Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of ~~October 30, 2009,~~April 29, 2010, the number of shares of the Registrant’s common stock outstanding was approximately ~~102.2~~103.9 million shares and the aggregate market value of the common stock outstanding held by non-affiliates based upon the closing price of these shares on the New York Stock Exchange was approximately ~~$5.4~~$6.6 billion.


	Three months ended September 30,						Nine months ended September 30,						Three months ended March 31,
	2009			2008			2009			2008			2010			2009
Net operating revenues	$	1,573,915		$	1,447,135		$	4,540,596		$	4,199,163		$	1,559,418		$	1,447,640
Operating expenses and charges:
Patient care costs		1,095,857			1,005,648			3,153,622			2,909,143			1,082,789			1,005,886
General and administrative		134,931			128,617			394,370			374,581			137,277			127,273
Depreciation and amortization		56,813			54,970			172,121			160,673			57,468			57,123
Provision for uncollectible accounts		42,021			37,305			119,990			109,433			41,563			36,736
Equity investment income		(708	)		(1,177	)		(1,066	)		(654	)
Equity investment (income) loss														(2,345	)		18

Total operating expenses and charges		1,328,914			1,225,363			3,839,037			3,553,176			1,316,752			1,227,036

Operating income		245,001			221,772			701,559			645,987			242,666			220,604
Debt expense		(45,535	)		(54,505	)		(140,924	)		(168,891	)		(44,583	)		(48,301	)
Other income		999			2,481			3,026			10,331			831			754

Income before income taxes		200,465			169,748			563,661			487,427			198,914			173,057
Income tax expense		74,195			62,010			209,485			175,853			73,914			64,783

Net income		126,270			107,738			354,176			311,574			125,000			108,274
Less: Net income attributable to noncontrolling interests		(15,340	)		(13,828	)		(41,216	)		(35,779	)		(15,577	)		(12,063	)

Net income attributable to DaVita Inc.	$	110,930		$	93,910		$	312,960		$	275,795		$	109,423		$	96,211

Earnings per share:
Basic earnings per share attributable to DaVita Inc.	$	1.07		$	0.90		$	3.01		$	2.61		$	1.05		$	0.93

Diluted earnings per share attributable to DaVita Inc.	$	1.06		$	0.89		$	3.00		$	2.59		$	1.04		$	0.92

Weighted average shares for earnings per share:
Basic		104,127,334			104,556,770			103,904,768			105,569,971			103,364,869			103,878,417

Diluted		104,607,318			105,577,823			104,315,019			106,421,184			104,765,600			104,409,026


	September 30, 2009			December 31, 2008			March 31, 2010			December 31, 2009
ASSETS
Cash and cash equivalents	$	581,680		$	410,881		$	755,909		$	539,459
Short-term investments		20,680			35,532			22,907			26,475
Accounts receivable, less allowance of $225,931 and $211,222		1,142,861			1,075,457
Accounts receivable, less allowance of $230,769 and $229,317								1,103,786			1,105,903
Inventories		69,014			84,174			68,038			70,041
Other receivables		235,785			239,165			225,038			263,456
Other current assets		34,816			33,761			34,485			40,234
Income tax receivable		—			32,130
Deferred income taxes		223,697			217,196			251,088			256,953

Total current assets		2,308,533			2,128,296			2,461,251			2,302,521
Property and equipment, net		1,088,446			1,048,075			1,093,850			1,104,925
Amortizable intangibles, net		141,925			160,521			129,285			136,732
Investments in third-party dialysis businesses		24,011			19,274
Equity investments								23,965			22,631
Long-term investments		7,567			5,656			7,584			7,616
Other long-term assets		34,262			47,330			33,397			32,615
Goodwill		3,932,964			3,876,931			3,942,386			3,951,196

	$	7,537,708		$	7,286,083		$	7,691,718		$	7,558,236

LIABILITIES AND EQUITY
Accounts payable	$	256,707		$	282,883		$	177,764		$	176,657
Other liabilities		426,856			495,239			412,515			461,092
Accrued compensation and benefits		314,677			312,216			299,709			286,121
Current portion of long-term debt		100,677			72,725			98,844			100,007
Income taxes payable		14,592			—			58,643			23,064

Total current liabilities		1,113,509			1,163,063			1,047,475			1,046,941
Long-term debt		3,555,853			3,622,421			3,509,713			3,532,217
Other long-term liabilities		100,722			101,442			89,634			87,692
Alliance and product supply agreement, net		31,980			35,977			29,315			30,647
Deferred income taxes		304,675			244,884			346,460			334,855

Total liabilities		5,106,739			5,167,787			5,022,597			5,032,352
Commitments and contingencies
Noncontrolling interests subject to put provisions		292,636			291,397			350,485			331,725
Equity:
Preferred stock ($0.001 par value, 5,000,000 shares authorized; none issued)
Common stock ($0.001 par value, 450,000,000 shares authorized; 134,862,283 shares issued; 103,232,774 and 103,753,673 shares outstanding)		135			135
Common stock ($0.001 par value, 450,000,000 shares authorized; 134,862,283 shares issued; 103,793,205 and 103,062,698 shares outstanding)								135			135
Additional paid-in capital		638,253			584,358			617,891			621,685
Retained earnings		2,202,410			1,889,450			2,421,557			2,312,134
Treasury stock, at cost (31,629,509 and 31,108,610 shares)		(756,157	)		(691,857	)
Treasury stock, at cost (31,069,078 and 31,799,585 shares)								(775,115	)		(793,340	)
Accumulated other comprehensive loss		(7,838	)		(14,339	)		(3,320	)		(5,548	)

Total DaVita Inc. shareholders’ equity		2,076,803			1,767,747			2,261,148			2,135,066
Noncontrolling interests not subject to put provisions		61,530			59,152			57,488			59,093

Total equity		2,138,333			1,826,899			2,318,636			2,194,159

	$	7,537,708		$	7,286,083		$	7,691,718		$	7,558,236


	Nine months ended September 30,						Three months ended March 31,
	2009			2008			2010			2009
Cash flows from operating activities:
Net income	$	354,176		$	311,574		$	125,000		$	108,274
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		172,121			160,673			57,468			57,123
Stock-based compensation expense		33,850			29,975			10,233			11,009
Tax benefits from stock award exercises		12,434			10,174			7,873			2,161
Excess tax benefits from stock award exercises		(8,115	)		(5,054	)		(1,378	)		(779	)
Deferred income taxes		45,417			56,157			(3,311	)		16,430
Equity investment income		(1,066	)		(654	)
Loss on disposal of assets		7,826			9,688
Non-cash debt and non-cash rent charges		7,497			9,971
Equity investment (income) loss								(1,334	)		18
(Gain) loss on disposal of assets and other non-cash charges								(695	)		7,051
Changes in operating assets and liabilities, other than from acquisitions and divestitures:
Accounts receivable		(68,235	)		(130,022	)		594			(13,757	)
Inventories		15,858			(1,248	)		1,818			13,055
Other receivables and other current assets		(2,164	)		(28,684	)		44,343			41,417
Other long-term assets		5,641			(12,761	)		(782	)		1,422
Accounts payable		(58,995	)		(12,800	)		1,800			(65,411	)
Accrued compensation and benefits		20,733			(11,752	)		17,349			(21,403	)
Other current liabilities		(68,383	)		29,838			(45,063	)		(54,116	)
Income taxes		55,226			(3,086	)		47,617			40,339
Other long-term liabilities		(9,702	)		3,163			315			(8,584	)

Net cash provided by operating activities		514,119			415,152			261,847			134,249

Cash flows from investing activities:
Additions of property and equipment		(205,653	)		(223,851	)		(42,585	)		(73,203	)
Acquisitions		(64,001	)		(77,157	)		(1,069	)		(39,828	)
Proceeds from asset sales		6,256			451			16,264			4,199
Purchase of investments available for sale		(1,737	)		(1,695	)		(521	)		(514	)
Purchase of investments held-to-maturity		(16,942	)		(19,005	)		(12,522	)		(6	)
Proceeds from sale of investments available for sale		16,537			5,323			880			10,669
Proceeds from maturities of investments held-to-maturity		16,123			18,728			15,990			20
Purchase of equity investments								(350	)		—
Distributions received on equity investments		929			802			350			—
Purchase of intangible assets and other		(260	)		(65	)

Net cash used in investing activities		(248,748	)		(296,469	)		(23,563	)		(98,663	)

Cash flows from financing activities:
Borrowings		13,924,642			12,937,047			4,877,000			2,619,540
Payments on long-term debt		(13,961,667	)		(12,938,297	)		(4,902,041	)		(2,630,739	)
Deferred financing costs		(42	)		(130	)
Purchase of treasury stock		(61,223	)		(169,673	)		—			(32,016	)
Excess tax benefits from stock award exercises		8,115			5,054			1,378			779
Stock award exercises and other share issuances, net		30,309			33,670			21,073			9,102
Distributions to noncontrolling interests		(46,888	)		(43,391	)		(18,658	)		(13,567	)
Contributions from noncontrolling interests		11,117			13,525			1,613			4,460
Proceeds from sales of additional noncontrolling interests		7,733			8,422			108			3,081
Purchases from noncontrolling interests		(6,668	)		(24,009	)		(2,307	)		(1,424	)

Net cash used in financing activities		(94,572	)		(177,782	)		(21,834	)		(40,784	)

Net increase (decrease) in cash and cash equivalents		170,799			(59,099	)		216,450			(5,198	)
Cash and cash equivalents at beginning of period		410,881			447,046			539,459			410,881

Cash and cash equivalents at end of period	$	581,680		$	387,947		$	755,909		$	405,683


	Non-controlling interests subject to put provisions				DaVita Inc. Shareholders’ Equity																									Non-controlling interests not subject to put provisions				Comprehensive income				Non-controlling interests subject to put provisions				DaVita Inc. Shareholders’ Equity																												Non-controlling interests not subject to put provisions				Comprehensive income
				Common stock		Additional paid-in capital			Retained earnings			Treasury stock							Accumulated other comprehensive income (loss)				Total										Common stock									Additional paid-in capital				Retained earnings			Treasury stock						Accumulated other comprehensive income (loss)				Total
				Shares	Amount	Additional paid-in capital					Shares			Amount									Total										Shares								Amount							Shares			Amount								Total
Balance at December 31, 2007			$	330,467			134,862	$	Retained earnings		135		$	479,115			$	1,515,290	Accumulated other comprehensive income (loss)		(27,732		)		$	(487,744	)		$	(2,511	)		$				1,504,285				$	Additional paid-in capital	48,178
Balance at December 31, 2008																																					$	291,397					134,862		$	Retained earnings		135		$	584,358		$	1,889,450	Accumulated other comprehensive income (loss)		(31,109		)		$	(691,857	)		$	(14,339	)		$	1,767,747			$	59,152		$	—
Comprehensive income:
Net income.		30,401											374,160															374,160				16,759			$	421,320
Net income																																							38,381														422,684															422,684				18,694				479,759
Unrealized losses on interest rate swaps, net of tax																							(12,947	)			(12,947	)							(12,947	)																											(2,578	)			(2,578	)							(2,578	)
Reclassification of net swap realized losses into net income, net of tax																							2,590				2,590								2,590
Unrealized losses on investments, net of tax																							(1,174	)			(1,174	)							(1,174	)
Reclassification of net investment realized gains into net income, net of tax																							(297	)			(297	)							(297	)
Less reclassification of net swap realized losses into net income, net of tax																																																															10,542				10,542								10,542
Unrealized gains on investments, net of tax																																																															986				986								986
Less reclassification of net investment realized gains into net income, net of tax																																																															(159	)			(159	)							(159	)

Total comprehensive income																																		$	409,492																																							$	488,550

Stock purchase shares issued									2,981						98				1,730								4,711																							2,135					107				2,387								4,522
Stock unit shares issued									(2,670	)					181				3,544								874																							(1,570	)				69				1,570								—
Stock options and SSARs exercised									12,278						1,133				23,328								35,606																							15,598					2,036				48,055								63,653
Stock-based compensation expense									41,235																		41,235																							44,422																	44,422
Excess tax benefits from stock awards exercised									8,165																		8,165																							6,150																	6,150
Purchase of treasury stock															(4,789	)			(232,715	)							(232,715	)
Distributions to noncontrolling interests		(40,016	)																												(19,341	)							(44,277	)																															(23,471	)
Contributions from noncontrolling interests		7,305																													11,769								10,502																																2,569
Sales and assumptions of additional noncontrolling interests		9,389																													1,993								13,483											(529	)																(529	)			4,039
Purchases from noncontrolling interests		(2,347	)																												(754	)							(2,594	)										(3,721	)																(3,721	)			(544	)
Changes in fair value of noncontrolling interests		(43,254	)						43,254																		43,254												24,819											(24,819	)																(24,819	)
Other adjustments to noncontrolling interests		(548	)																												548
Other adjustments																																							14											(339	)																(339	)			(1,346	)
Purchase of treasury stock																																																							(2,903	)			(153,495	)							(153,495	)

Balance at December 31, 2008		291,397			134,862		135		584,358				1,889,450		(31,109	)			(691,857	)			(14,339	)			1,767,747				59,152
Balance at December 31, 2009																																						$	331,725					134,862		$	135		$	621,685		$	2,312,134		(31,800	)		$	(793,340	)		$	(5,548	)		$	2,135,066			$	59,093
Comprehensive income:
Net income		27,824											312,960														312,960				13,392				354,176				9,608														109,423														109,423				5,969				125,000
Unrealized losses on interest rate swaps, net of tax																							(2,248	)			(2,248	)							(2,248	)																											(173	)			(173	)							(173	)
Reclassification of net swap realized losses into net income, net of tax																							8,114				8,114								8,114
Less reclassification of net swap realized losses into net income, net of tax																																																															2,187				2,187								2,187
Unrealized gains on investments, net of tax																							791				791								791																												200				200								200
Reclassification of net investment realized gains into net income, net of tax																							(156	)			(156	)							(156	)
Less reclassification of net investment realized losses into net income, net of tax																																																															14				14								14

Total comprehensive income																																		$	360,677																																							$	127,228

Stock purchase shares issued									2,135						107				2,387								4,522																							2,130					86				2,151								4,281
Stock unit shares issued									(1,342	)					59				1,342																															(84	)				4				84
Stock options and SSARs exercised									945						1,166				26,359								27,304																							4,129					641				15,990								20,119
Stock-based compensation expense									33,850																		33,850																							10,233																	10,233
Excess tax benefits from stock awards exercised									8,371																		8,371																							419																	419
Purchase of treasury stock															(1,853	)			(94,388	)							(94,388	)
Distributions to noncontrolling interests		(29,929	)																												(16,959	)							(11,509	)																															(7,149	)
Contributions from noncontrolling interests		8,653																													2,575								975																																638
Sales and assumptions of additional noncontrolling interests		12,022							(837	)																	(837	)			4,115																			52																	52				257
Purchases from noncontrolling interests		(2,594	)						(3,639	)																	(3,639	)			(435	)							(1,200	)										213																	213				(1,320	)
Changes in fair value of noncontrolling interests		(14,750	)						14,750																		14,750												20,886											(20,886	)																(20,886	)
Other adjustments to noncontrolling interests		13							(338	)																	(338	)			(310	)

Balance at September 30, 2009	$	292,636			134,862	$	135	$	638,253			$	2,202,410		(31,630	)		$	(756,157	)		$	(7,838	)		$	2,076,803			$	61,530
Balance at March 31, 2010																																						$	350,485					134,862		$	135		$	617,891		$	2,421,557		(31,069	)		$	(775,115	)		$	(3,320	)		$	2,261,148			$	57,488

Unless otherwise indicated in this Quarterly Report on Form 10-Q “the Company”, “we”, “us”, “our” and similar terms refer to DaVita Inc. and its consolidated subsidiaries.

The condensed consolidated interim financial statements included in this report are prepared by the Company without audit. In the opinion of management, all adjustments consisting only of normal recurring items necessary for a fair presentation of the results of operations are reflected in these consolidated interim financial statements. All significant intercompany accounts and transactions have been eliminated. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The most significant estimates and assumptions underlying these financial statements and accompanying notes generally involve revenue recognition and provisions for uncollectible accounts, impairments and valuation adjustments, fair value estimates, accounting for income taxes, variable compensation accruals, purchase accounting valuation estimates and stock-based compensation. The results of operations for the ~~nine~~three months ended ~~September 30, 2009~~March 31, 2010 are not necessarily indicative of the operating results for the full year. The consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2008.~~2009. Prior year balances and amounts have been classified to conform to the current year presentation. The Company has evaluated subsequent events through ~~November 5, 2009, which is~~ the date these condensed consolidated financial statements were ~~issued.~~

On June 29, 2009, the Financial Accounting Standards Board (FASB) established the FASB Accounting Standards Codification (Codification) as the single source of authoritative U.S. generally accepted accounting principles (GAAP) forissued and have included all nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) are also sources of authoritative U.S. GAAP for SEC registrants. The Codification does not change U.S. GAAP but takes previously issued FASB standards and other U.S. GAAP authoritative pronouncements, changes the way the standards are referred to, and includes them in specific topic areas. The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of the Codification did not have any impact on the Company’s financial statements.

Effective January 1, 2009, the Company was required to treat noncontrolling interests as a separate component of equity, but apart from the Company’s equity, and not as a liability or other item outside of equity. The Company was also required to identify and present consolidated net income attributable to the Company and to noncontrolling interests on the face of the consolidated statement of income. Previously, the Company had reported minority interests (noncontrolling interests) as a reduction to operating income. In addition, changes in the Company’s ownership interest while it retains a controlling financial interest are required to be accounted for as equity transactions. The Company was also required to expand disclosures in the financial statements to include a reconciliation of the beginning and ending balances of the equity attributable to the Company and the noncontrolling owners and a schedule showing the effects of changes in the Company’s ownership interest in a subsidiary on the equity attributable to the Company. This change did not have a material impact on the Company’s consolidated financial statements; however, it did change the presentation of minority interests in the Company’s consolidated financial statements. In conjunction with adopting these requirements, the Company is required to classify securities with redemption features that are not solely within the Company’s control such as its noncontrolling interests that are subject to put provisions outside of permanent equity and to measure these

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)~~2. Earnings per share

noncontrolling interests at fair value. See Note 9 to the condensed consolidated financial statements for further details. These presentation and disclosure requirements have been applied retrospectively for all prior periods presented.

All business combinations consummated after January 1, 2009 are required to be accounted for under the acquisition method (previously referred to as the purchase method). Under the acquisition method, the acquirer recognizes the assets acquired, the liabilities assumed, contractual contingencies, as well as any noncontrolling interests in the acquiree at their fair values at the acquisition date. Noncontractual contingencies are recognized at the acquisition date at their fair values only if it is more likely than not that they meet the definition of an asset or a liability. Transaction costs are excluded from the acquisition cost and are expensed as incurred. Any contingent consideration included by the acquirer as part of the purchase price must also be measured at fair value at the acquisition date and is classified as either equity or a liability. A Company that obtains control but acquires less than 100% of an acquiree is required to record 100% of the fair value of the acquiree assets, liabilities, and noncontrolling interests at the acquisition date. The adoption of these requirements did not have a material impact on the Company’s consolidated financial statements.

Basic net income per share is calculated by dividing net income attributable to DaVita Inc. net of the increase in noncontrolling interest redemption rights in excess of fair value, by the weighted average number of common shares and vested stock units outstanding. Diluted net income per share includes the dilutive effect of outstanding stock options, stock-settled stock appreciation rights and unvested stock units (under the treasury stock method).

The reconciliations of the numerators and denominators used to calculate basic and diluted earnings per share are as follows:

Stock-based compensation recognized ~~during~~in a period ~~is based on~~represents the amortization during that period of the estimated grant-date fair value of ~~the portion of the~~current and prior stock-based awards over their vesting ~~during that period,~~terms, adjusted for expected forfeitures. Stock-based compensation recognized in these condensed consolidated financial statements for the three and nine months ended September 30, 2009 and 2008 includes compensation cost for stock-based awards granted prior to, but not fully vested as of, January 1, 2006 and subsequent stock-based awards granted through September 30, 2009 and 2008, respectively. Shares issued upon exercise of stock awards are generally issued from shares in treasury. The Company has used the Black-Scholes-Merton valuation model for estimating the grant-date fair value of stock options and stock-settled stock appreciation rights granted in all periods. During the ~~first nine~~three months ~~of 2009,~~ended March 31, 2010, the Company granted ~~3,991~~1,225 stock-settled stock appreciation rights with a grant-date fair value of ~~$47,833~~$19,402 and a weighted-average expected life of approximately ~~3.5~~3.6 years, and also granted 14291 stock units with a grant-date fair value of ~~$647~~$18,419 and a weighted-average expected life of approximately ~~0.6 of a year.~~2.7 years.

For the ~~nine~~three months ended ~~September 30,~~March 31, 2010 and 2009, ~~and 2008,~~ the Company recognized ~~$33,850~~$10,233 and ~~$29,975,~~$11,009, respectively, in stock-based compensation expense for stock options, stock-settled stock appreciation rights, stock units and discounted employee stock plan purchases, which are primarily included in general and

administrative expenses. The estimated tax benefit recorded for stock-based compensation through ~~September 30,~~March 31, 2010 and 2009 was $3,880 and ~~2008 was $12,820 and $11,306,~~$4,171, respectively. As of ~~September 30, 2009,~~March 31, 2010, there was ~~$88,023~~$100,585 of total estimated unrecognized compensation cost related to nonvested stock-based compensation arrangements under our equity compensation and stock purchase plans. The Company expects to recognize this cost over a weighted average remaining period of ~~1.5~~1.6 years.

During the ~~nine~~three months ended ~~September 30,~~March 31, 2010 and 2009, ~~and 2008,~~ the Company received ~~$27,304~~$20,119 and ~~$29,876,~~$8,035, respectively, in cash proceeds from stock option exercises and ~~$12,434~~$7,873 and ~~$10,174,~~$2,161, respectively, in actual tax benefits upon the exercise of stock awards.

~~During~~In connection with a proposal to stockholders requesting approval of an increase in the ~~third quarter~~number of ~~2009, the Company repurchased 1,109~~ shares ~~of its common stock~~authorized for $62,373 or an average price of $56.25 per share. For the first nine months of 2009, the Company repurchased a total of 1,853 shares of its common stock for $94,388 or an average price of $50.93 per share. As of September 30, 2009, a total of $33,165 of share repurchases had not yet been settled in cash. In addition, the Company repurchased 1,049 additional shares of its common stock from October 1, 2009 through October 7, 2009 for $59,107, or an average price of $56.32 per share. All of these share repurchases were consummated pursuant to previously announced authorizations byissuance under the Company’s ~~Board of Directors. On October 8, 2009,~~equity compensation plan, the ~~Company’s~~ Board of Directors ~~authorized~~has committed to our stockholders that over the three-year period commencing on April 1, 2010 it will not grant a number of shares subject to stock awards under the Company’s equity compensation plan, including stock options, stock appreciation rights, restricted stock units or other stock awards, at an ~~additional $500,000~~average annual rate greater than 4.02% of the number of shares of our common stock that we believe will be outstanding over such three-year period. This 4.02% rate is the average of the 2009 and 2010 three-year average median grant rate plus one standard deviation as published by RiskMetrics Group for the Russell 3000 companies in the GICS 3510 industry segment. Awards that are settled in cash, awards that are granted pursuant to stockholder approved exchange programs, awards sold under our employee stock purchase plan and awards assumed or substituted in business combination transactions will be excluded from our grant rate calculation. For purposes of calculating the number of shares granted, any “full-value” awards (i.e., restricted stock, restricted stock unit, performance share ~~repurchases.~~or any other award that does not have an exercise price per share at least equal to the per share fair market value of our common stock on the grant date) will count as equivalent to 3.0 shares. The Company ~~has not repurchased any additional shares~~will publicly report its compliance with this three-year average annual grant rate commitment, and the data necessary to independently confirm it, in a public filing shortly after March 31, 2013.

Long-term debt was comprised of ~~its common stock from October 8, 2009 through November 5, 2009 under this Board authorization. Therefore,~~ the ~~total outstanding authorization for share repurchases as of November 5, 2009 was $500,000. This stock repurchase program has no expiration date.~~following:

NOTES TO CONDENSED CONSOLIDATED FINANCIAL ~~STATEMENTS—~~STATEMENTS (continued)

Scheduled maturities of long-term debt at ~~September 30, 2009~~March 31, 2010 are as follows:


2009 (remainder of the year)	$	32,661
2010		90,520
2010 (remainder of the year)			76,671
2011		67,752	66,912
2012		1,707,625	1,706,956
2013		901,783	901,124
2014		845	546
2015			850,318
Thereafter		852,436	3,543

On April 30, 2010, the Company notified the Trustee that it is exercising its right to redeem $200,000 aggregate principal amount of its outstanding 6 ⁵/8% senior notes due 2013, at a price of 101.656% and the redemption date is expected to be in June 2010. The Company expects to expense net pre-tax refinancing charges of approximately $4,000 in the second quarter of 2010, associated with the transaction.

During the first ~~nine~~three months of ~~2009,~~2010, the Company made mandatory principal payments totaling ~~$39,375~~$21,875 on the term loan A.

Effective January 1, 2009, the Company wasrequired to provide enhanced disclosures about the Company’s derivative and hedging activities. The Company is required to provide additional disclosures about (a) how and why the Company uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for, and (c) how derivative instruments and related hedged items affect the Company’s financial position, financial performance, and cash flows. These requirements did not have a material impact on the Company’s consolidated financial statements. The Company has elected to provide comparative disclosures for the prior period presented.

The Company has entered into several interest rate swap agreements as a means of hedging its exposure to and volatility from variable-based interest rate changes as part of its overall risk management strategy. These agreements are not held for trading or speculative purposes, and have the economic effect of converting portions of our variable rate debt to a fixed rate. These agreements are designated as cash flow hedges, and as a result, hedge-effective gains or losses resulting from changes in the fair values of these swaps are reported in other comprehensive income until such time as each specific swap tranche is realized, at which time the amounts are reclassified into net income. Net amounts paid or received for each specific swap tranche that have settled have been reflected as adjustments to debt expense. These agreements do not contain credit-risk contingent features.

As of ~~September 30, 2009,~~March 31, 2010, the Company maintained a total of ~~eight~~six interest rate swap agreements with amortizing notional amounts totaling ~~$482,600.~~$350,000. These agreements had the economic effect of modifying the LIBOR-based variable interest rate on an equivalent amount of the Company’s debt to fixed rates ranging from ~~3.88%~~4.05% to 4.70%, resulting in an overall weighted average effective interest rate of ~~5.70%~~5.83% on the hedged portion of the Company’s Senior Secured Credit Facilities, including the term loan B margin of 1.50%. The swap agreements expire inby September 30, 2010 and require quarterly interest payments. The Company estimates that approximately ~~$12,300~~$5,600 of existing unrealized pre-tax losses in other comprehensive income at ~~September 30, 2009~~March 31, 2010 will be reclassified into income over the next ~~twelve months.~~two quarters.

The following table summarizes our derivative instruments as of ~~September 30, 2009~~March 31, 2010 and December 31, ~~2008:~~2009:

Interest rate swap liabilities

September 30, 2009

December 31, 2008

March 31, 2010

December 31, 2009

Derivatives designated as hedging instruments

Balance sheet
location

Fair value

Balance sheet
location

Fair value

Balance sheet
location

Fair value

Balance sheet
location

Fair value

Current settlement of interest rate swap agreements

Other current
liabilities

2,541

Other current
liabilities

Interest rate swap agreements

Other long-term
liabilities

12,310

Other long-term
liabilities

21,886

Other current
liabilities

7,071

Other current
liabilities

10,792

Total

14,851

21,904

The following table summarizes the effects of our interest rate swap agreements for the ~~nine~~three months ended ~~September 30, 2009~~March 31, 2010 and ~~2008:~~2009:


	Amount of gains (losses) recognized in OCI on interest rate swap agreements												Location of (losses) gains reclassified from accumulated OCI into income		Amount of gains (losses) reclassified from accumulated OCI into income																Amount of gains (losses) recognized in OCI on interest rate swap agreements								Location of (losses) gains reclassified from accumulated OCI into income		Amount of gains (losses) reclassified from accumulated OCI into income
	Three months ended September 30,						Nine months ended September 30,							Three months ended September 30,								Nine months ended September 30,								Three months ended March 31,										Three months ended March 31,
Derivatives designated as cash flow hedges	2009			2008			2009			2008				2009				2008				2009				2008				2010				2009						2010				2009
Interest rate swap agreements	$	(1,722	)	$	(1,260	)	$	(3,681	)	$	(6,500	)		Debt expense		$	(4,450	)		$	(2,301	)		$	(13,280	)		$	(3,671	)		$	(283	)		$	(562	)		Debt expense		$	(3,579	)		$	(4,548	)
Tax expense benefit (expense)		670			490			1,433			2,528						1,731				895				5,166				1,428				110				219						1,392				1,769

Total	$	(1,052	)	$	(770	)	$	(2,248	)	$	(3,972	)			$	(2,719	)		$	(1,406	)		$	(8,114	)		$	(2,243	)		$	(173	)		$	(343	)				$	(2,187	)		$	(2,779	)

Total comprehensive income for the three ~~and nine~~ months ended ~~September 30, 2009~~March 31, 2010 was ~~$128,465 and $360,677, respectively,~~$127,228 including an increase to other comprehensive income for amounts reclassified into income, net of unrealized valuation loss on interest rate swaps of $2,014, net of tax, and an increase to other comprehensive income for unrealized valuation gains on investments, and the amounts reclassified into income of $214, net of tax.

Total comprehensive income for the three months ended March 31, 2009 was $110,502 including an increase to comprehensive income for amounts reclassified into income, net of unrealized valuation losses on interest rate swaps of ~~$1,667 and $5,866,~~$2,436, net of tax, ~~respectively,~~ and ~~an increase to other comprehensive income for unrealized valuation gains on investments, net of amounts reclassified into income of $527 and $635, net of tax, respectively.~~

~~Total comprehensive income for the three and nine months ended September 30, 2008 was $107,943 and $309,239 including~~ adjustments to ~~other comprehensive income for valuation gains (losses) on interest rate swaps, net of amounts reclassified into income of $636 and $(1,729), net of tax, respectively, and adjustments to~~

other comprehensive income for unrealized losses on investments, net of amounts reclassified into income of ($~~431) and ($606)~~208), net of ~~tax, respectively.~~tax.

As of ~~September 30, 2009,~~March 31, 2010, the Company’s interest rates were economically fixed on approximately ~~25%~~19% of ~~the Company’s~~its variable rate debt and approximately ~~61%~~59% of its total debt.

As a result of the swap agreements, the Company’s overall ~~effective~~ weighted average effective interest rate on the Senior Secured Credit Facilities was ~~2.81%~~2.57%, based upon the current margins in effect of 1.50%, as of ~~September 30, 2009.~~March 31, 2010.

The Company’s overall weighted average effective interest rate during the ~~third~~first quarter of ~~2009~~2010 was ~~4.79%~~4.67% and as of ~~September 30, 2009~~March 31, 2010 was ~~4.76%~~4.66%.

As of ~~September 30, 2009,~~March 31, 2010, the Company has undrawn revolving credit facilities totaling $250,000 of which approximately ~~$48,000~~$52,000 was committed for outstanding letters of credit. In addition, the Company currently has undrawn revolving credit facilities totaling ~~$3,000~~$2,500 associated with several of its joint ventures. These revolving credit facilities are typically guaranteed by DaVita Inc. or one of its wholly-owned operating subsidiaries based upon its proportionate ownership percentage.

The majority of the Company’s revenues are from government programs and may be subject to adjustment as a result of: (1) examination by government agencies or contractors, for which the resolution of any matters raised may take extended periods of time to finalize; (2) differing interpretations of government regulations by

different fiscal intermediaries or regulatory authorities; (3) differing opinions regarding a patient’s medical diagnosis or the medical necessity of services provided; and (4) retroactive applications or interpretations of governmental requirements. In addition, the Company’s revenues from commercial payors may be subject to adjustment as a result of potential claims for refunds, as a result of government actions or as a result of other claims by commercial payors.

In December 2008, the Company received a subpoena for documents from the Office of Inspector General, U.S. Department of Health and Human Services, or OIG, relating to the pharmaceutical products Zemplar, Hectorol, Venofer, Ferrlecit and Epogen^®, or EPO, as well as other related matters. The subpoena covers the period from January 2003 to the present. The Company has been in contact with the United States Attorney’s Office, or U.S. Attorney’s Office, for the Northern District of Georgia and the U.S. Department of Justice in Washington, DC, since November 2008 relating to this matter, and has been advised that this is a civil inquiry. On June 17, 2009, the Company learned that the allegations were made as part of a civil qui tam complaint filed by individuals and brought pursuant to the federal False Claims Act. The case remains under seal in the United States District Court for the Northern District of Georgia. The Company is cooperating with the inquiry and is producing the requested records. To the Company’s knowledge, no proceedings have been initiated by the federal government against the Company at this time. Although the Company cannot predict whether or when proceedings might be initiated, or when these matters may be resolved, it is not unusual for investigations such as these to continue for a considerable period of time. Responding to the subpoena will continue to require management’s attention and significant legal expense. Any negative findings could result in substantial financial penalties against usthe Company and exclusion from future participation in the Medicare and Medicaid programs.

In February 2007, the Company received a request for information from the OIG for records relating to EPO claims submitted to Medicare. In August 2007, the Company received a subpoena from the OIG seeking similar documents. The requested documents relate to services provided from 2001 to 2004 by a number of the Company’s centers. The request and subpoena were sent from the OIG’s offices in Houston and Dallas, Texas. The Company is cooperating with the inquiry and is producing the requested records. The Company has been in contact with the U.S. Attorney’s Office for the Eastern District of Texas, which has stated that this is a civil inquiry related to EPO claims. On July 6, 2009, the United States District Court for the Eastern District of Texas lifted the seal on the civil qui tam complaint related to these allegations and the Company was subsequently served with a complaint by the relator. ~~There appears to be substantial~~The Company believes that there is some overlap between this issue and the ongoing review of EPO utilization and claims by the U.S. Attorney’s Office for the Eastern District of Missouri in St. Louis described below. To the Company’s knowledge, no proceedings have been initiated by the federal government against the Company at this time. Although the Company cannot predict whether or when proceedings might be initiated or when these matters may be resolved, it is not unusual for investigations such as these to continue for a considerable period of time. Responding to these inquiries will continue to require management’s attention and significant legal expense. Any negative findings could result in substantial financial penalties against the Company and exclusion from future participation in the Medicare and Medicaid programs.

In March 2005, the Company received a subpoena from the U.S. Attorney’s Office for the Eastern District of Missouri in St. Louis. The subpoena requires production of a wide range of documents relating to ~~our~~the Company’s operations, including documents related to, among other things, pharmaceutical and other services provided to patients, relationships with pharmaceutical companies, and financial relationships with physicians and joint ventures. The subpoena covers the period from December 1, 1996 through the present. In October 2005,

the Company received a follow-up request for additional documents related to specific medical director and joint venture arrangements. In February 2006, the Company received an additional subpoena for documents, including certain patient records relating to the administration and billing of EPO. In May 2007, the Company received a request for documents related to durable medical equipment and supply companies owned and operated by the Company. The Company is cooperating with the inquiry and is producing the requested records. The subpoenas have been issued in connection with a joint civil and criminal investigation. It is possible that criminal proceedings may be initiated against the Company in connection with this inquiry. To the Company’s knowledge, no proceedings have been initiated against the Company at this time. Although the Company cannot predict whether or when proceedings might be initiated or when these matters may be resolved, it is not unusual for investigations such as these to continue for a considerable period of time. Responding to the subpoenas will continue to require management’s attention and significant legal expense. Any negative findings could result in substantial financial penalties against the Company, exclusion from future participation in the Medicare and Medicaid programs and criminal penalties.

The Company was recently advised by the U.S. Department of Justice that it is conducting a civil investigation into the Company’s financial relationships with physicians. The Company has not received details as to the extent or scope of the inquiry but is expecting a subpoena in the near future. The Company intends to cooperate with the investigation just as it is cooperating with the U.S. Attorney’s Offices with respect to each of the other inquiries as described above.

The Company has received several notices of claims from commercial payors and other third parties related to historical billing practices and claims against DVA Renal Healthcare (formerly known as Gambro Healthcare) related to historical Gambro Healthcare billing practices and other matters covered by their 2004 settlement agreement with the Department of Justice and certain agencies of the U.S. government. At least one commercial payor has filed an arbitration demand against the Company, as described below, and additional commercial payors have threatened litigation. The Company intends to defend against these claims vigorously; however, the Company may not be successful and these claims may lead to litigation and any such litigation may be resolved unfavorably.

Several wage and hour claims have been filed against the Company in the Superior Court of California, each of which has been styled as a class action. In February 2007, June 2008, October 2008 and December 2008, the Company was served with five separate complaints, including two in October 2008, by various former employees, each of which alleges, among other things, that the Company failed to provide rest and meal periods, failed to pay compensation in lieu of providing such rest or meal periods, ~~and~~ failed to ~~comply with certain other California labor code requirements. The Company has reached a tentative settlement in~~pay the ~~complaints served on February 2007, October 2008 and December 2008 and is waiting for court approval~~correct amount of ~~the settlement. In October 2008, the Company was served with a complaint which alleges, among other things, that the Company~~overtime, failed to pay the rate on the “wage statement,” and failed to comply with certain other California ~~labor code~~Labor Code requirements. The Company has reached a settlement and release of all claims against it in connection with the complaints served in February 2007 and December 2008 and one of the complaints served in October 2008. The Company has fully funded the settlement which, pursuant to the terms of the settlement agreement, will result in a dismissal of the underlying court proceedings against it. The overall settlement amount was not material. The Company intends to vigorously defend against ~~these claims. The Company also intends~~the remaining claims and to vigorously oppose the certification of ~~these~~the remaining matters as class actions.

In August 2007, Sheet Metal Workers National Health Fund and Glenn Randle filed a complaint in the United States District Court for the Central District of California against the Company. The complaint also names as defendants Amgen Inc. and Fresenuis Medical Care Holdings, Inc. The complaint is styled as a class action and alleges four claims against the Company, including violations of the federal RICO statute, California’s unfair competition law, California’s false advertising law and for unjust enrichment. The complaint’s principal allegations against the Company are that the defendants engaged in a scheme to unlawfully promote the administration of EPO to hemodialysis patients intravenously, as opposed to subcutaneously, and to over-utilize EPO. On December 17, 2008, the Court dismissed the complaint and allegations in their entirety with permission of plaintiffs to amend the complaint. The Company was not named as a defendant in plaintiff’s amended complaint. In June 2009, the Court dismissed the remainder of the case. Following the dismissal, plaintiffs filed a notice of appeal. The notice of appeal seeks review by the U. S. Court of Appeals for the Ninth Circuit of all of the district court’s dismissal rulings, including the ruling dismissing the Company as a defendant. The Company intends to continue to vigorously defend this claim.

In October 2007, the Company was contacted by the Attorney General’s Office for the State of Nevada. The Attorney General’s Office informed the Company that it was conducting a civil and criminal investigation of the

Company’s operations in Nevada and that the investigation related to the billing of pharmaceuticals, including EPO. In February 2008, the Attorney General’s Office informed the Company that the civil and criminal investigation has been discontinued. The Attorney General’s Office further advised the Company that Nevada Medicaid intends to conduct audits of end stage renal disease (ESRD) dialysis providers in Nevada, including the Company, and that such audits will relate to the issues that were the subjects of the investigation. To the Company’s knowledge, no court proceedings have been initiated against the Company at this time. Any negative audit findings could result in a substantial repayment by the Company.

In August 2005, Blue Cross/Blue Shield of Louisiana filed a complaint in the United States District Court for the Western District of Louisiana against Gambro AB, DVA Renal Healthcare (formerly known as Gambro Healthcare) and related entities. The plaintiff sought to bring its claims as a class action on behalf of itself and all entities that paid any of the defendants for health care goods and services from on or about January 1991 through at least December 2004. The complaint alleged, among other things, damages resulting from facts and circumstances underlying Gambro Healthcare’s 2004 settlement agreement with the Department of Justice and certain agencies of the U.S. government. In March 2006, the case was dismissed and the plaintiff was compelled to seek arbitration to resolve the matter. In November 2006, the plaintiff filed a demand for class arbitration against the Company and DVA Renal Healthcare. The Company intends to vigorously defend against these claims. The Company also intends to vigorously oppose the certification of this matter as a class action. At this time, the Company cannot predict the ultimate outcome of this matter or the potential range of damages, if any.

In June 2004, Gambro Healthcare was served with a complaint filed in the Superior Court of California by one of its former employees who worked for its California acute services program. The complaint, which is styled as a class action, alleges, among other things, that DVA Renal Healthcare failed to provide overtime wages, defined rest periods and meal periods, or compensation in lieu of such provisions and failed to comply with certain other California ~~labor code~~Labor Code requirements. The Company intends to vigorously defend against these claims. The Company also intends to vigorously oppose the certification of this matter as a class action. At this time, the Company cannot predict the ultimate outcome of this ~~matter or the potential range of damages, if any.~~matter.

In addition to the foregoing, the Company is subject to claims and suits, including from time to time, contractual disputes and professional and general liability claims, as well as audits and investigations by various government entities, in the ordinary course of business. The Company believes that the ultimate resolution of any such pending proceedings, whether the underlying claims are covered by insurance or not, will not have a material adverse effect on its financial condition, results of operations or cash flows.

Based on the Company’s intentions and strategy involving investments in debt and equity securities, the Company classifies certain debt securities as held-to-maturity and records them at amortized cost. Equity securities that have readily determinable fair values and certain other debt securities classified as available for sale are recorded at fair value.


	September 30, 2009							December 31, 2008						March 31, 2010						December 31, 2009
	Held to maturity		Available for sale		Total			Held to maturity		Available for sale		Total		Held to maturity		Available for sale		Total		Held to maturity		Available for sale		Total
Certificates of deposit and U.S. treasury notes due within one year	$	19,920	$	—	$	19,920		$	19,355	$	—	$	19,355
Certificates of deposit, money market funds and U.S. treasury notes due within one year														$	21,707	$	—	$	21,707	$	25,275	$	—	$	25,275
Investments in mutual funds		—		8,327		8,327			—		21,833		21,833		—		8,784		8,784		—		8,816		8,816

	$	19,920	$	8,327	$	28,247		$	19,355	$	21,833	$	41,188	$	21,707	$	8,784	$	30,491	$	25,275	$	8,816	$	34,091
							��
Short-term investments	$	19,920	$	760	$	20,680		$	19,355	$	16,177	$	35,532	$	21,707	$	1,200	$	22,907	$	25,275	$	1,200	$	26,475
Long-term investments		—		7,567		7,567			—		5,656		5,656		—		7,584		7,584		—		7,616		7,616

	$	19,920	$	8,327	$	28,247		$	19,355	$	21,833	$	41,188	$	21,707	$	8,784	$	30,491	$	25,275	$	8,816	$	34,091

The cost of the certificates of deposit, money market funds and U.S. treasury notes at ~~September 30, 2009~~March 31, 2010 and December 31, ~~2008~~2009 approximates their fair value. As of ~~September 30, 2009~~March 31, 2010 and December 31, ~~2008,~~2009, the available for sale investments included ~~$519~~$145 and ~~$1,558,~~$(205), respectively, of gross pre-tax unrealized ~~losses.~~gains (losses). During the ~~nine~~three months ended ~~September 30, 2009,~~March 31, 2010, the Company recorded gross pre-tax unrealized gains of ~~$1,294, or $791~~$200, after tax, in other comprehensive income associated with changes in the fair value of these investments. During the ~~nine~~three months ended ~~September 30, 2009,~~March 31, 2010, the Company sold ~~investments~~equity securities in mutual funds for net proceeds of ~~$16,537,~~$880, and recognized a pre-tax ~~gain~~loss of ~~$255,~~$22, or ~~$156~~$14 after tax, that was previously recorded in other comprehensive income. The pre-tax ~~gain~~loss is included in other income.

~~The certificates~~As of ~~deposit and U.S. treasury notes~~March 31, 2010, investments totaling approximately $18,500 classified as held to maturity are investments used to maintain certain capital requirements of the special need plans of VillageHealth, which is a wholly-owned subsidiary of the Company. As of December 31, 2009, the Company discontinued the VillageHealth special needs plans and is in the process of paying out all incurred claims. The Company expects to liquidate these investments as soon as all of the claims are paid and the various state regulatory agencies approve the release of these investments. The investments in mutual funds classified as available for sale are held in trust to fund existing obligations associated with several of the Company’s non-qualified deferred compensation plans.

The Company measures the fair value of certain assets, liabilities and noncontrolling interests subject to put provisions based upon certain valuation techniques that include observable or unobservable inputs and assumptions that market participants would use in pricing these assets, liabilities and commitments. The Company also has classified certain assets, liabilities and noncontrolling interests subject to put provisions that are measured at fair value into the appropriate fair value hierarchy levels.

The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring basis as of ~~September 30, 2009:~~March 31, 2010:


	Total		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets
Available for sale securities	$	8,327	$	8,327	$	—	$	—	$	8,784	$	8,784	$	—	$	—

Liabilities
Interest rate swap agreements	$	14,851	$	—	$	14,851	$	—	$	7,071	$	—	$	7,071	$	—

Temporary equity
Noncontrolling interests subject to put provisions	$	292,636	$	—	$	—	$	292,636	$	350,485	$	—	$	—	$	350,485

The available for sale securities represent investments in various ~~open or closed-ended~~open-ended registered investment companies, or mutual funds, and are recorded at fair value based upon the quoted market prices as reported by each mutual fund. See Note 76 to the condensed consolidated financial statements for further discussion.

The interest rate swap agreements are recorded at fair value based upon valuation models and a variety of techniques as reported by various broker dealers that are based upon relevant observable market inputs such as current interest rates, forward yield curves, and other credit and liquidity market conditions. The Company does not believe the ultimate amount that could be realized upon settlement of these interest rate swap agreements would be materially different than the fair values as currently reported. See Note 54 to the condensed consolidated financial statements for further discussion.

See Note 98 to the condensed consolidated financial statements for a discussion of the Company’s methodology for estimating the fair value of noncontrolling interests subject to put obligations.

The Company has other financial instruments in addition to the above that consist primarily of cash, accounts receivable, notes receivable, accounts payable, other accrued liabilities, and debt. The balances of the non-debt financial instruments are presented in the condensed consolidated financial statements at ~~September 30, 2009~~March 31, 2010 at their approximate fair values due to the short-term nature of their settlements. Borrowings under the Company’s Senior Secured Credit Facilities totaled ~~$1,880,875~~$1,837,125 as of ~~September 30, 2009~~March 31, 2010 and the fair value was ~~$1,815,919~~$1,814,161 based upon quoted market prices. The fair value of the Company’s senior and senior subordinated notes was approximately ~~$1,747,250~~$1,775,875 at ~~September 30, 2009,~~March 31, 2010, based upon quoted market prices, as compared to the carrying amount of $1,750,000.

~~DAVITA INC.~~8. Noncontrolling interests subject to put provisions and other commitments

The Company has potential obligations to purchase the noncontrolling interests held by third parties in several of its joint ventures and non-wholly-owned subsidiaries. These obligations are in the form of put provisions and are exercisable at the third-party owners’ discretion within specified periods as outlined in each specific put provision. If these put provisions were exercised, the Company would be required to purchase the third-party owners’ noncontrolling interests at either the appraised fair market value or at a predetermined multiple of earnings or cash flow attributable to the noncontrolling ~~interest~~interests put to the Company, which is intended to

approximate fair value. The methodology the Company ~~used~~uses to estimate the fair ~~value~~values of ~~the~~ noncontrolling interests subject to ~~these~~ put provisions assumes either the higher of a liquidation value of net assets or an average multiple of earnings, based on historical earnings, patient mix and other performance indicators, as well as other factors. The estimated fair values of the noncontrolling interests subject to ~~these~~ put provisions can ~~also~~ fluctuate and the implicit multiple of earnings at which these noncontrolling ~~interest~~interests obligations may ~~ultimately~~ be settled ~~could~~will vary significantly ~~from our current estimates~~ depending upon market conditions including potential purchasers’ access to the ~~credit and~~ capital markets, which can impact the level of competition for dialysis and non-dialysis related businesses, the economic performance of these businesses and the restricted marketability of the third-party owners’ noncontrolling interests. The amount of noncontrolling interests subject to put provisions ~~using~~that contractually employ a predetermined multiple of earnings ~~and therefore not at~~rather than fair value are immaterial.

Additionally, the Company has certain other potential commitments to provide operating capital to several dialysis centers that are wholly-owned by third parties or centers in which the Company owns an equity investment as well as to physician-owned vascular access clinics that the Company operates under management and administrative ~~service~~services agreements of approximately ~~$12,200.~~$6,200.

Certain consolidated joint ventures are contractually scheduled to dissolve after terms ranging from ten to fifty years. Accordingly, the noncontrolling interests in these joint ventures are considered mandatorily redeemable instruments for which the classification and measurement requirements have been indefinitely deferred. Future distributions upon dissolution of these entities would be valued below the related noncontrolling interest carrying balances in the condensed consolidated balance sheet.

As of ~~September 30, 2009,~~March 31, 2010, the Company’s total liability for unrecognized tax benefits relating to tax positions that do not meet the more-likely-than-not threshold ~~was $12,580, all~~is $18,718, of which $12,286 would impact the Company’s effective tax rate if recognized. ~~This~~The balance represents ~~an increase~~a decrease of ~~$1,693~~$11,975 from the December 31, ~~2008~~2009 balance, ~~of $10,887~~primarily due to a tax accounting method change initiated during the ~~addition~~quarter ending March 31, 2010. This decrease did not impact the Company’s effective tax rate. It is reasonably possible that $6,433 of ~~2009 liabilities, offset by statute expirations.~~unrecognized tax benefits may be recognized within the next 12 months, primarily related to tax accounting method changes.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in its income tax expense. At ~~September 30, 2009~~March 31, 2010 and December 31, ~~2008,~~2009, the Company had approximately ~~$2,783~~$4,243 and ~~$1,402,~~$3,226, respectively, accrued for interest and penalties related to unrecognized tax benefits, net of federal tax benefits.

The Company operates principally as a dialysis and related lab services business but also operates other ancillary services and strategic initiatives. These ancillary services and strategic initiatives consist of pharmacy services, infusion therapy services, ~~pharmacy~~disease management services, vascular access services, ~~physician services, disease management services~~

~~and full-service special need plans, as well as~~ESRD clinical research ~~programs.~~programs and physician services. For internal management reporting, the dialysis and related lab services business and each of the ancillary services and strategic initiatives have been defined as separate operating segments by management as separate financial information is regularly produced and reviewed by the Company’s chief operating decision maker in making decisions about allocating resources and assessing financial results. The Company’s chief operating decision maker is its Chief Executive Officer. The dialysis and

related lab services business qualifies as a separately reportable segment and all of the other ancillary services and strategic initiatives operating segments have been combined and disclosed in the other segments category.

The Company’s operating segment financial information is prepared on an internal management reporting basis that the Chief Executive Officer uses to allocate resources and analyze the performance of operating segments. For internal management reporting, segment operations include direct segment operating expenses with the exception of stock-based compensation expense and equity investment ~~gains (losses)~~income (loss).

The following is a summary of segment revenues, segment operating ~~margin~~income (loss), and a reconciliation of segment ~~margin~~income to consolidated income before income taxes:


	Three months ended September 30,						Nine months ended September 30,						Three months ended March 31,
	2009			2008			2009			2008			2010			2009
Segment revenues:
Dialysis and related lab services⁽¹⁾	$	1,491,260		$	1,377,977		$	4,308,988		$	4,025,934		$	1,478,424		$	1,376,563
Other – Ancillary services and strategic initiatives		82,655			69,158			231,608			173,229			80,994			71,077

Consolidated revenues	$	1,573,915		$	1,447,135		$	4,540,596		$	4,199,163		$	1,559,418		$	1,447,640

Segment operating margin (loss):
Segment operating income (loss):
Dialysis and related lab services	$	260,087		$	235,245		$	746,069		$	699,642		$	252,562		$	236,952
Other – Ancillary services and strategic initiatives		(4,357	)		(3,891	)		(11,726	)		(24,334	)		(2,008	)		(5,321	)

Total segment margin	$	255,730		$	231,354		$	734,343		$	675,308
Reconciliation of segment margin to income before income taxes:
Total segment income													$	250,554		$	231,631
Reconciliation of segment income to consolidated income before income taxes:
Stock-based compensation		(11,437	)		(10,759	)		(33,850	)		(29,975	)	$	(10,233	)	$	(11,009	)
Equity investment income		708			1,177			1,066			654
Equity investment income (loss)														2,345			(18	)

Consolidated operating income		245,001			221,772			701,559			645,987			242,666			220,604
Debt expense		(45,535	)		(54,505	)		(140,924	)		(168,891	)		(44,583	)		(48,301	)
Other income		999			2,481			3,026			10,331			831			754

Consolidated income before income taxes	$	200,465		$	169,748		$	563,661		$	487,427		$	198,914		$	173,057

Depreciation and amortization expense for the dialysis and related lab services for the three ~~and nine~~ months ended ~~September 30, 2009 were $55,072~~March 31, 2010 was $55,817, and ~~$166,844, respectively, and were $1,741 and $5,277, respectively,~~was $1,651 for the ancillary services and strategic initiatives.

Depreciation and amortization expense for the dialysis and related lab services for the three ~~and nine~~ months ended ~~September 30, 2008 were $53,209~~March 31, 2009 was $55,374, and ~~$155,830, respectively, and were $1,761 and $4,843, respectively,~~was $1,749 for the ancillary services and strategic initiatives.


	September 30, 2009		December 31, 2008		March 31, 2010		December 31, 2009
Segment assets
Dialysis and related lab services	$	7,296,121	$	7,031,550	$	7,471,859	$	7,334,235
Other – Ancillary services and strategic initiatives		241,587		254,533		219,859		224,001

Consolidated assets	$	7,537,708	$	7,286,083	$	7,691,718	$	7,558,236

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2010, the total amount of expenditures for property and equipment for the dialysis and related lab services was $45,034, and was $337 for the ancillary services and strategic initiatives.

For the three months ended March 31, 2009, the total amount of expenditures for property and equipment for the dialysis and related lab services were ~~$66,863~~$72,358, and ~~$203,315, respectively, and were $585 and $2,338, respectively,~~was $845 for the ancillary services and strategic initiatives.

For the three and nine months ended September 30, 2008, the total amount of expenditures for property and equipment for the dialysis and related lab services were $77,374 and $220,896, respectively, and were $1,470 and $2,955, respectively, for the ancillary services and strategic initiatives.11. Changes in DaVita Inc.’s ownership interest in consolidated subsidiaries

The effects of changes in DaVita Inc.’s ownership interest on the Company’s equity are as follows:

~~The~~Effective January 1, 2010, the FASB ~~effective for the Company’s first annual reporting period that begins after November 15, 2009, is eliminating~~eliminated the quantitative approach previously required for determining the primary beneficiary of a variable interest entity, and ~~requiring~~required additional disclosures about an enterprise’s involvement in variable interest entities. An ~~enterprise will be~~entity is required to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity by having both the power to direct the

activities of a variable interest entity that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity, or the right to receive benefits from the entity. In addition, the FASB ~~is establishing~~established new guidance for determining whether an entity is a variable interest entity, requiring an ongoing reassessment of whether an enterprise is the primary beneficiary of a variable interest entity, and adding an additional reconsideration event for determining whether an entity is a variable interest entity when any changes in facts and circumstances occur such that the holders of the equity investment are at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’s economic performance. ~~The Company is currently in process~~Except for the new disclosures requirements, there was no other impact to the Company’s financial statements as a result of ~~assessing the expected impact of this standard on its consolidated financial statements.~~implementing these new requirements.

The Company is deemed to be the primary beneficiary of all but one of the variable interest entities (“VIEs”) with which it is associated. These VIEs are principally operating subsidiaries owned by related party nominee owners for the Company’s benefit in jurisdictions in which the Company does not qualify for direct ownership under applicable regulations. These include dialysis operating entities in New York state and physician practice management entities in various other states.

For the ~~terms of~~VIEs that the ~~applicable arrangements,~~Company consolidates, the Company bears virtually all of the economic risks and rewards of ownership ~~for each~~under the terms of ~~these operating VIEs.~~the applicable arrangements. The Company has contractual arrangements with its respective related party nominee owners which indemnify them from the economic losses, and entitle the Company to the economic benefits, that may result from ownership of these VIEs. DaVita Inc. manages these VIE subsidiaries and provides operating and capital funding as necessary to accomplish its operational and strategic objectives. Accordingly, since the Company bears virtually all of the risks and rewards attendant to their ownership, the Company consolidates these variable interest entities as their primary beneficiary.

Total assets of these consolidated operating VIEs were approximately ~~$16,000~~$21,000 and their liabilities to unrelated third parties were approximately ~~$10,000~~$17,000 at ~~September 30, 2009.~~March 31, 2010.

The Company is also a member in a single partnership that qualifies as a VIE but which the Company does not consolidate. This partnership is an operating dialysis business that is under the joint control of DaVita Inc. and an independent third party and is owned 40% by DaVita Inc. and 60% by that independent third party. This partnership is adequately equity-capitalized to finance its own activities and has assets of approximately $13,000 and liabilities of approximately $1,000 at March 31, 2010. The Company accounts for its interest in this partnership as an equity method investment.

The Company also sponsors certain deferred compensation plans whose trusts qualify as VIEs and as their primary beneficiary the Company consolidates each of these plans. The assets of these plans are recorded in short-term or long-term investments with matching offsetting liabilities in accrued compensation and benefits and other long-term liabilities. See Note 76 for disclosures on the assets of these consolidated non-qualified deferred compensation plans.

The following information is presented in accordance with Rule 3-10 of Regulation S-X. The operating and investing activities of the separate legal entities included in the consolidated financial statements are fully interdependent and integrated. Revenues and operating expenses of the separate legal entities include intercompany charges for management and other services. The senior notes and the senior subordinated notes were issued by the Company and are guaranteed by substantially all of the Company’s direct and indirect wholly-owned subsidiaries. Each of the guarantor subsidiaries has guaranteed the notes on a joint and several, full and unconditional basis. Non-wholly-owned subsidiaries, joint venture partnerships and other third parties are not guarantors of these obligations.


For the three months ended September 30, 2009	DaVita Inc.			Guarantor subsidiaries			Non-Guarantor subsidiaries			Consolidating adjustments			Consolidated total
For the three months ended March 31, 2010																DaVita Inc.			Guarantor subsidiaries			Non-Guarantor subsidiaries			Consolidating adjustments			Consolidated total
Net operating revenues	$	104,771		$	1,310,558		$	269,201		$	(110,615	)	$	1,573,915		$	103,668		$	1,295,164		$	270,570		$	(109,984	)	$	1,559,418
Operating expenses		57,742			1,158,277			223,510			(110,615	)		1,328,914			60,035			1,138,931			227,770			(109,984	)		1,316,752

Operating income		47,029			152,281			45,691			—			245,001			43,633			156,233			42,800			—			242,666
Debt (expense)		(46,434	)		(37,146	)		(253	)		38,298			(45,535	)		(44,698	)		(42,223	)		(205	)		42,543			(44,583	)
Other income		39,175			—			122			(38,298	)		999			43,255			—			119			(42,543	)		831
Income tax expense		15,854			56,754			1,587			—			74,195			16,960			55,740			1,214			—			73,914
Equity earnings in subsidiaries		87,014			28,298			—			(115,312	)		—			84,193			25,593			—			(109,786	)		—

Net income		110,930			86,679			43,973			(115,312	)		126,270			109,423			83,863			41,500			(109,786	)		125,000
Less: Net income attributable to noncontrolling interests		—			—			—			(15,340	)		(15,340	)		—			—			—			(15,577	)		(15,577	)

Net income attributable to DaVita Inc.	$	110,930		$	86,679		$	43,973		$	(130,652	)	$	110,930		$	109,423		$	83,863		$	41,500		$	(125,363	)	$	109,423


For the three months ended September 30, 2008
For the three months ended March 31, 2009
Net operating revenues	$	92,199		$	1,226,156		$	228,496		$	(99,716	)	$	1,447,135		$	92,823		$	1,221,993		$	232,368		$	(99,544	)	$	1,447,640
Operating expenses		59,243			1,075,997			189,839			(99,716	)		1,225,363			60,660			1,064,201			201,719			(99,544	)		1,227,036

Operating income		32,956			150,159			38,657			—			221,772			32,163			157,792			30,649			—			220,604
Debt (expense)		(55,565	)		(43,574	)		(1,832	)		46,466			(54,505	)		(48,605	)		(40,309	)		(456	)		41,069			(48,301	)
Other income		48,718			—			229			(46,466	)		2,481			41,737			—			86			(41,069	)		754
Income tax expense		10,413			51,803			(206	)		—			62,010			10,169			53,896			718			—			64,783
Equity earnings in subsidiaries		78,214			22,370			—			(100,584	)		—			81,085			16,668			—			(97,753	)		—

Net income		93,910			77,152			37,260			(100,584	)		107,738			96,211			80,255			29,561			(97,753	)		108,274
Less: Net income attributable to noncontrolling interests		—			—			—			(13,828	)		(13,828	)		—			—			—			(12,063	)		(12,063	)

Net income attributable to DaVita Inc.	$	93,910		$	77,152		$	37,260		$	(114,412	)	$	93,910		$	96,211		$	80,255		$	29,561		$	(109,816	)	$	96,211


For the nine months ended September 30, 2009
Net operating revenues	$	296,696		$	3,800,836		$	758,233		$	(315,169	)	$	4,540,596
Operating expenses		181,435			3,336,776			635,995			(315,169	)		3,839,037

Operating income		115,261			464,060			122,238			—			701,559
Debt (expense)		(142,757	)		(116,095	)		(1,062	)		118,990			(140,924	)
Other income		121,628			—			388			(118,990	)		3,026
Income tax expense		37,653			167,702			4,130			—			209,485
Equity earnings in subsidiaries		256,481			74,180			—			(330,661	)		—

Net income		312,960			254,443			117,434			(330,661	)		354,176
Less: Net income attributable to noncontrolling interests		—			—			—			(41,216	)		(41,216	)

Net income attributable to DaVita Inc.	$	312,960		$	254,443		$	117,434		$	(371,877	)	$	312,960


For the nine months ended September 30, 2008
Net operating revenues	$	270,617		$	3,570,339		$	651,147		$	(292,940	)	$	4,199,163
Operating expenses		168,054			3,129,321			548,741			(292,940	)		3,553,176

Operating income		102,563			441,018			102,406			—			645,987
Debt (expense)		(171,203	)		(141,663	)		(5,136	)		149,111			(168,891	)
Other income		158,897			—			545			(149,111	)		10,331
Income tax expense		35,110			140,296			447			—			175,853
Equity earnings in subsidiaries		220,648			60,377			—			(281,025	)		—

Net income		275,795			219,436			97,368			(281,025	)		311,574
Less: Net income attributable to noncontrolling interests		—			—			—			(35,779	)		(35,779	)

Net income attributable to DaVita Inc.	$	275,795		$	219,436		$	97,368		$	(316,804	)	$	275,795

NOTES TO CONDENSED CONSOLIDATED FINANCIAL ~~STATEMENTS—~~STATEMENTS (continued)


As of September 30, 2009	DaVita Inc.		Gaurantor subsidiaries		Non-Guarantor subsidiaries		Consolidating adjustments			Consolidated total
As of March 31, 2010												DaVita Inc.		Gaurantor subsidiaries		Non-Guarantor subsidiaries		Consolidating adjustments			Consolidated total
Cash and cash equivalents	$	565,062	$	—	$	16,618	$	—		$	581,680	$	753,866	$	—	$	2,043	$	—		$	755,909
Accounts receivable, net		—		993,961		148,900		—			1,142,861		—		955,914		147,872		—			1,103,786
Other current assets		6,541		532,288		45,163		—			583,992		13,334		541,320		46,902		—			601,556

Total current assets		571,603		1,526,249		210,681		—			2,308,533		767,200		1,497,234		196,817		—			2,461,251
Property and equipment, net		11,899		886,410		190,137		—			1,088,446		12,831		892,020		188,999		—			1,093,850
Amortizable intangibles, net		32,739		104,181		5,005		—			141,925		27,839		97,266		4,180		—			129,285
Investments in subsidiaries		5,038,640		511,301		—		(5,549,941	)		—		5,300,687		502,020		—		(5,802,707	)		—
Receivables from subsidiaries		247,710		—		128,502		(376,212	)		—		21,621		—		136,138		(157,759	)		—
Other long-term assets and investments		7,665		19,810		38,365		—			65,840		7,682		20,907		36,357		—			64,946
Goodwill		—		3,606,813		326,151		—			3,932,964		—		3,614,075		328,311		—			3,942,386

Total assets	$	5,910,256	$	6,654,764	$	898,841	$	(5,926,153	)	$	7,537,708	$	6,137,860	$	6,623,522	$	890,802	$	(5,960,466	)	$	7,691,718

Current liabilities	$	126,032	$	893,231	$	94,246	$	—		$	1,113,509	$	177,214	$	776,063	$	94,198	$	—		$	1,047,475
Payables to parent		—		362,286		13,926		(376,212	)		—		—		138,730		19,029		(157,759	)		—
Long-term debt and other long-term liabilities		3,537,460		435,440		20,330		—			3,993,230		3,469,083		489,075		16,964		—			3,975,122
Noncontrolling interests subject to put provisions		169,961		—		—		122,675			292,636		230,415		—		—		120,070			350,485
Total DaVita Inc. shareholders’ equity		2,076,803		4,963,807		586,134		(5,549,941	)		2,076,803		2,261,148		5,219,654		583,053		(5,802,707	)		2,261,148
Noncontrolling interest not subject to put provisions		—		—		184,205		(122,675	)		61,530		—		—		177,558		(120,070	)		57,488

Total equity		2,076,803		4,963,807		770,339		(5,672,616	)		2,138,333		2,261,148		5,219,654		760,611		(5,922,777	)		2,318,636

Total liabilities and equity	$	5,910,256	$	6,654,764	$	898,841	$	(5,926,153	)	$	7,537,708	$	6,137,860	$	6,623,522	$	890,802	$	(5,960,466	)	$	7,691,718


As of December 31, 2008
As of December 31, 2009
Cash and cash equivalents	$	397,576	$	—	$	13,305	$	—		$	410,881	$	534,550	$	—	$	4,909	$	—		$	539,459
Accounts receivable, net		—		933,906		141,551		—			1,075,457		—		961,946		143,957		—			1,105,903
Other current assets		22,112		573,070		46,776		—			641,958		15,619		597,086		44,454		—			657,159

Total current assets		419,688		1,506,976		201,632		—			2,128,296		550,169		1,559,032		193,320		—			2,302,521
Property and equipment, net		15,175		864,725		168,175		—			1,048,075		11,232		900,969		192,724		—			1,104,925
Amortizable intangibles, net		39,990		114,237		6,294		—			160,521		30,212		101,931		4,589		—			136,732
Investments in subsidiaries		4,866,399		464,377		—		(5,330,776	)		—		5,130,035		509,733		—		(5,639,768	)		—
Receivables from subsidiaries		320,338		—		90,754		(411,092	)		—		293,062		—		138,482		(431,544	)		—
Other long-term assets and investments		13,320		14,815		44,125		—			72,260		7,700		19,528		35,634		—			62,862
Goodwill		—		3,571,669		305,262		—			3,876,931		—		3,622,885		328,311		—			3,951,196

Total assets	$	5,674,910	$	6,536,799	$	816,242	$	(5,741,868	)	$	7,286,083	$	6,022,410	$	6,714,078	$	893,060	$	(6,071,312	)	$	7,558,236

Current liabilities	$	106,370	$	990,024	$	66,669	$	—		$	1,163,063	$	170,061	$	781,870	$	95,010	$	—		$	1,046,941
Payables to parent		—		386,460		24,632		(411,092	)		—		—		418,529		13,015		(431,544	)		—
Long-term debt and other long-term liabilities		3,616,082		368,774		19,868		—			4,004,724		3,507,753		458,779		18,879		—			3,985,411
Noncontrolling interests subject to put provisions		184,711		—		—		106,686			291,397		209,530		—		—		122,195			331,725
Total DaVita Inc. shareholders’ equity		1,767,747		4,791,541		539,235		(5,330,776	)		1,767,747		2,135,066		5,054,900		584,868		(5,639,768	)		2,135,066
Noncontrolling interest not subject to put provisions		—		—		165,838		(106,686	)		59,152		—		—		181,288		(122,195	)		59,093

Total equity		1,767,747		4,791,541		705,073		(5,437,462	)		1,826,899		2,135,066		5,054,900		766,156		(5,761,963	)		2,194,159

Total liabilities and equity	$	5,674,910	$	6,536,799	$	816,242	$	(5,741,868	)	$	7,286,083	$	6,022,410	$	6,714,078	$	893,060	$	(6,071,312	)	$	7,558,236

NOTES TO CONDENSED CONSOLIDATED FINANCIAL ~~STATEMENTS—~~STATEMENTS (continued)


For the nine months ended September 30, 2009		DaVita Inc.			Guarantor subsidiaries			Non-guarantor subsidiaries			Consolidating adjustments			Consolidated total
For the three months ended March 31, 2010																	DaVita Inc.			Guarantor subsidiaries			Non-guarantor subsidiaries			Consolidating adjustments			Consolidated total
Cash flows from operating activities:
Net income		$	312,960		$	254,443		$	117,434		$	(330,661	)	$	354,176		$	109,423		$	83,863		$	41,500		$	(109,786	)	$	125,000
Changes in operating assets and liabilities and non-cash items included in net income			(637,351	)		491,204			(24,571	)		330,661			159,943			(157,840	)		228,531			(43,630	)		109,786			136,847

Net cash (used in) provided by operating activities			(324,391	)		745,647			92,863			—			514,119			(48,417	)		312,394			(2,130	)		—			261,847

Cash flows from investing activities:
Additions of property and equipment, net			(944	)		(156,362	)		(48,347	)		—			(205,653	)		(2,683	)		(34,561	)		(5,341	)		—			(42,585	)
Acquisitions			—			(64,001	)		—			—			(64,001	)		—			(1,069	)		—			—			(1,069	)
Proceeds from asset sales			—			6,256			—			—			6,256			—			16,264			—			—			16,264
Proceeds from investment sales and other items			14,800			(150	)		—			—			14,650			114			3,713			—			—			3,827

Net cash provided by (used in) investing activities			13,856			(214,257	)		(48,347	)		—			(248,748	)
Net cash used in investing activities																		(2,569	)		(15,653	)		(5,341	)		—			(23,563	)

Cash flows from financing activities:
Long-term debt, net			(38,632	)		(1,289	)		2,896			—			(37,025	)		(23,460	)		1,460			(3,041	)		—			(25,041	)
Intercompany borrowing			539,452			(490,946	)		(48,506	)		—			—			271,311			(279,651	)		8,340			—			—
Other items			(22,799	)		(39,155	)		4,407			—			(57,547	)		22,451			(18,550	)		(694	)		—			3,207

Net cash provided by (used in) financing activities	��		478,021			(531,390	)		(41,203	)		—			(94,572	)		270,302			(296,741	)		4,605			—			(21,834	)

Net increase in cash and cash equivalents			167,486			—			3,313			—			170,799
Net increase (decrease) in cash and cash equivalents																		219,316			—			(2,866	)		—			216,450
Cash and cash equivalents at beginning of period			397,576			—			13,305			—			410,881			534,550			—			4,909			—			539,459

Cash and cash equivalents at end of period		$	565,062		$	—		$	16,618		$	—		$	581,680		$	753,866		$	—		$	2,043		$	—		$	755,909


For the nine months ended September 30, 2008
For the three months ended March 31, 2009
Cash flows from operating activities:
Net income		$	275,795		$	219,436		$	97,368		$	(281,025	)	$	311,574		$	96,211		$	80,255		$	29,561		$	(97,753	)	$	108,274
Changes in operating assets and liabilities and non-cash items included in net income			(444,559	)		340,346			(73,234	)		281,025			103,578			(130,637	)		29,672			29,187			97,753			25,975

Net cash (used in) provided by operating activities			(168,764	)		559,782			24,134			—			415,152			(34,426	)		109,927			58,748			—			134,249

Cash flows from investing activities:
Additions of property and equipment, net			(1,308	)		(191,272	)		(31,271	)		—			(223,851	)		(159	)		(53,879	)		(19,165	)		—			(73,203	)
Acquisitions			(39	)		(67,897	)		(9,221	)		—			(77,157	)		—			(39,828	)		—			—			(39,828	)
Proceeds from asset sales			—			451			—			—			451			—			4,199			—			—			4,199
Proceeds from investment sales and other items			3,628			460			—			—			4,088			10,155			14			—			—			10,169

Net cash provided by (used in) investing activities			2,281			(258,258	)		(40,492	)		—			(296,469	)		9,996			(89,494	)		(19,165	)		—			(98,663	)

Cash flows from financing activities:
Long-term debt, net			(4,459	)		(444	)		3,653			—			(1,250	)		(13,135	)		20			1,916			—			(11,199	)
Intercompany borrowing			234,519			(266,111	)		31,592			—			—			52,703			(22,110	)		(30,593	)		—			—
Other items			(131,079	)		(34,969	)		(10,484	)		—			(176,532	)		(22,135	)		1,657			(9,107	)		—			(29,585	)

Net cash provided by (used in) financing activities			98,981			(301,524	)		24,761			—			(177,782	)		17,433			(20,433	)		(37,784	)		—			(40,784	)

Net (decrease) increase in cash and cash equivalents			(67,502	)		—			8,403			—			(59,099	)		(6,997	)		—			1,799			—			(5,198	)
Cash and cash equivalents at beginning of period			443,157			—			3,889			—			447,046			397,576			—			13,305			—			410,881

Cash and cash equivalents at end of period		$	375,655		$	—		$	12,292		$	—		$	387,947		$	390,579		$	—		$	15,104		$	—		$	405,683

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This Quarterly Report on Form 10-Q contains statements that are forward-looking statements within the meaning of the federal securities laws. All statements that do not concern historical facts are forward-looking statements and include, among other things, statements about our expectations, beliefs, intentions and/or strategies for the future. These forward-looking statements include statements regarding our future operations, financial condition and prospects, expectations for treatment growth rates, revenue per treatment, expense growth, levels of the provision for uncollectible accounts receivable, operating income, cash flow, operating cash flow, estimated tax rates, capital expenditures, the development of new centers and center acquisitions, government and commercial payment rates, revenue estimating risk and the impact of our related level of indebtedness on our financial performance, including earnings per share. These statements involve substantial known and unknown risks and uncertainties that could cause our actual results to differ materially from those described in the forward-looking statements, including, but not limited to, risks resulting from the regulatory environment in which we operate, economic and market conditions, competitive activities, other business conditions, accounting estimates, the variability of our cash flows, the concentration of profits generated from commercial payor plans, continued downward pressure on average realized payment rates from commercial payors, which may result in the loss of revenue ~~and~~or patients, a reduction in the number of patients under higher-paying commercial plans, a reduction in government payment rates or changes to the structure of payments under the Medicare ESRD program or other government-based programs, including, for example, the implementation of a bundled payment rate system which ~~result in~~will lower reimbursement for services we provide to Medicare patients, and the impact of health care reform legislation that was enacted in the U.S. in March 2010, changes in pharmaceutical or anemia management practice patterns, payment policies, or pharmaceutical pricing, our ability to maintain contracts with physician medical directors, legal compliance risks, including our continued compliance with complex government regulations, ~~and compliance with the corporate integrity agreement applicable to the dialysis centers acquired from Gambro Healthcare and assumed in connection with such acquisition,~~ the resolution of ongoing investigations by various federal and state government agencies, and the risk factors set forth in this Quarterly Report on Form 10-Q. We base our forward-looking statements on information currently available to us, and we undertake no obligation to update or revise these statements, whether as a result of changes in underlying factors, new information, future events or otherwise.

The following should be read in conjunction with our condensed consolidated financial statements.

We operate principally as a dialysis and related lab services business but also operate other ancillary services and strategic initiatives. These ancillary services and strategic initiatives consist of ~~infusion therapy services,~~ pharmacy services, ~~vascular access services, physician~~infusion therapy services, disease management services ~~and full-service special need plans, as well as~~(VillageHealth), vascular access services, ESRD clinical research ~~programs.~~programs and physician services. The dialysis and related lab services business qualifies as a separately reportable segment and all of the other ancillary services and strategic initiatives segments have been combined and disclosed in the other segments category.

Our consolidated operating results for the ~~third~~first quarter of ~~2009~~2010 compared with the prior sequential quarter and the same quarter of ~~2008 as well as the nine months ended September 30,~~ 2009 ~~compared to the same periods of 2008~~ were as follows:


Continuing Operations	Quarter ended														Nine months ended
																									Quarter ended
	September 30, 2009					June 30, 2009				September 30, 2008					September 30, 2009					September 30, 2008					March 31, 2010					December 31, 2009					March 31, 2009
	(dollar amounts rounded to nearest million)																								(dollar amounts rounded to nearest million)
Net operating revenues	$	1,574		100	%	$	1,519	100	%	$	1,447		100	%	$	4,541		100	%	$	4,199		100	%	$	1,559		100	%	$	1,568		100	%	$	1,448	100	%

Operating expenses and charges:
Patient care costs		1,096		70	%		1,052	69	%		1,006		70	%		3,154		70	%		2,909		69	%		1,083		69	%		1,095		70	%		1,006	70	%
General and administrative		135		9	%		132	9	%		129		9	%		394		9	%		375		9	%		137		9	%		137		9	%		127	9	%
Depreciation and amortization		57		4	%		58	4	%		55		4	%		172		4	%		161		4	%		57		4	%		57		4	%		57	4	%
Provision for uncollectible accounts		42		3	%		41	3	%		37		3	%		120		3	%		109		3	%		42		3	%		42		3	%		37	3	%
Equity investment income		(1	)	—			—	—			(1	)	—			(1	)	—			(1	)	—			(2	)	—			(1	)	—			—	—

Total operating expenses and charges		1,329		84	%		1,283	85	%		1,225		85	%		3,839		85	%		3,553		85	%		1,317		84	%		1,329		85	%		1,227	85	%

Operating income	$	245				$	236			$	222				$	702				$	646				$	243		16	%	$	239		15	%	$	221	15	%


	Three months ended
	March 31, 2010			December 31, 2009			March 31, 2009
	(dollar amounts rounded to nearest million)
Dialysis and related lab services	$	253		$	254		$	237
Other – Ancillary services and strategic initiatives		(2	)		(6	)		(5	)

Total segment operating income		251			248			232
Reconciling items:
Stock-based compensation		(10	)		(11	)		(11	)
Equity investment income		2			1			—

Consolidated operating income	$	243		$	239		$	221

Consolidated net operating revenues for the ~~third~~first quarter of ~~2009 increased~~2010 decreased by approximately ~~$55~~$9 million, or approximately ~~3.6%~~0.6%, as compared to the ~~second~~fourth quarter of 2009. The decrease in consolidated net operating revenues was primarily due to a decrease in dialysis and related lab services net revenues of approximately $5 million, principally due to a decrease in the number of treatments as a result of fewer treatment days in the first quarter of 2010, partially offset by an increase in the average dialysis revenue per treatment. The decrease in consolidated net revenues was also due to a decrease of approximately $4 million in the ancillary services and strategic initiatives net revenues primarily as a result of discontinuing the VillageHealth special needs plans effective December 31, 2009.

Consolidated net operating revenues for the first quarter of 2010 increased by approximately $111 million, or approximately 7.7%, as compared to the first quarter of 2009. The increase in consolidated net operating revenues was primarily due to an increase in ~~Dialysis~~dialysis and ~~Related Lab Services~~related lab services net revenues of approximately $50 million, principally due to an increase in the number of treatments as a result of an additional treatment day in the third quarter of 2009 and non-acquired treatment growth, as well as an increase in the average dialysis revenue per treatment. The increase in consolidated net revenues was also due to an increase of approximately $5 million in the Ancillary Services and Strategic Initiatives net revenues primarily from growth in our pharmacy business.

Consolidated net operating revenues for the third quarter of 2009 increased by approximately $127 million, or approximately 8.8%, as compared to the third quarter of 2008. The increase in consolidated net operating revenues was primarily due to an increase in Dialysis and Related Lab Services net revenues of approximately $113$101 million, principally due to an increase in the number of treatments from non-acquired treatment growth in existing and new centers and growth through acquisitions, as well as an increase in the average dialysis revenue per treatment. The increase in consolidated net revenues was also due to an increase of approximately ~~$14~~$10 million in the ~~Ancillary Services~~ancillary services and ~~Strategic Initiatives~~strategic initiatives net revenues primarily from growth in our pharmacy business.

The increase in consolidated net operating revenues of approximately $342 million, or approximately 8.1%, for the nine months ended September 30, 2009, as compared to the same period in 2008, was primarily due to an increase in Dialysis and Related Lab Services’ net revenues of approximately $283 million, or 6.7%, which was primarily due to an increase in the number of dialysis treatments from non-acquired treatment growth in existing and new centers and growth through acquisitions, and an increase in the average dialysis revenue per treatment, with the balance of the increase in revenues of approximately $59 million, or 1.4%, from the Ancillary Services and Strategic Initiatives, primarily due to growth in our pharmacy business, as well as, to a lesser extent, growth in HomeChoice Partners and VillageHealth.

Consolidated operating income for the ~~third~~first quarter of ~~2009~~2010 increased by approximately $9$4 million, or approximately ~~3.8%~~1.7%, as compared to the ~~second~~fourth quarter of 2009. The increase in consolidated operating income was primarily due to a reduction of approximately $4 million in the operating losses in the ancillary services and strategic initiatives, lower stock-based compensation and additional equity investment income. However, consolidated operating income was negatively impacted by lower dialysis and related lab services operating income primarily due to fewer treatment days in the first quarter of 2010, a decline in productivity and an increase in the Dialysis and Related Lab Services operating income, due to (i) growth in revenue, primarily from additional treatments, (ii) an increase in the intensity of physician-prescribed pharmaceuticals and (iii) cost control initiatives and continued improved productivity, partially offset by (i) higher workers compensation costs, (ii) an increase in pharmaceuticallabor costs and ~~(iii) higher center level settlement and impairment charges.~~related payroll taxes.

Consolidated operating income for the ~~third~~first quarter of ~~2009~~2010 increased by ~~$23~~$22 million, or approximately ~~10.5%~~10.0%, as compared to the ~~third~~first quarter of ~~2008.~~2009. The increase in consolidated operating income was primarily due to (i) growth in revenue in the ~~Dialysis~~dialysis and ~~Related Lab Services,~~related lab services, primarily from additional treatments, ~~(ii)~~and an increase in the ~~intensities of physician-prescribed pharmaceuticals~~average dialysis revenue per treatment and ~~(iii)~~(ii) cost control initiatives and improved productivity, partially offset by ~~(i)~~ higher pharmaceutical costs, labor and benefit costs, payroll taxes and ~~(ii)~~ additional other operating costs at our dialysis centers.

Consolidated operating income for the nine months ended September 30, 2009 increased by $56 million, or approximately 8.6%, as compared to the same period in 2008. The increase in consolidated income was primarily due to the same factors as discussed above for the increase in the third quarter of 2009 as compared to the third quarter of 2008, except for the intensities of physician-prescribed pharmaceuticals which decreased for the nine months ended September 30, 2009, as compared to the same period of 2008. Operating income also increased as a result of lower operating losses in the Ancillary and Strategic Initiatives.


	Three months ended						Nine months ended				Three months ended
	September 30, 2009		June 30, 2009		September 30, 2008		September 30, 2009		September 30, 2008		March 31, 2010		December 31, 2009		March 31, 2009
	(dollar amounts rounded to nearest million, except per treatment data)										(dollar amounts rounded to nearest million, except per treatment data)
Revenues	$	1,491	$	1,441	$	1,378	$	4,309	$	4,026	$	1,478	$	1,483	$	1,377

Segment margin	$	260	$	250	$	235	$	746	$	700
Segment operating income											$	253	$	254	$	237

Dialysis treatments		4,339,195		4,228,179		4,091,099		12,649,812		12,044,639		4,294,121		4,360,638		4,082,439
Average dialysis treatments per treatment day		54,927		54,207		51,786		54,175		51,385		55,768		55,198		53,365
Average dialysis revenue per dialysis treatment (including the lab)	$	343	$	340	$	336		340	$	334	$	344	$	339	$	337

Dialysis and ~~Related Lab Services’~~related lab services’ net operating revenues for the ~~third~~first quarter of ~~2009 increased~~2010 decreased by approximately ~~$50~~$5 million, or approximately ~~3.5%~~0.3%, as compared ~~with~~to the ~~second~~fourth quarter of 2009. The ~~increase~~decrease in net operating revenues was primarily due to ~~an increase~~a decrease in the number of treatment days in the ~~third~~first quarter of ~~2009 and non-acquired treatment growth at existing and new centers, as well as~~2010, partially offset by an increase of approximately $3$4 in our average dialysis revenue per treatment. The increase in the average dialysis revenue per treatment was primarily due to an increase in ~~the intensities of physician-prescribed pharmaceuticals, an~~our commercial payment rates, a 1% increase in ~~our non-government payment rates~~the Medicare composite rate and an increase in our ~~reimbursement rates for, average sale price, or ASP, associated with EPO,~~lab revenue, partially offset by changes in the mix of our non-government ~~payors.~~payors and a decrease in the intensities of physician-prescribed pharmaceuticals.

Dialysis and ~~Related Lab Services’~~related lab services’ net operating revenues increased by approximately ~~$113~~$101 million, or ~~8.2%~~7.4%, in the ~~third~~first quarter of ~~2009,~~2010, as compared to the ~~third~~first quarter of ~~2008.~~2009. The increase in net operating revenues in the ~~third~~

first quarter of ~~2009~~2010 was principally due to an increase in the number of treatments of approximately ~~6.1%~~5.0%, an increase in the average dialysis revenue per treatment of approximately ~~2.0%~~2.1%, with the balance of the increase due to additional lab revenue and management fees. The increase in the number of treatments was primarily attributable to non-acquired treatment growth at existing and new centers and growth through acquisitions. The increase in the average dialysis revenue per treatment was primarily due to an increase in our commercial payment rates, a 1% increase in the Medicare composite rate, and an increase in the intensities of physician-prescribed pharmaceuticals, ~~an increase in our non-government payment rates and an increase in our reimbursement rates for ASP associated with EPO,~~ partially offset by changes in the mix of our non-government payors.

Dialysis and Related Lab Services’ net operating revenues increased by approximately $283 million, or 7.0%, for the nine months ended September 30, 2009, as compared to the same period in 2008. The increase in net operating revenues for the nine months ended September 30, 2009 was principally due to an increase in the number of treatments of approximately 5.0%, and an increase in the average dialysis revenue per treatment of approximately 1.9%, with the balance of the increase due to additional lab revenue and management fees. The increase in the number of treatments was due to the same factors as discussed above for the increase in the third quarter of 2009 as compared to the third quarter of 2008. The increase in the average dialysis revenue per treatment was primarily due to a 1% increase in the Medicare composite rate, an increase in our non-government payment rates and an increase in our reimbursement rates for ASP associated with EPO, partially offset by changes in the mix of our non-government payors and a slight decline in the intensities of physician-prescribed pharmaceuticals.

Patient care costs.Dialysis and ~~Related Lab Services’~~related lab services’ patient care costs on a per treatment basis increased by approximately $3 in the ~~third~~first quarter of ~~2009,~~2010, as compared to the ~~second~~fourth quarter of 2009. The increase in the

per treatment costs was primarily attributable to a decline in productivity, an increase in ~~the intensities of physician-prescribed pharmaceuticals, an increase in workers compensation~~labor costs and related payroll taxes, and an increase in pharmaceutical costs, partially offset by ~~continued improved productivity and an additional treatment day~~a decrease in the ~~third quarter~~intensities of ~~2009.~~physician-prescribed pharmaceuticals.

Dialysis and ~~Related Lab Services’~~related lab services’ patient care costs on a per treatment basis increased by approximately $5 in the ~~third~~first quarter of ~~2009~~2010 as compared to the ~~third~~first quarter of ~~2008.~~2009. The increase in the per treatment costs was primarily attributable to an increase in the intensities of physician-prescribed pharmaceuticals, higher ~~benefit~~labor costs and related payroll taxes, additional other operating costs of our dialysis centers and an increase in pharmaceutical costs, partially offset by improved ~~productivity.~~

~~Dialysis~~productivity and ~~Related Lab Services’ patient care costs on a per treatment basis increased by approximately $4 for~~ the nine months ended September 30, 2009 as compared to the same period in 2008. The increase in the per treatment costs was primarily attributable to higher labor and benefit costs, an increase in pharmaceutical costs and an increase in the operating coststiming of ~~our dialysis centers, partially offset by a decrease in the intensities of physician-prescribed pharmaceuticals, and improved productivity.~~certain expenditures.

General and administrative expenses.Dialysis and ~~Related Lab Services’~~related lab services’ general and administrative expenses of approximately $112 million for the ~~third~~first quarter of ~~2009 decreased in absolute dollars by approximately $0.5 million from the second quarter of 2009. The decrease in the third quarter of 2009~~2010 was flat as compared to the ~~second~~fourth quarter of ~~2009 was primarily due to~~2009. However, general and administrative expenses in the ~~timing~~first quarter of ~~certain expenditures such as~~2010 were impacted by an increase in labor costs and related payroll taxes which were offset by a decrease in professional fees and ~~certain cost control initiatives.~~supply costs. In absolute dollars, general and administrative expenses increased by approximately ~~$4.0 million and $19.8~~$9.0 million in the ~~third~~first quarter of ~~2009 and for the nine months ended September 30, 2009, respectively,~~2010, as compared to the same ~~periods~~period in ~~2008.~~2009. The ~~increases were~~increase was primarily due to higher labor and benefit costs and ~~in addition,~~ the ~~nine months ended September 30, 2009 included an increase in our~~timing of certain expenditures, partially offset by lower professional fees ~~for legal~~ and ~~compliance initiatives.~~supply costs.

Depreciation and amortization. Depreciation and amortization for dialysis and related lab services was approximately $56 million in the first quarter of 2010, as compared to $55 million for both the fourth quarter of 2009 and for the first quarter of 2009. The ~~decrease~~slight increase in depreciation and amortization for ~~Dialysis~~dialysis and ~~Related Lab Services~~related lab services in the ~~third~~first quarter of ~~2009~~2010, as compared to the ~~second~~fourth quarter of 2009, was primarily due to the acceleration of depreciation on certain assets in the ~~second~~first quarter of ~~2009.~~2010. The slight increase in depreciation and amortization for the ~~Dialysis~~dialysis and ~~Related Lab Services~~related lab services in the ~~third~~first quarter of ~~2009 and for the nine months ended September 30, 2009,~~2010, as compared to the ~~same periods in 2008,~~first quarter of 2009, was primarily due to growth in new centers and expansions of certain existing ~~centers.~~centers, partially offset by certain assets becoming fully depreciated.

Provision for uncollectible accounts.The provision for uncollectible accounts receivable for ~~Dialysis~~dialysis and ~~Related Lab Services~~related lab services was 2.8% for the ~~third~~first quarter of ~~2009 as compared to~~2010, 2.8% for the ~~second~~fourth quarter of 2009, and ~~was 2.7%~~2.6% for the ~~third~~first quarter of ~~2008.~~2009. We assess our level of the provision for uncollectible accounts based upon our historical cash collection experience and trends, and will adjust the provision as necessary as a result of changes in our cash collections.

Dialysis and ~~Related Lab Services~~related lab services’ operating income for the ~~third~~first quarter of ~~2009 increased~~2010 decreased slightly by approximately ~~$10~~$1 million, as compared to the ~~second~~fourth quarter of 2009. The ~~increase~~decrease in operating income was primarily attributable to ~~an increase~~a decrease in revenue as a result of ~~an additional~~fewer treatment ~~day~~days in the ~~third~~first quarter of ~~2009 and from non-acquired treatment growth, as well as~~2010, partially offset by an increase in the average dialysis revenue per treatment of approximately $3$4. The increase in the average dialysis revenue per treatment was primarily ~~from~~due to an increase in our commercial payment rates, a 1% increase in the Medicare composite rate and an increase in our lab revenue, partially offset by changes in the

mix of our non-government payors and a decrease in the intensities of physician-prescribed ~~pharmaceuticals, an increase~~pharmaceuticals. Dialysis and related lab services operating income was also negatively impacted by a decline in ~~our non-government payment rates~~productivity, higher labor costs and related payroll taxes and an increase in our reimbursement rates for ASP associated with EPO, partially offset by changes in the mix of our non-government payors. Operating income also increased as a result of cost control initiatives and continued improved productivity, partially offset by higher workers compensation costs, increases in our pharmaceuticals ~~costs and higher center level settlement and impairment charges.~~costs.

Dialysis and ~~Related Lab Services~~related lab services’ operating income for the ~~third~~first quarter of ~~2009~~2010 increased by approximately ~~$25~~$16 million, as compared to the ~~third~~first quarter of ~~2008.~~2009. The increase in operating income was primarily attributable to growth in revenue from additional treatments as a result of non-acquired treatment growth, as well as increases in our average dialysis revenue per treatment of approximately $7 primarily ~~from~~due to an increase in our commercial payment rates, a

1% increase in the Medicare composite rate, and an increase in the intensities of physician-prescribed pharmaceuticals, ~~an increase in our non-government payment rates and an increase in our reimbursement rates for ASP associated with EPO,~~ partially offset by changes in the mix of our non-government payors. Operating income also increased as a result of cost control initiatives and improved productivity partially offset by higher labor ~~and benefit costs, an increase in pharmaceutical~~ costs and ~~an increase in the operating costs of our dialysis centers.~~

Dialysis and Related Lab Services operating income for the nine months ended September 30, 2009 increased by approximately $46 million, as compared to the same period in 2008. The increase in operating income was primarily attributable to an increase in revenue, as described above, cost control initiatives and improved productivity, partially offset by higher labor and benefit costs,related payroll taxes, an increase in pharmaceutical costs and an increase in the operating costs of our dialysis centers.


	Three months ended									Nine months ended						Three months ended
	September 30, 2009			June 30, 2009			September 30, 2008			September 30, 2009			September 30, 2008			March 31, 2010			December 31, 2009			March 31, 2009
	(dollar amounts rounded to nearest million)															(dollar amounts rounded to nearest million)
Revenues	$	83		$	78		$	69		$	232		$	173		$	81		$	85		$	71

Segment loss	$	(4	)	$	(3	)	$	(4	)	$	(12	)	$	(25	)
Segment operating loss																$	(2	)	$	(6	)	$	(5	)

The ~~Ancillary Services~~ancillary services and ~~Strategic Initiatives~~strategic initiatives’ net operating revenues for the ~~third~~first quarter of ~~2009 increased~~2010 decreased by approximately $5$4 million as compared to the ~~second~~fourth quarter of 2009. The ~~increase~~decrease was primarily ~~due to revenue growth in our pharmacy business.~~as a result of discontinuing the VillageHealth special needs plans, effective December 31, 2009.

The increase in net operating revenues for the ~~third~~first quarter of ~~2009~~2010 of approximately ~~$14~~$10 million, as compared to the ~~third~~first quarter of ~~2008,~~2009, was primarily due to growth in our pharmacy business, ~~and in our HomeChoice Partners business.~~

~~The increase~~partially offset by a decrease in net operating revenues in VillageHealth and in our clinical research programs.

Ancillary services and strategic initiatives’ operating expenses for the ~~nine months ended September 30,~~first quarter of 2010 decreased by approximately $8 million as compared to the fourth quarter of 2009, primarily as a result of discontinuing the VillageHealth special needs plans and timing of certain expenditures.

Ancillary services and strategic initiatives’ operating expenses for the first quarter of 2010 increased by approximately ~~$59~~$7 million as compared to the same period in ~~2008, was primarily due to growth in our pharmacy and growth in HomeChoice Partners, VillageHealth special needs plans and clinical research businesses.~~

~~Ancillary Services and Strategic Initiatives’ operating expenses for the third quarter of~~ 2009, ~~increased by approximately $6 million as compared to the second quarter of 2009, primarily due to volume growth associated with the pharmacy business and certain impairment charges.~~

~~Ancillary Services and Strategic Initiatives operating expenses for the third quarter of 2009 increased by approximately $14 million as compared to the same period in 2008,~~ primarily due to volume growth associated with the pharmacy business and increases in labor and benefit costs, as well as an increase in pharmaceutical ~~costs.~~costs, partially offset by lower costs as a result of discontinuing the VillageHealth special needs plans.

Ancillary ~~Services~~services and ~~Strategic Initiatives~~strategic initiatives’ operating ~~expenses~~losses for the ~~nine months ended September 30, 2009 increased~~first quarter of 2010 decreased by approximately ~~$46~~$4 million as compared to the ~~same period~~fourth quarter of 2009, and decreased by approximately $3 million as compared to the first quarter of 2009. The decrease in ~~2008,~~the ancillary services and strategic initiatives operating losses in the first quarter of 2010 as compared to the fourth quarter of 2009 was primarily due to improved performance in our clinical research programs and in our vascular access services, as well as lower operating

losses in VillageHealth. The decrease in operating losses in the first quarter of 2010 as compared to the first quarter of 2009 was primarily the result of discontinuing the VillageHealth special needs plans and volume growth in our pharmacy business, higher labor and benefits costs and an increase in pharmaceutical costs, partially offset by lower professional fees that were incurred in 2008 in connection with the VillageHealth special needs plans.

Ancillary and Strategic Initiatives operating losses for the third quarter of 2009 increased by approximately $1 million as compared to the second quarter of 2009, and were flat as compared to the third quarter of 2008. Ancillary and Strategic Initiatives operating losses in the third quarter of 2009 were impacted by certain impairment charges.

Ancillary Services and Strategic Initiatives operating losses for the nine months ended September 30, 2009 decreased by approximately $13 million as compared to the same period of 2008, primarily due to growth in revenue primarily associated with our pharmacy business outpacing increases in operating expenses, and improved profitability at several of our other Ancillary Services and Strategic Initiatives.business.

Stock-based compensation. Stock-based compensation of approximately ~~$11.4~~$10.2 million in the ~~third~~first quarter of ~~2009 was relatively flat~~2010 represented a decrease of approximately $0.4 million as compared to the ~~second~~fourth quarter of 2009 and ~~increased by~~a decrease of approximately ~~$0.7~~$0.8 million as compared to the ~~third~~first quarter of ~~2008. This increase~~2009. The decreases resulted primarily from ~~increases~~decreases in ~~both~~ the ~~grant-date fair value and~~ aggregate quantity of grants that contributed expense to these respective periods. ~~For the nine months ended September 30, 2009, stock-based compensation increased by approximately $3.9 million as compared to the same period of 2008, primarily as a result of the same factors.~~

Other income.Other income for the ~~third~~first quarter of ~~2009 decreased by approximately $0.3 million and decreased by approximately $1.5 million from~~2010 was relatively flat as compared to the ~~second~~fourth quarter of 2009 and the third quarter of 2008, respectively. For the nine months ended September 30, 2009, other income decreased by approximately $7.3 million as compared to the same period in 2008. The decreases in other income in the thirdfirst quarter of 2009, ~~and for the nine months ended September 30, 2009 were primarily due to lower interest rates, partially offset by higher average cash balances.~~respectively.

Debt expense.Debt expense of ~~$45.5~~$44.6 million in the ~~third~~first quarter of 2010 decreased by approximately $0.2 million from the fourth quarter of 2009 and decreased by ~~approximately $1.6~~$3.7 million, ~~from~~as compared to the ~~second~~first quarter of 2009. The ~~decrease was~~decreases were primarily due to an overall decrease in our effective interest rate as a result of lower notional amounts of fixed rate swap agreements that contained higher rates. In addition, the decrease in the first quarter of 2010, as compared to the first quarter of 2009, was also due to lower average principal balances outstanding. The overall average effective interest rate for the ~~third~~first quarter of ~~2009~~2010 was ~~4.79%~~4.67%, as compared to ~~4.92%~~4.69% for the ~~second~~fourth quarter of 2009 and 5.04% for the first quarter of 2009.

For the third quarter of 2009 and for the nine months ended September 30, 2009, debt expense decreased by approximately $9 million and $28 million, respectively, as compared to the same periods in 2008. The decrease in both periods were primarily attributable to lower interest rates as a result of reductions in the LIBOR-based variable interest rates on the unhedged portion of our debt and a decrease in our overall outstanding debt principal balances, mainly as a result of payments made on the Term Loan A.

Net income attributable to noncontrolling interests. Net income attributable to noncontrolling interests was ~~$15.3~~$15.6 million for the ~~third~~first quarter of ~~2009,~~2010, as compared to ~~$13.8~~$15.9 million for the ~~second~~fourth quarter of 2009 and ~~$13.8~~$12.1 million for the ~~third~~first quarter of ~~2008. For the nine months ended September 30, 2009,~~2009. The increase in net income attributable to noncontrolling interests ~~was $41.2 million, representing an increase~~in the first quarter of ~~approximately $5.4 million~~2010 as compared to the ~~same period in 2008. The increases in noncontrolling interests in the third~~first quarter of 2009 ~~and for the nine months ended September 30, 2009 were~~was primarily due to ~~increases~~an increase in the profitability of our joint ventures, as well as increases in the number of joint ventures.

Our accounts receivable balances at ~~September 30, 2009~~March 31, 2010 and ~~June 30,~~December 31, 2009 were ~~$1,143~~$1,104 million and ~~$1,128~~$1,106 million, respectively, which represented approximately 66 days and 68 days of revenue, respectively, net of bad debt provision. The decrease in DSO was primarily the result of improved cash collections. Accounts receivable balances of approximately 70 days of revenue ~~in both periods, net of bad debt provision, which is~~are more consistent with our past experience levels and our expected trends. Our DSO calculation is based on the current quarter’s average revenue per day. There were no significant changes during the ~~third~~first quarter of ~~2009~~2010 from the ~~second~~fourth quarter of 2009 in the amount of unreserved accounts receivable over one year old or the amounts pending approval from third-party payors.

Outlook for ~~2009 and~~ 2010.We are raising our operating income guidance range for 2009 from $900-$930 million to $930-$950 million. Also, we may modestly exceed the upper end of our previous operating cash flow guidance of $550-$600 million. Currently, we still expect our operating income for 2010 to be in the range of $950 ~~million-$1.02 billion.~~million to $1,020 million and we expect our operating cash flows for 2010 to be in the range of $675 million to $725 million. These projections and the underlying assumptions involve significant risks and uncertainties, and actual results may vary significantly from current projections. These risks, among others, include those relating to the concentration of profits generated from commercial ~~payor plans,~~payors, continued downward pressure on average realized payment rates from commercial payors, which may result in the loss of revenue or patients, a reduction in the number of patients under higher-paying commercial plans, a reduction in government payment rates or changes to the structure of payments under the Medicare ESRD program or other government-based programs, including, for example, the implementation of a bundled payment rate system which ~~result in~~will lower reimbursement for services we provide to Medicare patients, and the impact of health care reform legislation that was enacted in

the U.S. in March 2010, changes in pharmaceutical or anemia management practice patterns, payment policies, or pharmaceutical pricing, our ability to maintain contracts with physician medical directors, legal compliance risks, including our continued compliance with complex government regulations, ~~and compliance with the corporate integrity agreement applicable to the dialysis centers acquired from Gambro Healthcare and assumed in connection with such acquisition,~~ and the resolution of ongoing investigations by various federal and state government agencies. See “Risk Factors” in this Quarterly Report on Form 10-Q and the cautionary language contained in the forward looking statements and associated risks as discussed under “Forward-looking statements” on page 22 for more information about these and other potential risks. We undertake no obligation to update or revise these projections, whether as a result of changes in underlying factors, new information, future events or otherwise.

Liquidity and capital resources.Cash flow from operations during the ~~third~~first quarter of ~~2009~~2010 was ~~$167~~$262 million, compared to ~~$160~~$134 million during the ~~third~~first quarter of ~~2008.~~2009. The improved cash flow was primarily the result of improved earnings, cash collections and the timing of payments for certain expenditures. Non-operating cash outflows for the ~~third~~first quarter of 2010 included capital asset expenditures of $45 million, including $22 million for new center developments and relocations and $23 million for maintenance and information technology. We also spent an additional $1.1 million for acquisitions. We paid distributions to noncontrolling interests of $19 million. Non-operating cash outflows for the first quarter of 2009 included capital asset expenditures of ~~$67~~approximately $73 million, including $42 million for new center developments and relocations and ~~$25~~$31 million for maintenance and information technology. We ~~also~~ spent an additional $21 million for acquisitions. We also repurchased 1.1 million shares of our common stock for approximately $62.4 million in the third quarter of 2009 and paid distributions to noncontrolling interest of $17 million. Non-operating cash outflows for the third quarter of 2008 included capital asset expenditures of approximately $79 million, including $52 million for new center developments and relocations and $27 million for maintenance and information technology. We also spent an additional $30$40 million for acquisitions and paid distributions to noncontrolling interests of $14 million. We also repurchased 0.7 million shares of common stock for approximately $32 million.

During the ~~third~~first quarter of ~~2009,~~2010, we acquired ~~four~~one dialysis ~~centers,~~center, opened 21 new dialysis centers, ~~merged the operations of~~closed five centers, ~~into five existing~~sold three centers, ~~closed one center and~~ provided administrative and management services to one additional third-party owned ~~center. During the third quarter of 2008, we acquired six centers, opened 22 new dialysis centers, closed~~center and developed one center ~~merged the operations of two centers into two other existing centers and divested one center.~~

Cash flow from operations for the nine months ended September 30, 2009 was $514 million compared to $415 million for the nine months ended September 30, 2008. Non-operating cash outflows for the first nine months of 2009 included capital asset expenditures of $206 million, including $127 million for new center developments and relocations and $79 million for maintenance and information technology. We also spentin which we own an ~~additional $64 million for acquisitions. We also repurchased 1.9 million shares of common stock for approximately $94.4 million and paid distributions to noncontrolling interests of $47 million.~~equity investment. During the first ~~nine months~~quarter of 2009, we sold investments in mutual funds totaling $16.5 million. Non-operating cash outflows for the first nine months of 2008 included capital asset expenditures of approximately $224 million, including $158 million for new center developments and relocations and $66 million for maintenance and information technology. We also spent an additional $77 million for acquisitions. We also repurchased 3.5 million shares of our common stock for approximately $169.7 million in the first nine months of 2008 and paid distributions to noncontrolling interests of $43 million. During the nine months ended September 30, 2008 we sold investments in mutual funds totaling $5.3 million.

~~For the nine months ended September 30, 2009, we~~ acquired ~~13 dialysis~~seven centers, opened 6118 new dialysis centers, closed two centers, ~~merged the operations of 11~~divested majority ownership interests in three centers ~~into 11 existing~~while retaining a noncontrolling interest in each one and acquired noncontrolling interests in three additional centers ~~sold five centers, purchased equity investments~~ in ~~six centers~~which we also provide management and ~~provided~~ administrative and management services for two additional third-party owned centers. For the nine months ended September 30, 2008, we acquired 16 centers, opened 61 new dialysis centers, closed six centers, merged the operations of four centers into other existing centers, and discontinued administrative services to one third-party owned center, provided administrative services to one additional center, and divested one center.services.

We currently expect to spend approximately ~~$100~~$125 million for capital asset expenditures in ~~2009~~2010 related to routine maintenance items and information technology equipment. We also expect to spend $250 million for new center development, relocations and center acquisitions in ~~2009,~~2010, depending upon the availability of projects and sufficient project ~~returns.~~returns, which does not include any potential expenditures for our new corporate headquarters. We ~~may modestly exceed the upper end~~expect to generate approximately $675 million to $725 million of ~~our previous~~ operating cash flow ~~guidance of $550-$600 million.~~in 2010. Our actual expenditures for growth and cash flows in ~~2009~~2010 could vary significantly from these expected ~~amounts. We are engaged in efforts~~amounts due to ~~improve our internal policies~~the timing of payments and procedures to accelerate the time it takes to identify and process overpayments received from payors which may result in the acceleration of refunds and recoupments. A significant acceleration in refunds and recoupments to payors could materially and adversely affect our operating cash flows.collections.

During the first ~~nine~~three months of ~~2009~~2010 we made mandatory principal payments of approximately ~~$39.4~~$21.9 million on the term loan A.

During the third quarter of 2009, we repurchased 1,108,784 shares of our common stock for $62.4 million, or an average price of $56.25 per share. For the first nine months of 2009, we repurchased a total of 1,853,184 shares of our common stock for $94.4 million, or an average price of $50.93 per share. As of September 30, 2009, a total of $33.2 million of share repurchases had not yet been settled in cash. In addition, we repurchased 1,049,435 additional shares of our common stock from October 1, 2009 through October 7, 2009 for $59.1 million, or an average price of $56.32 per share. All of these share repurchases were consummated pursuant to previously announced authorizations by our Board of Directors. On October 8, 2009, our Board of Directors authorized an additional $500 million for share repurchases. We have not repurchased any additional shares of our common stock from October 8, 2009 through November 5, 2009 under this Board authorization. Therefore, the total outstanding authorization for share repurchases as of November 5, 2009 was $500 million. This stock repurchase program has no expiration date.

~~As of September 30, 2009,~~March 31, 2010, we maintained a total of ~~eight~~six interest rate swap agreements with amortizing notional amounts totaling ~~$483~~$350 million. These agreements had the economic effect of modifying the LIBOR-based variable interest rate on an equivalent amount of our debt to fixed rates ranging from ~~3.88%~~4.05% to 4.70%, resulting in an overall weighted average effective interest rate of ~~5.70%~~5.83% on the hedged portion of our Senior Secured Credit Facilities, including the term loan B margin of 1.50%. The swap agreements expire in

by September 30, 2010 and require quarterly interest payments. During the ~~nine~~three months ended ~~September 30, 2009,~~March 31, 2010, we accrued net charges of ~~$13.3~~$3.6 million from these swaps which is included in debt expense. As of ~~September 30, 2009,~~March 31, 2010, the total fair value of these swaps was a liability of ~~$14.9~~$7.1 million. During the ~~nine~~three months ended ~~September 30, 2009,~~March 31, 2010 we recorded ~~$5.9~~$2.0 million, net of tax, as an increase to other comprehensive income for previous losses that were reclassified into income, net of valuation losses.

As of ~~September 30, 2009,~~March 31, 2010, the interest rates were economically fixed on approximately ~~25%~~19% of our variable rate debt and approximately ~~61%~~59% of our total debt.

As a result of the swap agreements, the overall ~~effective~~ weighted average effective interest rate on the Senior Secured Credit Facilities was ~~2.81%~~2.57%, based upon the current margins in effect of 1.50%, as of ~~September 30, 2009.~~March 31, 2010.

Our overall weighted average effective interest rate during the ~~third~~first quarter of ~~2009~~2010 was ~~4.79%~~4.67% and as of ~~September 30, 2009~~March 31, 2010 was ~~4.76%~~4.66%.

As of ~~September 30, 2009,~~March 31, 2010, we have undrawn revolving credit facilities totaling $250 million of which approximately ~~$48~~$52 million was committed for outstanding letters of credit.

On April 30, 2010, we notified the Trustee that we are exercising our right to redeem $200 million aggregate principal amount of our outstanding 6 ⁵/8% senior notes due 2013, at a price of 101.656% and the redemption date is expected to be in June 2010. We expect to expense net pre-tax refinancing charges of approximately $4 million in the second quarter of 2010, associated with the transaction.

We believe that we will have sufficient liquidity, ~~and~~will generate significant operating cash flows and will have access to borrowings through the capital markets to fund our scheduled debt service and other obligations for the foreseeable future. Our primary sources of liquidity are cash from operations and cash from borrowings.

Stock-based compensation recognized ~~during~~in a period ~~is based on~~represents the amortization during that period of the estimated grant-date fair value of ~~the portion of the~~current and prior stock-based awards over their vesting ~~during that period,~~terms, adjusted for expected forfeitures. Stock-based compensation recognized in these condensed consolidated financial statements for the nine months ended September 30, 2009 and 2008 includes compensation cost for stock-based awards granted prior to, but not fully vested as of, January 1, 2006 and subsequent stock-based awards granted through September 30, 2009 and 2008, respectively. Shares issued upon exercise of stock awards are generally issued from shares in treasury. We have used the Black-Scholes-Merton valuation model for estimating the grant-date fair value of stock options and stock-settled stock appreciation rights granted in all periods. During the ~~nine~~three months ended ~~September 30, 2009,~~March 31, 2010, we granted ~~4.0~~1.2 million stock-settled stock appreciation rights with a grant-date fair value of ~~$47.8~~$19.4 million and a weighted-average expected life of approximately ~~3.5~~3.6 years, and also granted ~~13,566~~0.3 million stock units with a grant-date fair value of ~~$0.6~~$18.4 million and a weighted-average expected life of approximately ~~0.6 of a year.~~2.7 years.

For the ~~nine~~three months ended ~~September 30,~~March 31, 2010 and 2009, ~~and 2008,~~ we recognized ~~$33.9~~$10.2 million and ~~$30.0~~$11.0 million, respectively, in stock-based compensation expense for stock options, stock-settled stock appreciation rights, stock units and discounted employee stock plan purchases, which are primarily included in general and administrative expenses. The estimated tax benefit recorded for stock-based compensation through ~~September 30,~~March 31, 2010 and 2009 ~~and 2008~~ was ~~$12.8~~$3.9 million and ~~$11.3~~$4.2 million, respectively. As of ~~September 30, 2009,~~March 31, 2010, there was ~~$88~~$101 million of total estimated unrecognized compensation cost related to nonvested stock-based compensation arrangements under our equity compensation and stock purchase plans. We expect to recognize this cost over a weighted average remaining period of ~~1.5~~1.6 years.

During the ~~nine~~three months ended ~~September 30,~~March 31, 2010 and 2009, ~~and 2008,~~ we received ~~$27.3~~$20.1 million and ~~$29.9~~$8.0 million, respectively, in cash proceeds from stock option exercises and ~~$12.4~~$7.9 million and ~~$10.2~~$2.2 million, respectively, in actual tax benefits upon the exercise of stock awards.

In addition to the debt obligations reflected on our balance sheet, we have commitments associated with operating leases and letters of credit as well as potential obligations associated with our equity investments in ~~third-party~~nonconsolidated businesses and to dialysis ~~businesses.~~centers that are wholly-owned by third parties. Substantially all of our facilities are leased. We have potential acquisition obligations

for several ~~jointly-owned centers~~joint ventures and for some of our non-wholly-owned subsidiaries in the form of put provisions. ~~These~~If these put provisions ifwere exercised, we would ~~require us~~

be required to purchase the third-party owners’ noncontrolling interests at either the appraised fair market value or at a predetermined multiple of earnings or cash flow attributable to the noncontrolling interests put to us, which is intended to approximate fair value. The methodology we ~~used~~use to estimate the fair ~~value~~values of ~~the~~ noncontrolling interests subject to ~~these~~ put provisions assumes either the higher of a liquidation value of net assets or an average multiple of earnings, based on historical earnings, patient mix and other performance indicators, as well as other factors. The ~~estimate of the~~estimated fair values of the noncontrolling interests subject to ~~these~~ put provisions is a critical accounting estimate that involves significant judgments and assumptions and may not be indicative of the actual values at which the noncontrolling interests may ultimately be settled, ~~in the future,~~ which could vary significantly from our current estimates. The estimated fair values of noncontrolling interests subject to ~~these~~ put provisions can ~~also~~ fluctuate and the implicit multiple of earnings at which these noncontrolling interests ~~obligation~~obligations may be settled will vary significantly depending upon market conditions including potential purchasers’ access to the ~~credit and~~ capital markets, which can impact the level of competition for dialysis and non-dialysis related businesses, the economic performance of these businesses and the restricted marketability of the third-party owners’ noncontrolling interests. The amount of noncontrolling interests subject to put provisions ~~using~~that contractually employ a predetermined multiple of earnings ~~and therefore not at~~rather than fair value are immaterial. For additional information see Note 98 to the condensed consolidated financial statements.

We also have potential cash commitments to provide operating capital advances as needed to several dialysis centers that are wholly-owned by third parties or centers in which we own an equity investment as well as to physician–owned vascular access clinics that we operate under management and administrative services agreements.

The following is a summary of these contractual obligations and commitments as of ~~September 30, 2009,~~March 31, 2010, reflecting changes that have occurred with our debt instruments during the ~~second and third quarter~~first three months of ~~2009~~2010 (in millions):


	Less than 1 year		1-3 years		3-5 years		After 5 years		Total		Less than 1 year		1-3 years		3-5 years		After 5 years		Total
Scheduled payments under contractual obligations:
Long-term debt	$	33	$	157	$	2,608	$	851	$	3,649	$	76	$	1,773	$	901	$	850	$	3,600
Interest payments on senior and senior subordinated notes		—		243		213		92		548		61		243		153		31		488
Capital lease obligations		—		1		2		2		5		—		1		1		4		6
Operating leases		55		387		312		513		1,267		171		387		297		477		1,332

	$	88	$	788	$	3,135	$	1,458	$	5,469	$	308	$	2,404	$	1,352	$	1,362	$	5,426

Potential cash requirements under existing commitments:
Letters of credit	$	48	$	—	$	—	$	—	$	48	$	52	$	—	$	—	$	—	$	52
Noncontrolling interests subject to put provisions		154		51		55		33		293		183		64		63		40		350
Pay-fixed swaps potential obligations		5		10		—		—		15		7		—		—		—		7
Working capital advances for equity investments and third-party-owned centers and clinics under management and administrative services agreements		12		—		—		—		12		6		—		—		—		6
Income tax liabilities for unrecognized tax benefits												7		—		—		—		7

	$	219	$	61	$	55	$	33	$	368	$	255	$	64	$	63	$	40	$	422

Not included above are interest payments related to our senior secured credit facilities. Our senior secured credit facilities as of ~~September 30, 2009~~March 31, 2010 bear interest at LIBOR plus margins of 1.50%. The interest rates on our term loan A and the revolving line of credit isare adjustable depending upon our achievement of certain financial ratios. At ~~September 30, 2009,~~March 31, 2010, our senior secured credit facilities had an overall ~~effective~~ weighted average effective interest rate of ~~2.81%~~2.57%, including the effects of our swap agreements. Interest payments are due at the maturity of specific debt tranches within each term loan, which can range in maturity from one month to twelve months. Future

interest payments will depend upon the amount of mandatory principal payments and principal prepayments, changes in

the LIBOR-based interest rates that can fluctuate significantly depending upon market conditions, ~~including~~ the ~~credit and capital markets,~~mix of the debt tranche maturities, as well as changes in the interest rate margins. Assuming no principal prepayments on our senior secured credit facilities during the next year and no changes in the effective interest rates, we would pay approximately ~~$53~~$47 million of interest over the next twelve months.

The pay-fixed swap obligations represent the estimated fair market values of our interest rate swap agreements as reported by various broker dealers that are based upon relevant observable market inputs as well as other current market conditions that existed as of ~~September 30, 2009,~~March 31, 2010, and represent the estimated potential obligation that we would be required to pay based upon future settlement of each specific tranche within the swap ~~agreements.~~agreements as determined by the current estimated yield curve. The actual amount of our obligation associated with these swaps in the future will depend upon changes in interest rates that can fluctuate significantly depending upon market conditions, and other relevant factors that can affect the fair market value of these swap agreements.

In addition to the above commitments, we are obligated to purchase a significant majority of our hemodialysis products and supplies at fixed prices through 2015 from Gambro Renal Products, Inc., or Gambro Renal Products, in connection with an Alliance and Product Supply Agreement. Our total expenditures for the ~~nine~~three months ended ~~September 30, 2009~~March 31, 2010 on such products were approximately 2% of our total operating costs. In January 2010, we entered into an agreement with Fresenius Medical Care, or Fresenius, which committed us to purchase a certain amount of dialysis equipment, parts and supplies from them through 2013. Our total expenditures for the three months ended March 31, 2010 on such products were approximately 4% of our total operating costs.

The actual amount of purchases in future years ~~under the Alliance~~from Gambro Renal Products and ~~Product Supply Agreement~~Fresenius will depend upon a number of factors, including the operating requirements of our centers, the number of centers we acquire, growth of our existing centers, and in the case of the Alliance and Product Supply Agreement, Gambro Renal Products’ ability to meet our needs.

The settlements of approximately ~~$15~~$16 million of existing income tax liabilities for unrecognized tax benefits are excluded from the above table as reasonably reliable estimates of the timing cannot be made.

~~On June 29, 2009, the Financial Accounting Standards Board (FASB) established~~Effective January 1, 2010, the FASB Accounting Standards Codification (Codification) as the single source of authoritative U.S. generally accepted accounting principles (GAAP) for all nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) are also sources of authoritative U.S. GAAP for SEC registrants. The Codification does not change U.S. GAAP but takes previously issued FASB standards and other U.S. GAAP authoritative pronouncements, changes the way the standards are referred to, and includes them in specific topic areas. The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of the Codification did not have any impact on our consolidated financial statements.

~~The FASB, effective for our first annual reporting period that begins after November 15, 2009 is eliminating~~eliminated the quantitative approach previously required for determining the primary beneficiary of a variable interest entity, and ~~requiring~~required additional disclosures about an enterprise’s involvement in variable interest entities. An entity ~~will be~~is required to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity by having both the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity, or the right to receive benefits from the entity. In addition, the FASB ~~is establishing~~established new guidance for determining whether an entity is a variable interest entity, requiring an ongoing reassessment of whether an enterprise is the primary beneficiary of a variable interest entity, and adding an additional reconsideration event for determining whether an entity is a variable interest entity when any changes in facts and circumstances occur such that the holders of the equity investment are at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’s economic performance. ~~We are currently in process of assessing the expected impact of this standard on our consolidated financial statements.~~

Effective January 1, 2009, we are required to provide enhanced disclosures about our derivative and hedging activities. We are required to provide additional disclosures about (a) how and why we use derivative instruments, (b) how derivative instruments and related hedged items are accounted for, and (c) how derivative

~~instruments and related hedged items affect our financial position, financial performance, and cash flows. These requirements did not have a material impact on our consolidated financial statements.~~

Effective January 1, 2009, we are required to treat noncontrolling interests as a separate component of equity, but apart from our equity, and not as a liability or other item outside of equity. We are also required to identify and present consolidated net income attributable to us and to noncontrolling interests on the face of the consolidated statement of income. Previously, we had reported minority interests (noncontrolling interests) as a reduction to operating income. In addition, changes in our ownership interest while we retain a controlling financial interest should be accounted for as equity transactions. We were also required to expand disclosures in the financial statements to include a reconciliation of the beginning and ending balances of the equity attributable to us and the noncontrolling owners and a schedule showing the effects of changes in our ownership interest in a subsidiary on the equity attributable to us. This change did not have a material impact on our consolidated financial statements; however, it did change the presentation of minority interests in our consolidated financial statements. In conjunction with adopting these requirements, we are required to classify securities with redemption features that are not solely within our control such as our noncontrolling interests that are subject to put provisions outside of permanent equity and to measure these noncontrolling interests at fair value. See Note 912 to the condensed consolidated financial statements for ~~further details.~~

~~All business combinations consummated after January 1, 2009, are required to beaccounted for under~~ the acquisition method (previously referred to as the purchase method). Under the acquisition method, the acquirer recognizes the assets acquired, the liabilities assumed, contractual contingencies, as well as any noncontrolling interests in the acquiree at their fair values at the acquisition date. Noncontractual contingencies are recognized at the acquisition date at their fair values only if it is more likely than not that they meet the definitionimpact of ~~an asset or a liability~~. Transaction costs are excluded from the acquisition cost and are expensed as incurred. Any contingent consideration included by the acquirer as part of the purchase price must also be measured at fair value at the acquisition date and is classified as either equity or a liability. A Company that obtains control but acquires less than 100% of an acquiree is required to record 100% of the fair value of the acquiree assets, liabilities, and noncontrolling interests at the acquisition date. The adoption ofadopting these ~~requirements did not have a material impact on our consolidated financial statements.~~new requirements.

The table below provides information about our financial instruments that are sensitive to changes in interest rates, as of ~~September 30, 2009.~~March 31, 2010.


	Expected maturity date												Thereafter		Total		Average interest rate			Fair value		Expected maturity date													Thereafter		Total		Average interest rate		Fair value
	2009		2010		2011		2012		2013		2014				Total		Average interest rate		2010			2011			2012		2013		2014		2015				Thereafter		Total		Average interest rate		Fair value
	(dollars in millions)												Thereafter											(dollars in millions)
Long term debt:																				Fair value
Fixed rate	$	2	$	1	$	1	$	1	$	901	$	—	$	853	$	1,759	6.87	%		$	1,756	$	2		$	1	$	1	$	901	$	1	$	850	$	4	$	1,760	6.87	%	$	1,786
Variable rate	$	31	$	89	$	67	$	1,707	$	1	$	—	$	—	$	1,895	2.80	%		$	1,830	$	74		$	66	$	1,706	$	—	$	—	$	—	$	—	$	1,846	2.56	%	$	1,823


	Notional amount		Contract maturity date										Pay fixed	Receive variable	Fair value			Notional amount			Contract maturity date														Pay fixed	Receive variable	Fair value
	Notional amount		2009		2010		2011		2012		2013			Receive variable	Fair value			Notional amount		2010			2011			2012			2013			2014				Receive variable	Fair value
	(dollars in millions)												Pay fixed						(dollars in millions)																Pay fixed
Swaps:
Pay-fixed rate	$	483	$	94	$	389	$	—	$	—	$	—	3.88% to 4.70%	LIBOR	$	(14.9	)	$	350		$	350		$	—		$	—		$	—		$	—	4.05% to 4.70%	LIBOR	$	(7.1	)

Our Senior Secured Credit Facilities, which include the term loan A and the term loan B, consist of various individual tranches that can range in maturity from one month to twelve months and each specific tranche bears interest at a LIBOR rate that is determined by the maturity of that specific tranche. LIBOR-based interest rates are reset as each specific tranche matures and can fluctuate significantly depending upon market conditions including the credit and capital markets. Any increase in the LIBOR-based interest rates on the unhedged portion of our senior secured credit facilities, which totaled approximately ~~$1.4~~$1.5 billion as of ~~September 30, 2009,~~March 31, 2010, will have a negative impact on our overall earnings.

As of ~~September 30, 2009,~~March 31, 2010, we maintained a total of ~~eight~~six interest rate swap agreements with amortizing notional amounts totaling ~~$483~~$350 million. These agreements had the economic effect of modifying the LIBOR-based variable interest rate on an equivalent amount of our debt to fixed rates ranging from ~~3.88%~~4.05% to 4.70%, resulting in an overall weighted average effective interest rate of ~~5.70%~~5.83% on the hedged portion of our Senior Secured Credit Facilities, including the term loan B margin of 1.50%. The swap agreements expire inby September 30, 2010 and require quarterly interest payments. During the ~~nine~~three months ended ~~September 30, 2009,~~March 31, 2010, we accrued net charges of ~~$13.3~~$3.6 million from these swaps which is included in debt expense. As of ~~September 30, 2009,~~March 31, 2010, the total fair value of these swaps was a liability of ~~$14.9~~$7.1 million. During the ~~nine~~three months ended ~~September 30, 2009~~March 31, 2010 we recorded ~~$5.9~~$2.0 million, net of tax, as an increase to other comprehensive income for previous losses that were reclassified into income, net of valuation losses.

As of ~~September 30, 2009,~~March 31, 2010, the interest rates were economically fixed on approximately ~~25%~~19% of our variable rate debt and approximately ~~61%~~59% of our total debt.

Our overall weighted average effective interest rate during the ~~third~~first quarter of ~~2009~~2010 was ~~4.79%~~4.67% and as of ~~September 30, 2009~~March 31, 2010 was ~~4.76%~~4.66%.

Management has established and maintains disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that it files or submits pursuant to the Securities Exchange Act of 1934, as amended, or Exchange Act, is recorded, processed, summarized and reported within the time periods

specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosures.

At the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures in accordance with the Exchange Act requirements. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective for timely identification and review of material information required to be included in the Company’s Exchange Act reports, including this report on Form 10-Q. Management recognizes that these controls and procedures can provide only reasonable assurance of desired outcomes, and that estimates and judgments are still inherent in the process of maintaining effective controls and procedures.

There has not been any change in the Company’s internal control over financial reporting that was identified during the evaluation that occurred during the fiscal quarter covered by this report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

The information in Note 65 of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report is incorporated by this reference in response to this item.

A restated description of the risk factors associated with our business is set forth below. This description includes any material changes to and supersedes the description of the risk factors associated with our business previously disclosed in Part I Item 1A of our ~~Quarterly~~Annual Report on Form ~~10-Q~~10-K for the ~~quarterly period~~year ended ~~June 30,~~December 31, 2009. The risks discussed below are not the only ones facing our business. Please read the cautionary notice regarding forward-looking statements under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

If the average rates that commercial payors pay us decline significantly, it would have a material adverse effect on our revenues, earnings and cash flows.

Approximately ~~35%~~34% of our dialysis and related lab services revenues for the ~~nine~~three months ended ~~September 30, 2009~~March 31, 2010 were generated from patients who have commercial payors as the primary payor. The majority of these patients have insurance policies that pay us on terms and at rates that are generally significantly higher than Medicare rates. The payments we receive from commercial payors generate nearly all of our profit and all of our nonacute dialysis profits come from commercial payors. We continue to experience downward pressure on some of our commercial payment rates and it is possible that commercial payment rates could be materially lower in the future. The downward pressure on commercial payment rates is a result of general conditions in the market, recent and future consolidations among commercial payors, increased focus on dialysis services and other factors.

We are continuously in the process of negotiating agreements with our commercial payors, and payors are aggressive in their negotiations with us. In the event that our continued negotiations result in overall commercial rate reductions in excess of overall commercial rate increases, the cumulative effect could have a material adverse effect on our financial results. Consolidations have significantly increased the negotiating leverage of commercial payors. Our negotiations with payors are also influenced by competitive pressures. We expect that some of our contracted rates with commercial payors may decrease or that we may experience decreases in patient volume as our negotiations with commercial payors continue. In addition to increasing downward pressure on contracted commercial payor rates, payors have been attempting to impose restrictions and limitations on non-contracted or out-of-network providers. In some circumstances for some commercial payors, our centers are designated as out-of-network providers. Rates for out-of-network providers are on average higher than rates for in-network providers. Commercial payors may restructure their benefits to create disincentives for patients to select or remain with out-of-network providers or may decrease payment rates for out-of-network providers. We, along with others in the kidney care community, are resisting attempts to limit access to out-of-network providers through regulatory, legislative and legal means. Decreases in out-of-network rates and restrictions on out-of-network access combined with decreases in contracted rates could result in a significant decrease in our overall revenue derived from commercial payors. If the average rates that commercial payors pay us decline significantly, it would have a material adverse effect on our revenues, earnings and cash flows.

If the number of patients with higher-paying commercial insurance declines, then our revenues, earnings and cash flows would be substantially reduced.

Our revenue levels are sensitive to the percentage of our patients with higher-paying commercial insurance coverage. A patient’s insurance coverage may change for a number of reasons, including changes in the patient’s

or a family member’s employment status. Currently, for a patient covered by an employer group health plan, Medicare generally becomes the primary payor after 33 months, or earlier, if the patient’s employer group health plan coverage terminates. When Medicare becomes the primary payor, the payment rate we receive for that patient shifts from the employer group health plan rate to the lower Medicare payment rate. We have seen an increase in the number of patients who have government-based programs as their primary payors which we believe is largely as a result of improved mortality and the current economic recession which has a negative impact on the percentage of patients covered under commercial insurance plans. To the extent there isare sustained or increased job losses in the United States as a result of current economic conditions, we could experience a continued decrease in the number of patients under commercial plans. We could also experience ~~such~~ a further decrease if changes to the healthcare regulatory system result in fewer patients covered under commercial plans. In addition, our continued negotiations with commercial payors could result in a decrease in the number of patients under commercial plans to the extent that we cannot reach agreement with commercial payors on rates and other terms. If there is a significant reduction in the number of patients under higher-paying commercial plans relative to government-based programs that pay at lower rates, it would have a material adverse effect on our revenues, earnings and cash flows.

Changes in the structure of, and payment rates under the Medicare ESRD program, including the implementation of a bundled payment system under MIPPA and other healthcare reform initiatives, could substantially reduce our revenues, earnings and cash flows.

Approximately one-half of our dialysis and related lab services revenues for the ~~nine~~three months ended ~~September 30, 2009~~March 31, 2010 was generated from patients who have Medicare as their primary payor. Currently, the Medicare ESRD program pays us for dialysis treatment services at a fixed composite rate. The Medicare composite rate is the payment rate for a dialysis treatment including the supplies used in those treatments, specified laboratory tests and certain pharmaceuticals. Certain other pharmaceuticals, including EPO, vitamin D analogs and iron supplements, as well as certain specialized laboratory tests, are separately billed.

In July 2008, ~~the Medicare Improvements for Patients and Providers Act for 2008, or~~ MIPPA was passed by Congress. This legislation provides for an increase in the composite rate of 1% which went into effect on January 1, 2009 and an additional 1% which will go into effect on January 1, 2010. In addition, this legislation introducesintroduced a new payment system for dialysis services beginning in January 2011 whereby ESRD payments will be made under a bundled payment rate which will provide for a fixed rate for all goods and services provided during the dialysis ~~treatment, including laboratory services and the administration of pharmaceuticals.~~treatment. On September 15, 2009, ~~the Centers for Medicare and Medicaid Services, or~~ CMS released the proposed rule regarding the new bundled payment rate ~~system. Among other things,~~system and it is anticipated that CMS will issue the final rule in May or June of 2010. If the new bundled payment rate system is implemented as proposed, ~~rule includes in the bundle certain oral medications,~~it could have a material adverse effect on our revenues, earnings and ~~all laboratory tests ordered by nephrologists, whether or not related to the ESRD treatment and also includes an expanded list of case-mix adjustors, which impact the payment rate.~~cash flows. The initial 2011 bundled rate is required to be set based on a 2% reduction in the payment rate that providers would have received under the historical fee for service payment methodology and based on the lowest average industry pharmaceutical utilization from 2007 to 2009. Among other things, the proposed rule requires dialysis facilities to provide certain oral medications but does not provide funding sufficient to cover our costs for those medications. In addition, all laboratory tests ordered by nephrologists would be included in the bundle, whether or not the laboratory tests are related to ESRD treatment, without funding sufficient to cover our costs for those tests. The proposed rule also includes an expanded list of case-mix adjustors, many of which may be difficult or impossible for dialysis clinics to track, consequently reducing the payment rate for ESRD treatments. The proposed rule also introduced a transition adjustment that would reduce payments to providers by 3%. The combined effect of the adjustments provided in the proposed rule would result in a bundled rate that represents a significantly greater than 2% reduction in the payment rate that we would have received for our services prior to bundling. The proposed rule also requires the new single bundled payment base rate to be adjusted annually for inflation based upon a market basket index, less ~~1% of such index,~~a productivity adjustment, beginning in 2012. Also, beginning in 2012, the proposed rule provides that 2% of payments due to providers will be set aside subject to provider satisfaction of certain quality standards. A failure to achieve the required quality standards will result in the forfeiture of the 2% reserve. Dialysis providers have the option to move fully to the bundled payment system in 2011 or to phase in the payment system over three years. ~~We are in the process of evaluating the impact of the proposed rule and will be submitting formal comments to CMS.~~

We experience increases in operating costs that are subject to inflation, such as labor and supply costs, regardless of whether there is a compensating inflation-based increase in Medicare payment rates. The composite rate adjustment provided for in 2009 and 2010 will not be sufficient to compensate for the increases that we are likely to experience in operating costs that are subject to inflation. Because the bundled rates that will take effect in 2011 have not been set, we cannot predict whether we will be able to reduce our operating costs at a level that will offset any reduction in overall reimbursement for services we provide to Medicare patients. In addition, we

experience increases in operating costs that are subject to inflation, such as labor and supply costs, regardless of whether there is a compensating inflation-based increase in Medicare payment rates. To the extent the Medicare bundled rates are established at levels that result in lower overall reimbursement for services we provide to Medicare patients, it could have a material adverse effect on our revenues, earnings and cash flows.

~~In addition, ongoing public policy debates regarding healthcare reform and the extension of coverage to uninsured individuals has recently intensified. While we~~ We also cannot predict whether we will be able to implement the ~~federal government~~requirements of the final rule within the time frames set in the final rule or whether we will ~~enact~~be able to satisfy our Medicare and Medicaid regulatory compliance obligations as processes and systems are modified to comply with the final rule. In addition, if we are unable to adequately modify our processes and systems prior to implementation of the new requirements, we may experience significant delays in our ability to bill for services provided to Medicare patients which could adversely affect our cash flows.

In March 2010, healthcare reform legislation was enacted in the U.S. Although many of the provisions of the new legislation do not take effect immediately, and may be modified before they are implemented, the reforms could have an impact on our business. We cannot predict how employers and private payors might react to these changes ~~to the healthcare regulatory system in response to the current debate~~ or ~~the potential impact~~what form many of ~~any such changes,~~these regulations will take before implementation, but to the extent that any ~~changes~~modifications to the current healthcare regulatory system result in a reduction in patients covered by commercial insurance or a reduction in reimbursement rates for our services from commercial and/or government payors, our revenues, earnings and cash flows could be adversely affected.

Changes in state Medicaid or other non-Medicare ~~government~~government-based programs or payment rates could reduce our revenues, earnings and cash flows.

Approximately ~~15%~~16% of our dialysis and related lab services revenues for the ~~nine~~three months ended ~~September 30, 2009,~~March 31, 2010, was generated from patients who have state Medicaid or other non-Medicare ~~government~~government-based programs, such as Medicare-assigned plans or the Veterans Health Administration, as their primary coverage. As state governments and governmental organizations face increasing budgetary pressure, they may propose reductions in payment rates, delays in the timing of payments, limitations on eligibility or other changes to their related programs. For example, some programs, such as certain state Medicaid programs and the Veterans Health Administration, have recently considered, proposed or implemented rate reductions. In January 2009, the Department of Veterans Affairs informally adopted a policy to reduce payment rates for dialysis services to Medicare rates. The informal policy was subsequently withdrawn in July 2009. On February 17, 2010, the Department of Veterans Affairs formally proposed a rule which would materially reduce their payment rates for dialysis services to equal Medicare rates. The proposed rule is subject to a 60 day comment period and we expect to participate in the comment process. We cannot predict when or if the final rule will be effective or what will be included in the final rule. If the proposed rule is implemented in its current form, it will have a significant negative impact on our revenues, earnings and cash flows as a result of the reduction in rates or as a result of a decrease in the number of patients covered by the Veterans Health Administration that we service. Approximately 2% of our dialysis and related lab services revenues for the three months ended March 31, 2010 was generated by the Veterans Health Administration. While we cannot predict whether the Department of Veterans Affairs or any other government programs will be successful in reducing their payment rates or the timing of potential reductions, any such reduction could have a material adverse effect on our revenues, earnings and cash flows.

In addition, some state Medicaid program eligibility requirements mandate that citizen enrollees in such programs provide documented proof of citizenship. If our patients cannot meet these proof of citizenship documentation requirements, they may be denied coverage under these programs. If state Medicaid or other non-Medicare government programs reduce the rates paid by these programs for dialysis and related services, delay the timing of payment for services provided, further limit eligibility for coverage or adopt changes to their payment structure which reduces our overall payments from these state Medicaid or non-Medicare government programs, then our revenues, earnings and cash flows could be adversely affected.

Changes in clinical practices, ~~and~~ payment rates or ~~changes in rules and~~ regulations impacting EPO and other pharmaceuticals could substantially reduce our revenues, earnings and cash flows.

The administration of EPO and other pharmaceuticals accounted for approximately 30% of our dialysis and related lab services revenues for the ~~nine~~three months ended ~~September 30, 2009,~~March 31, 2010, with EPO accounting for approximately 20% of our dialysis and related lab services ~~revenues.~~revenues for the same period. Changes in clinical practices that result in further decreased utilization of prescribed pharmaceuticals or changes in payment rates for those pharmaceuticals could substantially reduce our revenues, earnings and cash flows.

Since late 2006, there has been significant media discussion and government scrutiny regarding anemia management practices in the United States which has created confusion and concern in the nephrology community. In late 2006, the House Ways and Means Committee held a hearing on the issue of the utilization of erythropoeisis stimulating agents, or ESAs, which include EPO, ~~utilization~~ and in 2007, the FDA required changes to the labeling of EPO and Aranesp^® to include a black box warning, the FDA’s strongest form of warning label. The FDA held additional hearings to revisit these label changes as they apply to ESRD and ~~continues~~has indicated that they will convene in 2010 to ~~examine the issue.~~further review ESA labeling. CMS also reviewed its EPO reimbursement policies and in January 2008, changes to the EPO monitoring policy went into effect which further limited reimbursement and which impacted the prescribing habits of our physicians and which has in the past and may in the future result in lower pharmaceutical intensities. Most recently, on March 24, 2010, HHS and CMS convened a meeting of the Medicare Evidence Development & Coverage Advisory Committee, or MedCAC, to review policies around the administration of ESAs, including, among other things, an evaluation of the efficacy of certain hemoglobin targets in CKD patients. These meetings could result in further restrictions on the utilization and reimbursement for ESAs which could result in decreased EPO utilization. Commercial payors have also increasingly examined their administration policies for EPO and, in some cases have modified those policies. Further changes in labeling of EPO and other pharmaceuticals in a manner that alters physician practice patterns or accepted clinical practices, changes in private and governmental payment criteria, including the introduction of EPO administration policies or the conversion to alternate types of administration of EPO or other pharmaceuticals that result in further decreases in utilization or reimbursement for EPO and other pharmaceuticals could have a material adverse effect on our revenues, earnings and cash flows.

Changes in EPO pricing ~~and the use and marketing of alternatives to EPO~~ could materially reduce our revenues, earnings and cash flows and affect our ability to care for our patients.

Amgen Inc. is the sole supplier of EPO and may unilaterally decide to increase its price for EPO at any time during the term of our agreement with Amgen. Future ~~changes~~increases in the cost of EPO without corresponding increases in payment rates for EPO could have a material adverse effect on our earnings and cash flows and ultimately reduce our income. ~~Although our~~Our agreement with Amgen for EPO includes potential rebates which depend upon the achievement of certain ~~criteria, we~~criteria. We cannot predict whether we will continue to receive the rebates for EPO that we currently receive, or whether we will continue to achieve the same levels of rebates within that structure as we have historically achieved. Our agreement with Amgen provides for specific rebates off of list price based on a combination of factors, including process improvement and data submission. Factors that could impact our ability to qualify for rebates provided for in our agreement with Amgen in the future include our ability to develop and implement certain process improvements and track certain data elements. Failure to meet certain targets and earn the specified rebates could have a material adverse effect on our earnings and cash flows.

Our agreement with Amgen ~~has developed and obtained FDA approval for Aranesp~~^®~~, a pharmaceutical used to treat anemia that may replace EPO~~terminates on December 31, 2010. We cannot predict whether any new agreement with Amgen will include the same or ~~reduce its use with dialysis patients. Unlike EPO, which is generally administered~~similar rebates as provided in ~~conjunction with each dialysis treatment, Aranesp~~^® ~~is administered less frequently. In the event that Aranesp~~^® or any future alternatives to EPO are marketed for the treatment of dialysis patients, we may realize lower margins on the administration of such pharmaceuticals than are currently realized with EPO. A significant increase in the development and use of similar alternatives to EPO, or a change in administration practices, could have a material adverse impact on our ~~revenues, earnings and cash flows.~~current agreement.

We are the subject of a number of inquiries by the federal government, any of which could result in substantial penalties against us.

We are the subject of a number of inquiries by the federal government. We have received subpoenas from the U.S. Attorney’s Office for the Northern District of Georgia, the U.S. Attorney’s Office for the Eastern District of Missouri and the U.S. Attorney’s Office for the Eastern District of Texas. We are cooperating with the

U.S. Attorney’s Offices with respect to each of the subpoenas and producing the requested records. We were recently advised by the U.S. Department of Justice that it is conducting a civil investigation into our financial relationships with physicians. We have not received details as to the extent or scope of the inquiry but we are expecting a subpoena in the near future. We intend to cooperate with the investigation just as we are cooperating with the U.S. Attorney’s Offices with respect to each of the other inquiries. Any negative findings could result in substantial financial penalties against us, exclusion from future participation in the Medicare and Medicaid programs and, in certain cases, criminal penalties. To our knowledge, no proceedings have been initiated by the federal government against us at this time. Although we cannot predict whether or when proceedings might be initiated by the federal government or when these matters may be resolved, it is not unusual for investigations such as these to continue for a considerable period of time. Responding to the subpoenas will continue to require management’s attention and significant legal expense. See Note 65 to our condensed consolidated financial statements for additional information regarding these inquiries and subpoenas.

Continued inquiries from various governmental bodies with respect to our utilization of EPO and other pharmaceuticals will require management’s attention, cause us to incur significant legal expense and could result in substantial financial penalties against us or exclusion from future participation in the Medicare and Medicaid programs, and could have a material adverse effect on our revenues, earnings and cash flows.

In response to clinical studies which identified risks in certain patient populations related to the utilization of EPO and other ~~erythropoesis-stimulating agents,~~ESAs, i.e., Aranesp^®, and in response to changes in the labeling of EPO and Aranesp^®, there has been substantial media attention and government scrutiny resulting in hearings and legislation regarding pharmaceutical utilization and reimbursement. Although we believe our anemia management practices and other pharmaceutical administration practices have been compliant with existing laws and regulations, as a result of the current high level of scrutiny and controversy, we may be subject to increased inquiries from a variety of governmental bodies and claims by third parties. For example, the subpoena from the U.S. Attorney’s Office for the Northern District of Georgia relates to the pharmaceutical products Zemplar, Hectorol, Venofer, Ferrlecit, EPO and other related matters. The subpoena from the U.S. Attorney’s Office in the

Eastern District of Missouri includes requests for documents regarding the administration of, and billing for, EPO. The subpoena from the Office of Inspector General in Houston, Texas requests records relating to EPO claims submitted to Medicare. In addition, in February 2008 the Attorney General’s Office for the State of Nevada notified us that Nevada Medicaid intends to conduct audits of ESRD dialysis providers in Nevada relating to the billing of pharmaceuticals, including EPO. Additional inquiries from various agencies and claims by third parties with respect to this issue would continue to require management’s attention and significant legal expense and any negative findings could result in substantial financial penalties against us or exclusion from future participation in the Medicare and Medicaid programs, and could have a material adverse effect on our revenues, earnings and cash flows. See Note 65 to ~~the~~our condensed consolidated financial statements for additional information regarding these inquiries and subpoenas.

If we fail to adhere to all of the complex government regulations that apply to our business, we could suffer severe consequences that would substantially reduce our revenues, earnings and cash flows.

Our dialysis operations are subject to extensive federal, state and local government regulations, including Medicare and Medicaid payment rules and regulations, federal and state anti-kickback laws, the Stark IILaw physician self-referral prohibition and analogous state referral statutes, the federal False Claims Act, or FCA, and federal and state laws regarding the collection, use and disclosure of patient health information. The Medicare and Medicaid reimbursement rules related to claims submission, licensing requirements, cost reporting, and payment processes impose complex and extensive requirements upon dialysis providers. A violation or departure from any of these requirements may result in government audits, lower reimbursements, significant fines and penalties, the potential loss of certification and recoupments or voluntary repayments.

The regulatory scrutiny of healthcare providers, including dialysis providers continues to increase. Medicare has increased the frequency and intensity of its certification inspections of dialysis centers. For example, we are

required to provide substantial documentation related to the administration of pharmaceuticals, including EPO, and, to the extent that any such documentation is found insufficient, we may be required to refund any amounts received from such administration by government or commercial payors, and be subject to substantial penalties under applicable laws or regulations. In addition, fiscal intermediaries have increased their prepayment and post-payment reviews.

We endeavor to comply with all of the requirements for receiving Medicare and Medicaid payments and to structure all of our relationships with referring physicians to comply with state and federal anti-kickback laws and ~~the Stark II~~ physician self-referral ~~law.~~law (Stark Law). However, the laws and regulations in this area are complex and subject to varying interpretations. For example, if an enforcement agency were to challenge the level of compensation that we pay our medical directors, we could be required to change our practices, face criminal or civil penalties, pay substantial fines or otherwise experience a material adverse effect as a result of a challenge to these arrangements. In addition, recent amendments to the FCA impose severe penalties for the knowing and improper retention of overpayments collected from government payors. These amendments could subject our procedures for identifying and processing overpayments to greater scrutiny. We have made significant investments in additional resources to accelerate the time it takes to identify and process overpayments and we may be required to make additional investments in the future. An acceleration in our ability to identify and process overpayments could result in us refunding overpayments to government or other payors sooner than we have in the past. A significant acceleration of these refunds could have a material adverse affect on our operating cash flows.

If any of our operations are found to violate these or other government regulations, we could suffer severe consequences that would have a material adverse effect on our revenues, earnings and cash flows including:

Delays in state Medicare and Medicaid certification of our dialysis centers could adversely affect our revenues, earnings and cash flows.

Before we can begin billing for patients treated in our outpatient dialysis centers who are enrolled in government-based programs, we are required to obtain state and federal certification for participation in the Medicare and Medicaid programs. As state governments face increasing budgetary pressure, certain states are having difficulty certifying dialysis centers in the normal course resulting in significant delays in certification. If state governments continue to have difficulty certifying new centers in the normal course and we continue to experience significant delays in our ability to treat and bill for services provided to patients covered under government programs, it could cause us to incur write-offs of investments or accelerate the recognition of lease obligations in the event we have to close centers or our centers’ operating performance deteriorates, and it could have an adverse effect on our revenues, earnings and cash flows.

If our joint ventures were found to violate the law, we could suffer severe consequences that would have a material adverse effect on our revenues, earnings and cash flows.

As of ~~September 30, 2009,~~March 31, 2010, we owned a controlling interest in numerous dialysis related joint ventures, which represented approximately ~~15%~~17% of our dialysis and related lab services ~~revenues.~~revenues for the three months ended March 31, 2010. In addition, we also owned ~~a noncontrolling interest~~equity interests in several other dialysis related joint ventures. We anticipate that we will continue to increase the number of our joint ventures. Many of our joint ventures with physicians or physician groups also have the physician owners providing medical director services to those centers or other centers we own and operate. Because our relationships with physicians are governed by the federal anti-kickback statute, we have sought to structure our joint venture arrangements to satisfy as many safe harbor requirements as we believe are reasonably possible. However, our joint venture arrangements do not satisfy all elements of any safe harbor under the federal anti-kickback statute. The subpoena and related requests for documents we received from the United States Attorney’s Office for the Eastern District of Missouri included requests for documents related to our joint ventures. We were recently advised by the U.S. Department of Justice that it is conducting a civil investigation into our financial relationships with physicians. See Note 5 to our condensed consolidated financial statements for additional information regarding these inquiries and subpoenas.

If our joint ventures are found to be in violation of the anti-kickback statute or the Stark Law provisions, we could be required to restructure the joint ventures or refuse to accept referrals for designated health services from the physicians with whom the joint venture centers have a financial relationship.

We also could be required to repay amounts received by the joint ventures from Medicare and certain other payors to the extent that these arrangements are found to give rise to prohibited referrals, and we could be subject to monetary penalties and exclusion from government healthcare programs. If our joint venture centers are subject to any of these penalties, we could suffer severe consequences that would have a material adverse effect on our revenues, earnings and cash flows.

There are significant estimating risks associated with the amount of dialysis revenue and related refund liabilities that we recognize and if we are unable to accurately estimate our revenue and related refund liabilities, it could impact the timing of our revenue recognition or have a significant impact on our operating results.

There are significant estimating risks associated with the amount of dialysis and related lab services revenues and related refund liabilities that we recognize in a reporting period. ~~Ongoing~~The billing and collection process is complex due to ongoing insurance coverage changes, geographic coverage differences, differing interpretations of contract coverage, and other payor ~~issues complicate the billing and collection process.~~issues. Determining applicable primary and secondary coverage for approximately ~~117,000~~119,000 patients at any point in time, together with the changes in patient coverage that occur each month, requires complex, resource-intensive processes. Errors in determining the correct coordination of benefits may result in refunds to payors. Revenues associated with Medicare and Medicaid programs are also subject to estimating risk related to the amounts not paid by the primary government payor that will ultimately be collectible from other government programs paying secondary coverage, the patient’s commercial health plan secondary coverage or the patient. Collections, refunds and payor retractions typically continue to occur for up to three years and longer after services are provided. We generally expect our range of dialysis and related lab services revenues estimating risk to be within 1% of revenues for the segment, which can represent as much as 6% of consolidated operating income. If our estimates of dialysis and related lab services revenues and related refund liabilities are materially inaccurate, it could impact the timing of our revenue recognition and have a significant impact on our operating results.

The ancillary services we provide or the strategic initiatives we invest in may generate losses and may ultimately be unsuccessful. In the event that one or more of these activities is unsuccessful, we may have to write off our investment and incur other exit costs.

Our ancillary services and strategic initiatives include ~~infusion therapy services,~~ pharmacy services, ~~vascular access~~infusion therapy services, disease management services, ~~physician~~vascular access services, ESRD clinical research programs and ~~ESRD special need plans.~~physician services. Many

of these initiatives require investments of both management and financial resources and can generate significant losses for a substantial period of time and may not become profitable. There can be no assurance that any such strategic initiative will ultimately be successful. Any significant change in market conditions, business performance or in the regulatory environment may impact the economic viability of any of these strategic initiatives. For example, during 2009 and 2008, ~~and 2007,~~several of our ~~VillageHealth business~~strategic initiatives generated net operating losses and isare expected to generate net operating losses in ~~2009.~~2010. If any of our ancillary services or strategic initiatives do not perform as planned, we may incur a material write-off or an impairment of our investment, including goodwill, in one or more of these ~~activities.~~activities or we could incur significant termination costs if we were to exit a certain line of business.

If a significant number of physicians were to cease referring patients to our dialysis centers, whether due to regulatory or other reasons, it would have a material adverse effect on our revenues, earnings and cash flows.

~~Many~~We believe that physicians prefer to have their patients treated at dialysis centers where they or other members of their practice supervise the overall care provided as medical director of the center. As a result, the primary referral source for most of our centers is often the physician or physician group providing medical director services to the center. Neither our current nor former medical directors have an obligation to refer their patients to our centers. If a medical director agreement terminates, whether before or at the end of its term, and a new medical director is appointed, it may negatively impact the former medical director’s decision to treat his or her patients at our center. If we are unable to enforce noncompetition provisions contained in the terminated medical director agreements, former medical directors may choose to provide medical director services for competing providers or establish their own dialysis centers in competition with ours. Also, if the quality of service levels at our centers deteriorates, it may negatively impact patient referrals and treatment volumes.

Our medical director contracts are for fixed periods, generally three to ten years. Medical directors have no obligation to extend their agreements with us. We may take actions to restructure existing relationships or take positions in negotiating extensions of relationships to assure compliance with the safe harbor provisions of the anti-kickback statute, Stark Law and other similar laws. These actions could negatively impact the decision of

physicians to extend their medical director agreements with us or to refer their patients to us. If the terms of any existing agreement are found to violate applicable laws, we may not be successful in restructuring the relationship which could lead to the early termination of the agreement, or cause the physician to stop referring patients to our dialysis centers. If a significant number of physicians were to cease referring patients to our dialysis centers, whether due to regulatory or other reasons, then our revenues, earnings and cash flows would be substantially reduced.

Current economic conditions, including the current recession, as well as further disruptions in the financial markets could result in substantial declines in our revenues, earnings, cash flows and financial condition.

The current economic recession could adversely affect our business and our profitability. Among other things, the potential decline in federal and state revenues that may result from such conditions may create additional pressures to contain or reduce reimbursements for our services from Medicare, Medicaid and other government sponsored programs. Increasing job losses in the United States as a result of current economic conditions ~~could~~has and may continue to result in a smaller percentage of our patients being covered by an employer group health plan and a larger percentage being covered by lower paying Medicare and Medicaid programs. Employers may also begin to select more restrictive commercial plans with lower reimbursement rates. To the extent that payors are negatively impacted by a decline in the economy, we may experience further pressure on commercial rates, a further slow down in collections and a reduction in the amounts we expect to collect. In addition, if the current uncertainty in the financial markets continues, the variable interest rates payable under our credit facilities could be adversely affected or it could be more difficult to obtain or renew such facilities or to obtain other forms of financing in the future. Any or all of these factors, as well as other consequences of the current economic conditions which cannot currently be anticipated, could have a material adverse effect on our revenues, earnings and cash flows and otherwise adversely affect our financial condition.

If we are not able to continue to make acquisitions on reasonable terms, or maintain an acceptable level of non-acquired growth, or if we face significant patient attrition to our competitors, it could adversely affect our business.

The dialysis industry is highly competitive, particularly in terms of acquiring existing dialysis centers. We ~~are facing~~continue to face increased competition in the dialysis industry from large and medium-sized providers which compete directly with us for acquisition targets as well as for individual patients and medical directors. Acquisitions, patient retention and medical director retention are an important part of our growth strategy. Because of the ease of entry into the dialysis business and the ability of physicians to be medical directors for their own centers, competition for growth in existing and expanding markets is not limited to large competitors with substantial financial resources. Occasionally, we have experienced competition from former medical directors or referring physicians who have opened their own dialysis centers. In addition, Fresenius, our largest competitor, manufactures a full line of dialysis supplies and equipment in addition to owning and operating dialysis centers. This may give them cost advantages over us because of their ability to manufacture their own products. If we are not able to continue to make acquisitions on reasonable terms, continue to maintain acceptable levels of non-acquired growth, or if we face significant patient attrition to our competitors, it could adversely affect our business.

The level of our current and future debt could have an adverse impact on our ~~business.~~business and our ability to generate cash to service our indebtedness depends on many factors beyond our control.

We have substantial debt outstanding and we may incur additional indebtedness in the future. The high level of our indebtedness, among other things, could:

If additional debt financing is not available when required or is not available on acceptable terms, we may be unable to grow our business, take advantage of business opportunities, respond to competitive pressures or refinance maturing debt, any of which could have a material adverse effect on our operating results and financial condition.

~~Increases in interest rates may increase our interest expense and adversely affect our profitability and cash flow and our ability to service our indebtedness.~~

We are subject to interest rate volatility associated with the portions of our borrowings that bear interest at variable rates. As of September 30, 2009, we had approximately $1.9 billion outstanding borrowings under the Senior Secured Credit Facilities, which bears interest at a variable rate. Approximately $0.5 billion of our outstanding debt is subject to interest rate swaps which have the economic effect of fixing the interest rate on an equivalent portion of our debt. The remaining variable rate debt outstanding under our Senior Secured Credit Facilities had a weighted average interest rate of 1.75% at September 30, 2009. In addition, we have approximately $202 million of available borrowings under our Senior Secured Credit Facilities that would bear interest at the LIBOR-based variable rate plus an interest rate margin of 1.50%. We may also incur additional variable rate debt in the future.

Increases in interest rates would increase our interest expense for the variable portion of our indebtedness, which could negatively impact our earnings and cash flow. For example, it is estimated that a hypothetical increase in interest rates of 100 basis points across all variable rate maturities would reduce net income by approximately $9.8 million, for a twelve month period given our current interest rates in effect at September 30, 2009. See “Item 3—Quantitative and Qualitative Disclosures about Market Risk” for more information. In addition, if we seek to refinance our existing indebtedness under our Senior Secured Credit Facilities, we may not be able to do so on acceptable terms and conditions, which could increase our interest expense or impair our ability to service our indebtedness and fund our operations.

~~We will require a significant amount of cash to service our indebtedness. Our ability to generate cash depends on many factors beyond our control.~~

Our ability to make payments on our indebtedness and to fund planned capital expenditures and expansion efforts, including any strategic acquisitions we may make in the future, will depend on our ability to generate cash. This, to a certain extent, is subject to general economic, financial, competitive, regulatory and other factors that are beyond our control.

We cannot provide assurance that our business will generate sufficient cash flow from operations in the future or that future borrowings will be available to us in an amount sufficient to enable us to service our indebtedness ~~including the senior and senior subordinated notes,~~ or to fund other liquidity needs. ~~We may need to refinance all or a portion of our indebtedness on or before maturity.~~ Our Senior Secured Credit Facilities are secured by substantially all of our and our wholly-owned subsidiaries’ assets. As such, our ability to refinance our debt or seek additional financing could be limited by such security interest. We cannot assure you that we will be able to refinance our indebtedness on commercially reasonable terms or at all. If additional debt financing is not available when required or is not available on acceptable terms, we may be unable to grow our business, take advantage of business opportunities, respond to competitive pressures or refinance maturing debt, any of which could have a material adverse effect on our operating results and financial condition.

Increases in interest rates may increase our interest expense and adversely affect our profitability and cash flow and our ability to service our indebtedness.

We are subject to interest rate volatility associated with the portions of our borrowings that bear interest at variable rates. As of March 31, 2010, we had approximately $1.8 billion outstanding borrowings under our Senior Secured Credit Facilities, which bears interest at a variable rate. Approximately $0.4 billion of this outstanding debt is subject to interest rate swaps which have the economic effect of fixing the interest rate on an equivalent portion of our debt. The remaining variable rate debt outstanding under our Senior Secured Credit Facilities had a weighted average interest rate of 1.75% at March 31, 2010. As of March 31, 2010, the interest rates were economically fixed on approximately 19% of our variable rate debt and approximately 59% of our total debt. In addition, we have approximately $198 million of available borrowings under our Senior Secured Credit Facilities that would bear interest at the LIBOR-based variable rate plus an interest rate margin of 1.50%. We may also incur additional variable rate debt in the future.

Increases in interest rates would increase our interest expense for the variable portion of our indebtedness, which could negatively impact our earnings and cash flow. For example, it is estimated that a hypothetical increase in interest rates of 100 basis points across all variable rate maturities would reduce net income by approximately $10.3 million, for the next twelve months given our current interest rates in effect at March 31, 2010. See “Item 3 – Quantitative and Qualitative Disclosures about Market Risk” for more information. In addition, if we seek to refinance our existing indebtedness under our Senior Secured Credit Facilities, we may not be able to do so on acceptable terms and conditions, which could increase our interest expense or impair our ability to service our indebtedness and fund our operations.

If ~~the current shortage~~there are shortages of skilled clinical personnel ~~continues~~ or if we experience a higher than normal turnover rate, we may experience disruptions in our business operations and increases in operating expenses.

We are experiencing increased labor costs and difficulties in hiring nurses due to a nationwide shortage of skilled clinical personnel. We compete for nurses with hospitals and other health care providers. This nursing

shortage may limit our ability to expand our operations. In addition, changes in certification requirements for skilled clinical personnel can impact our ability to maintain sufficient staff levels to the extent our teammates are not able to meet new requirements or competition for qualified individuals increases. If we are unable to hire skilled clinical personnel when needed, or if we experience a higher than normal turnover rate for our skilled clinical personnel, our operations and treatment growth will be negatively impacted, which would result in reduced revenues, earnings and cash flows.

Our business is labor intensive and could be adversely affected if we were unable to maintain satisfactory relations with our employees or if union organizing activities were to result in significant increases in our operating costs or decreases in productivity.

Our business is labor intensive, and our results are subject to variations in labor-related costs and productivity. If political efforts at the national and local level result in actions or proposals that increase the likelihood of union organizing activities at our facilities or if union organizing activities increase for other reasons, our operating costs could increase and our employee relations, productivity, earnings and cash flows could be adversely affected.

Our alliance and product supply agreement with Gambro Renal Products Inc. may limit our ability to achieve cost savings with respect to products and equipment we are required to purchase under this agreement.

Our alliance and product supply agreement with Gambro Renal Products obligates us to purchase dialyzers and certain other products from Gambro Renal Products. These obligations may limit our ability to realize future cost savings in regard to the products covered by this agreement. For the nine months ended September 30, 2009, our total spending on hemodialysis products, supplies and equipment with Gambro Renal Products was approximately 2% of our total operating costs.

Upgrades to our billing and collections systems and complications associated with upgrades and other improvements to our billing and collections systems could have a material adverse effect on our revenues, cash flows and operating results.

We are continuously performing upgrades to our billing systems and expect to continue to do so during ~~the remainder of 2009 and into~~ 2010. In addition, we continuously work to improve our billing and collections performance through process upgrades, organizational changes and other improvements. We may experience difficulties in our ability to

successfully bill and collect for services rendered as a result of these changes, including a slow-down of collections, a reduction in the amounts we expect to collect, increased risk of retractions from and refunds to commercial and government payors, an increase in our provision for uncollectible accounts receivable and noncompliance with reimbursement regulations. ~~These changes could also have an adverse impact on the claims review required by the corporate integrity agreement applicable to the centers acquired from Gambro Healthcare, described below.~~ The failure to successfully implement the upgrades to the billing and collection systems and other improvements could have a material adverse effect on our revenues, cash flows and operating results.

If DVA Renal Healthcare does not comply with the corporate integrity agreement applicable to the centers acquired from Gambro Healthcare, or DVA Renal Healthcare otherwise has failed or fails to comply with government regulations applicable to its operations, we could be subject to additional penalties and otherwise may be materially harmed.

In 2004, Gambro Healthcare entered into a settlement agreement with the Department of Justice and certain agencies of the United States government relating to the Department of Justice’s investigation of Gambro Healthcare’s Medicare and Medicaid billing practices and its relationships with physicians and pharmaceutical manufacturers. If DVA Renal Healthcare (formerly Gambro Healthcare) does not comply with the terms of the corporate integrity agreement applicable to the centers acquired from Gambro Healthcare, or otherwise has failed or fails to comply with the extensive federal, state and local government regulations applicable to its operations, we could be subject to additional penalties, including monetary penalties or exclusion from participation in

government programs, and otherwise may be materially harmed. The costs associated with compliance with the corporate integrity agreement and cooperation with the government are substantial and may increase. In addition, as a result of the settlement agreement, some commercial payors and other third parties have initiated legal proceedings against DVA Renal Healthcare related to the billing practices and other matters covered by the settlement agreement and we could be subject to similar claims in the future.

Our ability to effectively provide the services we offer could be negatively impacted if certain of our suppliers are unable to meet our needs or if we are unable to effectively access new technology, which could substantially reduce our revenues, earnings and cash flows.

We have significant suppliers that are either the sole or primary source of products critical to the services we provide, including Amgen, Fresenius Medical Care, Baxter Healthcare Corporation, NxStage Medical, Inc. and others or to which we have committed obligations to make purchases including Gambro Renal Products. If any of these suppliers are unable to meet our needs for the products they supply, including in the event of a product recall, and we are not able to find adequate alternative sources, our revenues, earnings and cash flows could be substantially reduced. For example, ~~in February 2008,~~a recall of heparin by Baxter Healthcare Corporation ~~proceeded with a recall and ceased further sales of heparin, a pharmaceutical used~~ in ~~the treatment of dialysis patients. As a result of the recall, there was~~2008 resulted in only one remaining supplier of heparin and the cost to purchase heparin significantly increased. While an alternative supplier has entered the market, it ~~is not clear that they can meet our full demand. It~~ is possible that our heparin costs may continue to increase and since there is no separate reimbursement for this drug under Medicare, cost increases have a direct impact on our profitability. In addition, the technology related to the products critical to the services we provide is subject to new developments and may result in superior products. If we are not able to access superior products on a cost-effective basis or if suppliers are not able to fulfill our requirements for such products, we could face patient attrition which could substantially reduce our revenues, earnings and cash flows.

We may be subject to liability claims for damages and other expenses not covered by insurance that could reduce our earnings and cash flows.

The administration of dialysis and related services to patients may subject us to litigation and liability for damages. Our business, profitability and growth prospects could suffer if we face negative publicity or we pay damages or defense costs in connection with a claim that is outside the scope of any applicable insurance coverage, including claims related to adverse patient events, contractual disputes and professional and general liability claims. In addition, we have received several notices of claims from commercial payors and other third parties related to our historical billing practices and the historical billing practices of the centers acquired from Gambro Healthcare and other matters related to their settlement agreement with the Department of Justice. Although the ultimate outcome of these claims cannot be predicted, an adverse result with respect to one or more of these claims could have a material adverse effect on our financial condition, results of operations, and cash flows. We currently maintain programs of general and professional liability insurance. However, a successful claim, including a professional liability, malpractice or negligence claim which is in excess of our insurance coverage could have a material adverse effect on our earnings and cash flows.

In addition, if our costs of insurance and claims increase, then our earnings could decline. Market rates for insurance premiums and deductibles have been steadily increasing. Our earnings and cash flows could be materially and adversely affected by any of the following:

If businesses we acquire have liabilities that we are not aware of, we could suffer severe consequences that would substantially reduce our revenues, earnings and cash flows.

Our business strategy includes the acquisition of dialysis centers and businesses that own and operate dialysis centers, as well as other ancillary services and strategic initiatives. Businesses we acquire may have unknown or contingent liabilities or liabilities that are in excess of the amounts that we originally estimated. Although we generally seek indemnification from the sellers of businesses we acquire for matters that are not properly disclosed to us, we are not always successful. In addition, even in cases where we are able to obtain indemnification, we may discover liabilities greater than the contractual limits or the financial resources of the indemnifying party. In the event that we are responsible for liabilities substantially in excess of any amounts recovered through rights to indemnification, we could suffer severe consequences that would substantially reduce our revenues, earnings and cash flows.

Provisions in our charter documents, compensation programs and Delaware law may deter a change of control that our stockholders would otherwise determine to be in their best interests.

Our charter documents include provisions that may deter hostile takeovers, delay or prevent changes of control or changes in our management, or limit the ability of our stockholders to approve transactions that they may otherwise determine to be in their best interests. These include provisions prohibiting our stockholders from acting by written consent; requiring 90 days advance notice of stockholder proposals or nominations to our Board of Directors; and granting our Board of Directors the authority to issue preferred stock and to determine the rights and preferences of the preferred stock without the need for further stockholder approval. In addition, we have in place a shareholder rights plan that would substantially dilute the interest sought by an acquirer that our Board of Directors does not approve.

Most of our outstanding employee stock options include a provision accelerating the vesting of the options in the event of a change of control. We also maintain a change of control protection program for our employees who do not have a significant number of stock awards, which has been in place since 2001, and which provides for cash bonuses to the employees in the event of a change of control. Based on the market price of our common stock and shares outstanding on ~~September 30, 2009,~~March 31, 2010, these cash bonuses would total approximately ~~$226~~$256 million if a change of control transaction occurred at that price and our Board of Directors did not modify this program. These change of control provisions may affect the price an acquirer would be willing to pay for our Company.

We are also subject to Section 203 of the Delaware General Corporation Law that, subject to exceptions, would prohibit us from engaging in any business combinations with any interested stockholder, as defined in that section, for a period of three years following the date on which that stockholder became an interested stockholder.

These provisions may discourage, delay or prevent an acquisition of our Company at a price that our stockholders may find attractive. These provisions could also make it more difficult for our stockholders to elect directors and take other corporate actions and could limit the price that investors might be willing to pay for shares of our common stock.

The following table summarizes the Company’s repurchases of its common stock during the ~~third~~first quarter of ~~2009:~~2010:

This stock repurchase program has no expiration date. We are authorized to make purchases from time to time in the open market or in privately negotiated transactions, depending upon market conditions and other considerations. However, we are subject to share repurchase limitations under the terms of the Senior Secured Credit Facilities and the indentures governing our senior and senior subordinated notes.

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Delaware		51-0354549
(State of incorporation)		(I.R.S. Employer Identification No.)


			Page No.
	PART I. FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements:

	Consolidated Statements of Income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2010 and March 31, 2009 ~~and September 30, 2008~~		1

	Consolidated Balance Sheets as of ~~September 30, 2009~~March 31, 2010 and December 31, ~~2008~~2009		2

	Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2010 and March 31, 2009 ~~and September 30, 2008~~		3

	Consolidated Statements of Equity and Comprehensive Income for the ~~nine~~three months ended ~~September 30, 2009~~March 31, 2010 and for the year ended December 31, ~~2008~~2009		4

	Notes to Condensed Consolidated Financial Statements		5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		22

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		35
		32
Item 4.	Controls and Procedures		3532

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		37
		34
Item 1A.	Risk Factors		37
		34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		49
		46
Item 6.	Exhibits		50
		47
Signature			5148


	Three months ended September 30,				Nine months ended September 30,
	2009		2008		2009		2008
	(shares in thousands)
Basic:
Net income attributable to DaVita Inc.	$	110,930	$	93,910	$	312,960	$	275,795

Weighted average shares outstanding during the period		104,118		104,548		103,896		105,561
Vested stock units		9		9		9		9

Weighted average shares for basic earnings per share calculation		104,127		104,557		103,905		105,570

Basic net income per share attributable to DaVita Inc	$	1.07	$	0.90	$	3.01	$	2.61

Diluted:
Net income for diluted earnings per share calculation	$	110,930	$	93,910	$	312,960	$	275,795

Weighted average shares outstanding during the period		104,118		104,548		103,896		105,561
Vested stock units		9		9		9		9
Assumed incremental shares from stock plans		480		1,021		410		851

Weighted average shares for diluted earnings per share calculation		104,607		105,578		104,315		106,421

Diluted net income per share attributable to DaVita Inc.	$	1.06	$	0.89	$	3.00	$	2.59

Shares subject to anti-dilutive awards excluded from calculation⁽¹⁾		9,696		6,333		13,125		10,218


	Three months ended March 31,
	2010			2009
	(shares in thousands)
Basic:
Net income attributable to DaVita Inc.	$	109,423		$	96,211
Increase in noncontrolling interest redemption rights in excess of fair value	$	(869	)	$	—

Net income for basic earnings per share calculation	$	108,554		$	96,211

Weighted average shares outstanding during the period		103,356			103,869
Vested stock units		9			9

Weighted average shares for basic earnings per share calculation		103,365			103,878

Basic net income per share attributable to DaVita Inc	$	1.05		$	0.93

Diluted:
Net income for diluted earnings per share calculation	$	109,423		$	96,211
Increase in noncontrolling interest redemption rights in excess of fair value	$	(869	)	$	—

Net income for diluted earnings per share calculation	$	108,554		$	96,211

Weighted average shares outstanding during the period		103,356			103,869
Vested stock units		9			9
Assumed incremental shares from stock plans		1,401			531

Weighted average shares for diluted earnings per share calculation		104,766			104,409

Diluted net income per share attributable to DaVita Inc.	$	1.04		$	0.92

Shares subject to anti-dilutive awards excluded from calculation⁽¹⁾		651			12,811


	March 31, 2010			December 31, 2009
Senior secured credit facilities:
Term loan A	$	131,250		$	153,125
Term loan B		1,705,875			1,705,875
Senior and senior subordinated notes		1,750,000			1,750,000
Acquisition obligations and other notes payable		12,839			15,891
Capital lease obligations		6,106			4,635

Total debt principal outstanding		3,606,070			3,629,526
Premium on the 6⁵/8% senior notes		2,487			2,698

		3,608,557			3,632,224
Less current portion		(98,844	)		(100,007	)

	$	3,509,713		$	3,532,217


	Three months ended September 30, 2009			Nine months ended September 30, 2009
Net income attributable to DaVita Inc.	$	110,930		$	312,960

Decrease in paid-in capital for sales of noncontrolling interest in three and ten joint ventures, respectively		(503	)		(837	)
Decrease in paid-in capital for the purchase of noncontrolling interest in two and five joint ventures, respectively		(1,184	)		(3,639	)

Net transfer from noncontrolling interests		(1,687	)		(4,476	)

Change from net income attributable to DaVita Inc. and transfers (to) from noncontrolling interests	$	109,243		$	308,484


Period	Total number of shares purchased	Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs⁽¹⁾	Approximate dollar value of shares that may yet be purchased under the plans or programs (in millions)⁽²⁾
July 1-31, 2009	—	$	—	—	$	121.5
August 1-31, 2009	—		—	—		121.5
September 1-30, 2009	1,108,784		56.25	1,108,784		59.1

Total	1,108,784	$	56.25	1,108,784


Exhibit Number
10.1		Employment Agreement, effective February 26, 2010, by and between DaVita Inc. and Luis Borgen.ü

10.2		Amendment to Mr. Borgen’s Employment Agreement, effective March 18, 2010.ü

10.3		Employment Agreement, effective March 17, 2010, by and between DaVita Inc. and Javier Rodriguez. (1)

10.4		Amendment to Stock Appreciation Rights Agreements, effective November 2008, by and between DaVita Inc. and Richard K. Whitney.ü

10.5		Severance Plan.ü

10.6		Memorandum Relating to Bonus Structure for Kent J. Thiry.ü

10.7		Memorandum Relating to Bonus Structure for Dennis L. Kogod.ü

10.8		Memorandum Relating to Bonus Structure for Thomas O. Usilton, Jr.ü

12.1		Ratio of earnings to fixed charges.ü

31.1		Certification of the Chief Executive Officer, dated ~~November 5, 2009,~~May 3, 2010, pursuant to Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.ü

31.2		Certification of the Chief Financial Officer, dated ~~November 5, 2009,~~May 3, 2010, pursuant to Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.ü

32.1		Certification of the Chief Executive Officer, dated ~~November 5, 2009,~~May 3, 2010, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.ü

32.2		Certification of the Chief Financial Officer, dated ~~November 5, 2009,~~May 3, 2010, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.ü

101.INS		XBRL Instance Document. *

101.SCH		XBRL Taxonomy Extension Schema Document. *

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document. *

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document. *

101.LAB		XBRL Taxonomy Extension Label Linkbase Document. *

101.PRE		XBRL Taxonomy Extension Presentation, Linkbase Document. *


DAVITA INC.

By:		/S/s/ JAMES K. HILGER
		James K. Hilger
		Vice President and ControllerChief Accounting Officer