered until that deal is consummated. That's why there's the adjustment in our thoughts on '14.

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

Just a few things here. First, just given that you received the restricted Knox-Keene license status from California, should we expect to see some of your California business get recorded as full risk on the P&L this year?

Short answer is yes. But moving things over -- moving the contracts over takes time and so we can't give you a specific schedule. But over time, some of that will happen. Is that right, Jim?

That's right. And Darren, the net is that there won't be a bottom line impact. It is simply a revenue impact of moving from a net to gross booking for some of that revenue.

Okay, but didn't you share in the risk with other parties, such that when you take full risk, the economics might, over time, be different? Just want to clarify that, Jim.

No. There's no change. We've always managed comprehensive populations in a comprehensive way. All that's changing here is how it gets accounted for.

Great. Okay, that's helpful. And then, wanted to also just ask about the duals opportunity and you've discussed it a lot. We're starting to see a little bit more in terms of the development around plan announcements. Do you still see your plan relationships and market share as positioning you well in California around the duals? And anything to add just based on some of this recent activity?

It's a moving target. As you probably know, if you've been following the releases, LA County, which is the biggest opportunity as far as numbers in dual has now announced the additions of 3 new plans. We have excellent relationships with those 2, not with CareMore. The revenue associated with the duals has not been formalized and so everybody continues to look at it as an opportunity if the revenue matches the risk. But at this point, it's hard to predict that.

Okay. And just based on what you're hearing about plan pricing, do you think it'll be good enough to manage the population effectively?

We hope so. And we are certainly in active discussions with all of the relevant health plans. You may have also noted that in Orange County, they've delayed the rollout of the duals, so this will be an LA County-specific issue with those several plans that were announced.

Your next question comes from the line of Justin Lake from JPMorgan. Justin Lake - JP Morgan Chase & Co, Research Division: First question, I just want to follow up on the Medicare Advantage commentary. I appreciate all the detail. What -- if you kind of think of about a target for -- if the bids go in for 2015 in June, Craig, what's your target there in terms of these new contractual arrangements? What percentage of members would be on those arrangements if -- in a reasonable view?

Well, in terms of the renegotiation of the contracts that KT and I have referenced... Justin Lake - JP Morgan Chase & Co, Research Division: Yes.

Right now, the renegotiated contract that I referenced represents a minor subset of our overall MA population. And we will grow from there over the course of the coming years as we renegotiate the contracts. Justin Lake - JP Morgan Chase & Co, Research Division: Okay. Is there a number that, in terms of -- is 20% of members reasonable to think of on these types of contracts going into 2015 or it's just too early?

I think this is a little bit like as we move to bundling in the Kidney Care side, Justin, where -- I don't think it's in your best interest for us to provide quarterly updates on what percent of the contacted book falls into what categories. So suffice it to say, we're working the issue, as we pledged to you we would. And I think you'll just have to accept the fact it's incorporated into our guidance beyond that, at least for now. Justin Lake - JP Morgan Chase & Co, Research Division: Okay. And on the economic side, clearly, these are going to be a mitigator to some of the headwind. Any way to think about how much so relative to the headwind you're facing in 2014 when you didn't have these?

Say the question again, please, Justin? Justin Lake - JP Morgan Chase & Co, Research Division: Sure. So if I do some back-of-the-envelope math, it looks like you've got a few 100-basis-point headwind in Medicare Advantage margins in HealthCare Partners this year, given the rate environment. So if we just kind of look out to 2015 and say, "Okay, that rate environment is going to be similar," how much would these -- would the margins -- how much better would the margins look under these types of contracts? Just trying to understand in terms of how much you think the offset would be. Do you think margins will be flat in these types of contracts and you would get to a reasonable outcome, or down less but still down?

The -- it's a fair question and we are not prepared to answer that right now. So let us just play with that, Justin, and see if that's something we want to be talking about so publicly next quarter. And it won't be in the end, of course, an analytically precise number because of some of the specific variables in some of the contracts. But I hear what you're saying that with -- if we had more of what we have now with respect to that contract, how much would that mitigate. I hear the question and right now, you know it's in a minority of our contracts and so you can take that as a directional answer. And beyond that, let's wait until next quarter. Justin Lake - JP Morgan Chase & Co, Research Division: Okay. And then just a couple of quickies. One, the -- on the exchanges, you talked about that being less of a headwind because there's less membership there, totally understandable. But have you seen any evidence of the membership that is on the exchanges yet, having an impact on rates or where the choice of dialysis center for these patients and these exchange products?

As to rates, we know that we only agreed to our normal commercial rates with respect to any exchanges. At least I don't know of any exceptions to that and so if there are any, it would be very minor but it could be literally 0. We know of other people who make the same statements. We don't know where some of these patients are going to be taken care of. Some of these narrow networks do not have quality dialysis providers in them. And we have not noticed any material outflow of patients from our centers. But it's so early in the year and we don't get data from every center right away. And so, I think we have to wait a couple more months before we can comment more analytically on your question.

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

I was wondering if you just had a sense of where your physician competitors are operating from a margin perspective, either when you do due diligence on a potential acquisition or just industry kind of information, how you think about HCP's margins and how they stack up versus the peers?

Well, I think we have limited insight into a lot of the other groups out there. So it'd be a pretty speculative answer and I think, therefore, probably not that valuable to you. I don't know, Bob, can you offer anything more definitive than that?

I think that's a complete answer. We do a lot of M&A due diligence and many groups are struggling, especially with the MA cut. And it's an opportunity for us when it comes to consolidation and growth.

Yes. I mean -- and that kind of gets to the point of my question. I guess, like when we normally evaluate a health care provider, we kind of say, "Well, what are the industry margins?" Where can Medicare rates go from a floor perspective because they can't go to a point where they push a large sum of the providers into real crisis mode? And so I was just trying to get a sense of whether the peer margins -- because the way I understand how you thought about 2014, originally, the thought was MCOs won't be able to -- will cut benefits rather than pass the cuts on to you. And then as the year went on, you realized that they were not cutting benefits and that since your peers were taking the rate cut passed through to them, you'd kind of had to follow suit and I was just wondering whether we're getting to a point in 2015 where the peer margins are getting to a point where they really can't afford to take another rate cut the size that they took this year and that maybe your margins were better than the peers and that was going to be a sustainable point. I don't know if you have any sense of that. It sounds like, to some degree, you see that happening now, at least some of your competitor that you're evaluating it for as deals go are reaching that point. I just wasn't sure if you had a sense of where we are in that cycle.

Clearly, last year, we thought that the health plans would trade some growth for margin. They didn't. There's a lot of belief that they may this year, but I don't think we're ready to speculate based on our experience last year. But there's no question that the pressure on physician groups with the revenue cuts is, in some cases, going to put them in a position where they have to do something to survive.

Okay. And then the protection, as you mentioned in that one contract, that's very helpful. Are these protections that you found to be somewhat standard from other practices and you're playing catch-up to that? Or are you kind of leading the way in trying to get these things to become more standard with industry practice?

One thing you can say about us is we learn. And so we are leading the way in what we believe is an unusual rate environment. Recognized that the last couple of years of parity and rough rescaling is a new environment compared to the many years ahead of before that. So this kind of issue was not raised frequently in contract discussions. And I'd say we are smarter now than we were a year ago and we're making good progress.

Okay. And then last question for me. Just going back to the other question within Knox-Keene license, if that doesn't really help your profitability overall, what was the strategic rationale for getting a license?

I think, from a -- just working with the government point of view, that enough government folks preferred us to take that path. And in general, we like to work as collaboratively as possible with all government agencies. And so that was the primary motivator.

But it's not like a step towards integrated care or ACOs or anything else like that. It was just kind of to continue what you've always been doing?

I think on a secondary basis, it does, in some cases, create some more flexibility for doing different types of business. Although, in all of those cases, we could have entered into shared savings relationships of the same type that we had in Southern California before we did the Knox-Keene. And so it was not essential, but it will make some of those other things easier. Are those the words that would use, too, Bob?

Yes. I think that's -- that will give us greater flexibility.

Your next question comes from the line of Kevin Ellich from Piper Jaffray.

Just a couple of questions, first on HCP. Kent, I was wondering if you could give us an update on your outlook for acquisitions. I guess, dependent upon what the -- how the rates look when they come out for 2015, do you think that's going to accelerate the pace of deals that you'll get done?

Yes. It's a fair question, Kevin. But you know as well as we do, it is so hard to predict what deals are going to come out and with what pricing expectations, what your competitors are going to do. So it is logical to think that there might be some increase in M&A activity because of the squeeze going on economically. But boy, there's so many variables that I would be really hesitant to throw anything into a model.

Sure. And then does the settlement, that -- the $389 million that you guys have reserved, does that change how much you're willing to spend on deals in the next 1 to 2 years? Or I guess, how does that play into the equation?

The short answer is no. The types of joint ventures that are the focus of the settlement with the government are not a material part of our past nor our future and not a big part of the industry overall. And so it really has no impact on our or anybody else's acquisition thinking, would be my guess.

Got it. You said that you'll unwind 11 JVs. How many will you have remaining after you unwind those?

I don't think we've ever disclosed that publicly. But suffice it to say, it's a small percentage.

Got it. Okay. And then last question on the dialysis side. Just wondering if, looking at your cost structure, from supplies and other expenses, is there anything in the next 1 to 2 years that you can call out or think -- help us out with that, that could help you reduce that?

I would just say on both sides of the house when reimbursement gets cut, you got to look for savings and the notion of finding 0 just doesn't feel like a high-performing organization. And so while we, on both sides of the house, feel quite good about our economic prudence in the past, we will be looking at everything again with the fresh perspective that's forced by reimbursement cuts. But there's nothing -- there's no big straightforward lever to pull that we've been just sitting around not pulling before.

Your next question comes from the line of Gary Lieberman from Wells Fargo.

If I could follow up on that last comment, Kent, about the cost containment. How do you feel HCP's talked about some of what you'll be doing in face of the rate cuts to try cut costs and how would you characterize where you are in that process?

I think the answer would be disappointing. We don't have anything dramatic to say. We haven't had any stunning insights and the numbers that we have come up with are incorporated into our guidance. And beyond that, nothing noteworthy enough to mention. Is that -- am I answering the question, or did I blow it?

No, I think that's an answer. Maybe another question. You mentioned closing of some dialysis centers. Could you give us any kind of data, either number of centers or amount of revenue or EBITDA impact?

We haven't decided yet. And it's a, as you might guess and as many of you know, for us, an incredibly painful decision. There's a reason we carry a lot of money-losing centers, not counting de novo centers, which, of course, you expect to lose money for a while. And that is that we were a successful enterprise. We love taking care of our patients. And the notion of closing centers where we're taking care of people is just not what we're about. At the same time, there have to be limits and if the government is going to cut rates as they have and as they're contemplating, doing nothing is just not appropriate, although anything we would do would always be in careful collaboration with other people in the local market in order to maintain continuity of care. So we can't give a number right now because we haven't decided and we're agonizing as we look. But we felt it was important to let you know that the number wasn't going to be 0.

Would it be reasonable to assume that there would not be much EBITDA impact, if any?

Correct.

Okay. And then maybe my final question, in terms of unwinding some of the joint ventures. Does that potentially have any impact on the medical directors at those centers, or how do you manage that?

Could you ask that question again, please?

As you unwind some of the joint ventures, could that potentially impact any of the medical directors that you have at those centers? And so could it be any kind of operational issue for you?

Yes, I appreciate it. The short answer, yes, it could. But it's unlikely that most of the relevant transactions were with groups with whom we have larger and multifaceted relationships and, therefore, not expected to change. And even in the couple of cases where it might be a smaller relationship, in most of those instances it shouldn't make a difference either. As someone mentioned earlier, over 70% of our centers already are wholly owned. And so it's not that us owning 100% or something is somehow a destabilizing element. For the most part. Of course, there could be an exception or 2, but not the rule.

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

On the subject of those JVs, could you describe to us exactly what is the characteristic of the JVs that you're having to unwind? What is it the government doesn't like versus the other JVs you have where there's no problem?

Yes. And let me first go backwards a moment because someone asked a few moments ago how many JVs we have. And that's not something we've disclosed before. But we have disclosed the percent of our revenue that comes from JVs and that's right in the ballpark of 21%. So from that, you can pretty well infer how many there are out there and be in the right strategic ballpark. The type of JVs that we're focused on are JVs where we did a partial divestiture, which is to say that we owned 100% and then sold a percentage of that -- a minority percentage of that 100% to local nephrologists.

Okay. Versus your other ones, you're just -- these are new partnerships and so it's just that simple?

It's pretty much that simple. And because we are in the process of finalizing all aspects of the agreement, I just don't think it's a good idea to start parsing things any further. So I think we'll leave it at that for today.

Okay, that's fair. In terms of the kidney side of the business, the operating income guidance going up here, would you characterize that as more top line driven or is this more something you got on the expense side?

It's more top line driven because of the lower enrollment in the exchanges.

Okay. So more a function of pricing. And then in terms of external growth, obviously, you did a few acquisitions this year in the U.S. and internationally, as well as some de novos. What's -- what are you embedding in your guidance for 2014 on the subject of either de novos or acquisitions?

I don't think we've broken that out. Suffice it to say, we anticipate doing more acquisitions. Whether it will be a little more, a little less than the prior year, impossible to predict. Could there be a significant dropoff in acquisitions? Maybe. Just don't know, too early in the year. Could there be a significant increase in acquisitions on the Kidney Care side? That's unlikely. There's nothing out there that would provoke that. On the de novo front, we once again expect to have a robust year of building de novos in areas where there's enough private patients to subsidize the federal government, but we don't go beyond that and give a specific number. It's always a little hard to nail down.

Okay, that's fair. And then the last one and I'll hop. The operating income being up nicely, your cash flow from ops down, you highlighted the one item on just timing of working capital. Is there anything else that would cause that disparity?

Well, the change in working capital was one of the major drivers. Was anything else noteworthy that we should mention, Jim or Jim?

Yes. This is Jim Hilger. We've had some tax preference items in 2013 that won't be reported -- or repeated in '14, accelerated depreciation being the most notable one.

Your next question comes from the line of Margaret Kaczor from William Blair. Margaret Kaczor - William Blair & Company L.L.C., Research Division: First, just to get back to exchanges. How many exchanges have you guys decided to participate in versus not participate? And kind of what drove that decision? Was it pricing or was it something else?

I don't know the number and I don't know that we've tracked. Because in general, any exchange that's willing to pay our normal commercial rates, we sign up for; and those that don't, we don't. So it's been a pretty simple decision filter and I don't know that anybody's added them up. Margaret Kaczor - William Blair & Company L.L.C., Research Division: Do you know if anyone actually accepted the kind of the lower rate contracts or any of the private guys or kind of the smaller guys?

I'm sure that some people have and we have no way of knowing how many. But given we're all in the same situation where the 10% of our patients that are private subsidize the 90% that are government, there are limits to how much of that you can do before you put your entire survival at risk. So I'm sure the answer is yes and only time will tell how many it was. Margaret Kaczor - William Blair & Company L.L.C., Research Division: Okay. And then could you guys talk a little bit more about HCP acquisition targets. In the past, you've kind of talked about kind of a 2- to 3-year time horizon as the result starts to materialize. Is that still accurate? And then also, can you talk about the acquisition candidates that you've done diligence on? How many was that? Why wouldn't things pan out there? Or is it just you guys are overloaded right now in the Q, with people interested in acquiring -- in getting acquired?

Let me take a quick stab and we'll see then if Craig or Bob want to amend. With respect to organic growth in patient numbers, that's where there's a time lag as we work to familiarize ourselves to the patient's condition and provide coordinated care and, as we succeed in doing so, bringing down the cost of that care through better health. So that's one of the references to the 2- and 3-year time frame that you mentioned. When we buy something, if, in fact, it has a mature Medicare Advantage population that it's been working with, then there could be profits immediately and, of course, we would be paying a multiple for that. And then as to the pipeline of M&A opportunities, it is -- there is one. It is so impossible to predict with any accuracy which organizations will, in fact, decide to sell and whether or not we'll be the winning bidder that helping you do a better job of forecasting is unfortunately not something we're able to do. And we've also mentioned in the past how we had to build a business development capability pretty much from scratch with respect to new markets, that we were necessarily going to be a little awkward and slow in the early going and we're making some good progress. But that certainly has slowed us down. Have I covered it, Margaret? Margaret Kaczor - William Blair & Company L.L.C., Research Division: Yes. So I guess, the acquisitions that maybe did or did not pan out, it doesn't sound like that was big number maybe. But those that maybe didn't have a higher price premium than you guys were willing to pay, did those go to hospitals largely? Or what other players, insurers?

On the ones we've lost that are of size, I can think of a couple, maybe 3. 2 went to payors and 1 went to a health system, a hospital health system. So and that I worry that, that "n" is so small that could be misleading. But that is the factual answer to your question of the 3 that I can think of offhand.

Your next question comes from the line of Lisa Clive from Sanford Bernstein. Lisa Bedell Clive - Sanford C. Bernstein & Co., LLC., Research Division: Three questions. First, on the dialysis business. Integrated care, obviously, the rate cut slowed down the progress of the development of the ESCO program and potentially changed the decision around participating. Can you give us an update on where you stand with Medicare on this? And can you give us any insight into how Medicare is thinking about the size and duration of the program? And then second question, if a new ESA enters the market this year, is it safe to assume, given that you signed a pretty long-term contract with Amgen, that, that allows for some sort of automatic price step-down? And how should we think about the potential impact on your cost structure from any changes in the ESA competitive landscape?

Okay. On ESCOs, we do not know when CMS will come out with the version 2 or version 3, depending on how you're counting. And we still have high hopes because we know they want to do it and we know that we and other providers can improve quality significantly and dramatically and transparently while, at the same time, saving literally billions of dollars. So we're incredibly enthusiastic about it but just don't know when the next version will come out. The good news is that there's more and more recognition to the fact that this type of integrated care is the answer. And then on ESAs, I have to admit, I did not get a refresher on the stipulations in our contract as to what we can disclose and what we cannot. And so on any kind of auto step-down in price and the other issues you mentioned, we just, I think, are not allowed to disclose. Lisa Bedell Clive - Sanford C. Bernstein & Co., LLC., Research Division: Okay, fair enough. And a final question, given the Medicare rate cut that went through spread out over 4 years, are you seeing any increase in activity of small providers who are interested in selling themselves, given the headwinds they're facing now?

Not anything significant yet.

Your next question comes from the line of Gary Taylor from Citigroup.

I had a couple of questions, but I guess I wanted to come back to this ESA question. Because I thought, Kent, you had publicly pretty firmly said before that there was no automatic sort of price step-down in the long-term contract with Amgen.

If I'd said it before, then it was true and is still true. But I just couldn't remember offhand the terms of the contract and what we had been allowed to disclose or not and we just didn't do a refresher on that one leading into this call and so we had to err on the side of being safe. But if it was disclosed before, it must have been true and if it was true, it still is true.

Okay. On HCP for the duals in California that we're talking about earlier, is there anything explicitly in the 2014 guidance in terms of revenue or operating income contribution in '14?

Answer is no. It's 0.

Okay. And which -- there was a quick discussion kind of where the rates are shaking out, so forth. Is that a program where strategically you'd be willing to absorb losses initially to be involved in the rollout of that program?

Only if we thought the program was stable enough and long term enough that we could get our shareholders a return on the capital that we were investing. What is so often the case is that if you take that risk upfront and succeed right at the point that you might be expecting to earn the fruits of your labor, the rules change and, therefore, you're not allowed the return what you invested to get. So you got to be awfully cautious on that sort of thing and, therefore, can't answer with a definitive yes or no.

Okay. Last question. At the Investor Day, Kent, I believe you said if you saw a similar Medicare Advantage cut in 2015, HCP's operating income would be down or you might have said likely would be down again, I believe. Is there enough happening in terms of these renegotiated MA contracts that you talked about a little bit today, that you'd want to revise that outlook? Or would you still stick to that?

I absolutely stick to what was said at the capital markets, that if we get hit with the rate decreases, OI will be down.

Your next question comes from the line of Whit Mayo from Robert Baird. Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division: Just had a couple of quick ones. And you've referenced 2014 being an investment year for HCP, I think on this call and also at the Capital Markets Day. And I think I heard you referenced business development earlier as an area that you were particularly focused on now. But is there anything specifically to call out at this point in time in terms of systems or other capabilities that you've identified as a priority going forward?

This is Craig again. Our primary focus for investment, thus far in 2014, has been in the business development and integration arena. So we've added resources with the business development team. We're leveraging our legacy HealthCare Partners and DaVita expertise in existing and new markets. And we're laying the groundwork for successful post-acquisition integration. So that's where a majority of our resources are thus far. In terms of your question about other systems and processes, I would say that we're in the evaluation phase of each of those to determine if additional investment should be made in technologies or processes that would further enhance our capabilities in the future. Does that answer your question? Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division: Yes, it does. But I mean, can you be maybe a little bit more specific about what those capabilities are? I mean, is it actuarial capabilities? I mean, I didn't know if you'd be willing to comment a little bit further.

There are no particular capabilities that I would call out at this point. I think we're looking at broad-based opportunities for improvement. Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division: Okay. And my last question just relates to buybacks. You hit the pause button on that a while ago and it might just be helpful to hear your latest thoughts on what -- where the internal discussion is around rethinking share repurchase at this point.

Yes. Our thinking on share buybacks and just in general, our capital deployment is as robust as ever. And over the last 14 years, as some of you can attest, we've been active along the entire spectrum of having a higher leverage ratio, having a lower leverage ratio; doing a lot of buybacks, doing no buybacks; spending a lot of money on acquisitions, spending no money on acquisitions. And so we look at that full spectrum every single quarter. And of course, with respect to share buybacks, we look at what our alternative uses of capital are, what our current valuation is, what are the risk dynamics as you look out in the near and intermediate term. And so we play with it all the time. And right now, we don't have anything interesting to say about any conclusions in that realm.

[Operator Instructions] There are no further questions at this time.

All right. Thanks, everyone, for your interest in DaVita HealthCare Partners; and we will do our best on your behalf between now and 3 months from now. Thank you.

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