Good afternoon. My name is Kim, and I'll be your conference facilitator today. At this time, I would like to welcome everyone to the DaVita HealthCare Partners First Quarter 2014 Earnings Call. All lines have been placed on mute, to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions). Thank you. Mr. Gustafson, you may begin sir.

Well, thank you Kim, and welcome everyone to our first 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; Garry Menzel, our CFO; Craig Samitt, President of our HealthCare Partners Division; Jim Hilger, our Chief Accounting Officer; 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 the actual results to differ materially from those described in the forward-looking statements. For further details concerning these risks and uncertainties, please refer to our SEC filings, included in our most recent quarterly 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 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.

Thank you, Jim, and thank you all for your interest in DaVita HealthCare Partners. Q1, disappointing financial performance in HealthCare Partners. Strong financial performance in Kidney Care. I will discuss this performance as well as we will update our outlook, but first as always, I will review our clinical outcomes. We continue to present our clinical outcomes first, because that is what comes first. We are first and foremost a caregiving company. On the Kidney Care side, we now serve approximately 165,000 dialysis patients in the United States, approximately 35%; and in this area, CMS recently released the quality incentive program payment results for 2014 payments. I remind everyone that the way they structure the quality incentive program is with penalties only, there is only downside, so that's why we will use the penalty word. They had established four clinical measures, central venous catheters, AV fistulas, URR, less than 65, and hemoglobin, less than 12. DaVita ranked number one in the industry in all four clinical measures, and if you look at the percent penalties in aggregate, only 1.6 of DaVita clinics had any penalty, compared to 6% of clinics for the rest of the industry. This performance is even more notable, especially when you adjust for socio-economic factors given we have more lower income people and people of color in our patient population in the overall nation. Nonetheless, we had a 59% lower rate of penalty centers versus the rest of the industry in four counties, and we improved our rural clinic performance year-over-year, while the rest of the industry saw rural clinic performance decline. Moving on to HealthCare Partners and clinical metrics in that area, one of the areas of focus is reducing hospital readmissions in the second half of 2013, looking at California and Nevada, we had…

Thanks Kent. I will cover two topics. One, the recent ESRD legislation, and two, the 2015 Medicare Advantage rate notice. So first, as part of the reason, physician SGR legislation, Congress partially addressed dialysis, reimbursement underfunding. The key legislative highlights are, as in the 2014 ESRD rule, the 2015 rate would be essentially flat with 2014. The good news, is that the remaining dialysis cuts were reduced and stretched over three years. In 2016 and 2017, our bundled payment rate will be updated by market basket minus 1.25%, and in 2018, market basket minus 1. The bundling of additional oral drugs is delayed until 2024. This is positive outcome, as there was substantial risk that CMS significantly underfunded these drugs in 2016, resulting in a de facto rate cut. Overall, this is a good victory for the care community, as these changes were scored by the congressional budget office, of putting about $2.2 billion back into the dialysis payment system. Having said that, we still on average, lose money on our Medicare patients. The absence of full market basket increases over the next few years, the Medicare reimbursement will be further below our cost of providing care. As a result, we will expand only in geographies where there is a healthy subsidy from the private sector. And geographies without the private support will remain flat, or be a contraction of service, as we will be forced to close some centers. Second, in April, CMS announced the final Medicare Advantage benchmark rates for 2015. Based on the final roll, we expect 2015 rates to be roughly flat for us, compared to 2014. We and others benefit from the rollbacks in the planned risk recalibration in 2015. Although this presents uncertainty in 2016 and beyond, as CMS moves forward with the new model. Going back, the risk recalibration is good for beneficiaries, as it will help prevent more dramatic benefit changes in 2015, moving to the new model could create adverse selection or encourage payors to take steps to avoid serving higher cost patients, whose health needs are the greatest. Its encouraging that CMS ought to protect MA benefits and acknowledge the clinical improvements that Medicare Advantage Program is making. Saying, and I quote, enrollees are benefiting from greater quality. Over half of enrollees now in plans with four or more stars, a significant increase from 37% of enrollees in such plans in 2013. Note that in HCP, we have over 80% of our patients in plan, that are four star rated and above for 2015, well above national averages. I will now turn the call to Garry.

Thanks LeAnne. I will walk through a few more details on the numbers. First, some additional comments on our Kidney Care operating metrics. Kidney Care adjusted operating income of $387 million was up $1 million from the prior quarter. Non-acquired dialysis treatment growth in the quarter was 5%, when normalized for days of the week. Dialysis segment profitability was down $21 million sequentially, due to two negative factors, offset by three positive factors. The two negative factors were; one, three fewer treatment days in the quarter; and two, an increase in patient care costs of $4.42 per treatment, which was due primarily to an increase in EPO unit cost in the quarter, and seasonally higher fixed and central level expenses per treatment, because of the fewer treatment days in the quarter. These were largely offset by three positive factors; a 2% increase in treatments per day, as a result of strong non-acquired growth. Two, a $0.77 increase in dialysis revenue per treatment; and three, a $4.19 decrease in dialysis segment G&A, $1.50 of which is due to impairments that were recorded in the fourth quarter, and the remainder is a combination of tighter G&A controls, and normal quarterly fluctuations. During the quarter, we lost $6 million in our international operations, in line with our prior international outlook of $25 million of losses. However, at the time, this specifically included any costs for our Saudi Arabia expansion. As our planned ramp up in Saudi Arabia will create $15 million in additional operating losses in 2014, we now expect to lose $40 million internationally, which is included in our increased Kidney Care guidance. Kent has already discussed in detail the performance of HealthCare Partners, so I will next review some key metrics for the overall enterprise. First, our debt expense was $106 million in the first quarter. Second, the effective tax rate was 40.5% in the quarter, in line with our expected range of 40% to 41% for full year 2014. Third, we continue to generate strong cash flows, as operating cash flow was $419 million in the first quarter. We still expect operating cash flow to be between $1.45 billion and $1.55 billion in 2014, excluding any payments associated with the potential settlement of physician relationship investigations. Finally, we have updated our 2014 operating income guidance. Our updated enterprise operating income guidance is $1.725 billion to $1.84 billion. This includes one, reduced HCP guidance of $205 million to $260 million. Two, increased Kidney Care guidance of $1.52 billion to $1.58 billion. Note that this Kidney Care guidance includes $15 million in 2014 losses to ramp up operations in Saudi Arabia, which were not included in the prior guidance. So combined with the $10 million for Tandigm, that means we are including $25 million in expenses previously excluded. Therefore, on apples-to-apples basis, the bottom of our consolidated guidance range is up $25 million and the top is up $5 million. I will now hand the call back to KT.

Thank you, Garry. I'd like to add one editorial comment on the policy front. The ESRD Kidney Care victory was a big one, and once again, we led the community to a thoughtful strategy and through formidable campaign. I'd like to step back for a moment, and just think about our two primary businesses, Kidney Care and our Medical Group, and think about each of them across four parameters, as we look out over the next two to three years. Rate minus expense times volume and then factored by execution risk. On the Kidney Care side, rate, there is more downside than upside. Although, we do have somewhat of a reimbursement safety net, as the government cannot afford to have many centers closed. On the expense side, things look relatively stable, compared to historical norms. On the volume side, things look relatively stable, probably a bit slower than the rate we have enjoyed the last few years. With respect to execution and reliability, Kidney Care looks pretty solid. On to HealthCare Partners, our medical group. As to rate, there is more downside than upside. As to expense, there is probably more downside than upside, but hopefully, we can make those words not true. As to growth, unit growth looks very promising, and as to execution, reliability, the legacy markets look solid, the new markets look poor. Now if you step back to look at the aggregate enterprise for a moment, we still think it is a differentially solid platform for the long term. A strategic position is good. The market positions are strong. The talent trajectory is good, and our capital structure and our capital efficiency and our cash flows are all solid. Thank you, and let's move on to Q&A.

(Operator Instructions). And our first question comes from Justin Lake with JP Morgan. Your line is open.

Thanks. Good evening. First question, you mentioned the operating income for HCP, and you gave us a number of metrics that basically allowed you back into these recently acquired practices are losing about $80 million for the year in your guidance. Can you tell us what the plan is for turning this around, Kent, and how much we can expect to improve for 2015?

Justin, could you repeat the numbers you threw out please?

Sure. You said the legacy business is running $76 million, the reported numbers for HCP are $54 million positive. [Indiscernible] back into these newly acquired centers, running about $20 million a quarter of losses? Or $80 million for the year. So obviously a very big number in terms of losses there. I am curious, what you are doing to turn that around, and how quickly you think you could turn around?

Yeah. First, without getting into a lot of complexity, you can't just subtract the two and take the difference, and then attribute all of that to new markets, because there is some other stuff going on, like the MA rate predictions, etcetera. There are some issues that cut across the two categories. Its not quite as clean as that. And in addition, some of those losses were absolutely planned and intentional, part of establishing ourselves in new markets. But separate from fine tuning the actual number, what we are going to do, to make it better, is going to sound pretty vanilla on our call. We are working on the rate side, the expense side and the unit side. But the biggest single swing factor, is having the transaction in New Mexico be approved by the government.

Can you give us a number on the swing factor for that?

I don't think that would be in your best interest, Justin. So I think we will have to hold back from that.

Okay. And then, on HCP again. Last quarter you mentioned you're working with plans to try to get the contract structures that were a little more reasonable, in terms of times, when there was pressure on reimbursement. We are just curious if you can give us an update on how those negotiations are going, and whether you're feeling more comfortable going into 2015, than you did in 2014?

Yeah, I would say, we made tiny bit of progress in the quarter, that's actually not disappointing, in the sense that a lot of contracts aren't appropriate to change, until they are up for renewal, and we don't necessarily want to precipitate an extensive renewal conversation with everyone at one time. So its not disappointing when I say tiny, nor is it impressive, its kind of a tweener.

Okay thanks. I will jump back in the queue.

All right.

Thank you. And our next question comes from Kevin Ellich with Piper Jaffray.

Good afternoon. Kent, just wanted to clarify again? You said the three big legacy foundational markets was doing -- was at $76 million of operating income, or was it $176 million?

It was $76 million, its actually right in that $75 million to $76 million range, and the other number was $116 million in EBITDA after allocating all corporate overhead.

Got it. Okay. That's helpful. Then, can you give us a little bit more color on the potential upside? Is that all dependent upon the deal -- the Blue Cross deal in New Mexico going through, or is it something else that you're thinking about, that you don't know about yet?

We can't disclose exactly where that contractual contingency sits, because of some confidentiality agreements. And so, all we can say is that, that contractual contingency exists within our new market portfolio, and there is a good chance, better than 50% chance that it will in fact be triggered.

Okay. But we don't have any idea on the timing?

Since every prediction on the timing has been wrong so far, I think we will shy away from venturing into predicting again.

Okay. Fair enough. And then, as for the Medicare Advantage, obviously pretty positive news on that front. But just curious, how close are we to achieving parity between the [indiscernible] parity. Isn't that a year or two out?

Most of our counties are in the two year or four year phase down periods. So 2015 will be the final year for our counties and the four year. We do not have any membership of significance in the six year, based on [ph] counties.

Okay. So 2015 really is the last year. Okay, great. Then last one on HCP, looking at the decline in operating -- the ratio of operating income to care dollars, have gone from 10% a year ago to 5%. What's your long term objective, where could this go and what's going to get us there?

Kevin, say the question one more time please?

The ratio of operating income to care dollars under management this quarter came in at 5%. A year ago, it was 10.4%. is that just contingent upon improving operations, and one out of HCP, I guess I am trying to get some idea as to what a normalized ratio should be?

I think I am hesitating, because there is a bunch of variables that could push it one way or another. For example, we will probably be doing more joint ventures with payers, and that may very well b e low margin business, because we are splitting the equity and the upside. But on the other hand, it could be incredibly capital efficient, and in the long run, as we have talked about for 15 years, its cash on cash, return on capital, that ultimately determines a company's long term future. And so in some cases, we may be actively seeking, what looks like low margin business, but is incredibly attractive in terms of risk adjusted return on capital. And then, looking at it from a different perspective, we will also still be doing some of the good old traditional global care business, where we and our physician leaders take the entire bolus of it and manage it with ever increasing capability. So how those different factors are going to net out, combine with just in general, increase competition in the space, is pretty hard to predict. So I think -- what we will have to get good at doing, is just parsing out these different variables. So you can see, where any movements in margin are good news, bad news, or neutral news.

Got it. Okay. Thanks.

Thank you, Kevin.

Thank you. Our next question comes from Brian Zimmermann with Goldman Sachs.

Hi. Thanks and good afternoon. I was wondering if you could give us some updated thoughts in potential closing of centers. The CMS rate is going to improve and just curious if you're still planning on going ahead on closing centers?

Unfortunately the answer is yes, and we are probably going to be closing in the neighborhood of 20 in the near to intermediate term, as much as it breaks our heart, when the government cuts our reimbursement, and holding it flat constitutes a cut, given there are certain cost pressures we face, that we simply can't get down to zero. That in some geographies, where there are not enough private patients to subsidize the federal government, we and other people are going to have to close down some centers. We will do so with incredible care and respect and oversight, in order to take care of our patients and our teammates. But in the end, we are caring a lot of money losing centers, and we can't continue to carry that many, if in exchange, our rates get cut.

Okay. And then on the patient care cost side, I understand that they went up per treatment, but you did a pretty good job containing costs from the G&A side. Can you give us a bit more detail on what those G&A cost controls were, and do you see additional opportunities in the next couple of quarters?

I do not think we are going to see a continuation of tremendous accomplishment, so that's where -- that we pulled off over the last year. We started thinking about it and planning for it, a full two, two and a half years ago, when we expected the government to be squeezing reimbursement, and so it was done with a lot of foresight, with a lot of warning and planning, and so it is not to disrupt people's lives nor our company's operations, and of course most importantly, our patient care. Having said all that, there's limits to how much can be done there, and so, I think you are looking at, pretty much the end of that run of progress.

Okay. And then my last question is on capital deployment. You're sitting here with $1.1 billion on the balance sheet. Can you give us an update on thoughts towards acquisitions or potential repurchases?

Well, we are hoping, although it sounds funny to use that word, that we will be taking a big chunk of that cash to execute on our settlement with the federal government, and that would be about $390 million or so, and at our new size, we certainly want to keep -- certainly want cash on hand. Having said that, we don't need to have $1 billion in our wallet, and we will go through our normal exercise, consistent with how we thought the last 15 years, in comparing at that time, our business opportunities, our repurchase opportunities and our debt reduction opportunities. And so right now, we don't have a position on that, and of course, we welcome any input from all of you, which you would prefer.

Okay. Thanks a lot.

Thank you, Brian.

And your next question comes from Darren Lehrich with Deutsche Bank.

Thanks. Hi everybody. So wanted to just may be ask a little bit more about some of the deals that you're referring to, and if I guess if you could may be help us think through where you think you miscalculated the most, in terms of entering these new markets and the types of structure you had, its clear in Albuquerque, you miscalculated with regard to the payor landscape and the ability to forge a better relationship there with Lovelace, hopefully that changes. But, can you maybe help us think through how else you have miscalculated, and how this strategy may be pivoting, so that you can avoid that?

Darren, it’s a right question. But the correct answer to it, is that the team that did those deals, was not thoughtful. It did not do the right kind of rigorous analysis, reflection. Did not weight the relative merits of partnership versus fighting, and in particular, in one instance, didn't correctly calibrate what had happened after fighting a battle in Albuquerque. Both Lovelace, the hospital and the plan, and us, both sides came out significant losers. The only ones who benefited, were our collective competition. The new team has since turned relationships around in that market, and we are readying employees to work collaboratively, with both Lovelace and the new plan. The way these things should work, assuming that we do get government approval on that transaction. So rather than go through what would sound like a relatively vanilla characterization of different types of mistakes, the root cause was the team that was working on it did not bring the right discipline and thoughtfulness, and those people are not doing deals with us anymore.

Okay. That's fair. I guess may be that turns me to the next most obvious question is, you just announced a fairly significant transaction, this Tandigm joint venture. So may be just, given that there is a new more thoughtful team, I guess, that put that one together, give us some background on how that deal came about, what the model looks like, and may be talk a little bit more about how that strategy will be different?

Let me go ahead and take a quick stab, and then Dr. Samitt may want to add. But this is the type of arrangement we might end up doing in other places, and we certainly have a lot of major payors, who are talking to us about types of arrangements like this. IBC is the leading payor in that market, with a very strong market position, and a good reputation, as a citizen in the healthcare community. So we like that type of partner. The way we structured it, is the new venture is incented to succeed. So neither parent company, so to speak, can get in the way, because of any other considerations. The new management team and the Board of Directors are incented structurally to deliver success for patients, physicians and shareholders through that venture; and that's the only way to attract the kind of challenge you need to tackle the challenge, in a market that does not have any significant integrated care penetration. Lastly I would say, the way its structured, although it will not lead to any quick profit drop-through is very capital efficient; because we are not having to make any large acquisitions, and because of the way the economics are structured, the upfront operating losses are quite modest, in particular, quite modest, relative to the long term market opportunity. Craig is there anything you'd like to add?

Sure KT. Just four additional points. The first is that the IBC-Tandigm transaction allowed us to review lessons learned from the prior deals that KT described in the past, and focus on avoiding risks, that we were faced with some of the other deals from prior to 2014. The second is, as you can see, this is our new pilot in forging a team of equals relationship between a payor and a renowned delivery system. And so, we are optimistic that the shoulder-to-shoulder partnership will be highly effective. In terms of structure, we are through Tandigm, enabling primary care physicians, with supports from both the payor side, which is very data and analytics rich, and healthcare partners, which is clinical care model and population health rich, in managing the transition of Philadelphia marketplace from volume to value. And fourth, is the reason why this is a prime market for us is that, Philadelphia is one of the highest cost of care marketplaces in the U.S., with in fact the highest admission rate per thousand in the country. So our expertise is very much needed in that market.

Makes sense. My last question just about Tandigm. What is your enrolment target, if we think about this couple of years down the road, how many lives do you think you will have in that arrangement?

It’s a fair question, but there is just too much uncertainty at this point. So giving you a number would be tantamount to just guessing -- if we succeed, the number could be significant. But succeeding is not going to be easy. There are reasons why markets have high admit rates, and part of our challenge is to establish a collaborative constructive relationship with the leading hospitals, in order to collectively bring quality improvements and appropriate savings to the table, shared by everyone.

Okay. Thank you.

Thank you.

Thank you. Our next question comes from Gary Lieberman with Wells Fargo.

Thanks for taking the question. I guess going back to Albuquerque; specifically, it would appear that there was a meaningful decrease in performance sequentially. Can you give us any more details around what was worse than you had originally expected, just over the last quarter or so?

I think Gary, we don't want to go into any more micro detail on individual market. So if you could just allow us to stick with having disclosed much more than we typically do already in individual market, because we felt we needed to, in order to answer the legitimate questions. But I think we best leave it at that.

Okay. I guess may be then, a little bit bigger picture on the underperforming deals. Can you may be discuss, how much risk you feel is still there? Is there still some meaningful downside of things don't get better or on the same technology, or do you feel like it sort of bottoms out?

I would say, we are much closer to bottoming out, and so the ratio of upside to downside is attractive, a breath of fresh air, in an otherwise stuffy room. So that's good news, I would say.

Okay. And then do you have any concern that the Blue Cross deal does not close in Albuquerque, or is it just typical stuff that's maybe going to take longer?

We don't have any insight really. The Department of Justice keeps those things close to the vest certainly, and periodical evidence would suggest, that the deal will get approved. But you never know for sure, and particular, if in the government's mind, Blue Cross Blue Shield is unwilling to agree to reasonable conditions, then all bets are off. So we don't know enough to handicap other than these things typically, as you know, get closed.

Okay. And then, does any of this change the guidance you had given on the acquisition pace at HCP, which I think was sort of two this year, more next year, and then a lot the year after?

I would say at this point, we are not changing anything.

Okay. May be one question on the international comments that were made, the losses, I think Garry, you said were $40 million, and that changed. What was it before?

$25 million. Sorry Gary.

That's very helpful. And may be last question on dialysis, what did you guys think of the revised parameters around the accountable care demo with the ESCOs?

Before I answer that Gary, let me go back and tweak my response to your question about the expected pipeline of significant deals in HealthCare Partners. I think we probably should dial back that expectation a bit, because we need to prove quickly, that we can reliably deliver on what we say we are going to do, before we should run around deploying any more of your capital. So probably, we pull that back a bit, and can't quantify right now, but at least directionally, I think you should think about it that way. On the ESCOs, we know that we are incredibly passionate and bullish on our capability, to dramatically improve quality and substantially reduce costs and deliver incredible patient experiences in an integrated care, globally capitated or anything like it world for Kidney Care, and we have proven it. And we have proven it at significant scale with breadth and depth, and so we so much want to bring that value to America, and in so doing, forcing others to invest and get better and better at the same time. And we are very grateful that CMS has put so much time into trying to figure out a way to introduce a vehicle for making all that come true. Having said that, and being very appreciative of some of the changes they make, we were disappointed in what they came out with, and I think I will just stop there.

Would you say they are headed in the right direction and just need some minor tweaks, or is it still significantly off-base for what you would need to really ramp up your involvement?

We think there is just a couple very reasonable changes that would open up the gates to a beautiful pilot. So we think its very doable and very reasonable.

You can't share any of those specifics with us?

I don't think that would be good to get into on a big public forum. We are sharing our thoughts with them, and we are incredibly grateful that they are listening.

Okay, great. Thanks very much.

Thank you.

Your next question comes from Jason Gurda with KeyBanc.

Thank you. Kent, if we think about a deal that actually works out as it expected to, how should we or how should we expect to see the multiyear impact on margins play out? Is it one to two years of initial losses, followed by ever increasing margins after that, or --?

Yeah, it’s a tough one to answer Jason, because in HealthCare Partners, every deal could be quite different, depending whether we are primarily partnering with a hospital or a physician group or a payor or all of the above, and whether or not they already have risk, or whether or not we are just starting a new risk contract. And so, unfortunately, given unlike dialysis, every deal could be quite different. You need to stare at our track record, in order to draw the right inferences and extrapolations. This is where we have made your life very difficult, by having a lousy track record of doing new things. And so, we recognize the torturous position that our performance has put you in, and we hope to make amends over the next couple of years.

All right. Putting aside the Albuquerque decision. You will be facing more Medicare Advantage rate cuts in 2015, making additional expansion in investments. Should we expect operating income growth at HealthCare Partners next year?

At this point, I think we ought to stay silent on 2015, until we get a little more time and experience under our belt. We are not comfortable saying, OI is going to go down. We are not comfortable saying its going to go up. We are not comfortable sayings its going to be flat. We need a few more months under our belt, before we can give you a value added estimate.

Okay. My last question would be, I think you have warned in the past, that the exchanges offer more downside than upside, I think that's the way you put it. Is there any early read on your relationships with the payors on the exchanges that, any takeaways from the first quarter?

Although its very preliminary, because as you understand, there is a lot of lag time, in finding out exactly who is going to exchange, and what exchange is going to pay and all that kind of stuff. So with a big caveat, on the fact that it is preliminary, the early results are positive, in the sense that we thought it was going to be quite bad, and so far, it is not.

Thank you.

Thank you.

Thank you. And our next question comes from Kevin Fischbeck with Bank of America Merrill Lynch.

Great, thanks. I guess a few questions on HCP. You mentioned that -- I think you said half of the issue was related to deals in new markets, and you mentioned contracts, what was that comment related to? What was the other issue there?

There are three drivers of the shortfall Kevin. Half was the new market, new business acquisition portfolio. The second was the Tandigm $10 million previously excluded, so doesn't represent underperformance. The third component was a mistake, we were 0.8% off in forecasting our actual MA rates across the markets, and that 0.8% equals $4 million a quarter, $16 million on a year, right off the bottom line. Its of course embarrassing for us to make a mistake like that, but we did.

I guess though, in that source bucket we see -- you said the deals fell into buckets of new acquisition and then taking on new risk contracts. I just want to understand what you meant when you meant risk contracts, as opposed to deals being new market entrants?

Got it. I am sorry Kevin, I understand the question now. There is one example where we just took over a network for a payor, it was an unsuccessful MA network that they have been running by themselves and with some others unsuccessfully and we took it over from them, with no exchange of capital involved.

Okay. So you've basically assumed a new risk contract?

Correct.

Is it a new market or an existing market?

This was a new market, and while we expected losses, because we knew what their current economics were, and some of that we were cushioned from, and then some not. The problem is, the actual losses have exceeded the expected losses in the assumption of that contract.

Okay. And then I guess broadly, because that sounds hard to sell, I guess sometimes, maybe they are hard to differentiate. But when you look at HCP, would you say that it is more a cost issue or more a contract issue; because it feels like one might be easier to solve in a short period of time than others? I just wanted to get your thoughts around that.

Our primary problems there have been from unthoughtful contracting non-thorough due diligence and one very bad business decision. Not our ability to drive integrated care, not our ability to work with physicians in the community to drive quality improvements, and savings and utilization etcetera. The news on those scores is positive, and so I think your diagnosis is correct. The stuff that was done wrong is easily fixed and we think we are there. Now also I want to add, again, we are doing new stuff and different stuff, so there will still be an experience curve, and there will still be a [indiscernible] issue. But we already are way, way, way better on the dimensions that cause us the problems a year, year and a half ago today.

Okay. And I guess, I understand the shortfall this year makes you reticent to kind of make predictions about next year. But I think at the Analyst Day, you were kind of thinking that, you could be flat year-over-year in HCP, depending on how the final rate came in with the risk adjusters. It feels to me like the final rate for 2015 was better than one might have thought at the time. This years numbers are lower, it sounds like you feel like you understand to some degree that there is a contracting opportunity into next year, and yet you're not comfortable to say that you will be better next year versus this year. When you think about the swing factors, if its not your ability to manage costs, and that feels like its in control of the next year, what are the factors that you could understand going into next year? Generally where the rates are, generally what the contracting issues are that would stop you from growing next year?

Yeah, its very good logic Kevin as usual, and I think the honest answer is just that, if you're sitting in these chairs, having been wrong now a few times, we simply don't want to represent, until we have done a lot more work, analytical work on every aspect of the business, before we start talking about stuff that's a year or two out.

Okay, then I guess just last question. California Duals, do you have a sense there of how you will be participating in there, what the revenue opportunity might be for you?

Yeah Kevin, this is Craig Samitt. We are in active discussions with multiple payors, who will be participating in the California Duals program. We hope to be able to participate in the program, but don't know yet if we will, with which payors or for how many patients we will be providing care for.

Okay. All right. Great. Thanks.

Thanks Kevin.

And your next question comes from Ben Andrew with William Blair.

Good afternoon, and thank you for taking the questions. Couple of things I guess to start, Kent. Is there some sense that the window of opportunity for transactions is tightening on you, given both the lag between when you have been able to announce large transactions, and that's perhaps what's being manifest in the need to move towards more partnerships than [indiscernible] acquisitions?

Let me take a stab and see if I get it right. There aren't very many mature proven MA risk management NDs that are around and independent anymore. So there is not a lot of eight point bucks out in the forest. And the good news is, those that are out there, are differentially interested in us, because of our legacy and our reality of physician leadership. So that's the bad news and good news on that side. But we do these other partnerships, not have a sense of need or not because of some notion that they are second best. We actually think that they can be absolutely as good and effective, as the conventional acquisitions. And in fact, the deal in Philadelphia is starting off with a very collaborative partnership with a leading physician IPA in the market. Its not just a payor DaVita partnership. The leading doctors who want to bring the improved quality and savings that comes from integrated care are very much onboard with the effort.

Okay. And then, looking at that Pennsylvania opportunity is kind of your first big foray in the northeast. Are there other obvious markets in that region that makes sense for you all, assuming that you're able to prove out the kind of the performance with this one?

Yes.

Excellent. And then I guess the only other question is, on the international dialysis side. The Saudi Arabian contracts, and you have given us some good details on the startup there. How quickly can that be a material contributor? Is this really going to be a multiple year process to bring that to something that moves the needle for the dialysis franchise internationally? Thanks.

Its going to be a couple years, just because there is so many centers involved and so many patients, that will be in a constant state of having a bunch of young immature centers, where we have got operating costs but not many patients, or zero patients as we build them, and then just the classic issues of having overhead, that's disproportionate to the revenue, and tell you have enough centers up and running. So its going to be a couple of years.

Thank you.

We will of course work very hard to provide analysis that allows you to gauge our progress, and not just force you to sit back and wait for years until the portfolio matures.

Thank you. Our next question comes from Gary Taylor with Citi.

Hi, good afternoon. A few questions; one, I just wanted to follow-up on the California Duals -- maybe I am incorrect, but it was my understanding at LA County, the plans were enrolling to Dual eligibles already. So I would have thought, they would have had provider networks in place, but it doesn't sound like that's the case?

That is correct. The first phase of enrollment has begun. Again we are in active discussions with multiple plans and do hope to be able to participate in the program. We are not enrolling to-date, at this point.

And therefore the plans do have lives that they are accountable for, that they don't have organized networks for and people just keep on going to their existing provider, with whatever management the plan itself can overlay. But for them, its just highly imperfect, but pretty normal way to get something like this started.

So there is no revenue, no operating loss -- income or loss expectations associated with this in the guidance or there is a little probability weighted something in there?

Right now, the premise is that, there is nothing big that's going to go on good or bad with Duals, and if we cut a deal that we think is material, we will get back to you the moment it happens.

Got you. On the other and corporate drag on the growth Kidney Care operating income, which typically runs $22 million, $26 million a quarter was actually zero this quarter and the gross Kidney Care operating income was down. Was there a reclass or was there some unusual benefit this quarter?

Would you just repeat the question please Gary, and then either Jim Hilger or Jim Gustafson can hopefully nail it for you.

I am just looking, year-over-year, dialysis operating income a year ago, $408 million. You had $22 million of losses in other and corporate to take you through a net $386 million operating income. This quarter, the gross was $387 million, you had zero net other and corporate, to get a net $387 million. So its up $1 million year-over-year, but obviously the loss is from international ancillary and corporate were much lower than they typically are. So I didn't know if there was a reclass between those, or some unusual benefit in the other and corporate lines this quarter?

Jim [ph], can someone give a good answer?

The improvement is in DaVita RX and in international. Year-on-year the accounts are almost solved.

And is that recurring?

Why don't, Gary, you give us a minute, because it just sends too much tentativeness in the answers. So give us a couple of minutes and we will get back to you.

Okay. So unrelated though, I mean, Kent, you characterized dialysis performance as strong. So the gross dialysis operating income was from $408 million a year ago, down to $387 million. How does that translate to strong --

Very fair, and by that standard it wasn't strong, relative to our guidance and our fears about what 2014 might look like. We actually feel -- on our side, we are feeling very-very good. But compared to the standard that you just set forth reasonably, you're right, you could then say it was just -- you could say whatever you want.

Okay. Last question, and maybe I will reveal my ignorance here. You said treatment days, down three days year-over-year, and I calculate weekdays the same and Saturdays the same. So was that weather related or am I just not understanding how you calculate treatment days?

This is Jim Gustafson. That's sequential Gary from Q4 to Q1, not year-over-year.

Okay. That makes sense. Okay, that's all I had.

All right. Thank you. I will point out one, I think it was mentioned earlier in the call, but we did have a significant increase in some of our costs, including EPO, which is part of why you see the OI number on the dialysis side, that Gary you were talking about. Okay, operator.

Thank you. Our next question comes from John Ransom with Raymond James.

Hi. I just want to demonstrate my grasp of the obvious. The deal in Pennsylvania, just to think about expectations for that division. You're probably going to have to do five to 10 of those deals and its probably going to take a couple of years, before we start seeing some material EBITDA from that strategy, is that a fair way to think about it and is that a reasonable pipeline?

Yes sir.

Yes on both?

Say again please?

Yes to both questions? So you need 5% to 10% or its going to take a couple of years?

Maybe better say both questions again, so I am not being -- I am not too cryptic.

No I am saying, it looks like it would take a couple of years by your own reckoning, and then may be you have to do, five to seven deals like this and a couple of years before you start to see some material EBITDA to the enterprise, is that a fair way to think about it, and is this the new template going forward?

Well, if we are successful, the Philadelphia joint venture could be of pretty serious size, just like healthcare partners in California and Florida and Nevada. And so, the numbers could be substantial, therefore, you don't have to do lots and lots of them, if you succeed and they grow at a nice steady pace. Having said that, we do want to do more than one. We do not think this will be the last time we use a model like this and in many other instances however, we will still be a majority owner. In this particular case, the payor had such a strong market position, and because of some other aspects of the agreement as well, 50-50 just seemed like the right thing to do.

Now the other question, you have a fairly small percentage of their MA lives in total. What's the trigger to get more than what you have? Or is it -- are you in the short term, or you just kind of limit these 300 primary care doctors, or is there a trigger to expand this beyond, what I'd call kind of a [indiscernible] to a broader relationship with their other MA lives?

John I am sorry, I missed the beginning of the question. Can you repeat that again?

Sure. I am sorry. You have a fairly small percentage of their MA lives. I am talking about the Blue Cross plan. What's the trigger to get a bigger percentage? Are you limited in the short term, that is the 300 docs?

We are beginning to venture with the 300 physicians. But the hope and expectation is that, we would expand the contracted network with Tandigm beyond the 300 physicians through this year and into next year as well. So our expectation is that, our membership of both MA and commercial will grow in this venture.

But its not -- you have to wait a year or you can grow it during the year, and next year there is something like -- we are going to try this for a year and see how it goes, and then we will extend it. So you can grow this as it happens?

There is no specific trigger, before we can expand this network.

Okay. Thank you.

But I will add you don't want to take too many lives, if they are being cared for by physicians who are not committed or positively interested in the new model. Okay, operator. Thank you.

Thank you.

Thank you. And our last question comes from Lisa Clive with Sanford Bernstein.

Hi. Just one question, going back to integrated care on the dialysis side. Your Village Health business has been going along for several years, and obviously with ESCO not quite exactly the way you want it. What should we think about for the outlook of integrated care on your non-Medicare fee-for-service patients?

The question is, what kind of growth can we expect on the Village Health side? Is there a reasonable care price?

Yeah. And maybe not specific growth, but sort of what are your long term plans there? Is there a way to move into integrated care, without the ESCO program, or is there -- how are you thinking about that clearly? DaVita RX is a big platform for you, but what else should we think about as opportunities there?

Village Health, we can grow it outside of the ESCO program. Not as cleanly and as aggressively as we could, if there was an attractive ESCO program. But yes, we can continue to nudge it along and push it along. In addition, one of Village Health's great benefits, is it adds value to our fee-for-service clients, who then can take that value into account, when we are negotiating dialysis rates. So just because we are not capitated or at risk with them, doesn't mean that they cannot appreciate the impact on quality in total costs, and how that reflected and monetized in part through conventional fee for service rates. But to the first part of your question, where we will continue to strive to grow Village Health everywhere, we can. It just won't be rapid without a government program that works.

Okay, great. And then maybe actually just one last question on the ESCO program itself. Under the current ESCO 2.0, it seems like the size is still pretty limited. Assuming you can get over your or you can reach an agreement with CMS on the few outstanding issues that you have, how many patients would you ideally like to enroll in this product program?

Oh, if we like the program, we like to take the whole program to ourselves. I think they are putting a cap of 15,000 or 20,000 and of course, they would never allocate more than X percent to us, and we would take that in a second and double it if we could, if we just get a couple of changes.

Okay. Thanks very much.

All right. Thank you.

And we do have one question that just queued up, Whit Mayo with Robert Baird. Your line is open.

Thanks for squeezing me in. You guys gave the OI for the legacy HCP markets, but can you also share the revenue and how margins would have compared versus the prior year?

We can't do it spontaneously, and we will think about doing it for the next call, let us sort that out. We want to make sure there is reasonable boundaries on how much market specific stuff we talk about; because in general, its not in your best interest for us to go to deep market-by-market. We violated our normal policy, because we felt we had to do it in order to be responsible in discussing our current performance to you. But I am not at all sure we are going to want to go, where you're going.

No I can appreciate that. But I guess may be directionally, can you confirm that margins were higher this year versus the prior year? Anything to kind of point us in the right direction without divulging too much specific data?

I think not, and let us just reflect after the call, and if I am making the wrong game time [ph] decision, Jim and Garry will correct it.

No, that's fair. Thanks a lot.

Thank you.

Thank you. And at this time, we show no further questions.

All right. Thank you all very much. We will -- wait a minute, we have some breaking information.

Just wanted to respond to Gary's question. Gary the answer to your question is, we had better overall results in our ancillary businesses, which includes international. And the management -- the corporate charges were down, because we are allocating corporate costs among our various operated segments. And that is a change on the corporate charges.

Okay. So hopefully Gary, that took care of that one, and our early answer we apologize was misleading. So I am glad we are able to correct it quickly, and thank you all very much for your interest in us. We will do our best to do what we said we were going to do going forward. Thank you.