Jim Gustafson - DaVita, Inc. Kent J. Thiry - DaVita, Inc. Joel Ackerman - DaVita, Inc. Javier J. Rodriguez - DaVita, Inc. LeAnne M. Zumwalt - DaVita, Inc..

Kevin Mark Fischbeck - Bank of America Merrill Lynch Tejus Ujjani - Goldman Sachs & Co. LLC Justin Lake - Wolfe Research LLC Whit Mayo - Robert W. Baird & Co., Inc. John W. Ransom - Raymond James & Associates, Inc. Patrick Wood - Citigroup Global Markets Ltd. Gary P. Taylor - JPMorgan Securities LLC.

Good evening. My name is Jenny, and I'll be your conference facilitator today. At this time, I would like to welcome everyone to the DaVita Third Quarter 2017 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers remark there will be question-and-answer period. Thank you. Mr.

Gustafson, you may begin your conference..

Thank you, Jenny, and welcome everyone to our third 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; Joel Ackerman, our CFO; Javier Rodriguez, CEO of DaVita Kidney Care; Jim Hilger, our Chief Accounting Officer; and LeAnne Zumwalt, Group Vice President. Please note 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 the forward-looking statements.

For further details concerning those risks and uncertainties, please refer to our third quarter earnings release out earlier today and 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 upon 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 earnings press release filed with the SEC and available on our website. I'll now turn the call over to Kent Thiry, our Chief Executive Officer..

Thanks, Jim and thanks everyone for joining our call. Before we get into the specifics of our Q3 financial performance and outlook, we'll start as we always do with our clinical performance. First within the DaVita Medical Group, the opioid epidemic, of course, is getting a great amount of publicity and appropriately so.

Our Everett Clinic in Washington was recently awarded with the Washington State Medical Association's highest award for patient safety because of their work in this category. We had an amazingly robust program where we implemented pain scarring tools, risk assessment, urine screen and trainings supporting for providers.

And were recognized by the community for the exemplary leadership that we demonstrated. Within DaVita Kidney Care, it's a good time to step back and stare at our cumulative accomplishment in the area of integrated care. If you look at the C-SNIPs that we've been involved with for 10 years or so, the outcomes are simply outstanding, just to name a few.

25% reduction in hospitalizations, 49% fewer readmissions, 66% lower CBC rates compared to the national average, et cetera, et cetera. And the recent ESCO data both from us and others further reaffirms the value, the potential, both clinical and economic, of integrated care.

It is all relevant not only clinically for our community but for our shareholders as well because it seriously supports and reinforces the arguments for our PATIENTS Act where we'd build on these existing vehicles to really scale those integrated care accomplishment.

As many of you probably noted, the bill was reintroduced with bipartisan support in the House and Senate in just the last couple of weeks. This proposal is scalable, it's sustainable, does not penalize high-quality providers like DaVita, and it gives nephrologist flexible and substantive participation options, more on that in the quarters to come.

But now I'll turn it over to Joel Ackerman to discuss DaVita Medical Group..

Thank you, Kent. Good afternoon. For the third quarter of 2017, DaVita Medical Group had an adjusted operating loss of $5 million, which excludes a $601 million non-cash goodwill impairment and other non-GAAP items.

Before I discuss the drivers of this disappointing outcome, let me start by saying that we recognize that the business is not achieving our capital return expectations nor is it contributing to OI growth.

We recognize the skepticism investors will have right now as a result, but we remain confident that the operational changes we are making will result in improved financial performance in the future.

As a reminder, this business has a disproportionately high amortization load, $45 million for the quarter, which includes roughly $7 million related to the acceleration of our branding initiative and depreciation of $16 million for the quarter.

Therefore, this quarter's adjusted operating loss of $5 million translates into an adjusted EBITDA of $55 million for the quarter. The outcome this quarter is primarily the result of two drivers. First, higher than expected medical costs, which represents about $30 million of impact.

This is largely of the result of two things; increased utilization, driven by higher patient acuity than we have seen in the past; and by true-ups of prior period costs that impact our shared savings result.

We anticipate the higher acuity seen during the year will result in increased revenue of approximately $30 million in 2018 as the new diagnoses of these patients will be reflected in our 2018 reimbursement. Second, the finalization of prior year Medicare Advantage payments, which we have historically received in the third quarter, was delayed by CMS.

For your reference, this was a $13 million item in 2016. Despite this underperformance, we continue to make operational progress on the four drivers of improvement we laid out at our Capital Markets Day. However, the financial impact of these operational changes have yet to show up in our results.

Of particular note, during Q3, we announced the restructuring that eliminated 350 non-clinical positions in DMG. We expect the resulting annualized savings to be approximately $40 million per year starting in 2018. Looking forward, we now expect full year 2017 adjusted operating income for DMG to be in the range of $50 million to $85 million.

We plan to give 2018 DMG OI guidance in February on our fourth quarter earnings call. While we're not giving specific 2018 guidance at this time, we expect that DMG's 2018 operating income will be up from 2017 adjusted operating income for several reasons.

First, we expect $40 million in savings next year from the recent restructuring, as I just mentioned. Second, $30 million of revenue increases that reflect the patient acuity increase, as I mentioned before. Third, we expect to benefit from four risk contracts that have or are near signing in our new markets.

Finally, we've been making progress in re-contracting with payers in our legacy markets and have signed or substantively agreed with payers on improvements in terms covering approximately 25% of existing Medicare Advantage risk business. Overall, we're optimistic about our ability to drive increased revenue per member per month in 2018.

We expect all of the above should more than offset the 2018 Medicare Advantage rate headwinds we have previously disclosed.

For 2019 operating income, we continue to see reasonable scenarios that deliver operating income greater than $200 million through the four levers we discussed at our May Capital Markets Day despite the reduced expectations for 2017. Now I will turn it over to Javier Rodriguez to discuss Kidney Care..

charitable premium assistance, payer contracting and guidance. Let me start with charitable premium assistance. As you know, we recently released information concerning our exposure to charitable premium assistance. I want to take this opportunity to summarize the four most important points.

Point number one, charitable premium assistance has been critical support for the neediest patients, who are forced to navigate through an extremely complicated insurance environment. Point number two, we think charitable premium assistance is unlikely to go away for many reasons.

Point number three, even if charitable premium assistance were to go away for dialysis patients, we believe that a large number of patients would likely retain their existing coverage, despite facing significant financial hardship.

Point number four, if this unlikely scenario plays out, we estimate approximately $100 million to $250 million of downside risk to our annual operating income. Because we provided a lot of color in our press releases, I will leave additional comment for Q&A.

For the last couple of quarters, we have also received some questions around the payer environment, so I want to provide additional color and try to be as helpful as I can. As we review the portfolio for 2018, we don't see anything to call out as unusual.

So can I provide a little bit more detail? What does this mean? Four out of our five largest payers have rates locked in for the next two to three years, and we're currently negotiating the fifth in the normal cadence of renewals.

For the smaller regional players, we continue to have normal give-and-takes in negotiations, so some will end up and some will end up down. On to guidance. For 2017, we're tightening our adjusted operating income guidance for Kidney Care to be in the range of $1.57 billion to $1.6 billion from the previous guidance of $1.565 billion to $1.625 billion.

The new range includes the negative financial impact of the hurricane. Next, given there are so many moving pieces in the business, we want to be as helpful as I can here and break from the recent practices of providing guidance on the fourth quarter earnings call. First, a reminder.

We will have a year-over-year accounting headwind of $100 million in 2018 for our recent transition to 401(k) match program. Nevertheless, we expect operating income for the Kidney Care business to be in the range of $1.5 billion to $1.6 billion in 2018.

In our guidance, it's worth calling out three elements, which we have considered in the forecast, but they're harder to handicap. Number one, open enrollment for ACA plans. Given all the regulatory uncertainty, it's hard for us to forecast individual patient decisions. Point number two, cost of the MEDICs.

We don't have clarity around price, cost and volume yet. And then lastly, advocacy in California. As you know, the labor unions have proposed a ballot initiative that would significantly alter our economics in the state of California.

If they decide to proceed with the initiative, we might have to incur significant onetime costs in 2018 to support our advocacy efforts, which we have not included in our stated guidance range. Longer term, we continue to expect the multiyear trajectory to be consistent with what we said at Capital Markets Day earlier this year.

Now I'll give it back to Joel to discuss international..

Thank you, Javier. For this quarter, adjusted international operating losses were $8 million, which includes $1 million foreign exchange loss and excludes higher equity losses of $6 million due to goodwill impairment at the APAC joint venture and restructuring charges of $3 million.

This restructuring charge is related to a reorganization of our international operating structure to improve efficiency and reduce our G&A by eliminating some redundancy across the global, regional and country level. We expect this restructuring to save approximately $6.5 million per year in international cost starting in 2018.

For full year 2017, we reaffirm international OI guidance we provided last quarter. Looking forward, we continue to expect to reach breakeven internationally during 2018. As we said last quarter, whether we achieve breakeven for the full year of 2018 will largely be a function of our acquisition pace for the rest of 2017.

As mentioned in Capital Markets Day, we're building a solid platform for growth in our international businesses. Finally, some comments on cash generation and capital deployment. Operating cash flow was $553 million in the quarter and $1.56 billion year-to-date.

Cash flow continues to be strong despite the adverse impact of a temporary increase in DSO of four days over the last two quarters due to the following; as a reminder, one day of DSO translates to approximately $30 million in operating cash flow. So the four days were the result of three things.

First, receivables inherited in the Renal Ventures acquisition, which contributed about 1.5 days; second, delays in submitting claims from centers impacted by the hurricanes, which contributed another 1.5 days; and third, normal fluctuations, which contributed one day.

We expect our DSOs to decline three to four days over the next few quarters as we work through these items. Separate from these short-term DSO increases, we have also seen a structural increase of dialysis and lab DSOs of approximately three days over the past year due to changes we have made to our collection processes.

These include changes to our billing processes for government payers, anticipating changes in regulatory requirements as well as changes in billing frequency for certain commercial payers to reduce collection costs at the expense of a slight increase in working capital.

We continue to expect operating cash flow for 2017 to be in the range of $1.75 billion to $1.95 billion. Now, over to Kent for a few closing comments..

Thank you, Joel. I'd like to offer a few thoughts on three topics. Number one, DMG; number two, CPA; number three, capital deployment with respect to share buybacks. While it was a solid quarter for Kidney Care, it was an extremely disappointing quarter at the DaVita Medical Group, as you no doubt, have already noted.

It is difficult at this point to find any words that are useful to the capital markets given our continuous failure to meet the expectations we have previously set. This reality is exacerbated by the fact we still believe in the value and potential of these assets and teams. Nonetheless, the results are the results.

We are intensely focused on affecting a change in the burden that DMG performance is placing on the enterprise, your enterprise, through both strategic and operating initiatives. We would like to reiterate what we said in May at our Capital Markets Day.

We are pursuing strategic alternatives for underperforming assets across our businesses and across markets. Steps like the $40 million G&A reduction that Joel discussed are still in our control; many others involve third parties and therefore are difficult to time. I'd like now to move on to charitable premium assistance, CPA.

First and most importantly, our teammates acted ethically with respect to our charities and our patients. CPA is unambiguously good for ESRD patients who are among the most in need.

Charitable assistance has long been explicitly accepted and endorsed by the government, above board explicit, intentional, and it was intentionally expanded by the Affordable Care Act. We have a responsibility, both regulatory and ethical, to comprehensively educate our patients.

And as to any notion that commercial insurers are unfairly burdened by the aggregate regulatory ecosystem of the ESRD system is ridiculous.

There are two subsidies that cut the other way that dramatically outweigh any incremental burden from charitable premium assistance on commercial insurers, namely the Medicare entitlement for patients under 65 and the 30-month limitation of Medicare Secondary Payer statute or commercial coverage.

Our patients are the only Americans discriminated against in this way unable to keep commercial coverage that they would like to keep and have the ability to pay for. Most important, of course, in all of this is our teammates continue to provide amongst the best clinical quality care to dialysis patients in America.

We will continue to advocate for our patients to be taken care of by the system. Finally, regarding stock buybacks. We have continued to do them. We have been deploying a considerable amount of our durable cash flow towards our long-term capital allocation strategy, which has manifested itself in the form of these repurchases in recent months.

In fact, since our last earnings call, we have repurchased nearly 8 million shares or approximately 4% of our outstanding stock and announced a new authorization with approximately $1.2 billion currently remaining.

Year-to-date, this means year-to-date through November 7, that is, we have purchased approximately 11.4 million shares or about 6% of our shares outstanding at the beginning of the year. We think this was the right thing to do with your capital.

Operator, would you please open up the line for Q&A?.

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

Great. Thanks. So I guess, one, when you think about the 2018 number for dialysis and basically we assume that you're kind of at the high end of the range and we throw in the $100 million stock comp change, you're looking to grow about 3%, it looks like ish OI next year in that business.

And I guess you're talking about growing volumes organically at least that amount, actually more than that amount.

So why wouldn't there be EBITDA growth more like in line with where the top line growth should be kind of in mid-single-digit next year?.

Appreciate the question, Kevin. A couple of things. As you know, next year, Medicare reimbursement is only going up 0.5 and for every percentage point is roughly $40 million. So when you have that line not going up and you have the labor pressures that we have and the cost structure moving up, you just have some compression there.

So the range that we gave you is consistent to support that..

Okay. And I guess when we think about the DMG outlook, and then I guess I appreciate the complexity of the DMG business and the general rate pressure in that business over the last several years.

And it's obviously more complicated than the relative sustainability of the dialysis business, but I guess the inability to forecast earnings from quarter-to-quarter, is this really surprising? I mean, as we think about this business over since you've owned it, does HCP have this problem before you owned it as far as quarterly visibility? Or is there something new in the way the business is being run or the factors influencing the business that make it difficult for you guys to consistently forecast just a quarter or two ahead?.

I'll go ahead and take a stab at that, Kevin, and you let me know if it's sufficient.

The two big changes in the last four or five years compared to the prior four or five are, one, the rate of annual Medicare Advantage rate increase benchmark rate type stuff, and then number two, in the case of HCP, a non-trivial increase in the weighted average acuity of their patient group during that same period.

And what that meant is you could be off a fair amount in your medical loss ratio forecast or your unit growth forecast, but it would all be matched by your reimbursement per member per month increase.

Because in the last four or five years, instead of increases in those two areas, there's been dramatic decreases totaling in the neighborhood of $275 million. I'm not going to get the number exactly right.

Therefore, any adjustment or any miss on the medical loss ratio or unit growth front, even though it might be of exactly the same absolute magnitude as prior years has a dramatically bigger impact on the net remaining OI. And of course, it takes a while to restructure the business according to the new revenue reality.

Is that responsive?.

Yeah. And I guess the acuity side makes more sense to me.

But I guess to the extent that there's always going to be this inherent delay between when your risk scores adjust to the acuity care you're seeing underlying basis, is there a reason to believe that the acuity dynamic this year is unusual in some way, or are you going to have the same issue where next year the acuity increases and you'll get last year's acuity boost, but you won't be able to factor in next year's acuity issues?.

Excellent question, and let me try to step through it in a reasonable clear way. If there was the same kind of acuity increase every year, then there wouldn't be any year-over-year delta or it'd be very, very modest because every year would benefit from the prior year's acuity increase. But in fact, that's not the case.

This year, there was a differential increase in acuity. And so in fact, we did incur a significant number of incremental medical costs tied to that higher acuity.

Just to give you one reason for why that happened, we did a great job of dealing with an unusually high percentage of our patients who had flu issues and an unusual incidence of serious issues within that flu population in the first quarter.

The derivative benefit from all that extra care in cost is that you actually capture a lot of other acuity developments that you would otherwise not have because you wouldn't have seen the patient for significantly longer period of time. So that's just one analytical sliver of the larger picture.

So this was truly a discontinuous incremental increase in acuity. We don't have any reason to expect there to be another one the subsequent year.

To be honest, from a long-term point of view, we would be happy if it happened again because while you suffer a relative deficit in the first year it happens because you're incurring the cost and the revenue is deferred, on average, we keep our patients for a long time and do great work with them.

And so the actual net present value of this type of change in acuity is seriously positive. However, in the very first year it happens, you're eating the cost and none of the revenue..

Okay, that makes sense. And I guess maybe my last question, you talked about recontracting 25% of your MA risk business for next year. How should we think about that? Is that unusual? I guess you mentioned on the commercial side, you've announced that you've got a large contract signed up for two or three years.

Is this 25% just normally happen or are you specing this out because you're saying this 25% are the real problem contracts and that's what you're talking about, first.

And then second, what is it that you're doing? Is it really a rate recontracting or is there some other aspect that you're really looking forward to improve the profitability?.

Yes. So first, it's not normal course. It is something that we set out intentionally to do and accomplish this year, which we haven't done in the past.

In terms of the second question about what exactly we're doing, it's I think the simplest way to think of it is increasing the percentage of premium that we are keeping relative to the percentage of premium that the payer with whom we're contracting keeps..

Okay.

So that's it, just follow through it then to the bottom line from your perspective?.

Exactly..

Okay. All right. Thank you..

And Kevin, the only thing I would add there is our results this year are, as you all know, highly public. And so we go with great credibility to our payers in this context and point to the fact that we are a very high-value added and significant part of their network.

And the industry is in a different spot now and there simply have to be adjustments in the revenue paradigm to adjust for the changes on the government reimbursement and cost side.

Operator, could we go on to the next one, please?.

Sure. Our next question comes from the line of Tejus Ujjani from Goldman Sachs. Your line is open..

Hi. It's actually Tejus Ujjani actually. Thanks for taking the question. Just want to go back to this workforce reduction in the DMG segment.

You mentioned $40 million of annual operating impact or operating savings, and just trying to understand if this is a sustainable reduction in kind of overhead infrastructure, why wasn't it done in prior quarters or previously if the group had been underperforming for some time?.

Sure. So look, we have been thinking about the performance of the business for quite a while now. The decision to eliminate this many positions is not one you can run into quickly. There are puts and takes when you make decisions like this.

And now is the point where we thought some of the operating changes that we had made had been established well enough that we could handle a change like this within the business without it hurting the overall operating performance..

Okay. Thanks. And just kind of switching topics to the DaVita Rx. I think Javier had mentioned back in Capital Markets Day and it came up on the last call as well, a $70 million to $90 million EBITDA headwind for the pharmacy business in 2017.

Can you just share any update on how much of that's actually occurred so far this year? How much you have incremental for the rest of the year? And if there's anything actually incremental in 2018 guidance?.

Yes. We are on the high-end of the range, but we are – so that number did hold up. And as it relates to 2018, we expect the economics to stay in the same range as they did in 2017..

Okay. Got it. Thanks very much. And then just going back to, I think, one of the earlier questions about what's implied in core Kidney Care segment growth, given some of the top line pressures and wage pressures.

I mean, it seems like you're saying that there's not really any operating leverage kind of going forward into next year in the Kidney Care segment. I mean, given the scale and size of the business, I mean, are all the costs really variable at this point? I mean, I guess any color on that would be helpful..

No doubt about it that 2018 is not where we want to be. And 2019, the numbers are looking better, because we have the Medicare reimbursement and we have some visibility into other items that will look better in 2019 over 2018. We will, of course, work very hard to beat the number we have. But that is the right number to do at this juncture.

And as I said, there's three big variables that we're going to get visibility into shortly here with open enrollment and in the cost of MEDICs. And so we will do our best to perform on those metrics..

Great. Thanks very much for the questions. I'll hop back in the queue..

Thank you..

Thank you. Our next question comes from Justin Lake from Wolfe Research. Your line is open..

Thanks. So a few questions here. Wanted to first go back to premium assistance. And appreciate all the color you've given. Wanted to talk about your interaction with CMS on this, right. So they came out last year with something outside of the exchange reg that they later pulled back on.

The exchange reg came out just recently, there was no mention at all of charitable premium assistance.

So given that, I'm curious as to what is your interaction with CMS right now on this topic? Has it quieted down, given most of managed care is making significant profits on the exchanges now? Just give us some kind of an update, if you can?.

And, Justin, I'll take a stab at this.

Number one, I would say that there's a dramatic difference in how this administration at least so far is approaching the issue versus the prior administration, which is to say a lot more listening and developing a much deeper understanding of the nuances and the complexities, both generally on the issue and with respect to dialysis patients.

That's a good thing. Second, they're also, as everyone knows, way behind in staffing up and missing some key leadership spots. Put all that together, it is not that the item has dropped off the agenda at all, but perhaps nothing is going to emerge for a while. It's very difficult – impossible would be a better word – to predict.

You are also correct that because a whole lot of plans are doing better in the exchanges now than before and throughout this entire period, more people are noticing that they were making very substantial profits in most of their other lines of business, while at the same time complaining about the exchanges that that pressure has also abated somewhat.

So I want to repeat. It's still on the agenda, both of the plans and of the administration. And we can't predict when they're going to do something. But the good news is, it's at least from a process point of view, far more measured than before. And we just don't know what to expect.

We will continue to advocate for our patients who, as we mentioned in our preparatory remarks, this aspect of the dialysis and kidney care ecosystem has existed very explicitly and very intentionally for 25 years..

Okay. That's helpful. Then, Kent, in regards to DMG, as recently a September 7 at a conference, you said DMG had some nice momentum. So given the problems in the quarter, obviously the visibility in this business that I think you discussed before must be limited.

How should we think about or educate ourselves on this? Your forward view of the business, given the interest from others you've talked about in acquiring it, and your discussion around strategic alternatives.

Are there any other strategic alternatives for something like DMG, other than a sale of the business that we should consider? Or is that the main strategic alternative you're discussing?.

Well, first as to the question you asked at the front end of your paragraph, we understand that you and others must have a very dim view of our confidence when it comes to forecasting, and there really is no other rational perspective for someone to have at this point.

Second, as to the question, are there other strategic alternatives other than selling everything? The answer to that question is yes. There's different options in every single market as well as in aggregate. Of course, at the same time, we also recognize our fiduciary responsibilities to you and your associates..

So can you give us anymore color on what those other strategic alternatives would look like?.

Well, I'll just give one example so you get an idea. It could be that one would sell – create a separate equity vehicle in an individual market and have some of the local players become serious equity partners simultaneously enhancing the contract terms between us and them in an individual market.

Just to give one example of a non-total sale that could change both the short-term economics of the business as well as derisk the business as well as liberate some capital. So I'm not advocating for that versus anything else.

I'm simply answering your question as to what would be an example of an alternative strategic alternative to selling everything and then adding on top of it the follow-up question, which is, well, what would that do for shareholders?.

That's helpful. And then just lastly, before I jump back in. You brought 6 million shares in October despite knowing that DMG was having some clear issues.

Can you give us some color around that decision?.

Sure, Justin. It's Joel. We're, in general, not going to comment on our individual purchases over a given quarter or a month, but let me give you a little color about how we think about this. So in general, we like to use both open market purchases or 10b-18 purchases as well as planned purchases, 10b-51 purposes.

They have different advantages and disadvantages. The open market gives us flexibility on a day-to-day basis to decide whether we want to buy or not depending on the stock price than anything else. The challenge there is the window does close at times, and we obviously can't trade when the window is closed, so that removes certain flexibility.

The 10b5-1 solves the window issue, but it locks us in over a protracted period of time and we can't respond based on all the other factors. So we use both. When we do 10b5-1s, we tend to lean towards more complex plans to try and think forward about what's likely to happen, ensure that we're buying at opportune times.

That said, there can be unintended consequences of the complexities of our 10b5-1 plans..

So if I'm hearing that correctly, is it fair to say that you put that in place before the quiet period ended or began, I should say? And you have the information on the quarter, but maybe felt like the stock price at that time was interesting so you wanted to buy?.

I'm going to leave it where I did in terms of the general guidance without getting into any of the specifics..

Okay. Thank you..

Thanks, Justin..

Thank you. Our next question comes from the line of Whit Mayo from Robert Baird (sic) [Robert W. Baird] (40:56). Your line is open..

Hi, good afternoon. On this exchange topic, CMS mentioned Friday during a webinar with both navigators and payers that those eligible for Part A coverage or have Part B Medicare coverage should not be enrolling in marketplace plans or some language to that effect. I think we talked a little bit about this at my conference briefly.

And this is, I think, the second time that they've sort of guided the payers and the navigators to this point.

Do you just have any thoughts on the implications of this with the ESRD patients?.

Whit, we're looking around the table here for a moment because none of us are feeling well equipped because we didn't know about this Friday statement and it's a fairly tricky area where you've got to be pretty damn precise. So LeAnne or Jim, do either of you have any ability to shed light on this, or do we just say we'll have to get back to you.

We're not thinking we can do a great job, repeating stuff we've already said..

That's fine. Okay. Jim, I'll send you the email. And maybe back to Joel's comment on some of the changes to the collection process, and I think you referenced anticipating some regulatory changes.

Any color on specifically what you're referencing?.

This is Javier. Basically, we went through and reviewed the best way to do billing. We had a new billing system, and we changed some policies and procedures. So there's nothing from a regulatory perspective at how we're doing internally..

Okay. And looking at the Kidney Care guide, I think you signaled that the international losses or the ancillary losses, I guess, should be sort of breakeven.

Is that generally the assumption that you've used to construct the 2018 guide?.

I'm sorry, I was writing down something.

Could you repeat the question?.

Yeah. Just the Kidney Care guidance for 2018, I'm just curious what the assumptions were for the ancillary business.

I think you've consistently stated that you believe it can breakeven, and I was just looking to confirm whether or not that's exactly what you've assumed sort of within the range?.

We don't have an immediate answer.

Why don't we have some people take a look and get back to you before this call is over, okay?.

That's fine. And maybe just one last one here. Just back to DMG and the comment on higher utilization. I mean, I think you're the only person this quarter or in the past year for that matter citing higher utilization.

Is that really acuity or are you really seeing utilization days per thousand go up?.

So it is acuity. What I would also remind you about us is given the nature of our business, we don't have the scale of the large payers, so we are rather localized. And while we are in six markets, we are dominated or we are heavily-weighted towards one market.

And as a result, we don't have a diversification that some of the other larger managed care players you're talking about have..

Okay. That makes sense. Thanks..

And the other thing I would add, in some cases, if we're below average utilization in a market, and that's what we've been 18 months, and then we become less below average, for us, it actually shows up as an earnings decrement.

But separate from that, LeAnne, you have an answer on the navigator question?.

Well, I think if I heard you correctly, you're saying that the navigator training is instructing navigators if a patient has enrolled in Medicare, they can't enroll in a QHP, which is true. So I think that may be the clarification.

But unless I see the training, I couldn't respond beyond that, but happy to take a look at the training and give you any another color..

No, I'll send it over just stating if someone is not enrolled and is eligible for Part A, you should direct them to Medicare and away from a market-linked plan (45:40), but I'll send it over, LeAnne. Thanks..

Sure. No problem..

And then I just want to follow-up on the question you asked on the SIs in international. We don't guide in particular line, so it's included in our broad range..

Okay. Thanks..

Thank you. Our next question comes from the line of John Ransom from Raymond James. Your line is open..

Hi. I'm disadvantaged from having Justin who had asked all the smart questions. So I'll weigh in with my weak stuff at the end. On the pharmacy, you put in your slides for reviewing assets strategically, that's a business of scale.

That would seem to be kind of an easy one to see if someone else could maybe do it better because they like may buy a little cheaper. Why are you hanging onto that asset if it's going to continue to kind of boil in 2018 at these levels? I'm just curious about that..

Yes. Thanks for the question. On the pharmacy, it is a clinical story. And so when you look at the research and you look at the quantity of prescriptions that our patients take, so on average, a dialysis patient has 10 prescriptions and takes about 20 pills.

So one of the big advantages is that we can consolidate and we could really help the patients on adherence. And then, of course, as you know, we did that business bottoms-up, so we didn't deploy a lot of capital. And so it's been a clinical story that's actually been an acceptable return on investment. So that's how we think about it..

I mean, is it making positive EBITDA at this point? I know its missing plan, but is it net positive EBITDA or is it negative EBITDA?.

It's got thin margins, but it is making money..

Okay.

And then my second question is, your sort of preliminary guidance for 2018, with all the puts and takes in managed care, how does the pricing, commercial pricing, compare in 2018 versus 2017?.

I think what I gave is as far as I want to go, which is our portfolio is in what I'd call a normal state with a lot of our contracts being stable on the large account and the normal fluctuations of the small account. And that's as far as I'm going to go today..

But you made some cryptic comments Javier about 2019.

What's better in 2019? I mean are you already seeing that play out? What's better in 2019 other than Medicare than we might see in 2018?.

Yes, I probably shouldn't have gone there. When I said it, I cringed. So unfortunately, you were paying attention at every word I said..

That's a rare moment. That is actually a rare moment, so I'm going to take credit for that..

Yeah, well, I'm not going to regret and go further on that, but it's fair to say that I shouldn't have said it..

Well, I guess what I'm trying to figure out with my simple mind is if you've got a clinic with 50 patients and you add two Medicare patients, and I know Medicare doesn't cover the total cost, it would seem like the marginal cost of treating a Medicare patient would be less than $250 which is about right on with your base.

So I'm sort of questioning the operating leverage of the business if that isn't the case.

And if that's not the case, are you rethinking maybe de novo spend? Because maybe the economics have gotten different in the business than what we've seen (49:36)?.

Yes. No, I get where you're going at, and this is obviously are we compressing margin. And if so, would we deploy capital in a different way? And so we are, of course, evaluating our capital deployment. And if the returns do go down, what we would do is, of course, we'll operate our centers at a higher utilization and so would everyone else.

But what we have to look for 2019 is, number one, we wouldn't have the 401(k) headwind. And number two, Medicare is going back to normal increases. And so that will be a nice tailwind, back to normality on that..

Okay. Thank you..

And let me go backwards a second to the question about last Friday and CMS' comments. If their comments were precisely what we heard on this call, that would probably be a mistake by them. And if on the other hand, it was a comment they were making that pertained only to Medicare eligibles over age 65, it may not have been a mistake for them to say.

So the devil is really in the detail on this. And we look forward to staring at it. And we'll follow-up with them if there needs to be any clarity. It is also not unusual for that population to just in general, lean philosophically towards Medicare for everything.

And many of them think that Medicare should be the only program that covers all Americans, period. And so to have some sort of implicit bias is not at all surprising or new. For it to be explicitly decided as procedural guidance would be another thing entirely, and so we'll look into it, and thanks for bringing it up..

Thank you. Our next question comes from the line of Patrick Wood from Citigroup. Your line is open..

Thank you very much for taking my questions. I just have two please, if I may. And the first one would be on the ESCO savings.

I'm just curious if these came in -for the data that CMS put out – if these came in roughly in line with where your guys were expecting the overall pool to come in? And also, long term, whether you think that that's a fair set of expectation going forward? Or if you think the industry can do a little bit better, given it's early days? And the second question is just appreciate on DMG that the confidence over the long term to still see that inflection up in the total EBIT level.

The difficulty I've got is, and maybe I'm thinking about this simplistically, but a $600 million write-down is not a small proportion of the total value of that asset. How should we think about the fact that you're maintaining that outlook at the same time as writing down the asset.

Just to give me some comfort around that would be helpful? Thanks, guys..

First, let me take the ESCO question. I don't know how precise we were in the numbers, because the reality is that we are big supporters of integrated care, because we've done it for quite some time.

And we know that when you have the comorbid condition that our patients have that it just makes sense that someone that is a quarterback of healthcare through all the transition, and when you have access to them for 12 hours, that you can bend the cost curve. So that being said, we were happy with the progress we made.

We also have to highlight that it's a small population, so that number will fluctuate over time. And so it's going to be a bumpy up and down, because of the small size..

And let me just add that one of the fundamental architectural flaws in ESCO is – that rebounds to everyone's detriment is the open-ended black box of rebasing. And what this does is makes the long-term returns highly uncertain.

And what that does is dramatically reduce the amount of transformational investment that people like us and FMC and others are willing to make to drive truly breathtaking improvements in the system where everybody would win. And so this is related to the answer to your important question of what can you expect from the ESCOs downstream.

On to you, Joel, for the other question..

Sure. So as you think about the goodwill impairment, there are many factors that go into that calculation. And while the performance in 2019 that we talked about is certainly one of them, there are many others, some more short term in nature.

So while they certainly are not disconnected, there are a lot of things that go into the goodwill calculation other than our thoughts about 2019..

Sure, appreciate it. Thanks so much for the color, guys..

Thank you, Patrick..

Thank you. Our next question comes from Gary Taylor from JPMorgan. Your line is open..

Hi, good evening. Had a couple questions. The first one, I just want to make sure I have this right. The implied fourth quarter Kidney operating income that would be comparable to the $404 million this quarter, I think the midpoint is $402 million.

Do I have that correct?.

No. The midpoint would be closer to $400 million, but that's in the ZIP Code..

Okay.

And so any incremental – I think the $404 million you're implying really would have been for 2018, including hurricanes, and so stepping down a little bit sequentially would be mainly driven by what?.

There are two main things in the fourth quarter. We have an escalation of benefit costs as the teammates run through their deductibles. And we have historically a higher G&A during the period. That explains the bulk of that difference..

Okay. I do have a CPA question for you, Kent. What we've heard from a number of plans is that they feel they're under no legal obligation to pick up the AKF funds and as they have rescinded some of these policies and refused to accept checks and wire transfers to AKF.

Instead, they're now seeing a lot of these patients paying with a prepaid debit card, and in fact that those cards are going to the dialysis center care of patients and dialysis administrative personnel are helping these patients pay those premiums.

And I guess my question is, given your view that this is an acceptable and sustainable part of the ecosystem, why is it necessary for the AKF to potentially hide the origin of that funding? And is there any business risk to DaVita in essentially being complicit in circumventing these plans' terms and conditions of coverage if they decided not to accept those payments?.

Well, first, I'm not intimately familiar with what the AKF does, so we'll have to follow up. Second, there couldn't be anything more explicit and more public than provider funding of the AKF in the entire pantheon of American health care, and it's how it's been for 20 years.

It's how the government approved it, consistent with criteria the government set down. But I cannot opine on exactly operationally how that comes up.

I also know that the overwhelming majority of payers, a huge percentage, I'm not going to get the number right, but overwhelming majority probably understates it are continuing to process charitable premium assistance claims in the same way they did a year or two or three ago.

And so whatever tiny subset of reality you may be discussing, I'm just not familiar with, but feel free to follow up with our team. But on the broader frame, the other statements I've made are highly, highly relevant..

Okay. I'll step back. Thanks..

Thank you..

Thank you. Our last question comes from Justin Lake from Wolfe Research. Your line's open..

Thanks. Appreciate getting back in the queue here. Just wanted to run through a bunch of numbers question here. First, if we go back into something in the neighborhood of $10 million $15 million, I think, from hurricanes, can you give us the exact hurricane OI impact in 3Q? And I apologize if you gave it already.

And any impact assumed for 4Q that we should consider?.

I couldn't hear the last part, but we did highlight that there was $14 million plus 25 basis on NAG.

Was there something else that you said on the back end?.

So yes, is there a 4Q impact?.

I am not sure of that. Let me look around. I think the bulk of its flushed through the quarter, but I'll verify here..

Okay.

And is there any reason to think that shouldn't be coming back whatever it is the $14 million plus wherever the fourth quarter shouldn't come back next year, is there any kind of sustainable hurricane impact 2018 that we should consider?.

Yeah. We are still assessing a couple of the centers, but the numbers should not be a meaningful number right now. And the number that they just gave me for the fourth quarter is in the range of $2 million to $3 million, Justin. So....

Okay. That's helpful. Then getting back to the question around re-contracting benefits. You put pretty specific numbers around the savings from restructuring, the revenue increases from the risk scores as they go through.

Is there any number that you can give us in terms of what you think the benefit will be from this re-contracting next year?.

We're going to stay away from giving a specific number on that. Some of that is still playing out over the balance of the year. So we'd rather not give a number..

Okay. And then I just wanted to go back to the international question that Whit asked.

I know you guys don't typically guide to the entire employer business, but you've been pretty specific in terms of international? So, can you give us what international the expected loss is this year on international first?.

Sure. So we said last quarter, and we're sticking with it, something in the low 30s of OI, excluding the onetime stuff..

And should we expect that to get to breakeven next year? Is that what's implied in guidance cause you've been talking about getting to breakeven I think this year?.

Sure. So what's implied in our guidance is in 2018, we will get to breakeven. When during the year we get there and whether not we'll be breakeven for the full year really depends on the acquisition pace over the remainder of the year in 2018, but we believe we will get there at some point during the year..

Okay. That's helpful. And then, Javier, you mentioned California, advocacy cost could impact next year. So just want to make sure I understand that from a perspective of did you say that there was some of that built into guidance? I thought you said that wasn't built into guidance.

And so what's the answer there? And then is that something that you would consider a onetime charge and kind of strip out or is that something that you kind of look at as normal course of business?.

It is not built into the guidance, so that is correct. I don't think we would – from an accounting perspective, it wouldn't called out as a one-time charge, but we would view it as in year non-recurring, how's that? So we would tell you what that number is so you could carve it out..

And you talked about as being somewhat meaningful impactful.

Can you give us a ballpark on like would this thing really does kick up with 2018 what the impact of it?.

The numbers are all over the place, and these campaigns can really go up and down. So it's really hard to give you a number, Justin..

All right. Thanks for all the color on the numbers. Appreciated it..

All right. Thanks, Justin. Feel free to come back again..

I show no questions at the moment..

All right. Then thank you all very much for your continued interest. We will do our best. Thank you..

And that concludes today's conference. Thank you for your participation. You may now disconnect..