Jim Gustafson - Vice President-Investor Relations Kent J. Thiry - Chairman & Chief Executive Officer Vijay Kotte - Chief Financial Officer - HealthCare Partners James K. Hilger - Interim CFO and Chief Accounting Officer LeAnne M. Zumwalt - Group Vice President-Purchasing and Public Affairs Patrick McKinnon - Vice President Javier J.

Rodriguez - Chief Executive Officer, Kidney Care, DaVita HealthCare Partners, Inc..

Matthew Borsch - Goldman Sachs & Co. Kevin K. Ellich - Piper Jaffray & Co (Broker) Joanna Gajuk - Bank of America Merrill Lynch Margaret M. Kaczor - William Blair & Co. LLC Gary Lieberman - Wells Fargo Securities LLC Chris Rigg - Susquehanna Financial Group LLLP Whit Mayo - Robert W. Baird & Co., Inc. (Broker) Ryan Newman - Promus Capital.

Welcome to the DaVita HealthCare Partners Fourth Quarter 2015 Earnings Conference Call. At this time all participants are in listen-only mode. After the discussion, we will conduct a question-and-answer session. And now, I'll turn the call over to your host. Mr. Jim Gustafson. Thank you. You may begin..

Thank you, Vin, 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; Jim Hilger, our Interim CFO and Chief Accounting Officer; Vijay Kotte, our CFO for HealthCare Partners; and LeAnne Zumwalt, Group Vice President.

I'd like to start by noting that 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 the actual results to differ materially from those described in these statements.

Further details concerning the risks and uncertainties, please refer to our SEC filings included in our most recent annual report and subsequent quarterly reports. Our forward-looking statements are based upon information currently available to us, and we do not intend and disclaim any 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'll now turn the call over to Kent Thiry, our Chief Executive Officer..

All right. Thank you, Jim, and welcome to all. This will be a pretty high density call, and I'll be covering more topics than normal because of some of the nuances contained therein. As usual, I will first talk about our clinical outcomes because that is what comes first.

Second, for each major business unit I'll talk about the operating performance for the quarter, year, and provide some thoughts on 2016. Third, we'll then step back on each business briefly and on the enterprise overall to try to set the table for our Capital Markets Day coming up on May 18 in New York City.

And then lastly, I'll talk about enterprise capital allocation. So let's launch right in since there's quite a bit to cover. On the clinical outcome front, excellent news once again. Kidney Care, 97% of our patients with a Kt/V of 1.2 or greater, 73% of patients with fistulas placed for access.

At our recently final results announced for the CMS QIP program for another year period, once again we outperformed the rest of the community with only 1.4% of our facilities facing a penalty compared to 7.1% for the rest of the industry.

Of course, no quality rating system is perfect, but in rating test after rating test, we come out as clinically differentiated. On the HCP front, equally promising results. With respect to HEDIS clinical metrics, we'll just pick Nevada this time. We try to move it around for you geographically.

And in terms of subject matter, we once again exceeded the Medicare fee-for-service benchmark on all metrics, and had four-star or five-star across all MA patients on all nine HEDIS metrics. So in both cases, both main sides of the house, our outcomes compare very favorably to national averages. This is good for patients. This is good for the taxpayer.

Now, let's move on to the quarter and the year. We'll hit HCP first, international second, Kidney Care third. HCP operating performance for the quarter, $25 million, that excluded the estimated write-down. This was within our guidance range.

On a normalized basis, this was actually about $37 million if you normalize for prior-period adjustments, et cetera, which actually is about exactly the same amount of profit in Q4 of 2014 normalized. For the full year OI improved, as you know, from $215 million to $240 million, which is also within our guidance, although at the low end.

In order to achieve that, the legacy markets were up a bit, the new markets were up a bit, and the combination of those bits was more than enough to make up for the medical cost inflation and some very substantial investments in capability building/G&A.

And Vijay Kotte, our new HCP CFO will discuss those investments and capabilities in G&A in more detail in just a few minutes. But I will say (04:48) move right on to 2016 guidance for HCP. It is $175 million to $225 million. There are three primary drivers of that range. Driver number one, $58 million in reimbursement cuts.

This is primarily the result of the new acuity coding RAF model being implemented, the final chunk of the way, a 100% implemented as of that time. As previously discussed, the HCP was more comprehensive in its coding capture.

Complete diagnosis of patient conditions is a good thing, but it also left the entity far more vulnerable to any coding reimbursement compression. So $58 million from that source, most of it the model and the model is now 100% in. Second big driver of that range is our investment in additional capabilities.

There's two components to this $60 million year-over-year increase. Component A is really remedial. Their prior business leadership essentially stopped investing in the company, it was working to maximize profitability for the sale either knowingly or unknowingly. And as a side note, just want to remind you that we knew that.

That is why we only paid a six times multiple in a world where other allegedly comparable assets were then going for nine times to 10 times and now much greater than 10 times in the market.

And the second component of that big G&A capability investment is offensive, meaning investments that we think are going to create significant competitive advantage for us over time. The third primary driver is the positive one, which offsets a big chunk of those two negative ones. Solid operating performance, good old solid operating performance.

So if you look at the math, you have a $58 million hit from essentially the completion of the RAF model. You have a $60 million hit from the increased investment in G&A, half remedial, half offensive. That would equal a $118 million hit.

You then have a $78 million operating performance improvement which offsets all but $40 million of the two negative trends, and that yields the change from the $240 million in 2015 OI to the midpoint of the guidance $200 million for 2016. We can of course take questions on all of that but those are the three primary drivers.

2017 does look better than 2016, the model will be behind us. We continue to make steady progress on our capabilities and our contracting.

If we put the P&L aside for a moment and look at cash flow and take as a scenario the midpoint of our guidance, in other words the $200 million for HCP, and simultaneously take the midpoint of our guidance for the total enterprise, that $200 million would equal 11% of total enterprise operating income.

However, HCP operating cash flow is projected to be over $400 million, about 25% of total enterprise operating cash flow. This happens because of what we've talked about in the past, low working capital intensity, low CapEx requirements, and a $100 million per year hard dollar cash tax benefit.

If we step back for a moment and look back at three difficult years, the total reimbursement cut from the implementation of the new RAF model for us, $165 million.

What we had anticipated was a much smaller number than that, in fact less than half, so about $100 million of incremental P&L harm that we had not expected is due to that single variable, $100 million.

Now, the fact that it came from that does not make it any less painful than if it came from anything else, but the important message is it did not come from operating problems or operating issues.

Looking forward instead of backward, we have six primary markets; California, Nevada, Florida, New Mexico, Colorado and Washington, or more particular the Seattle area. In those primary markets we have six leading independent medical groups.

It is in those places plus our joint venture, Tandigm in Philadelphia, of course, but that is a horse of a different color, that is where we'll be placing most of our emphasis in the near and perhaps intermediate term. Prices are very high right now for valuable properties.

Our bandwidth is pretty stretched given how much we've grown and given how much opportunity we have in those six markets plus with Tandigm. And then third, we need to prove to you that we can get the right returns and margins in a number of those places before we do too many other significant things.

Because of all that, it is unlikely we will do any other big Everett like deals, unless it is through a capital like transaction or is for a very attractive multiple. Other good news to take into account and looking forward instead of backward, I'll list a few of them each of a different type.

First, our legacy markets in 2015 once again outgrew their markets in terms of MA growth. The markets grew 6%, we grew 9%. Number two, we've dramatically improved patient service metrics since the time of the transaction. Number three, we've had a number of significant IT advances that have improved our support for our front line physicians.

We have a long journey there and Vijay will talk about that a little more but we've got some nice early momentum and victories in better supporting our front line physicians. Number four, we've had a number of forecasting and fire period adjustment issues. You know that painful truth as we do. Our finance leadership team is literally 90% new.

And fifth, and finally in this case, if you look at our top 22 executives, we have five great veterans with immense amounts of valuable HCP experience, and 17 new executives that we think are the right people to help take us into that next chapter going forward.

So that's it on HCP for now, although Vijay will come back and talk about some of those capability and G&A investments a little bit later. So to move on to international, we underperformed in 2015, $55 million in losses compared to original $40 million of guidance.

But why? Well, we had a $5 million AR reserve, which almost entirely came from one country where there were two fiscal intermediaries that became insolvent. We actually hope to get a bunch of that money back.

We also are $10 million behind plan or were $10 million behind plan in two countries where we built new centers and patient growth was behind plan. In 2016 for international, our guidance is losses of approximately $40 million. This assumes no unusual AR reserves. We are experiencing payment delays with the Saudi government.

So that's a washout, but we have done nothing on that front now, we still expect to receive all of the funds. And the good news is, the Ministry of Health in Saudi is explicitly very happy with our service, and very impressed by the patient feedback they have received. Their words, not ours.

In 2017, we anticipate improvement over 2016 on an OI basis, and in 2018 in international dialysis in our current country portfolio we expect to achieve breakeven. We are, in fact, already in 2015 or we did already in 2015 generate positive aggregate EBITDA at the clinic level in eight out of our 10 countries as we continue to grow and cover our G&A.

And another reference point that gives you a sense of the per country scale, in 2014 we had an average of $10 million revenue per country. 2015, an increase of 50%, up to $15 million per country. 2016, if we hit our plan will be $27 million in revenue per country.

So you can see that at reasonable margins we are making strong progress in covering the fixed nut of global G&A. Finally, most of our growth internationally has been through acquisition. Virtually every one of those acquisitions has been competed for with others.

And so these are market valuable assets that real competition wanted to have, and our competitors continue to invest in growing internationally as well because of the returns they see.

Now, stepping back for a moment with respect to international, we are still very bullish on the long-term opportunity both in Kidney Care and other HealthCare services. Now, on to the Kidney Care operating performance. Once again, strong quarter, strong year. Operating income, $449 million, and then for the year $1.658 billion.

First number was for the quarter, of course, once again excluding some non-recurring stuff. Jim Hilger will provide more detail on the numbers. I'll go right into guidance. We anticipate in 2016 another solid year, $1.625 billion to $1.725 billion. Of course, there's always risk, we'll fall short and there's always hope that we will exceed.

This guidance, per our normal customs, does include the international economics, and it also includes the unfortunate fact of flat Medicare reimbursement for the third straight year. The uncertainty in our 2016 performance, as in many recent years, centers on revenue and revenue per treatment.

We anticipate our performance in the first half of the year with respect to RPT to be positive, but we have a lot less visibility into the second half of the year, hence the broadness of the range. And regarding the strategic initiatives, there could be some earnings volatility there.

One reason is ESCOs, as you know, we have launched, and so we incur those costs, particularly those extra start-up costs now, and we get the shared savings payment later if we perform and the data is correct. And the second variable are some Rx, DaVita Rx renewals. All of this of course is incorporated into our guidance.

Stepping back now with respect to Kidney Care and looking out three years, four years, five years, there's one big downside and three attractive upsides. The big downside is what will happen to private pay.

It is unfortunate that we have a large cost shift in our dialysis industry in America with private patients paying a lot more to subsidize the 80% to 90% of our patients that are Medicare and Medicaid.

And when you put that on top of payor consolidation, distributed risk pools, exchanges and other things going on, it would not be prudent to not be nervous about what will happen with private pay. On the other hand we do have three upsides; one is in the ESA market. For the long term, as many of you know, we spend about $800 million per year on ESAs.

We are intensely looking for the right long-term partner or partners and hope to consummate some type of long-term partnership well before the expiration of our current contract at the end of 2018. Second, integrated Kidney Care. We are very competent at this. Regardless of who has the risk, we think we will be one of the sub-contractors of choice.

And third, finally, the flat Medicare reimbursement is scheduled to go away at the end of 2018. In 2019 we hope to be back to our normal market basket. All-in-all, our strategic position in U.S. Kidney Care is strong. Now, let's step back to the enterprise overall. The guidance; OI of $1.8 billion to $1.95 billion; OCF, $1.55 billion to $1.75 billion.

But on an equally important topic, how are we thinking about capital allocation at the enterprise level? Well, first with Kidney Care, we stay the course, and since there aren't a lot of large properties available out there, that means they will not use all the cash they generate.

HCP, they will focus on existing markets unless something that is capital-light or at a very attractive multiple comes along. International, we will continue to invest to grow.

Putting all three of those together, what does our capital allocation look like if you pick something arbitrary like the next three-year period? We will generate in a reasonable scenario – with of course downside risk and upside hope, but in a reasonable scenario, we will generate operating cash flow of approximately $5.5 billion in the next three years.

If you count normal use, meaning our current operating plans, business plans, et cetera, which of course could change, we will use about $3.5 billion for those purposes.

This leaves about $2 billion on the side for us to contemplate what to do with, with of course your counsel as well, as we compare other growth opportunities to debt repayment opportunities to share repurchase opportunities. Now, Vijay Kotte, our new CFO of HealthCare Partners will walk through a few more details..

Thanks, Kent. I'll take a few minutes to provide more detail into the investments we're making into the future. As Kent stated before, we are continuing to make both remedial and offensive investments into the business. The best way to look at these items is to put 2015 and 2016 together.

When you do that, we have a total of approximately $80 million in incremental investments over 2014. To provide more context into these investments, I'll put them into three primary buckets. First, we have information technology; second, legal and compliance; and, third, next generation capability and change match.

In the bucket of IT, we plan to spend $40 million more in 2016 than we did in 2014. This includes the following areas.

First, security; second, applications to support population health; third, a community portal to enhance communication between patients and providers; an enterprise data warehouse; our accounting system conversion; and a national IT infrastructure to enable our creation of one company.

Next, in the legal and compliance bucket, we will invest an additional $10 million to $15 million over 2014. In our final bucket, we're investing approximately $18 million into research and development related to next generation care management capability, a team we call Catalyst, with applications to our current markets as well as others.

Now, Jim Hilger, our CFO, will walk you through a few more details on the numbers in the quarter..

Thanks, Vijay. First, I'd like to point out a couple of non-GAAP items in the quarter. In the fourth quarter, we recorded an estimated accrual of $23 million for potential damages and liabilities in our DaVita Rx pharmacy business. We have excluded these numbers from our reported non-GAAP income from continuing operations.

A few words about this estimated accrual. The reserves relate to the period from 2010 through 2015. As a part of our normal process, last spring, we initiated an internal compliance review of DaVita Rx, during which we identified potential billing and operational issues.

We notified the government in September of 2015 that we were conducting this review of DaVita Rx and began providing regular updates of our review. Upon completion of our review, we filed a self-disclosure with the OIG on February 5, 2016, and we have been working to address and update the practices we identified in the self-disclosure.

In addition, as disclosed earlier today, on February 5, 2016, DaVita Rx received a Civil Investigative Demand from the U.S. Attorney's Office. The information requested has some overlap with the items we self-disclosed, and we do not know if the U.S. Attorney knew we are already in a process of developing a self-disclosure with the OIG.

At HCP, we took an estimated $206 million impairment charge of non-cash goodwill in an intangible asset of certain HealthCare Partners' operating units.

These impairments were driven primarily by underperformance of the business reporting units in recent quarters as well as changes in other market conditions, including government reimbursement cuts and our expected ability to mitigate those cuts.

The final amount of these impairment charges will depend upon the final outcome of this valuation work, which we expect to be completed in the first quarter of 2016. This non-cash charge will not impact go-forward performance or our cash taxes.

On to the overall enterprise, our debt expense was $103 million in the fourth quarter, which is a good run rate for debt expense in future quarters. Our income attributable to non-controlling interest was $40 million.

Next, our effective tax rate for income attributable to DaVita HealthCare Partners in the fourth quarter was 36% and for the year was 38.2%. And we expect the full year tax rate for 2016 to be in the range of 40% to 41%.

We have also repurchased $151 million of our common stock in the fourth quarter, and we also repurchased an additional $249 million in the month of January. As a result of these transactions, we now have approximately $259 million remaining under our current board authorization.

As you think about modeling the first quarter, here are a few things that you should keep in mind. In our Dialysis business, Q1 2016 contains one fewer day than this past quarter. So you should expect lower revenues and higher fixed costs for treatment.

Second, our payroll tax caps reset at the beginning of the year, which leads to higher costs of a $1 to $1.50 per treatment. At HCP, OI fluctuates from quarter-to-quarter due to the seasonal needs of patients, and Q1 tends to be a bit lighter than the full-year average. Now, turning to cash flow.

We continue to generate strong cash flows as operating cash flow was $437 million in the fourth quarter and $1.861 billion for all of 2015 excluding the Vainer settlement. The strong cash flows in 2015 are borrowing a bit from 2016 operating cash flow mostly due to the timing of cash tax payments and other working capital items.

But despite that, we still expect 2016 operating cash flows to be $1.55 billion to $1.75 billion, showing that we continue to generate strong cash flows. As always, this guidance range captures a majority of probabilistic outcomes, but we could be above or below this range. And with that, operator, let's go ahead and open it up for Q&A..

Thank you. Our first question comes from Mr. Matthew Borsch with Goldman Sachs. Your line is now open..

Yes, hi. Thank you. Could you maybe just address the areas of operating performance improvement that you're expecting in the HCP business? Maybe just – I don't know if there's any kind of granularity that you're prepared to give at this point, whether it's by geography or function.

I'm just curious the types of things that you think are going to be going better this year versus last?.

Matthew, this is Kent. Thanks for getting on the call. It's pretty broad-based. So there's nothing really that jumps out. There's no dramatic disparity in unit growth or margin enhancement, either through MLR improvement or G&A savings or revenue enhancement. So it's pretty mixed across the portfolio..

And let me ask on a different front still related to HCP.

As you look at things that are potentially for sale and you mentioned prices are high, is that still principally because of the major hospital systems that are bidding up? Is it, I mean, more of the same hospitals? How much is hospitals? How much is managed care versus other?.

It's certainly health systems bid sometimes breathtaking amounts for these medical groups, but we have been surprised by some of the other players, including some of the health insurance entities and the offers that they have put on the table as well..

Okay. All right. Thank you..

Thank you. Our next question comes from Mr. Kevin Ellich with Piper Jaffray. Your line is open..

Good afternoon. Thanks for taking the questions. Kent, I guess just kind of big picture, thinking about the guidance, which historically you've had a track record of being conservative. But if you look over the last few years, we haven't seen much growth in operating income. I guess, clearly, there has been some issues with HealthCare Partners.

But I guess, broadly speaking, what will it take to get growth reaccelerating?.

A very fair question, Kevin, and one that we are pretty intense about on the inside. On the Kidney Care front, with that flat Medicare reimbursement that's just a real problem that we've got to get addressed.

And then, hopefully, through a new partner or the same partner in a new partnership with ESAs, or getting some integrated care runway, we can start to break out of the current trend. On the HCP side, of course, some of the declines have taken away the Kidney Care gains.

And so if we just stop that and get back to a reasonable steady growth on HCP, that together with the normal growth in Kidney Care could start to generate some much more interesting numbers.

And then, lastly, international is unfortunately just a couple of years away from being able to really help, although, once it starts helping it could be a long-term big deal..

Got it. Okay. And then, going back to your comments on Kidney Care and the potential downside and three factors for potential upside. In the ESA component, you said that contract expires in 2018.

Should we expect to see something happen in the next year or two years?.

We would like to develop the right kind of long term win-win partnership sooner rather than later. We have the contract we have with Amgen and so if they don't want to do anything new with us, we certainly can't force them to.

Having said that, there are other people that we can create agreements with that just wouldn't kick in until the day after the Amgen agreement expired.

So our point is pretty simple that we think we can be a great partner for someone for the next five years to 10 years in that area and we're eager to find that party and start working towards that long-term future.

Necessarily, even if we got very serious with someone tomorrow, these deals are pretty complicated and nothing would be signed for some time. But that's one of the reasons why we want to start working on them now because it takes a while to put them together.

Is that responsive?.

It is. And can you remind us, I think in the contract you had the ability for 10% of your ESA supply to come from someone else.

Are you guys testing other options out right now? And if so, how's that going?.

LeAnne, you want to talk about that?.

Certainly. We do plan to do some pilots over the next year..

Okay.

Will you go with one source or will you try different options, LeAnne?.

Certainly we'll try multiple options..

Okay, great. And then, I guess going to hammer, going to the share repurchase, you guys were very active in January. I think you said you have $259 million remaining.

Should we expect to see continued share repurchase activity maybe get – are you guys going to go back to the board to get – to re-up the authorization? And even though you don't provide EPS guidance, is that part of your outlook for 2016?.

I'll go ahead and take that one. We're going to apply the same sort of measured calculus we've always applied looking at the alternative deployments, looking at the different scenarios going forward, looking at interest rates, looking at the stock price.

As the CEO, I'm feeling a little sheepish about the fact that we bought back quite a bit when the stock was a fair amount higher than it is today and we would have done more value for – created more value for our long-term shareholders by waiting a little bit as opposed to buying when we were at above historical average EBITDA multiples.

So we bring our normal sort of intellectual calculus to it, but certainly we've demonstrated over the last year and certainly many of you were actively engaging and encouraging us too. Certainly, we've demonstrated, as we have at different times in our history, the willingness to going to the market and take some shares out of play..

Okay. Thank you..

Thanks, Kevin..

Thank you. Our next question comes from Mr. Kevin Fischbeck of Bank of America Merrill Lynch. Your line is open..

Hi. This is actually Joanna Gajuk filling in for Kevin today. Thanks for taking question. So on HCP guidance and the breakdown on different elements that are impacting the operating income. Specifically, I recall the company mentioned on the last call, Medicaid headwinds of $20 million.

So should we assume that you no longer include that headwind or it's just small that you didn't disclose that?.

What happened is we thought it would be Medicaid of $20 million, it turns out the Medicaid is $8 million. And so when we talked about $58 million, $50 million was that RAF model....

Okay, got it..

...in Medicare, $8 million was Medicaid..

Okay. That makes sense. So then I know you mentioned that those headwinds, you expect to be offset by a broad, I guess, based operating improvement. But are you willing to talk about the legacy market's performance in 2015? I don't know whether specific numbers are up or down, or the magnitude of the improvement.

And then, what do you think this would be 2016 versus 2015?.

Right. In 2015, our legacy markets contributed to the profit growth, the OI growth as did our new markets. So both were contributors to our ability to offset the bad stuff that happened in normal medical cost inflation and our big investments.

In 2016, we anticipate the same that independent of the rate cuts, that both legacy markets and new markets will do better than they did in 2015..

Great. And then just a follow up on your comment around the dialysis business, and the pricing, that you expect the pricing to be positive in first half, but there's less visibility for the second half of the year.

So can you shed a little more light why you think that?.

It's not because of any particular normal negotiation between us and the payor. It's just because of all the noise in the air with everything going on with exchanges, regulatory ambiguity in those areas, what some of the new payors are going to do in terms of getting in and out of exchanges.

So there's just so much going on that we're uneasy, increasingly uneasy, and we thought we should share that..

So there's nothing specific to cause because I want to say you mentioned something around some specific contracts, or I guess maybe that was on the HCP side, so maybe that's irrelevant. And I guess that's all for me now. Thank you..

Okay. Thank you. I think you might be referring to the DaVita RX renewals I referred to..

Right..

But that isn't independent point separate from what's going on in mainstream Kidney Care..

Great. Thanks..

Thank you..

Thank you. Our next question comes from Ms. Margaret Kaczor with William Blair. Your line is open..

Good afternoon, guys. First of all, thanks for all the details in terms of where you guys are investing in HCP. So maybe a question on that. What impact should we expect these investments to have? I might assume it's better outcomes that are going to lead to these higher patient adds.

But even more specifically, over what timeframe should we see the fruits of these investments, is it as early as 2017, or is it more 2018, 2019, 2020?.

Well, Margaret, we knew this question was going to come and dreaded it because it's going to be the answer you hate. It's not going to happen right away. For example, in technology space it'll take a year, one to two years to get a lot of that stuff done. And then the benefit it has does not immediately leap off the P&L.

In terms of our next-gen care management and changed management group, that's got some near term upside. When you're managing $4 billion of medical cost, the spending that extra whatever it is, $20 million with some new talents, with some new analytics, and with some new approaches, you can get a pretty good payback on that pretty quickly.

But the whole team is so new and the processes we're putting in place are so new that we would just hate to create expectations and then fail. We're very bullish on the impact they're going to have, but it just is not going to be overnight..

Okay. So maybe to take that even further, and I'm sure you'll appreciate this question as well. You talked about profitability in HCP, maybe improving in 2017, and part of that is that the reimbursement cuts from the RAF model go away. And so that should be, if I'm thinking of it right, about a $60 million tailwind.

But then are you going to increase investments further in 2017 to offset that? And then also the final bucket in terms of OI performance, should that improve in 2017 as Centura and Everett start to have a larger impact?.

Yeah. Well, you do know us well. The elimination of the RAF model that's been hanging over our heads, that's certainly the elimination of a headwind. It doesn't lead to a tailwind.

It just leads to the absence of wind, which for us right now would feel pretty good assuming that benchmark rate increases would be, roughly speaking, equivalent to what goes on with medical cost inflation.

And so we do want 2017 OI to be nicely higher than 2016 OI because of the elimination of those headwinds and a lot of the other stuff hopefully kicking in.

But did I miss a part of your question?.

Yeah. So the operating performance of Centura and Everett, what kind of impact will they have in 2017 and 2018..

Thank you. On Everett, we would also expect 2017 to be better than 2016. 2016 has some integration expenses. 2016 has some adding talent to take on risk pools. So we have that expense. We have some additional amortization from the deal. We have some special additional expenses that exist for the first year or two years of the deal and then go away.

And so we are counting on – we are expecting a nice operating income trajectory at Everett clinic in 2017 versus 2016, and 2018 versus 2017, and 2019 versus 2018. We have high hopes for the significant growth of the business there. And then on Centura, that is a tougher one. We certainly expect it to do better in 2017 than 2016.

It really depends on if we get a quality of risk (41:07) contract, what the effective date is, and then how quickly we can make a difference. So that one could stretch out a little bit based on the timing of all that. We're making nice progress, but right now there's nothing locked and loaded..

Okay. Great. And then just one more from me. You guys were nice enough to provide kind of the DeNovo clinics that were waiting for regulatory approval last quarter. How are those looking this quarter, and should we expect they're still could be a bolus of clinics that we'll see open in the first half of the year? Thank you..

Yeah. The DeNovo backlog is still about the same as what it was last quarter, but what we're seeing is a much better improvement in opening new clinics. So that's where we'll see improvement in the first half of the year..

And that person speaking is Patrick McKinnon, Chief Financial Officer of Kidney Care..

Great. Thanks, guys..

Thanks, Margaret..

Thank you. Our next question comes from Mr. Gary Lieberman with Wells Fargo. Your line is open..

Good afternoon. Thanks for taking the question.

Sticking with HCP for a second, is it possible to get some color on Albuquerque, maybe just how the recovery has gone on, and where it is today versus where it was, say, a year or two years ago?.

Boy (42:28) Gary, this is Kent Thiry. I'll handle that. The difference between a year or two years ago is night and day. This is just huge orders of magnitude, better. So that's the high level answer. The operations have been stabilized. We're in very constructive risk pool conversations with one of the major payors.

We're in healthy collaboration discussions with two other significant health systems. The leadership has been stabilized. The management team has been improved.

So there hasn't been any – I mean, the numbers are certainly way better than two years, but I'm not wanting to represent this as we're on some stunningly steep trajectory of profit improvement, but all the fundamentals are better, and now we'll see what we can get done in the next couple of years..

Okay.

And then how much of your time are you spending on HCP versus on the Kidney Care business?.

I spend significantly more time on HCP than on domestic Kidney Care..

Okay. And then maybe just talking about the self-disclosure and the CID both happening on the same day.

Is that just coincidence, or is there something else that we could read into from that?.

It's just totally coincidence..

Okay.

And then is there any additional color you could give us around it?.

I don't think so, Gary. We just don't know much yet. The good news is that through our own internal normal compliance processes we uncovered some issues, and we did the right thing in investigating them. We did the right thing in reporting to the government. We did the right thing in doing some refunds.

All of these were small dollar issues, and transactions that were a tiny, tiny percentage of overall transactions. And we kept the OIG up-to-date along the way as to the work we were doing but not completed, and then we send off our formal self-disclosure document.

And then it just so happened that very same day that we got the CID from the Department of Justice, and we have no idea if the Department of Justice had any idea that we were already nine months down the track with the OIG..

Okay. And then I think you said your analysis went back to 2010, and it looks like their inquiry goes back to 2006.

Is there anything to read into that?.

No, I guess, it would suggest, again, that the two things aren't at all linked because clearly they were coming up with their own set of issues and their own set of dates, but beyond that we don't know.

As you know, in many instances once they decide to take a look, they often that first document is very, very broad because, why not?.

Okay. And then on your comments regarding negotiating an ESA contract. It sounds like – you're talking about it more than I think you had in the past on new contract.

Is there anything tangible you can share with us or any hope that it could get done in the near term?.

No idea. This is – we are eager. I'll be redundant, but we are eager to have a long-term partner and a long-term plan, and we just think there's a lot of opportunity.

But getting there we'll take either our current partner deciding they want to create the next generation together, or doing it with someone else, in which case the implementation of course would have to wait.

But the reason we're talking about it more is people are getting more serious because it's just not that far away anymore, and $800 million a year and growing is a lot to play with..

And then, I guess, maybe just last point on that.

Is there anything that you can share with us or that you're aware of, of the one short term biosimilar that has been expected to come to market but has not yet?.

I personally don't think it makes much sense for us to start talking about individual biosimilars and what exactly is going on. And so LeAnne, I don't know if there's anything you'd like to get out on the table. Anything I do would just be repeating publicly known information..

No Kent, I think you answered that correctly..

Okay. All right. Thanks very much..

All right. Thanks Gary..

Thank you. Our next question comes from Mr. Chris Rigg with Susquehanna. Your line is open..

Good afternoon. Thanks for taking my questions. We're going to get the advanced notice for 2017 MA rates next week, and obviously I don't want to – it's hard for you guys to predict what's going to be in there. But one thing that's been kicked around is potentially adjusting the risk models to better code for duals.

Do you have any thoughts on that, particularly if it was budget neutral, and if not, can you at least give us a sense for within the HCP pool of enrollment how many are duals? Thanks..

Yeah. Like you observed, we don't have any idea what they're going to do, and we do believe that currently in Medicare Advantage the sickest people we get under reimbursed for, and the healthiest people they over reimburse for.

And for people like us, who are not insurance companies, and we want to keep the patients we have, we do keep them, we can't really determine which new ones come to us, the current reality works to our disadvantage.

And then with respect to duals in particular, while we have a bunch, it's impossible to say whether we would benefit materially or not until you know whatever the heck they would do..

Got you. And then changing gears here, just with regard to the seamless payor organization rollout or pilot/fall, can you give us a sense for some initial feedback from patients, or just anything with regards to that would be helpful. Thanks a lot..

Is this regarding ESCOs?.

Yes..

It's just too soon. But we can tell you that we've been in a globally capitated pilot with CMS for seven years, eight years now, and it's pretty significant. There's 800 patients there or so. And then we have another 800, 900 globally capitated patients within our HealthCare Partners universe.

And in general, and in particular on the Kidney Care side where the C-SNP plan, special needs plan, is focused just on these Kidney Care patients, it's spectacular. The patients get extra services. The doctors have extra support. The referring doctors get better information. The nurses get to provide coordinated care.

The patient and family gets support at home. So I can tell you in our mature other where we're globally capitated, it's a spectacular, beautiful, transparent victory..

Great. Thanks a lot..

Thank you. Our next question comes from Mr. Whit Mayo with Robert W. Baird. Your line is open..

Hey. Thanks. Good afternoon. Kent, you've discussed in the past your desire to reengage in productive conversations with your Health Plan partners to ensure that your incentives are aligned with their incentives, and they treat you as a good partner with the MA rate cuts.

And are there just any developments along the re-contracting front that would be of any interest to us?.

Yes, is the short answer. I'm not going to get the mix right, but if you ask on Capital Markets Day we'll have it. And Jim Rechtin is not here right now, but I'd say a healthy percentage of our renewals end up with a new agreement where our interests are much more aligned. And that's been true every year. It's a big shift from what existed before.

And the same statement is true with respect to health systems in hospitals where a very solid percentage of our new contracts there create a lot more alignment than the old ones which were so zero-sum. So I would say, it's steady progress, nothing dramatic.

But it's really healthy in reducing downside risk, and over the long-term will create some shared upside..

Great. And just on Renal Ventures, I don't think I've heard an update. Just maybe I should know this, but just divestitures, FTC, and any sense for the contribution this year..

Hi. This is Javier Rodriguez, CEO of Kidney Care. There is no update. We're still anticipating a Q2 close..

Okay. And maybe one last one.

It's just, any way to get a sense of the size of DaVita Rx now, either by patients or revenue?.

Boy, I don't remember what our historical policy has been. It has certainly grown. It is making some money, it's not losing money anymore. And I'm going to have to turn to Jim Gustafson so I don't violate any policy. Go ahead, Jim..

Yeah. We disclosed we're serving in various capacities 165,000 patients, and that includes both internal and external..

Great. Thanks, Jim..

Thank you. Our next question comes from Mr. Ryan Newman with Promus Capital. Your line is open..

Hey guys, thanks for taking my call. You spoke a little bit about the softness in some international markets, and how other players were attracted to those assets as well. As well, I know you've expanded a little bit in Colombia, in Portugal, China, Germany.

Can you just talk a little bit about where the most softness occurred?.

Where the most what has occurred?.

Where the softness conditions existed internationally?.

Softest conditions?.

Yeah..

So soft as in....

The worst performance..

Poor performance? Okay. Thank you. Sorry for my....

No. I misworded the question. I apologize..

I'd say the softest performance from a profit point of view, I mean, my mind is racing as to how much I should disclose..

Sure..

We've had some profit problems in Colombia. That probably sticks out as one of the softest. In Saudi, we've been growing a little bit behind plan, but the microeconomics appear to be solid. And I think beyond that, I'd have to get into so many nuances.

In China, we still put in the R&D category where we're very steadily consistently investing to look for the winning formula. And we don't have it yet, but we're not discouraged. We've got some stuff that's working there, and we have some stuff that's not working, and that's kind of the hit rate we expected.

India, we know, is a long haul kind of thing, an immense market. But we're not ever going to start doing anything big there quickly because the microeconomics are just too tiny. So there's a little bit of flavor across three or four, and I'm probably giving Jim Gustafson a heart attack by providing all this..

Yeah. That's great. Thanks, guys, for the detail and I appreciate your time..

Thank you..

Thank you. At this time, we no longer have further questions on queue..

Well, the Capital Markets are May 18.

Correct, Jim?.

Yes..

In New York, we're going to nail down the location. There's a lot to talk about. We look forward to going into more detail.

We're going to have a longer general session that we normally do so that we hopefully give you a very comprehensive and analytically thoughtful not only reiteration of our strategy but our progress and the right kind of leading indicators to stare at.

So we're looking forward to a real high intensity extended exchange, and we'll do our best in between now and then to get through 2016, and start growing again in 2017. Thank you very much..

Thank you. So that concludes today's conference call. Thank you all for participating. You may now disconnect..