Gap (GPS) Q4 2016 Results Earnings Call Transcript

DaVita, Inc. (NYSE: DVA)

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> DaVita Inc

DVA

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Q4 2017 Earnings Conference Call

Feb. 13, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good evening. My name is Eric and I'll be your conference facilitator today. At this time, I would like to welcome everyone to the DaVita fourth quarter 2017 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press * and then the number 1 on your telephone keypad. If you would like to withdraw your question, press * followed by the number 2. Thank you, and Mr. Gustafson, you may begin your conference.

Jim Gustafson -- Vice President of Investor Relations

Thank you, Eric. Welcome everyone to our fourth quarter conference call. We appreciate your continued interest in our company. I'm Jim Gustafson, Vice President of Investor Relations. With me today are Kent Thiry, our CEO; Joel Ackerman, our CFO; Javier Rodriguez, CEO of DaVita Kidney Care; Jim Hilger, our Chief Accounting Officer; and LeAnne Zumwalt, Group Vice President.

Please note that during this call, we may make forward-looking statements within the meaning of the federal securities laws. All of these statements are subject to known and unknown risks and uncertainties that could cause the actual results to differ materially from those described in the forward-looking statements. For further details concerning those risks and uncertainties, please refer to our third quarter earnings release earlier today and our SEC filings, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q. Our forward-looking statements are based upon information currently available to us and we do not intend and undertake no duty to update these statements for any reason.

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Additionally, we'd like to remind you that during this call, we will discuss some non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our earnings press release filed with the SEC and available on our website.

I'll now turn the call over to Kent Thiry, our Chief Executive Officer.

Kent J. Thiry -- Chief Executive Officer

Thank you, Jim. Thanks to all of you out there for your continued interest in our enterprise. We are first and foremost a clinical caregiving company and as is our custom, I will start with talking about a clinical spotlight before I move into a summary and then Joel and Javier can take care of the follow-up.

Flu, as we've seen in all the major media, is the leading cause of hospitalizations in general and even more so in this ESRD population. The current flu season is especially severe. Vaccinations significantly reduce the risk, even in a difficult year like this. We vaccine over 94% of our patients, which is a very distinctive percentage and many years in a row where we have outperformed the norm in this all-important category.

Now onto a high-level summary of the quarter itself. It was a good quarter for DaVita Kidney Care and we carried solid momentum into 2018 and 2019. There's a lot of noise in this quarter's numbers due to a bunch of factors, including the DMG sale and tax reform and Joel will step through a bunch of that to help you navigate. But the bottom line is it was a good quarter. We have good operating momentum and we continue to generate strong cash flows and we will deploy a significant amount of those cash flows toward share repurchases as the quarters roll on.

On to Javier for DaVita Kidney Care.

Javier J. Rodriguez -- Chief Executive Officer, DaVita Kidney Care

Thank you, Kent. Good afternoon. Let me dive right in. I'll provide some details on the main drivers of the business and Joel will cover the financial results in more detail. First, our nonacquired growth for the quarter was 3.5%, approximately flat versus the third quarter of 2017 after normalizing for the impact of the hurricanes.

Next, net dialysis revenue per treatment came in consistent with recent quarters. As we think about 2018, I'd break it down between government and commercial revenues. As you know, 2018 Medicare rate update is essentially flat and will be a headwind for margins for all dialysis providers. As it relates to commercial revenues, there tend to be two questions. Is there anything new on charitable premium assistance? How is the commercial environment? We believe that there's very little going on around the country on charitable premium assistance and as it relates to the contracting environment, the conversations are back to the normal puts and takes.

On to the cost side. Like many other companies, we're experiencing a tight labor market with upward wage pressure. We continue to expect a 2 to 3% annual increase and don't see significant opportunity to offset this with productivity improvement in the near term. With labor cost inflation continuing to outpace Medicare reimbursement, we will continue to feel margin pressure in the traditional Medicare fee-for-service business in 2018. With normal Medicare updates scheduled to resume in 2019, we expect these margin pressures to subside.

Finally, we continue to be excited at the prospect of transforming patient care in the dialysis industry through Patient Act. We currently have an unusual amount of bipartisan support in both chambers of Congress with more than 150 co-sponsors. We believe we have a real shot in getting this bill passed this year, but as always, it's significant lift to get transformative legislation passed. To wrap up 2017, we ended the year with adjusted operating income for kidney care of $1.616 billion, above our most recent 2017 adjusted guidance of $1.57 billion to $1.6 billion. Joel will go into more details on this in a moment.

On to 2018 guidance. Because of the pending DaVita Medical Group transaction, our kidney care guidance effectively becomes our guidance for operating income from continuing operations. For 2018, we continue to expect operating income of $1.5 billion to $1.6 billion for kidney care business. As a reminder, we have a one year-over-year accounting headwind of up to $100 million as we finish the transition from profit share program to a 401(k) match program. With the old program, we accrued for the expenses in the calendar year before the payoff. With the new program, we will accrue for the expenses as we pay it out. This accounting change created a one-year gap in 2017 when we did not need to accrue for such payouts.

To close out my remarks, I would like to follow up on three variables that we discussed last quarter that could swing 2018 forecasts. First, open enrollment period was in line with our initial expectations. We will continue to monitor as the numbers slope throughout the year and we'll keep you posted.

Second, on to pharmaceuticals. As we had discussed before, calcimimetic, a drug that's taken many an ESRD patient to treat mineral bone disease, has just moved into our dialysis reimbursement with the introduction of an injectable drug called Parsabiv. The reimbursement and the cost of calcimimetic are coming in line with expectation, but it's still too early to understand the full picture until we get more data on volume and product mix. Physicians make individuals prescription decisions based on each of the patient's needs, so how they will view the new drug option is very difficult to predict. Our view of the most probable range of outcomes continues to be included in our guidance and we plan to provide an update when we gain better visibility.

Third, on to the ballot initiative being pursued by the union in California. We won't have much to report until later this year and we have not included potential advocacy costs in our guidance range. If the initiative does pass, we believe that it would have material adverse impact on the entire industry in California and would likely make a large number of centers in California financially unsustainable, which would severely limit patient access to outpatient dialysis care. We have also become aware that the union is pursuing a similar initiative in Ohio. We have not included any potential advocacy costs in Ohio in our guidance range either.

Now on to our CFO, Joel, for financial results and details.

Joel Ackerman -- Chief Financial Officer

Thank you, Javier. I will start with an overview of the financial results for the kidney care business as reflected in our continuing operations. Adjusted operating income for the fourth quarter was $430 million, up approximately $26 million or 6% versus the third quarter, although the fourth quarter benefited from a couple of items that are outside our run rate.

First, we recognized $14 million shared savings revenue that our DaVita Health Solutions business earned throughout 2017. Second, we had a $9 million one-time benefit in insurance expense due to a revaluation of our reserves. As a reminder, adjusted operating income for the third quarter was $404 million, but this figure was negatively impacted by approximately $14 million due to the hurricane season.

The fourth quarter was shorter by one-half treatment day relative to the third quarter, which accounts for most of this difference. For our US dialysis and lab business, our reported revenue-per-treatment net of provision for bad debts was up $0.49 per treatment quarter-over-quarter. Underlying this are two largely offsetting, unusual items. First, we recognized approximately $20 million in cash receipts that we had previously reserved that flowed through the gross revenue line. This was offset by a $23 million increase in our provision for bad debts to address our higher estimates of patient pay receivable write-offs for all of 2017.

To comply with the new revenue accounting standard, starting with the first quarter of 2018, you will start to see a few changes and additions to our disclosures. I want to highlight two in particular. First, we will only be reporting revenue-per-treatment net of provision for bad debts. Second, we expect to recognize a benefit of approximately $30 million in the first four months of 2018 from a change in how we account for Medicare bad debt recoveries. Prior to 2018, we recognized these recoveries only after attempting to collect, which takes approximately four months. Under the new rules, we will estimate and recognize estimated Medicare bad debt recoveries at the time of treatment. I refer you to our Form 10-K to be filed later this month for additional details.

Our patient care costs were down approximately $0.11 per treatment quarter-over-quarter. As a reminder, our patient care cost in the third quarter of 2017 was higher by approximately $1.00 per treatment, due to the hurricane impact. US dialysis and lab segment G&A costs were down approximately $1.69 per treatment sequentially due to lower outside professional fee expense and normal quarterly fluctuations. For Fiscal 2017, G&A was down approximately 3% per treatment year-on-year. As G&A always has some quarterly variability, the annual G&A per treatment is a better result to use for your go-forward modeling. Lastly, please keep in mind that our first quarter tends to be the weakest quarter of each year due to seasonality, with two fewer treatment days in Q4, flu impacts, and higher payroll taxes.

A few words on the DMG sale. As a reminder, we announced in December that we entered into an agreement to sell DaVita Medical Group to Optum. We're working with Optum on the required regulatory approvals and continue to target closing in 2018. It has been a very productive working relationship and we look forward post-close to the additional long-term benefits that the business will get from our relationship with Optum and United. Because of the pending transaction, the DMG business has been reclassified as "held for sale," and the results of operations are reported as discontinued operations.

In addition, prior period presentation have been revised to conform to current-year presentation. In the fourth quarter, DMG generated operating loss of $23 million. This includes operating results which were negatively impacted by a bad flu season and both direct and indirect financial impact from the transaction, including the shift to held for sale accounting.

In addition, we recognized a tax benefit of $164 million in order to recognize deferred tax assets required upon the classification of DMG as "held for sale." The net impact of all these items is that we reported $144 million gain as one line on the income statement as a discontinued operation.

On to international. Our strategy is evolving under the direction of the new leadership. The result is an increased focus on core markets where we are well positioned to achieve scale and drive clinical and financial value. Also, as we discussed last quarter, we restructured our international organization to streamline our reporting structure and reduce administrative costs and anticipate this will save $6.5 million in annual G&A expense in 2018.

As a result of these strategic changes, including changes in expectations concerning the JV's available market opportunities, we are taking a non-cash writedown of our investment in the Asia-Pacific JV of $280 million, which reverses much of the $381 million non-cash gain we booked in 2016 and 2017 from the creation of this joint venture.

Adjusted operating losses from our international business was $46 million for fiscal year 2017, which included $2 million in impairment charges, $4 million in prior period adjustments, and $8 million in foreign currency losses. This was in line with the revised guidance that we had previously provided for 2017. As we have discussed in recent quarters, we expect to achieve break-even operating income in late 2018. This is incorporated in our enterprise guidance for continuing operations for 2018.

Next, some information on taxes. To account for the impact of US tax reform legislation passed in December, we recognized a one-time reduction of tax expense of $252 million in the quarter. This is the net gain to remeasure our deferred tax assets and liabilities to reflect our expected go-forward tax rate. Excluding this and other one-time items, our adjusted effective tax rate on continuing operations was 40.4% in the quarter and 39.1% for 2017.

As we continue to review the impact of the recently announced tax reform, we now expect our effective tax rate from continuing operations in 2018 to be 26.5 to 27.5%. Despite moving up the bottom end of the range by 50 basis points, we continue to expect a 2018 income tax expense reduction of $110 to $130 million in tax reform.

Now cash flow. Enterprise operating cash flow for 2017 was $1.907 billion, within our previously provided guidance. For 2018, we will provide cash flow guidance for continuing operations in light of our expectation that the DMG sale will close this year. We expect operating cash flow from continuing operations to be $1.4 to $1.5 billion. This guidance reflects the benefit of tax reform from both a lower effective tax rate and the accelerated depreciation of certain capital expenditures. This cash flow guidance excludes any cash flows from DaVita Medical Group, although investors should keep in mind that we will still own the cash flows from this business up until the date the transaction closes.

In 2018, we expect to spend $925 million in CapEx on continuing operations, roughly evenly split across maintenance and development CapEx. This is an include of approximately $100 million from 2017. But most of this increase is due to expenditures we do not expect to recur in 2019, so holding all else equal, we expect our CapEx in 2019 to be to closer to our 2017 levels.

For the full year 2017, we repurchased 13 million shares of our common stock, or nearly 7% of our shares outstanding at the beginning of the year. During Q4 2017, we repurchased 7.4 million shares. We have also repurchased approximately 900,000 shares this year through February 12, 2018. Now I'll turn it over to Kent for some closing remarks.

Kent J. Thiry -- Chief Executive Officer

If you'll excuse a little bit of redundancy, I'll make three points before we turn to Q&A. No. 1, it's early in the process, but the DMG transaction is proceeding on track. No. 2, it was a good quarter for DaVita Kidney Care and they have good operating momentum. This reflects the fact that we continue to have a very solid platform in DaVita Kidney Care, our US kidney care business.

Third and finally, we expect to continue to generate strong cash flows and we expect to be thoughtful in the deployment of this cash to benefit you through a combination of share repurchases, substantial continued kidney care growth, and a limited number of investments in other healthcare service areas. On to Q&A, please.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. If you would like to ask a question, please press * followed by the number 1 on your phone and record your name clearly when prompted. Your name is required to introduce your question. To cancel your request, press * followed by the number 2. One moment, please, for our internal questions.

Our first question comes from Kevin Fischbeck. Your line is open.

Kevin Fischbeck -- Bank of America Merrill Lynch -- Analyst

Great, thanks. I wanted to maybe follow up on that last comment about capital priorities. I guess specifically the commentary about investment to other healthcare services. Any color you can provide there about the types of things that you might be looking at or how limited those investments might be, I think it's an area of some questions based upon how DMG didn't play out. I'm trying to understand how far afield you might be looking to go with these other investments.

Joel Ackerman -- Chief Financial Officer

Sure, I'll take that, Kevin. It's Joel here. A few thoughts. First, we're thinking about this from a sector perspective, not from a deal perspective. We want to find the sectors where we think we can evolve them over the next few decades the way we have helped shape the kidney care sector over the past few decades. Second, we are hyper-focused on opportunities where we can add value. Where we can take the core competencies we have developed over many decades and apply them to new sectors and new businesses.

Third, we know some things we don't want to do. We're not going to become a health insurance company. We're not going to get into drugs or devices. We're not going to get into the hospital business. So healthcare services a bit more narrowly defined than you might otherwise think.

Finally, in terms of your question about scale, we're not looking at multi-billion-dollar deals. We don't have a specific range, but I think it is safe to say you're not going to see something at or near the scale of the DMG transaction.

Kevin Fischbeck -- Bank of America Merrill Lynch -- Analyst

Okay, that's helpful, I guess. Is there a way to think about it from the DMG proceeds? Would you say that the majority of it would be spent on share repurchase or is that not something that you can really say at this point?

Joel Ackerman -- Chief Financial Officer

Sure, so what we've said and continue to believe first is we will pay down debt. We haven't changed our guidance around the range. We expect to pay debt down to get back into our traditional range. Second, the majority of the remainder will be used for share repurchases.

Kevin Fischbeck -- Bank of America Merrill Lynch -- Analyst

Okay. I think you've talked about 3 and 3.5 times leverage, but then I think you also talked about being comfortable at the higher end of that range. Is it the 3.5 that you're talking about or the mid-point of that range? How do we think about that?

Joel Ackerman -- Chief Financial Officer

It's a complicated number because after the deal closes, there may be a period of distortion. How the share buy-backs play out in reality remain to be seen and there's certainly a possibility that we will keep cash on the balance sheet to facilitate that over time. Because the leverage levels that we've talked about are always net, net of cash, that excess cash on the balance sheet could create some distortion. But normalizing for that, again we expect to be in that 3 to 3.5 range. Where exactly in that range we wind up remains to be determined over time.

Kevin Fischbeck -- Bank of America Merrill Lynch -- Analyst

Okay. The last question for me, the sale of DMG -- is there anything we should think about as far as stranded costs or things that couldn't be put into operations that either costs that can come out once the sale actually happens or that might be a drag prospectively after the sale happens?

Joel Ackerman -- Chief Financial Officer

I think it safe to think of the continuing operation number that we are guiding you to as the forward run rate. We have worked hard and we will continue to work hard to ensure that there are no material stranded costs or dis-synergies associated with the sale of DMG.

Kevin Fischbeck -- Bank of America Merrill Lynch -- Analyst

Okay, great. Thanks.

Kent J. Thiry -- Chief Executive Officer

Kevin, I would add on the leverage ratio that we have made statements over the prior six months, nine months, whatever, saying that within the context of our historical statements and guidance that we were leaning in a more positive way toward being higher rather than lower within that range. I think at this point, given everything that's going on in the markets the last month or two with respect to interest rates, etc. I don't know if that particular refinement to the guidance is really still in place. I think what you're looking at is basically we're going to bring the same attitude and flexibility to it that we've brought for a long time.

Kevin Fischbeck -- Bank of America Merrill Lynch -- Analyst

All right. Thank you.

Operator

Our next question comes from Justin Lake. Your line is open.

Justin Lake -- Wolfe Research LLC -- Analyst

First question, I just wanted to try to get as much color as I can on CapEx. Now that you're in the process of developing DMG, you talked about CapEx of $925 million. I guess $825 million is more the run rate you want us to think about longer term. I compare that to a depreciation number that's closer to $500 million. I just want to understand the use of cash here. Can you break that $825 million run rate down for us in any way in terms of maybe US versus international? Maybe some numbers with the cost to develop new centers versus just other areas beyond maintenance and developing new centers that we should be thinking about?

Joel Ackerman -- Chief Financial Officer

Sure. So let me see if I can help out. We're not going to break out international, but as I said in the script, that number splits roughly evenly between maintenance and development. I think an important component to understand about the development is we have done more and more self-development of our clinics over time. What that means is we build the clinic and then we sell it. We believe that drives a cost savings on the construction of the clinic. What I would point you to in the cash flow statement is a line called "proceeds from asset sales," which is a positive cash flow number associated with the sale of the self-developed clinics. As you're thinking about the total picture of our cash flow, I think it is fair to incorporate that positive piece of the cash flow into the overall thinking.

Justin Lake -- Wolfe Research LLC -- Analyst

Okay. In terms of the development dollars, can you tell us what those development dollars are? We're just trying to understand how do you think about capital from the perspective of returns on capital, just given how much more significant the CapEx is here versus your run rate depreciation and relative to your total cash flow you're generating?

Joel Ackerman -- Chief Financial Officer

In terms of how we think about capital deployment, we've got a very structured approach to how we think about capital and whether it drives OI growth and appropriate return on capital. The development is the biggest component of that is building new clinics. Those historically have been a high return on capital investment for us. I don't know that a whole lot has changed around that.

Justin Lake -- Wolfe Research LLC -- Analyst

Okay. Just last question on this. What is the cost of developing new clinics right now?

Joel Ackerman -- Chief Financial Officer

Roughly $2 million.

Justin Lake -- Wolfe Research LLC -- Analyst

Okay. So that's what runs through CapEx for every new clinic you build?

Joel Ackerman -- Chief Financial Officer

Roughly.

Justin Lake -- Wolfe Research LLC -- Analyst

Okay, great. I'll jump back in the queue. Thanks, guys.

Operator

The next question comes from Frank Morgan. Your line is open.

Frank Morgan -- RBC Capital -- Managing Director

Good afternoon. My question surrounds the growth in the international. Obviously you had the charge on the Asia-Pacific JV, but does that in any way change your view over international growth and when do you really start to see the international business growth? Thanks.

Joel Ackerman -- Chief Financial Officer

So no, it doesn't change the view of international growth. I would split the growth into two components -- revenue growth and OI growth. The revenue growth as you can see from the reported results continues to be relatively high. From an OI perspective, which is probably what you're more interested in, we stand by what we said last quarter, which is we expect to get to break-even in the latter part of 2018. So from a year-over-year perspective, you'll see significant growth.

Frank Morgan -- RBC Capital -- Managing Director

Gotcha. Maybe one more. Ken made reference to commercial pricing. I'm just curious, as you go through the commercial pricing and contracting, are there any significant contracts that are left out there that need to be negotiated? Are you seeing any change in the appetite of these commercial payers to look at value-based elements in their contracting? Thank you.

Kent J. Thiry -- Chief Executive Officer

Thank you. There's nothing to highlight as unresolved on the payer contracting. We have normal renewals that come up, but I wouldn't point anything out. If anything, we are more contract right now, meaning that there's less renewals as usual. As it relates to value-based, it really depends on the payer and their appetite of how to structure the contract. We're seeing a wide range of nothing all the way to P-for-P, etc. So there's not been a material change in the structure of our contracts.

Frank Morgan -- RBC Capital -- Managing Director

Okay, thank you.

Kent J. Thiry -- Chief Executive Officer

Thank you.

Operator

Our next question comes from Whit Mayo. Your line is open.

Whit Mayo -- Robert W. Baird & Co., Inc. -- Analyst

Thanks. Maybe just starting on the kidney care business. The cost-per-treatment was down over $4.00 year-over-year, one of the lowest numbers we've seen in two years and aside from perhaps the Amgen purchasing contract, are there any other factors worth mentioning? I think you referenced some hurricane distortion from the third quarter, but anything else to call out?

Joel Ackerman -- Chief Financial Officer

There's two pieces. The Amgen that you mentioned on EPOGEN and the 401(k) $100 million that we discussed on the front end of the call. We did not incur approximately $100 million of what we used to call profit share and now 401(k).

Whit Mayo -- Robert W. Baird & Co., Inc. -- Analyst

Okay, helpful. Then G&A same thing down? 10% year-over-year on a per-treatment basis. I think I heard you reference lower professional fees. Any more color you can share on just how sustainable that number is as we look at 2018?

Joel Ackerman -- Chief Financial Officer

The number we have is a little different on a per-treatment basis. But what we're seeing is that when you annualize the number, it's roughly in the $27.00 per treatment and we expect that to be in that range. I don't think there's anything to call out on professional fees.

Whit Mayo -- Robert W. Baird & Co., Inc. -- Analyst

Okay. Let's just have a bad number here. Maybe two other quick ones real quick. On the topic of calcimimetic, I'm kind of curious what the feedback has been from your nephrology partners at this point. Do you have any sense of preference at this point where they're leaning, what the pros and cons of the IV versus the oral drugs are?

Joel Ackerman -- Chief Financial Officer

We do not. We have very little data right now. As you know, there's going to be a lot of variables in this one category because we have both an oral going into IV. It's going to go from Part D as in dog to Part B as in boy. Then the oral is going to have an introduction of generic. So there's going to be a lot of moving pieces right now. I think physicians are wanting to see publications and seeing how this plays out in the marketplace. So right now we're not seeing a lot of change yet.

Whit Mayo -- Robert W. Baird & Co., Inc. -- Analyst

When this, because the drug is now reimbursed under Part B, can DaVita Rx play a role in dispensing this drug?

Joel Ackerman -- Chief Financial Officer

DaVita Rx is dispensing the drug now.

Whit Mayo -- Robert W. Baird & Co., Inc. -- Analyst

Okay. That's it. That's all I got. Thanks, guys.

Joel Ackerman -- Chief Financial Officer

Just to clarify, that's the oral drug that Rx is dispensing.

Operator

Our next question comes from John Ransom. Your line is open.

John Ransom -- Raymond James & Associates, Inc. -- Analyst

Good afternoon. A couple things for me. I may have messed up, but did you call out the pharmacy? How should we think about the pharmacy year-over-year comparisons in your '18 guidance versus your '17? That was a tough year for that business.

Joel Ackerman -- Chief Financial Officer

Yeah, I think that the way we've talked about Rx right now will hold, which is the changes we had from '16 to '17 will be in our run rate and then of course, because of all the things that we've explained in the past, so I won't go through each and every other category. We, of course, are monitoring all the things that are happening in the pharma space. As you know, some drugs will go generic and so on and so forth.

So we will monitor what that does to our economic model. But we, of course, keep going back to the clinical piece of it and how much we like it when our patients have 10 prescriptions and 20 pills. Medication management is a real gift to them. But, of course, we have to make the economic model work.

John Ransom -- Raymond James & Associates, Inc. -- Analyst

So in other words, very minimal EBITDA in '18, not much different than '17? So the macro environment, you're not really able to make much of a dent just given some of the issues in the macro environment? I don't mean to put words in your mouth, but that's what I think I hear you saying.

Joel Ackerman -- Chief Financial Officer

No, what I'm saying is the environment is quite dynamic and we will continue to monitor it and adjust, but we continue to like the story that it's for the patient in managing this and, of course, we have to make the economics work for all our constituents.

John Ransom -- Raymond James & Associates, Inc. -- Analyst

Sure, OK. The second question is, this is a tougher sounder question than I mean it, but just looking at the pharmacy, looking at international, looking at DMG, it's hard to conclude that any of that has just been a wonderful success. So when you stray outside your core, I guess I'm just wondering why do you think the fourth time will be the charm as you start looking at other areas of healthcare services? I know you've ruled out a bunch of stuff, but it doesn't look like that has been a great experience so far. But look, I know people who have been married five times, so there's always hope. I was just wondering what lessons learned and why you want to go back to that particular well?

Kent J. Thiry --Chief Executive Officer

This is Kent here, John. A very fair question. I'm going to go ahead and throw out some thoughts and then you can feel free to further follow up. First, DMG was a very disappointment performance. Having said that, we took a lot of cash out along the way and also had some nice benefits on the kidney care side during the period in which we owned it in terms of enhancing our integrated care capability. But it doesn't change the fact that it was disappointing in the end. It's important to remind people by far the primary drivers of the disappointing performance were reimbursement reductions, not operating performance.

Clearly, very thoughtful other people felt it was still a very valuable asset with a lot of upside potential, people who know the business as well or better than anyone. But the short-term and their immediate operating performance was what it was, largely by the reimbursement cuts and then we decided it was in your best interest rather than continue to pursue what we still think was some very substantial long-term potential in which several other people thought had a lot of long-term potential because it was reflected in the multiple they paid. Rather than do that, it was on a risk-adjusted basis better for us to take the return on capital now in addition to the return on capital we earned along the way.

Then on Rx, it has been a big clinical success and has had a run of several profitable years, in addition to being a strategic asset. We will see what happens now, but by many measures up to this point, it's been a very good success and a very important part of our kidney care portfolio. Now there's an awful lot going on in the pharma space that wouldn't have been predictable 3, 4, 5 years ago.

Then as to the more conceptual question, without going into international in detail, we do think we've learned a lot from the experiences we've had and it's important to look at the root cause of why they turned out where they did. Just as there as times you can buy something and have it do quite well and it's not a reflection of exactly what your deal premises were or what your operating performance was, and you don't want to persuade yourself you're brilliant at that point.

We think it's in the best interest, the best long-term interest of our shareholders to deploy a fraction of our cash flow toward looking at new long-term growth opportunities in the same way that 18 years ago, we decided that dialysis, despite the fact that it had a lot of warts and some people had lost a bunch of money, was worth sticking with and our business model was worth sticking with. We're very happy that we made that call 16, 17, 18 years ago, when it would've been easy to cut our losses and leave it.

John Ransom -- Raymond James & Associates, Inc. -- Analyst

Thanks, Kent. My other question is, just going back to the question on CapEx, I guess I was thinking wrongly as it turned out, that given that you're selling DMG and given that you're kind of narrowing your focus and on international, we had thought maybe CapEx would perhaps step down a bit from where it had been. So should we think about your taking what you were spending international and DMG and you're doubling down on those things? Because it looks like CapEx, I mean, obviously you said it's going up this year, then it's going to stay flat. It's just surprising to me it's staying flat given that you're paring down and narrowing your focus.

Kent J. Thiry -- Chief Executive Officer

Well, let me just make one comment. Just recall that DMG was a business with very positive cash flow characteristics, meaning their net cash flow relative to CapEx, etc.

Joel Ackerman -- Chief Financial Officer

I don't think we come at it from that angle of saying how are we going to redeploy cash that we might've deployed somewhere else. It's much more of a question of what are the options for this cash flow between paying down debt, returning it to the shareholders, making new investments, or investing in kidney care. So that's the angle we come at it from. With all those angles, we use kind of a similar lens, which says, is this going to drive OI growth and is it going to drive attractive, risk-adjusted returns on capital?

John Ransom -- Raymond James & Associates, Inc. -- Analyst

I mean, the CapEx at DMG was not zero. I don't think you've ever disclosed it. I don't know why I had $100 million number in my mind. Am I thinking about that wrong?

Joel Ackerman -- Chief Financial Officer

I don't know that we disclosed it. Offhand, I don't think any of us know and we wouldn't say anything without wanting to confirm its accuracy and that we had the right definition. So I'm afraid for both the reason that we'd have to make sure that we nailed down the definition and not sure what we disclosed historically, we can't answer right off the cuff here.

John Ransom -- Raymond James & Associates, Inc. -- Analyst

It's a lot easier to shoot from the hip without regard to the fact

[inaudible] [00:42:21]. I understand. All right, thanks so much. That's all for me.

Kent J. Thiry -- Chief Executive Officer

All right. Thanks, John.

Operator

Our next question comes from Lisa Clive. Your line is open.

Lisa Clive -- Sanford C. Bernstein Ltd. -- Analyst

Great, thanks. Two questions for me. Could you give us just an update on where your ACA signups actually came in? How many were on the exchange? How many off the exchange? Am I right that you had about 3,000 patients on and off exchange once the Medicaid patients sort of went away and something like 1,800 of those had premium support? I'm just curious as to what the latest numbers compare versus those historicals. And also, are you expecting any clarity through a new rule from CMS on the guidelines or on premium support for the ACA plans?

Kent J. Thiry -- Chief Executive Officer

Thanks, Lisa. Your numbers that you recited are the numbers that we disclosed several months ago. We're not going to keep updating those. Those numbers are pretty stable. There's not a big story in those numbers is probably the right way to think about it. As it relates to a rule, as I said in the earlier comments, we're not seeing a lot. The one dynamic that really appears to have momentum is that both providers and government would like clarity as to how we provide the education. We all want to do it the right way. We will see what vehicle that comes in but we don't have any additional information as to whether there's going to be rule making or not.

Lisa Clive -- Sanford C. Bernstein Ltd. -- Analyst

Okay, thanks. Then a final question, could you just give us an update on your thinking about ESCO? Clearly, the financial structure is not ideal. It's retrospective and Medicare has a lot of leeway in terms of what the benchmarks are. But the initial results you've achieved have been pretty good. I know the Patient Care Act is making its way through D.C., but I'd imagine that probably wouldn't establish a new payment framework for several years. So what do you do in the meantime around integrated care?

Kent J. Thiry -- Chief Executive Officer

Yeah, we would like the Patient Act and if the bill passes, it actually has a start in '19, so it would be pretty much a very quick ramp-up. If the Patient Act doesn't pass, we of course will ferret out the options, whether we want to grow the ESCOs or not. Right now, the ESCO enrollment is not open and so we will have to see what CMS guides us on and where we stand if we don't get the Patient Act.

Lisa Clive -- Sanford C. Bernstein Ltd. -- Analyst

Great, thanks very much.

Kent J. Thiry -- Chief Executive Officer

Thank you.

Operator

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

Gary Taylor -- JPMorgan Securities LLC -- Analyst

Thank you. Just a couple quick tie-ups and then one question. Back to Parsabiv, is that in the 2018 guidance as a good guy?

Joel Ackerman -- Chief Financial Officer

Yes.

Gary Taylor -- JPMorgan Securities LLC -- Analyst

Care to quantify or not?

Joel Ackerman -- Chief Financial Officer

No. For all the reasons I cited earlier in the conversation, which is there's a lot of variables right now for us to be helpful but it is included in our guidance with all the normal handicapping we do to the numbers.

Gary Taylor -- JPMorgan Securities LLC -- Analyst

Thanks. I just want to make sure -- you were ripping through some numbers pretty quickly. I want to make sure I got them correct. But in the fourth quarter, you were saying OI benefited from insurance reserve adjustment of $9 million and a 14 million shares savings. That was all 4Q numbers, right?

Joel Ackerman -- Chief Financial Officer

That's right.

Gary Taylor -- JPMorgan Securities LLC -- Analyst

Have you ever had share savings numbers that you've quantified before? I guess we're just trying to think about should we think about next year in the fourth quarter contemplating there might be something there?

Joel Ackerman -- Chief Financial Officer

I would not. First, we have never reported anything like that before. I would not model in this as being kind of a Q4 recurring event.

Gary Taylor -- JPMorgan Securities LLC -- Analyst

Okay. Then on the bad debt, I'm trying to understand you said there was about a $20 million good guy to gross revenue and $23 million bad guy on bad debt, both from some reconciliation. Is there any color on what was driving those? Are those in commercial revenue accruals? Any help?

Joel Ackerman -- Chief Financial Officer

The bad debt was associated with largely driven by an increase in uninsured patients. The cash receipts, the offsetting item, is associated with a reserve we typically take associated with commercial revenue and it has proven that our reserve was a bit conservative so we had a one-time reserve release there.

Gary Taylor -- JPMorgan Securities LLC -- Analyst

Got it. Then my last one, given that you are saying you think commercial mix is pretty stable and you're back to a normal commercial rate environment, can you share what your expectations are for revenue per treatment growth in 2018? What's built in into the guidance? You know, Medicare is basically flat, so on an overall basis, what are you looking for?

Joel Ackerman -- Chief Financial Officer

We have not guided on revenue-per-treatment and we're not going to start right now. I think the best thing to do is just keep to the OI range for now.

Gary Taylor -- JPMorgan Securities LLC -- Analyst

All right. Understood. Thank you.

Joel Ackerman -- Chief Financial Officer

Thank you.

Operator

Our next question comes from Justin Lake. Your line is open.

Justin Lake -- Wolfe Research LLC -- Analyst

Thanks. I appreciate you letting me jump back in. A bunch of things here. First, just deployment of the cash. You're going to get a significant amount of proceeds, post this deal, plus your generated cash in '18. As you think about deploying the share repurchase, is there any way to do that just given the magnitude of it in an accelerated manner, whether it's an ASR, or a Dutch, or something like that? Any contemplation there?

Joel Ackerman -- Chief Financial Officer

So Justin, those are certainly two options available to us, as well as open market purchases. We are thinking through our strategy now. It will depend on a whole bunch of factors. I don't expect that we will be giving a whole lot of color on how we anticipate doing this. It's just something we'll report on after it's done.

Justin Lake -- Wolfe Research LLC -- Analyst

Okay. Any of those factors specifically that we should be thinking about going into the decision?

Joel Ackerman -- Chief Financial Officer

Look, there are a lot of factors, including price, timing, other use of proceeds. But I don't think we have a formula or an algorithm we can guide you to.

Justin Lake -- Wolfe Research LLC -- Analyst

Okay. Then you mentioned a $30 million one-time benefit on Medicare recoveries from a timing perspective. So that's going to be a benefit of $30 million to OI in 2018?

Joel Ackerman -- Chief Financial Officer

Correct.

Justin Lake -- Wolfe Research LLC -- Analyst

Okay. And that's a good guy versus what you previously expected? Obviously, you give a range. Is that a reasonable way to think about it? Are there any other bad guys that we think should be offsetting that or should this move us to the higher end of the range all else being equal?

Joel Ackerman -- Chief Financial Officer

So this isn't a good guy relative to what we had been talking about before. Given the magnitude, a dollar of RPT, it's not something we would necessarily typically call out. There are a bunch of things like this that flow through from a year-to-year basis on any given year. The reason we wanted to call it out this quarter was because it will drive a roughly $3.00 RPT increase in Q1 because that $30 million will be concentrated largely in the first three or four quarters of the year. So we just wanted to make sure you and everyone else knew it was coming.

Justin Lake -- Wolfe Research LLC -- Analyst

Okay. Then on the

[inaudible]

[00:51:07] accounts, can you tell us which row the increase in the number of insured patients you're seeing in the quarter and do you expect this to be the new run rate going into 2018?

Joel Ackerman -- Chief Financial Officer

Sure. That flows through the bad debt line. The other adjustment that I referred to flows through the gross revenue line. Because they offset and because of the new revenue accounting standards going forward, we're no longer going to report that gross number, nor the bad debt number. So you'll only see the net number. So I think it is safe to use the net RPT that we delivered in Q4 as a starting point for modeling 2018.

Justin Lake -- Wolfe Research LLC -- Analyst

Got it. But you're saying the two aren't correlated, right? Or they don't have anything to do with each other, right? One is collection of commercial and the other is an increase in insured patients? I'm curious what's driving the increase in uninsured patients or am I mistaken here?

Joel Ackerman -- Chief Financial Officer

They're not connected insofar as they're not necessarily driven by similar underlying business dynamics. If that's your question.

Justin Lake -- Wolfe Research LLC -- Analyst

Well no, I'm just curious what's driving the increase in insured patients in the first place. Is that something that you feel like has happened as white noise or do you -- it sounds like you feel like this is the new run rate. So you're going to collect commercial at a higher rate and you're going to have more uninsured patients going forward as well.

Joel Ackerman -- Chief Financial Officer

Right. That is our view going forward. I think if you want to think about this bad debt number, it's a few things. It's underinsured, it's uninsured, it's higher patient paid deductible. So I think some of these are broad trends you're seeing within the health insurance industry. That's probably as helpful as I can get.

Justin Lake -- Wolfe Research LLC -- Analyst

Okay. I've just got a few other numbers questions here to run through. The advocacy cost? You said there was nothing in for California and Ohio. Is there a number that you can think of that we should be prepared for if you do need to start advocating against this stuff in the back half of the year?

Javier J. Rodriguez -- Chief Executive Officer, DaVita Kidney Care

No, it's a little early. Of course, there's a lot to play out before now and then. As you know, these things can heat up or die down. And so the number could be quite drastically different depending on the scenario.

Justin Lake -- Wolfe Research LLC -- Analyst

Okay. Then lastly on the Patient Act, have you gotten a CBO score yet on this?

Joel Ackerman -- Chief Financial Officer

No, we have not.

Justin Lake -- Wolfe Research LLC -- Analyst

Any idea what's holding that up? I know the government, there's a lot going on and they're passing stuff day-by-day, but is there a reason why, given how long this has been out there that we haven't got a CBO score?

Kent J. Thiry --Chief Executive Officer

It really is a couple of reasons that are quite straightforward. First, the CBO prioritizes stuff and with all the major legislative disputes and issues, the tax reform and all this stuff around healthcare in the summer and the rest and these people coming up with proposal after proposal after proposal, every one of those sucks all the oxygen out of the room. When there's not regular order, most of this stuff is typically done in very hectic, frenetic ways. Then there's a huge amount of organizational fatigue and a huge queue of proposals. So that's one.

The second is that the Patient Act involves some pretty significant numbers and pretty significant complexities. It's really transforming an entire segment and has that potential. It just deserves extra levels of rigor in sort of analyzing all the interdependencies from both the policy and predicted behavioral point of view. It's not as simple as a lot of other legislation about changing something with a drug or changing something on readmission, reimbursement, or whatever else.

So it requires a lot of iteration. I guess that's the third thing I'll say. It's not as if they haven't been working on it or they haven't been communicating, there's been a huge amount of interaction between our Congressional champions and the CBO, in between us and our Congressional champions. So it's getting a huge amount of high-quality attention. It isn't sitting in a closet.

Justin Lake -- Wolfe Research LLC -- Analyst

That's great to hear. The last one, is there any way that this has a cost component to it? Do you think it scores as a cost for the government over whatever period they're looking at it, I guess 10 years?

Kent J. Thiry -- Chief Executive Officer

Justin, you've been around a long time also. Predicting what the CBO is going to do is not something that we're foolish enough to do. Yeah, the answer to your question I guess is yes. It's not, one can see a scenario where they presume cherry-picking and some other stuff and say it would be a cost. We think very much it's going to be a tremendous saver for the system over the relevant timeframe, but we're not the ones doing the ultimate model and they've got to protect themselves and tend to lean a little bit conservative.

So yes, they could come out with a cost. No, we don't think they should. But it wouldn't necessarily be low quality, shoddy work if they did because they've got a tough job of predicting all this stuff. So is that helpful?

Justin Lake -- Wolfe Research LLC -- Analyst

It is, I appreciate it, Kent. Thanks.

Kent J. Thiry -- Chief Executive Officer

All righty.

Operator

We show no further questions in queue at this time. As a reminder, if you would like to ask a question, press * followed by the number 1 on your phone and record your name when prompted. To cancel your request, press * followed by the number 2. One moment, please.

Kent J. Thiry -- Chief Executive Officer

All right, operator. That's good. Thank you all very much and we look forward to talking to you again next quarter. Thank you.

Operator

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

Duration: 63 minutes

Call participants:

Jim Gustafson -- Vice President, Investor Relations

Kent J. Thiry -- Chief Executive Officer

Joel Ackerman -- Chief Financial Officer

Javier J. Rodriguez -- Chief Executive Officer, DaVita Kidney Care

Jim Hilger -- Chief Accounting Officer

LeAnne M. Zumwalt -- Group Vice President, Purchasing and Public Affairs

Kevin Fischbeck -- Bank of America Merrill Lynch -- Analyst

Justin Lake -- Wolfe Research LLC -- Analyst

Frank Morgan -- RBC Capital -- Managing Director

Whit Mayo -- Robert W. Baird & Co., Inc. -- Analyst

John Ransom -- Raymond James & Associates, Inc. -- Analyst

Lisa Clive -- Sanford C. Bernstein Ltd. -- Analyst

Gary Taylor -- JPMorgan Securities LLC -- Analyst

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