davita 2015 capital market day and q1 earnings call

CompanyName:DaVitaHealthCarePartnersIncCompanyTicker:DVASector:HealthCareIndustry:HealthServices

EventDescription:Q12015EarningsCallMarketCapasofEventDate:17.70BPriceasofEventDate:81.89

©2014TheStreet,Inc.Al l R ightsReserved Page1of38

DaVitaHealthCarePartners(DVA)EarningsReport:Q12015ConferenceCallTranscriptThefollowingDaVitaHealthCarePartnersconferencecalltookplaceonMay5,2015,09:00AMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

KentThiry;DaVitaHealthcarePartners;Co-Chairman,CEOJamesHigler;DaVitaHealthcarePartners;InterimCFO,CAOJamesRechtin;DaVitaHealthcarePartners;SVP-StrategyUnidentifiedCompanyRepresentative;;

OtherPart icipants

WhitMayo;RobertW.Baird;AnalystWilliamJung;SansomeAnalyst;AnalystKevinEllich;PiperJaffray;AnalystStephenAlt;ShareGlobal;AnalystMargaretKaczor;WilliamBlair&Company;AnalystTonyRosenthal;TimeSquareCapital;AnalystChristopherRigg;SusquehannaFinancialGroup;AnalystGaryLieberman;WellsFargoSecurities;AnalystDarrenLehrich;DeutscheBankEquityResearch;AnalystDavidCallum;JPMorgan;AnalystKevinFischbeck;BankofAmericaMerrillLynch;AnalystJustinLake;JPMorgan;Analyst

MANAGEMENTDISCUSSIONSECTION

JamesHigler (InterimCFO,CAO):

Operatingincomeinthequarterwassolidat$60million.That'sanincreaseyearonyearandsequentiallyandinlinewithourguidance.

Movingontocorporatecost,debtexpenseinthequarterwas$97million.(Technicaldifficulty)goingforwardtobe$104million(technicaldifficulty).

Intherangeof39%to40%.OperatingcashflowsinthequarterwerestrongandourLTMcashflowswere$1.450billion.

Andwiththat,I'llturnitovertoKentThiry,ourCEO.

KentT hiry(Co-Chairman,CEO):

Thatwasmymother.Yes.Whyanyoneputsanannualsacredcapitalmarketsdayinalargelyblackroom,Idon'tknow.Certainly,that'snotourmood.It'sgoodtoseemanyofyouagainthathavebeenwithusforalongtime,andwelcometothosethatarenewer.Asusual,I'llcoveralotofstuffandthenwe'lldoaQ&Auntileitheryoudroporwedo.

Missionandvaluescomefirst,particularly,poignantalmosttomakethispointgiventherecent




settlementonhowinsomepeople'smindthatcancallthequestionhowseriouslywetakethisstuff.

Butweabsolutely--andifyoutalktoahugepercentageofour67,000teammatesacrossothercountrieswouldtellyouhowmuchourbehavior,howmuchourdecisionsaredrivenwithinthecontextofourmissionandvalues.Andwe'resoproudofthefactthatthedatasupportsthenotionthatinmany,many,markets,manythingsofwhatwedo,wearetheproviderpartneremployerofchoice,theplacethatmostdoctorschoosetoaffiliate,theplacewheremoreteammatesarelikelytocomeandtostay,andthepartnerthatmanyotherswanttoworkwith.

Andsothedatasupportsthisotherwisesortofnebulousconceptualpitterpatter.Andthisincludesoursevencorevalueswhere,asmanyofyouknow,IgetscoredeverysingleyearbythepeopleIworkwith.AndmyscoresaremadepublicacrosswhatwecalltheDaVitaVillage.Sowetakethisstuffincrediblyseriouslywhichiswhysomeofoursettlementissuesaremorethemoreappallingtouspersonally.

Hammerwentoversome--JimHilger,Hammer'shisnickname,wentoversomeofthenumbers,butthisistoquicklyrecapattheaggregatelevelofourrevenueandOIandguidancenumbersthatmanyofyouarefamiliarwith.Ithinkforthefuture,though,farmoreimportanttothinkaboutthesignificanceofourplatforms.

Now,they'replatformsthatareproducingcashflowrightnow,sothere'snothingtenuousaboutthem,quitetheopposite.Butinadditiontotheplatforms,we'redoingalotofdifferentthingsinthiscountryandelsewhereinthedecadetocome.AndIwon'ttortureyouwithgoingthroughallthedifferencesortofstrategicstufflistedonthisslide.

Butourabilitytodoconventionalfee-for-servicemedicine,ourabilitytodriveclinicaloutcomesthroughadistributedphysicalenvironment,ourabilitytodosophisticatedcontracting,performance-basedcontractingofdifferentvarietiesandtypeswithdifferenttypeofentitieswhetherthey'reACOsorpayers,theseareaffordablecapabilitieswhichcanallowustopivotinalotofdirectionsintheyearstocomeandonallsidesofourcompany.

Justtoquantifyspecsoftheplatform,again,separatefromitscashflowgeneratingcapability,separatefromitsclinicalcapability,ifyoujustlookatsomeoftheassets,it'sprettyformidableontheKidneyCareside,35%ofAmericansindialysis,wetakecareofnow.We'reinalotofdifferentplaces,over2,000locations.Inaddition,ourabilitytomanagecareholisticallyisunmatchedwhetheryou'retalkingaboutourpharmacy,whetheryou'retalkingaboutourvascularaccesscenters,whetheryou'retalkingaboutourglobalcapcapability,etcetera.

Andthenontohealthcarepartners,which,althoughadifferentbusiness,adifferentsport,averycomparable,athleticrequirementsaroundpayercontracting,clinicmanagement,physicianpartnering,workingwithphysicians,nursesandotherclinicianstodriveclinicaloutcomes,purchasingforalotofthesamecharacterssothatthe--whilethesearedifferentsports,theathleticrequirements,thecorecapabilities,thecorecompetenciesarehighly,highlyparallelthatyoucanmovetalentbackandforth.Andthenjusttheassetsthemselvesintermsofnumberofphysicians,numberofclinics,etcetera,relativelyuniqueinAmerica.

Forallthistowork,togrowanumberofbusinessesandtogrowsize,someofyouhavebeenwithussincewewereback$1billioninrevenue,kindof$140millioninequitymarketcap.Butapartofhowthatworksisthroughcreatingasufficienttalentacquisition,retention,developmentcapability.Andthisissomethingwetakeveryseriously,becauseotherwise,whenwegooffanddonewthingsoroldthingsinnewplaces,weputyourcapitalatgreaterrisk.Sowehavetakenveryseriously,for15years,thenotionofcreatingtalentataratewhichisproportionaltoourcapitalisticaspirations.

Andatthispoint,forexample,kidneycare,conventionallegacykidneycarehascontributedalmost100




executivestoHCP-E)-E)),100peopleofwhomabouttwo-thirdsaremanagersandabove,twohealthcarepartners,twointernational,twoRx,twoPaladina,etcetera,whichallowsustobemoreaggressive,tobemoreexperimental,tobemoreinnovativewithyourcapitalinaway,whileatthesametimereducingriskbecauseofourabilitytoexporttalent,exportphilosophy,exportmanagementprocessdiscipline,etcetera.

Compliance,let'stalkaboutthisfirstsinceit'sthenewnews.AndIthinkouroverwhelmingfeelingsaboutthis--forgetthethoughts--arejustwe'reverydisappointedinourselvesandreallyhumbledbythefactthatwearehavingtowriteacheckthisbig.Andwecangointomoredetailonsomeofthisifyou'dlikewhenwe'reinQ&A.

Butthisisnothowweeverenvisionedourselvesspendingtimeoryourmoney.Wedidmakesomemistakesandwe'reaccountableforthat.Itisnotrepresentativeatall.Infact,itcreatesawildlyinaccurateperceptionaroundhowseriouslywetakecompliance.Andifanyoneeverwantstocomeinforaseparatethree-hoursession,Imean,weshouldputagroupmeetingtogetherandjustoverwhelmyouwiththedepthandbreadthofoureffortsinthisregard.

Theunfortunaterealityis,giventhewaymultipliersworkintheFalseClaimsAct,youcangetthevery,verybignumberswithavery,verysmallnumberofinstancesforwhichyoumaybeatsomeriskofanegativefinding.Soforus,fromacompliancepointofview,thestrategicimperative,thisisverystraightforward,wewanttoearnthegovernment'strustgoingforward.

Andtherefore,despitethefactthatweareincrediblyproudofthebreadthanddepth,theintensityandtheintegrityofourhistoricalcompliancesystemarestaringatthedata,steppingbackandtryingtorelookeverything.We'regoingtohaveourboardofdirectorsfarmoreinvolvedincomplianceoversightgoingforward.That'satourrequest.Itdoesn'treallymatterifwewouldrequestitornotbecausetheywouldwanttodothesamethingatthispoint.Butwe'rechangingourmanagementprocess,we'readdingformidableresources,we'llbespendingupwardsof$25million,$30millionayearjustonthis,separatefromanyotherancillaryactivitiesthatarerelatedtoit.Andwe'realsogoingtorampupourproactivedegreeofcommunicationwiththegovernment.Sowearesteppingbackandsayingthisissimplyunacceptableperformance.Andithasanunacceptableperceptualimpactaswell.

Wedohaveasubpoenathat'sbeendisclosed.It'sintheHealthcarePartnerspartofthebusinesslargelypertainingtothingsthathappenedbeforeweownedit.Wearegoingtoveryproactivelycooperatewiththegovernmentinthiseffort.Andasvirtuallyallofyouknow,there'sasubstantial[ex-cost]establishedfor--includingcoveringhealthcareregulatoryissueslikethoseinquestion.

OntoHealthcarePartners.Ifyouthinkbackonthepastcoupleofyears,there'sjustnootherwaytocutit.Itwouldbestraightforward.Itwasabadstart,andwe'lltalkaboutthatalittlebitandthenputitbehindus.Becausewe'reatawholedifferentphasenow,awholedifferentplacethanwewere12monthsago.Ineveryway,Imeanthatinagoodsense.

ThefoundationofHealthcarePartnersisformidable.Intermsoftheassetsincontractandtheassetsinmarketpresence,theassetsinindividualtalent,theassetsincollectivecapability,theassetsintermsofreportingcapability,theseareformidableassetsorformidablefoundationforustobuildon.TheOIgrowth,however,willbeslowerthanyouwouldhavehoped.Havingsaidthat,cashflowisstrongbecauseofthehealthofthebusinessandbecauseofthestructureofthebusiness.Andouroriginalinvestmentthesisstands.

Whatisthebadstuff?Well,ofcourse,having$150million,$200millioninratecutsisatoughwaytostartanything.Thereweretwobaddealsdonethatdistractedattentionandconsumedsomecapital.Andthenthere'sjustthenormalorganizationalstressofdoingabigacquisitionandtheneliminatingabunch




ofseniorfolksandlivingontothatnextphase.Andsothatpartisinevitable,butunnecessarilyontopoftheotherstuff,createssomedifficulty.

However,thegoodstufflistislongerandinvolvesawholebunchofstuffthat'shappenedoverthelastyear.Soverydifferentfromthetypesofthingsthathappenedinthefirstyearwherejustnotenoughgotdoneintermsofbuildingnewcapabilitiesandpursuingapathofcoherentdisciplinedgrowth.

Thelegacymarkets,however,throughoutthisperiod,haveperformedwell,andabeautiful,beautifulfoundationIreferredtobefore.Weturnedaroundbothofthebaddealstakingupsomeveryseriousincrementalmap.

Andabaddealdoesnotmeanabadasset.Abaddealcando--kindofhastodowithwhatyoupaidorhowyouconductedyourselfforwhathappenedimmediatelyafteryoudidthedeal.Thesearesomegoodassetsbuttheyweredonethroughbaddealstructures.They'vebeenturnedaroundtoaverysignificantdegree.

Wenowareatatrajectoryofaddingcapabilitiestofuelourgrowthlong-term,growthinourvaluepropositionandgrowthinourmarketfootprintataveryniceclip.Stillnotthekindofrocketspeedwewanttobeat,butwaydifferentthanayearago.

Wedidacquiretheleadinggroup,actuallytheleadingindependentgroupinallofColorado,butinparticularlya[strong]groupinColoradoSpringsthatwe'reexcitedtobepartneredwith.Andwe'remakingsomeniceprogressinwhatwecallournewbusinessmodelR&D,andwe'lltalkmoreaboutthatdownstream.SomoregoodnewsatHealthcarePartnerstodayversusninemonthsagothanhasbeenthecaseeversinceweannouncedthedeal.

Andjustbreakingthroughallthesortofnoiseinthebadstuff,goodstuffparadigm,throughallthenoise,whenwesignedthedeal,whenwesignedtheletterofintent,theEBITDArunratewas$470million.Let'sjustputthisalloncontext.Sowhenwedecidedtopaywhatwepaidandthetermsthatwepaidit,theEBITDArunratewas$470million.

Ifyoutakethemidpointof2015guidance,whichofcoursesaysriskonthedownsideandupsideontheupside.Butifyoutakethemidpointof2015guidance,that'llbe$420million.Butasmanyofyourecall,wehaveaverysubstantial,harddollarguaranteedtaxbenefitthatwesave$100millionintaxeseveryyear,whichisequivalentofcoursetoabout$160millioninadditionalEBITDAguaranteed15years.

Andsothatnumberistobeadjusted,thereallifecash-on-cashreturn,becauseinalong-term,businessescanonlyeatthatwhichtheycanpurchasethroughthecashtheygenerateversusthecashofyearsthattheyhavedeployed.Thatisthelawofcapitalisticgravityandwhichwehavealotofrespectfor.And,therefore,theadjustedEBITDAonthedealiscurrentlyrunningabout$587millionatthemidpoint'15guidance.Andjustsodespiteallthenoiseandsomeofthedisappointmentsarethebasicfundamentaltermsandeconomicstructureofthedealareveryhealthy.

Havingsaidthat,there'rechallengesand,ofcourse,opportunities.Onthechallengeside,internally,wehavetogetbetterandbetteratexportingthatwhichweareverygoodat.Itisonethingtotakecareof200,000livesverywellinagloballycapitatedbasis.It'sanotherthingtogoandhelpsomeoneelse,anewpartner,dothatinanewcitywherethatkindofinfrastructureisnotyetsetup.

It'satotallyachievablething.We'remakingverygoodprogressonit,butwearenotdone.Wearenotpracticedatityet.We'renotclosetoperfectingit.Andtodoso,ittakessomenewcapabilitieswhichtakessometimeandeffort.

Externally,ofcourse,there'realotofpeoplegoingafterthesameriskpools.Sothegoodnewsisthat




createsdemandforourcapability,thebadnewsisthatmeansthere'smorecompetitionfordeliveringthatcapabilityof-suchislife.We'llseehowwedointermsofplayingthatfootballgameovertime.

Andthen,ofcourse,withMA,there'sstillreimbursementriskinthefuture,although,ingeneral,thepoliticalcontextinwhichthesedecisionsarebeingmadeishealthierforMAtodaythanitwasafewyearsago.

Ontheopportunitiesside,wehavesignificantgrowthpotentialinourthreesubstantiallegacymarkets.Asbigastheyare,theycangetbigger.Wehavedemonstratedabilitytoscale,whichveryfewotherscanputonthetable.Andwe'readesirablepartnertoalotofdifferentfolks.

Andthenexternally,wethinkthisdeclineincommercialHMOlivesissomethingthatwe'regoingtoattackandhopefullybeabletomakesomerelativeprogresson.AndthecaseforcontinuedMAgrowthisverystrong,asmanyofyouknowaswellorbetterthanwedo.

Areminder,atHCP-E)-E))ataGlance,it'sjustkindoftheinfrastructurethatexists,thescalethatexists,themarketfootprintthatexists,Ithinkthehospitalnumberisincorrect.Iguessprobablyhospitalcontracts,nothospitals.Sopleaseignorethat.

Ontothebusinessoverviewhere,we'renowinthesestates.AndwearetheleadingindependentmedicalgroupinAmerica.Thisisabigdeal.Thereareinsurancecompanieswhohavemovedintothephysicianproviderspace.Therearehealthsystemsthatarebuyingphysicianpracticesandemployingphysicians.Butwhenyouthinkaboutindependentmedicalgroup,somethingthathasphysician,caregiverDNA,notinsurancecompanyDNA,nothospitalDNA,wearetheleadingindependentmedicalgroupinAmerica.Alotofdoctorsareinterestedinbecomingassociatedwithsomeonelikeus.

Thisiswhatwedo.Iwon'tgothroughitbecausesomanyofyouknowitsowell.Butit'sareasonablecharacterizationandaconcisewayoftheconstructofwhatwedothatweworkincommercialMedicareandMedicaidwhichwebelieveisinperformance-basedcontracting.Itdoesnothavetobeinthisglobalcap.Andthenweeliminatewastetoimprovequalitywhichreducescost.Andsometimes,wehavesomeinfluenceoverdownstreamrates.Andaslongasyouprovideapatientwithdistinctiveaccessandcare,andphysicianswithadistinctiveplacetowork,youcanhaveaheckofascalablemodel.

Wehavedifferentiatedcapabilities.Youdon'thavetobelieveusonthis.Youcantalktothefolksweworkwithinthedifferentmarketsandseethat,bothfromaclinicalqualitypointofviewandacostmanagementpointofview,weareinfactonaveragedifferentiated.

Andthenumbersreflectedusingthegovernment'sstarratingsystem,Idon'tknowifthere'sanyotherorganizationinAmericathatcanputupaslidelikethisonewhereyouseeanunusuallyconsistentlevelofstarratingaccomplishmentwhich,ofcourse,correlatestotwothings--one,actualclinicalquality.

Ifyouwrotedownthosemeasures,andifyouwerelookingatfiveorganizationsthataremanaging800,000peopleinaglobalcapbasisor320,000MApatientsandonegroupacrossfivemarketscanputthesekindofnumbersonthetableandanotheronehaslowernumbers,youwouldnothesitateastowhereyourecommendedforyourmomordadtogobetakencareof.Inthesametime,it'snotsurprising,therefore,thatthisleadstofewerhospitalizationsandfewerbereavements.Andwecontinuetogetbetter,andplanondoingso,andthinkthere'salotofopportunityintheyearstocome.

Andweareregardedasanexcellentplacetowork,verycomparabletowhatyouareusedtoonakidneycaresideand,inparticularagoodplaceforclinicians,physicians,tospendtheircareer.

We'realeader.Youcanseehereacrossourmarketsjusthowsubstantialourlocalphysicianpresenceis,physiciansandextendersinthiscase,andinsomecaseshowitextensivetheIPAphysiciansare.Someof




theIPAnumbersareactuallylow.ThisisactuallyprobablyjustIPAPCPs.Andinmostmarketsweare,infact,theleadingindependentmedicalgroup,theleadingindependentphysiciannetwork.

We'regrowingontheteamphysicianwhichisourtermforemployedphysicians.Sowhenyouthinkofteamphysiciansandextenders,we'regrowinginlegacymarkets,we'regrowinginnewmarkets.We'rehopingwecanacceleratethis.

Andtheteamoverall,leadershipteamisnowgettingincreasinglynicelybalanced.Soatthecorporatelevel,ledbyTylerandChan,ourleadMDsfortheentireenterprise,18yearsand13yearsatHCP-E)-E))respectively.

Thenmovingtosomeofthefolkswhoareseasonedveterans,bothformerCOOsofourkidneycarefitnesswhohavemovedover,JoeMello,whohadjustreturnedtousasofafewmonthsagoandisintheroomheretoday.EarlierinhiscareerbeforehestartedwithDaVitaKidneyCare,wastheCOOofFriendlyHillsClinicandsomeotheroperationswhichweresomeofthepioneersofdoingglobalcapbackinthedaysbeforeMedPartners,[Ficor],etcetera.Andsovery,verydeeproots.Infact,awholebunchofpeopleatHealthCarePartnersusedtoworkforJoewhenhewasCOOofsomeofthelargerglobalcaporganizationsinLA20yearsago.

Andthenyoucanseetherestofthelistwherewe'retakingagroupthatwaslargelyallhome-grownandinjectingamixtureoffolksfromKidneyCareaswellasamixtureofpeoplefrompayersandotherorganizationstoenrichtheintellectualandexperientialdiversityoftheplace.

Andonthemarketside,yousee,again,astrongphysicianleadershiprepresentation.Andagain,anemergingmixofpeoplewithdiverseexperientialbackgrounds.Theyaregoingtomakeusmorenimble,moreinnovativeand,hopefully,everbettergrowersandcontractors.

Ontothebuildingblocksofthebusiness,soyoucouldtakeyournumberofmembers--ofcourse,there'ssomemixissuesthere,butsimplystated,members--andthenyougetyourmargin.Andthenyouhavewhat'sgoingoninthenewmarkets,whichistosaythosemarketswe'vealreadyaddedtothelegacy,andthenfuturemarketswhicharethosewe'renotinyet.

Let'stalkabouteachinturn.ButthebasicfundamentalsofMAgrowthareanexcitingpartoftheinvestmentthesis.Thereisagrowingrecognitionamongthepartofseniorsthatyougetmoreservice,yougetmorecare,yougetmoreattention.

IfyoulookatthedemographicsandthepercentageofpeoplewhowhentheyageintoMedicareareopen-mindedandwhoarepositiveaboutthistypeofcare,managedcare,integratedcare,thenumberstodayareverydifferentthanevensevenoreightyearsago,becauseofthedemographicissuesandbecauseofjustthemomentumthat'sbeenpickedup.Whenyoustartgettingmoreandmorecommunitieswhere38%,39%ofthehumanbeingsareinMedicareAdvantage,it'snotthenewprogram.It'sbecomemoreandmorethenorm.Andsojusttheenvironmentalfundamentalsofdemandarevery,veryfavorable.

AndinD.C.,you'veseenaverysignificantsortofsubtletectonicplateshiftingwherethenumberofmoderatedemocratswhofiveyearsagowouldhavegonealongwithanyideasaboutcuttingMAbecauseofthediscomfortamongthemoreliberaldemocratswiththeprivatesectorpresenceandstrengthandvibrancyinMedicareAdvantage.You'veseenawholebunchofthemshiftnowtobefarmorefavorablebecausesuchahighpercentageoftheirbeneficiariesareinMedicareAdvantageandhappierthantheotherfolks.Andwe'regeneratingthekindofclinicalimprovementsmoreandmoresystemicallythatpeoplecareabout.

Soyou'veseen,again,thissortofsubtleshifttothetectonicplate,butnonetheless,fundamentaland




verysignificantforthelongterm.Itdoesn'tmeanitwillbeasmoothpathatall,that'snotwhattectonicplatesnecessarilydo.Butwhentheystartmovinginonedirection,they'reprettyhardtostop.

Inourlegacymarkets,youcanseethatthepenetrationofMAoverallisprettysubstantial.Andtwoofthemabovethenationalaverage,onerightabovethenationalaverage.Butyoucanseethey'restillgrowingatagoodclip.Ifyoulookatthe'12to'14CAGRandthegrowthinmarketMAlives,averyniceclipstill,8%to9%,despitethosepenetrationlevels.Andthenifyoulookatourperformanceinthatsameperiod,gainingmarketshareinasignificantwaydespitetheturmoil,despitethechanges.

Infact,wegrewmorethanwewerepreparedtohandlewhichledtosomeseriousoperatingissues.Butwewouldhaveratherhadamorerobustgrowthandhavetodealwithimprovingouroperationsarounditthanofoperatedperfectlyandhadnogrowth.Andso,obviously,wedon'twanttoendupchoosingbetweenthosetwoalternatives.Butinthiscase,thisiswhatwewouldhavechosen.Butalso,thesearen'tsustainablegrowthrates,soIdon'twanttocreditanyinappropriateperceptionsbecausesomeofthishadtodowithspurtsofgrowthinthosemarketsthatwejustcan't--there'snowaycompetitivelytosustainthatkindofdifference.

Butoverall,youcanseeourtotallivesareup.Downincommercialbecauseofsomeofthebasictrendsaroundpeoplemovingtoself-insuredstatusandhighdeductiblehealthplansandtherest.Butoverallincreasing,although,thatinandofitselfisnotnecessarilythebestindicatorofhowwe'redoing.

Soonmembership,ifyoujusthadtotakeawayandtalktoyourinvestmentpartnersbackattheoffice,goodnews,MAgrowthlooksattractive.Commercialisdeclining,andDaVitahopestodosomethingaboutthattoataminimumdeclinelessthanotherfolks.Andwe'llseeifwecanpullthatoff.

Onthemarginfront,I'mnotgoingtogothroughingreatdetaileverythingthat'sgoingonwithMAreimbursementbecausesomanyofyouaresoconversant.However,duringQ&A,we'rehappytotakequestionsonthatandTedHalkias,ourHCP-E)-E))CFOand[Leanne]fromD.C.cantalkaboutthisaswellasI.

Butalotofdifferentcomponents.Andthegoodnewsis,abunchoftheverydifficultstuffthat'sbeengoingoninthelastcoupleofyearsispeteringoutorishopefullydoneintermsofthenewmodelbeingphasedin.Theytransitiontofee-for-servicelevels,etcetera,etcetera.

Intermsofstarratings,I'vealreadytalkedaboutthatalittlebit.You'requitefamiliar.Wedovery,verywellherewhichisgoodforourpayerpartners,goodforourpatients,etcetera.Thisdoescreateadilemmaforthegovernmentbecausethegovernmentcanlookatthisassortofstructuralinflation,asmoreandmorepeoplegetbetter.

Ifyoubelieveinyourmeasures,ifyoubelieveinyourmetrics,youshouldbethrilledthatmoreandmorepeoplearehittingthosehigherlevels,becausesocietyshouldbegettinganeconomicreturnonthoseadditionalreimbursementlevelsthattheyreceived.It'snotalwaysthewaytheylookatit,however.Sometimestheylookedatitassortofastructuralinflationthatneedstobeoffset.Andthat'sapoliticalconceptualanddatabattlethatweneedtofightintheyearstocome.

Onthecommercialrates,ingeneral,whatwe'reseeingisthatwhatwegetpaidismatchingwhat'shappeningwithcostincreases.Soofcourse,there'sadistributioncurveonwhatwegetinrateincreases,there'sadistributioncurveonwhatwe'reexperiencingintermsofcostincreases.But,onaverage,thosethingsappeartobestayingreasonablyparallelandinourlegacymarketsitfeelslikethatrealitymightbesustainedinthenearterm.

However,therearethingsgoingoninthedistributionchannelswiththeemergenceoflowercostproducts.There'salowercost,atthispoint,primarilydrivenbyproviderswillingtosignupfordiscountsin




exchangeforthehopeofincrementalvolume.Andweallknowinthepasthowoftenthosehopeshavebeendashedand,therefore,thatthoseproductlineshavenotbeensustainable.Anduptothispoint,wehavebasicallynotparticipated.Andsowe'vebeenabletogrowdespiteturningdownmostofthelowerreimbursementnetworks.

We,now,asallthoseproductsreachtheirsecondstageoftheirsecondyearorthirdyear,sortofthenextchapterintheirexistence,ourintentonengagingaconversationisaroundachievingsavingsthroughamorethoughtfulandcoordinatedutilizationmanagementproductdesign,benefitdesign,etcetera,asopposedtojustproviderdiscounts.Andaslongaswecandothat,aswellasdeliverdistinctiveserviceingeographiccoverage,wemaybeabletoparticipateinsomeofthoseandfieldsomeadditionalgrowthinawaythatisattractiveeconomically.Proofwillbeinthepudding,ofcourse.

Oneofthethingsthatweinherited,aswe'vetalkedaboutthelastcoupleofyears,iswehadalotofcontractswithpayersthatwerenotveryaligned,sothatifbenefitswentoneway,webenefitedalmostexclusively.Ifbenefitswenttheotherway,thepayerbenefitalmostexclusivelyingeneral.That'snotourphilosophy.Wepreferwiththepeopleweworkwithmostintenselytobesmilingorfrowningatmoreorlessthesametime.

Andso,althoughit'sahighlyimperfectratingsystemrightnow,wecantellyouthatwemovedfroma100%notalignedtoabouttwo-thirdssomewhataligned.AndIwouldsaywehaven'tyet,withperhapsoneexception,achievedfullstrategicalignmentinawaythatwe'rereallydoingsomepositive,somestufftogether.Somaybewehave10%or20%ofthat.Butwe'vemovedalotofthestuffawayfromjustinappropriatedistractingzerosometerms.

We'llprobablybeenabletoclarifyandrefinetheprecisionofthesecategoriesastheyearsrollon.

Historically,onthecostside,ifyoulookateverythingtogetheracrossgeographies,acrossourplanmix,etcetera,etcetera,thecostshavebeengoingup2%to3%.Andatthispoint,it'sdifficulttodoanyseriousforecastingoutofthenextfewyears.Alotofdynamicsandtherealitiesaredifferentmarketbymarket.Butcertainly,thishasbeenthehistoricaltrendandthere'snothingthatlookslikeit'sgoingtobedifferenttomorrowonthat.

Weare,however,goingtoaddawholebunchofexpensethanwebeentocreateafundamentallydifferentgrowthcapability,afundamentallymorerobustvaluepropositioninexistingmarkets,andanintenselymoreaggressivegrowthtrajectoryelsewhere.Andsothat'sgoingtocostmoney,that'sgoingtoaddtoourfixedcostsotospeak.

Ourcentralizedcapabilityisnotcentralizedgeographicallybutcentralizedintermsoftheabilitytodeploytonewmarketsandthenewproducts.Andsoseparatefromoperatingmargins,lookingrelativelystablewithallthenormalqualifiersaboutwhoknowswhatinfactwillhappen,separatefromthat,wewillbeinvestingsomeofyourcapitalinbuildingourcapabilities.

Somargins,overall,lookkindofflat,exceptyougottosubtractouttheinvestmentandnewcapabilities.

Withrespecttonewmarkets,thesearethemarketsthatwe'veenteredinthelastcoupleofyears.SothisisColorado,thisisTandigminPhiladelphia,andthisPhoenixandAlbuquerque.Butwithrespecttothosefour,ineverycasewe'reseeingsignificantimprovementsincapability.Andcoupleofthosecases,verysignificantimprovementsonthemap,thetwoprofitturnaroundsthatwedidinAlbuquerqueandPhoenix.

Sothecapabilityturnsaregood,thegrowthisgood,andtheeconomicsaregood.Butexactlywhat'sgoingtohappenoverthenextyeartwo,we'renotpreparedtoputastakeintheground.Wethinktheeconomicsaregoingtogetbetteroverthenextcoupleofyears.Mightnotbeenoughtoaffectyourinvestmentassessment,butthetrajectoryispositive,justnotdramatic.Andwecantakemorequestions




aboutthatinQ&A.

Andsoin'16,it'shardtosayincrementallywhatexactlywillhappenacrossthatportfolioofnewmarketsversus'15.In'17and'18wefeelquitecomfortablethat,onewayoranother,theeconomicsaregoingtobebetter.

Thenontofuturemarkets--andhere,thisisrepetitive.Thathasitsownvirtue.Welikeacquiringleadingmedicalgroups,partneringwiththeleadingmedicalgroups,that'sPowerAlleyforus.That'sColoradoSprings.Welovetodothatandwe'reinsomeotherconversationsaswespeak.

Butinaddition,we'restillveryinterestedinthispayerandpartner,thishealthsystemandpayerpartnerships.Payerpartnershipslikewe'redoingwithIndependenceBlueCrossinPhiladelphia,intheformofTandigmandhealthsystempartnershipsliketheoneswe'vetalkedaboutwithCenturaandaretalkingtosomeothers.

Andsoifyoulookatfuturemarkets--sometimesifyoubuyagroup,youpickupsomeimmediateOIorEBITDAifyou'rebuyingthatatamultiple.Inothercases,youmightbebuyingagroupwithnoretainedearningsandyou'regoingtotransformitintoanentitythatcantakeriskandgenerateprofitthatway.Andsobuyingmedicalgroups,youmightgetanOIbumpinthenextcoupleyears.Youmightnot,youmighthavetheopposite.

Andwithrespecttohealthsystemandpayerpartnerships,again,dependingonthenatureofthedeal,itmaybethatyouincuroperatinglossesforthefirstcoupleofyearswhichcanbeeconomicallyfarmoreattractivethanpayingaseventimesmultipleonbuyingEBITDAbecauseyoucangenerateitforfarlessthanseventimes.Butitdoestaketwotothreeyearstomovealongthatpath.Andsoit'sdifficulttopredict.Butinthefuturemarketswemoveinto,they'regoingtobeshorttermadditivetoOIordilutivetoshorttermOI.Itdependsonthenatureofthedeal.

Andsoanaggregate,you'relookingattosortofbaselinegrowth.Ifyoulookatawholebunchofthingsnotchangingfromtheircurrenttrajectory,you'relookingat0%to3%baselinegrowth.Butthenit'splusorminuswhetherornotweoutperformourcompetitioninlegacymarketsorunderperformourcompetitioninthelegacymarket.Soit'splusorminusthatcompetitiveperformanceandhowmuchlocalgrowthwecapture.Andthenit'splusorminusnewandfuturemarketgrowth.

Cashflow(inaudible)isaninterestingstory.KidneyCare,we'vetalkedabouttheattractivecashflowcharacteristicsofthisbusinessfor16yearsnow.Andthat'swhatyouseerepresentedintheleft.Thesearenumbersthatarecomparabletothosethatwe'vetalkedaboutandwe'veusedtofuelourgrowthforthelast16years.

PerhapslessevidentbutnoteworthyisthecashflowcharacteristicofHealthCarePartnerswhichwetalkedaboutthetimethatweannouncedthedeal.Butit'sworththatwenowthenstepbackandlookatit.Andofcourseanyyearortwocanbealittlebitupordown,butthefundamentalcashflowcharacteristicsofthebusinesswherealotofyourrevenueisgloballycapitatedandyougetpaidbeforeyouenduphavingtopaystuffoutinmanycases,andisverylowmaintenanceCapEx,etcetera,youcanseethatwhileitwas12%ofouradjustedOI,16%ofouradjustedEBITDA,there's28%ofwhatwe'recallingnormalgrowthcashflows.Soit'sbeforedoingacquisitions,beforedenovos,etcetera.

Andso,Irepeat,forthoseofyouwhoarenewerinevaluatingus,weareverymuchaboutlongtermaftertaxcash-on-cashreturnsastheultimatefuelthatoneneedstokeepacorporateenginegoing.

Ondivisionstrategy,ourplatformwithHealthCarePartnershastremendousoptionalityandpotentialityfordownstream.Rightnow,ourhandsarefullgrowingwhatwedonow.However,thetypesofthingsthatwe'reactivelycontemplating--ourmanagingMAplansformedicalgroupsandhealthsystems,doing




practicemanagementforhealthsystems,wearealreadydoingsomedirecttoemployerworkwhichisexciting,toofferveryextensiveambulatorycareunderperformance-basedcontractingthatcanbelargelyfee-for-service,andjustingeneraldoingmoreandmoreperformance-basedfee-for-servicenotunlikewhatwe'redoingmoreandmoreofinKidneyCare.Sothisbusinessplatform,oncewe'vegotittothespotwewantittointermsofmanagementprocessandtherightadditionaltalentsowecandonewthings,thisbusinessplatformhasalotofpotential.

Andwhatwewanttobeknownforinthisroomwithyou,five,six,sevenyearsfromnow,wewouldwantourHealthCarePartnersbrandthroughoutmuchofAmerica,amongphysicians,amongpatients,amongmembers,amongpayers,tobeaboutdifferentiatedclinicaloutcomes,tobeaboutdifferentiatedpatientexperience,inawaythathealthcareisrarelyseen.Notjustwhenyou'reinaclinic,inanexamroomwiththedoctorandnurse,butthroughouttheentireyear.Andyouandyourfamily'sinteractionwithyourprovider,wewantthattobeaquantitativelyandqualitativelydifferenttypeofexperience.

Weadjustedourabsoluteevenconceptualinfancy,andthereisnow--althoughwecandosomeveryniceservicerelativetoconventionalhealthcarerightnow,butintermsofbeingdifferentiatedandhavingbrandloyaltylikeStarbucks,likeNordstrom,likeLexus,wearejustatthebeginningofthatjourneyandquiteabitexcitedaboutwhatitcouldmeanforpatients,forourteammates,andforourshareholders.

Thirdly,physicianexperience,wewouldliketobeknownasonethebestplacesforaphysiciantospendhisorhercareerinAmericasothatwhenpeoplecomeoutofmedschool,whentheycomeoutofresidencies,whentheycomeoutoffellowships,evenincitiesthatwe'renotin,theythinkaboutcallingustointerviewforajob.Thattheemploymentmarketforphysiciansisgoingtobeverydifferentworldfivetosixyearsnow.

Peoplegraduatingfromthosedifferentprogramslookattheircareersverydifferently,lookattheiroptionsverydifferently.AndjustasinvirtuallyeveryotherarenainAmericatherearecertainorganizationsthathaveareputationforbeingabetterplacetowork,amorerespectfulplacetowork,ahealthierplacetowork,amorethoughtfulplacetowork,wethinkinhealthcarethat'sgoingtobecomemoreandmorerelevant.Andforus,fromourKidneyCareexperience,thatspeakstoourstrengthsandoursweetspot.Andlastly,wewanttobeagreatplacetoworkforallthefolks.

Sothesearethefourthingsthathopefullywe'llgettotalkaboutwithyousixyearsfromnowinaslightlylessblackroomthanthisone.

Andonthevaluepropositionfront,thisisjustasamplingofsomeoftheclinicalinitiativesthatwe'reworkingonrightnow.It'saseriousstakesinthegroundonseriousissuesthatwetrulydopopulationhealth.Butjusttosay,we'vegot800,000Americanswherewe'veacceptedresponsibilityfortheirholisticlongitudinalcare.Andweactuallyinvestinit,weactuallydoit.Butthesearesomeoftheareaswhereweareveryexcitedabouthowwemightbeabletogetalotbetterthisyearversuslastyear.EventhoughImadethesecategories,we'realreadyquitedifferentiated.

OntoKidneyCare,first,ataglance,thesearehighlevelnumbersandthisisatypicalcenter.Ithinkthisisthesamepictureyouseenforyears.

Andontoinvestmenthighlights--soyouknowmuchofthis,stabledemandgrowth,steadycashflows,significantgovernmentengagement,thatthisisanarea--becausewearesuchadiscreteservicethatthetransparencybetweenusandthegovernment,betweenusinandMedicareisveryhigh,wethinkthat'sagoodthing.Becauseaslongaswebringasuperiorandever-improvingvaluepropositiontothetable,wecangetgoodstuffdonetogether,andsowelikethat.Sothoseareallindustrycharacteristics.

OntheDaVitaside,ourclinicaloutcomesaresimplyoutstandingandthegapisgettingbiggernot




smaller.Wehavescale,Iguess,that'srelativelyobvious.We'vebeendoingthisforawhilewithsomeconsistency.Theteamhasbeenaroundforawhile,althoughwealsoinfuseitregularlywithsomenewfolksfromoutside.Andwethink,again,wehavethisplatformthat'sverywell-positionedandveryabletotakeadvantageofnewcaremodels.

Thedemandscurveiswell-published.There'salotofgovernmentdata.WearelocatedinademographicjetstreamofAmericagiventheincreasedproblemsofkidneydiseaseamongthosethatareelderlyHispanicorAfrican-American.

Atthesametime,wehaveeveryhopethatcarefordiabetesandhypertensionimprovesacrossAmericaandbeginstoaffectthispipeline.Butsofar,thedemographicjetstreamisoffsettinganyclinicalimprovementthat'shappeningacrossthepopulation.Howthosetwoforcesnetout,however,isveryhardtosay.

WetakecareofaboutathirdofthepatientsinAmerica,alittlemorethanthat,whichisaveryexcitingforus.Youpickyourmetric,whetherit'spublicdataorprivatedataoracombination,wearetheleaderoramongtheleaders.Andwe'vegot55,000folkswhoareincrediblyexcitedaboutthefactthatthosewordsaretrue.

Andwehavewhatwecallourqualitypyramid,whichhasthedifferentbuildingblocksoftrulydoingpopulationhealth.ItisworthnotingthatinKidneyCarewe're--whatever,97%fee-for-service,probably92%conventionalfee-for-servicewithoutanysortofperformancesticker.I'mjustmakingupthosenumbers,butit'sveryhigh.

Butnonetheless,foryearswehavemanagersinourpopulationhealthcentersbeforethephraseexisted.Andthat'sdrivenourclinicalimprovements.Andthisparadigmsortofcaptureswhat'stheultimatepeakwhichisthequalityoflifeforthatpatientandtheirfamily,andthenallthebuildingblocksunderneath.

Thegovernmentistakinganumberofcuts.Nocutisperfect.Mostcutsareuseful.Thisisthemostrecentone,it'saforcedcurve,oneofthefirsttimes,maybethefirsttimethatTMSsaidwe'regoingtohaveforcedcurves.Sojustlikeaprofessorsayingonly10%ofyouupthere--mymathstudentscangetanAandonly20%cangetaBandthen40%getaC,theclassicoldschoolforcedcurve,that'swhattheydecidedtodo.

Andareasonablesetofmetrics--again,nosetofmetricsisperfect,butwhenyoustarttalkingaboutwhereyouwanttoput170,000patientswhichisahowmanywehaveor500,000likeAmericahas,youwouldpayalotofattentiontoanyseriousdifferentiationaccordingtothosemetrics,that'sthebottomline.Andhere,youcanseeinthetop--intermsofwhogotAs,18%ofourcentersgotAswhichmeansthatonly6%oftherestofthecommunitycenterscouldgetAs.Andyousee33%ofoursgotBs,andetcetera,etcetera.Sotheskewisabsolutelydramaticinawaythatnoonewouldignoredespitethedata'simperfections.

Andifthatweretheonlydatasource,itwouldbelesssignificant.ButthegovernmentalsohaswhattheycalltheQIPsystem,qualityincentivepayments,whichisabitofmisnomersincethereareonlypenalties.Andyoucanseethat,forus,thepercentageofclinicsthathadanypenaltydramaticallylowered.Again,thisistiedtometricswhichareclinicalinnatureorwouldcorrelatewithclinicaloperatingdiscipline.

Andthen,onceagain,ifyoutookamulti-yearcutandcomparedthe--yougetthesameanswer.Sothesearethreedifferentwaystocuttingthedatabut,thisisrelevantforyourcapitalbecauseit,overtime,qualityismatteringmoreandmoreandmore.Andthedemonstrabilityofquality,thetransparencyofquality,thereliabilityofquality,thevitalityofquality,theseareallbecomingevermoreimportant.

We'veinvestedinthisforyearsbecauseofourmission.Maybeinthenext10yearsit'llbecomemoreand




morerelevantforourmargin.Andonthisscorethere'relotsofdatathatcanmakeyoufeelbetteraboutyourinvestmentonboththosedimensionsofmissionandmargin.

Weloveshowingtheadjustmentingross-mortalityovertheleft.Wedon'tthinkthere'sanyotherorganizationofscalethatcanshowdatalikethat,thatkindofdrop.Theoneblipyouseebackinthe--yearsago,that'swhenboughtGambro,whichaddedabout--I'mnotgoingtogetitright,about9,000employees,somaybe20,000to30,000patients,probablyabout30,000.Andtheywerenotasclinicallygood,andsoournumbersallwentupuntilwecouldbringthembackintheline.

Butifthisiscumulativelyabouta29%dropinmortalityinpopulationthat'sgettingolderandsicker,andwhereourpopulationskewstotheslightlymoreacutelyI'llthantheoverallAmericanpopulation.

Andthenseparately,ifforgetusforamomentandjustlookattheirlargedialysisorganizations,theLDOs,andcompareustoeveryoneelse,youcanseethatasmuchassomepeoplewouldpreferitnottobetrue,thefor-profitLDOsarehigherqualitythanthesmallindependents.Andthereisjustnowayarounditasmuchassomefolksideologicallyareuncomfortablewithit.Itisabsolutelytrue.Andmaybe,youknow,we'vepublishedpapersthatshowthattheaveragequalityofthecenterswebuyversuswheretheyarethreeyearslater,there'szeroambiguityaboutthedifference.

Andswitchingtoanotheraspectofourtrackrecordwhichisjustgoingbackto2003,orwecouldgobackalittlebitfurtherastooneinthatwewereinorabovearangeofOIestimating,sofarwe'vehitthatmark.

Ontothebuildingblocks,inthisbusinessisthesametrilogythatyou'reusedtoseeing.Anumberoftreatmentstimesrevenuepertreatmentminustheexpensefortreatment.Onanon-acquiredgrowthnormalized,youcanseewe'restayinginthatsamegeneralpocketoffour-and-a-halftofiverightnowattheslightlylowerend.

Theacquiredcentershasdroppedoffdramaticallyinthelastcoupleyears.It'snotthatwe'velostmarketshareofdealsgettingdone,it'sbecausetherearefewerdealsgettingdone,period.

Soonthetreatmentside,you'relookingat4.5%to6%growth.That'sareasonableguesstimateasyoulookatoverthenexttwotothreeyears.Obviously,again,there'supsideanddownsideinthat,butthat'sthefactpartofthecurveintermsofprobabilisticdistribution.

Ontherevenueside,wefacethesamequandarywe'vefacefor15to16yearswhichisthat83%ofpatientsareMedicare,7%Medicaid,10%areprivate,andwelosemoneyonaverageon90%ofthepatientswetakecareof.Prettyfrustratingsystem,butit'sonethatwe'veoperatedinforsometimewheretheprivatesectorsubsidizesthegovernment.

It'saverycleanmapsincevirtuallyallourcentersarediscreteeconomicentities.Andsothere'snoambiguityaboutthiseconomicfact,itisjusttrue.

ESRD,asyouknow,wentthroughawholebunchofreimbursementconversationsandmodificationsoverthepastcoupleofyears.Here'showitmetedoutintheendastowhatwe'regoingtoget.

AndIwouldexpectasetofclosures.Theproblemisthatifyoudonothaveanyprivatepatients,it'sverydifficulttokeepacenteropenonaverage.Andweclosedmorecentersthispastyearthaninanyyearinalongtime.Andtheindustryclosed50centers.

Now,newcentersarebeingopenedup.Butthoseareindemographicallydifferentiatedplacesthathadenoughcommercialpaytooffsetthegovernmentdeficit.Sotheseclosuresareprimarilyhappeninginplacesthatarelowerincome,lowereducation,becausetherearen'tcommercialpatientsaround.




Wehaveanother50orsothatareonourwatchlist.Wehave200whereweoperatedaloss.Andinsomecases,wehavehighhopesthatthat'llchange.Inothercases,wedon'treallythathope.Butfromasenseofmission,we'rejustnotcomfortableclosingthosedoors,andsowe'regoingtocarrythemonforaslongaswecan.

Andofcourseinthosecaseswherewedohavetocloseacenter,weleteverybodyknow,wegothroughaveryextensiveplanningprocesstryingtoensurethatthere'scontinuityofcare.Itisinescapable,however,thatforalotofpatientsandphysicians,itislessconvenient,andinsomecases,inevitablethatit'slowerqualitycarebecausethey'removingfromustosomebodyelse.

Inothercases,lowerqualitycare,becausethey'removingfromadayshifttoalatenightshift.Thatleadstoallsortsofissueswithrespecttothenatureoftheclinicalpersonnelwhoworkinthoseshifts,thepercentageofmistreatmentsthathappeninlifewhenyouworkinthoseinstances,andevenjustthephysiologicalchallengeofgettingdialysiswhenyou'refarmorefatiguedbecauseit'slateintheevening.Soforallsortsofmultivariatereasonsthere'reseriousqualityimplicationswhencenterscloseinsomecases.

I'vealreadytalkedaboutthis,thegoodnewsisthatthere'snoillusionaroundtheeconomicstructureofkidneycareinAmerica.Andsoeverybodythatrunsadialysiscenterknowsthatthey'vegottorelyonthosecommercialpay.Theydon'tsubsidizeMedicareunlesstheyhaveoneofthosesmallpocketsinAmericawhereyoucanactuallymakeitonMedicarealone.

Onethecommercialside,separatefromtheconventionalnegotiations,there'salotofnewstuffgoingonwithnarrownetworksanddifferentproductdesignsandemployersdoingdifferentthings,etcetera.Andsogivenwerelyoncommerciallivesasoureconomiclifelinetosubsidizethe90%ofourpatientsthataregovernmentpay,givenwerelyonthat,wegetverynervouswhenthere'schange.Andyoucanarguethere'supsideinthechange,youcanarguethere'sdownside.There'scertainlysomeofboth.Butwegetverynervouswhentherearestructuralchangestooureconomiclifeline.

WhathasnotchangedisthequalitythatI'vetalkedabout,thefactthattherestillisalife-savingtherapythat'snotlikelytobereplacedanytimesoon,thatmanyofthesereferralsareprettyintenselymadeforclinicalreasonsandwhicharerelativelynetworkindependent.Thereisatightbondbetweenpatientsandtheircenter,theircaregivers,theirphysician.

Therearesomeseriousnetworkadequacyissuesbeingsortedoutsothatpeoplecan'tbuildnarrownetworkswithschlockdialysis.Andwestillhavearelativelyfragmentedpatientbasewhenthepayerisevaluatingtheirgeographicdistributionofdialysispatients.It'snotthattheyhavethousandsofthemineachcity.

Othercommercialcontractingsetaside,givensomeofthosestructuralchangesgoingon,wecanaskthequestion,well,sortofthefundamentalsofpayercontractingchanged?Andtheanswerisno.Imean,thisisalowfixedcost,highvariablecostbusiness.Soit'sradicallydifferentthanahospital,anursinghome,etcetera,orasurgerycenter,etcetera.

Thisisnotaplacewhereyoucancutpriceandmakeituponvolumebecauseofyourpurevariablecost.It'sexactlytheoppositeofahospital.Andthere'ssomeseriousstickiness,ofcourse.Andsoingeneral,inresponsetothequestionsweget,we'renotorientedtotryto,despiteoursize,thinkthatwe'regoingtolowerpriceandgetabunchofincrementalvolume.Thatdoesn'tseemveryplausible.

Ontherevenuepertreatmentside,therefore,youputthemaltogether,andthebadnewsis,flatisalltoorealascenario.Andmaybeweget1.5%growth.Butthisis,ofcourse,afunctionofdoingbetterthanthisonthecommercialside,butitbeingweighteddownbythe90%ofourbusinessthat'sonthegovernmentside.Andsowhatyou'reseeinghereistheweightedaverageresult.Andonceagain,ofcourse,there's




downsideandthere'supside,butthisisthefatpartoftheirprobabilisticcurve.

Ontheexpensepertreatmentside,thisisthesamebreakoutwehaveshownyouhistorically.There'sbeennodramaticchange.We'lltalkalittlebitlateraboutsomepotentialforchangegoingforward.Butrightnow,thisishistoricaltrendscontinued.

OntoESAs.There'salotgoingonhere.It'sanewworldemergingwhereAmgenand[EPO]willhavecompetition.InEurope,thisledtosignificantlylowerprices.AndAmgenhasretaineditsmarketleadershipoverall.Butitdidhavetodosomeprice-reducingtodothat.Andwe,ofcourse,arehopingforareplayofthatbasicstoryintheintermediatefuture.

Ouragreement,justtoremindyou,gothrough2018.Weknewwhenwesignedthelong-termcontractthatitwaslikelytherewouldbenewentrantsalongtheway.Alotofdifferentpredictionsaboutwhen.Ithinkit'sendeduphappeningrightaboutthemidpointofwhatweexpectedwhenwedidthescenarioanalysisbackthen.Butthere'sjustalotofuncertaintyhere.

Andwhattypicallyhappensandwhatwe'rehopinghappenshereisthatincreasedcompetitionleadstosomelowerprices.Andofcourse,peoplelikeFMCandDaVitaandothers,we,inourpositions,haveasignificantabilitytomovefromonedrugtoanotherwhenthey'reclinicallyequivalent.Sohopefully,thathappens.Orwedon'thavetomovetoaclinicallyprovendrugbecausewegetabetterpricethantheexistingone.

Soonanexpenseside,youseeaslightlydifferentdistributionthantherevenueside.Andsoifyouhadtobet,theoddsthatourmarginscompressaregreaterthantheoddsthattheyexpand,butitdoesn'tlooksodramaticineitherdirectioninthenearterm.

Ontotalkingaboutpopulationhealth,yetagain,thatdespitethekidneycare,justtoremindyou,thesepatientscostabout$90,000ayearforMedicare.There'realotofhospitaldays.Wehaveaccumulatedauniqueportfolioofcapabilitiestoactuallyimprovehealthandmanagedowntotalcostforthispopulation.

Andinaddition,it'smoretechnologyenabledandempoweredthaneverbeforewithbothourelectronichealthrecordwhichwecallFalconandwhatwedointhepatientportalandpatientinteractionfront.Soit'salotoffun.It'shighvaluefordoctors,it'shighvalueforpatients,it'shighvalueforpatients'families,andwe'regettingbettereveryyear.It'sveryexciting.

Ifallthosewordsaretrue,youwouldexpecttoseeitshowingupinthenumbersinourgloballycapitatedpilot,oursinglebiggestpilot.YoucanseethekindofnumbersVillageHealth,ourSpecialNeedsPlan,isgenerating.There'sasubstantialdropinhospitalization,asubstantialdropinreadmission,asubstantialdropinthingslikecapitalusewhichisaproxyforincrediblequalityimprovementsandcostreductions,andsoourcapabilitybecomesevermoretangibleinthisregard.

Goodnewsismoreandmorepayerswanttobuysomeofthatcapability.Sooverontheleft,youseethatoutofa170,000patientsorso,we'reupfrom5,000to24,000thatareinsomewaytouchedbyourVillageHealthcapabilityandtypicallytiedtosomeformofperformance-basedreimbursement.Sometimesnotveryexcitingmath,butnonetheless,thetrendismorepayersaregoingtodomoreperformance-basedcomp,andwe'vegottheportfolioofproductsandservicestomatchuptothat.

Andwe'rereallyproudofthefactthatourpatientexperienceisimprovedasourcaremodeliswidened.Andthere'sonedatapointonthatinSouthernCaliforniawhenwewerenumberonein2013.Ithinkwestayedupatnumberthreefor2014inactualpatientsatisfaction.

Whenyoucangetagroupofdialysispatientstoratetheirintegratedcareprovider,us,higherthana




wholebunchofotherspecialneedsplansthatdealwithpatientswhoareyoungerand/orhealthierandingeneralhavemorerobustday-to-daylivesbecausetheirconditionisnotasdebilitating,whenwecangethigherscoresthanthosegroupsdespiteourpatientmix,thatmeanswearedoingsomebeautifulthingsforthosepeople,notjustclinicallybutintermsofhowweinteractwiththemashumanbeings.

Onthemedicationmanagementfront,likemuchoftherestofAmerica,thisisabigdeal.Akidneycarepatient,eighttonineprescriptionsoutsideofwhatweinfuseduringthetreatment,typicallymultipleco-morbidities,themajorityhavediabetes,athirdofhypertension.Amajorityatsomepointhavesomeformofcardiovasculardiseasethat'swhytheyhaveallthoseprescriptions.

Alotofpeoplecan'tkeeptrackofallthat.Theirdoctorscan'tkeeptrackofallthat,astheirseniorcardiologistandanendocrinologist,andanephrologist,andtheirinternest,etcetera.AndsoourDaVitajustcontinuestodobeautifulwork.Youcansee14%fewerdaysspentinthehospital,21%improvementinsurvival.Thesearenumbersthatatfirstwethoughtcouldn'tactuallybetrue,theremustbeamethodologicalmistake,butthey'veheldup.

Andinpart,it'sbecausewecreateatremendousprescriptionadherence,thelikesofwhichisnotachievedinnormalPBMsbecauseofourbondwiththesepatientsandtheirfamiliesandtheirdoctorsandtheglueofourelectronichealthrecord.Andasaresult,we'regrowing.Youcanseethatweactuallydidour15millionthprescriptioninMayof2014.

IfyoulookatthedifferentwaysinwhichourinvestmentinVillageHealthwhichisnon-trivialallocationofyourcapital,youlookatthereturn,itcancomeinalotofdifferentways.Itcancomebecauseaprivatepayerrealizesthatwehelpkeeppeopleoutofthehospital.Thatthenhelpsusonthecommercialraterenewalindependentofcreatingaglobalcapcontract,independentofcreatingsharedsavingsorabonusplantiedtohospitaldaysbecausesometimesthedataisnotavailable.

Butnonetheless,ifthepayerknowsit'sthere,thatwillincreasewhenweshowupintheraterenewalsitself.Obviously,forthegrowthinMedicareadvantage,thosefolksallcareaboutwhathappenswiththesepatients,andwehaveawholebunchoftheminourHealthCarePartnersunitaswell.SonobodyhasanywhereclosetoasmanygloballycapitatedESRDpatientsaswedo.Andwedowonderfulworkonbothsidesofthehouse.

IthasalsoenabledustobeabetterpartnerwithCMS.Andasmuchaswe'vehadthehumblinganddisappointingexperiencewithoursettlementsandsomeotherareas,butwearegettingbetterandbetteratworkingwithCMSatcreatingabetterkidneycaresysteminAmerica.Andthat,everybodywinsoverthelongtermifyoudothat.

WeareincreasinglythepreferredpartnerforACOsandphysicians.Andofcourse,whatweloveiswhenwehavetrulycapitatedrelationshipsinthisspherebecausethatallowsustodeployallofourcapabilities,allofourgifts,inonefellswoop.

There'ssomestuffgoingonhere.ESCOsprobablywillcomeoutsoonunlesswecangettherightgovernmentwaivers,thesamewaiversthatACOsandMAplanshave,sowe'renotaskingforanythingspecial.Butifwedon'tgettherightkindofwaivers,andthenwemayverywellnotbeabletoparticipateinthatprogramatall.We'vealwayssaidwewouldevenifitwasn'tagoodscaleofaprogram,justtobegoodcitizens,butwecan'tbeagoodfoolishcitizenanddoitunlesswegetthesamewaiversthattheyhaveeverywhereelse,orsomethingthatapproximatesit.

Specialneedsplans,westillbelieveinthoseaswell.Andthenofcourse,there'snormalcapitationcontracts.

Movingontotheoutlookthen,youputitalltogether,allthedifferentnumbers.Youcansee,again,




margins,moreorlessthesame.Alittlemoredownsidethanupside.Andsomesteadygrowth,notdramaticbutawfullywonderfulandsteadyonitsownregard.

Andifallthatistrue,thentheaggregateis3%to8%percentofOIgrowth.Andasyoulookoutoverthenexttwotothreeyears,again,ofcourse,there'sdownside.Itcouldbelowerthanthat.Itcouldbehigher,butthiscapturesthemajorityofprobabilisticoutcomesandhopefullyprovidesomeusefulguidanceforyou.

Wejustwantedtosummarizeinthekidneycarefront,what'sthesame?Clinically,we'regoodandwe'regoingtogetbetter.Capital-efficienttreatmentgrowth,verybigdealcumulatively.Commercialmix,commercialrate,alotgoingonthere.That'salittlescary.Ifeellikethere'smoredownsidethanupsideandfeweracquisitionopportunities.

Sothat'sallmoreorlessthesameaswhenwetalkedayearago.Whathaschanged?TheASApicturehasbecomealotmorerealintermsofnewcompetition.Someofthesechangesandhowinsuranceisdonearemoresignificantoutthereinthemarketplacethanayearandtwoyearsago.Theregulatorycomplianceissueasweknowdoesnotchangeinourattitudearoundit,butwewanttoshowrespectforthefactthatishastochangeinhowyouassessusinthisregardbecauseofthesettlementswe'vehadtosign.

Andthenthequalityofconversationsaroundpopulationhealthinallofitspermutationsarewayup.There'sjustmoreandmoreorganizationsaremoreandmorefocusedonactuallydoingstuffandexecutingonstuffasopposedtojusttalkingaboutit.Sothosearealldifferent,amixtureofpositivesandnegatives.

Let'stalkaboutinternationalforalittlebit.We'renowin10countries,93clinics,over7,000patients.Wedidn'texistofcoursefiveyearsago.Thetrajectoryisgoingupintotheright.Ourinvestmentininternationalisverycontrolled,andhopefullythisissomethingyou'vebeenabletoobserve.

Andwebelievethatstrategicallytherisk/rewardratioisexceptionallyattractive.Butaswesaidfromthemomentwegotintoit,it'saverylongtermpicture,it'saverylongtermstory.

Alongtheway,however,youwanttoseetherightleadingindicators.Oneofthosewouldbequalityimprovementandwecouldshowthisinvirtuallyeverycountry--maybeatthispoint,everycountryoutofthe10;dramaticclinicalimprovement,alevelofoperatingdiscipline,metricdiscipline,dataanalyticalusethatmostoftheseplacesjustdonothaveindialysis.

Andsowecouldshowthis,Ithink,forall10countries.EightofthemIknowforsure,justdramaticclinicalimprovement.Thatleadstoahealthierbrand,thatwillleadtomorenewbusinessdownstream.Thatcircleisunfoldinginreallifeinsomeplaces.Nonetheless,rightnow,thisisatinything,onlyabout1%ofouroverallrevenue.

Iwantedtogiveyouthreeexamples.Imean,firstistoestablishthecontext,thatwhenyou'regoingtoentermultiplecountries,you'regoingtobeasubscaleineachcountry.Inordertodoadecentjob,youhavetocreateacertainminimumoverheadinordertocreatenewbusinessandexecutewellonitsothatyouhaveareputationandcapabilitytodomore.That'sallcommonsense,youknowthat.

Butthen,howdoesonegetcomfortablethatyou'reontherightpath?Andsowhatwe'vedoneistrytomakesurethatourmicroeconomicunit,ourbuildingblock,ourindividualcenters,thatifwelookattheactualoperatingperformance,thecliniclevelEBITDAperformanceoftheactualbuildingblocks,howarewedoingthere.Andonceoneachievesprofitabilitythere,howmanyofthoseunitsmustyouhaveinordertoreachbreakeven,andthenprofit,andthenareasonablecumulativeafter-taxcash-on-cashreturn.




Sohowmanyofthoseunitsdoyouhavetoaccumulateinordertogettherewiththerightassumptionsaboutthesizeofoverheadbecominglowerandlowerinpercentageofthetotalcost.Andthenwhatmarketdoesthatequateto.Becauseifyou'reatapacewhereyou'remakingsolittleperclinic,thatyouhavetoendupwith70%ofthecentersintheentirecountrytheunreasonablereturn,that'sabadmodel.

Ontheotherhand,ifwiththeirawfullylowmarketshare,youcangettherethroughwhatyou'veactuallyestablishedbyactualcenterlevelEBITDAperformance,youstarttosay,"Althoughitwilltakeawhile,weareontherightpath.Thatwecandissectthehighlevellosesinawaythathasusfeeloptimisticorpessimistic."

Andsowe'redoingthreeexampleshere.Oneisoneofthemoreextremeexamplesofanemergingmarket.So,alowreimbursementmarket.Andhereyoucanseethattheprogresswemadein--youcanseethatwheretheG&Astands,andyoucanseethatwe'vecumulativelynowhitpositivecenterlevelEBITDAacrossourentirelittlenetworkofcenters.Sothatincludesthelosers.

Andweprobablytookoutallcenterslessthan18monthsold,somethinglikethat.Butyoucanseetheclearprogressinwhatour2016and'17planhaveusdoing.

Butyoucanseethisoneisgoingtotakealongtimebecausethat'sjustcountrylevelG&A.Andsoyoustillhastogofurtherbeforeyou'regeneratingtoaprofit.Soyousay,thisisinthecategoryof,"Whoa,betterbeabigcountry,"andyoucanseethatatthebottomitis.Thatwecanstartgettingtheclearprofitabilityattiny,tinymarketshares.Allright?

Sothere'sroomtorun,andthat'sgoodbecauseweneedalongrunwaythere.ThisisacountrywithahigherGNPpercapita.

Andhereyoucanseethatwe'vealready,thisyear,reachedalevelwhereourcenterlevelEBITDAiscoveringallthecountryG&A.Notyetcovering,inthiscase,theAsiaPacG&A,notcoveringanypartofmysalary.Butyoucanseethatthetrajectoryisveryhealthy.Andonceagainwearetalkingaboutveryreasonablemarketshares.Enoughsaid.

Andthenlastly,amorematurecountrywithsignificantlyhigherGDPpercapita.Andhereyoucanseewe'realreadyverysignificantlyprofitableatcenterlevelEBITDA,wellabovethecountryG&A,coveringahugepercentagealreadyofthemacro-regionalG&Aandstillataverylowmarketshare.

Andsoalloftheseistosaythatasyoulookattheaggregatenumberofourinvestment,you'vegottodivideitby10countries.Andthenrecognizethatineachofthosecountrieswe'reputtingitthroughthistypeofanalysistomakesurethatwe'renotfoolingourselvesforsomebeautifulpictureofwhatinternationalisgoingtolooklikesixyearsfromnow,butdeludingourselvesastowhatthelinkagesbetweentoday'sreality--today'soperatingreality,actualoperatingrealityinthatpicture.

So,thisiswhereweare.We'resubscaleacross10countriesonpurpose,allright?Wecouldhavedonefewercountries.Wedecidedthatwasnotstrategicallyallwewantedtodo,andwearedeliveringseriouslydifferentiatedclinicalvalue.Challenges,youknowaswellarebetterthanwe.

Ontotheenterprisesummary.Capitalstructure,IthinkI'llturnthisoverto,[Jeff].

Unidentif iedCompanyRepresentative ():

Thanks,Kent.





You'rewelcome.


Okay.I'lljustgothroughafewquickslidesonourcapitalstructure.

You'veseenthisslidebefore.Thisisa12-yearhistoryofourleverageratio.Youknowwe'vearticulatedforover10yearsnowthatweexpectforthelongperiodsoftime,ourleveragetobeinthe3timesto3.5timesnetdebttoEBITDA.Webelievethat'soptimalforshareholders,plus,atthesametimegivingustheflexibilitytopursuestrategicopportunitiesastheyarrive.

Youcanseetwicewe'vegoneabove3.5times,thefirsttimetoacquireGambro.Andwerapidlyde-leveredtounder3timeswithinthreeyears,andthenmorerecentlytoacquireHealthCarePartners.Andwithinfourquarters,wewereonceagainat3times.

Thisisourproformacapitalstructure.Proformaforthefinancingwedidaboutamonthago.Youcanseethatthere'sabouta50/50mixbetweenbankdebtandbonddebt-long-termbonddebt.Mostofthatbankdebtishedgedthroughacombinationofswapsandcap.Soareouroverallweightedinterestrateisjustunder4.5%.

Andthenfinallythisgivesussomecomfortthatwehavenoloominglargematurity.Ourrevolvercomesduein2019,andthenthefirstlargetowerofrefinancingisnotuntil2021.Andyoucanseethatinalmosteveryyearwherethereisarefinancinghurdle,it'swellunderourone-timeEBITDA.Andtheonethat'saboveisslightlyaboveone-timeEBITDA.

Andwiththatall,I'llhanditovertoJim.


Thanks,[Jeff].Now,afewwordsaboutcapitaldeploymentandcashflow.Ourhistoricalcashdeploymenthasbeenprettybalancedbetweengrowth,sharerepurchaseanddebtrepaymentwithextraemphasisongrowth,lookingatitonalongertermaswellasthemediumterm.

Duringthequarter,werepurchasedabout890,000sharesofstockvalueatabout$70million.AndwehaveanupdatedBoardauthorizationforsharerepurchasewhichstoodat$1billionasofMarch31st.Wehavestrongoperatingandfreecashflows.Freecashflowcanbeusedtoredeployintothebusiness,forgrowth,sharerepurchaseordebtrepayments.

Lookingatourcashflow,particularlyin2013and2014,thosetwoyearsbenefitedfrombonustaxdepreciationandimprovementsinworkingcapital.Andwedon'texpectthosetwobenefitstoberepeatedin2015.However,ourfreecashflowisquitestrong,andourconversionofnetincomeandEPSinthefreecashflowjustunderlinesthequalityofourearnings.

Andwiththat,IwillturnitovertoKent.


Okay.Sowhat'sthebadnewsandgoodnewsisasyouknow,thoseofyouhavebeenwithusforawhile,wetrytogiveyouareasonablesummaryattheendof--ifyouhadtograbyourpartnersbackattheofficefor6minutesor2minutesandsay,"Justgivemethehighlightsoftheargumentsagainstinvestinginthisenterpriseorinvestinginit,"that,"Boy,yougottolookatonthebadsideisthere'sraterisk."Anditjustisandthatstuffhitshardandfast.

Andsay,"Boy,HealthCarePartners,thoughttheOIwouldgrowfasterinternational."That'soutsideofourtimeinvestment--ofourtimehorizonforinvesting."Andcoupleofbigsettlements.Soyougottoworry




aboutthiscompliancething,andwhethertheyjusttalkaboutitversusreallydoingit."Sothosearereasonableconversationstohaveandwe'rehappytodiscussofcourseanyofthose.

Onthegoodnewsside--clinicalexcellence,ofcourseforuswithinDaVita,weloveitforourmissionreasonsbutitisalsohighlycapitalisticallyrelevant.Andevermoresonotgoingtoadd$30milliontoOItomorrow,butwethinkitcouldaddhundredsandmillionstoOIoverthenextdecade.

Weareastabledemandinwhatwe'reabout.We'reingooddemographicspotsfromademandpointofview.Andthestructureofthebusiness,aslongasprudentlymanaged,generatesongoingcash.We'realeader,nationally,locally,intheoneortwocases,internationallywhilebeingprudentonhowwegetthere.

Populationhealthcapabilityissignificantandwetakeitseriously,andwe'reinvestinginittomakeitbetterandbetterandbetter,morerobust.Andthenwehavethesebusinessplatformsuponwhichonecan--hopefully,fromwhich,onecanlaunchrocketsovertime,notunlikeinKidneyCarewherewelaunchedtherocketofDaVitaRx,wherewelaunchedtherocketofourLifelineVascularAccessCenterswherewelaunchedthenot-so-rocketbutformidableplaneofVillageHealth.Sowelookatourbusinessinthatway.Thatwehavetheongoingsortofcorecapabilities,butyoualsohaveaplatformofwhichyoucanlaunchadjacentproductsandservices.

AndsoI'llfinishwiththisslidewhichisjustthescenariothatifyousayoverallourROIgrowthis3%to8%andthere'sdownside,itcouldbelowerthanthat.There'sprobablymoredownsidethanupside,butthere'sboth.Soifyousay,thenwe'regoingtogrowthat3%to8%.Andyoupickuplittlefinancialleverageandthatnudgesitto4%to10%.

Butatthatrate,thatmeansyougotmoneyleftover,becauseyournetcashflowwillbenon-trivial.Andsowiththatcashyouwouldeitherbuybackstockonaprudent,steadybasis,oryouwoulddomoredeals.Andifyoupresumethatthey'rereasonable,youwouldgetsomereturnonthosedeals.

Andsothatnudgesitupto5%to12%withallthenormalqualifiersaround.Thisisnotbeingaprediction,butifyoulookatallthecurrenttrends,thisscenarioisnotatallanunreasonableoneintermsofthinkingwhatthenexttwoorthreeyearslookslike.

Sothat'sourupdate.Andnowit'stimetoaskquestionsandgiveusadvice.Andthere'sacoupleofmicrunners,butyoucanalwaysyell.

Darren,lookslikeyou'reputtingyourhanduprightaway.

QUESTIONS&ANSWERS

DarrenLehrich (Analyst-DeutscheBankEquityResearch):

Thanks.ThisisDarrenLehrichfromDeutscheBank.SoIwantedtotalkalittlebitmoreaboutHCPandgetyourinputandyouroutlookontheinvestmentpiece.Ithinkwhenyoutalkedaboutyourinternationalyoudescribeditasacontrolledinvestment,andIthinkwecanseethat.ButIthinkwhenyoudescribedthebuildingblocksofHCPandyoutalkedaboutinvestment,Ithinkit'shardforallofusintheroomtoreallyunderstandandenvisionhowthatinvestmentmightlook,whatitmightdeductfromyouroutlookinthatbusiness.Maybegiveussomeexamplesofhowyouthinkthatwillbedeployedthroughtheincomestatementoverthenextcoupleofyears.


Yes,letmetakeastabandthenyoutellmeifI'mmissingthepoint.Ithinkthere'ssortofthreechunks.




Onechunkiswegotthis$3.5billionoflegacymarketpositions.Andifwedoourjobright,wewillgrowthosemarketpositions.Andaswegrowthem,thatgrowthwilldriveincrementalprofitgrowthatthesametime.Nodelay.

WewillgetadditionalMAlives.WewillgetadditionalcommercialHMOlives.Wewillgrowintermsofnumberofphysicians.Wewillimprovesomeofourcontracting.Wewillimproveourutilization.Andsogainingshareandbecomingmorecapableonmedicalmanagementand,insomecases,somecontractingpick-ups.

Sobucketnumberonecouldhavenicedialysis-likeincrementalprofitgrowthtiedtoincrementalunitgains.Boom.Andthat'swhereyou'regoingtohavetopullinanotherchunk.Ofcoursethere'sdownsidetheretoo,butthat'stheonethatlookscertainlyniceandorderly.

Then,second,isyougetthosesituationswherewe'redoing--wherewe'reexportingourcapabilityandtransforming.SotakingsomebodylikeaTandigminPhiladelphiawheresuddenlyyouhave$500billionworthofmedicalmanagementacross50,000livesovernight.Andyouknowyou'regoingtoincuroperatinglosses,andyourbakingonthefactthatyou'regoingtobeabletocrackthroughallthenormalneighborhoodfrictions,andcreatetherightconfidenceandhavetherighttenacityandturnthatintoaprofitstreamXyearsdownthestream.

Andthenthird,wouldbethepotentialforactuallybuyingthingsthathaveEBITDA.Andsoyou'repickingupsomeincrementalOIatareasonabletoturnoncapitalthroughacquisition.Andsotheproblemwehaverightnow,theproblemthatwehave,youandwetogether,isthatbuckettwoandbucketthreeareveryunpredictable.

Andrightnow,evenbucketone,we'resoyounginitthatwecan'tspeakwiththesamesortof--andtheresomuchdynamism.Wecan'tspeakwiththesamelevelofconfidenceortightnessofthedistributionofprobabilitiesaswecaninKidneyCare.Butthosearethethreebuckets.

Andhopefully,inayearortwo,bucketonewillbemuchmoreapparenttoeveryone,whatevertrajectorythat'son,andwillalsohavesomeseriousevidenceintwoandthree.Rightnowit'sacertainlevelofambiguity.


Andifyoucouldjustmaybehelpbracketnumerically,becausethere'sobviouslysomeinvestmentinTandigmthatyoujustdescribedhereincurringoperatinglosses.SothinkwhatI'mgettingatisreallyjustwhatistheappetiteoftheorganizationtoincurlosses,topursuethesetypesofopportunities?AndIwouldsortofmatchthatquestionupwiththeorganizationalcapabilitiestoactuallydomultipleofthesenewmarketsperyear--inagivenyear.


Yes.Greatquestion.I'dsay,inHCPweareconservativeintermsoftheamountoflosseswewanttotake,becauseuntilwedomorenewmarketexportinganduntilwe'veaddmorecapabilities,it'snotprudenttosuddenlysaywe'regoingtogotakea$180millioninoperatinglossesbecausewe'resosure--ifyougiveus1millionlives,we'lltaketheoperatinglivebecauseweknowwe'regoingtoturnthatintoageminthreeyears.We'llsay,no.That'sjusttoomuch,toobigachunkofriskforusrightnow.

Andsoyou'dseeinTandigmandthepotentialforwhatwearedoinginFullWell,withCenturainColoradoandinotherareaswherewe'retalkingaboutlosinga$10million,$18million,chunkslikethataswhatwe'rewillingtopayfordevelopingthoseskillsandtoolsandenhancingourabilitytodiagnoseaheadoftime,exactlywhatittakestomakesomethingworkinanewmarket.




Sowe'reintomoreofthosesmallerbitesizechunksandhavingaportfoliothen,whereasinKidneyCare,ifsomeonewaswillingtohandus30,000globallycapitatedESRDlives,wewouldtakeitinasecondandtellyou,"Yes,we'regoingtolose$90millionnextyear.Andwecan'twaitbecauseweknowwhatwe'regoingtodowiththosedollarsandinyeartwo,threeandfouryou'regoingtobehappywithus."Somaybethatrelativecomparisonisuseful.


I'llletsomeoneelsego.


Wegotoverhere.Let'sgothere.

DavidCallum(Analyst-JPMorgan):

Yes.Thanks.It's[DavidCallum],JPMorgan.IwantedtoreferbacktotheslidewhereyousharepotentialmarginpressureinKidneyCare.AndIthinkitwasbasedontheunitcostrisingjustthefewbasispointsmorerapidlythanrevenuepertreatment.ButIwasn'tclear,doesthattakeintoaccountthepotentialoperatingleverageofadditionaltreatments?SoitseemedtomethatwassoclosetobeingjustmarginallynegativethatthatcouldsliptobeingEBITDAaccretion.


Yes.AndIthinkifIgotthenumbers--ifIrecallthenumberscorrectly,therevenuepertreatmentwas0.0%to1.5%,expensepertreatmentwas0.5%to2%.Yes.Thebadnewsiswealreadytookintoaccounttheleverageoffixcost.Wehaveonehere,andthenthereisaguythere,andthenoneinthebackthere.

KevinFischbeck(Analyst-BankofAmericaMerrillLynch):

Hi,guys.KevinFischbeckfromBofA.Justacoupleofquestionsontheoutlookthatyouguysprovidedtoday.Asfarasthequarteritselfwent,Ididn'tseealotoutperformanceinthequarter.Andyouraisedthedialysisguidance.Canyoutalkaboutwhatwasgivingyoutheconfidencetoraisetheoperatingincomeguidancefordialysis?


Iknowyourrealvoiceisalittlequiet,Kevin.SothequestionisinQ1,didn'tlookliketherewasalotofoutperformancegoingon,sohowdowefeelcomfortableimprovingtheguidanceinthewaythatwedid.

Letmegiveanunsatisfactoryanswerfirstandthenwe'lltrytosee--whichisbecausewehavereallygoodinsightintohowoureconomicsarefolding.AndQ1isalwaysalittledifferentthanotherquartersforawholebunchofreasons,wecangotoseasonalityandthetaxthingsandtheemployeeexpenses,andthere[are]toomanyexpenses.

Sotheaggregateansweristhis,wedoupdateeverymonthourmicroforecast,andthere'senoughthat'sgoingwellthatwe'reprettyconfidentthatbottompartisnotaverylowprobability,astowhich,thesubsetsofoureconomics,revenueversuscost,exactlyaregoingbetterthanwethoughttheymightfivemonthsago.ThatIwouldnotdoagood,crispjobof.

Anyonewhowanttotrytotacklethat?





[Proceed].


Itshouldbeturnedon.Aswenoticed,ourrevenuehasimprovedinthequarter.Andsowhileourcostpertreatmentdidgoupcommensurate,$5versus$4incostincreases,alotofthecostincreaseswerereallyduetothefewerdaysinthequarter.

Soweexpectimprovedperformance.AndI'lljustpointoutthatwedon'tgiveindividualquarterlyguidance.SoQ1,whilemaynothavebeenhasrobustassomemayhavemodeled,wasinlinewithourexpectationswork.


[JR],doyouwanttoaddanything?Butwedidn't[add]tomoveupthebottom[lightly].Trustme.


So,maybejustJimontherevenuepertreatmentbeingbetter.Youmentionedoneofthethingsbeingcommercialmixwasbetter.Areyouseeingsignsofachangeincommercialmixactuallystarttoimprovenow?


CommercialmixhasmovedupmodestlywhichafterafewyearsofCalifornia-likedroughtiswonderful.


Okay.AndthenjustlastquestiononHCP.YouprovidedguidancesayingthatHCPwasgoingtobeatleast$25millionbetterontheNewMexicoandArizonamarketsthisyear.Anyupdateonwhereareyouthere,isitstillatleast$25millionorareyoudoingbetterthanthat?Whatkindoflineofsightdoyouhavethen?


Itappearsvirtuallydefinitewewillachievewhatwesaid,atleast$25million.ButI'mnotgoingtoprovideanewnumber.


Okay.


Butwewilldowhatwesaid.


Okay.Isthereathoughtaboutwhenthatbusinessbecomesnetpositivetothecompany?


Yes.Alotofthoughts,butnotagoodanswer.We'rehopingthatthosetwobooksofbusinesscanbeprofitablewithin,I'dsay,twoyears.Butineachcase,thingshavetohappen.Butwepulledup$25millionanditwasn't$25millionand$0.10.Imean,wewillcomfortablybeatthe$25million.

Let'sgobackthere.Next,please.




WhitMayo (Analyst-RobertW.Baird):

Hey.Thanks.WhitMayowithRobertBaird.MyquestionreallygoesbacktoHCPintheslideyouhadaroundthetwo-thirdsandone-thirdofthecontractsnowbeingalignedversusnotaligned.HowdoesthattranslateintokindofanOIconversion?Sodoesthatmeansthatroughlytwo-thirdsofyourOInowisalignedwiththehealthplanpartnersoristhatanothersimplesignthat'seasytoteaseout?


Yes.And,Whit,thanksforyourhelpincoordinatingtodayandsettingitup.Ibelievethatthetwo-thirds--andIshouldhavesaidthis--isactuallyarepresentationofpercentageofdollars.Thepercentageofcontractsisactuallylower,butwedidit,weconvertedittodollars.Atleastthat's--now,isthattrue?Yes,it'strue.

WhitMayo (Analyst-RobertW.Baird):

Okay.Maybejustoneotherfollow-upquestion,justbackonthequarter.Imean,youcitedIthinksomeelevatedlegalcallsinthequarter.Wasthereanythingthatyouwouldcaretocalloutifperhapsnotexactlynon-recurringorrunratethatweshouldbeputtinginourmodelsgoingforward?


Idon'tthinkso,becausewearesoresolvedtonothavemoreofthesesettlements,thatyoushouldjustassumesomeofthesehigherlevelsofexpensearegoingtogoonforagoodlongtime.Imean,theyhavethesethingscomebackupfrom2003,'04,2005,thingsof10yearsago.It'sreallyfrustratingforeveryone,youknowlessthanus.Andsomakingsureweredoingeverythingwecan,everythingwecantobecorrectandavoidthisisjustsuchanimperative.

Thewaythesethingswork,I'llgiveoneexample.OnthisVainercase,themedicationwasteinthatissuewasabout$4pertreatment--$3,$4pertreatment.Asyouknow,theaveragecostofadialysistreatmentisabout250,260.Soit'salittle1.5%plusitstiny,tiny,thingandits$3pertreatment.Themandatorypenaltyforsomeofthesecategoriescanbeanywherefrom$5,500to$11,000pertreatment.Sothepenaltyis3,000timesthedollarsatissue--3,000or4,000.

Sointhatworld,givenwedothedialysistreatmentsandwedo26millionayear,thewaythatthestructureofthepenaltiesworkisatinymistakeleadstoamassivenumber.Andsothat'sonereasonwhybettingmoreandlegalnowisjustgoingtogetusaverygoodreturnaswellaskeepusinapositionoftrustwiththegovernment,nottheopposite.Isthat,hopefully,responsive?

Imean,overhere.Goahead,sir.

WilliamJung (Analyst-SansomeAnalyst):

Yes.WilliamJungfromSansomePartners.IhaveaquestionondialysisandHCP

Soondialysis,inlightofthecompetitioninEPOcomingon,especiallyforyouguysafter2018,doyouseethefutureinanewrebasedrevenuepertreatmentnumberfromCMSandsoexpecttofullygiveupmostoftheeconomicbenefitthere?

Andthen,ontheHealthCarePartnerside,obviouslythemarginhasgonedownandalotofthathasbeenkindofoutsideofyourcontrol,whatarethefactorsthatyoucancontrolonthemarginsideandwhatimpactwitheachofthosefactorshave?Andoftheimpact,howmuchoftheeconomicscanyoukeepintheimprovementversushavingtogiveituptoathirdpartyorthegovernment?





Yes,onESAs,isonEPO,yes.Iftherearesignificantdropsintheacquisitioncostofadrug,thegovernmentwillrebase.Havingsaidthat,ittakessometimefornumberstosettleout.Andsecond,wewouldholdourselvestothestandardofachievingadifferentialnewlevelofpricingversusothersbecauseofoursizeandstrategicvalue,etcetera.Andsohopefully,onewouldn'tlosea100%ofit.

Andwhatyoutendtofindintherealworldofpolicydecision-making,ifacostgoesdownandthegovernmentgoingtosave,itrelievespressureonsomeofthethings.Liketheyknowrightnowwe'reunderpaidforoutliersindialysis.Theyknowwereunderpaidforsomestuffwe'redoingwhenwetakeanewacuteKidneyCarepeopleoutofthehospitals.

There'sanumberofareaswherethey--andwhatthey'regoingtoreimburseforneworaldrugsandthingslikethat.Sowhenapartoftheircoststructuregoesdown,itrelievespressureonalotofotherreimbursementdecisionsthatthegovernment'smaking.Correspondingly,ifcostsaregoingwayup,theygettighteronotherreimbursementdecisions.

Sowhereasontheonehand,youcanlookatitandjusthaveamicroeconomicsliverandthat'spartofwhatgoeson.Butitalsoeithermakesitmoredifficultoreasierallotherrelatedreimbursementdecisions.Andso,therefore,itisstillgoodforsocietyandforus,thepeople,ifpricesgodown.Butquantifyingitisimpossible.

OnHCPoutofourcontrol,yes.Butstill,Ididapoorjobofhandicappinggovernmentreimbursementforwhichit'dbeappropriatetocriticize,anditwasapoorperformanceonmypart.Period.Andthereshouldhavebeenpartsofthedealthatwerecontingentonsomeaspectsofgovernmentreimbursement.Andnowit'sjustamissonmypart.Period.Soit'soutofcontrol,butnotinthatsense.AndIapologize.

Astootherwayswherewecanimprovemargin,there'sahugeamountofcomplexityandrichnessincontractingontherevenueside.Firstofall,theseareprettytitanicbattles,notunlikewhatwehaveinKidneyCare.Whenwe'retalkingwithHumanaorAnthem,we'reunitedaboutwhatpercentageofpremiumweshouldgetandwhathappenswiththepremiumtaxandblah-blah.What'sincluded,what'sexcluded,allthatstuff.Sothere'smarginimprovementinimprovingpayercontracting.Andthus,somarginrisk,it'sbeingoutperformedthere.

Andthenonutilizationmanagementwhichisjusttheeliminatingwastecomponent,ofeliminatingdumbhospitalizations,andkeepingpeoplehealthyandavoidinghospitalizations.Wecangetbetteratbothofthose.

Thenthereismanagingallyourdownstreamreferrals,specialists,hospitals,everythingelse.Andthere,we'removingtowardsbecomingmuchmorestrategicallyalignedwiththenumberoffolks,healthsystemsinparticular.Andsoweworktotogetherreducecostandshareintheincrementalsavings.

Andthenlastlyissharegain.Sharegainwillleadtomarginenhancementbecausewehaveseriousfixedcostsinourmarkets.Sothere'salotofleverstopullonmarginimprovement.We'lljusthavetowaitandseehowgoodweareatit.

WilliamJung (Analyst-SansomeAnalyst):

Imean,let'ssayyoudohavethatmarginimprovement,howmuchoftheeconomicswouldyouactuallybeabletokeepversushavingthe--


Thegoodthinghere,yougettokeep--becausetherearethepayersinbetweenus,andthegovernmentorusandtheemployer.Andsoyougettokeeplotsofitorloselotsofitprettymuchoutthereonthehook.




Intheback?

Unidentif iedAudienceMember :

Hi.Isitpossible,Iwouldlikeyoutoexplainalittlebitmore,howdoyoutakeoveraclinic,agroupofphysiciansthat'snotworkingforprofit?Andifyoutendtomakeprofitsoutofthat,howisthetransformationprocessandsoforth?


Yes.


Some(inaudible).


I'veneverseenaphysiciangroupnotrunforprofit.ButIgetyourpoint,withoutretainedearningsbecausetheydistributealltheirprofit.Itisalsoamusingtomewhenpeopletalkaboutthefor-profitsectorandthatincludesphysician-runentities.

Butifit'sgood(inaudible)todistributeallthoseearnings,youjusthavetohave--aswehadtodowithColoradoSprings--veryseriousconversationsabouthowthephysiciancompensationpoolwillbeset,andthenwhatearningsareoutsidethatthatcreateprofitforusinexchangeforthecapitalthatweputit.

Soit'sanegotiationlikeeverythingelse.Butthere'ssome--ingeneral,youkeepintacttheaggregatesizeofthepool.Soyousaytoyourdoctoryouhavetheabilitytomakethesameamountofmoney,andthenyou'regoingtohaveupsideiftogetherweachievecertainthings.That'sthebasicconversation.Andthenunderneathit,youactuallyputsomeofthecurrentcompensationinastructurewherethey'reincentivizedtodosomeofthestuffthatyouwantaroundpopulationhealthmanagement.

Butingeneral,ifonegoesintothis,andyouwillassurethedoctorsthatyou'renotgoingtakeanyprofitbyreducingtheirpay.Instead,you'regoingtoworktogetherandsharetheupside.That'sthebasiccontext.


Soyoudon'treducetheirpay[dayone]?


Correct.Correct.It'llbeatoughdealtosell.


Howmuchdoyoudecidethatyou'regoingtopayforthispotentialprofits?Becauseit'sveryintangible.


Yes.Andthat'shighlysituation-specific,allright?There'snoformula.Buttheyusedtohaveashortattempttocharacterizeit,thatifyouhavedoneduediligenceandyouthinkyoucangettowhereyouhave50,000lives,solikewehaveitwithTandigm.AndtheCEOfromTandigm,Tony,isherewithustoday.




Youthinkyoucangetthatandyousaywethinkwecanmanagethat$500millionatrisktothepointwherewehavea7%margin.Soit's$35millioninprofitcreated,thatwouldbethewayyou'dstarttocalculatethenumbersasyouwouldforecastyourabilitytoachieveacertainrevenuelevelandcertainMLR,andthenyoudecidehowthesplit'sgoingtoworkintermsofprofit.


Andwheredoesthatprofitcomefrom?Where'stheimprovementthatbringstheprofit?


Itwouldcomefromtwothings,improvingthestarratingandsothattherevenuegoesup,andeliminatingwastesinreducing--andimprovingqualitysothatthecostsgodown.


Thankyou.


Thankyou.KevinEllichintheback.

KevinEllich (Analyst-PiperJaffray):

Hey,Kent,IjustwantedtofollowupontheQ3call.Ibelieveyougotonthecallandyousaidtherewasariskthatoperatingincomewouldbedownyear-over-yearin2016versus2015.Andhere,youjustcameoutandyougavesortoflong-termguidanceforconsolidatingtheoperatingincome.Soshouldwenowassumethatwe'reforecastinggrowthin2016foroperatingincome?

Ibelieveyouevensaidthethreerisks.Soifyoucouldjustgoover,IbelieveMedicareriskonATPwhichwe'venowquantifiedas50million,andthetwounknownswouldbeMedicareandcommercialratesindialysis.Soifyoucouldjustclarify,reconcilethelong-termguidancetothe2016commentaryinthefuturecall,thatwouldbeappreciated.Thanks.


Yes.Veryfairand[Gustafson]youtotellmehowI'mdoinghere.Sotheoddsof'16beingdownfrom'15arecertainlysignificantlylowerthantheywerebefore.AndGustafson,doIstopthereor--


Imeanit'stherebecausewe(inaudible-microphoneinaccessible).


AndwemovedupIthinkthe$25milliononthehighendofKidneyCare.Andsothe'15barsgoingupispartofwhatI'mprocessing.Andnow,'15isdifferentonaprobabilisticbasis.SoI'dsafelysaytheprobabilitythat'16isdownismuchlowerthanbefore.


Sobasically,let'sjustsayhypothetically'16isflat.Sowe'rebasicallysaying--


Couldyougrabthemic,please?Sorry.





Ifwejusthypotheticallysay'16isflat,sowe'rejustsayingthat'17,'18,weshouldstartseeinganiceaccelerationinearningsgrowthatDaVitaATP.That'sbasicallythetakeaway?


Well,Idon'twanttogobeyondwhatI'vesaid.Soprobablywith'16beingdownismuchlowerthanbefore.And'17,'18,asyousaw,there'ssomeseriouslysolidprobabilitythatwe'regoingtobeinthat3%to8%OIgrowthrangewhichwillthentranslateintoincrementallyhigherEPS.SoIknowI'mjustbeingrepetitivebut--


Ijustwanttoclarify.Sothelong-term,the5%to12%EPSoutlook,whatyearsisthatrange?It'sathree-year--


Yes,I'dsay,roughlyspeaking,it'sawaytothinkabout'17,'18.


'17and'18?


Yes.


Okay.Thankyou.


Ifyoujustthinkabout'16,we'retakingasignificanthitonHCPAndsoifyoudoCAGRs,'16'ssortofafunnyyear.Andwe'llseehowmuchwecanoffsetthosecuts.That'swhythehesitation.Butabsentanydiscontinuitiesoncewegetthroughthebulletwe'retakingin'16,thenyougetintotheoutlookmodelthatwepresentedheretodaywhereyou'retalkingaboutthat3%to8%OIgrowth.

Thankyouforclarifying.I'msorry,Iwasn'tmoreclear.Let'sgoovertothisside.


Thankyou.


Letmejustask,doesanybodywanttoadd[Gustafson],HammertowhatIsaid?Okay.Giveitsomemorethoughtandgoahead.

StephenAlt (Analyst-ShareGlobal):

Thankyou.[StephenAlt]from[ShareGlobal].Typicalquestionalsoonthekidneyarea.Whenyoutalkaboutpricing,itseemsthingsmightbealittleconservative.Medicare,thepathisset.TheDocFixbasicallymadethathappenforeverybodyandit'squitenice.Itlookslikemaybe0.5%to1%oftheminimum'16,'17,'18andonwards.Wedon'thavetoworryaboutbasicallyoralsthat'sthrownoutto2022




or'23orwhat-not,sonothingtoworrythere.

Andonthecommercialside,again,Idon'tunderstandwhyyou'rebeingconservative,becauseIwouldimaginethebundleswereresetprobablyin'12,'13forcontractswithcommercialpayers.Andtheyprobablyhaveinflationaryclauses,andwe'realreadyin'15.Sothecomparison,youmayhavebeenflatforanumberofyears,butnow,thoseinflationaryclausesshouldbecomingin.SowhatamImissing?


Yes.Onacommercialside,thoseguysaremean.

StephenAlt (Analyst-ShareGlobal):

NotatS&P,itlookslike.


Andsothere'stwoissuesonthecommercial.Oneisjustthatthesenegotiationsareintense.Thesearepowerfulorganizationswithalotofmarketshare.Andsomeofthemaremean.Andsothoseareveryserioustussles.Andtogetoverlyoptimisticonhowtheycomeoutisjustinappropriate,especiallyastheygetincreasinglyfrustratedwithhavingtosubsidize90%ofourpatientsfromthegovernmentside.

Andthensecondisjustwhat'sgoingtogoonwithallthischangeinthedistributionchannels.What'sgoingtogoonintheirnetworks,what'sgoingtogoonwithalltheselocalACOs,commercialACOs?What'sgoingonwithemployersanddowedesignhowtheythinkaboutthebenefitsandtherest?

It'salotofchange.Andtheysortofblindlylookatthatandsayit'sallgoingtobefine.Everybody'smakingallthosechangestotrytosavemoney.Andsothey'renotsettingthemupforfun.AndsoIthinkwehavetoshowalotofrespectforthepotentialchallengesonthecommercial[weight]side.We'requiteseriousaboutit.

Isthatadequate?

Whowe'vegotoverthere?Okay.

MargaretKaczor (Analyst-WilliamBlair&Company):

It'sMargaretKaczorfromWilliamBlair.Kent,justacoupleofquestionsforyou.First,anythingthatyoucantellusoutsideofthenewESAdrugscomingoutforothernewdrugslike[Tripera]?Isthatgoingcostsavingsforyou?

SimilarquestiononOutsetMedical,couldthatbeagoodcenterdeviceforyou,andalsocostsavingsmodulesyoucouldlookatoverthenextfiveyears?


Yes.I'llOutsetisanewpieceofequipmentandit'sapprovedforin-centeruse.They'repursuingapprovalforhomeuse.It'sapotentialcompetitorinthenextstage.Andinacenter,itcouldtheoreticallyallowonetomovetowardsaloweruseoflabor,moreselfcare.

AndwehavehighhopesforOutset.Wehopetheydowell.Andwehopetheygetapprovedatthehomebecausewewouldlovetobuyalotoftheirhomeproductsiftheygetitapproved.

There'salotofoperatingcomplicationsonthein-centerside.Butthat'sgotsomeupsideifit'sattherightprice.Duringhomehemoequipmentfortoohighapricewipesouttheeconomicsandyoucan'tdoasustainablequalityprogrambecauseyoucan'tgetthescale.Andthere'snowaytocreatesomething




economicallyviable.

SoOutset,we'reafanof,wishingthemthebest,andhopewegettobuyabunchoftheirstuffforhomeuseinparticular.

Andthenfortheotherdrug,whocanputthatlittlepint?Jim?


Rightnow,asyouknow,ironisrelativelyinexpensive.SoIdon'tthinkthatwouldeverbearanyrealfruitintermsofmarginimprovement.


CanIgetalittlemorewaterplease?

We'llgoinhere.We'llkeepswitching,[side-wise].

T onyRosenthal(Analyst-TimeSquareCapital):

TonyRosenthalfromTimeSquareCapital.Kent,thanksverymuch.CanyoutellushowmuchthelegacymarketsinHCPwillcontributetoyouroperatingincomeguidanceof$225millionto$275millioninOIfor2015?


Practicallyspeaking,basicallyallofit.


Canyoubemorespecific?


Morespecific.Canyouhelpmewithmorespecific?BecauseIsaidbasicallyallofit.


Iwouldliketounderstandwhatthelossesareinthenewmarkets.


Okay.Thankyou.


Whatisthedollaramountoflossesinthenewmarkets?


Yes.Idon'tthinkwedisclosedthat.Idon'tknowthenumberofhand.Let'sbringit--we'llcheckitoutandtalkaboutitinthenextearningscall.Butnowwewanttobeshowingthatornot,offhand,Ithinkprobablycouldbefine.ButIdon'twanttodoitspontaneously.

ChristopherRigg (Analyst-SusquehannaFinancialGroup):

Goodmorning.ChrisRiggwithSusquehanna.Acoupleofquestionshereandafollowuptoouryearon2016.I'mnottryingtoputyouonthespotwithregardtospecificchanges,butifyouthinkaboutHCPyou




kindofgottheworstcasescenariowithregardtotheriskmodel.I'mjusttryingtofigureoutwhatissortofmakingyoufeelbetterabouttheyear-to-yearchanges.IsitjustcoreMArates,kidneybusiness,sortofwhatsortofqualitativelymakesyoufeelbetteraboutnextyear?


About'16?


Correct.


It'spureandsimple.It'sthehitwetookinthefinalrulewassmallerthanwhatwefeared.


Andisthatdrivenbyjusttheoverallcoreratechangeversustheriskmodel?


Yes,sir.


Okay.AndthenI'mstillrelativelynewtothestory,andIcan'tgetmyheadaroundthisconceptwhereyousortofdescribedinthekidneycarebusinessthegoodbucket,thecommercialside,whereyoumakeallyourmoneyandthebadbucket,thegovernmentside.Andthenwhenyouthinkaboutsortofdemographicsinthegoodjobyouguysaredoing,keepingpeoplealivelongerwhoareinsortofthatbadbucket,whyistherenotsortoflongtermmargindegradationinthekidneycarebusiness,justgivensortofthewaythemixfromgoodtobadisgoinglongterm?Thanks.


Yes.Theansweristherewillbe.Thatwe'regettingbetterandbetteratkeepingpeoplealive.Onaverage,asyoukeeppeoplealivelonger,ahigherpercentageoftheMedicare,andyoulosemoney.Andso,ironically,aswecontinuetosucceedinclinicalimprovements,wewillbringourmarginsdown.You'reabsolutelyright.

GaryLieberman (Analyst-WellsFargoSecurities):

Thanks.GaryLiebermanfromWellsFargo.There'sonecompetingESAinthemarket,isthatenoughforacatalystforpricecompetitionfromAmgenordoyouthinkthereneedstobeasecondcompetingdrug?


Numberone,wehopeitis.Numbertwo,moreisbetter.


Okay.Andthencanyougiveusanykindofguidancebasedonmaybewhat'sgoingoninEuropewithcompetitiononESAsorwhatanexpectationforadiscountfromcurrentpricingmightbe?


Yes.AndletmesayonthefirstoneisIdon'tmeantobeflipping.Inotherspaces,youoftenneedmore




thanonenewentranttoachieveabreakthrough.Butinourspace,whichissoconsolidated,there'stheopportunityforasingleentranttomoveseriousmarketshare.Andnonetheless,onewouldlikemorethanthat.

AndthenontheEuropeanexample,it'sjust--it'ssohardtoextrapolate,because,first,there'snotamonolithicEuropeanreality.Imean,themarketsharesandpricesdifferbycountry.AndsoIthinktheonlyprudenttakeawayfromaninvestmentassessmentpointofviewisthattherewassomeseriouspricereductionandAmgenstayedpricecompetitivetomaintainmarketleadership.Andsotheydidfineandsodideverybodyelse.That'swhynumbersIthinkwouldbesortofpointlessbecauseIjustwouldn'tknowwhichnumbertopickasonethatislikelytohappenhere.


AndthenifperhapsAmgendoesn'tcompeteonprice,isthereanythinginyourcontractswiththemtoprotectyoufromthatorareyoujust--dotheyjustsortofhaveyouagainstthelaw?


Wehavesomeconditions.Ifcertainmarketconditionsoccur,wehavetherighttogooffanddootherthings.Iftheydon'toccur,wedon't.Socouldtherebeascenariowhereotherpeoplearepricingbelowthemandwedon'tgettogothereandwedon'tgetapricebreakisthatthatcouldhappendependingonwhichmarketconditions.Andthatwaspartofthecalculatedriskofuspickingupguaranteedsavingsintheearlyyears.

Butfromacompetitiveandstrategicpointofview,ifthateverhappenedwheretherewasasignificantgap,thenAmgenwouldknowthatthedaythecontractwasover,wewouldbemovingtosomeoneelseinaverysubstantialway.Evenitwastooureconomicdetrimentatthatpoint,itwouldbetoolate.Wewouldwanttoinflicttheequivalentdamageback.Andinaddition,wecouldcutthatcontracttwoyearsbeforetheexpirationofourAmgencontract.

Andsoweexpecttohave--wehaveagoodworkingrelationshipwithAmgen.Itisawonderfuldrugforourpatients.We'reveryusedtoworkingwithit.Andsowehaveeveryintentionofcontinuingtoworkwiththem,wejustwantedtobereasonableeconomics.

AndIthinktheywillwantalongtermrelationshipwithus.Oursenseistheywantalongtermrelationshipwithusaswellhencewedidthesix-yearcontract.Andatsomepoint,inthelatterdistantfuture,we'llbesittingdowntotalkaboutwhatthenextperiodoftimelookslike.Butinthiscase,itwillbewithalternativesoutthereunlikethelasttime.


AndmaybeonemorequestionontheESCOs.Itseemslikethat'sbeenslowertogetgoingthanyouexpected.Canyoutelluswhereyouare?


Thewhat?


OntheESCOs.


ESCOs,yes.





CanyoutelluswhereyouareinyourconversationswiththeCMSongettingonthesamepageofmakingthatwork?


Yes.It'stakenalongtime.

Butfirst,onESCOs,wejustwanttoapplaudCMS.They'vetakenitveryseriouslyfromthebeginning.TheychoseustobethefirstsortofespeciallyACO.Asyouknow,thefirstmodel,there'snoonewhojoinedexceptus.Wewerewillingtodoitoutofcitizenshipandtryingtobeagoodpartner.Butnobodyelsedidbecausethemodelwassobad,andtheywentbackandreworkeditandtheymadeseriouschanges.

Itisstillnotascalablemodel.It'sstillsomethingthatyoucouldonlymakeworkincertainplaces.Andthatwasourhopetodoitwellenoughinthoseplaces,topersuadethemwithmorecredibilitywhatascalablemodelitwasbecausewecouldsavetaxpayersbillionsofdollarsanddramaticallyimprovequalityfor500,000Americans.Becauseifwediditatscale,itwouldtransformthewaylotsofcareworksacrossAmerica.

Sowe'restaringatthisamazingopportunitytotransform--thefirsttimetotransforminAmericahowaseriouschronicconditionistreatedclinically.Economically,patientserviceandbeaposterchildforwhatshouldhappeninotherchronicstates.Butthey'vegottoworkouttheirmodel.

Someofthemareveryworriedaboutusmakingaprofit.Ijusthaveanaversiontothat.Andinaddition,withoutthewaiversthattheotherACOsandMAhas,itcouldbeverydifficultforustodomuchofanythingforfearofbeingaccusedofdoingsomethingagainsttherules.

AndsoCMSisworkingveryhardonitandweapplaudthem.Andwejusthopetheycangettotherightspot,andpredictingthatisverydifficult.Andy,thenewadministratorisverysmart,andverymuchpleasedinthissortofthing.Buttheygottoworkwithalotofdifferentagencies.

Isthatresponsive,Gary,ordidImissit?


No,that'sveryhelpful.Thankyou.


Sowehavehighhopes.ItwouldbeanamazingstoryforAmericanhealthcare,andwouldonlytakeaboutfouryears.AndwecouldchangeitacrossAmericawithtotaltransparency--totalclinicaltransparency.Itwouldbestunning.


Okay.


Darren?


JustIhadafewotherquestions.TheoneisjustbacktoHCPandyoucouldmaybeupdateusonhowyou'rethinkingaboutthedualeligibleopportunity.Thatwasnotabigpartofyourcommentarytoday.




AndconsistentwithhowIsortofaskedthepriorquestionaboutHCPinvestment,doyouseeyourparticipationinthedualsasrequiringinvestment?Andgiveuskindofatwotothreeoutlookonthat.


Yes.Sodualsstrategicallyremainabigupsideforus,forHCPactually,similarlyondialysisbutlet'sjuststickwithHCPSo,big,bigstrategicopportunity.However,inCalifornia,wherewe'redoingthebulkofit,thestategovernmentcontinuestoissuesuchanunrealisticsetofrulesandexpectationsthatitrightnow,asthecurrentregulatorysetofrulesexists,isnotanexcitingopportunity.

Sowe'restilldoingabunchofdualsandwe'regettingbetteratit.Buttoreallydoduals,youwouldwanttoinvesttotransformmoreoftheecosystemofcarearoundthesepatients,toworkmoreonbehavioralhealth,toworkmorewithareacommunityserviceorganizations,todomoreinthehome,toattackotheraspectsoflifelikefoodintherefrigeratorandeducationoneatingandthingslikethat.Thisiswhereyoureallybreakthecycleofexcessivecarecostforthatpopulationandthelongtermcareissue.

Andrightnowwecan't--themodelwon'tallowustoinvestthatwhichwecouldinvesttotransformit.Andsowe'redoingmoreincrementalthings.Andsoit'svaluable,butnotexciting.Anddependingonwhathappenswithfunding,couldbecometheoppositeofit,itcouldbecomeexcitinginabadway.

AndsonowseparatefromCalifornia,whichiswherewe'redoingourwork,ifyoulookoverthenextfivetosevenyears,theworkwedoinothermarkets,dualsremainsanareaofgreatpromise.Nothingtobakeintoyourmodel,butanareaofgreatpromise.


That'sgreat.AndthenjustasitrelatestothecommercialpieceofHCPIknowyou'vearticulatedadesiretogrowagainincommercialandalludedalittlebittosomestrategiesthatyouhavetodothat.ThecommercialliveshaveobviouslyshrunkeninsidetheHCPbusiness.IthinksomeofthatwaslivesmovingaroundduetochangesinMedi-Cal.Butmaybecanyoujusttalkalittlebitabouthowyou'rethinkingaboutthatopportunitytogrowthecommercialbookinsideHCPandwhatthatmightlooklike?


Yes.It'stherightquestion.AndI'llturntoJiminasecond.Rightnow,myanswerisunimpressive.It'sgoingtobegeneric,becauseit'sonlyaboutninemonthsago,ItookoverandXmonthsago,wemadethedecision.Xbeinglessthannine,tosaythatwethinkthere'ssomerealvalueinuschangingthecurrenttrendinthatareaifpossible.Wecan'tchangethemarkettrendbutwecanchangeoursharewithintheremainingmarketbygettingoutthereandpromotingourselvestothenormaldistributionchannels,promotingourselvesmoreoversomeofthosepayers.

Andingeneral,it'sbeen--thecommercialHMObusinesshasbeensortofasecond-classcitizenwithinthecontextofHealthCarePartnersdowninCalifornia.Sowe'regoingtochangethatandmakeitaprioritywiththepayerandwiththedistributionchannelsandwithourownclinics,etcetera.

SoIthinkthere'sonlyprobablyonemorelevelofdetailwehaverightnow,that'swhyI'msayingit'squitesuperficial.Butwe'regoingtotakeitfromanareawe'regettingvirtuallynoemphasistoseriousemphasis.Andoverthenexttwoorthreeyearswe'llseeifwecanmakeamaterialdifference.

Jim,doyouwanttoaddanything?

JamesRechtin (SVP-Strategy):

Ithinkthatprettymuch--





Pleasestandup.

JamesRechtin (SVP-Strategy):

Ithinkthatsummarizesitwell.TheonlythingthatIwould--thetwothingsIwouldadd.One,mostofouremphasisoncommercialisinSouthernCalifornia.That'swheremostofourlivesare.SopartofthisissimplyputtingmoreemphasisoninLasVegasandinFloridawherewe'vejustreallynevermadeaneffortbefore.

AndthenwithinSouthernCalifornia,mostofthedegradationinliveshasbeenalittlebitlosinglivestoKaiserandalittlebittheemergenceofsomeoftheselowcostplans.Thelowcostplansrightnowarelargelycomingthroughproviderdiscountswhichwedon'tseeasbeingsustainable.Thereareotherwaystogettolowcostplansmuchmoredriventhroughbenefitdesignandutilizationmanagementefforts.Andsopartofwhatwearelookingtodoisbegintopartnermoredirectlywithhealthplanstocreatesolutionsthatkindofaddressthatpartofthemarketinadifferentway.That'ssomethingwehaven'tdonebefore.


Bywayofintroduction,Jimjustjoinedusafter13yearsatBain.HejoinedusasourSVPofstrategyandisnowalsorunningpayercontractingandhospitalcontracting,andthehospitalcontractingontheHealthcarePartnerside.Ithinkhe'sour31stBainperson.

Darren,ifwecouldgoherefirstandthencomebacktoyou,isthatokay?


JustonelastquestionIhadrelatedtothedialysisbusiness.Andthatwas,Ithinkyouconfirmedinyourcommentsthatthevastmajorityofyourcommercialcontractsarestillfee-for-service.Somaybejustupdateusonyourkindoftwotothreeyearoutlookonhowyouthinkpayercontractingmightevolve.Areyoustartingtoseesomemorefullyintegrated,fullycapitatedtypesofcontractingthat'sbeingdone,andisthatsomethingyouwouldconsiderdoing?


Onthecommercialsideofkidneycare?


Commercialside,yes.


Ofkidneycare?Yes.Therearefivetimesasmanycommercialpayersengagedinseriousconversationswithusaboutperformance-basedreimbursementinkidneycarethan18monthsago.Andsoquantitativelyandqualitatively,theircommitment,theallocationoftalent,theirnimblenessaroundit,alsofivetimesgreater.Sodirectionally,it'savery,verypositivestory,notnecessarilyforglobalcap,butforseriousperformance-basedcontracting.

Havingsaidthat,ittakestime.Imean,thecycletimeislongbecauseofthecomplexityoftryingtocomeupwiththerightdataset.Andit'sstillnotthebiggestcostitemandsoit'snotlikethemnegotiatingacontractwiththelargesthospitalinthecityorsomething.




Butthenationalpayersarebecomingincreasinglynational,andthathasanegativeimplicationsometimesforproviders.Forus,alotofitispositivebecauseit'sdealingwithourfinancialbasisisascalething.Itsuddenlytakessomethingthatlocallyisthefifteenthmostimportantthing,itarisestoseventhifyoucandoitnationallyasopposedtoalotofothercontractsthattheydowhichhastobemarketbymarket.

Sothere'sreallynicetailwindsthere,butit'snothingthat'sgoingtoshowupanddramaticallychangeovernight.Andit'spartof--Iwanttolinkthisbacktothewholequalitythingwhichisthisiswherebeingbetteroverallsystematicallyendsuphavingrealmathematicalimplicationsforusfinallyaftermanyyearswhereitdidn'tmakeanydifference.

Andofcourse,JR,againifyouwanttoaddanythingjusttellme.


Hi.Ijustneedaclarification.Earlier,youweretalkingaboutyouwouldreceivethe--thisisonalegalissue.HCPIguessyousaidthatitreceivedasubpoena.Butifyoucouldjustclarify,sothereweresomereservesagainstthatoristherepotentialforsomecallback?Couldyoujust--I'mnotfamiliarwiththat,couldyoujustelaborateonthatalittlebit?


Yes.Andformoreofawrite-up,it'sinourSECfilingsfromthe[DL].Butjustforthehighlevel,there'sabout$600million--$611millioninescrowrightnow.Andthatescrowincludesinthescopeofitscoveragehealthcareregulatoryissues,thelikesofwhicharecoveredinthatsubpoena.Andmostofthepracticesthatarecoveredandincidentswerepre-deal.Butnotentirelycomplexbutthehighlevel--that'sthehighlevelstory.

Kevin,attheback.


It'sdangeroustotellaroomfulofanalyststhatyou'llanswerquestionsuntilyoudrop.


IsaiduntilIdroporyou.


Iguess,Iwonderifyoucangivemorecoloronthecontractingwith--youmentionedthenewbusinessmodelcontractingpotentiallywithmanagedcarecompaniesorwithhealthsystems.Isthereonethat'spreferableoronethatseemstobegainingalotmoremomentumversustheother?IfyouweretosayI'mgoingtodo10,howwouldyouthinkaboutwhatpercentagemightbeinthisareaversus--


IsthispayerpartnershipversushealthsystempartnershiponHCPside?


Yes.


Shortanswerisno.Rightnow,wehaven'tdrawnanyconclusionsaboutwhicharesuperior.Andthat's




whywecalleditR&D,wereallyareprobing.


Isthereanexpectationthatthemarginprofilewillbethesame?Ithinkthatthemarginyougetwouldbepartofthevaluethatyouadd.Youmightadddifferentamountsofvaluetoahealthpartnerversusahealthsystem.Sohowshouldwethinkaboutthat?


Yes.It'safairquestion.Firstofall,it'sverymarket-specific,fact-specificastohowoneassessestheupsideversusdownside,thecapabilityofthepartner,thecommitmentofthepartner,whatthemarketislike,howmuchmarketfrictiontherewillbe.Sotheanswercouldbeinonemarket,youverymuchforapayer,andanothermarket,youverymuchpreferthehealthsystem.

Andinallmarkets,inmanycases,you'dratherhavethemboth.SoforexampleatTandigminPhiladelphia,TonyistheCEO,andwewithIBC.Immediately,webasicallydidthedealwith300oftheleadingprimarycarephysiciansinthemarketalreadyprettywiredtosignupasourinstantphysiciannetwork,alloftheminterestedinintegratedcare.

SoeventhoughnominallythedealisbetweenusandIBC,therereallyisathirdpartneratthetablewithisthephysiciancommunity.Inanothercase,withCenturainColorado,we'reworkingsimultaneouslywiththemandsomepayers.Andsoingeneral,ifyousaythere'sphysicians,there'sthehealthsystems,there'spayersandthere'sus,themorewecancompletethesquareandhaveallfourofusworkingonittogether,that'sactuallybest,becauseitalsomeansyou'resplittingtheupsidewithfourpeople.

Soit'sincrediblymarket-specific,Kevin.Andwehavenotdrawnanyconclusionsaboutfundamentallywhetherornotwepreferoneortheotheracrosstheboard.


Okay.ButIthinkyouguysgaveguidance,you(inaudible)announcedoneortwo,Ithink,"bigdeals"ornewarrangementsthisyear.Isthatstillthewayyou'rethinkingaboutit?


Wewouldbedisappointedifwedidn'tdotwomoredealsthisyear.Idon'tknowaboutbig,butwewouldbedisappointedifwedidn'tdotwomoredealsthisyear.


Okay.AndthengoingbacktoGary'squestionabouttheESCOsandthewaivers.IsthereareasonwhyCMSwouldn'tbeaswillingorviewthisdifferentthanotherACOsasfarasthey'rewillingtogivewaiversandstructurethecontractinthesamewayhereastheydointheotherways?


Notthatweknowof.AndIdon'tknowifImayhaveanyotherdata,butnotanyreasonthatwecouldthinkof.


Yes.Sowhenyou--





Imean,andjustunlessitwouldjustbebecausethey'reworriedbecauseweandphysiciansaresobig.Thatwouldbe--ifthatbothersthemwithrespecttowaivers,orbecausewe'reforprofit.Idon'tknowifthere'ssomeideologicalorphilosophicalissuesthatplaythere.But,logically,itdoesn'tappeartobeanybasisforadifference.


Okay.Thanks.


Leanne,wouldyouamendthosewordsatall?

Goingonce.There'sJustinunderthelayer.

Just inLake (Analyst-JPMorgan):

Kent,justacoupleofquickfollowup--


Youdon'tgettoaskquestionsinyournewrole.


Idon'treallyhavearolerightnow.I'minbetweenroles.


Okay.


JustacoupleoffollowupsontheESAstuff.One,specificallyinthenumbersyougaveonthedialysissegmentinthe2015earningsandthethreeyearforward,canyouconfirmwhetherthere'sanybenefitoranymeaningfulbenefitfromlowerESApricesinthatordoesthatassumetheESAscontinuealongthepricesthatyouhaveintheAmgencontractrightnow?


I'mhesitatingbecauseIdon'tknowifit'sinourshareholders'bestinterestformetoanswerthat.Soletmenot.Andyoucouldprocessthrough,Ithink,whyI'dbeuneasyanswering.Sothat'smyspontaneousanswer.

Andwe'llthinkaboutitandmaybewecoulddecidebythenextearningscallifwewanttoamendit.Butwe'reveryseriousaboutwantingtogetsavings.AndIjustdon'tknowthatgoingpubliconaparticularassumptionwouldbehelpful.


Okay.AndthenyoumentionedtheanalogytoEuropeandwhathappenedtherewhentherewasacoupleofnewintroductionsofESAequivalents.ThepeopleI'vetalkedtooverthere,Igettheindicationthatthepricingwentdownsomewhereinthe20%,25%range.IsthatyourunderstandingaswellintermsofwhetherAmgenloweredpriceby--I'msorry,thatwasAmgen'spricethatwentdownby20%,25%.





Yes.Inseveralplaces,thatnumberiscorrect.


Okay,great.Thanks.


Allright.Okay.


Allright.Butthatkindoftriggersanotherquestioninaway.InyourcontractwithAmgen,areyouatallallowedtotrialMircera?Obviously,yourphysicianshavetogetcomfortablebeforeevenhavingthethreatthatyouwillbeabletoswitch.Soareyouwillingorareyouthinkingabouttrialing?Obviouslytheirlaunchisquiteimminent.It'sgoingtobehelpfulfornegotiationsin2018orbeforethen.But,again,willtherebeatrialwithyou?


Right.Wecando10%ofourbusinesswithsomebodyelse.Andsothat's10%,that'salotsincewe're35%ofthemarket--3.5%ofthemarket.That's$77million.So[thereitis].So,yes.

Okay.Goingonce,goingtwice.

It'ssogoodtoseemanyofyouagain.ThankyouverymuchforyourinterestinourCompanyandwewilldoourbestwithyourcapitalthatwecaninthecomingyear.Thankyou.

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