Nov 5, 2010
Executives
LeAnne Zumwalt - VP of IR Richard Whitney - Chief Financial Officer Luis Borgen - Chief Financial Officer and Senior Vice President Jim Gustafson - Vice President of Investor Relations Kent Thiry - Chairman and Chief Executive Officer
Analysts
Andreas Dirnagl - Stephens Inc. Gary Lieberman - Wells Fargo Securities, LLC Justin Lake - UBS Investment Bank Kevin Ellich - RBC Capital Markets Corporation Darren Lehrich - Deutsche Bank AG Jeff Hoernemann - Feltl and Company, Inc.
Mark Arnold - Piper Jaffray Companies Gary Taylor - Citigroup Inc Kevin Fischbeck - BofA Merrill Lynch
Operator
Good afternoon. My name is David, and I will be your conference operator today.
At this time, I would like to welcome everyone to the DaVita Q3 2010 Earnings Call. [Operator Instructions] Now I'd like to turn the call over to Mr.
Jim Gustafson. Sir, you may begin your conference.
Jim Gustafson
Thank you, David, and welcome, everyone, to our third quarter conference call. We appreciate your continued interest in our company.
I'm Jim Gustafson, Vice President, Investor Relations. And with me today are Kent Thiry, our CEO; Luis Borgen, our CFO; as well as LeAnne Zumwalt and Rich Whitney.
I'd like to start with our forward-looking disclosure statements. During this call, we may make forward-looking statements within the meaning of federal securities laws.
All of these statements are subject to known and unknown risks and uncertainties that could cause the actual results to differ materially from those described in the forward-looking statements. For further details concerning these risks and uncertainties, please refer to our SEC filings, including our most recent quarterly report on Form 10-Q and annual report on Form 10-K.
Our forward-looking statements are based on information currently available to us, and we do not intend and undertake no duty to update these statements for any reason. Additionally, we'd like to remind you that during this call, we may discuss some non-GAAP financial measures.
A reconciliation of these non-GAAP measures to the most comparable financial GAAP financial measures is included in our Form 8-K submitted to the SEC and available on our website. I will now turn the call over to Kent Thiry, our Chief Executive Officer.
Kent Thiry
Good afternoon or evening, depending on where you are. Thanks for joining our call.
We had a solid quarter in line with our previous expectations. I'll try to quickly cover four topics: number one, clinical outcomes; number two, bundling; number three, international dialysis; and number four, our outlook.
First, I'll review our clinical outcomes first because we are first and foremost a caregiver company at this point, serving nearly 124,000 patients. With respect to adequacy, which is essentially how well we are doing at removing toxins from our patients' blood, this quarter, 96% of our hemodialysis patients had a Kt/V greater than 1.2.
That's a 90-day data. Second, with respect to vascular access, 67 of our patients have fistulas, the preferred form of vascular access, also a 90-day data.
And third, with respect to anemia management, physicians have managed 69% of our patients to hemoglobin levels between 10 [g/dL] and 12 [g/dL] over the last three months. For these and virtually all other clinical measures, our patient outcome has compared very favorably to all national averages.
And our quality of critical care not only results in healthier patients, but also drives reductions in hospitalizations and surgical procedures and therefore, generates significant savings for the U.S. healthcare system.
Subject number two is bundling. We have notified CMS that we will opt into the bundled reimbursement system beginning January 1, 2011.
Our data says that most providers have made a similar decision as far as opting in. While short-term economics would have argued for transitioning not 100% of our centers, opting in was the best long-term choice.
I will make two other points on bundling-related issues. We are intensely working on several work streams to offset the payment cuts.
And as to the second cut, that being the transition adjustment, the kidney community has been working with CMS and members of Congress asking that CMS revise their estimate based on the actual data of how people are deciding on the opt-in versus transition choice. Our request is consistent with Congressional intent in the original legislation and is unambiguously the right policy decision.
The good news is several members of Congress are absolutely persuaded that a fix is the right and fair thing to do. The bad news is that the combination of a lame-duck session and the first half of 2011 legislative season, which could be incredibly volatile, could make for a very difficult period in which to get a fix attached to anything been done.
Without a correction, without a fix, the government will be seriously underfunding the dialysis community, further stressing providers who are already losing money on Medicare. The third subject is international dialysis.
We are pursuing launching dialysis operations in several countries outside the U.S. We believe the long-term upside opportunity dramatically outweighs the downside risk, and that international markets can be a long-term growth driver for our shareholders, long term defined as the second half of this decade and beyond.
Some of the primary factors that led us to this conclusion include that the market is large, appears to have reasonable margins, is growing more rapidly than the U.S. market and there is significant share remaining outstanding.
In addition, privatization and government outsourcing trends are gaining some momentum globally with governments looking for scaled healthcare solutions. We realized that building an international business with attractive and sustainable returns will be challenging, will take time and will expose us to new risks.
In addition, of course, it will require a sustained financial investment, which will be dilutive to earnings over the next several years as we start up in order to acquire new operations. And Luis will provide some numerical guidance regarding 2011 on this subject in a few minutes.
Onto the next topic, which is our outlook. We are further narrowing our operating income guidance for 2010 to be in the range of $995 million to $1.015 billion.
As always, this range captures the majority of probable outcomes. We will not, unfortunately, be able to provide any specific operating income guidance for 2011 at this time.
The range of potential outcomes is simply too wide for it to be useful. Since we cannot do that, we thought it would be useful to step back and share some important thoughts on the future.
First, and perhaps most important, we feel that we are well positioned from a competitive point of view. And there is a solid probability that the risk-reward relationship of owning DaVita stock is attractive over the long term.
We'll cite three examples that just reflect this assessment about the long-term risk-reward profile being attractive. The first example is we decided to take advantage of the distinctively attractive debt market terms that were available now and to take on some debt as all of you know.
So you may not appreciate how attractive the terms were by doing it right now. Just two quick reference points.
It was the lowest yielding bond for any single B-rated offering in the last five years, period. And it was the lowest yielding bond for any healthcare offering with our credit rating ever.
So simply said, it was a very good time for us to do what we did. Our second example is that we are interested in buying back some stock and/or acquiring additional dialysis assets over time.
Many of you know that our long-standing communicated leverage comfort range is 3 to 3.5x. While we have pretty adequately been above and below, that historical perspective has not changed.
And then the third example is that we are in fact comfortable investing to establish a scaled international business and remain open to pursuing other healthcare service business opportunities that fit within our core competencies. I repeat, these are three examples that are consistent with our assessment that there is a solid probability we can offer an attractive risk-reward profile in our stock over the long term.
Having said that, it is important not to lose sight of some of the significant near-term issues we face. And let me cite a few of those risks.
The most significant of these uncomfortable risks is that we have had eight straight quarters of decline in our commercial mix from approximately 13% to approximately 11%. This decline did not moderate in the most recent quarter.
In fact, it has accelerated over the last two quarters, and this just reflects the continued economic realities of the U.S., including unemployment. Commercial patients, as most of you know, are the source of virtually all of our profitability as well as the source of subsidization of our Medicare deficit.
Up to this point, we have successfully offset this decline, as our performance reflects, with improved pricing on the remaining commercial book and strong cost controls. But neither of these solutions are infinitely available.
A quick tangent on commercial contracts because since our last quarter, some of you have asked us if we absorbed rate cuts in the two large long-term contracts we announced last quarter. The answer is no.
As we have said many times over the years, few payers can deliver on any price per volume tradeoff in a way that is sensible for a dialysis provider. And we are pleased with the commercial rate increases we've achieved over the last 24 months.
We are, of course, dependent on private rate increases as long as the Medicare economics are what they are. A second risk that's actually better characterized as a fact is that our wage and salary increases will be higher in 2011 than in 2010, and this is simply a common sense reflection of the reality that the healthcare service economy is relatively healthy compared to America's general economy.
The third and final risk for people to continue to pay attention to, as we do, is just the amount of operating change the bundle will entail. Implementing the bundle means not only changes in pharmaceutical products and protocols, but also changes in our billing processes, changes in capturing case mix adjustor data, changes in billing secondary payers and substantial changes to clinical operations.
None of these risks changes our assessment of the long-term risk-reward profile of our stock. They could well, however, create material earnings pressure in the near and intermediate term.
I will now turn the call over to our CFO, Luis Borgen.
Luis Borgen
Thanks, Kent. Overall, the third quarter wasn't one with our previously stated expectations.
Despite a continued decline in our commercial mix, we're able to achieve solid operating results in Q3 through growth in revenue per treatment and continued strong cost management. Through this all, our capitals have remained strong this year.
This past quarter, dialysis revenue increased $4 per treatment from Q2 2010. This was due to improvement in commercial rates, an increase in Medicare ASP reimbursement for pharmaceuticals and seasonal flu shot administrations.
This was partially offset by lower utilization of physician-prescribed pharmaceuticals and the continued decline in commercial mix. Non-acquired growth of 3.7% was adversely impacted by the calendar as the third quarter of 2010 started and ended on a Thursday and approximately 60% of our insider patients dialyzed on Monday, Wednesday and Friday.
When normalized for the calendar, our non-acquired growth in the quarter was 4.1%. Dialysis operating expense was up $0.77 a treatment as normal operating cost increases were largely offset by solid cost controls and decline in utilization of physician-prescribed pharmaceuticals.
G&A was up this quarter due to investment in growth opportunities including international, legal costs associated responding to the recent DOJ subpoena and the timing of certain other expenses. Keep in mind that Q2 G&A was a bit below our normal run rate.
The Q3 G&A per treatment run rate is a better reflection of expected spending levels going forward. In the third quarter, we saw an increase in net income attributable to noncontrolling interest.
Next quarter, we expect this to moderate somewhat, but it will remain higher than it has been in previous quarters. Our effective tax rate attributable to DaVita was lower this quarter due to FIN 48 adjustments.
We expect our effective tax rate to be around 39.5% for the year. Cash flows remain strong.
Year-to-date, we have generated $719 million in operating cash flows and $561 million in free cash flow. We are increasing operating cash flow guidance to be in the range of $800 million to $875 million.
This increased forecast is based on lower expected 2010 tax payments due to the bonus depreciation tax provision suspended on September 27. For all the same reasons that we cannot give operating income guidance for 2011, we are not providing cash flow guidance for 2011.
Still, you should not expect the same bump in OCF [operating cash flow] next year that we have gotten this year as 2010 benefited from some one-time working capital items, including $60 million in bonus depreciation and a five-day reduction in DSO. Looking ahead to 2011, we expect to invest at least $15 million in operating losses and to put at least $30 million of capital to work in international markets.
If opportunities warrant, we may invest more. Finally, on October 20, we completed our refinancing, raising $4.5 billion in debt.
After transaction costs and the repayment of a previous debt, we netted approximately $825 million to add to that cash already on our balance sheet at the end of the quarter. Following this refinancing, we expect debt expense to be $53 million to $55 million in the fourth quarter and $230 million to $240 million in 2011, depending on what hedges we may implement on our floating rate debt.
In the fourth quarter, we expect $65 million to $75 million in one-time charges associated with the retirement of our old debt and the issuance of new debt. We will call these items out separately when we report the fourth quarter.
For more details on the debt refinancings, please refer to Note 2 of our third quarter earnings release. How do we plan to deploy this cash?
First, we hope to use some of the proceeds for acquisitions and other growth investments. Additionally, we may continue to do share repurchases over time.
In fact, over the past six weeks, we have used $400 million to acquire approximately 5.7 million shares of our outstanding equity. Operator, let's go ahead and open it up for Q&A.
Operator
[Operator Instructions] Your first question comes from the line of Jeff Hoernemann with Feltl and Company.
Jeff Hoernemann - Feltl and Company, Inc.
I guess just with the international thing kind of coming to the front here, I guess if you could give us any detail, what kind of detail you can give us would help, in terms of is it developed, developing countries that you're looking at, what kind of a time line. Any incremental would help.
Kent Thiry
I appreciate that question, Jeff. And because of the stage we're at, which is very early exploration of different parts of the globe, it's impossible for us to provide more guidance because we're still evaluating.
So we're just so early stage. It was important and necessary that we give you the heads-up, but we can't go much further because we aren't much further.
Jeff Hoernemann - Feltl and Company, Inc.
Probably this you can, though, on the G&A impact. Is that something that we should think about ratably over the year?
Is that going to increase as the year goes on?
Kent Thiry
It will most likely increase as the year goes on.
Jeff Hoernemann - Feltl and Company, Inc.
And then the capital expense, the maintenance CapEx is a little bit higher this quarter than we'd seen in the past even on a percentage of revenues. Is that related to international, or is that prepping for bundling?
Luis Borgen
It was not related to international. It was primarily related to our new building.
Operator
And your next question comes from the line of Justin Lake with UBS Investment.
Justin Lake - UBS Investment Bank
Just first question, I guess a follow-up on the international side. Kent, would it be fair to say that given you're choosing this time after all these years to set upon an international expansion strategy right into the implementation of bundling, should we take that at least as an indication that you're comfortable with being able to operate the business and grow the underlying business earnings in 2011 in a bundling world?
Kent Thiry
I have to amend that partially, Justin. It's a reflection of the fact that we're comfortable we're going to be able to operate with our historic level of confidence in the new bundling environment.
As to whether or not we're going to be able to grow earnings, in using the exact wording that you did, again, we're not able to provide any guidance on 2011 yet. But as to our ability to adjust to and operate competently within the new reimbursement scheme, while it's going to take a lot of work and I'm sure we'll hit some speed bumps, we're feeling like we can handle that at the same time that we explore stuff overseas.
Justin Lake - UBS Investment Bank
And then secondly, on the noncontrolling interest increase, it was fairly dramatic in the quarter. Can you walk us through what drove that and why it's going to be higher?
Luis Borgen
Sure, there are two primary reasons. The first is improved performance on our joint venture centers.
And second, the certain timing of our fairly [ph] credit rated write-ons at the JV level. Going forward, we expect it to moderate somewhat but be higher than Q2.
Justin Lake - UBS Investment Bank
What level do you -- I mean, I guess you were at a run rate of about $16 million. It's now $24 million.
Where do you expect that run rate to be in Q4 and going forward?
Luis Borgen
Possibly the midpoint of that, given or take, about a few million dollars. So that would be a reasonable expectation.
Justin Lake - UBS Investment Bank
So closer to $20 million?
Luis Borgen
That will fluctuate quarter-to-quarter.
Justin Lake - UBS Investment Bank
And then just lastly, on the capital deployment. You've mentioned share repurchase, I think the word you used were "from time to time."
Can you give us any more specificity? I mean, it seems like you were fairly aggressively in the market buying stock, obviously, in the beginning of the fourth quarter.
Should we expect that level of interest in share repurchase going forward? And what level do you think you draw down the cash balance to where you want to leave before you were running something in the neighborhood of $500 million, give or take, on the balance sheet to be comfortable that you had -- to be opportunistic on M&A, et cetera?
Is there a number that you can give us as far as cash is here? Or probably buying back stock until we're back to $500 million or $300 million?
Anything you can tell us there?
Kent Thiry
Justin, very fair question, and I just don't think we can go much further than we have. And probably the best indicator, as always, is to look at our practices over the last 11 years because we revisit this question virtually every week, every month, every quarter, every year.
And in the near term, for example, whether or not or how much stock we buy back would be dramatically affected by whether or not we buy something. And so it's just so difficult for us to go further, because there's so much risk that what we would tell you would turn out not to be true.
So I think we have two stick with what we've said about our long-term assessment and stop there.
Justin Lake - UBS Investment Bank
If I ask it just in one other way and I'll jump out of the queue, can we at least think about the additional cash you added, $825 million you identified as a reasonable target for which you'd like to deploy in leaving the cash on the balance sheet for M&A opportunities? Or would that even be too far to jump?
Kent Thiry
No, it's a very fair question. We've not thought about it that way.
And so the answer to the narrowed question you've asked is no.
Operator
And your next question comes from the line of Gary Lieberman with Wells Fargo Security.
Gary Lieberman - Wells Fargo Securities, LLC
Kent, you mentioned that in the near term, it would have been, I guess, more profitable to transition onto the bundle over time as opposed to going all-in on day one. Could you share with us maybe some of the assumptions that you were using in that analysis?
Kent Thiry
Sure, that you might have an area, a country or a particular couple of centers where the physicians are significantly higher utilizers of some of the fee-for-service items because of their practice philosophy or because of their patient mix. And so in that scenario, you would be better off in year one to be transitioned in as opposed to fully bundled.
But for us, from a philosophical and operating perspective, it is not at all attractive to be operating under two different sets of operating paradigms, and not all clear that we could do it with the kind of precision one needs to do it with. Is that responsive?
Gary Lieberman - Wells Fargo Securities, LLC
Yes, no, that's helpful. And I guess in those areas or just sort of overall, how quickly do you think you can implement whatever changes need to be implemented in order to sort of reach that break-even point or the profitability point under bundling?
Kent Thiry
Very fair question, and of course the answer will differ by center. And so in some cases, we think we can adjust pretty quickly.
In other cases, we may never adjust because some of the decisions aren't ours. And so the answer's all over the map, both figuratively and literally.
Gary Lieberman - Wells Fargo Securities, LLC
And then to the international, are there any countries specifically that you guys are thinking are most attractive?
Kent Thiry
It would be premature to comment. We're just so early stage.
We, of course, generically like the ones that have enough scale, that have what appear to be attractive margins and have nice growth characteristics and are still fragmented in terms of ownership. So if you want to think of a shortlist of criteria, that's a pretty good start.
And then you overlay on that all the clinical, contextual stuff for being able to assess the stability and sustainability of the first four items. So that's probably as far as we can prudently go because that's where we are.
Gary Lieberman - Wells Fargo Securities, LLC
Revenue per treatment rebounded nicely in the quarter after being down sequentially last quarter. I think you had said that pharmaceutical usage was, again, declined in the quarter.
So what were the key drivers? I'm not sure if you said on the revenue per treatment coming back this quarter.
Luis Borgen
On the positive side, we had an improvement in commercial rates, increase in Medicare ASP for pharma and seasonal flu shots. But that was offset by continued decline in our mix and lower utilization of pharmaceuticals.
Gary Lieberman - Wells Fargo Securities, LLC
Okay, so increases in commercial rates were not a significant portion of it?
Luis Borgen
They were. There were on the positive side.
Operator
And your question is from Darren Lehrich of Deutsche Bank.
Darren Lehrich - Deutsche Bank AG
I wanted to start first with the international. And I recall, Kent, in framing the opportunity internationally, you've said before that the approach might be more with joint ventures.
So I guess I just wanted to clarify, is that still the philosophy in how you're going to approach new markets with a local partner? Or has that strategy changed?
Kent Thiry
Yes, the answer will be country-specific. In some countries, if we decide to start doing stuff there, it will be with a local partner.
In other countries, if we go, we'll go it alone.
Darren Lehrich - Deutsche Bank AG
And then I think you've framed up 2011 in a couple of ways relative to this. I just want to clarify, though.
You said $15 million of operating losses invested, and I just want to confirm that, that doesn't relate to the strategic initiatives, which has now reached breakeven. So if you could maybe just help us think about where the strategic initiatives are relative to what you've described in the $15 million?
Or is that all international investment?
Kent Thiry
The $15 million was all international. And as Luis pointed out, there's some -- could be quite a bit of movement there depending on, ironically, how positive we're feeling and how fast we're moving, that number could get bigger.
But it's difficult to see it being any smaller just because it costs a certain amount of money to start to check these things out and put more than your toe in the water. So that number was all international.
As to the strategic initiatives in general, what we've always said and continues to be true, is that you should always expect the fact that we might have some losses in that category because we're always going to do some R&D. Right now, however, we had a break-even quarter because of the makeup of that portfolio.
We've got things like our home infusion company and vascular access centers that make money. We've got DaVita Rx specialty pharmacy that's a little bit of a breakeven, which is awfully nice and we referred to that before.
And then we have our disease management operations, which still consume a bunch of profit. So that's a quick summary of what's going on within that portfolio.
And so that number will continue to bounce back and forth a little bit separate from international.
Darren Lehrich - Deutsche Bank AG
And Kent, oftentimes when U.S. companies with significant domestic operations start thinking about internationally, investors begin to wonder that you've run out of growth opportunities.
I know that you've been spending a lot of time studying international. Maybe you can just share with your investors here on the line how long you've been sizing up international and kind of how long you've been thinking about that as a potential diversification for the company.
Kent Thiry
Well, certainly, we've thought about it for a long time and consistently came up with the answer not to pursue it. So in that sense, several years.
The thinking about it was a positive bias thinking. It was a good idea.
It's probably the last 18 months or so. Is that responsive, or do you want -- and maybe ask a follow-on and I can be more useful.
Darren Lehrich - Deutsche Bank AG
No, that's helpful. My other question here, just Amgen, have you reached a contract for next year and beyond?
Kent Thiry
The answer is no.
Darren Lehrich - Deutsche Bank AG
And then with regard to the transition payment adjustment, is there a definitive answer that you've received at this point that it does in fact require legislation, that CMS won't alter their simulation model based on what they learned November 1?
Kent Thiry
There are a bunch of people in CMS and elsewhere who do give a definitive answer to that question, and that answer is it has to be legislative, legislatively directed. There are some people in that agency and one of the others who aren't totally definitive at this time.
Darren Lehrich - Deutsche Bank AG
And is there a budget score associated with the legislative solution?
LeAnne Zumwalt
This is LeAnne. It should not score.
Darren Lehrich - Deutsche Bank AG
That's great. My last question, just 2011, you're not giving guidance.
I understand there's a lot of things that may be puts and takes. But at a high level, it would seem like you got a really big hole to dig out relative to the $10 per treatment cut that's coming your way.
Do you think operating income could be flat in a best case for next year?
Kent Thiry
Yes, we just can't go there. There's too many variables.
You've brought up several of them in your usually thoughtful way, and so it's just not possible. And I do want to add one amendment or attachment to LeAnne's answer and that is, well, we think it should not score the CBO [Congressional Budget Office] has not taken a position.
And so we have a fear that they may incorrectly, in our mind, although we're not widely regarded as an expert on these topics by them, we have a fear that they would score it. And that would be a big problem as you know.
So we're neither optimistic nor pessimistic, and anybody who is optimistic or pessimistic should probably not be listened to.
Operator
And your next question comes from Andreas Dirnagl of Stephens Inc.
Andreas Dirnagl - Stephens Inc.
Kent, I'm going to try and ask the question that's been asked a couple of times in terms of what you're going to do with some of your cash in a slightly different way, and you'll excuse me in advance if it comes out as very blunt. You did a great recap, and that's wonderful.
And it's great that you, as a management team, have taken advantage of the capital market to do that. What's not so great from an equity investors point of view is that if I'm doing my numbers right, the recap overfunding, even with the share repurchases you've already completed, is dilutive to equity investors, which is very much against your track record in terms of things you've done.
I'm wondering if we can get you to make some sort of comment or commitment to sort of say that you're going to be at least deploying enough capital to make sure that the recap is effectively neutral to your equity investors in some sort of reasonable time frame.
Kent Thiry
I'm sorry, Andreas, but we can't do that. That's why we're placing such emphasis on this distinction between the longer term versus the near/intermediate term.
Andreas Dirnagl - Stephens Inc.
Let me ask a question then in terms of potential acquisitions. Does today's announcement of the merger of Liberty and Renal Advantage change your outlook in terms of looking at MDOs in the U.S.?
Kent Thiry
No.
Andreas Dirnagl - Stephens Inc.
So that remains a potential going forward?
Kent Thiry
Yes.
Andreas Dirnagl - Stephens Inc.
And then in terms of the international expansion, is this something -- you keep saying you're in the early stages, but is it something that you think you'll be doing in some sort of measured way sort of region-by-region? Or is it a possibility that you could be doing sort of larger transactions that could put you significantly into international, let's say within the next 12 months?
Kent Thiry
Well, there aren't many things of size to do in that whole sphere, and of course, that's part of the attractiveness of the idea that fragmentation and where we'd be entering with respect to the growth curve. But if there are some, then we would certainly be open to it.
Part of the rest of that reality is given it is a growth market in the globe as you look out the next 20 years. Anything of any significance would want a higher multiple versus a lower multiple because they would claim that they're a part of this long-term growth wave.
And from our point of view, we would not be interested in a lot of the high multiple stuff. So the answer to your original question is we're open to both.
The pragmatic reality is that we'll probably be doing this more on the measured end of the spectrum than anything else. Measured end of the spectrum still involves some of the P&L hit that we characterized, but in terms of moving towards having a scale position, that's most likely going to take a while.
Is that a good enough answer or...
Andreas Dirnagl - Stephens Inc.
Yes, now I think that's helpful. Maybe just at least in terms of the impact from the international expansion, I think you specifically used the term "fund operating losses."
Are there going to be just general G&A expenses in terms of that effort that there are going to be in addition to that?
Luis Borgen
No. The answer is yes.
The $15 million figure we gave as an estimate includes G&A. However, that number could fluctuate, as you said, up or down depending on the opportunity.
Andreas Dirnagl - Stephens Inc.
Sure. Okay, it does include G&A.
And then finally, two other quick things. Kent, thinking about it for a long time, international, the answer had been no for a while.
About 18 months ago, that answer, I guess, you said began to change. I'm just sort of curious, what changed sort of 18 months ago?
Was it a change in something in the international arena? Or was it that you were starting to see an end to some of the uncertainties in the U.S.
in terms of regulatory changes, reimbursement changes, et cetera?
Kent Thiry
Yes, I think the sort of intellectual rationalization answer would be that the international markets have got to sort of an inflection point. And the weighted average added to the government's.
And how to think about privatization and outsourcing has reached an inflection point, and that therefore, the answer was different now than before. So add that to the intellectually legitimate answer, and there's truth in it.
I think the primary answer is that I got it wrong before, and so it probably would've been better for us to have started doing this earlier than we are.
Andreas Dirnagl - Stephens Inc.
And then finally, I'm just sort of curious, can you provide some color as to sort of why certain people within CMS believe that takes legislation? What's the logic behind that?
Because I would think that the legislation is that the entire thing has to be budget-neutral and without a change to the transition fee, they'll probably come in under budget, so to speak.
Kent Thiry
Let me take a stab at it and then LeAnne will correct me if I get it wrong. The legislation required, of course, if they get the bundle going.
As part of getting the bundle going, they had to make some guess, some estimate of who is going to opt in 100% and who is going to transition in gradually. And then, the way they were thinking about it is that, "Okay, if the guess is wrong, we'll get all the answers to some people.
We'll implement the bundle. And then, a year later, we'll take a look and make an adjustment if appropriate."
And it has turned out, it appears, that their answer, their guess is way, way off. And so our argument is that, we were thinking about it in a sense of a way, if your guess was close, but you're way, way, way off, not because you were foolish, at all, it's just the way life has evolved.
And therefore, we want you to change your plans and do it very quickly. And some of them are saying that the way the language is written, they don't -- some of them are saying they can't, some are saying they don't have to, and they just assume weight anyway.
Now LeAnne, why don't you amend if appropriate.
LeAnne Zumwalt
I think that's a fair assessment.
Andreas Dirnagl - Stephens Inc.
So just to be clear, is it therefore, fair to characterize it as more a question of sort of the timing of the change/potential refund rather than the question as to whether or not one is needed?
Kent Thiry
Yes, a great question. The optimistic in the industry say it's just a matter of timing.
The non-optimistic, and I'm in the latter camp, say that whenever you wait 15 months for them to recalculate a number, that there is huge risk about how that calculation might be done and what other factors might influence what they do with it. And so it is not a case in my mind that it is safe to just assume, "Oh, the downside is we have to wait 15 months."
I think that would be naive. But in the spirit of full disclosure, there are some people outside of DaVita would probably say, oh, the worst case is waiting 15 months, which, by the way, as you know, is no small amount of money.
But the net present value is dramatically different than permanent. So that's the complete answer, and we think it's incredibly important that we work hard to try to get them to change it quickly.
Then we run into what you brought up before, which is A, a lot of people in CMS either think they can't or don't want to and don't have to; and B, this is not the best time in the world to ask Congress to pay attention that to dialysis.
Andreas Dirnagl - Stephens Inc.
One last mechanic question for Luis. The share repurchases you've completed to date, Luis, were those done directly as open market purchases or was there any sort of ASR involved?
Luis Borgen
Those were open market purchases.
Operator
And your next question comes from Kevin Ellich with RBC Capital Investments.
Kevin Ellich - RBC Capital Markets Corporation
Just going back to the transition adjuster, if Medicare or Congress were to give back some of that money, just wondering if you could provide us with the sensitivity, what it would do to revenue and earnings?
LeAnne Zumwalt
On the revenue front, the delta between the 3.1% and might now like, we could estimate based on the data we know of adjuster closer to 0.39%. That's $6.50 a treatment on the revenue side.
We cannot extrapolate that further as we haven't provided guidance for 2011. And we are working through implementation of bundling any further comments on that.
Kevin Ellich - RBC Capital Markets Corporation
And of course, that $6.50 is peer price, so it would fall straight to pretax, right?
LeAnne Zumwalt
So in total, that would be about $75 million in total revenue.
Kent Thiry
And now that'd be a $75 million hit to pretax profit. That's the answer to your second question.
Kevin Ellich - RBC Capital Markets Corporation
And then, looking at the non-acquired treatment growth, I think it's seen at 3.7% this quarter. It was a little downtick from what we've seen over the last, let's say, six quarters.
Anything going on there?
Luis Borgen
On a normalized basis, it's up 4.1%, which is consistent with last quarter, essentially flattish.
Kevin Ellich - RBC Capital Markets Corporation
Was there an adjustment that I might have missed?
Luis Borgen
It's accounting for the Monday, Wednesday, Friday treatment days versus Tuesdays...
Kevin Ellich - RBC Capital Markets Corporation
Okay, different days. Got it, days in the quarter.
Okay. And then, Kent, I was wondering if you could provide us updated thoughts more on home dialysis and home hemo?
Kent Thiry
There's nothing dramatic going on there, is the short answer. Do you have a more specific question?
Kevin Ellich - RBC Capital Markets Corporation
Well, yes. I guess it's really more broad in terms of under bundling.
What's your thoughts on using alternative, other modalities, trying to shift more patients to home dialysis? I know its not necessarily your decision or more if a patient has been positioned, but what would you like to see?
I mean, is that one of the ways you're going to help mitigate the impact of bundling?
Kent Thiry
Got it. Right now, holding, of course, clinical outcomes constant, there's no clear motivation to do anything differently with respect to modality.
Kevin Ellich - RBC Capital Markets Corporation
And then lastly, your comments on the parameds, have you seen continued deterioration through October? And I guess where do you expect that to bottom?
Kent Thiry
I don't think we want to get into starting to report it month-by-month. So I think we'll just stick with this eight-quarter trend, and we gave you some data on the trend within the trend.
And we better just stick with that than rather start talking about it every other day. Although we do talk about it every other day, I don't think we want to put you through that torture.
Operator
And your next question is from Kevin Fischbeck of Bank of America.
Kevin Fischbeck - BofA Merrill Lynch
I just want to follow up on that $75 million issue. I just want to be clear.
Regardless of whether there's some sort of refund or not, let's assume there's no refund, it seems like that doesn't change anything, you will get that $75 million bump in rates in 2012, regardless because CMS will use the data for 2012 on a prospective basis in kind of a worst-case scenario. Is that the right way to think about it?
Kent Thiry
That's the way the optimist think about it. I'm not confident that, that's how it would unfold.
Kevin Fischbeck - BofA Merrill Lynch
And then, just to go back to the cash on the balance sheet issue. I guess maybe, it was Justin's question where you mentioned that the $835 million was not necessarily how you thought about a number being extra for share repurchase or acquisition, but there was really no requirement that you raised an extra $835 million as part of the refinancing.
So I want to get your thoughts about why $835 million versus $300 million versus zero. Any color there?
Luis Borgen
Well, like as we said, the market was very attractive, so we decided to raise that amount of money to provide sufficient flexibility for us to redeploy that cash for growth opportunities, acquisitions and share repurchases.
Kevin Fischbeck - BofA Merrill Lynch
I guess the cash is there for all of that, but without a clear view of timing or how that cash might be deployed.
Luis Borgen
Whatever changes flexibility is, like I repeat, the market was very attractive, and we wanted to minimize the refinancing risk going forward. It was an opportune time.
We took as much in to retain ability to support our business and secure the capital structure for us over the next several years.
Richard Whitney
Yes, and maybe the only other thing I would add to that is that, since we are in the middle of a refinancing transaction, it was a sensible time. If we are going to re-lever up to our long-term target range, it was a sensible time to do that.
And we do have every intention to deploy the capital. The question really is the mix of what we'll deploy it on and the timing of deployment.
Kevin Fischbeck - BofA Merrill Lynch
I guess, then as far as how you deploy that capital, I understand not really wanting to provide any guidance for next year at this point, but you did just buy back 6% of your stock in the last three months. So you must have some pretty good view about what the earnings power is, and I guess if not, how you thought about buying back that much stock given that uncertainty the next year.
Kent Thiry
Well, let me take a first stab at that, because it's certainly a logical statement and is certainly merit to the statement. But in the end and any point in time, when we have a bunch of cash or leverage capacity within the context of our historical comfort zone, we only have a few choices, which is to sit on the cash and buy back stock, buy dialysis assets or pay down debt.
So it's always a relative -- an issue of relative attractiveness. And therefore, you've got to be careful before you go too far in taking what's chosen and extrapolating that out in terms of absolute attractiveness.
And we feel very good about every decision we've made along these lines in the last few months. But that's in the context of our alternatives.
Kevin Fischbeck - BofA Merrill Lynch
But I guess, what I get from the context that you're raising an extra $835 million, using that -- but okay. And then, I guess last kind of topic of conversation, the EPO, been a lot of questions around the proper dosage of EPO.
A number of panel discussions, and there's going to be a few more over the next few months, it looks like. So I wanted to see if you had any takeaways from that and whether the scrutiny, generally, will make it easier for you to deal with, getting to proper utilization in a post-bundle world, how do you think about that?
LeAnne Zumwalt
Yes, we're on a point right now where there's still very active discussions going on, as you know. FDA has not come out and said what their thoughts on the label, and CMS has undertaken a national coverage now.
So I think you're going to see another couple of months of very active dialogue. And we can't give you a point estimate or anything of how those will come out.
But I think what we know and how physicians are treating patients is slightly more conservative now with respect to those patients that might be at risk or high-dose, et cetera. And I think, we are seeing some practice change.
Does that answer your question?
Kevin Fischbeck - BofA Merrill Lynch
It does. Did they explain a lot of the decline in physician-prescribed drugs in the last couple of quarters?
LeAnne Zumwalt
It does, it does.
Kent Thiry
And so let me take a step back just for a second since a number of people have been asking appropriately about the transition adjustments, since it's a very big $75 million number and why we think people should not just be thinking it's guaranteed 12, 14 months now. If you read the language in intense detail and look at empirical decision patterns by CMS, even if one concludes that the budget neutrality phrase applies to that calculation 15 months from now.
It is not clear what all gets to be taken into account including the late 2010 or early 2011 actual empirical experience about what's going on within dialysis. And so it is not as black and white as some people would like to think it is, once you start ripping apart the actual paragraphs.
Operator
And your next question comes from Gary Taylor of Citigroup.
Gary Taylor - Citigroup Inc
I guess first is on the revenue per treatment, $4 sequential increase. And of course, I wrote down all the factors that you talked about.
So maybe just couple of questions. Was there any unusual commercial renewal activity this quarter?
Or would you describe it as a typical renewal quarter?
Luis Borgen
It was a typical renewal quarter.
Gary Taylor - Citigroup Inc
And given the impact of the flu administrations, I was wondering if either you could quantify that impact of revenue per treatment, or maybe at least give us a thought heading into 4Q, if you would see a similar impact from the flu shot administrations?
Luis Borgen
The answer to your first question was a small marginal improvement, and we expect to be Q4 to be less than the Q3.
LeAnne Zumwalt
Related to the flu shot.
Luis Borgen
Related to the flu shot. The Q4 impact relates to the flu shot.
Gary Taylor - Citigroup Inc
And in revenue per treatment, any other obvious things in the 4Q we should be aware of? Obviously, lower EPO's been a trend.
Lower commercial mix has been a trend. ASPs, we already have those, but anything else top of mind that we should be thinking about?
Luis Borgen
Nothing beyond that.
Gary Taylor - Citigroup Inc
LeAnne, what's your best guess on the Medicare NCD timing?
LeAnne Zumwalt
Actually they disclosed that to me. I think it's around March 16, they plan to publish a preliminary and finalize that mid-June.
So in January, there's a Metcalf [ph] (1:12:55.7) meeting, in January 19, I think. If asked for industry comment now, so I think you'll see a lot of activity.
Gary Taylor - Citigroup Inc
And then just going to the international and the $15 million operating losses you expect for next year, or I know that could be higher or lower. Is the thought that, that's primarily for funding a development and infrastructure team internationally?
Or do you actually implicitly having any patient operations in 2011?
Kent Thiry
We anticipate having actual patient operations.
Gary Taylor - Citigroup Inc
And were there any material costs in 2010 associated with the development activity?
Kent Thiry
That's one of the reasons G&A bumped up a bit.
Gary Lieberman - Wells Fargo Securities, LLC
And I think my last question maybe, Kent, you've done a really good job at the capital market days over the last few years of kind of talking about the industry outlook in the U.S., talking about kind of a longer-term business model for DaVita, kind of a top line in growth and operating income outlook in the U.S. So I know it's early, but if you think about international over the next five years, what would you suggest that it contributes top line and operating income?
Or what could it contribute?
Kent Thiry
It feels bad, but we just can't give any sort of quantified answer. It's just way too much uncertainty, so hopefully, pretty soon, we'll be able to start putting a box around it.
But right now, it just would be foolish to do so.
Gary Taylor - Citigroup Inc
Five years out, would your best guess be that international is material to your operating income?
Kent Thiry
That would probably be a hope as opposed to a plan. If things went really well, then maybe it could be.
Of course, a big part of that is what you presume for the business in the U.S. And our hope is that the business in the U.S.
continues to do well enough so that it's very difficult for international to achieve that in five years, no matter what kind of choppiness we experience in the next 18 to 24 months.
Operator
And your next question comes from the line of Mark Arnold with Piper Jaffray.
Mark Arnold - Piper Jaffray Companies
Kent, you said that your cost per treatment is going to go up, or I shouldn't say go up, that certain elements of your cost structure are going to go up next year. Can you give us a sense for how much you think labor costs, in particular, you expect to increase?
Kent Thiry
No, it's pretty dynamic now. There's never been a time in the last 10 years where there's such dramatic differences from our experience in what's going on market-by-market, what's going on in -- give me the easy examples.
What's going on in Detroit with wages versus what's going on in North Dakota where they've got oil. So we've never had a world where there's such significant differences across our 1,500 centers in terms of what's a competitive wage and salary.
The one clear thing, 2011 versus '10, is that healthcare service in general is going to be giving some serious merit increases, and in our case, they're definitely going to be larger on average than they were in 2010. Hence, our comments because it's a good thing for our people and it'll keep our clinical outcomes strong.
But from a year-over-year point of view, it is unambiguously going to be a material increase in expenses.
Mark Arnold - Piper Jaffray Companies
Those raises would be a Q1 event? Is that correct?
Kent Thiry
They'll be spread throughout the year.
Mark Arnold - Piper Jaffray Companies
One last question, and it goes to just the capital deployment discussion, but we've talked about MDOs, we talked about international. I guess I'm curious if your view has changed at all regarding acquiring other healthcare services businesses in the U.S.
Kent Thiry
The short answer is no. We remain open to it.
If they fit with our core competencies, you can tell from our historic behavior that we're not quick to pull the trigger on things, and we don't go off and place huge bets in uncertain territory. And maybe that's a slightly inaccurate answer.
Maybe we have a bit more interest now than we did five years ago, but at the same time, that gets immediately tempered by the burdens created through our pursuit of international stuff. And so it could be we just don't really have any management capacity to look at other things in the U.S.
Mark Arnold - Piper Jaffray Companies
And then, just one follow-up to that. Has health reform had any impact on that view as well?
Kent Thiry
Yes, in the sense that we take healthcare reform, depending on how it emerges once they write the regs [regulations], is going to create some new business opportunities. And we think they're going to be our type of opportunities, meaning, they're going to be opportunities where you can simultaneously reduce cost and improve quality, and just bring a higher level of coherence and value added to the American healthcare system.
That ain't going to happen in the next 12 months. But at a high level, healthcare reform, once they write the regs, and if they write them well, should create business opportunities and the kind of them that we like.
And so hopefully, three years from now, we can pounce on something that you will like a lot.
Mark Arnold - Piper Jaffray Companies
And then just one last question on that. Have you given much thought, if any thought, to making any sort of vertical acquisitions in the dialysis space?
Kent Thiry
We've given a lot of thought to it over the years, and we've always come down very, very quickly and cleanly on the side of we're a service company. And it's scary for us to contemplate actually making things.
Operator
And your next question is a follow-up from Kevin Ellich with RBC Capital Markets.
Kevin Ellich - RBC Capital Markets Corporation
Just one quick follow-up. Going back to Luis' comment about revenue per treatment, then, lower utilization of pharma.
I was wondering if you could say how much of that was EPO or was there other drugs or pharmaceuticals included in that comment?
Luis Borgen
No, I can't comment any further beyond what I've already said.
Kevin Ellich - RBC Capital Markets Corporation
So it was all EPO then?
Luis Borgen
We can't comment on that.
Operator
You have another follow-up question from Andreas Dirnagl with Stephens Inc.
Andreas Dirnagl - Stephens Inc.
Kent, a question. You're not providing 2011 guidance on this call.
Is there an expectation that you'll provide it with the fourth quarter call?
Kent Thiry
We hope so.
Andreas Dirnagl - Stephens Inc.
And then, I don't want to necessarily put him on the spot, but I want to make sure I heard it correctly. I think it was Jim that sort of piped up in the background with the answer of one of the previous question.
When it comes to this capital that you've raised and the capital that you have or the cash that you have on the balance sheet, I guess is it fair, at least, to characterize it then as your expectation is that you want to deploy that capital, and it's just a question of how and timing. It's not a question that you want to sit on that cash.
Because there was a period of time going into the bundle where you said because of the uncertainties you were building your cash balance.
Richard Whitney
Andreas, it's Rich. I was the one who made that comment and yes, that's what I meant.
Andreas Dirnagl - Stephens Inc.
And Luis, can you just confirm with all of the recap that is now being completed and the share repurchases you've done to date. Am I correct, is your cash balance end roughly around $1 billion?
Luis Borgen
That's correct.
Andreas Dirnagl - Stephens Inc.
And to the extent that you were to repurchase shares, when would your next window of opportunity open?
Luis Borgen
After a few days, about a week or so.
Kent Thiry
Andreas, you're one of the people who's asking questions about the transition adjustment that I would recommend that no one paid any attention to my reading of the language and encourage you to go check it out yourself. And then, you can look at it, and look at the, frankly, deficit situation next year, and then, you end up deciding for yourself if you want to be in the optimistic category or the non-optimistic category.
But that's the best close rather than relying on any of my interpretations of the technical language.
Operator
[Operator Instructions] You have a follow-up question from Justin Lake with UBS Investment.
Justin Lake - UBS Investment Bank
Just one more question on the commercial mix. The acceleration you're seeing here in the last two quarters, and it seems to be somewhat out of step with the unemployment rate or the pace of change there.
I was curious if you could tell us how much of this might be a function of COBRA explorations for the new commercial base?
Kent Thiry
We don't have a good handle on that. It probably is a part of what is going on.
Justin Lake - UBS Investment Bank
Is there anything else that, I know you track these, the coverage status of your patients pretty closely? Is there anything that you can tell us as to why this might be accelerating now, especially given the pace of change that's been noted by your largest peer as not being very fast.
Kent Thiry
I think there's some definitional issues, which you can explore with the large peer. As to our numbers, we don't have a great sense of sort of causality so that we can any -- in one quarter link it to macroeconomic issues directly.
So some of these stuff is certainly accumulative. Some of it has to do, perhaps, as we were outnumbered by is the rate underemployment as opposed to employment.
And then, somewhat has to do with just what employers are doing with healthcare coverage even with the people that are employed were suddenly their burdens that are passed on to the employees become so great that more people drop. So it could have to do with underemployment, it could have to do with increasing cost and there's the laying off of the burden.
Those are two of the very rational hypotheses about why a drop-off would continue to happen even if unemployment nationally is constant.
Justin Lake - UBS Investment Bank
And just last question on this topic is at this peak rate of change, can you tell us when the rate might be closer to 10%?
Kent Thiry
Well, what I would do is even though things have -- what I was going to say at first is, we know it's down to about 208 basis points over eight quarters. And so we kind of do the math and extrapolate, so that's one answer.
The problem with that answer is the rate of decline has accelerated recently, and so that might be excessively conservative. And then of course, the third thing is of course, this is heavily affected by the American economy.
And so you end up saying, "Extrapolating from the past may not be so smart, rather, just look at what's going on with average wages, typical healthcare coverage and unemployment, underemployment in America. And that's probably a better way to do it than thinking about an extrapolation formula from the past."
Luis Borgen
This is Luis. I like to make an additional specific answer to the question as to when we could be back in the open market.
The answer is Tuesday, November 9, just to be more specific.
Operator
You have a follow-up question from Darren Lehrich of Deutsche Bank.
Darren Lehrich - Deutsche Bank AG
Just a follow on Justin's question about payor mix, because it is a little bit of a curiosity to a lot of us. Definitionally, have you changed your payer mix calculation?
In other words, have you stripped out the Medicare advantage from that number, so we're now talking about a pure commercial private payor mix.
Kent Thiry
Our definition has been exactly the same all eight quarters. And it does not include Medicare-assigned, Medicare Advantage.
Justin Lake - UBS Investment Bank
So definitionally, that may be the difference?
Kent Thiry
We know from talking to some providers, they sometimes include the As, sometimes don't. Some other people include Medicare Advantage, sometimes don't.
And there's other state programs. Then there's how you handle Medicaid HMOs.
So there's a bunch of those categories. And we know that some other providers lump things together that we don't, and that could explain some of the differences.
Obviously, also, there might be something else explaining the difference, the geographic issues or people may have better or worse ideas than we have on this subject. And maybe over- or underperforming us but as for the calculation itself, our definition has not changed through the eight quarters.
Justin Lake - UBS Investment Bank
And then, I guess I would just close with a request that maybe you put your payor mix disclosure in your 10-Qs numerically because it's something you're pointing out as a materiality, but we haven't been seen the spot disclosure now since you're last 10-Q or your last 10-K. So.
. .
Kent Thiry
Yes. Certainly, we will give it serious consideration, as we have.
And of course, the serious consideration that we give to it has been reflected in our transparency in this subject itself in each of the recent quarterly calls.
Operator
And there are no further questions in queue at this time.
Kent Thiry
Okay. Thank you all very much for your time and attention, and we will do our best in between now and our next call.
Thank you.
Operator
Ladies and gentlemen, that concludes today's DaVita Q3 2010 earnings call. Thank you for your participation.
You may now disconnect.