Jim Gustafson - Vice President of Investor Relations Kent J. Thiry - Co-Chairman, Chief Executive Officer and Chief Executive Officer of Healthcare Partners Garry E. Menzel - Chief Financial Officer James K. Hilger - Chief Accounting Officer.

Justin Lake - JP Morgan Chase & Co, Research Division Kevin M. Fischbeck - BofA Merrill Lynch, Research Division Kevin K.

Ellich - Piper Jaffray Companies, Research Division Gary Lieberman - Wells Fargo Securities, LLC, Research Division Matthew Borsch - Goldman Sachs Group Inc., Research Division Dana Syrune Nentin - Deutsche Bank AG, Research Division Gary P. Taylor - Citigroup Inc, Research Division Lisa Bedell Clive - Sanford C.

Bernstein & Co., LLC., Research Division Margaret Kaczor - William Blair & Company L.L.C., Research Division.

Good afternoon. My name is Kim, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the DaVita HealthCare Partners Fourth Quarter 2014 Earnings Call. [Operator Instructions] Thank you, Mr. Gustafson, you may begin your conference..

Thank you, Kim, and welcome, everyone, to our fourth quarter conference call. We appreciate your continued interest in our company. I'm Jim Gustafson, Vice President of Investor Relations. And with me today are Kent Thiry, our CEO; Garry Menzel, our CFO; Jim Hilger, our Chief Accounting Officer; and LeAnne Zumwalt, Group Vice President.

I'd like to start with our forward-looking disclosure statements. During this call, we may make forward-looking statements within the meaning of the federal securities laws.

All of these statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.

For further details concerning these risks and uncertainties, please refer to our SEC filings, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q. Our forward-looking statements are based on information currently available to us, and we do not intend and undertake no duty to update these statements for any reason.

Additionally, we'd like to remind you that during this call, we will discuss some non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our Form 8-K submitted to the SEC and available on our website.

I will now turn the call over to Kent Thiry, our Chief Executive Officer..

growth through IPAs, growth through payer partners, growth through health system partners and growth through acquiring prominent medical groups.

We did the Phoenix IPA back right around that time and since that time, we've done a significant payer partnership, a significant health system partnership and a significant acquisition of a prominent medical group.

On the payer's side, Tandigm was a 50/50 JV with Independence Blue Cross in Philadelphia, the largest health plan in that region, now over 275 PCPs signed up, another 75 joining within about a month.

We currently are taking care of 16,000 Medicare Advantage patients; 53,000 commercial patients, about $400 million in annualized revenue being managed in that partnership. The next segment, health systems. We've got a 50/50 JV with Centura, partnering in Colorado. And there it's a very substantial number of doctors.

They alone have about 340 employed physicians, a mix of PCPs and specialists as well as a broader network. That's Centura, the largest health system in the State of Colorado. And then the last segment, leading medical groups. As many of you recall, we did acquire a leading group in Colorado Springs, Colorado Springs Health Partners with 51 PCPs.

So the message here is that 18 months ago, 20 months ago, we said that we're going to explore growth models in each of those 4 segments. Now 18 to 20 months later, we are doing just that with a strong entry in each one of those segments in order to explore the most capital-efficient, risk-adjusted, optimal ways of growing as the years go by.

We continue to be very modest in our business development investment, although it is growing incrementally. Having said that, however, the activities are quite robust.

In particular we're in discussions with several major health systems and in particular, in Southern California in some very interesting discussions with a few different health systems, and we look forward to deciding which ones to actually drive to closure and may do some very interesting things. And that's separate from health systems.

We're also talking to several high-quality medical groups in a serious way. No one ever knows what's going to happen with the business pipeline, but the quality and quantity of the conversations we're having is better than ever before. Our business development capabilities, as I said, is still quite modest.

And hopefully over the next year or so, that will change. Although right now we couldn't deal with any more effective business development, since we're pretty much at capacity. With respect to overall guidance, it is $1.75 billion to $1.9 billion, which is relatively flat. It's made up of Kidney Care operating income.

$1.525 billion to $1.625 billion; and HCP Operating income, $225 million to $275 million. I would like to reiterate the comments I made last earnings call, and that is we face 2 serious headwinds right now for the enterprise. Medicare reimbursement on both sides of the house under a lot of pressure in different forms.

And on the Kidney Care side, a tough commercial pay environment as you look out over the next few years. Not so much because of any change in negotiating dynamics or leverage, but because of architectural changes in the way the healthcare system is working.

When you put all that together, as we said, the last earnings call, there is real risk that 2016 OI could be down from 2015 at the enterprise level.

Now even in a scenario where OI is flat, if we just take that premise for a moment, if you look out over the next 2 years between our current cash balance and our free cash flow and then you take out maintenance CapEx, still assume very robust dialysis de novos, and we make our mandatory debt payments.

So after doing those 3 things, business as usual, we will still have $2.4 billion in cash to deploy in whatever way we thought was best for you and for the long-term strategic value of the enterprise. So acquisitions, buybacks, et cetera.

We very much look forward to discussing our longer-term strategic positioning and our outlook at our Capital Markets Day in New York City on May 5, in conjunction with our Q1 earnings call. More details will come out soon, and we hope to see many of you there and satisfactorily answer all your questions. Garry, our CFO, please take over..

one, a reduction in our tax reserves; and two, the incorporation of federal and state tax credits that were retroactively enacted by Congress in December 2014. We expect the full year tax rate for 2015 to be in the range of 39.5% to 40.5%.

I would also like to provide a few reminders as you model the normal seasonality for the first quarter of 2015 in our business. In Kidney Care, first, Q1 2015 contains 3 fewer treatment days than this past quarter. So you should expect lower revenue and higher fixed costs per treatment.

Second, our payroll tax cuts reset at the beginning of the year, which leads to higher costs of $1 to $1.50 per treatment. And third, Q1 will not benefit from the Medi-Cal revenue that was recognized in the fourth quarter.

At HCP, operating income fluctuates from quarter-to-quarter due to the seasonal needs of patients, and Q1 operating income tends to be a bit lighter than the full year average. Also, the severity of a flu season can have a material impact on medical costs.

We are seeing higher utilization right now with the flu vaccine being only 23% effective according to the CDC. However, it is still too early to know how the flu season will play out, but we estimate that it impacted our operating income by $2 million to $4 million in Q4 2014 versus the comparable period in 2013. Turning to cash flow.

We continue to generate strong cash flows as operating cash flow was $199 million in the fourth quarter and $1.728 billion for 2014, excluding the after-tax impact of payments made in connection with the previously announced settlement with the government. This was within our guidance range.

We expect 2015 operating cash flow to be between $1.5 billion and $1.7 billion, lower than 2014 but in line with our historical trends. As always, this guidance range captures a majority of probabilistic outcomes, but we could be above or below this range. Finally, some comments on capital deployment. We continue to have a very strong cash balance.

We are in the fortunate position of having various opportunities where we could deploy our capital in each of our business lines. We are constantly reviewing our capital allocation to make sure that we sustain the long-term health of the organization and achieve appropriate after-tax cash returns on capital.

We did not do any share repurchases in the fourth quarter nor have we done any to this point in 2015. We felt that it was prudent to wait until after next week's announcement about Medicare Advantage rates before making any large capital deployment decisions.

As we have said before, we favor a situational approach to capital deployment, and we'll continue to review our options. And with that, operator, let's go ahead and open it up for Q&A..

[Operator Instructions] And our first question comes from Justin Lake with JPMorgan..

I guess we'll start with Medicare Advantage. Kent, you discussed the fact that OI could be down at HCP next year despite what seems like a robust Medicare Advantage membership growth environment.

I'm just trying to understand, what kind of rate would it take for OI to be down next year as kind of we think about next week's rate release for HCP? And then can you give us an update on where you are with the contracting initiatives to get plans to give you some offset here on the benefit side?.

Justin, on the rate front, I'm afraid there's not a simple answer because there's so many variables that they're playing with now. They're playing with coding intensity, they're playing with the benchmark rate, they're playing with the RAF coding, which we're particularly sensitive to because we have above-average RAF.

They're playing with the Star system. And so there's 4, 5, 6 different levers that they are thinking about pulling. And of course, the economics are a result of that net number at the end. And so there's no magic sort of single line to draw and correlate it to 2016 outcomes. On the contracting front, we should have a better answer for you than we do.

I know that we have picked up some significant incremental protection through the course of the year, but I can't translate it into sort of a percentage of the book of business or something like that. So why don't we just pledge Garry to have that for the next time around.

I think it's been solid progress qualitatively, much better than where we were a year ago but not close to done yet. For example -- and Justin, just for example, the kind of thing, so one that we signed recently, for example, any benefit design changes we and the plan basically spit them 50/50 up or down.

The cost or the benefit of doing them is shared, and so we're aligned in terms of our microeconomic incentives..

Great. And just maybe a -- a way to follow-up on the rate side before I ask my other question is the -- I know there are a lot of moving parts, as you said, but they're all going to net out to something. So I'm not asking for a -- to be clear, I'm not asking for a -- all 6 components, Kent. I'm just thinking about a range.

Are you saying like -- can you say if the ultimate outcome is you have it all together and it's minus 5%, that's what's going to drive OI -- that kind of rate would drive OI negative? Or is it minus high-single digits like you had in 2014? The 7% to 9% I think you said.

Just trying to put a ballpark around when we see this rate, how should we think about it for the data?.

Okay. Very fair question to which we do not have a very fair answer. So why don't we take that under advisement. We've got Capital Markets in a couple of months. And by that time, we'll know what they've done across all those things and maybe going forward, we should always calculate that number.

But I'm afraid right now spontaneously, cannot do that justice. I mean obviously our forecast is a product of a bottoms-up set of a mix of assumptions on every single one of those variables, but we don't have the magic sort of index number that you're talking about..

Okay. My other was question was on the commercial mix.

I'm just trying to get an idea, can you give us an update on where your commercial mix has trended through the year and kind of come out of 2014?.

Yes. It's with some little ups and downs. It's basically been flat for 3 years or so now, which is much better than what happened to it a couple of years before then. And we have hopes that if the economy continues to recover, that it will go up.

But there's so much noise in the system now compared to before, with exchanges and narrow networks and everything else, that it's not as sort of linear a relationship as it used to be. But the answer to the narrow question you asked is it's been more or less flat for 12 quarters in a row..

And so these impacts, as we've gone in -- we're 1.5 months into the quarter now, I assume you're seeing some further changes from narrow networks and such.

Is there anything that you've seen over the last 3 months, let's say, including mid-February, that would give you any increase in line of sight versus where you were when you gave the guidance in terms of mix deterioration that seem to be embedded in your guidance?.

Yes, I hear you. Good question. The short answer is no. There's been no material development. We continue to get our normal commercial rates on the exchanges, but we worry about competitors being willing to discount for exchanges, at which point, we would suffer from a reduction in our incremental growth rate. And I could go kind of down a checklist.

But the answer to your question is that if you think about the 5 or 6 or 7 variables that affect mix and rate, there have been no material developments that represent any kind of discontinuity from before.

Is that responsive?.

That's absolutely responsive..

Our next question comes from Kevin Fischbeck with Bank of America Merrill Lynch..

Just really a follow up on that question there. I think the company is well known for outlining all the risks that are out there that appear reasonable but often times, you guys highlight things that don't actually come to happen, which is great to be aware of them.

But at the same time -- just trying to really get to the point here of is there something specifically that you're seeing? Have you seen -- because it really takes 2 to tango in this case of someone has to accept the lower rate, some player has to be of the view that the business model that has historically served everyone is now upside down and now it makes sense to change it.

And have you actually seen that happen in at least small instances that make you think that there's a bigger risk here? Or is this just, hey, it's a risk because we're seeing hospitals do it, but we haven't really seen any indication that's happening at all yet?.

Fair. I think the answer's a little bit in between. Have we seen any clear irrefutable evidence? No. Are there rumors of 1 or 2 of some consequence? Yes. So it's a bit of a tweener. But no, we cannot point to anything that we know of that would represent -- well, that's the answer to the question..

I guess that's fair because we do not know how the competitors are necessarily priced.

But do you feel like you're getting a lot more pressure from the managed care side? Is that there [ph] -- you have changed dramatically and you're doing all you can to hold the line or has that not really even changed much?.

That's always been a pretty unvarnished fistfight and that continues. If anything, to some extent, in some cases, the conversations are less adversarial because we're bringing so much of their value to the table now with reducing hospitalization, reducing mortality and everything else that we're doing on the quality side.

So you'd almost push it the other way. But then when you stare at the emergence of narrow networks, the emergence of ACOs, the emergence of exchanges, you look at all that stuff going on, you get -- you have to respect the fact that the architecture of the building is different. And to presume the same sort of outcome is just not prudent.

But we are absolutely sticking to our commercial rates for exchange business..

Okay. And the data you gave about Albuquerque, I think you said 2,500 members going to 11,000.

What was ABQ at when you bought them?.

0. I mean they may have had some -- they certainly had some had Medicare fee-for-service [indiscernible]..

Well, I guess I'm just trying to think, I guess, where are we as far as them rebuilding the book of business or the revenue base? I guess you're right, it was more like fee-for-service even within the capitation.

But where are you in rebuilding the revenue base that they had when you first bought them? Are we back to where they were? Or not there yet? How do you think about that?.

Why don't we check and get back to you within 10, 15 minutes on this call, Kevin..

Okay. And then just to clarify something you said about the growth in the legacy markets being up 7% year-over-year.

Do you characterize legacy being Southern California, Nevada and Florida? Or do you -- now that you've had New Mexico and Arizona, are they legacy now?.

Yes. Good point. Legacy is those 3 and then you sort of have Phase I of new, which were those 2 that were done right on the time of the deal that had fairly tempestuous beginnings in Phoenix and Albuquerque, and then Phase II new, which is the 3 that I referred to.

So that's -- just from a terminology point of view, that's what we're talking about, and so the growth rate was in those 3. And let me go back for a second and just be clear on something, that ABQ had some MA patients but was just treating them on a fee-for-service basis. We're now treating the 11,000 on a partial-risk basis.

And then at some point in the future, we'll move to full risk as soon as our payer partner is ready..

Okay. And this is my last question. Obviously, you've gone through ABQ in kind of the fix there.

Can you talk a little bit about Arizona? What went wrong and where we are in the progress of fixing that?.

All right. Say your question again, Kevin..

I guess -- historically talked about obviously New Mexico not going well. We've kind of covered a lot of what you've done there to fix that. I guess it sounds like Arizona has not gone as planned either.

Can you just talk a little bit about what happened there and where we are in the progress of returning that to normalized profitability?.

Yes. Well, let me first just comment. In aggregate, we delivered what we said we would, I don't know, 6, 7 months ago, in that year-over-year there will be an improvement exceeding $25 million. So that's the aggregate net economic result as we committed to you.

It would be -- and then specifically in Arizona, we worked out an arrangement whereby a couple unprofitable plan populations got pruned in a very significant way, reduced by about 65%, 70% of lives, which eliminated a huge amount of losses for us..

Our next question comes from Kevin Ellich with Piper Jaffray..

I guess Kent, starting off with the subpoenas that were announced after the close. Can you give us some more information? It kind of really sounds like this might be about something else.

Do you have any color for us?.

I can't really say anything other than our release said. It's literally all we know. So that's -- if I could read it to you, which, of course, would be terribly redundant, but we don't know anything else..

Okay. See, last fall, I think it was November, Medicare held an ambulance open-door forum and dialysis patient transportation billing and coding was actually brought up on the call. I think there was confusion about the coding. So I'm wondering if they're trying to get information from you guys about that..

Yes. There certainly was a lot of noise around transportation in general, and then including in the dialysis space. We've had very clear policies for our people on that front for a long time and do a very thorough job of reinforcing them all the time, and so we feel very good about that. And as you know, we don't do the transportation.

We don't bill for the transportation, not our transportation. So what you're saying is all true. Nonetheless, we only know what we know and we'll have to keep you posted as things unfold..

Sure. Okay. Great. And then can you give us some updated thoughts on Medicare's continual shift to be value-based reimbursement models and how you're positioned? And kind of on top of that, we've seen you do a few deals over the last several months.

You mentioned some on the call, but also the Camden Group acquired a small consulting business as well and wondering kind of what your view is in participating in the -- in Medicare's bundled payment for care improvement initiative and whether you think it has legs or not..

Yes. We don't have any particular perspective on that program. So I won't waste your time with just saying some superficial pablum. Our Camden Group, which is for those of you who don't know, is a consulting firm, it does superb work. They have a number of clients who are participating in the program.

And so we're watching and we'll continue to watch, but we're not, at this point, doing anything dramatic in that sphere..

Great. And then going back to some of Garry's comments. I think you mentioned you saw a $3 per treatment increase. I guess how much of that's recurring? And then can you just recap again the $29 million Medi-Cal prior period increase? Where did that come from? And that's all I have..

So onto the first question. You may have to repeat the second question for me. The first question, as I pointed out in the per-treatment increase, some of it was -- we did intentional nonrecurring IT expenditures at the end of the year, and some of it were normal seasonal increases.

We're not breaking out how much of that is recurring, but I think you can assume on a G&A perspective that the run rate that we have for the average of 2014 is likely to be the run rate that we will have in 2015..

And on the second subject, I think you asked about the $29 million, is that right?.

Yes, yes, that's right..

Yes. And what that is, is Medi-Cal, which is Medicaid in California, instituted significant cuts back a while ago. It became -- it was litigated and so in order to be appropriately conservative, prudent, we couldn't -- didn't want to realize that revenue.

And recently, there were decisions which made it clear that the state would not claw back those dollars and hence, it was time to put them through the P&L.

Is that correct, Jim?.

Yes. That's correct..

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

Maybe just to pick up on the -- on that IT cost.

Could you talk a little bit more maybe in detail about what it was and how you think about whether -- when the decision becomes whether or not to capitalize the cost versus running it through the income statement?.

I don't think we're prepared at this point to highlight what the individual IT costs were, and we certainly haven't made any decisions on capitalizing versus running through the P&L. It depends, of course, on the nature of costs in terms of variable versus fixed..

Yes, that's right, Gary. We follow GAAP from a capitalization standpoint and the project spend in the fourth quarter was just more of an expense in maintenance type IT as opposed to long-lived assets. It was just necessary spend that, for the most part, was not capitalizable..

Okay. And then on the revenue per treatment, you had some nice pickup.

I don't recall if you said what that was from, but could you give us maybe more detail on what the growth in revenue per treatment was?.

RPT, we call it RPT, revenue per treatment, that is principally -- the rise in the quarter was principally driven by the recognition of the previously discussed California Medi-Cal revenue..

Okay. That makes perfect sense. And then maybe moving on to HCP. Kent, I think you said that at this point, the contracts are structured so that if, I guess, what happened last time, where the managed care providers didn't pass along much or any of the increases to the beneficiaries, you guys would not take a disproportionate share of that.

Is that on 100% of the contracts at this point? Or that's on a portion of HCP's contracts?.

It's just a portion and then that's where I can see that I -- that we don't, around this table right now, know what the percentage is.

And it tends to not be a monolithic number either because, while some of the contracts are now pure in that you're 50% aligned up and down, even-steven; other ones have much more complicated formulas or corridors and some have no protection.

And so all I can say is we moved from no protection to having a decent subset of our contracts with some or good protection, alignment's almost a better word. But there's still a bunch that we -- where we are exposed. And it isn't that we suddenly wanted to reopen every single contract we had.

First of all, from a capacity point of view, we couldn't do that. Second, you have some of our payers who don't want to do that and particularly, for 1 term of an entire contract. And so it's a bit of a process.

So a little bit analogous to when we were starting to move to bundling in all sorts of our old Kidney Care contracts, that it took in the end 3 to 4 years for us to move from 0% to 10% that way to 70% to 80% that way, and I think we're on the same kind of journey..

Okay.

So are we maybe halfway there? Or is there any way to kind of guess where we are in that process?.

I'm looking around and nobody is confident enough to throw out an estimate. So I think we'll just have to tell you at Capital Markets with whatever precision we think's appropriate. But right now it's not a matter of our not being willing to disclose, it's that none of us knows the number right around the table..

Okay. And then you had said you incorrectly handicapped the potential changes to MA, and you mentioned a couple of the individual items.

Is there any more detail you can give us? Was there one thing that was more than another? Or sort of what should we keep our eyes open for when the rates come out?.

Well, I think it's the whole package. I mean, any one of the levers can add up to significant money over time.

So whether it's the acuity coding, also called the RAF scores, whether it's the benchmark rate, whether it's the coding intensity, whether it's adjusting the Star system that -- on the margin, that math gets to be pretty significant of profits pretty quickly, which is why we are very worried that 2016 could be well below 2015.

And then the other point we wanted to make very clearly is that we did not handicap the dynamism around Medicare Advantage reimbursement rates correctly. And for that, I wanted to apologize and make very clear that I got it wrong..

Okay.

And then once the rates come out, how long will it take you guys to go through that? And when could we expect to get some visibility from you on what the impact might be?.

They'll come out with a preliminary rule on most, if not all, of those variables on February 20, and then a final on April 10. I think -- April 6, excuse me. So in between, there'll be a lot of drama..

Okay.

I guess in terms of DaVita giving us some kind of guidance or direction in terms of where the proposed rates came out, when might we hear that?.

Oh, for that, that will be at our Capital Markets on May 5..

Our next question comes from Matt Borsch with Goldman Sachs..

Not to beat a dead horse, but maybe just staying with the topic here.

I just want to understand, is there something that maybe shifted your view on the Medicare Advantage rates for 2016 in terms of industry chatter, consultants? The reason I'm asking, I guess, because the only really piece of hard information that we got in recent months, to my knowledge, is the trend -- preliminary trend factor, which as compared to a year ago when in December of 2013, it came out with very a worrisome number.

This time around, it was actually slightly positive.

So I'm just wondering, is it because of where we are in the calendar that you're raising the issue now or have there been things recently that have got you particularly concerned?.

I don't think there's any clean answer to that because obviously in staring at it, there's a million different dots to connect from the conversations we're having with people in D.C. and what other people are saying and what people like you say and all the rest. So there's no magical source of data that we have.

We do have more susceptibility than others on the RAF coding front because we have an above-average RAF, because we have slightly older patients and we've had them for longer periods of time. And we're more disciplined in both collecting diagnoses as well as acting on them, which is why we have superb clinical outcomes.

And so we're more sensitive on that score than others. But then there's the other 3, 4, 5 variables.

And right now, our concern is that the administration may not realize how close they are to actually reducing the incentive for people to invest in Medicare Advantage, which has been the source of tremendous innovation, cost reduction and clinical improvements.

In a lot of markets, it's estimated now that once you get MA penetration up into that 35%, 40% range, the ripple effect into affecting fee-for-service expenses is quite substantial. There's a guy speaking in D.C. today who's well respected, he talked about as much as a 9% spillover effect.

And so we worry that they -- some of them may be trying to, if not kill the goose that's laying the golden eggs, cut off a leg..

And as you look at the -- I mean, you talked to this and you've made some progress on renegotiating some contracts.

But do you think that there is some fundamental unfairness in the way that the rate pain comes down between the plans and what you're facing as a delegated provider group? And is that something that might actually make you think differently about being delegated versus going on your own with your own MA plan?.

Well, it's a very colorful question. I am sure that at some point in some markets, we will be a plan. And this is no different than what I said before. We prefer to work in alignment with existing plans and feel that's the best way to more quickly get to a good place for everyone, including the patient and the physician networks.

But I predict with a high level of certainty that at some point, in some markets, we will be -- we'll be a plan. Did I answer enough of that or was there....

Yes, you did absolutely. And I just -- sorry, just one more follow-up, sticking with this theme, which is, where are your end markets? And there are -- this is happening in markets that you're not in, but major hospital systems that are forming their own plans.

How are you working around that? Are you willing to subcontract with those plans versus that maybe shifting the landscape for you? I realize that's a very open question. So whatever color you can give on that would be great..

No, no. Your intuition is exactly right. I would think as the years unfold, we're going to have some health systems as our partners. And whether it's their plan and we're a subcontractor or it's our plan and they're a subcontractor or it's both our plans and we're fully partnered, that's going to happen.

And for a lot of the health systems that are starting to put a plan on the shelf, we're one of the phone numbers they call. Because once you do that, you really get pretty intense about actually managing the population. And so you're absolutely right.

And that's why 18 months ago, we said one of the sort of R&D segments we're going to play with from the perspective of developing growth models was the health system segment, and that's why we're working with Centura. It's why we're talking to 1 or 2 others already right now.

And we may very well, in some of those cases, be doing a plan with them or a subcontractor to their plan..

Our next question comes from Darren Lehrich with Deutsche Bank..

This is Dana Nentin in for Darren. As it relates to your outlook, I was wondering if you could confirm what, I guess, if at all, you're assuming on P&L investments as it relates to the HCP business as well as your international or ancillary businesses..

On international, I believe our guidance is that 2015 will be about flat to 2014. What you have going on underneath that calm exterior is some nice profitability improvements in some countries offset by the increased expenses as we ramp up in Saudi Arabia, where we won that huge government contract for 5,000 patients.

So that's the mathematical answer to that. As to the dollars we're investing in new capabilities in HCP, I do not know the number offhand. It is not a small number because we think the potential for creating long-term competitive advantage is quite substantial. Of course, there's an element of subjectivity.

If you add someone in cybersecurity, does that count as new capability that's strategic or is it just a new recurring normal operating expense or is it something in between? So I don't -- for Capital Markets perhaps, we can put something on the table that will give you a sense of what is incremental expenses that are very much tied to creating new capabilities for the future as opposed to just supporting existing.

And by the way, if I can just break in, Dana, that someone asked a while ago about ABQ revenues. And they're back to approximately 80% of their peak, which is a significant improvement from 2 years ago at the low. But back to you, Dana..

Okay, great. And then I guess just as it relates to a couple of your business segments.

On the DaVita Rx business, can you update us on, I guess, the revenue in that business? Or maybe if you could size it in any way, like patients served?.

We, Dana, up to this point, have not disclosed Rx revenue. And so I will not make a spontaneous decision to change that policy, but we'll take it under consideration before Capital Markets. It has grown, we will say that. It's not -- it's a material amount of revenue.

And what was the related question?.

If you could size it in terms of maybe patients served?.

Let me see if I can get permission to share that. Let me put it on mute for 1 second. We're going to -- it's approximately 65,000 patients, and people are going to check and see how out of date I am or how far off I am, but that gives you a ballpark sense..

Our next question comes from Gary Taylor with Citi..

I just had a couple of questions. The first, just going back to kind of the conversation on commercial reimbursement. Now that EPO is bundled on the government side and I think largely bundled on the commercial side, the government is giving you 0 on rate.

This modest -- is it fair to say that this modest growth in revenue per treatment is purely being driven by 1/3 of your revenue or so that's commercial revenue?.

Yes..

And so that seems to imply maybe your commercial rate growth is in the 2% range.

Is that -- what did that look like a few years ago? Has that changed?.

Well, I can't -- Garry is too new to know the past, and I am not going to be able to confidently say what year-over-year increases were 3 or 4 years ago. If I had to guess, I would say on a net basis, probably higher than that by a bit. That would be my -- the odds of that statement is directionality true, probably 80%..

All right. I know that drug reimbursement was a driver on overall commercial revenue per treatment historically, so you have to parse that out.

Is the -- this comment though about the narrow network, is that creating some pressure on your out-of-network revenue? Is that an element of the discussion at all?.

Could you please repeat the question?.

Yes. Kind of your general comment on commercial rate pressure driven by some structural changes in the industry, and I think you mentioned narrow networks. And I just wondered, is there -- DaVita still have a material portion of out-of-network revenue.

And if so, is that something that's being pressured by the narrow networks?.

Certainly, out-of-network business is always under pressure. I don't think we've ever disclosed our precise percentage. It is, in general, much lower today than it was before. And so I will probably leave it at that..

Got it. Just 2 other quick ones. On the $33 million HCP operating income, I think historically -- I'm not sure if you did this last quarter. It seems I remember maybe the 2Q, but you had talked about what the new market losses were.

Is there an update for that number that's embedded in the $33 million?.

Yes, I think we're trying to move away from some of that parsing. We did it because, at the time, it was necessary for you to have a fair picture of what was going on. And therefore, we did it.

At this point, we think you've got a fair picture without us going into that kind of detail, which, a, can be misleading; and b, sometimes is counter to your interest in terms of how it affects those market dynamics..

Okay. Fair enough. Last question. I just want to confirm the $11 million foreign currency headwind is only in other comprehensive income and doesn't impact the reported EPS or the reported operating income or the international operating income loss.

Is that correct?.

Yes. There is some that ran through other income, which is the same line that interest income is in. And that was about $5 million for the year and about $2.5 million for the quarter of a headwind due to the strengthening dollar. The rest that you see runs through OCI..

And our next question comes from Trevor Walton [ph] with Advocate Health Care [ph]..

Can you guys provide an update on the hemodiafiltration trial that was supposed to end in the fall?.

Yes. We -- the hemodiafiltration trial is no longer going on. We stopped that, so we're not doing that anymore..

Does that mean results are not favorable? And you don't see use of the product in the future?.

We did not see it promising and so, at this point, we decided to stop the trial. No details behind exactly why..

And our next question comes from Lisa Clive with Bernstein..

A follow-up question on your ancillary services business. It sounds like from a prior question that much of the growth in recent years has come from DaVita Rx, which is performing quite nicely.

Could you also give us an update potentially on the number of patients you have on an integrated care platform today? And really how you see that shaping up in the next few years?.

Yes. We don't break that out, and it's not to be difficult. But it really gets difficult to categorize, because you can have a pretty tiny pay-for-performance bonus and then define that as sort of a value-added managed care-type contract all the way to being globally capitated.

And so I think from a strategic point of view, the number continues to grow and the sort of weighted average depth and robustness continues to grow. But not in a way that would affect your modeling one way or another, which is why we don't think there'll be any particular utility in us sort of arbitrarily defining what counts and what doesn't.

So it's very nice progress. It helps with relationships. It's consistent with our mission. Someday, we hope that we can monetize our capability in a way that makes it worth talking about with you. But right now it's just not..

Okay. An update to that.

Could you give us an update on anything that is potentially going on with the ESCO program? Or is that just completely on ice right now?.

I think -- I'm going to say words that one should never say. I think it's going to go into effect soon and that's just because I was in D.C. recently. And so I think it's going to go in soon. We are participating out of a sense of citizenship. It's not at scalable program as currently defined.

However, we totally applaud CMS for doing all the work to get it where it is, and in particular Dr. Conway and others.

And hopefully, we can use this as a platform to take that next step to a scalable program, which will really transform kidney care in America, dramatically improve quality, save a bunch of money, be good for shareholders, be great for families, keep people at work. So we're getting -- we're inching towards the promised land..

Okay. That sounds very intriguing. Just one follow-up question. It's looked like from the initial proposals that an entity of your size can maybe end up something in the ballpark of 6,000, 7,000 patients.

Is that the right way of thinking about it?.

It's been so long since we submitted the details, to be honest, I don't remember. Those numbers could be about right. Remember, CMS gets to pick which proposals for which markets, and it's sometimes difficult to forecast then even within one of those selections exactly what the enrollment's going to be.

But that maybe -- it's certainly not that we're going to have 20,000 patients and it's not that we're going to have 1,000. I mean we could have 0 if they don't award anything to us. So we'd be surprised and disappointed at that. So it's not 25 and it's not 1,000, but beyond that, I don't really remember.

I think where CMS was is that, in total, they wanted to have about 15,000 patients in the pilot. Now they may have gotten more aggressive on that, but that used to be the number. And if you assume that if we're 35% of the patients in America, we'd be 35% of the ESCO patients, that would put us right about exactly where you were estimating..

Our next question comes from the line of Scott Schaper with William Blair..

the ICPs, the JVs, et cetera.

Which of those to date and going forward do you think will have the best ROI? Which one will have kind of fastest growth in MA patients? And if you were a betting man, which you're probably not, which of the 4 horses would you want to really grow the most on a 5- or 10-year basis?.

Okay. Well, I'll first give a qualitative answer. They will all develop slower than you would like. But then separate from that, if we compare the medical group segment to the health system segment to the payer segment to the IPA segment, the one that we're, by virtue of our DNA, most compatible with and attracted to is the medical group segment.

I mean we're a physician caregiver organization and so medical groups are like finding cousins or long-lost brothers or sisters for us as opposed to the other categories. And so I think that's the one that we're sort of philosophically drawn to.

But as to which one will end up being the best vehicle for good risk-adjusted return on equity, it's just too soon to tell. If you forced me to bet right now, even though I'm not a betting man, I would go medical groups..

Okay. And then just one more for me.

Anything that you guys are seeing due to some of the weather the East Coast is getting? Are you seeing people maybe miss some of the dialysis appointments, anything on HCP?.

On the weather, in general, our teammates do amazing things to help their patients get dialyzed. And I mean amazing in terms of picking them up, in terms of clearing out parking lots when there's no public services to do it, working early, working late, helping babysit for each other's kids so somebody can stay late.

I mean it is inspiring to see what our people do. As a result, almost always, almost everyone gets their treatments.

Does anybody around the table know anything different this time?.

I think no. And we do all always see a few -- a higher number of mistreatments every winter. And it just depends on where the storms are and stuff, but there is a little seasonal impact every winter..

We just had -- there were floods in Malaysia.

And so we had people that were sleeping and sitting on their roofs because the water filled their houses, and our teammates continued to travel by boat to a stranded dialysis center to dialyze, with at least one caregiver being apart from their family for 7 days straight to make sure that patients got to the center then back in a boat, back to their home.

So it gives you some sense of what they do..

And at this time, I show no further questions..

Okay. Well, thank you, all, very much for your consideration. We will do the best we can and look forward to seeing many of you at Capital Markets..

Thank you. This concludes today's conference. You may disconnect at this time..