American Renal Associates' (ARA) CEO Joe Carlucci on Q4 2017 Results - Earnings Call Transcript

American Renal Associates Holdings, Inc. (NYSE:ARA) Q4 2017 Earnings Conference Call March 7, 2018 9:00 AM ET

Executives

Darren Lehrich - SVP, Strategy & IR

Joe Carlucci - CEO

Syed Kamal - President

Michael Anger - Chief Medical Officer

Jon Wilcox - CFO

Analysts

Kevin Fischbeck - Bank of America Merrill Lynch

Operator

Greetings, and welcome to American Renal Associates Fourth Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Darren Lehrich, Senior Vice President.

Darren Lehrich

Thank you, operator, and welcome, everyone to ARA's fourth quarter 2017 earnings conference call and webcast. On the call today are Joe Carlucci, our CEO; Syed Kamal, our President; Jon Wilcox, our Chief Financial Officer; and Dr. Michael Anger, one of our National Chief Medical Officer. Dr. Don Williamson, our COO; is travelling today but he will be joining us for the Q&A session later.

I want to remind everyone that we may make certain remarks today that constitute forward-looking statements within the meaning of the Federal Securities Laws. The Company's actual results may differ materially from such statements due to a number of risks and uncertainties including those described in our most recent Form 10-K and Form 10-Q, our earnings press release and in our other filings with the SEC. Any forward-looking statements made today are effective only as of today, and the Company undertakes no obligation to revise or update any forward-looking statement for any reason.

On today's call, we will refer to certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most comparable GAAP measures are available in the earnings press release which is available in Investor Relations section of our website at americanrenal.com.

Finally, I want to remind everyone that since we are involved in certain litigation and inquiries described in our filings with the SEC, we will not be able to answer any questions about these matters.

And with that, I'm pleased to turn our call over to Joe Carlucci.

Joe Carlucci

Thank you, Darren. As I reflect on 2017, I could not be more proud of how our organization has responded, and frankly risen above, many of the challenges we faced a little over a year ago. We believe we entered 2018 in a stronger position to grow, driven by a more sustainable cost structure, continued execution on our development program due to recent openings and signed deals, and other operational tailwinds. We also enter 2018 with an even greater focus on building upon our operating model to integrate patient care even more closely with our physician partners. We're doing this from a position of strength because the partnership model we've developed more than 17 years ago has been validated by strong quality metrics, outstanding patient satisfaction and superior physician satisfaction rates.

During the fourth quarter of 2017, our organization maintained it's strong focus on delivering quality patient care, while once again sustaining the performance in the operational initiatives that we've discussed with you throughout last year. As you can see from our Q4 and full year results, we delivered on the commitments we made by achieving our 2017 financial guidance. We've executed on the 2017 initiatives and we are confident we can maintain a more efficient cost structure into 2018. I'm also pleased to report that we manage to do this with very little change to our voluntary dialysis clinic staff turnover rate which stood at 7.8% at year-end 2017. This turnover metric is considerably below that of other facility based healthcare service providers and I believe it is evident due to our desire to treat our staff with dignity and respect.

On the quality and satisfaction fronts, I'd like to share some good news we've recently received. First, I'm pleased to share our recent results in the CMS Quality Incentive Program or QIP. The proportion of ARA's facilities that have received a QIP production has been meaningfully below the national average in recent years. For performance year 2016 which relates to our current 2018 payment year, only 10.5% of ARA's clinics will receive a QIP production versus an average of 14.2% nationally. For the past four performance years in the QIP program, the proportion of ARA clinics with a QIP production has been similarly low, averaging nearly half of that of the national average and our consistent outperformance in QIP is a strong indicator of our unwavering focus on high quality care.

Second, our third annual voluntary physician satisfaction survey was just completed and ARA once again scored very well by being in the 99th percentile for physician engagement and alignment among physicians that practice in the outpatient clinic setting according to press Guiney [ph], the survey firm that conducted the survey. Engagement and alignment are key measures of satisfaction among clinic doctors and indicative of the clinician's sense of pride and intention to remain affiliated with their clinic. In the phase of uncertainty in our operating environment over the past year, we believe these physicians satisfaction results underscore the strong relationships we have with our physician partners which are grounded in providing high quality QIP for their patients. The consistent performance and quality and satisfaction measures validate that by consistently following our core values we continue to differentiate our Company from the rest of the industry.

Now onto some numbers. Q4 adjusted EBITDA less NCI was $28.6 million, and full year 2017 adjusted EBITDA less NCI was $105.5 million, putting us in the upper end of the $100 million to $106 million guidance range we provided in 2017. We had a very busy fourth quarter in terms of the novel clinic openings with a total of 9 clinics opened in Q4. We also acquired 3 clinics during Q4. Our assigned clinic pipeline of 25 clinics at year end remained robust and gives us great visibility and some denovo openings for the next 12 to 18 months. On the expense side, our patient care cost per treatment were $220 in Q4 or a decline of $5 per treatment on a year-over-year basis. Syed Kamal and our entire operations team did a terrific job managing the labor productivity initiative throughout 2017, and this remained evident in the fourth quarter. Patient care costs were $3 higher than Q3 2017, and as expected the increase was driven almost entirely by higher denovo start-up cost given the number of openings in Q4.

Our G&A cost per treatment in Q4 was $41 which was down over $4 per treatment from Q4 '16 and was relatively stable with our Q3 2017. We've been able to maintain G&A savings for several quarters, proving the effectiveness of some of the changes we made in the organization early last year. During 2018, we're planning some new operational initiatives that will require some incremental investment in G&A but we'll remain disciplined about how we add resources to support these efforts, while also staying focused on providing high quality management services to our clinics.

Let me now turn to our outlook for 2018. Today, we are introducing 2018 financial guidance for adjusted EBITDA less non-controlling interest to be in the range of $110 million to $116 million. Jon Wilcox will share some of the details related to our outlook but I want to give you a high level perspective on the assumptions underlying our 2018 guidance which include the following.

Number 1, a relatively stable outlook for commercial mix with a range of plus or minus 0.5% from our 2017 average. Number 2, treatment growth in the range of 6.5% to 7.5%, driven primarily by non-acquired growth. Number 3, tailwinds from savings due to Mircera and ESA alternative which will partially be offset by higher supply cost in other areas. Number 4, the inclusion of [indiscernible] for 2018. And number 5, a 2018 Medicare update that is below underlying cost growth in the final year of rebasing [ph].

As you all know, Congress recently passed the Tax Cuts & Jobs Act, and we expect tax reform to provide cash tax benefits overtime in the range of $2 million to $3 million annually. We plan to invest approximately one-half of these future cash tax benefits into two new operational initiatives during 2018. We've contemplated these initiatives for some time and with the additional of Dr. Don Williamson as our Chief Operating Officer to our senior team, we believe the time is right to make these investments.

The two new initiatives include; number one, a new integrated care model pilot where we will be testing a differentiated care model to better position us for future value based contracting opportunities. And number two, a new clinical research initiative that should help us establish and more structured approach to participating in industry research trials. These initiatives will require some investment and they are not expected to generate revenue during 2018 but they are very consistent with our core values and our vision to be a leader in the quality and innovation, to improve the health of patients and [indiscernible] disease.

Finally, let me close by mentioning a recent legislative success for the Kidney Care Community within the budget bill that the President signed on February 9. For the Kidney Care Community we are pleased to see the legislative provision related to the acceptance of independent accreditation organizations, to conduct Medicare certification surveys, as well as another provision that should improve access to tell our health services for home dialysis patients. The independent accreditation provision could elevate certification delays for dialysis facilities in regions with limited CMS surveyor resources, thereby improving access to dialysis services for Medicare beneficiaries.

Now I'd like to turn the call over to Syed Kamal, our President, to give you an update on our business development during the quarter. Syed?

Syed Kamal

Thank you, Joe. We ended 2017 with 228 clinics in operation, an increase of 11 clinics from the third quarter of 2017. During Q4, we opened 9 denovo clinic and acquired 3 clinics, and we merged 1 clinic. For the full year 2017, we added a net of 14 clinics including 50 denovo's that were opened, 3 acquisitions and we also sold two clinics and merged two other clinics. The clinic sales and mergers were part of our 2017 operating initiatives to rationalize the footprint with as little disruption as possible to patients and the staff.

As expected, our 2017 clinic openings were weighted to Q4 and I want to take this moment to thank our project management and operations teams for their hardwork during the quarter to open so many clinics in such a short time period. We continue to have good visibility into future openings due to assigned pipeline which stood at 25 signed clinics as of December 31, 2017; this is down from 36 at the end of Q3 due to the completion of 3 acquisitions and 9 openings in Q4, offset by a new signed deal. We remain optimistic about the pipeline given the number of discussions we are having with both, new and existing nephrology groups. We're excited that we have expanded our footprint into a new state during Q4 by entering Oklahoma, our 26th state, and we want to welcome our staff and new physician partners there. We look forward to continuing to affiliate with higher quality nephrology groups in other new markets during 2018.

I'd now like to turn the call over to Dr. Mike Anger, one of our Chief Medical Officer. Dr. Anger has been an ARA partner since 2008 and leads a sizeable group of nephrologists in Colorado.

Michael Anger

Thanks, Syed. I'm pleased to join everyone today to provide the fourth quarter clinical update. As Syed mentioned, my name is Mike Anger, and I've been a practicing nephrologist for over 30 years. My nephrologist group in Colorado has 12 clinics in partnership with ARA. As you know, ARA's business model allows it's physician partners to take the lead in the care of their patients. In this physician-driven model, our goal is to provide the highest quality of care.

I'm going to review just a couple of important clinical metrics and update you on a recent development related to our erythropoietin-stimulating agents, also known as ESAs. The first clinical metric I'd like to discuss is Kt/V, a marker of adequacy of the dialysis treatment. During the fourth quarter of 2017, 98% of ARA's hemodialysis patients had a Kt/V greater than or equal to 1.2, the value at or above which is considered adequate dialysis. This measure has remained stable over the past year and demonstrates that we are providing adequate dialysis therapy to the overwhelming majority of our patients, and we are doing so on a consistent basis.

The next clinical metric I'd like to discuss is vascular access of our dialysis patients. As I've discussed before on these calls, one of the focus areas for quality is the percentage of patients receiving dialysis through a venous catheter for greater than 90 days. A lower percentage is better because prolonged venous catheter use in dialysis patients may be associated with a higher risk of infection or hospitalization.

In the fourth quarter of 2017, the percentage of patients who utilized catheters as their sole source of access for dialysis for 90 days or greater averaged 10% for ARA. This indicates that a meaningful percentage of ARA patients are receiving dialysis through a safer, permanent access such as an arteriovenous fistula or an arteriovenous graft. The vascular access measure of the percentage of patients who utilized catheters as their sole source of access for dialysis for 90 days or greater has been in the 10% range, and has been gradually declining, demonstrating that more of our patients are dialyzing without the prolonged use of catheters. We constantly monitor numerous clinical parameters on all of our patients, such as Kt/V and vascular access, as they all serve as components of the ultimate goal of care, keeping patients healthy, out of the hospital, and able to continue to dialyze in our clinics.

I'd like to close the clinical section with an update related to our recent progress with the ESAs alternative, Mircera. As we discussed on our third quarter 2017 earnings call, our Amgen agreement gives us flexibility to use alternative ESAs in 2018 and we introduced Mircera as an alternative to Aranesp and EPOGEN mid-way through the fourth quarter of 2017. Physician interest in adopting this ESA has been strong due to Mircera's clinical profile and we are progressing well with the conversion plan to accommodate the significant physician interest while ensuring that conversions are producing excellent anemia management results for patients at a more efficient cost.

In closing, on behalf of ARA's clinical team, I look forward to participating in these calls periodically and updating you on these metrics and other important clinical measures that will help you understand our focus on high-quality patient care.

This concludes my remarks on the clinical side, so let me turn it over to Jon Wilcox.

Jon Wilcox

Thank you, Dr. Anger. Our Q4 net revenue declined 2.4% compared to Q4 2016, driven by an 8.2% decline in revenue per treatment due to adverse changes in commercial mix on a year-over-year basis, primarily as a result of lower ACA mix, partially offset by total treatment growth of 6.7%.

Treatment growth continues to be driven primarily by the ramping of denovo clinics and the underlying growth in the dialysis patient population. For the fourth quarter of 2017, treatment growth of 6.7% was driven by non-acquired treatment growth of 6.1% while acquisitions contributed 0.6%. Adjusted for clinics that were sold in treatment days, our normalized treatment growth in Q4 would have been 7.3%. We acquired 3 clinics during Q4. Our Q3 and Q4 non-acquired growth was less than the first half of 2017, primarily due to the timing of denovo openings which were more heavily weighted to the second half of the year, as Syed mentioned earlier. However, our treatment growth for the full year of 8.1% including 7.9% non-acquired growth was consistent with our guidance of upper single digit growth for the full year 2017.

For the full year 2017, the impact from hurricanes, clinic sales and treatment days on our total treatment growth was 0.3%, so normalized for these items, total treatment growth would have been 8.4%. Our revenue per treatment in the fourth quarter was $348 or $31 below the fourth quarter of 2016. RPT was higher than in Q3 due to approximately $4 per treatment of year-end revenue adjustments that are not expected to reoccur. Excluding these amounts, our Q4 revenue per treatment was stable with Q3.

For the full year 2017, revenue per treatment was $343 and the year-over-year rate decline of $30 per treatment is broken down into two buckets. One, approximately 80% was due to lower ACA mix; and two, approximately 20% was due to lower non-ACA commercial mix. For calendar year 2017, our non-ACA commercial mix was approximately 12% and our ACA mix was approximately 1%. Together our total commercial mix for calendar year 2017 was 13% which is fairly consistent with what we assumed in our 2017 guidance. We exited 2017 with a slightly lower Q4 non-ACA mix than the average for the year.

I'm now going to move on to a discussion about the expense side of our P&L in Q4. Patient care costs in the fourth quarter of 2017 on a per treatment basis were $220 million and this is down 2% from $225 per treatment in the fourth quarter of 2016. The patient care cost per treatment trend is primarily attributable to our operating initiatives to reduce costs and improved productivity, partially offset by normal supply cost increases. The $3 per treatment sequential increase from Q3 2017 is primarily due to higher start-up costs associated with the 9 clinics opened in the last three months of 2017. We are not seeing anything unusual with respect to labor pressure, and our staff turnover metrics as Joe indicated, remains fairly consistent with recent years.

G&A expenses in the fourth quarter 2017 on a per treatment basis decreased 10% year-over-year to $41 per treatment. This is primarily attributable to slower growth of other corporate costs and the targeted reductions we made earlier in 2017 that have been sustained. The supplemental business metrics table in our earnings press release includes the patient care cost and G&A expense figures I just reviewed, as well as comparable adjusted figures in these categories for prior periods which exclude unusual stock-based compensation and other unusual charges.

Our provision for uncollectible accounts during the fourth quarter of 2017 represent 1.2% of patient service operating revenues or approximately $4 per treatment. We believe the bad debt percentage is in-line with normal quarterly fluctuations around the 1% level. Please keep in mind that revenue and revenue per treatment will be reported on a net basis in 2018 due to the new revenue accounting standard. Our accounts receivable, net of allowances, represented 37 days of revenue for the quarter ended December 31, 2017 and remains relatively stable.

Our adjusted EBITDA less non-controlling interests, or adjusted EBITDA less NCI during the fourth quarter of 2017 was $28.6 million, a $3.6 million decline as compared to the fourth quarter of 2016. Normalized for the Q4 revenue adjustments I referred to earlier, we estimate our Q4 adjusted EBITDA less NCI would have been approximately $27.6 million and our fiscal year 2017 adjusted EBITDA less NCI would have been approximately $104.5 million.

NCI, as a percentage of adjusted EBITDA decreased to 40.6% in the fourth quarter of 2017 from 42.4% in the fourth quarter of 2016. Our clinic ownership level has increased approximately 1 percentage point year-over-year to 54% at December 31. So the year-over-year change in the NCI percentage is due to decreased profitability at the clinic level, as well as a slightly higher ownership level. We expect our NCI percentage to be in the 39% to 40% range for 2018.

We reported a GAAP net income attributable to American Renal Associates Holdings, Inc. of $0.2 million in the fourth quarter of 2017 as compared to a loss of $7.1 million in the fourth quarter of 2016. For the full year of 2017, we reported GAAP net income attributable to ARAH of $4.9 million as compared to a loss of $0.4 million in 2016. For the fourth quarter of 2017, our non-GAAP adjusted net income attributable to American Renal Associates Holdings, Inc. was $6 million or $0.18 per share using a normalized tax rate of 41.5% and excluding certain GAAP items as disclosed in our press release. For the full year 2017, our non-GAAP adjusted net income attributable to ARAH was $0.61 per share.

Turning to cash flow, for the fourth quarter of 2017 we had another strong cash flow quarter and generated $31.2 million of cash flow from operations. After deducting distributions to non-controlling interests of $19 million our adjusted cash flow from operations was $12.2 million. Our full year 2017 cash flow from operations was $128.5 million, or 73% of adjusted EBITDA. After deducting distributions to NCI and adjusting for refinancing transaction costs in Q2, our adjusted cash flow from operations was $49.8 million for the year or $13.7 million in excess of our total capital expenditures for the year. During Q4 2017, we spent $11.3 million on capital expenditures, of which $941,000 was related to maintenance CapEx, and the remainder was related to development CapEx. Our full year 2017 capital expenditures were $36.1 million of which $6.4 million was related to maintenance and $29.7 million was related to growth from expansions and denovo development.

As of December 31, 2017, our adjusted owned net debt was $459.5 million, down from $461.6 million at September 30, 2017. Our adjusted net leverage was 4.4x our trailing adjusted EBITDA less NCI of $105.5 million, up slightly from adjusted net leverage of 4.2x at September 30, 2017.

Finally, I'd like to discuss our outlook for 2018 adjusted EBITDA less NCI. We are introducing guidance for 2018 adjusted EBITDA less non-controlling interests to be in a range of $110 million to $116 million. This range represents growth of 5% to 11% over our normalized 2017 adjusted EBITDA less NCI or approximately $104.5 million which is net of the Q4 revenue adjustments I mentioned earlier. The growth rate assumed in our guidance is also impacted by approximately 1 percentage point due to the corporate investments we are making for certain new operating initiatives. Our guidance assumes that our non-ACA commercial mix is fairly consistent with the quarterly trends for the full year 2017 of approximately 12%, plus or minus 0.5 percentage point and that our ACA mix also remains consistent with 2017 of approximately 1%.

Our guidance also assumes the following; total treatment growth of 6.5% to 7.5% driven primarily by non-acquired growth. I would note that the upper end of that range for treatment growth would represent a slight increase from the levels observed in the second half of 2017 due to recent denovo openings and the Q4 acquisitions, although we do expect treatment growth to be higher in the second half of 2018 than in the first half due to start-up clinic ramping.

Personnel cost growth in the 2% range, lower ancillary cost due to gradual increases and adoption of Mircera by our physicians throughout 2018 offset partially by higher supply cost related to increased unit prices for PD supplies. New clinic additions in the range of 15% to 20% which is similar to recent years. The inclusion of Calsima [ph] Medics reimbursement from Medicare during 2018. It is important to note, that Calsima [ph] Medics may cause revenue per treatment to increase but it is still too early in the transition to provide specific ranges for the impact to RPT. The 2018 environment for Calsima [ph] Medics is expected to be dynamic due to an impending generic version of sensipar, as well as expected lags in coverage by non-Medicare payers.

Below the adjusted EBITDA line I want to provide a few additional details to assist you with your models for 2018. First, we expect depreciation and amortization at percentage of revenue to be in a range of 5% to 5.5%. Second, we expect our interest expense to be approximately $7.5 million to $8 million per quarter reflecting the higher interest rate environment offset slightly by our interest rate hedges. Third, we expect our effective tax rate to be in a range of 27% to 29% reflecting the recent changes from tax reform. And fourth, we expect recurring stock-based compensation to be approximately $1.5 million to $1.7 million per quarter, an increase from the $1 million per quarter level in 2017.

Following our IPO in 2016, we adopted an equity program with annual grants generally investing and expensed over a 3-year period. As a result, it will take 3 years for this non-cash stock-based compensation expense to fully normalize on our P&L. 2018 represents the second of this program.

From the standpoint of quarterly modeling, please keep in mind that the weighting of adjusted EBITDA has been higher in the third and fourth quarters than in the first and second quarters due to higher Q1 payroll taxes and the factors I mentioned above related to ramping of clinics and treatment growth. For reference, our first half 2017 adjusted EBITDA less NCI weighting was 46% for the year, and our second half weighting was 54% of the year.

The other thing to note from modeling is that we adopted ASC606 effective January 1, 2018 and under this new accounting standard for revenue we will be reporting our revenue net of bad debt, effectively removing the provision for doubtful accounts from the base of our income statement. As such, we have presented net revenue per treatment in our supplemental business metrics and this is how revenue and revenue per treatment will appear going forward.

I want to note that our range could be impacted by a variety of other factors that are discussed in greater detail in the risk factors in our SEC filings and press release. The biggest swing factor to our financial results continues to be further changes to our commercial mix and the reimbursement rates we are able to realize from commercial payers including the potential for rate pressure from benefit design.

Finally, as it relates to our balance sheet, I want to reiterate our medium to longer term target for net leverage to be in a range of 3x to 4x. Based on our 2018 guidance range for adjusted EBITDA less NCI, we expect to be near the top end of this range by year end 2018. As it relates to tax reform, we expect it to be a net positive to the cash taxes we pay in 2019, initially by $2 million to $3 million. As Joe mentioned, we plan to invest half of that future benefit into operational initiatives during 2018. Any excess cash tax benefits from tax reform are expected to be deployed towards debt reduction to accelerate our goals to be within the 3x to 4x net leverage.

Now I'd like to turn the call over to Joe for some closing remarks.

Joe Carlucci

Thanks very much, Jon. I want to thank our staff for their contributions to each and every day. And as a physician-driven company, I also want to thank our physician partners for their dedication and unwavering attention to the provision of excellent care to the patients who choose ARA clinics for their dialysis services.

With that, we'll be happy to take your questions. Operator, can you please open the Q&A session. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Kevin Fischbeck with Bank of America Merrill Lynch. Please proceed with your question.

Kevin Fischbeck

I wanted to ask a little bit about the guidance; I guess the guidance number was basically [indiscernible], it was going to be -- but Q4 was a lot stronger, I think you mentioned maybe a million or so seems like EBITDA from this one-time breakthroughs in Q4 and maybe another $1.5 million of new costs next year. But I guess given our strong Q4 was with everything else that you had highlighted kind of why more of it didn't float till 2018 or you're just being conservative on cost of medics; how do you think about that?

Joe Carlucci

Jon, you want to take that one?

Jon Wilcox

Sure. So when you look at our guidance of $110 million to $116 million, it's a growth between 5% and 11%. A couple of things, I think you talked about the 1% investment we're making in new corporate initiative. What I would say is the biggest swing factors for the range include changes in the commercial mix and lower commercial rate, as well as the timing and ramping of our denovo clinics. The guidance range assumes that our commercial mix is kind of plus or minus that 50 basis points in relation to calendar year '17 mix of 13% and so -- those are really I would say the biggest swing factors for guidance.

Joe Carlucci

Darren?

Darren Lehrich

Kevin, I would just add maybe a couple of things to that one. When you think about the fourth quarter probably not a good run rate when you think about the full year '18 just because we do have that waiting in the first half versus the second half that Jon mentioned in his prepared remarks. First quarter does have higher payroll taxes and fewer treatment days and those sorts of things. The other thing that I think you ought to just think about in terms of '18; we talked about the benefit of Mircera and certainly that will be a help for us in 2018. But we also see some unit price pressure on PV costs and that's a slight offset to that Mircera benefit, so just something to consider when you're modeling.

Kevin Fischbeck

And then I guess going to that commercial dynamic, it's not to me like you're saying that you do expect commercial to relatively stable but you're highlighting it as kind of a swing factor. Is there anything in there? I guess anecdotally [indiscernible] that you can kind of give us if there is something specifically that you're worried about as far as potential downside? And then, I guess -- specifically you mentioned that the payer -- not payer, benefit design changes as far as I get a little color on that aspect of yours as well?

Jon Wilcox

Kevin, that's a good question, that's what I was going to highlight. It's a little bit on the plan design is, because when we talk -- just to be clear, when we talk about plan design, we're talking about the features in the plans and that limit patient choices on where they can receive their care. We've talked about in the past how those -- these plans have encouraged patients to move into Medicare during the 3-month period they are entitled to maintain their private insurance. In addition, we've seen some more restrictive products from payers; so I talked about how we have mixes -- quarterly fluctuation and mix and this was a type of thing that can create some of that quarterly fluctuation in the mix and played a role in our Q4 mix being well in the year. But just to follow-up on that, we did incorporate that into our 2018 guidance, so when we talked about how we built the guidance off of our lower Q4 mix, that's really what we're referring to there.

Kevin Fischbeck

Okay. So you're saying that there is more narrow network commercial plans and in response to that the concerned patients might say rather move to Medicare now and keep seeing my nephrologists at my clinic as a result?

Jon Wilcox

I'd rather not get into the specifics of kind of the planned design. I would just say it limits patient choice and just leave it at that, just for competitive reasons.

Kevin Fischbeck

And then, I guess -- this is the last question. The new site is big, I don't think it's still looking to do 15 to 20 but obviously the number of sites in the pipeline with down 11 even they are only open to 9, what happened to the other 2; was that just being delayed so it's not going to be to your window or did something happen around those being cancelled?

Darren Lehrich

So we had 9 openings in the quarter and that was in-line with our expectation that put us at 15 openings for the year and then we added the 3 through acquisition and we did have one kind of deal as well in the fourth quarter. So we were 36 deals in the third quarter and then when you take into account the 9 openings, the 3 acquisitions and the 1 signed deal that gets either the 25. And I think that gives us really great visibility into 2018 and we do behind that sign pipeline, we do have lots of active conversations going and so we'd expect to replenish the openings that we had with new signed deals as we move forward.

Joe Carlucci

Kevin, those 3 denovo -- I mean those 3 acquisitions really were denovo's and so at the last minute we decided to purchase the 3 clinics rather than build. And to Darren's point, we've not seen any slowdown or changes in our model, we think that the physician ownership in dialysis is a good thing. As Darren indicated, we're talking to nephrologists all the time, so we'll -- but we will continue to grow based on what our guidance has indicated.

Operator

[Operator Instructions] Our next question is from Anna [ph] with Leerink Partners. Please proceed with your question.

Unidentified Analyst

So again, following up on the guidance, maybe on the volume growth; it's 6.5% to 7.5%. You've talked about exiting the year at a higher rate of growth as the denovo's come on-stream and the backhalf loading. Just kind of going back to maybe first principles and the ways, is there an ability to accelerate the volume growth beyond that and is it more supply constrained and is it all about the denovo's and the pace of buildout of the denovo's or can you do something around increasing capacity in your existing clinics with supply constraint?

And if it's -- is there any demand constraints here that might be boosted through physician incentive or consumer outreach or even payer initiatives; I grant it, there was a lot of noise around the exchanges and all but more broadly for commercial, if you will?

Joe Carlucci

Let me just comment on a couple of things that you've brought up. Number one, we look at our utilization or capacity every single quarter and clearly, it's a better -- more efficient use of CapEx to expand. So we're looking at expansions of clinics all the time. Our physicians have constraints, we receive calls from nephrologists all the time and we don't see that slowing down at all. While our patients choose obviously where they receive their dialysis care, so there is not sort of physician incentives that I think off for sure. So I pointed out those three things, I hope I've responsive to your question. I'm going to turn over to Jon now.

Jon Wilcox

So what I would say is, the fluctuation really you're seeing is just because of the waiting of timing of denovo's and it's really lumpy in terms of when those clinics open, there is nothing underlying the fundamentals that are working as such simply opening those new clinics, and we opened 9 this quarter and we've talked about 15 to 20 next year. So we've always had kind of an up and down of those clinic openings as being the biggest driver but really at the core of it to Joe's point in terms of the fundamental growth of the disease is still strong, so we don't really see anything there.

Unidentified Analyst

On the margins, on the revenue per treatment and cost per treatment that you're building into the '18 guidance range; I think you're saying commercial mix will be stable ACA's is what it is and it's stable. Is there anything at all or play in the -- on the revenue per treatment side for the upside? And then on the cost per treatment, what are you really baking in on the Mircera savings, ex-PD [ph] headwinds and the CAS [ph] Medics, is that again some level of conservatism in there or as a midpoint to your -- it is what it is and that's your best case?

Joe Carlucci

I just want to point out that in 2019 we're looking forward to a Medicare rate increase which we haven't had. As you know, the last several years. Jon, you want to…

Jon Wilcox

So what I would say is, if you think about 2018 the biggest swing factors we've talked about, both are just in terms of margin and the revenue rate, it's going to be the unknown related to CAS [ph] Medics. It's really too early to tell and quantify those things, and that's really why we don't give guidance in '18 on the margin on an RPT basis as the lot of -- it's a newer drug release for the dialysis side of the business, so until we get some visibility on how sustainable that is, it's a little too early to comment on what that could add or not.

Joe Carlucci

And I just want to add one other thing that, in guidance we don't anticipate acquisitions. And what we've done historically with acquisitions -- the important factor for us is that we want to maintain our physician partnership model, and so to the extent that we do an acquisition, we want to be sure who our partners are, i.e., the nephrologists.

Unidentified Analyst

One final one on the CMS and American Kidney Fund, can you just update us again on the charitable premium assistance. You said there was some disclosures from AKF?

Joe Carlucci

There are some new guidelines. I'll now turn over to Darren.

Darren Lehrich

Sure. As far as the AKF goes, we did provide the mix of our AKF patients last quarter and we're not going to be updating than the regular basis but you can use that as a reference point and as you say last quarter, we are very much in-line with industry averages that we've seen other companies disclose. What Joe is referring to is just -- the AKF recently announced that there are some program enhancements that they've made, they also issued a provider code of conduct and we're pleased to see those program enhancements. I think one of the real keys there was they enhance the coverage to include transplant for patients that are getting transplants and post-transplant. The HIP [ph] program will cover those patients, and so are the other things that we're referring to there and clearly good for patients.

Operator

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

Joe Carlucci

This is Joe. I want to thank everybody that participated. We want to certainly thank all of those that have invested in American Renal, we'll continue to be good stewards of your investment. And I'll close by saying that we're expecting yet another [indiscernible] here. So anybody that's travelling, I hope you travel safely. And thanks again, and thanks again to our physicians partners and our staff. Have a great day.

Operator

This concludes today's conference. You may disconnect your lines at this time. And thank you for your participation.