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DaVita (NYSE:DVA)

Q1 2011 Earnings Call

May 03, 2011 8:30 am ET

Executives

LeAnne Zumwalt - VP of IR

Unknown Executive -

LeAnne Zumwalt -

Luis Borgen - Chief Financial Officer

Jim Gustafson - Vice President of Investor Relations

Kent Thiry - Chairman and Chief Executive Officer

Analysts

Kevin Ellich - RBC Capital Market

Brian Zimmerman

Unknown Analyst -

Jim Gustafson

Hello, ladies and gentlemen, I'm Jim Gustafson, DaVita's Vice President of Investor Relations. And I'd like to welcome you to our Q1 2011 earnings call and our 2011 Capital Markets Day. For those of you in the room and for those listening online, thank you very much for joining us.

First, I'd like to go through our forward-looking statements. We will make some forward-looking statements today. I'm putting up slide here that is also available on the WebEx and will be available as PDF afterwards. And I suggest that people take the time to read this. Also, we'll be making some non-GAAP statements and the reconciliation to those non-GAAP statements will be available online as well.

So today our agenda will be first to go through the overview of our Q1 results and then to discuss an overview of the company, some investment highlights, business fundamentals, go through the financial review and then finally, summarize it all. So with that, to go over our Q1 results, I'd like to introduce, Luis Borgen, our Chief Financial Officer.

Luis Borgen

Thanks, Jim. Good morning. Welcome to our capital markets day. Okay. Treatment growth was 7.2% compared to Q1 of the prior year. Our non-acquired growth was 4% when normalized for the calendar it was 4.2% this is to the greater proportion of treatments that occurs on Mondays, Wednesdays, Fridays. The non-acquired growth in Q1 was consistent with the most recent quarters.

Our Q1 revenue per treatment declined by $44.72 sequentially, the primary drivers were reduced Medicare reimbursement rates due to bundling, declining utilization of physician-prescribed pharmaceuticals and the commercial mix, which continue to decline. The rate of decline did moderate in the quarter. Remember, this mix decline is a combination of decreased mix of new private patients due to the economy and improved mortality. This is partially offset by improved commercial rates.

Our patient care cost treatment decreased $1.59 sequentially. This sequential decline was primarily due to the reduced unit cost and utilization of physician-prescribed pharmaceuticals. Our Q1 patient care cost represents a good baseline for 2011 at this time.

Moving on to our bottom line results. Operating income was $236 million. It was down 3% due to implementation of lower Medicare reimbursement, prior to the transition adjustment fix. EPS for the quarter was $0.96, down about 8% year-over-year. Along with a lower operating income, EPS was also impacted by higher debt costs as a result of refinancing last fall.

Q1 was a very strong cash flow quarter, operating cash flow was $330 million. This was favorably impacted by a couple of items. Number one, we had certain favorable working capital items going our way. And number two, the timing of our semiannual interest payments on a bond, which typically occurred in Q1 and Q3 are now in Q2 and Q4.

Moving on to operating income guidance. Now that we have one quarter under our belt and have some clarity on our transition adjuster fix for 2011, we are providing OI guidance for 2011 of $1.40 billion to $1.1 billion. This incorporates the recent transistor adjuster fix and DSI, which we expect to be approximately zero OI contribution in 2011, net of transaction and integration costs.

Our initial 2012 guidance is from $1.1 billion to $1.2 billion. This includes the net expected OI contributions from DSI.

Some of you may be surprised by the low end of our guidance. We've not usually give guidance this far out, but the recent changes that we've seen in reimbursement and our cost structure we thought it was appropriate to give you a sense of how we intend to grow off this new baseline. There are four variables that could negatively impact operating income and put it at the lower end of guidance. Number one, commercial mix has and continues to decline and may continue to do so in the future. Additionally, we face rate pressures from the VA [Veterans Affairs] and state Medicaid programs. And finally, we may accelerate our investments in our International business should we identify the right opportunities. We may update guidance as we have more clarity over the next six months.

Moving on to our 2011 cash flow outlook. I want to take a few minutes to walk you through our thinking with respect to our cash flows for this year. First, we expect maintenance CapEx to be approximately $240 million. Our distributions to joint venture partner should be approximately $100 million.

Let me step back a minute. Our operating cash flow guidance for 2011 is $840 million to $940 million. Once you take into account the maintenance CapEx and the NCI distribution, this would imply a free cash flow guidance of $500 million to $600 million.

We anticipate spending at least $150 million on development CapEx. In addition, we will spend about $690 million to acquire DSI. And finally, we expect to have about $70 million in mandatory debt repayments related to our term loans. In this scenario, we would see approximately a $310 million to $410 million reduction in our cash balance this year.

So what does this all mean for available cash. We started the year with $860 million. I just walked through our changing cash. So we expect the reduction of $310 million to $410 million. And year-to-date, we have acquired about $80 million through acquisitions and about $100 million of share repurchases. So on a net basis, our remaining cash should be approximately $270 million to $370 million before any further acquisitions or share repurchases this year.

Thank you. With that I want to introduce our Chief Executive Officer, Kent Thiry.

Kent Thiry

Okay. Good morning, and welcome to those of you who are new to DaVita, and particularly welcome to those of you who've been with us for a while. The categories are pretty much normal ones. We'll try to move crisply as we always do so that we can spend much intense time as you would like on as many questions as you would like. It's important that we always start with a mission. We are first and foremost a caregiver company. In the end, if we're to choose between serving you, the shareholder or you the potential patient or your mother or father is the potential patient or your brothers or sister, we choose the latter as our first priority. And it's important for people who know that going in. This is what the house looks like. If anyone has been in for a while, I would have dropped by sooner, please do what we can help set that up. I would like you to know that in addition to kind of generate returns we're doing really good things for fellow human beings. This is a typical center except for the fact it's really clean.

We have about 1,650 of those right now. And here is a typical matured center, just so you get a feel for the operating reality across those 1,642 places. Here is the totals. Once we close DSI, we'll be a tad over 30% in national market share.

So now under the investment highlights. So what we've tried to do here is if we were you and had to come to this meeting or listen to this WebEx then go back to your partners and describe why would you invest or would not invest. We try to get to the right point so that we essentially afford you that summary. Hopefully with the right backup behind the assertions. From an industry point of view, so forgetting DaVita except for the fact that hopefully over the last 12 years, we play a significant role in shaping the industry. As we have said for a long time, as we are leader in the industry, job one is to protect the profit pool, and job two is to fight over it. And many industries when leaders forget job one, they end up fighting over a price that's not worth very much in the end. So we spent a lot of time over the last 12 years, trying to make sure there is sufficient capital attractiveness in the segments so we can continue innovate care and provide more access, simultaneously providing return to you. So the government gets the return, the patient gets the return as do you. So in that context, what are the industry highlights? This is a summary, and we'll briefly step through each of these assertions.

They're quite different in total for most healthcare service segment service in America or the world for that matter. On the demand side, there a few areas as regular and as predictable of demand. There's no clinical controversy, minus a little bit of discretion though, where exactly -- when you started out this patient. There's no real clinical ambiguity but we need it. There's nothing dramatic going on within the foreseeable timeframe around transplant, although we always hope that will change from a clinical point of view. It's not cyclical. It's not seasonal. Physicians have a lot of loyalty to its centers and to a company in many cases, not all patients have a lot of loyalty to the centers and physicians as there are very limited therapeutic alternatives. And then if you look at the demographic trends, the elderly and Hispanic and Afro-American populations are those, which are disproportionately prone with kidney failure and they, of course, are also the highest segment in America. So as we've said for years during the demographic jet stream of American medical care. So demand is stable within most of your investment time horizons. Looking backward instead of forward, you can see that those words that we're saying are true now have been true for sometime.

From a cash flow point of view in part because of that demand in part because we're a low-fixed cost business, I want to remind you that what it takes to build a center from scratch, several hundred thousand of dollars lethal improvement, several hundred thousand dollars in equipment, which can be pulled out and use elsewhere, several hundred thousand of working capital losses until you reach breakeven that can also be pulled out if you're working down your receivables if you ever put the center in. So you're only making capital is really the leasehold improvements and whatever lease you signed.

So relative to revenue flows and cash flows and great level of fixed cost base and most of our capital investment with periodic opportunistic exceptions like when we bought Gambro 5 years ago and DSI right now, most of our capital investments are quite small in incremental.

It is just incredibly important that most of this community is investor-owned because in our world of American health care it's an unfortunate reality that for 87% of our patients which are government-paid, we actually lose money, like 82% Medicare, 5% Medicaid. And so that remaining 13%, actually 11% to 13% depending exactly how you want to cut it, much subsidized the other 87%. None of us will design the healthcare system this way. It's not appropriate for the government to regulate our cost control in our segment because it's just a massive cost shift. But from an investor point of view, when you first look at that, it's of great concern because you say, "Oh, my gosh, the private payers won't continue to subsidize the government" why would they want to do that, it takes so much more. The short answer is they have to because all the providers are faced the same reality. And so no one can afford to get by if they don't pay charge private payer significantly more than Medicare. It's not a happy fact, but it's a well-known fact and particularly now that about three quarters of all centers in America are owned by investors, they're very sensitive to that reality. So no one's going to do something foolish assumingly, and put patient care at risk in the sort of Don Quixote-like quest for incremental volume.

The government also has different relationship for us because most other segments the government can't be held very accountable. Hospitals are complicated institutions, and surgeries, nursing homes a lot of different types of patients. So these goes on and on and on. We are a single DRG provider. Our economics are very transparent, about 85% of the centers in America are discrete. They only do dialysis. Their economics are discreet and so the government has more insight into what dialysis cost than any other segment that they manage. And they also know that they are almost all of the patients and so they know that if they make a mistake centers start to close. When centers start to close, that's really bad for those patients in that area. And much as a very good reason for it, that feedback goes immediately to CMS, and congress then creates tension. In some cases some centers do close for good reasons. So there's alternatives nearby. But any sort of significant kind of centers closing for economic reasons because of more extremely inadequate Medicare reimbursement would lead to immediate and appropriate political pressure because you have lots of patients that need dialysis 3x a week in immediate jeopardy. So it's a natural state myth. There's still a lot, 1,000 centers across the country. Despite our growth, this number had stayed virtually identical for several years -- despite our growth because of the low barriers to entry, a lot of new providers continue to enter.

So what you take away from is that when we said for years that the bad news is the government is unlikely to do what it does every now and then in the segment, and make a mistake by reimbursing too much. And suddenly creating a short-term windfall, some sort of opportunistic shareholder turn situation. That's not going to happen in our segment. The good news is you're not going to get the opposite mistake where suddenly a reimbursement is passed, it's going to put a lot of centers at serious immediate jeopardy. That's not going to happen either or highly unlikely. Today, Washington D.C. hopefully, over the last six months you've seen that we're different from most other segments in American healthcare service in other way, which is we have created a literally unique coalition that's got all the providers and for profit, not for profit, big and small, the leading physician organizations, the leading nursing organizations, pharma and device leading patient activity groups, all in one coalition. We meet quarterly. We've done it for years. There's staff leadership. There's committee work. People work very hard to create a United Nations-like actually better than the United Nations-like consensus on significant positions. So we more so than most segments are able us to particular issues like we were able through in the transition adjuster go and actually say, "We're speaking for the entire community." As that doesn't happen, too often and when that doesn't happen, it's very easy for members of congress to say, "While we're hearing different things so we're going to do what we think is right," which is often wrong. So this is a good thing and you can see the issues like transparency, like clinical outcomes reporting, like paper performance, we've taken stances as a community, radically different from most of the provider community in America. That doesn't mean it's always happens. The congress knew that it can actually wanted to move forward some of the coherent structure relevant to healthcare reform that we were once a segment that is willing to dance. Even though that song never started playing in the past, it meant to say we're more thoughtful with us than they otherwise would have been if we had been like most of other segments fighting, fighting, fighting these same important things.

Recently, we've been very, very active, more active than we would ever want to be in Washington, D.C. I won't brother to step through this. They'd probably come up in Q&A. But from a historical perspective, the last 3 or 4 years has been the busiest policy times or periods of the last 11, 12 years. And it's good. So the step we started, it is good that we started things like the Kidney Care Partners coalition and in the Kidney Care Council to start that, but sort of rejuvenated 7 and 8 years ago because otherwise, we will never been able to present the sort of coherent front and the coherent argument and so that for the most part, policies have been reasonable. There's no some real significant gaps in what they've done. They just don't make sense and do put a bunch of centers at risk but by and large, that has been a whole lot of collaboration and interaction back and forth.

At the same time your partners are going to ask you what are the low lights, what are the arguments again. And those are pretty straightforward or straightforward to think of, at least, not necessarily straight forward to assess and that's why we're here today to do, however. One is that just reimbursement risk with fiscal government situation and all the things that are shaking in private pay. While one can be comfortable in certain things in the medium term. In any given short-term situation, you don't know what kind of mistakes someone might make and how long it would take to, of course, correct. And then investigations, we are always going to get investigated when we were under fee-for-service. And remember, we're necessarily you're going to get investigated for using too much of stuff, another one a bundle from who's going to accuse us of using too little of stuff. That's not going to change. That is in general, in America, a clarity in healthcare regulations achieved through litigation, not actually more specific regulation. And so that's an unfortunate reality that we'll talk about in track record in this regard and those are certainly, two things you wish didn't cloud the investment horizon, but they do.

What about DaVita separate from the industry. Our clinical outcomes are outstanding, getting better every year. We have a solid operating track record at this point usually long. From a compliance point of view, we get to say where as nobody else good to say. And then in terms of future upside, there's notion that America might finally be ready to allow integrated care. It's exciting.

Clinically, I won't step through all these but if you look through all the public measures or if you want to sit with us and step through all the private measures, the relevance of this, separate from the fact that if you ever need dialysis, this might help inform your physician before the go. But separate from that, from a shareholder point of view, the beauty of this slide and its equivalent over the last 11 years is that you're not going to wake up in the morning and find out that my gosh, the company you invested in is providing lousy care that's been discovered in some dramatic way and dramatically impair your investment. That's not the reason we do it, but that is a catalyst by product of our acute clinical care.

We also are real serious about this continues improvement. For some of you that are new, we could take area after area and point to graphs that are like this.

And this happens to be adequacy and just shows we are very, very steadily improved with a significant blip when we bought Gambro about 6 years ago. And we've also got a whole lot of other programs, which we love to talk about but typically don't come up much in Q&A. That are hoping and continue to trend that you saw and reflected in the prior slide, as well as others.

And then from an operating point of view, this has been our operating income guidance going back to 2003. We could also show '02 and '01 and '00 but that's probably not useful at this point, but up to this point we've been able to do what we said we would do.

And then compliance. This is important because particularly, if you are new and you see that we get a subpoena and it's a comprehensive subpoena and they make some public statements that are aggressive and you know that the government insists that we hire medical directors in every single center, et cetera, et cetera, et cetera, that it is appropriate to be nervous, worried and have anxiety around investigations. One can derive some comfort from the fact that we don't know of any major sub-care service provider. And at this point, perhaps no major pharmaceutical or device manufacturer either with this track record. You can see that we do get our fair share or unfair share of subpoenas. But time after time after time after 2 to 4 years of investigation, there is no settlement that we literally closed the doors without us having to pay any money because we didn't do anything wrong. It's not to say at some point it might not be prudent for you, for us to do a settlement even if we didn't do something wrong. But up to this point, we decided in every instance instead to fight until the very end, and we think that's worked out well for us. There are two more recent ones, a very significant 2010 victories for the government decline to participate in an essentially a whistleblower lawsuit. So the whistleblower may still continue, but the government after substantial investigation declined to continue. And so we paid them zero in those cases, don't know if it will lead to sort of private step going on around it. We have a never-ending queue of private suits as well.

The integrated care, we won't spend a lot of time on because it's not a relevant for most of your investment time horizon. But, it's significant, I guess, a, because we think someday the America will be ready for wanting to organize integrated care dialysis patients and kidney care patients because society will save a lot of money and there'll be better clinical outcomes. In addition, this is relevant for you in a sense that we are out there doing demonstrations for the federal government, proving that this works and thereby continuing to demonstrate that we're trying to be a good citizen within the healthcare community. So when they're making some of these discretionary decisions and given there are some people in the CMS who are ideologically opposed to -- for profit healthcare. The fact that in addition to providing ever-continuing clinical outcomes in the conventional sense, we are continuing to invest millions of your dollars to try to innovate for a better system, which is higher quality, lower cost and higher service, does continue to persuade some incremental people every year that we actually care about that -- and was good at it. Now maybe someday it will also be economically relevant. We can only hope.

So this is a summary of the investment highlights. Those summary appoints one might think we're partner if you're thinking about whether or not to maintain an investment or launch one, and then we could talk about those two and happy to talk more about those two. And now, the person who needs no introduction, LeAnne.

LeAnne Zumwalt

Okay thanks. On to the bottom line update. As you know, over the last year or so, we've been preparing for the new payment system. And the initiatives that we undertook in preparation for this are largely complete and that was early in the quarter. With the takeaway for you, it means that the Q1 cost -- pharma cost structure is really going to be a pretty good representation of what you can expect for the balance of this year based on where we took today. With respect to billing and collection, no major issues there. We were able to get the bills out on time and there's solid Medicare cash flow. One or two problems that are working, the onset patient adjuster, that's an adjuster where we're paid higher in the first 120 days where we care for our patients is really not working from a systems perspective with CMS. We hope that will get collected, and we're certain to recapture that money, but not able to currently get some of the funding that we should. And I'll talk a little bit more about where we stand on the case mix, or the new case mix adjuster. So we've got some challenges ahead of us that we need to continue to put CMS on in both the short term and the more medium term. So a good example of what Kent said was when we work together with the community, we're able to effectively impact Medicare policy. The transition adjuster is a good example of that. We have our policy arguments, we have our data arguments. We appeal to CMS to fix this. And in fact, they moved the clock forward. They gave us the fix early in this year where they really fully intended to not fix it until 2012. The result is $73 million of revenue for us this year that we might not otherwise have received. And then on a follow-on years, we'd expect about $8 million to $10 million of incremental revenue until the transition adjustment is eliminated in 2014.

So what do we have ahead? The big issues are case mix adjuster, 2012 quality improvement program. We stand to lose about $1 there based on the constructs of that program. And then, I'll touch on orals in 2014. The issues with the case mix adjuster can be kind of categorized in three or four things. First, the documentation requirements by CMS really don't follow current clinical practice. There's an inconsistency there. The issue for us is that most of the diagnoses are being done by physician other than the nephrologists we work with. That leads to tremendous data capture problems where we've had to build some new systems and processes trying to get at that data, and if we do get the data now, it's not very timely. It's well after the incident for the patients and that's causing us to have to do some rebillings. Let me give you a couple of examples. So with respect to documentation requirements, when you look at the original role for pneumonia, which is one of the conditions, CMS search the data set and came up with say, with 10,000 cases. Well, then, between that data search and the time they've implemented, they put in criteria around the capture of the culture. And this criteria is put out by the society of thoracic -- excuse me, the American Thoracic Society. No physician is really documenting the return of the culture in the way that they are now asking for it. So in the original rule, an incidence rate I think of about 2.4% of that based on the documentation requirements alone, there's no way we're going to see that same incident rate, and the practical reality is physicians are not documenting according to that standard. So we're not able to bill it. Although those same cases exist today, the incremental requirements are just too rigorous. Then going on to kind of another example, as you look at the acute conditions, 6% of the conditions that they picked are diagnosed by a nephrologist, so only 6%. 94% are diagnosed by someone else and we have to try to figure out the puzzle as who that is. On the chronic side, pretty similar story, 20% of those conditions are diagnosed by a nephrologist or 80% are diagnosed by some other physician.

This is a case where in a preliminary rule, we talked a lot to CMS about it and how bad this policy would be. They did make some changes. Those changes weren't enough, and we continue to dialogue with them, and we're hopeful that we can get them to move and improve this policy. So I think the intention of it was good that we should know more about our patients and be treating our patients holistically, but the practical reality is the documentation requirements don't work.

So orals in 2014? Good news here is that the policy was delayed. So if you look back again at our comment roles, they we're going to implement incremental orals in this year and we were able to get that delayed. The data that's available for them to implement this policy effectively is actually pretty robust, and they can get at it. The unfortunate part of that is it's not CMS data, going to be data that's in the public domain and we're going to need to convince them to use that data. And then if you look at the improvements in the Part D program that are going on today. Some of the issues with patient adherence to medication in choice of medications are being eliminated through that donut hole closing. And we obviously need to make sure that those things are considered as CMS implements this policy. On the bad news side, this is a -- could be a massive shortfall for us. If you look at the original rule, the preliminary rule, CMS estimated that the cost to deliver the medications was about $14 a treatment. The industry thought that, that was about $45 a treatment. So in the preliminary rule, it's pretty good. Big gap. Good news is, though, they postponed the policy because they believe the data we put in front of them. Why is CMS data inadequate? It's pretty obvious. They tend to use data that's a couple years old. In this case in 2010 when they are looking at oral medications, they, in fact, are looking at 2007 data, which was one of the early years of the Part D program. Not many of the patients have enrolled, the donut hole was having an impact on a number of the key variables, which is adherence and medication choice.

So where do we come out on this? If it's done correctly, we can achieve the goals that CMS wants, which is realized improved patient care. That said, if they don't take into consideration contemporary data, that objective won’t be hit. Back to Kent.

Kent Thiry

Thank you. Let's go to the three building blocks, the holy trilogy of dialysis economics, number of treatments times the revenue minus the expense, we'll go through each in turn. Once again just to sort of refresh your analytical memory to provoke questions about the go-forward world. First on the non-acquired growth side, this is the normalized number. And that's the case, the one above is about the non-normalized, but that's less useful from a business point of view. From a de novo point of view, no different than the past. The track record is clear on solid returns. This is our way of adding capacity for growth in existing markets, as well as finding ourselves a new market, thereby strengthening our geographic network and allowing us to help our affiliated physician practices grow.

Here is the actual numbers. And we're thinking that '11 will look a lot like '10, with all the right qualifiers about opportunities and time certification.

From an industry capacity point of view one of the things people might wonder about is excessive capacity being added, meaning are we having more and more dialysis centers per patient and does that suggest any sort of vulnerability from a cost structure point of view in terms of inadequate utilization or a revenue point of view in terms of people being too hungry for incremental patients and doing foolish things with unsustainable economics. And here's the actual data, so you can see that centers are growing in line. What you've seen driving growth is the investor-owned centers getting share over the non-investor-owned and that is different from the overall trend in terms of capacity versus demand.

About acquisitions. The first on DSI, we're going to have some divestitures. It will be a higher percentage of centers than we had in the Gambro case. So it will be higher than that 10% to 15% level. We think it will close in the third quarter. The net effect on OI is zero with a one-time cost exceeding partially your benefit, and then in 2012 it will be accretive.

More generally, we'll continue to have small acquisitions in that 1% to 2% range for the foreseeable future. And so if you look at a normalized neg of 3.5 to 4.5 and then you goose it with 1% or 2% on the acquisition side, you end up staring at a medium-term outlook over that 4.5% to 6.5%.

Moving on to revenue per treatment, starting with private. We remained, as I mentioned earlier, totally dependent on private pay to subsidize a government that doesn't pay its way. I think this was already been referred to, other than for those of you that are new, it's important you know that private patients can retain their private insurance for up to 30 months, then they put to Medicare. And then from a contracting point of view, you put a lot of the different things together we've already talked about, if you own a center, you know you've got low fixed costs, you know you've got high variable costs, most of the cost is created, incurred at the point that a patient actually comes in and you take care of them. There's also a lot of stickiness because of loyalty, and so this isn't the case we're suddenly patients go shifting from one center to the other, in any kind of significant volumes. And part of that is also influenced by the fact that, it limits to how hard you want to work and move patients when they're only going to be on private insurance for another 12 months, 15 months, whatever. And so in general, strategically, it is not prudent to lower price per volume. In general, meaning, like hard to imagine a different scenario.

In addition, in a segment like this with long-term relationships with physicians and payers if ever did that and succeed once, you would probably just create an incredible backlash at renewal time. And so either in that same geography, or different geographies. So it's very hard to see coming out ahead in that game in a world where while there are some cost advantages for some people, they are not material enough to ever justify an aggressive -- we can lower price and somehow get beneath somebody else's cost. And therefore, that's a prudent business strategy, it's sustainable. That reality doesn't exist in our space. It appears to be generally recognized.

What is not changed if you think about the ongoing tension or struggles or battles or discussions or nudging back-and-forth that it goes on between the payer and the provider, it still the case and it's ever more evident to people that better dialysis saves in total cost. The last thing you want to do is move someone to get a couple of percent savings on the dialysis side because all it takes is 1/2 more of a day in the hospital and you've lost an entire savings from anything in the dialysis rate. We also agree, delicate along the notion of moving these patients, because it is a life-saving therapy. Many referrals are network independent. If you're a dialysis patient you're going to go through your copays and deductibles. So a lot of the outer network pressures don't apply, a lot that were different from all. I talked about the bonding before. In addition, payers' do have a responsibility to defy the increasing sensitivity to this is the next 5 years go by to have adequate network so people are not having to drive too far for something that they have to get 3x a week for the rest of their life. And in the end, payers don't have a lot of these patients although the ones they have are expensive. So these are the same things that have been true for the last 11 years.

We have been continuing to bundle commercial pairs at a regular clip starting at the time we told you were. In some cases also we're going beyond the 90-day out type of contracts and going beyond the one year type of contracts. And in many cases when we do that, what both sides get is an element of great stability, which is to say we know we'll get a rate escalator and they know they're not going to get on higher increase than that. And that equation is perhaps a lot easier for both sides to deal with than the trauma of hoping for something better but being at risk for having something worse and having to deal with it every year.

Continuing on revenue per treatment on the mix side. The bad news is unemployment in America, you know about this from the other investments, and from an economic point of view, the beautiful, beautiful clinical fact that we're keeping people alive longer, given virtually everyone that we keep alive longer is a Medicare patient that actually hurts your mix. So it's a wonderful clinical fact but analytically, it does mean that your mix of prior patients will continue to go down. What are factors that are going to push the other way? Hopefully, would create vigor. Well, one investor be in economic recovery with more people being insured. Another would be giving our dialysis patients equal rights to retain their insurance. Outpatients are the only -- if one of you goes on to dialysis, you will be in the only group of Americans in the country who can't keep their private insurance even if you want to and even if it's clearly better for your family. You have to go on the Medicare. It's totally inappropriate quality, which has a lot of negative effects on incentives for disease management in the private sector, et cetera. It's a ridiculous sort of historical artifact, but it's true. In addition, the fact that Medicaid need savings, that makes it more attractive. In some instances, to have more patients on private pay. For those of you who don't know it used to be when on Medicare Day One [ph] then it was moved out to 6 months, 12 months then 18 months then 30 over the last 20 years or so.

As to exchanges, we wish we could shed some serious light on this beyond saying it could really be a big deal. But we can't because there's so many, as you know, unanswered questions around it. But the right way to think about it for us is that there is upside and there is downside. And it's impossible to predict the net right now, because if you take #1, patients who move from being government patients because they're on Medicaid or whatever to an exchange or they are just going into an ER. So patients can move from non-private to an exchange, all right, that multiplied by whatever the rate is. The exchange rate minus the government rate that could be a positive because you have people who are in Medicaid or something they move to an exchange and if the exchange rate is higher than the government rate that will be a net pickup. If those two things are true. There's certainly will be some that move through exchanges but the exact rate is unclear. Obviously, in that first one if the exchange rate were the same as government rates, it wouldn't make any difference if someone shifted. So you have patients that go from non-private to an exchange, times whatever the net rate is, and then you have on the other hand, patients who might move from private to an exchange. And if that private rate was higher than the exchange, that would be a loss. So it goes from non-private to an exchange times the rate differential, and then you add or subtract those going from private to the exchange, times the rate differential, and that's going to give you the net number that are bad. No one can plug in these 4 numbers right now. No one knows what the exchange rate is relative to the other existing rates and no one knows what the movement will be either from the government to exchange or private to exchange, but this is the formula you can play with different scenarios. Although it's hard to go very far, given the numbers are totally unknown and the political controversy that's going to exist as the exchange implementations get closer is going to be stunning to watch as they try to figure out what the rates are going to be and what the mechanism is going to be for setting those rates. It's going to be a real political firefight because if you set the rates too low, you could create some serious chaos in the provider side, not just in the health [ph]. If you set them too high, you're going to a massive expense problem. And so they put themselves in situations where they have a palacious [ph] set of alternatives politically and are exactly the kind of choices they hate to make. So it's going to be fascinating political theater.

So what is the entire revenue takeaways? The bad news is it's a mixed bag. And the mix deterioration is moderating but still there. This dialysis equal patient right is a very big deal, hopefully to resolve in the next several years, and then you have this big unknown, the big unknown elephant in the room or the known elephant in the room at exchanges.

Moving on to the government side of revenue per treatment. The Medicare as most of you know is about 1/2 of our revenue. There's a bunch of stuff going on with the market basket that was part of that legislation that we worked 8 years to get passed quick, which is the quality program, which essentially is penalties if you don't hit certain quality standards and then buy whatever process they're going to do an annual review of saying whether or not the bundle is leading to the right number. So there's a lot of nontrivial action going on. But from a broader perspective, this is a period of relative stability.

I think I'll just leave it at that for now. And then outside of Medicare specifically in the other parts of government type programs, which is about 15% of our dialysis revenue, we've already referred to the fact that there is VA pressure and there's Medicaid pressure. And so on that chunk of the business there's some significant intensity.

Under the expense side of the ledger. This is roughly speaking a proportion of our expenses. No significant difference than the past. Although certainly, some incremental reductions on the pharma side.

On the people side, the facts of the past remain true. Every year, there are wage increases, they are partially offset by productivity gains and you see the net here. If the economy starts to recover, these costs will go up. The good news is that typically, the movements in private mix, are more significant than movements in labor in either direction up or down.

On the pharma side, you all know this. What's going on in ESAs with pricing utilizations, if we look at the next three is very much in flux. Vitamin D and iron, there is now price competition where there wasn't and the same with a number of other supplies.

On ESAs. All we can say is that which you already know. In 2014, important patents expire as there is a competitive pipeline. And then with respect to biosimilars, once again, we'll have to defer to some of you who would be better at predicting what kind of decisions congress and regulators are going to make. Certainly, there's a lot of pressure building to allow more activity in this sphere.

And then the other center expenses, there's whole bunch of miscellaneous stuff and you can see the historical trends. And right now, we're not expecting anything different from the historical trends as we look out the next couple of years.

And finally, G&A. This year was very uncharacteristic surge, driven by the items that are listed there, a very significant expansion of our IT activities, both in the human resources area and the basic clinical management systems, as well as developing in EHR, our expansion internationally and then the one-time cost associated with DSI.

On other care services, here we'll be brief and if you want to go somewhere in Q&A, you can. But the core objective here is really simple. It is to improve outcomes, document-ably, demonstrably and unambiguously and simultaneously reduce hospitalizations materially. And this is very doable. We've got three different primary ventures within this general category. Two of them are profitable, one is not. But they all achieve better objectives than the bottom. And the important thing of course is try to figure out how to monetize that in a more powerful way. We have put together over the last decade, a portfolio of capabilities so that if and when we persuade the government to scale some of these solutions, we have a wonderful arsenal of really nice patient-centric capabilities and to take advantage of that.

At the ACOs [Accountable Care Organization], we really like the concept, which has been reflected in our activities integrated care for years. The preliminary rule is a huge wet blanket on top of the country's enthusiasm for this really as a tax payer and citizen literally is depressing. And that is the system for getting dialysis, and then particularly for our segment it precludes specialist ACOs, which is in a selfish sense is depressing and also really unfortunate for our patients, because it would have been a path for us to break through and do really striking things in terms of cost and quality.

On to International. The Wygo International [ph] is a symbol that we talked about for a few quarters now. It's big. It's segmented. It's going faster than the U.S. And a lot of governments have realized they have to fund it and doing it all in through a public provider network is exceptionally unattractive economically, clinically and politically. So these are macro trends. That doesn't mean you're going to go hop onto some easy and fast-moving train but the long-term upside is really quite impressive.

Issue is that it costs money and it takes time, and there's going to be some mistakes along the way. And so this is not something that's going to enhance our stock price in the short or medium term, but could be very powerful if you look out for the long term. We're calibrating our investment, accordingly. On the financial view, I think, Luis, back to you.

Luis Borgen

Okay. All right. Thank you, Ken. So I'm going to walk through our financial review here to wrap things up before our summary. Our consolidated revenues since 2006, our first full year with Gambro, we've grown revenue for approximately 7% CAGR. The revenue per treatment declined in 2010 primarily due to utilization as we prepared for entering the bundle. This decline continued into Q1 of 2011. Our operating income has consistently grown over time. We have an 8% CAGR over the last several years and the margins have remained relatively steady during this period.

In terms of earnings per share, over time, we've been having very steady earnings per share. And you'll see a little bit later on how we build up the earnings per share model from revenue through expenses getting through our earnings per share growth over time. One very cool aspect of the business, it generates a lot of cash. We generate more than 100% of cash relative to net income. So very strong cash flow business. It's consistent and it's steady. Of note here would be our operating cash flow guidance of $840 million to $940 million. And you'll also see that the free cash flow is going to be flat to down, primarily due to 2 items: number one is our continued investment in IT and our new headquarters building.

Our leverage ratio, our long-stated expectation is that we would be between 3% to 3.5% net EBITDA -- net debt-to-EBITDA. Pro forma for the DSI acquisition, our Q1 will be about 3x leverage, which is in line with our historical range.

Our debt structure, as you all know, we completed a comprehensive refinancing in the fall of 2010. Right now, we're effectively all fixed. The main pieces of our debt structure senior notes, about $1.6 billion, fixed at 6.5%. Our Term Loan B, about $1.75 billion that has a floor of 1.50%. And that's capped at 4% for about $1.25 billion of that. And finally, our Term Loan A, we're flat [ph] all of that to 1.6% LIBOR. And all of these are through September 2014. The all-in rate is about 5.3%.

We effectively pushed out our maturities beyond 2014, locked in very attractive rates and have a sound capital, so it could fund our growth for the next several years.

In terms of priority for cash, we've been very consistent over time. Our preference is to grow the business and to the extent we have excess cash flow, we'll look at share repurchases or debt repayments.

And finally, to provide some perspective on how we've deployed our cash. Here's a chart from 2006 through 2010, indicating that we've deployed about $600 million to acquisitions; another $800 million towards development; and finally, about $1 billion of cash towards share repurchases over the last several years.

Here's our financial formula. As we've stated earlier, our revenue growth is a function of NAG, our non-acquired growth plus acquisitions, that's about 5% to 6%. Our business has some degree of fixed costs, and therefore, you'd expect operating income growth of 5% to 7%. We will take on financial leverage as we said to 3%, 3.5% in EBITDA to get you to net income growth of 7% to 9%. And given the amount of free cash flow that we generate, we're able to redeploy that against acquisitions or share repurchases leading to EPS growth of 9% to 11%.

And with that, I'll turn it over to Kent to wrap up.

Kent Thiry

Thank you. So this is the last slide. I think that these 2 biggest negatives for you to debate with your partners just what is the government going to do given the pickle they've put themselves in and what's going to happen in the commercial side. It's just an awful lot of dynamism there. The silver lining in that cloud is that the government gets really intense about meeting savings, one of the easy ways to get them is to allow people to keep their private insurance longer or allow us to guarantee them savings and go after integrated care in a big way. So 2 of their solutions, we would actually be very positively excited about, but that suggests a level of coherence and the decision-making, which is not practical, given how many big things they're going to be thinking about outside of dialysis. So it's there. But you've got to be careful to calibrate its probability. So those are the scary things from an investor perspective.

The good news is within that broader environment, we're well positioned. The strong clinical outcomes are not only wonderful spiritually but they're very useful to you from a business point of view. The way this industry works leads to very stable demand in cash flow. It's a rational community, overall, that understands the need for private to subsidize the public. And then, we've got this window of upside over the long term, not in the next 12, 24 months but the nice sort of structural upside for the period beyond that.

And do we now move to Q&A? We now move to Q&A. [Operator Instructions]

Kevin Fischbeck

Yes, this is Kevin Fischbeck from BofA Merrill. I think a couple of questions. The first is the most suppliers, [indiscernible] me was that you feel like Q1 run rate across is kind of the way you think about it, and I think that people had thought that it might take some time to actually roll out how you're going to be responding to bundling and certainly would take some time for it to get doctor buy-in with everything that is you're doing, and why is it you'd expect that you've gotten everything and there's not real....

Kent Thiry

The reason we're able to get so much spend in Q1 is that we've spent 2010 getting ready. And so it did take a long time, but we did it ahead of time rather than waiting.

Kevin Fischbeck

But it's not something that you look at from a -- I think you might have rolled out your initiative, do you feel like everyone is compliant with those initiatives? And there's no kind of room for additional doctors buying into whatever the right protocol is?

Kent Thiry

No. We actually -- we worked so -- it was surprising to us. It's not what we projected, but we worked so hard on iterating around on protocols, alternatives throughout 2010. That's sort of -- separate from getting to an answer. We inadvertently built far more breadth and depth of ownership than we ever had before. Although we used to think this is a strength. And so the take up was -- exceeded anything we had done in prior implementations of stuff like that. So it is what it is.

Kevin Fischbeck

Okay. Then one last question before I hand it over to the next person. You mentioned that the -- part of the reason you might be at the low end of guidance next year would be an acceleration into International investments. Just wanted to get your thought process about what it is that you're looking for that might say, yes, now is the time to accelerate that versus continue with what you were thinking before?

Kent Thiry

It's not that we're predicting that our rate of expenditure will accelerate in 2012 in International, we're just saying it could. We're still so early in that game and there's some stuff that looks promising. But it would lead to more P&L dollars because it would be subscaled upfront. So it's not a prediction but it could happen, and it's too early for us to make a prediction. So it's more sensitizing, it is a fact that it could happen. We usually wait till the end.

Unknown Analyst -

Well, let me get a couple in now and then maybe a couple at the end. But a question on some of your quality -- specifically the hemoglobin levels, that 10 to 12 range, I think with 79% of your patients within that range. Can you give us an idea of that 21% that's outside of the range, are most of those above or below the range?

Kent Thiry

The answer to that question is there will be more above most of the time. But beyond that, I don't know if we're doing.

LeAnne Zumwalt

It's quite split pretty evenly. A little bit more on the high end. And that is important because some patients are naturally above the top end.

Unknown Analyst -

And that sort of leads then to the follow-on, which is sort of a follow-on to Kevin's question. I think obviously, you've done a great job in sort of getting your preparations ready for the bundle. I'm more curious about the fact that you say that pharma costs are a good run rate for the rest for the year. Does that mean you don't expect any of that above 12 population to continue to migrate down? In other words, you're static from this point out in terms of any further improvement?

Kent Thiry

From an economic point of view, yes.

Unknown Analyst -

Okay. And can you tie that in at all to the upcoming Amgen contract and what your expectations are in terms of pricing?

Kent Thiry

LeAnne, you want to do that?

LeAnne Zumwalt

All we can say right now is that we have a contract through the end of the year with Amgen, and we're working with them and a reasonable dialogue towards a longer-term agreement. That's what we can provide.

Unknown Analyst -

Okay. And then just quick one, Luis, on guidance, specifically in 2011, the inclusion of DSI. There are obviously some assumptions that you've made with that and I was wondering if you could just run through some of them. For example, when you say to close in 3Q, will DSI have an impact starting in 3Q or starting in 4Q?

Luis Borgen

So our guidance for DSI is to have a net 0 OI contribution. Our current expectations is that we will close some time in Q3 and whatever OI contribution we may have from DSI would be offset by transactions and integration costs.

Unknown Analyst -

And that was actually my question, which is, will you be breaking out those one-time costs when you report?

Luis Borgen

That's to be determined. We'll see what those are and to the extent they're material and make sense to disclose, we will.

Unknown Analyst -

Okay, then finally Kent, in terms of DSI and the integration, is this date sort of an integration date in name only? In other words, do you already have people on the ground with DSI and you're already looking at clinical protocols? Are you already looking at IT systems? How close are you already working with them in advance of the actual closing date of transaction?

Kent Thiry

Yes, I think the answer is sort of a tweener. There are certain things we can't do because of the rules. But we are coordinating with them on a lot of stuff. Getting to know each other and getting to know each other's systems, et cetera. So without doing anything to get in the way with their running their business, we're doing a lot of talking.

Jim Gustafson

Justin And then, we'll go to a gentleman here.

Justin Lake

So first just a quick clarification. LeAnne, did you say Amgen contracts till the end of the year?

LeAnne Zumwalt

Yes, we've extended our contracts till the end of the year.

Justin Lake

So you've got another 6 month-contract?

LeAnne Zumwalt

Yes, we have.

Justin Lake

Okay. And similar terms as far as we should expect kind of low single-digit rate increase in the back of the year as well?

LeAnne Zumwalt

Justin, we're just going to say at this time, we've extended the contract and leave the commentary at that.

Justin Lake

Okay. And just -- I think the expectation might have been that the 6-month contract is typically not been the typical -- it's been more of a 2- to 3-year agreement. Is there anything in your mind that's keeping that type of lengthy contract from getting signed right now?

LeAnne Zumwalt

There's a lot of things going on in the industry, including what you heard Amgen talking about with potential changes in the label and those things. Those may be entering into their thought process about timing.

Kent Thiry

I would say, Justin, the reason there's not a longer-term one is we can't agree.

Justin Lake

From a de novo standpoint, the -- it looked like there were a few more de novos in the first quarter than we have typical seen. Any kind of update on what you've been -- what you'd be able to accomplish there as far as getting the government to sign up on those a little bit more timely?

Luis Borgen

Our current expectation is 65 de novos for the year. There's always puts and takes between quarters. We do our best to get them open on time. But I would say 65 is our best thinking for the year. Are you asking about timing certifications?

Kent Thiry

Yes, the backlog seemed like it was pretty significant last year and that was keeping you from...

Luis Borgen

Yes, so is it going up the business stable.

Kent Thiry

Yes, I think it was about 1.5 year or 2 years ago it was much higher. We've brought it down since stable for several quarters in a normal range. It's been high 30s, low 40s of uncertified centers and that's been pretty consistent. There are a couple of pockets, Texas, most notably that take longer to certify.

Luis Borgen

But the year-over-year comparison is...

Luis Borgen

Pretty stable over the past year.

Justin Lake

And just last question on mix deterioration. Can we get -- so it's been 2 straight quarters where you've seen at least that the pace, the rate of change moderate somewhat? Is that correct?

Kent Thiry

Last quarter didn't moderate as did this previous quarter -- i.e. Q1.

Justin Lake

From last quarter, okay. So you're seeing moderation. And can you give us any breakdown, I mean, what -- you had mentioned that there's 2 factors here. One, people are living longer on Medicare, which is deteriorating your mix and then the economy, which I assume is less -- the growth in new patients is coming at a lower percentage of those coming from commercial. Is there any breakdown you can give us as far as the -- how those 2 contribute? Is it more -- are you seeing improvement in terms of the rate of growth in commercial patients?

Kent Thiry

Where we've seen -- it's roughly split between those 2 factors. And that could vary quarter-to-quarter. But I would say...

Justin Lake

Is the improvement coming in either one?

Kent Thiry

Can't break that up for Q1.

Unknown Analyst -

First question is on EPOGEN. Have you looked at hypo-responders versus hyper-responders? The thinking is that for the hypo-responders, their hp doesn't increase even if you give a lot of EPOGEN. In fact, giving a lot of EPOGEN is harmful to those patients. Have you looked at that type of situation whether you can modify a protocol accordingly to reduce EPO spend on?

Kent Thiry

Our physicians have looked at that with great intensity for the last couple of years. And different people have different points of view. And in general, in America, you have people giving less EPO to hypo-responders now than before. That's a clear directional trend. Where each individual physician lands on that issue is varied by their own perspective and their group's perspective and to some degree geographic points of view. So all we can say is we know that docs are going to be continuing to stare at that with a whole lot of intensity. And whether or not the general directional trend over the last 2 years continues, we don't know. LeAnne, you have anything to add to that?

LeAnne Zumwalt

Well, and in our new protocol that we will adopt, certainly, we did address that patient population. And I think that Kent's right, there continues to be a lot of study on that population. And I would probably recommend that over the next few years, we'll see some improvement or changes in protocols for those patients because these are a topic of significant study.

Unknown Analyst -

Okay. The second question is, Kent, you mentioned the 30-month MSP. You've been talking about that for quite a while now. Are you still working on that? Or do you think maybe waiting for the implementation of the insurance exchange, which will render the 30-month irrelevant?

Kent Thiry

Yes, depending on how they define the exchanges it could, it will never make 30-month development. I don't think the -- but it may make it far less relevant, that is true. And as to whether or not we're working on it, previously, we don't work on the 30-month -- an extension of 30 months because it's not politically viable, and there are periods when you do. So there's hunting season, there is non-hunting season. And so I'm sure there will be in the next couple of years opportunities where we try to extend it. Whether or not, we'll succeed is -- that's very much -- it's very unpredictable. Is that responsive?

Unknown Analyst -

I guess whether you'd see any opportunities in the near future legislatively, you can introduce the proposal of the extending -- given there is a lot of pressure, budget pressure on the Medicare side. It clearly would be a saving for the government.

Kent Thiry

That's right. So we may take another swing at it in the near term is the answer because there are groups that don't want it to happen. Health insurance companies are not in love with the provision, employers are not in love with the provision. And so I don't know if we'll be putting it out there or not in 2011. We always want it, but it's not always -- you can't keep on going in, in the same thing all the time or you -- or people don't pay attention.

Gary Lieberman

Gary Lieberman from Wells Fargo. Could you just clarify, LeAnne, did you say that the impact of the comorbidities on revenue per treatment was $2?

LeAnne Zumwalt

Yes, the opportunity is about $2. Yes.

Gary Lieberman

Okay. And that's for -- that's not just for Medicare revenue treatments, that's average overall treatment?

LeAnne Zumwalt

Yes.

Gary Lieberman

Okay. And then did you say what the impact or what you had included from DSI in 2012?

Luis Borgen

We did not.

Gary Lieberman

Okay. But it's consistent with sort of the 10%, 15% -- or even in the 10% to 15% divestitures that you talked about?

Luis Borgen

That's still an unknown of how many, but it is consistent with minimum expectations of 10% to 15% as Kent mentioned earlier.

Gary Lieberman

Okay. And then on the Amgen contract, you just mentioned that you had been able to come to terms, is there any advantage to you in waiting to the end of the year or is there something that you'd like to -- you would have preferred to get done either beginning of this year or the middle of this year but just can't kind of...

Kent Thiry

I'm going to go first just back to the prior question. It is going to be more divestitures than the 10% to 15% range. So that is just -- that is by far the most likely outcome. We just want to be very clear on that. The good news is there's a very good market right now for selling dialysis centers. And so that the whole divestiture from a shareholder point of view is not as daunting as it could be in a different environment, not daunting at all, in fact, at this point. And then on -- we would love to have a long-term ESA contract that we like. And we're going to love to have that today. We'd love to have it a month from now. Seemed like we'll take it any time. It's just tricky to work out. And so both sides are working on it, and we'll see what happens.

Gary Lieberman

And then just the last question. Could you just update us on your home dialysis initiatives on both PD and HHD?

Kent Thiry

Sure. The home is growing. How much it will grow is difficult to calibrate at this point, because a lot of physicians are reflecting on exactly what they want to do here. And the tendency of some of the situations with the new bundle sometimes where people get excited about something new, but then they try it and good things -- and it drives some short-term growth and then subscale and you close it down. So it's important to sort of think one more step downstream. PD is much, much bigger than HHD. And HHD, my counsel to people is you should ignore the people with really strong points of view on either side. Those who say, "Oh my God, HHD, MFD is the greatest gift, and it's going to explode in growth." Those people should be ignored, because it's not all clear that, that's true. Those people who say it's not worth the extra expense and should go away, equally should be ignored. So the real question is for what percent of the population is it of superior attractiveness or efficacy. And no one knows the answer to that question right now. We have more of these patients than anyone else in the world, and it is not clear. And will be a significant part of deciding when it's clear because we have the most data. So our counsel to people is ignore those who are inappropriately optimistic or pessimistic. And we're studying the data and working in the real world with more patients than anybody else. Is that responsive? Feel free to come back at it more if it's useful.

Kevin Ellich - RBC Capital Market

Kevin Ellich from Piper Jaffray. Maybe we can talk about international a little bit. Could you remind us how much you've spent and how much you've planned to spend and then what factors went into your decision to go into Singapore?

Kent Thiry

So International, what factors and how much we're going to spend and then what factors...

Kevin Ellich - RBC Capital Market

Drove the decision to go into Singapore?

Kent Thiry

Yes, let me do the second one, first. Singapore is a very attractive city relative to the alternatives for attracting executive talent. It's very attractive in terms of being able to travel to a lot of places. It's got a lot of the right symbolism, which are going to deal with a lot of the countries in that part of the world. So those were all the reasons that we chose Singapore to be our regional headquarters there. Then as the factors that determine how much we're going to invest there, it's very much what the quality and quantity of interest we get in different pockets. And so on the one hand, well, I guess , I'll just stop there. Sort of a self-evident statement, but it's really true. As we're visiting different countries, how many people want to talk to us, how high-quality are they as partners, what are the relative economics in that country versus another? How many countries can we realistically advance the ball in at any one time? So those are the variables. So it is the case where assuming we're being prudent, more expense means there are more opportunities. So that is a positive, but in the early years, it manifests itself as larger losses.

Kevin Ellich - RBC Capital Market

What about the competitive landscape there? Is there a lot of dialysis providers or you guys are going to be the only game in town?

Kent Thiry

The dialysis market overall in the world is very fragmented. FMC, Virginia has a significant international service business, built in close conjunction with our long-standing product business. And then for most of the rest of the world, it's very fragmented and there's still a lot of places where the government provides dialysis. And this gets to one of those -- one of those fundamental trends going on is governments realizing that they need to provide dialysis to their population because with a smaller world, more and more people know it exists, know what the differences between quality and non-quality. It's much more binary and transparent and discreet and obvious than the quality of diabetic or pneumonia care or vaccinations. So first of all, the inside population have and to the fact that it exists is much greater. And then what happens after that is governments realize, "oh, my gosh, there's going to be a lot of people. We're really inefficient and low quality in providing it. My gosh, somehow we've got to harness market forces to deal with the social problem." It is striking that we have more receptive meetings with governments in other countries than here in the sense that other countries really believe that unless we harness market forces, we cannot solve our healthcare challenge and here, we've been, to some extent been cursed by the fact we have enough money to believe that maybe you can.

Kevin Ellich - RBC Capital Market

Got it. Okay. And then going on to the guidance, maybe Luis could take this one. The 2012 guidance, just wondering what the underlying assumptions are for top line growth, treatment growth, capital deployment. What goes into the operating income guidance you provided?

Luis Borgen

Yes. They're in line with our historical. So for the capital piece of it, we went through the capital assumptions, are there any specific questions I can walk you through? I think we set cap -- maintenance CapEx was 240 -- 212. We haven't determined CapEx for '12 for our operating income guidance. It's pretty far out there. We could give you a flavor for what type of growth we could see. And if we look at the midpoint-to-midpoint, we're about 7.5% operating income growth with a range that reflects the possible outcomes against some of the swing factors we mentioned. Mix, VA pressure, state Medicaid pressure, international investments to the extent we want to accelerate that.

Kevin Ellich - RBC Capital Market

.

Do you think growth in '12 is a good run rate to use long term for the business?

Luis Borgen

A long-term growth rate is quite reflective of the slide we showed at the end, which is 5% to 6% unit growth. Some fixed cost leverage getting us to 9% -- 11% EPS growth. Year-to-year that could vary, but I would use that framework for more longer-term projections.

Kent Thiry

But wait a minute, I want to break in. That's a scenario. That we live in a space where to ignore the nontrivial probability of these continuities and the revenue or expense side positive or negative, to ignore that would be inappropriate. So when you think about longer term, that's a scenario. It is not a prediction. That would be foolish.

Kevin Ellich - RBC Capital Market

Okay. Then last question. On the commercial contracting side, can you remind us what percent of your commercial contract is bundled and what type of price escalators you typically get on annual basis?

Kent Thiry

Yes. Other than saying that the percent of our private in bundle is going up every year. I don't know if we got any instance of anyone going from bundling back to fee-for-service. JR, have we? No, so far it's a total one-way street. So the percentage that's bundled goes up all the time. And as to escalators, they vary by quite a bit. There will be the range of probably, gas. But I think we should leave it at that, particularly, a bunch of the people that we talked to and negotiate with our -- listening to the phone call.

Brian Zimmerman

Brian Zimmerman with Deutsche Bank. Next year, part of your annual update will be subject to risks by your results in the QIP with a score of 26 and above. We're glad that you keep your rate. Based on what your current 2011 quality scores are, what would your QIP score be?

LeAnne Zumwalt

Yes, so the way this works -- and let me -- this may be pulling it back a little is that in 2012, we're going to be paid for performance that we achieved in 2010 compared to 2007. So the answer to the question is. If they would use current data, we would perform quite well on the QIP. But unfortunately, that's not the construct. What we are advocating now with CMS, for example, is that the 2010 performance should be compared to '09, the most current year that it could be compared to for our payment in '12. That's one option for them to do. Really the statute required them to pick some measures in advance, to set targets in advance. So our overarching goal for 2013 is to implement this in the right way where they do pick the benchmarks and the goals we work with them, get a public campaign. So the community is really improving the level of care for all of our patients. But that's not how it's working today.

Brian Zimmerman

Okay. So if you're using the current data, the reimbursement would be close to 100%?

LeAnne Zumwalt

Yes, if you are using current data and the 2 majors that they've identified, which would be the hemoglobin and apathy.[ph]

Brian Zimmerman

Can you talk about -- nobody answered the additionals. Can you talk a little bit about that in light of the healthcare reform? How does that sit into the integrated care, coordinated care and if you -- you briefly mentioned, if you actually exclude specialists probably like you guys, you are saying you are doing some demonstrating -- demonstration project. So how do you see that demonstration will be expanded, and maybe just a little bit of comment on that.

Kent Thiry

Yes, so the question is about the demonstration projects in the context of ACOs and all that stuff? The -- whether or not our demonstration project our core demonstration project will be expanded, I don't know. JR, is that likely?

Unknown Executive

Right now, no.

Kent Thiry

So we're looking at some growth there. It's nothing dramatic, nothing that's going to sort of be a blip on your radar screen. For us, it's the mechanism for which to demonstrate the CMS that it really can work, and it can work on a significant body of patients. So we're going to see some growth there. But without something new from the government, we're not able to -- we can't scale that demonstration project without some new authorization from CMS.

Brian Zimmerman

It's not any healthcare reform.

Kent Thiry

No.

Brian Zimmerman

What's the economics of that type of project?

Kent Thiry

I think -- that's not -- this demonstration project, what we're doing is not something able to be embedded in the healthcare reform. The answer to that is no. It was not and what's the...

Brian Zimmerman

Economics of that type of arrangement versus the current dialysis treatment?

Kent Thiry

Well, the next question, what are the economics of that I don't -- some of it we're limited as to what we can say publicly because it's just seems as the [ph] demonstration project. But suffice it to say, I think we had, in the first 3, 4 years, were 58 quality targets that CMS set. We hit 55 of the 58. The MLR is attractive and going down. The patients adore it. The physicians like it because there's always coordinating work done. And so that's some of the factors that I can share. Andreas?

Andreas Dirnagl

Kent, I want to go back to Kevin's questions on the International. You've talked about international potentially having great -- or being a great opportunity. You talked about in 2011 spending roughly $50 million. You've now said today you may accelerate some of that, may go into 2012. I have to say that's quite out of character for you in terms of, "Hey, we're going to spend a lot of money on what looks like it could be an opportunity." And I'm wondering from the CEO perspective, how you're thinking about it in terms of this is how much I would invest and if I don't start getting a return in this timeframe, I'm going to cut the cord on this or we're going to have to reassess it.

Kent Thiry

I think -- talking about the way I do, Andreas, because it is going to take a significant period of time before you get a return on this. And to announce you're going to go out and do international healthcare service, and create any other expectations, really a bad idea. So is that right, why do anything that is going to take a long time, cost a non-trivial amount of money, and has risks and consumes management resources, but the only answer is because if it works, it's a very, very big pie. Very, very big. It's a multiple of the U.S. market size. And so this is one of those we're going to spend an amount that's not trivial but also doesn't put at risk as the base business that also doesn't lead us to some precipitous drop in stock prices. Stock prices are not going to go down $30 because we spent $50 million internationally. So we're not betting the farm. This is sort of the equivalent doing R&D on a new drug or something. And so yes, it might not work. If it works, it's $1.5 billion drug. So I'm going to do that, but I want to make sure I don't have it consume too high a percentage of my R&D, too high a percentage of my management time. So one of the things that's wrong in the American healthcare service is there's inadequate R&D from an investment point of view and from an intellectual rigor point of view. Well this is very controlled R&D on something that has spectacular long-term upside, but that emphasis on the word long term and bumps along the road is really important. So that's why I'm talking about it differently than if we were adding a vascular access center. When we added vascular access centers 8 years ago, we're going to try it, try to get regs right, we'll invest. If doesn't work, you get out of it. That's what's different.

Andreas Dirnagl

Okay, great. And then can we obviously take then something from your decision to date that probably developing economies in Southeast Asia is sort of the preliminary focus? Or are there going to be other regional centers that you're thinking about doing? Or is it sort of just focus for now and once we get our feet wet here, then we'll move on to other.

Kent Thiry

I would be surprised and disappointed if we weren't active in more areas than just Southeast Asia. And that wasn't a conviction we went into it with but just a couple of other parts of the world where quality people are responding with enthusiasm to the notion of working with us and they want to work with us now. And the notion of saying, "We'll come back in a couple of years when it's more convenient for us" is very unattractive.

Andreas Dirnagl

Okay. And then 2 quick ones on a different subject, if I could. One just to review either Luis or Kent, in terms of your guidance and the ranges you are giving, the risks that you then talked about in terms of what could affect that guidance, they are incorporated into that guidance and then what could lead it to be at the lower end as opposed to the higher end of the range? In other words, something would have to happen outside of your probabilistic assessment in order to go below your guided ranges right now? You've incorporated what you think the reasonable risks are in that range. Is that correct?

Luis Borgen

Yes, but with any forecasts, there's always something that could fall outside that. We think is a reasonable assessment, and we'd have to be prudent to highlight those risks that we face or could face to varying degrees next year.

Andreas Dirnagl

Okay. And then final one, I don't know, maybe it's for LeAnne. Can you just help me and review how the transition of patients goes if they come on board with Medicaid? Because I believe if they come on board Medicaid, it is accelerated that they go into Medicare? Is that correct?

LeAnne Zumwalt

Two scenarios. If you come in through Medicaid and you’re a home patient unperfect in hemodialysis, you're instantly moved into the Medicare program if you're eligible. Now if you are a regular hemodialysis patient, you would be eligible to enter Medicare after 3 months.

Unknown Analyst -

Kent, I'm just wondering as you've highlighted today and over the course of the last several years, there's great stability in the business, has been for a long time. When I think about reimbursement issues today versus any time over the course of the past couple of years, it seems like we're getting a little bit more clarity around directionally how that's going to shake out. The -- from a debt capital markets perspective, capital appears to be plentiful today, relatively attractively priced. And so I'm really wondering as from a longer-term capital planning perspective, while we're today in this 3x leverage context, any thoughts about as you look out over the near term altering what has traditionally been that comfort zone in terms of leverage and taking that up to some degree from the current context and getting a little bit more aggressive in terms of share repurchase. I'm not talking about the days of Gambro, Kent, where you were 5-plus-times the leverage but going from a 3x comfort zone to maybe a 4-ish times comfort zone and just getting a bit more aggressive in terms of share repurchase. Any thoughts around that?

Luis Borgen

Yes, I think we would start by rejecting the historical premise that the last few years have been stable. That -- what's happened is the last 2 years has been incredibly dynamic and it's netted out to something that much stable on a graph. And it's very different things. And as we look forward, there are some elements of our revenue and cost and unit growth structure, which are more stable than the last 4 years, which in our mind have been anything but stable. And there are other parts, primarily the government reimbursements and exchanges and the overall economy that are not stable. And so trying to give a weighted average stability score across the whole sort of universe of things that affect our stock price, I don't know, we haven't had that debate. But I wouldn't be a no-brainer. I think directionally, there'd be some sense that on a net basis that the next couple of years look more stable than the last 4. But that -- it says more about how unstable the last 4 were with traditional bundling legislation, the step around orals, the list goes -- the healthcare reform. List goes on and on. Therefore -- first, that comments on the context on the premise, therefore, at this point, we have no change of -- we have no intention to amend the leverage guidance we've had for 11 years now. That 3%, 3.5% seems about right. However, we probably haven't had a great debate on that subject for a couple of years because it wasn't relevant. So maybe that's something we should do over the next year or so.

Unknown Analyst -

I wanted to go back to one of your earlier comments that you feel like the Medicare reimbursements have given the way to CMS pays for it -- major payer for it results in also situation where CMS and everybody overpays for a certain period of time, like you might see in some other sectors. Should we read that comment to mean that you feel like bundled payment rate as it's constructed today is more or less an aggregate spending where it should be and you don't expect CMS to come back next year in the 2012 rate and making negative adjustment down because spending is higher than you thought or anything like that?

Kent Thiry

Could you repeat the first part about overpaying, because they're foreign concepts to me.

Unknown Analyst -

In your comments you said that because the government pays for most of the dialysis, you're never going to see huge overpayments. You're going to see huge underpayments...

Kent Thiry

Or you won't see huge -- yes. There you go.

Unknown Analyst -

You have seen overpayments for certain period of time, but you don't see that happening in dialysis, I guess.

Kent Thiry

Yes. Okay. What will Medicare do as they stare the bundle in the first couple of years, impossible to know. We still lose money on Medicare. So that's a very powerful fact. They clearly made mistakes, some of the case mix adjuster, to make a case mix adjuster dependent on data we do not have and cannot get is totally unfair. And then to have projected incidence levels of some case mix adjusters that are 10x off what all the other data says is patently unfair. So they've got some serious things to fix which should lead to them closing the gap between our expense per treatment and Medicare revenue per treatment. So that is the big should. Will they do that? Don't know. Could they in fact do the opposite and say, "Well, it looks like the private sector's willing to keep subsidizing, let's go ahead and see if we can get away with cutting it, even though we made those mistakes and we know it or let's not correct those mistakes and rely more heavily on the private sector." That could happen. I mean, they relied on the private sector to subsidize it for 30 years so far. And while it goes up a little bit or down a little bit each year, that reality has been true for a long time. So did that answer the question?

Unknown Analyst -

I guess we're going to be seeing a proposed rule in the next 3 or 4 months, I guess. And so I don't know if there's any dialogue that you've had with CMS that kind of makes you feel like, at least for right now they kind of feel like things are still in flux and you expect 2012 to be stable or whether there's...

Kent Thiry

Well, they play pretty close to the vest. And if we're going to be -- it gets back to no huge surprise either way, I think. I think it's highly unlikely there will be a big surprise either way. How do you amend that?

LeAnne Zumwalt

No, I would say the same thing. And I would add one comment. In all the other PTS systems, they have looked at that system holistically when they are making changes. We would expect that same treatment. So identifying a single item and cutting this or that, we would not expect that. We shouldn't have to expect that. They should be looking at the payment system holistically as Kent mentioned.

Unknown Analyst -

Okay. And then when I think about the -- just switching subjects, the cash flow bridge that you provided is very helpful, but you said you're going to be selling 15%, 20% more of DSI. Do you think that there's going to be $100 million or more of proceeds from asset sales? And I don't remember seeing that in that bridge. Is that the right way to be thinking about it just, maybe it doesn't all happen in 2011 despite inputting the numbers but...

Luis Borgen

You're correct. That was not on the bridge and to the degree that we have excess cash or cash proceeds from the divestitures, which we expect we will, and that would be a source of cash that we'd have to decide what to do with it.

Unknown Analyst -

Okay. And then last topic here. You didn't spend a whole lot of time talking about the other businesses, about your assets, the Rx and the wellness. How do you think about those businesses in your growth profile going forward, the profitability. I mean, some of them have been struggling back, 2 to 3 profitable. Where do you think that those can go over the next couple of years?

Luis Borgen

With respect to those 3, VillageHealth, which is integrated care, Lifeline, which is our vascular access, and DaVita Rx, which is specialty pharmacy. On VillageHealth, whether or not that becomes something which is materially -- which is economically material to you, we won't know for a couple of years. And maybe not ever. So that one is pretty impossible to predict. We'll always continue to do VillageHealth type stuff because it's essentially clinical innovation in R&D that informs our base business anyway because some of those practices we can incorporate, add more value to the system and do better with Medicare Advantage and private payers, some segments that actually do look at this stuff. So it would never go away. So we're getting back on a Andreas' question, do you ever shut it down? No because you'd have that function as a cost center no matter what, even if you weren't trying to develop a revenue stream associated with it. The amount you invested in it is, of course, a part driven by what do you think are the shots that you can actually get revenue greater than expenses but you'd always have it there as a cost center expense no matter what. And Lifeline, our vascular access centers, we hope they continue to grow but that's not going to be anything that is going to become economically material just because it's too small. This is very important, for a number of our physician relationships because the nephrologist love it and what it does. And it's very significant because we're the best at it in America and their conversations with some of the payers, because it saves them stunning amount of money. So it is a good thing, and we like it a lot but it's not going to become economically material like quadrupling in size or something like that. And then on DaVita Rx, if they reasonably fund orals in the bundle in 2014, which is in their best interest to do both clinically and economically, then, DaVita Rx can become economically material to you guys.

Justin Lake

Just a follow-up, one quick question on new centers, you mentioned closures in the slide show. Maybe you can just discuss what your success rate is right now versus where it was 3 to 5 years ago?

Kent Thiry

Well, I'm going to guess there are -- and then if someone could correct me, but I know I'm not going to be far off, the success in de novo if you look at all of them over the last 9 years, probably still at 99%, plus or minus 1%. Does anybody know? I still don't know of any -- if we had any failures from the de novos. Do you know of any? So I'm going to assume we've had some, but it's -- so some of the closures weren't de novos. If you acquire 4 centers, you might close one down, but it's still very high. If you recall strategically, we decided, when we had that big year with 85, our decision was we had too high batting average that we needed to have more failures -- it would be better to have a 90% hit rate with 1,000 at-bats than 100% a hit rate with 500 at-bats. So your shareholders are much better off because 90% still leads to a weighted average of great returns, so you might as well double the amount of capital you're deploying into that area. So that was when we spiked things up for a bit. And so that -- that's where my guess -- we went up from the 0 we used to be at to having some failures or ones that are probably going to fail over the next year or 2. But that was conscious. It was -- we had an inappropriately high success rate.

Justin Lake

And just on capital deployment, the share repurchases seem to be moving a little bit in fits and starts. You're very aggressive in the back half of the year. They did nothing in the first quarter. Then it looked like you bought closer to 1 million shares in April. Any kind of rhyme or reason there that we should be looking for as we get to the back half of the year in '12 as far as how you'll be deploying free cash flow to share repurchases?

Luis Borgen

It fits and starts and no rhyme or reason, okay. I'm trying to reflect in whether or not that appropriately captures how we think about it or not. And we don't have to amend your question at all. The -- you know the answer, Justin, we look at this every quarter, we have for 11 years. We evaluate all the same factors that you would. First quarter alternatives in terms of growth and do we have any need to do anything on the debt side. And then we look at what's going on in the market itself and both in the debt markets in terms of terms and our own market in terms of what's going on with the stock. And so we would think, what is it "foolish consistency is the hobgoblin of little minds." So some people have that philosophy. We prefer no rhyme or reason and fits and starts.

Justin Lake

Lastly on ECOs obviously, I think the world would agree that there was -- the initial take on the regulation was disappointing to say the least. I was wondering if you might have some opportunities through the centers of innovation. Any other ways to work with managed care for instance, with Medicare or maybe Medicare Advantage or any commercial business to take advantage of some of the investments you've made there? To put yourself in a position to kind of, I don't know, if you want to call it capitation or to more holistically manage these patients.

Kent Thiry

We will take a swing with CMI.

Justin Lake

And any thoughts on magnitude or timing there to how many patients do you think you can get through?

Kent Thiry

We're willing to go big. The notion that the government [ph] will be a willing partner in growing big, it's a bit farfetched.

Justin Lake

Timing there? Whether you expect you might hear something or be able to...

Kent Thiry

I mean, they want to go fast. And they want to go fast for the 1.5 year it's taken them to get people working in the room. So where do you go with that, but they do sincerely want to move. But they're just -- it's not in their organizational DNA. So we'll see. And they have some really talented people there who have every intention of getting some stuff done. Whether or not they can overcome all the organizational obstacles that life puts in your way once you're a part of that organization, which again is not a function of their being bad people but just the cumulative set of procedural rules that they have to follow, even in that group, is pretty formidable. And so hopefully, this group of wonderful folks will be able to do stuff that others couldn't and actually be able to go fast. But we would never predict that view.

Justin Lake

Any investment there that -- yes, I know you've made a lot of investments whether it's VillageHealth or the drug, the pharma distribution business. It would seem like you've got a lot in place to get started there, but any investments we should keep in mind that you would need to put in place for that?

Kent Thiry

Good point. In the unlikely scenario that they wouldn't go big and they wouldn't go fast, we would have to announce Q1 investment of that P&L investment.

Justin Lake

Any definition of what big would mean as far as percentage of your patients?

Kent Thiry

I think I just rather wait until we have -- I'd just be picking a number, Justin, so I just don't -- I just don't think there would be any value in my giving you a number.

Unknown Analyst -

Maybe just to get a quick update on kind of a competitive landscape, seems like there have been maybe some fits and starts, some new entrants into the market and how, if any impact, it is having on your ongoing contracting with medical directors?

Kent Thiry

I would say that the level of competitiveness today versus a year ago versus 2 years ago versus 3 years ago has been quite constant. There's a couple 2, 3 bigger players and then there's 3 or 4 medium players and then there's small players and new entrants and there's independent physicians. So I think that's been pretty constant for the last few years, always intense and no sign of that abating. Also no particular sign of it getting more intense, but there's already quite intense, full-fledged, full-contact support. If you want to do a follow-up question of it.

Unknown Analyst -

And then I guess maybe just along with that or maybe separately, just any changes, is it more difficult, easier in terms of renewing contracts with medical directors or just a new supply in nephrologist and their availability?

Kent Thiry

Yes, I would say that's also the same, which is -- both for renewing medical directors and signing up new medical directors, the competition is very intense, and that's no different from the last 3 or 4 years. I don't know if any of you are sensing anything different. Feel free to bring it up. Javier? Javier's gone. Would you say that's the case? He runs a big chunk of the country so he would have a more granular sense.

Unknown Analyst -

And then I guess, maybe just separately to follow up on -- under a scenario where Medicare decides whenever that might be to try to a take whack at the bundled reimbursement rate. What do you view maybe other than the leverage you have with commercial payers is some of the bigger levers that you would think would be kind of your first line to try to minimize the impact to earnings?

Kent Thiry

And so this is if Medicare significantly reduced the bundled reimbursement?

Unknown Analyst -

Exactly.

Kent Thiry

Yikes. Do you guys want to answer that? Well, certainly, we go -- the way we work, you go right to the private payers and push for higher rate increases, because overall, you see our average profitability, we have an awful lot of centers that are hovering $0.01 above, breakeven or x dollars below. And we carry a non-trivial number of centers that lose money. And so those become really untenable quickly and a whole bunch of others that are profitable, but inadequate return on -- if you knew it's going to be that low, you wouldn't have done it unless there were broader reasons. So those become negative. So you would -- the industry's response would be to immediately go to the private payers and take more, as well as going to pharma and device companies and ask them for bigger -- for price reductions. But it would also probably have implications for annual merit increases for our teammates, as well as for -- all our teammates, including the ones that are sitting in this room. So that was a pretty generic answer but I don't think there's any other way. I don't think there's any sort of silver bullet or fire.

Unknown Analyst -

Just a couple of more, Kent, quick, pre-DSI, you had been talking about having an appetite for an MDO acquisitions. I was wondering, did DSI sate that appetite? Or is there something -- are you still, as the opportunity arise, be willing to buy something bigger as opposed to just sort of the regular tuck-in acquisitions?

Kent Thiry

We would always be willing to and then of course it's a minus divestiture leakage. So it gets more difficult. But intellectually, it's just a numbers thing. If the numbers are right, you can do it.

Unknown Analyst -

And then just in terms of -- we've talked about it a couple of times and then a couple of different ways sort of equal rights for dialysis patients sort of an interim step is MSP extension. Would you characterize that concept as something that is in active discussions and do you see as a cost saving? Or is it something that you guys in the industry have been pushing and haven't been able to get traction on?

Kent Thiry

I'd say right now it's not active. Some people -- a lot of people in Congress keep a list, scored-savings ideas. And so it's on the shelf in a lot of people's offices. And so we'll see if it gets pulled out.

Unknown Analyst -

What's the rough score, LeAnne, for a half -- for say, a 6-month extension or 12-month extension?

LeAnne Zumwalt

I think and I recall, I would say the government, it was $1.5 billion over a time, I think, 6-month extension, something like that. If you're really want to know, I'll look it up and send it to you.

Luis Borgen

And my memory is $1.2 billion for this 12 months over 10 years, so we'll find out and see.

Unknown Analyst -

Okay, great. And then finally, Kent, you often don't get a lot of questions about sort of the quality side, but now that you're through or the clinical side, I should say. But now that you're through your preps for the bundle, can you just talk about the process that you went through in terms of the medical board and the decisions they made? How that was disseminated to your physicians and whether there was any major pushback or any issues that you faced along the way?

Kent Thiry

Yes, I love the question because it's actually a great process. What the bundled precipitated was a more intense and reflective analysis of a whole bunch of clinical practices, and it happened in a while because while we look at it very intensely and analytically over the year, a lot of other doctors who are busy running their lives, running their practices and there will be opportunities to really step back and say, "Wow, well let's reflect on the interaction between DSOs and iron. Let's reflect on oral drugs. Let's reflect on this." And so there was a lot -- during this process when we started sending out proposed protocol changes and ideas and created a form for them to share ideas independent of us, the participation dramatically exceeded what we normally have. And so it's very, intellectually robust, and so we went through. I mean, we started on this, well, ahead of time of course. We went through a series of really cool research studies, all sort of micro-compressed in a period of time in order to experiment with some of the ideas that different physicians were throwing out. And so if you went to this through the outcomes, what would this do to outcomes. And so it was -- we've run those cases when necessity was the mother of invention. We had to do a lot of experimenting quickly, but still have very rigorous data. And so it was broad, and it was deep and it was quite nimble. It was unsustainable as a way to run yourself. But it was good. And it got a lot of dollar. A lot of doctors enjoyed it because they haven't done it in some time. They had instead rely on the experts and the rest. So it was very, very healthy. And then of course -- and then to pick an area of anemia, that has been for the last 5 years, all sorts of this controversy was -- some new studies coming out that are well regarded, some studies coming out not so well regarded. Different points of view. And you've heard now that Amgen is saying the FDA is thinking of eliminating explicit hemoglobin ranges. That's just not useful given how different, different patients are. The hypo-responders versus the hyper, ethnic differences, et cetera. What happens when you come out of the hospital versus when you went. And so in particular, the fact that the 2 things coincided, the implementing of a bundle and some of the new science and new government pronouncements on ESAs led to an incredibly intense discussions revisiting stuff in really healthy ways. Is that responsive? And one of the reasons again, to buy for the -- it's easy for me to say that, is that true or not, and is it relevant or not? Well, the fact that there was such an immediate pickup of the final protocol that emerged after all these iterations was a direct reflection of the breadth and depth of involvement and the intellectual integrity around it. And if I could finally, there was a little bit more consensus in an area where there's been a lot of pitter patter. And then second, for you again, you've got to worry about companies getting subpoenaed post-bundle because while the government said 2.5 years ago, we want to put in the bundle but we want you to figure out ways to do less and hold clinical outcomes constant. That's what we want you to do. Go do that. You have 3 years to do it. And as soon as you do it, you get subpoenaed, accusing you of having done it in the wrong way. And the good news for us is we did it with incredible intellectual integrity and documentation rigor, but that doesn't mean we wanted to go through 3 years of someone looking for fault.

Unknown Analyst -

Kent, you alluded briefly to PD and Home HD, and you also alluded, I think, briefly to transplants. You're going through the slides at a ferocious space. I didn't actually see the mix between PD and conventional HD and Home HD. I thought I missed it because of the pace that you guys were going at. And also I didn't quite understand the economic impact on you across those modalities. And last, I know it's a wonderful thing when people get a kidney transplant, and they don't have to be on dialysis any more. But I don't understand the frequency of that, the probability of somebody reaching that end as opposed to the other, death. And I wonder if you can just kind of talk through those aspects as well.

Kent Thiry

Sure. Either of you want to do any of those.

LeAnne Zumwalt

Go ahead.

Unknown Executive

Go ahead.

Kent Thiry

Okay. We didn't show the mix. PD has probably moved from 8% or so to a little over 9%. HHD is still 1/8 of that or so and not changing. And then as to economics, if you look at it on a theoretical basis, in many instances, PD is less expensive for treatment in the bundle than normal HD. And HHD is more expensive in every case, whether theoretical or the applied. The reason was PD emphasized that if you look at it sort of theoretical basis, is that -- with PD, you have to achieve a certain scale and stability in order to achieve those theoretical economics. And a significant percentage of PD in America is done subscale and without the right consistency. And so, the theoretical relative to PD economics are often not reflected in the aggregate reality. So with PD, you can see differences. With HHD, it's more expensive all the time.

Unknown Analyst -

Okay, that's more expensive to you. So it's in the bundle, you're paid the same whether it's PD or conventional or HHD when you talked about more expensive or less expensive more specifically...

Kent Thiry

Yes, that's what it [ph] costs to us.

Unknown Analyst -

So the economics are advantageous to you if the patient is actually able to have a PD modality, but in most cases, they're not?

Kent Thiry

Well, in most cases not, but again as I make the point, theoretically, you can say what advantage if it's PD, again, assuming it's clinically equivalent for the patient as the absolute black-and-white first filter. But second, in the real world, a lot of PD ends up having hidden costs because of subscale programs, accepted churn in the patient base because of poor patient selection, et cetera. So the pro forma that someone creates about PD and the bundle is not supported by the operating reality and so the delta is not nearly as large and, in many cases, unachievable.

Unknown Analyst -

And what about transplants and other things that may disrupt the historic patterns through the substitution risks and technological change? How many people get transplanted, is it a pretty small number?

Kent Thiry

About 17,000 a year. So 17,000 and that has been, thus far, as a percentage of the total ESRD patients, is that right? So far -- and absolutely going down, because I know long, long ago, it's 11,000 to 12,000 showing my age. Right now, what the experts say and what some of you may know differently, and please speak up. What the experts say is that there is nothing happening that is likely to materially change the number of transplant donors in your investment conference. But I -- this is just me parroting what people who supposedly understand this say, we're open to any other perspectives but I don't see any.

Unknown Executive

And are there technological changes going on that might seem to disrupt?

Kent Thiry

Nothing that I can think of off-hand. I got an iPhone.

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