Aug 4, 2009
Executives
Rich Whitney - CFO LeAnne Zumwalt - Investor Relations
Analysts
Kevin Ellich - RBC Capital Markets Gary Lieberman - Wachovia Kevin Fischbach Sudeep Singh - Deutsche Bank Securities Andreas Dirnagl - JPMorgan Securities Justin Lake - UBS Mark Arnold - Piper Jaffray & Co. John Ransom - Raymond James & Associates Inc.
Gary Taylor - Citi Arthur Henderson - Jeffries & Company Chuck Ross
Operator
Good afternoon. My name is Deena and I will be your conference operator today.
At this time, I would like to welcome everyone to the DaVita Second Quarter 2009 Investor Conference Call. All lines have been placed on mute to prevent any background noise.
After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad.
If you would like to withdraw your question, press the pound key. Thank you.
I would now like to turn the call over to Ms. LeAnne Zumwalt.
Madam, you may begin your conference.
LeAnne Zumwalt
Thank you, Deena, and welcome, everyone, to our second quarter conference call. We appreciate your continued interest in DaVita.
I'm LeAnne Zumwalt with Vice President of Investor Relations. And with me today is Rich Whitney, our Chief Financial Officer.
Kent Thiry, our CEO had a death in the family and will not be able to join us. I would like to start with the forward-looking statement disclosure.
During this call, we may make forward-looking statements, which can generally be identified by the content of such statements or the use of forward-looking terminology, and may include statements that do not concern historical facts. All such forward-looking statements are subject to known and unknown risks and uncertainties that could cause the actual results to differ materially from those described in the forward-looking statements.
For further details concerning the risks and uncertainties, please refer to our SEC filings included in our most recent quarterly report and on Form 10-K, our annual report on Form 10-K. Our forward-looking statements are based on information currently available to us, and we undertake no obligation to update these statements, whether as a result of changes in underlying factors, new information, future events, or other developments.
Additionally, our press release and related disclosures includes certain non-GAAP financial measures. These measures should be considered in addition to the results prepared in accordance with GAAP and should not be considered a substitute for GAAP results.
Also included in the press release is a reconciliation of these non-GAAP measures to the most comparable GAAP financial measures. First, I will view our clinical outcome.
We continue to present our clinical outcomes first because that is what comes first. We are first and foremost a caregiver company, serving now approximately 116,000 patients.
First, with respect to adequacy, which is essentially how well we are doing at removing the toxins from our patients' blood, again this quarter, 95% of our hemodialysis patients had a Kt/V greater than 1.2. Second, with respect to vascular access, 63% of our patients have fistulas, the preferred form of vascular access.
Third, anemia management, physicians have managed 88% of our patients to hemoglobin levels between 10 and 13 over the last three months. Most importantly, our gross mortality rate for 2008 was 16.5%, an 11% improvement from our 2005 mortality rate of 18.5.
This means that around 2200 more patients were alive at the end of 2008 due to our improvement. For these clinical measures, our patients' outcomes compare quite favorably to national averages.
Our superior clinical care not only results in healthier patients, but also drive significant savings to the US healthcare system. I'll now turn the call over to Rich Whitney.
Rich Whitney
Thanks, LeAnne. Q2 was a strong quarter for DaVita clinically, operationally, and financially.
In any quarter, a number of small things happen, some favorable, some unfavorable. This quarter, it seems almost everything went favorably.
Even excluding this, our fundamental operations were strong. I will come back to the details of our performance in the quarter in a moment, but first, let me begin by answering some key questions about the current environment.
Question number one, what is the status of healthcare reform? As you are all no doubt painfully aware, the discussions regarding the structure of reform and how it will be paid for are very much in flux.
At this point, we are not in a position to predict the legislative outcome or its potential impact on our industry. I will, however, say the obvious.
Policies that are likely to decrease the number or rates of private patients are negative for our industry. Policies that are likely to increase the number of private patients would be favorable.
Question number two, what is the status of CMS's bundling rules? While we expect to see the preliminary bundling rule sometime in August and right now we and the rest of the industry do not have an ability to offset the 2% reimbursement cut in the bundle.
And further, we're nervous about the bundled rate calculation and fear that it could effectively be a larger than 2% cut. And if so, we would be forced to close some centers.
Additionally, the house healthcare reform bill includes a provision that would require oral medications be included in the bundle. This policy, if implemented, would hurt patients and given that no one could accurately calculate the costs of oral medications, which are not currently reimbursed through part B, this number would be a guess at best.
All this said, we are working closely with CMS and congress to ensure that the bundling is implemented as outlined in MIPPA. Question number three, how is the economy impacting our business?
We have seen a slight decline in our percentage of private patients over the past few quarters and to date, this has not had a significant impact on our overall rates as the mix shift has primarily affected lower paying managed care patients. Okay.
Now, back to the details of the quarter, the second quarter was characterized by healthy volume growth, stable private pricing, increased utilization of physician prescribed pharmaceuticals, strong cost controls, and very strong cash flows. Compared to Q2 of last year, revenue was up 8%, operating income up 8%, and EPS up 13% on a 1.6% lower share count.
Non-acquired growth was 4.5%, which is an increase from recent quarters. We are still experiencing significant delays in certification of our de novo centers, currently with 62 completed and awaiting certification.
We continue to expect non-acquired growth to be in the range of 4% for the year, as the certification delays may weigh on our growth. Dialysis revenue increased $3.62 per treatment from Q1.
The main contributors to this increase were an increase in physician-prescribed pharmaceuticals, an increase in ASP drug reimbursement rates, and these two items were partially offset by a seasonal decline in lab testing and the small private mix shift that I mentioned. Dialysis operating expenses increased about $2 per treatment sequentially and this is due to an increase in pharm utilization, higher health benefit costs, and the continued impact of the uncertified de novos.
These items were partially offset by a decrease in payroll tax from the seasonally high first quarter, and strong labor productivity and cost control. If you look at dialysis operating costs year-over-year, they increased about $3 per treatment or 1.3%, and this demonstrates solid cost controls offset by annual wage inflation and higher pharma costs, primarily EPO and heparin pricing.
Dialysis G&A was at 7.3% of segment revenue for the quarter and was consistent with the full year of 2008 and with our expectations for fiscal 2009. During the quarter, we modestly increased our bad debt reserve to 2.75% of revenue in the dialysis segment and this reflects a slowdown in the timing of payments from some of our non government payers.
As for cash flow, the latest 12 months operating cash flow of 705 million was exceptionally strong and was favorably impacted by higher operating income, lower cash taxes, primarily resulting from bonus depreciation, and the timing of various working capital items. We still expect operating cash flow for the year to be in the range of $550 to $600 million as we expect certain working capital items to be a use of cash in the second half of the year.
Regarding our outlook, we are narrowing our 2009 operating income guidance range to $900 to $930 million. As you look for the rest of 2009 and into 2010, it may be difficult for us to maintain Q2's operating cost performance.
Also, there is a risk we could experience a more significant private mix decline due to sustained levels of high unemployment, and we face the risk of cuts from state Medicaid plans and other government programs, virtually all of which are looking for budget relief. Our expectations regarding these swing factors are reflected in our operating income guidance range.
Longer term, our operations are solid and we expect to continue the trend of recent years, generating steady growth and strong consistent cash flows. The biggest longer-term risks that we face are the potential for a poorly implemented bundling policy and potential reimbursement discontinuities from healthcare reform.
If either of these factors cause the reimbursement deficit on the government business to grow, this will put increasing pressure on private insurers to subsidize this business. Overall, we are well positioned to offer significant value to patients, physicians, payers, and the government through integrated care management, specialty oral pharma delivery, vascular access care, and pre-dialysis disease management services.
This is in fact what payers and government want and something only the large national dialysis companies can deliver. Operator, let's go ahead and open it up for Q&A.
Kevin Ellich - RBC Capital Markets
Rich just wondering if the 3rd op with that bad debt reserve increased to 2.75%, wondering if you could provide a little bit more color? You mentioned the slowdown on the managed care payer side.
Are there any specific payers that you guys are bumping into problems with?
Rich Whitney
Yeah, I really can't point to any specific payers. It's, it's almost across the board.
And it's a trend we've been watching for a quarter or two and it's obviously been offset by improvements in other areas because our DSO remains stable at 70 days over the last several quarters. But, it's really just a little bit of a slowdown on the non government payer side causing us to boost that provision a little bit.
Kevin Ellich - RBC Capital Markets
And are those in-network or out of network contracts?
Rich Whitney
It wouldn't really make a distinction. I don't think it's a material distinction.
Kevin Ellich - RBC Capital Markets
Okay.
Rich Whitney
In this particular issue.
Kevin Ellich - RBC Capital Markets
Got it. And then going back to your comments on the bundling rule, I guess, what's your expectation for your market basket increases?
I think the house bill included a provision for productivity gains.
LeAnne Zumwalt
Yeah, the house bill actually now it is not applicable because in fact the dialysis segment was eliminated. Now that could come back in the senate, but right now where we stand, we expect our market basket to be implemented as permit by market basket minus one.
Kevin Ellich - RBC Capital Markets
Got it. And then, Rich, could you help us, provide an update on uses of free cash flow?
I guess how you would like to use that?
Rich Whitney
Sure. Our priorities in terms of use of cash remain the same as they have always been, and that is to sort of three priorities in this order.
First, investing in profitable growth opportunities, acquisitions and de novos. Second, share repurchases, and third, paying down debt.
Regarding growth, as we have stated, virtually all of the MDOs, the midsize dialysis organizations have offered themselves up for sale over the last 18 months or so. And we are interested in acquiring, should any of them become available at a reasonable price.
So that is sort of part of that dynamic in terms of growth. I should mention also, sort of given the current environment as it relates to healthcare reform, the economic environment, capital markets environment, it may be that our appetite would only be for one such transaction instead of multiple transactions.
But nevertheless, we're interested in acquiring and hopefully that will be possible. Secondly, as it regards to share repurchases, again, given all the uncertainties that I just mentioned, we have not been in the market since the early part of the year, and so that's our posture at the moment.
We obviously, as it relates to all of these factors, on allocating our free cash flow, we evaluate them continually. And then finally, regarding debt pay down, you know, as we've said in the past, if we pay down debt now, we can't re-borrow.
Certainly can't re-borrow at our current rates. And so any cash that we currently hold costs us a little bit less than 2% pretax, so it's a pretty cheap option to ensure that we have plenty of cash to take advantage of whatever opportunities might present themselves.
So hopefully that gives you a good sense for how we think about it.
Kevin Ellich - RBC Capital Markets
Yeah. That's helpful.
And then just one last quick question. On the delays you guys we fear still experiencing, a competitor mentioned this morning that it looks like Medicare is going to speed up these certification process.
Have you guys heard the same thing, or what's your expectation on that front?
Rich Whitney
We, of course, are working at the federal level and at the state level and we've seen honestly very little progress at this point in time. There was sort of one glimmer of hope in that Texas, which is one of the bigger problem states and had previously said that they would literally not certify any dialysis centers for the balance of 2009, recently came out and said that they would certify 22.
Only five of those are DaVita centers, so it's a small glimmer of hope, but at least it's some progress, really nothing else to report on that matter at the moment.
Operator
And your next question comes from the line of Gary Lieberman.
Gary Lieberman - Wachovia
Thanks, good afternoon. I guess maybe just a follow-up on the last question regarding the certification process just to get a little bit more background, if you guys understand it.
What is it specifically? Is it just state budgets that they are constrained and they don't have manpower to certify the facilities, or is there something else going on?
Rich Whitney
No, it's exactly what you said.
Gary Lieberman - Wachovia
Okay, and then maybe if you could give us an update on some of the new initiatives and kind of where you are with regards to your expectations for the costs associated with them through this point in the year?
Rich Whitney
Sure. The short story is that they are halfway through the year.
They are on track with our plan in aggregate and individually as well. The segment loss for the quarter was about $4 million and right now we're not changing our outlook in terms of what our expectations are for the balance of the year.
Gary Lieberman - Wachovia
Okay, and then I guess just one final question on the cost side of the business, with regards to heparin, is there anything that that you guys are, have done or are trying to do to try to mitigate some of the increased costs of the drug?
Rich Whitney
Yes. First of all, I should note that the maker of heparin Kabi has recently raised its list price by another 30%.
And this is on top of four-fold increases from last year coinciding with their gaining a monopoly position on heparin and cumulatively this set of business decisions is one that’s going to be, I predict long remembered by the industry. And nevertheless, we continue to work on new protocols to further reduce utilization and in terms of new entry, there has been none yet, but we continue to expect that there will be other alternative suppliers over the course of the next couple of years.
Operator
Your next question comes from the line of [Kevin Fischbach].
Kevin Fischbach
I wanted to follow up on your comments on bundling. I guess if I heard correctly, you said that you felt like there was not an ability to offset the 2% rate cut going into bundling in 2011.
I wanted to just make sure I had that right.
Rich Whitney
Kevin, it's sort of too early to tell right now. We have, obviously we have clinical teams looking at various opportunities to potentially offset the 2% reimbursement cut without adversely impacting our clinical outcomes.
But, there is no magic bullet, and as we sit here right now, we don't have the ability to quickly offset the 2%. And as you think about entering bundling, there are really both risks and opportunities.
On the one hand, there's a 2% cut, and on our Medicare revenue, that's about $60 million hit to DaVita. And CMS could get the bundled reimbursement rate wrong.
So the impact could be greater. On the flip side, while we don't yet know how to maintain clinical outcomes while reducing our costs, as we've said in the past, it's our belief that any time you take something from the point that it is essentially free, and there are no trade-offs, and make it an actual cost and require trade-offs, we think that we will be able to innovate and find ways to maintain or improve clinical outcomes and have at the same time lower resource utilization.
And in fact that's what CMS wants. But as we sit here right now, we start out at least 2% behind.
So there is certainly going to be a transition period.
Kevin Fischbach
Okay. And then, I guess you mentioned, just thinking about the risk to the bundled rate, or certainly the proposed rate that might be, I have some issues with it when it's proposed.
You mentioned the Part D drugs. Are there any other issues that as an industry that you're concerned about that you would highlight that people should be thinking about coming into the wagon and that you want to make sure is fixed in the final rule?
Rich Whitney
Well, of course we haven't seen the draft rule yet. So until we do, it's difficult to say.
We're generally just concerned about them getting the number right, using timely and accurate data. And then, in these kinds of rules, there are any number of provisions that could create the opportunity for reimbursement leakage.
So things like outlier pools, various risk adjustors and things like that. There have been a lot of different things talked about.
We'll see what ultimately comes out in the proposed rule. And then of course there will be a common period and industry will work with CMS and provide its feedback and the rule will undoubtedly change from preliminary to final.
But, as we stand here right now, those are the kinds of things that we are worried about.
Kevin Fischbach
Okay. No, that's helpful.
If I'm reading your guidance correctly, looks like for the second half of the year, you're looking for, 443 to 473 in operating income and, just taking Q2 simply and annualizing it, that gets you to the high end of the range right there. I guess you mentioned a couple of things that the quarter a lot of things went well this quarter.
And I guess you've mentioned some of the issues facing the second half of the year, but I guess is there anything seasonally besides what you mentioned about managed care rates or, costs going up as the year goes on. I think seasonally in the business that would make Q2 not a good run rate?
Rich Whitney
Well, first of all, Q2 was higher than expected. So that's sort of where you start.
We had a really strong quarter on cost controls and labor productivity and we just have a concern about our ability to maintain our momentum there, particularly in the labor area. So that's the, that's the biggest point.
Seasonally, there are a few things. One, there are more treatment days in Q3 and Q4, so that's a positive.
And the flip side, our productivity tends to be seasonally lower, meaningless favorable, as we move into Q3 and Q4. And then as you think about the lower end of our range, it incorporates some impact from an assumed decline in private patient mix as well as some rate pressure on Medicaid and other government programs, as I mentioned in the prepared remarks.
That's how we get to the range that we're at.
Kevin Fischbach
Okay, and last question, any reason why you didn't raise the cash flow guidance along with the kind of implied raise in the operating income guidance?
Rich Whitney
Well, it's higher primarily because of working capital changes. If you look at the last 12 months or if you pull out the cash flow statement and look at the year-to-date six months versus the year-to-date from last year, the big part of it is working capital changes.
And as we look to the balance of the year, we think that many of those working capital items will be a use of cash. And so, that's the primary reason that we're not changing guidance at this time.
Operator
Your next question comes from the line of Darren Lehrich.
Sudeep Singh - Deutsche Bank Securities
It's actually Sudeep Singh calling in for Darren. Thanks for taking my questions.
First one, just going to back kind of the managed care environment, maybe if you could just talk about what you're seeing in terms of contracting, if that's changed at all, and how much of your 2010 book you have visibility into it right now?
Rich Whitney
Yeah, nothing in our outlook regarding payers has changed. As you know, at the end of 2007, we had some private rate reductions in a couple of situations.
And then since then, we've been achieving modest rate increases, generally consistent with the prior year's performance. And that said we're still in discussions with a couple of large payers and there're really are no material developments to report.
And in fact, nothing is eminent either. I guess the final point I would make is that as we've said before, we're absolutely willing to accept some losses of private patients in order to maintain acceptable rates.
Sudeep Singh - Deutsche Bank Securities
Okay. And then just switching over to kind of your ancillary businesses, could you talk a little bit more about kind of what you're seeing with respect to your DaVita Rx business and kind of the contribution you're seeing from that as it relates to just your overall ancillary segment?
Rich Whitney
Sure. DaVita Rx is our specialty oral pharmaceutical distribution business and it is continuing to grow nicely.
It's about a, roughly $150 million run rate business. And we have said in the past that we expect that business to breakeven this year and it's on track.
Sudeep Singh - Deutsche Bank Securities
Okay, and then with respect to village health, how's the experience been like there? And given kind of everything that's happening down in VC and within CMS, do you really think that kind of village health model can kind of be, the payment model for the future in light of everything that's being discussed right now?
Rich Whitney
Yeah, we certainly think that there are some, some interesting opportunities in that area. As it relates to village health and remember there has been some confusion about this.
Remember, village health has a number of different activities, including our special needs plans, including our capitated demonstration projects, both in ESRD and pre-ESRD, as well as our disease management operations for private insurance plans. So in village health, one development is that we have set about a plan to discontinue our snips special needs plans business at the end of the year.
And they have had low enrollments and high administrative costs, and we've just determined that the model is not viable. The demonstration projects in the private insurance disease management continue on and are really delivering some encouraging clinical results.
That leads to your question about whether there are opportunities in VC. We do think that if you look at all the talk around healthcare reform, there's been a lot of discussion about disease management, cost management, and accountable care organizations, et cetera.
And we think that we are very well positioned to participate in those kinds of reforms within the dialysis business, and given the investments that we've made in integrated care management, whether it be within village health, whether it be our oral pharmacy business, whether it be our vascular access management business, et cetera, et cetera. And so we look forward to discussions with the government and other payers about how we can bring those capabilities to bear.
Operator
Your next question comes from the line of Andreas Dirnagl.
Andreas Dirnagl - JPMorgan Securities
Thanks guys. First of all, our condolences to Kent, but Rich, you should know that you've been very Kent-like so far on the call.
Rich Whitney
He'll be happy to hear that and I'll pass along your thoughts to him.
Andreas Dirnagl - JPMorgan Securities
Great, just a couple of questions. I just want to make sure that I'm hearing you correctly in terms of what you said so far in terms of what's going on with private payer rates.
You said, as you said for a couple of quarters, that you're willing to lose some volume if rate pressure is too high from the private payers, but just be clear, you haven't had that to date in a significant way, correct?
Rich Whitney
Correct.
Andreas Dirnagl - JPMorgan Securities
Okay, and then also, we've been hearing obviously private rate pressure has been a concern for a while. But, clearly given the results in the quarter so far, I don't think there's anything you can sort of point out and say that is specifically sort of driven by that but now I guess we're starting to hear maybe you're getting a little bit of a mix shift because of the economy.
Is that less from current patients losing their coverage and more from sort of new patients as they roll on, perhaps having a slightly lower private mix shift because of the fact that they don't have coverage?
Rich Whitney
Yes, more new patients.
Andreas Dirnagl - JPMorgan Securities
Okay, good. Just quickly then on the de novos, clearly it's a frustration.
Is it at all impacting sort of your de novo development plans, or are you just continuing to go forward at the same rate and they will get certified whenever they get certified?
Rich Whitney
Yeah, Andreas, it certainly is factoring into our decisions that we make on our de novo development plan, but it's state by state because it's not an equal problem in all states. In fact, some states are certifying along the same timetables they always have.
So we are taking it into account when we decide whether to move forward with a project or not.
Andreas Dirnagl - JPMorgan Securities
So, maybe you're basically seeing a little bit of a geographic shift in terms of where you're focusing.
Rich Whitney
Yeah, and remember, the pipeline is from project planning and execution, et cetera, takes some time. So some of the centers we're opening right now have been in the planning works for quite sometime.
Andreas Dirnagl - JPMorgan Securities
Okay.
Rich Whitney
We are in terms of evaluating our investments, we are taking into account our best view as to the time delay.
Andreas Dirnagl - JPMorgan Securities
Sure, and then sort of maybe final question from me. In terms of that evaluation on investments, the term often gets banded around.
Rich, can you sort of define what you would define an MDO as in terms of maybe patient count?
Rich Whitney
I don't have a specific definition for you, but there is about a half dozen of them. LeAnne, do you happen to know what the range of patients is?
Andreas Dirnagl - JPMorgan Securities
A guess would be fine.
Rich Whitney
Yeah, up to 12,000 and as small as a few thousand.
Andreas Dirnagl - JPMorgan Securities
Okay. So here's the question.
It's been clear that you guys have very clear parameters in terms of what you want to utilize your cash for, and you outlined it again in terms of growth opportunities, share repurchases and debt. Where you maybe hearing some frustration from me and from investors, is while that's good in theory, you guys haven't done anything significantly on any of those fronts in a while.
You've now got over half $0.5 billion of cash on the balance sheet, which is enough to purchase one of those MDOs for 100% cash, which you likely wouldn't do. That's not even taken into account the ability to lever up that cash.
So the question really becomes, this is not an issue that's going to go away. The cash continues to build, and even with your sort of more muted outlook for cash flow for the second half of the year, that cash balance is still going to continue to grow.
Where does it hit a point where you've got to do something with that cash rather than just letting it collect a percent or two in the bank?
Rich Whitney
Okay, fair question. Again, the levels you're seeing right now I think are a little bit artificially high because of the timing issues.
Nevertheless, as you think about use of cash, why haven't we done a deal, because we haven't been able to find one at a price that we deem to be reasonable. And so we're being patient and disciplined and hopefully we will find situation where the price we think is reasonable is viewed as reasonable on the other side as well.
So we continue to work hard on that but we haven't yet found that situation that works for both sides. As it relates to share repurchases, remember, we've bought back about a quarter of a billion dollars of stock over the last 12 months or so, and so it's not that we haven't been doing any.
Our posture in the last four or five months has been more cautious, as one would expect given the amount of uncertainty down in DC, in particular. And then debt paydown, I mean we could just pay down the debt, which wouldn't be a bad idea, given that we have maturities coming in '11 and '12, but as we've said, we can't reborrow it at anywhere near the same rates.
So for the time being, it seems to be sensible for us to hold the cash as opposed to choosing to pay down the debt. I don't know if that answers your questions, Andreas.
Andreas Dirnagl - JPMorgan Securities
It certainly helps. I mean as an aside, I think it's clear that that debt repayment certainly is not an issue.
Maybe just to end, can you remind us where your current repurchase stands in terms of what you can still spend?
Rich Whitney
I think it's around $150 million. We'll check the number and give you an exact one.
Although obviously those can be changed at any time, so I don't know that it's necessarily a meaningful number.
Operator
Your next question comes from the line of Justin Lake.
Justin Lake - UBS
First question, just on the bundle, I want to make sure I understand. You outlined in your comments, the bundle is going to include a 2% cut.
I just want to make sure, is there anything in the legislative language that gives CMS the authority to go beyond that?
Rich Whitney
No. In fact, it specifically needs to be budget neutral.
LeAnne Zumwalt
Well, I would add to that.
Rich Whitney
Minus 2%.
LeAnne Zumwalt
However, pharma utilization will be set at the lowest of '07, '08, '09. So in fact, it could be lower as you enter bundling because of that adjustment on pharma utilization.
Justin Lake - UBS
Then if you think about the rate that's going to come out, I think there's some concerns in the market as far as the rate being somewhere below, let's just call it an average Medicare rate in the $240 range. Can you talk about the secondary pieces as far as may be outliers or rural adjustments that might be included there and how that could affect you?
LeAnne Zumwalt
CMS does have some flexibility in the area. We know that they will develop an outlier policy.
They could expand the case mix adjustors, so there's patient elements and those two would be in the category of patient adjustments. They also have the flexibility to implement some facility adjustments.
One that they would have to implement is low volume, high cost. So it was defined in the MIPPA legislation, but they could divide some other adjustors.
So we're going to be careful to watch those and analyze how those pools of money are set aside and how they might impact any base rate that comes out. So I think it's going to be all of us doing a little bit of work to just understand how the different adjustors interact with the base rate.
Justin Lake - UBS
If you think about those adjustors, is there anything about your subset of facilities as far as whether it's low volume, high outlier facilities that might look different versus the average in the country?
LeAnne Zumwalt
Well, with 116,000 patients, we're probably generally going to be, patient characteristic wise, probably pretty similar to national averages. However, on a facility basis, I think there can be some differences.
We operate in California at a very high cost state. There is a geographic wage adjustor that's existed and will continue to exist, so some of those things can favor one organization versus another.
In general, we'll just have to take a look at it and see how we come out.
Justin Lake - UBS
So rural facilities, things like that, you have a similar?
LeAnne Zumwalt
Yes. We do.
Justin Lake - UBS
Then just lastly, on this subject at least, the comment period. How long do you expect that to run for?
LeAnne Zumwalt
Well, most comment periods are 60 days.
Justin Lake - UBS
Right.
LeAnne Zumwalt
Have asked for a longer period, and so we will hope that CMS will grant that. This is a very complex rule.
So, I think it's going to take probably longer than 60 days for most organizations to be able to get their hands around it.
Justin Lake - UBS
Just one last question on the payer mix shift. To the extent that you're seeing it occur in new patients rather than existing, I would assume any change there is going to take a while to really get into the run rate as far as affecting your overall mix.
Is that the right way to think about it?
Rich Whitney
I think so, yes.
Justin Lake - UBS
Can you give us an idea, I mean if we think about the 13% that you report as private pay, how much different is that number on new patients that you're seeing right now?
Rich Whitney
Well, let me come at it a different way just to give you a sense for magnitude of what we're talking about. Our mix of non-government patients used to round up to 13% and now it rounds down to 12%.
So, that's sort of the magnitude of the shift that we've seen over time. Again, up until now, it hasn't had a significant impact on our revenue per treatment, because the mix shift has really been focused on the lower paying end of the business.
Justin Lake - UBS
What period of time is that, Rich?
Rich Whitney
Last few quarters.
Operator
Your next question comes from the line of Mark Arnold.
Mark Arnold - Piper Jaffray & Co.
I just have a few follow-up questions I guess, as most of mine have been answered. Just back to the cash balance question, maybe to ask it a different way, what level is too much cash on your balance sheet, Rich?
Rich Whitney
Well, I don't know how to answer that, because we are constantly evaluating the different opportunities to utilize our cash. So, what might be an adequate level at one time could very well not be an adequate level or be too much theoretically at another time.
So I'm not really sure how to answer that. As we sit here right now, we are comfortable with the level of cash that we have on hand in part, because it's higher than we expect it to be as the year progresses.
Secondly, because as we look at our opportunities, our view right now is that it's more prudent for us to hold onto our cash as opposed to paying too much for an acquisition or buying back more of our stock ahead of a fair amount of uncertainty in Washington. The good news is that it only costs us a little bit less than 2% pre-tax to hold onto the cash.
So, it's just a very cheap option on liquidity. Again, we have to remember that our debt structure is at, we almost top ticked the market in terms of the financing bubble, if you will, and so our rates are very attractive and we wouldn't want to pay down a bunch of debt and then have to reborrow it at higher levels or have to redo our financing structure in order to allow for reborrowing.
Mark Arnold - Piper Jaffray & Co.
Understand. The bulk of your senior debt doesn't mature till I believe it's 2012.
So to what extent, are you able or willing to look in or to lock in your floating rate debt at those LIBOR rates, the low LIBOR rates we're experiencing today?
Rich Whitney
We are just to give you a couple of facts. Right now, we are 64% fixed, and if you net our cash, which is the natural hedge, then it's more like 79% or 80% fixed.
So we are willing obviously to fix some amount of debt. The percentage of our bank debt that's swapped right now is about 30% and we have a little less than $190 million of swaps that roll off in the back half of the year.
So our percentage of fixed absent doing any new hedging transactions would trend down over the course of the year. So that's just a little bit of background facts.
In terms of our posture on hedging, we feel like the mix of fixed versus floating right now is fine and obviously you can't lock in today's whatever it is, 40 basis points of LIBOR forward. The curve obviously goes up from there.
Further, I guess the last point is that we're not that many years away from the maturity on the bank debt, and so our ability to hedge is limited. We literally could only hedge until 2012 and that would come with some risk because you never wait until the maturity to refinance your debt.
So that's kind of a limiting factor on how much hedging would be prudent to do as well, but we've generally had the posture of having a mix of fixed and floating as opposed to trying to predict whether rates will move above or below the forward curve on LIBOR rates.
Mark Arnold - Piper Jaffray & Co.
One last clarifying question. There's been a number of questions about the bundle.
I guess just the way that you phrased it in your prepared remarks, where you said that the concerns about the impact from the bundle of being greater than the 2% mandated cut. I think this is the first time you guys have really talked about concerns as it relates to that.
Is there anything that's happened recently that makes you more worried about the cuts extending beyond just 2%? Or is this just we're getting closer to the point where that proposed rule is going to be released and it's one of the areas of concern for the industry?
Rich Whitney
It's really the latter. So anytime you have a big reimbursement change like this, it's always a risk that they get the number wrong or that there's leakage because of some of these provisions that LeAnne mentioned earlier.
So I think that's generally a concern when reimbursement changes the way it is or when you move to a perspective payment system. So we've always had the concern.
It's just getting closer now.
Operator
Your next question comes from the line of John Ransom.
John Ransom - Raymond James & Associates Inc.
You made a comment in your prepared remarks about some concern about Medicaid rates. Could you perhaps give us an update on which states have not yet set your rates for the state fiscal year beginning July 1?
Rich Whitney
Well, there's a laundry list of states that are actively considering cuts, some of which have implemented cuts. I think it would be fair to say virtually every state has budget pressures.
So I don't know that it would be productive to go down the list, because it's literally well over a dozen that are in very active stages of proposed cuts.
John Ransom - Raymond James & Associates Inc.
It's a little odd because most of the companies who have reported seem to be fairly satisfied with kind of 2009-2010 rates have been set and that states they [rest lose] in the 57% matching funds when they start cutting Medicaid. Then some states providers have successfully sued for below cost rate increases.
So it's unusual, dialysis will be singled out among all the other single services.
Rich Whitney
I don't know. If you want, you can catch up with us afterwards and we can take you through the list of states that have pending proposals, some that have had implemented proposals and others that are considering.
We obviously have a very active state legislative team that works on all these issues. As well, in addition to the state Medicaid programs, there's other government programs, I mean literally every government program is under budget pressure.
So to give you another example, veterans administration, for which we have reasonable number of patients has bantered back and forth on the potential cut and it's unclear whether that will actually happen or not, but that's sort of throw that in with the Medicaid as being an area that is of some near-term concern. I should reiterate, as I think I've said that our view on these matters is incorporated into the guidance that we have for the balance of the year.
John Ransom - Raymond James & Associates Inc.
So in terms of what might get "worse" from the second quarter, because obviously you guys put up a wonderful quarter. You mentioned the state Medicaid.
You mentioned maybe the cost containment, the cost control efforts may not be there in such intensity. Is there anything else that we should think about back half of the year?
Rich Whitney
I would say it's maintaining our cost management momentum, in particular labor productivity, which was strong this quarter and Medicaid and other government programs. I guess the third thing that we did mention was to the extent that we see a more significant erosion in the private.
John Ransom - Raymond James & Associates Inc.
Okay.
Rich Whitney
Yes. That trend continues and/or gets more significant.
That would be the other factor that would lead to us be more cautious about the back half of the year than to just say take the current number and grow it from there.
John Ransom - Raymond James & Associates Inc.
Just drill down on some of the things you guys said historically about the private market. In the past, you've mentioned pressure from midsize chains in certain markets kind of forcing you to go in-network or take network pricing at lower rates.
Is that pressure abated at all, or is that still something you guys wrestle with daily?
Rich Whitney
I don't think we've ever said that. We certainly have competition in lots of our markets, but I think that our view is that literally every significant provider understands that there is a significant deficit in terms of the reimbursement versus our costs on the government side.
That's 87% to 88% of our business. The private rates on the balance have to be sufficient to offset that government deficit in order for the business to work.
I think everyone pretty much understands that. So I don't know that we've said in the past that we've had pressure from competition to do one thing or another with the payer.
John Ransom - Raymond James & Associates Inc.
That was a big comment at their capital markets today. I just didn't know if that was one of those things that had abated recently because you guys have not mentioned it.
Have the losses from Village Health and specialty, has your view changed on that mid-year from where you were at the beginning of the year?
Rich Whitney
No. We are on plan.
John Ransom - Raymond James & Associates Inc.
One of your competitors talks about a global dialysis bundle or even take all the costs of dialysis patients, I know you guys have the demonstration project, but what's your longer-term view on a global Medicare bundle and do you think the government is serious about that or do you think that's more theoretical at this point in time?
Rich Whitney
I think it's possible. I think that it seems to us, it would be a sensible way to manage this patient population, both from a clinical standpoint and an economic standpoint.
Obviously, there's a lot of challenges to get from where we are today to there, but the implementation of the bundling system is in some ways a step towards more integrated care. So I know we have to have a longer-term view I think, but within the context of a longer-term view, I think that it's quite possible that we could see movement towards that area.
In fact, dialysis may be one of those segments that's best positioned to ultimately deliver on the promise of the integrated care. People have been talking about this for two decades now.
This is a business that's highly consolidated and mature and has a couple of significant companies that have the scale and wherewithal and are increasingly investing in the capabilities to be able to deliver on integrated care. So, no, we think that's real.
Does that means that something would change with Medicare, which is obviously the biggest customer and the one that would have to make a move for it to ever be significant? Do we think that would happen this year?
That seems unlikely.
Operator
Your next question comes from the line of Gary Taylor.
Gary Taylor - Citi
I missed the first three or four minutes. So, Rich, I don't know, did you quantify the payer mix shift in terms of impact on the revenue per treatment in the quarter, or did you just give it in terms of the percent of patient mix?
Rich Whitney
Gary, the first three or four minutes is when we gave all of the pertinent information.
Gary Taylor - Citi
I know. I missed every comments, everything.
Rich Whitney
We did not quantify it. We sort of characterized it as having a small impact and the reason why to-date the impact has been relatively small is that the mix shift appears to be disproportionately impacting the lower end of our non-government mix, lower end meaning the lower rate and as you know, we've been saying for, I don't know, three quarters now that this is an area that we're watching and an area that in our view is a risk, if the US continues the period of sustained high levels of unemployment and people continue to lose their insurance.
Gary Taylor - Citi
Is the disproportion impact on the lower rate, is there something intuitive about that being service industry job loss and the benefits being less rich or the rates being lower? Is there something intuitive about that or just coincidence?
Rich Whitney
We have a number of hypotheses, but we don't really know.
Gary Taylor - Citi
On the G&A, I think my model only goes back 10 or 12 years, but I don't think I've ever seen a 9.5% of revenue in G&A and it jumped about $16 million sequentially. Did I miss something on that as you talk about where on a dollar basis you think that G&A number goes?
Rich Whitney
I think you may have missed something. Our all-in percentage was 8.7% in Q2.
And that was down from 8.8% in Q1. We also reported for the dialysis segment, which is often more meaningful, and in Q2 that was 7.3%, down from 7.4% in Q1.
Gary Taylor - Citi
Okay.
Rich Whitney
So, you know, as we've said before, we continue to focus on getting leverage at that line item and we've actually made them making some pretty good progress over the course of the last few years, and we'll continue to work away at it going forward.
Gary Taylor - Citi
Yeah, just an error in my model. Sorry for that and then again on the gross margin, it looked very, very good, much better sequentially, which seems a little atypical and you really just talked about labor productivity driving that nothing else there really unusual helping you there?
Rich Whitney
Yeah. When you say gross margin, if you mean patient care costs?
Gary Taylor - Citi
Yeah, or the inverse of that so yeah.
Rich Whitney
The trend there was the patient care cost for 68.6% in the quarter of revenue. And sequentially that was down from 68.8%.
So it was a small improvement, and on a per treatment basis, it was actually up about 0.9% sequentially. Then year-over-year, which is usually the way we look at it, it was up about 1.3% from the same quarter last year.
And that's reflective of, obviously labor, normal labor rate increases as well as higher pharmaceutical costs. So we had EPO price increases and heparin price increases during that time period.
Gary Taylor - Citi
Okay. Last question--
Rich Whitney
And a lot of that was offset by some solid cost management.
Gary Taylor - Citi
Last question, when would this Kabi price increase impact you? I was thinking you had price protection kind of through the middle of this summer.
So would the next couple quarters be impacted by that rate increase?
Rich Whitney
Yeah, it was effective June 30. And, no, we don't have price protection that extended beyond that.
Gary Taylor - Citi
Can you refresh us on what your quarterly heparin spend is on a dollar basis?
Rich Whitney
Yeah, we've never disclosed that. We don't typically disclose line item expenses such as that.
Gary Taylor - Citi
All right.
Rich Whitney
Let me try to be a little bit helpful, though. I can say that since the significant price increases were implemented last year, we've made very good progress in driving down utilization in that area.
And so, while it's still a negative for us, it's nowhere near the, that kind of impact as it was the first time around when the price increases came through.
Gary Taylor - Citi
[Personius] is talking about potentially using Citrasate as a substitute for heparin. Do you guys have any comment on that yet, is that something you've looked at, that that may be in the bucket of opportunities here?
Rich Whitney
Yeah, in fact, LeAnne is very close to that. So, LeAnne, why don't you--
LeAnne Zumwalt
Yeah, so we are working with FMC on a pilot to test adding Citrasate to the dialysis, which could lower our dependence on heparin, but it wouldn't eliminate it completely, but it certainly has a potential to make a nice reduction and will work with them to see if we can get it implemented.
Rich Whitney
That would be one example of the things we're working on, we have a number of initiatives that we're working on to try to continue to make progress in that area.
Gary Taylor - Citi
If that pilot was successful, where we talking six months from now, nine months from now, where you might actually be in a position to benefit from that? Any thought on the timeframe?
Rich Whitney
I think it's too soon to speculate.
Operator
Your next question comes from the line of Art Henderson.
Arthur Henderson - Jeffries & Company
Hi. Thanks for taking the question.
Most of them have already been answered, but I was just curious, are you planning on having a conference call when this proposal, this bundled proposal comes out to discuss it? Or what should we look for from you during that point in time?
Are you just going to kind of hunker down and figure it all out and respond to the proposal and that's it? Or is it going to be something more active with the street?
Rich Whitney
We don't have any plans for a conference call right now. We don't really know when it's going to come out.
Maybe it will be partly dependent upon that. It would take us some time to be able to say anything intelligent or semi intelligent about the rule.
So we'll just have to see when it comes out and how that falls with our normal sort of scheduled communication with the street.
Arthur Henderson - Jeffries & Company
Okay, that's fair. Rich in, your opening remarks, and I kind of caught the tail end of what you were saying.
You were talking about the bundle and the oral medications and I was wondering if you could just go back over that one more time just in terms of what that issue is.
LeAnne Zumwalt
Well, the house bill -- this is LeAnne include some expansion of oral medications or allows for the extension of oral medications into the bundle. The difficulty that we see is for CMS really to be able to properly size that opportunity and see current patient trends with respect to orals.
Number of issues I could go through, but the kind of the top couple are one, as you know, only a fraction of the Medicare beneficiaries are in the Part D program. So they don't have data on everyone and they'd be bringing in and covering a benefit for people who are in the private sector today or don't have coverage.
So they will have a limited universe. They will look at older data most likely.
They don't have the current data, and both compliance rates and penetration rates, and in fact, even the price increases from the manufacturers themselves over the last year would make the review challenging and actually the answer quite different if you had current facts versus old facts. So that's our concern.
And if you short change that it really will have a negative impact on patients.
Arthur Henderson - Jeffries & Company
Okay. That's helpful.
Okay. And then lastly, the MSP extension talks, are they pretty much off the table with what's happening, with reform on Capitol Hill or is it still kind of out there loosely being discussed?
Rich Whitney
I wouldn't say that it's off the table or on the table as we sit here right now. I think if you step back from it, we think that it's very good policy.
You know, if we can pay for at a time when the government needs significant pay-forwards, and I mean it's also good policy, I think we've said this in the past, but it's worth repeating, it's also good policy because our patients are uniquely discriminated against. You think about it, the paying your insurance, private insurance premium for years or decades even and then at the time that you need it most, you become a dialysis patient, then your benefit only lasts for 30 months.
So, you know, we think that's really a form of discrimination that does not make sense and is really not fair. In addition, in extending the time that private insurers are responsible for dialysis patients we think it would encourage more investment in preventive care and wellness programs and the like.
And this provide more incentive for payers to want to engage in disease management type of activities with providers and others. So, it's difficult to predict the politics in any one year.
So we usually stay away from it. But, we still think the likelihood is reasonably high that it will happen over the next few years.
Arthur Henderson - Jeffries & Company
Yeah, okay. All right that's fair.
And then last question and I'll jump out. On the de novo certification, obviously you're waiting for that but I think you mentioned in your commentary that perhaps that could slow your velocity of doing those.
Your guidance on that issue from a CapEx perspective hasn't changed as of yet, that's correct?
Rich Whitney
Correct.
Operator
Your next question comes from the line of [Chuck Ross].
Chuck Ross
Hello. Forgive me if I missed this.
Do you give CapEx and kind of acquisition expectations, dollar amounts for the year?
Rich Whitney
We have not changed them from the guidance that we gave earlier in the year and that guidance was $100 million, approximately $100 million for maintenance CapEx and approximately $250 million for acquisitions and de novos combined. And of course that second bucket in particular is sort of always, the caveat always is it's really depends upon the availability of attractive investment opportunities.
But nevertheless we're on track for both of those numbers right now. As it relates to de novo, kind of following up on the last question, our guidance there is to do around the same number that we did last year, which was 87.
We haven't changed that guidance as we sit here right now. And we opened 41 through the first six months of the year.
So we're roughly speaking on track with that original guidance.
Chuck Ross
Okay. One of the big reasons you're not buying back stock or interested in making a number of midsized acquisitions is the uncertainty with healthcare.
Why, then are you willing to invest $250 million in acquisitions in de novo, given that uncertainty? In other words, why wouldn't you pull way back on those two?
Rich Whitney
Yeah, well, we are interested in doing acquisitions, both in sort of the normal one see-two see acquisitions, as well as the possibility of acquiring a midsize dialysis organization. A comment that we made was that given the uncertainty, it may be that we would only be interested in one as opposed to multiple acquisitions of midsize organizations.
And that's really reflective of cash that we have on hand, the maturities that we have and our debt structure, as well as the uncertainties in the capital markets and the economy and healthcare reform. So it was a bit of an off the cuff comment, but I think it's sort of accurate in terms of capturing the way that we're thinking about acquisitions right now.
Chuck Ross
Okay. I guess my point is that you're interested in doing some acquisitions to some extent you're interested in continuing to do de novos, so you're willing to spend 250 million there, but yet you're not willing to buy back stock.
I would think that the uncertainty of healthcare reform, if it's applicable to buying back your stock, would also be applicable to that. So why spend 250 on the one, but not the other?
Rich Whitney
Yeah, well, we're always evaluating the different alternatives, both in the absolute and against each other. And typically we lean more towards spending capital, all else being equal, on acquisitions than we do on buying back our own stock, although we have historically done a lot of both.
And the reason why the priority is in the order that it is, is because acquisitions not only presumably deliver a financial return, they also have an impact on your strategic position, whether it's improving your local market position or network or whether it's generating regional scale economies or whatever the case may be. So that's why it's in the priority of order that it's in.
I don't know. Have I answered your question?
Chuck Ross
Partially. I guess what I'm trying to get at is, the uncertainty which is keeping you from buying back stock I would think would apply just as much to acquisitions in de novos.
So why are you still willing to do acquisitions in de novos with the big uncertainty of healthcare reform?
Rich Whitney
Because it's not an all or nothing thing. It's an on the margin thing about how aggressive you're willing to get on one or the other.
And once again, I think it's important to note that we did spend a quarter of billion dollars buying back our stock not that long ago. So it's not that we haven't chosen to use some of our cash for that activity, and we've also chosen to use some of it for acquisitions.
And we have chosen to hang on to some of it in the hopes that we'll have good opportunities in the coming quarters.
Chuck Ross
Yeah. The great thing about DaVita is the cash just keeps coming, so the 250 that you spend on share buybacks, we're right back asking you for more because the cash keeps pouring in.
Have you slowed at all the de novo process? In other words, I understand that you have to go out there and it takes a while to find the right site to get one up and running.
It's not something you decide to do a month before it opens. Has there been any slowing in the process?
I know you're not going to give us 2010 guidance, but should we expect there to be any slowing in the de novo process, or no?
Rich Whitney
I would say that we are placing more emphasis and scrutiny on our investments in light of the certification delays, again, it is very state-specific. But nevertheless, because of that, I would say it's fair to think about there being some, some decline in that trend, although right now, I wouldn't predict it would be meaningful.
Operator
You have another question from the line of Andreas Dirnagl
Andreas Dirnagl - JPMorgan Securities
There's been a lot of chatter in the market about the bundle and that it might be released eminently. I just wanted to sort of make sure, I mean there are timeframe that you're thinking of?
I know it's hard to predict the exact date, but is it a sooner rather than later event, or--
Rich Whitney
For the announcement of the rules?
Andreas Dirnagl - JPMorgan Securities
Yeah.
Rich Whitney
We gave that answer in the first three minutes, Andreas. We think its our belief is that it's going to be an August event, but we really don't know.
There were rumors it was going to come out a few days ago. There were rumors it was delayed until mid-August.
So, we don't know for sure, but it is our anticipation that it will be coming out before the end of the summer.
Andreas Dirnagl - JPMorgan Securities
Okay, great. Maybe this is a naive question that I just need to be educated on, but how do you set a rate when 2009 isn't done yet and 2009 is one of the years that is going to be included?
Rich Whitney
Great question.
LeAnne Zumwalt
We want the answer to that one, too. I'm sure that with the final rule, be updating for the most current trends.
It's clear that it would be difficult for us or CMS or anyone to estimate 2009 utilization, for example, so we have to rely on the fact that they do update the bundle as they should, and we'll certainly work with them to help them understand those trends.
Andreas Dirnagl - JPMorgan Securities
Great. I just thought I was missing something.
Thank you very much.
Operator
And you do have another question from the line of Justin Lake.
Justin Lake - UBS
My follow up has been answered. Thanks a lot.
Operator
And if there is any more questions, please press star, then the number one on your telephone keypad. And I'm currently showing no questions at this time.
Rich Whitney
Great, thank you, operator. Thank you all for your continued interest in DaVita.
And we look forward to talking to you again in three months.
Operator
This concludes today's conference call. You may now disconnect.