(1)

On January 1, 2018, we adopted Topic 606 using the cumulative effect method for those contracts that were not substantially completed as of January 1, 2018. Results related to performance obligations satisfied beginning on and after January 1, 2018 are presented under Topic 606, while results related to the satisfaction of performance obligations in the prior period continue to be reported in accordance with our historical accounting under Revenue Recognition (Topic 605).

The following table summarizes consolidated operating income and adjusted consolidated operating income:

Three months ended
March 31, 2017 December 31, 2016 March 31, 2016
(dollar amounts rounded to nearest million)
Operating income (loss):
Kidney Care:
U.S. dialysis and related lab services $ 945
$ 436
$ 440
Other—Ancillary services and strategic initiatives
U.S. ancillary services and strategic initiatives (53 ) (59 ) (1 )
International (5 ) (14 ) (10 )
(58 ) (73 ) (11 )
Corporate administrative support (11 ) (4 ) (7 )
Total Kidney Care operating income 876
359
422
DMG 12
22
(57 )
Total consolidated operating income 888
381
365
Reconciliation of non-GAAP measures:
Add:
Goodwill impairment charges 24
28
77
Impairment of assets 15
—
—
Impairment of minority equity investment —
15
—
Accrual for legal matters —
16
16
Reduction in a receivable associated with the DMG acquisition
escrow provision —
4
—
Less:
Gain on settlement, net (527 ) —
—
Equity investment income related to gain on settlement (3 ) —
—
Gain on ownership changes (6 ) —
—
Adjusted consolidated operating income⁽¹⁾
$ 392
$ 445
$ 458



	Three months ended
	March 31, 2018			December 31, 2017			March 31, 2017
	(dollars in millions)
Operating income:
U.S. dialysis and related lab services	$	433		$	459		$	945
Other—Ancillary services and strategic initiatives	(7		)	(296		)	(58		)
Corporate administrative support	(16		)	(12		)	(11		)
Total consolidated operating income	$	411		$	150		$	876
Reconciliation of non-GAAP measures:
Goodwill impairment charges	$	—		$	—		$	24
Impairment of investments	—			280			—
Impairment of assets	—			—			15
Gain on settlement, net	—			—			(527		)
Equity investment income related to gain on settlement	—			—			(3		)
Gain on APAC JV ownership changes	—			—			(6		)
Adjusted consolidated operating income⁽¹⁾	$	411		$	430		$	380

Certain columns ~~rows~~ or ~~percentages~~rows may not ~~add~~sum or recalculate due to the use of rounded numbers.

(1)

For the periods presented in the table above adjusted operating income is defined as operating income before certain items which we do not believe are indicative of ordinary results, including goodwill impairment charges, investment and other asset impairments, a net settlement gain, and gains on ownership changes. Adjusted operating income as so defined is a non-GAAP measure and is not intended as a substitute for GAAP operating income. We have presented these adjusted amounts because management believes that these presentations enhance a user’s understanding of our normal consolidated operating income by excluding certain items which we do not believe are indicative of our ordinary results of operations. As a result, adjusting for these amounts allows for comparison to our normalized prior period results.

Consolidated revenues

Consolidated revenues for the first quarter of 2018 increased by approximately $68 million, or 2.4%, as compared to the fourth quarter of 2017. This increase was primarily driven by the increase in calcimimetics revenue, as discussed below. Our U.S. dialysis and related lab services revenues increased by approximately $145 million, primarily due to the administration of calcimimetics and an increase in Medicare bad debt revenue offset by one fewer treatment day, as discussed below. This was partially offset by a decrease of $70 million in our ancillary services and strategic initiatives net revenues, primarily due to a decline in volume in our pharmaceutical business due to calcimimetics. Ancillary services and strategic initiatives net revenues also decreased due to a reduction in shared savings revenue recognized by our ESRD Seamless Care Organization (ESCO) joint ventures, partially offset by increases in revenues from international expansion, shared savings recognized at DaVita Health Solutions, and VillageHealth revenues from special needs plans, as described below.

Effective January 1, 2018, both oral and IV forms of calcimimetics, a drug class taken by many patients with ESRD to treat mineral bone disorder, became the financial responsibility of our U.S. dialysis and lab services business for our Medicare patients and are included in our payment under Medicare Part B. During the pass-through period, Medicare payment for calcimimetics will be based on a pass through rate of the average sales price plus approximately 4%. CMS has stated intentions to enter calcimimetics into the ESRD bundle in approximately two years. Previously, calcimimetics were reimbursed for Medicare patients through Part D once dispensed from traditional pharmacies, including DaVita Rx.

Consolidated revenues for the first quarter of 2018 increased by approximately $218 million, or 8.3%, as compared to the first quarter of 2017. This increase was primarily driven by the increase in calcimimetics revenue, as discussed above. Our U.S. dialysis and related lab services revenues increased $267 million, primarily due to an increase in revenue due to the administration of calcimimetics, an increase in Medicare bad debt revenue, and volume growth from additional treatments, as described below. This increase in consolidated revenues was partially offset by a decrease of approximately $38 million in our ancillary services and strategic initiatives revenues, primarily due to a decline in volume in our pharmaceutical business due to calcimimetics. Ancillary services and strategic initiatives net revenues also decreased due to a reduction in shared savings revenue recognized by our ESCO joint ventures, partially offset by increases in revenues from international expansion, shared savings recognized at DaVita Health Solutions, and VillageHealth revenues from special needs plans, as described below.

Consolidated operating income

Consolidated operating results for the first quarter of 2018 increased by approximately $261 million as compared to the fourth quarter of 2017, which included an impairment of $280 million on our investment in the Asia Pacific joint venture (APAC JV). Excluding this item, adjusted consolidated operating income for the first quarter of 2018 decreased by $19 million due to a decrease in U.S. dialysis and related lab services operating income of $26 million and an increase in expenses in our corporate administrative support of $4 million, partially offset by a decrease in adjusted operating losses in our ancillary and strategic initiatives of $9 million, as discussed below.

Consolidated operating results for the first quarter of 2018 decreased by $465 million as compared to the first quarter in 2017, which included an adjustment to the gain on the APAC JV ownership change of $6 million, a net gain on a settlement with the U.S. Department of Veterans Affairs (VA) of $530 million, a goodwill impairment charge of $24 million related to our vascular access reporting unit, and an asset impairment of $15 million related to the restructuring of our pharmacy business. Excluding these items from the first quarter of 2017, adjusted consolidated operating income for the first quarter of 2018 increased by $31 million due to an increase in adjusted operating income in U.S. dialysis and related lab services of $18 million and a decrease in adjusted operating losses in our ancillary and strategic initiatives of $18 million, partially offset by an increase in expenses in our corporate administrative support of $5 million, as described below.

U.S. dialysis and related lab services business

Results of operations



	Three months ended
	March 31, 2018			December 31, 2017			March 31, 2017
	(dollars in millions, except per treatment data)
Revenues:⁽¹⁾
U.S. dialysis and related lab services patient service revenues	$	2,508		$	2,536		$	2,373
Provision for uncollectible accounts	25			(148		)	(107		)
U.S. dialysis and related lab services net patient service revenues	2,533			2,388			2,266
Other revenues	5			5			5
Total U.S. dialysis and related lab services revenues	2,538			2,393			2,271
Operating expenses and charges:
Patient care costs	1,779			1,619			1,548
General and administrative	196			186			188
Depreciation and amortization	135			134			125
Equity investment income	(5		)	(5		)	(8		)
Gain on settlement, net	—			—			(527		)
Total operating expenses and charges	2,105			1,934			1,326
Operating income	$	433		$	459		$	945
Reconciliation of non-GAAP measures:
Gain on settlement, net	—			—			(527		)
Equity investment income related to gain on settlement	—			—			(3		)
Adjusted operating income⁽²⁾	$	433		$	459		$	415
Dialysis treatments	7,174,026			7,244,555			6,804,384
Average dialysis treatments per treatment day	92,568			92,287			88,369
Average dialysis and related lab services net revenue per treatment	$	353.05		$	329.68		$	333.00

Certain columns or rows may not sum or recalculate due to the use of rounded numbers.

(1)

~~For~~

On January 1, 2018, we adopted Topic 606 using the ~~three months ended March 31, 2017, we have excluded the adjustment to the gain~~cumulative effect method for those contracts that were not substantially completed as of $6 million on changes in ownership interest resulting from the formation of the Asia Pacific dialysis joint venture (APAC JV), the net gain on the settlement with the VA of $530 million, a goodwill impairment charge of $24 millionJanuary 1, 2018. Results related to ~~our vascular access reporting unit,~~performance obligations satisfied beginning on and ~~an asset impairment of $15 million~~after January 1, 2018 are presented under Topic 606, while results related to the ~~restructuring~~satisfaction of performance obligations in the prior period continue to be reported in accordance with our ~~pharmacy business.~~ historical accounting under Revenue Recognition Topic 605.

(2)

For the ~~three months ended December 31, 2016,~~periods presented in the table above adjusted operating income is defined as operating income before certain items which we ~~have excluded the goodwill impairment charge~~do not believe are indicative of ~~$28 million related to our vascular access reporting unit, an impairment of $15 million related to~~ordinary results, including a ~~minority equity investment, estimated accruals for legal matters of $16 million,~~net settlement gain. Adjusted operating income as so defined is a non-GAAP measure and an adjustment to reduce a receivable associated with the DMG acquisition escrow provision relating to an income tax item of $4 million. For the three months ended March 31, 2016, we have excluded a goodwill impairment charge of $77 million related to a DMG reporting unit and an estimated accrual for legal matters of $16 million. These are non-GAAP measures and areis not intended as ~~substitutes~~a substitute for GAAP operating income. We have presented these adjusted amounts because management believes that these presentations enhance a user’s understanding of our normal consolidated operating income by excluding certain items which we do not believe are indicative of our ordinary results of operations. As a result, adjusting for these amounts allows for comparison to our normalized prior period results.

Revenues

Dialysis and related lab services’ revenues for the first quarter of 2018 increased by approximately $145 million, or 6.1%, as compared to the fourth quarter of 2017. The increase in dialysis and related lab services’ revenues was principally due to an increase in average net revenue per treatment of $23, partially offset by a decrease in the number of treatments. The increase was primarily related to the administration of calcimimetics, as discussed above, and an increase in acute revenues due to seasonality. The increase also resulted from an increase in Medicare bad debt revenue of $24 million due to a policy election made under the new revenue standard to only apply the new guidance to contracts that were not substantially completed as of January 1, 2018. The decrease in the number of treatments was primarily due to one fewer treatment day during the first quarter of 2018 as compared to the fourth quarter of 2017.

Dialysis and related lab services’ revenues for the first quarter of 2018 increased by approximately $267 million, or 11.8%, as compared to the first quarter of 2017. The increase in net revenues was principally due to an increase in our average dialysis net revenue per treatment of approximately $20 and volume growth from additional treatments. This increase was primarily related to the administration of calcimimetics, as discussed above, as well as the increase in Medicare bad debt revenue of $24 million due to a policy election made under the new revenue standards. The increase in the number of treatments was primarily attributable to acquired and non-acquired treatment growth and approximately one additional treatment day during the first quarter of 2018 as compared to the first quarter of 2017.

In November 2017, CMS published the 2018 final rule for the ESRD Prospective Payment System (PPS), which increased dialysis facilities’ bundled payment rate for 2018 relative to prior years. In particular, CMS projects that the 2018 final rule for the ESRD PPS will (i) increase the total payments to all ESRD facilities by 0.5% in 2018 compared to 2017; (ii) increase total payments to hospital-based ESRD facilities by 0.7% in 2018 compared to 2017; and (iii) increase total payments for freestanding facilities by 0.5% in 2018 compared to 2017. The 2018 final rule for ESRD PPS also implements changes to the PPS outlier policy, broadening the pricing methodologies used to determine the cost of certain service drugs and biologicals in computing outlier payments when average sales price data is not available.

Operating expenses and charges

Patient care costs. Dialysis and related lab services’ patient care costs of approximately $248per treatment for the first quarter of 2018 increased by approximately $25 per treatment as compared to the fourth quarter of 2017. The increase was primarily related to the administration of calcimimetics, an increase in labor and benefits costs and an increase in insurance costs. The increase in labor and benefits costs was primarily due to the 401(k) matching program that began in 2018, an increase in payroll taxes, and a decrease in productivity. These increases were partially offset by a decrease in travel expenses and profit sharing expense.

Dialysis and related lab services’ patient care costs per treatment for the first quarter of 2018 increased by approximately $21 per treatment as compared to the first quarter of 2017. The increase was primarily related to the administration of calcimimetics, an increase in labor and benefits costs related to clinical rate increases and the 401(k) matching program that began in 2018, as well as an increase in other direct operating expenses associated with our dialysis centers. These increases were partially offset by a decrease in pharmaceutical costs and intensity.

General and administrative expenses. Dialysis and related lab services’ general and administrative expenses of approximately $196 million in the first quarter of 2018 increased by approximately $10 million as compared to the fourth quarter of 2017. The increase in general and administrative expenses was primarily due to increases in long-term incentive compensation expense, benefit costs related to payroll taxes and the 401(k) matching program that began in 2018, consulting expenses, occupancy costs and asset impairments related to expected center closures. These increases were partially offset by decreases in contract labor and travel expenses.

Dialysis and related lab services’ general and administrative expenses for the first quarter of 2018 increased by approximately $8 million as compared to the first quarter of 2017. This increase was primarily due to increases in benefit costs related to the 401(k) matching program that began 2018, professional fees, asset impairments related to expected center closures and occupancy costs, partially offset by decreases in contract labor and travel expenses.

Depreciation and amortization. Depreciation and amortization for dialysis and related lab services was approximately $135 million for the first quarter of 2018, $134 million for the fourth quarter of 2017, and $125 million for the first quarter of 2017. The increase in depreciation and amortization in the first quarter of 2018, as compared to the fourth quarter of 2017 and the first quarter of 2017, was primarily due to growth in newly developed centers as well as acquired centers.

Equity investment income. Equity investment income for dialysis and related lab services was approximately $5 million for the first quarter of 2018, $5 million for the fourth quarter of 2017, and $8 million for the first quarter of 2017. Equity investment income in the first quarter of 2018 decreased by approximately $3 million as compared to the same period in 2017 primarily due to income recognized at our nonconsolidated joint ventures in the first quarter of 2017 related to the gain on the settlement with the VA, as discussed below.

Gain on settlement, net. During the first quarter of 2017, we reached an agreement with the government for amounts owed to us for dialysis services provided from 2005 through 2011 to patients covered by the VA. As a result of this settlement we recognized a one-time net gain of $527 million, as well as equity investment income of $3 million, for our share of the

settlement income recognized by our nonconsolidated joint ventures. As a result, the total effect of this settlement on our operating income was an increase of $530 million.

Segment operating income

Dialysis and related lab services’ operating income for the first quarter of 2018 decreased by approximately $26 million as compared to the fourth quarter of 2017. Operating income was negatively impacted by a decrease in treatments due to one fewer treatment day in the first quarter of 2018 and increases in labor and benefits costs, insurance costs, long-term incentive compensation expense, consulting costs and asset impairments. Operating income was positively impacted by the administration of calcimimetics, a reduction in travel expenses, as well as a decrease in profit sharing costs, as discussed above.

Dialysis and related lab services’ operating income for the first quarter of 2018 decreased by approximately $512 million as compared to the first quarter of 2017, which included a net gain on settlement of $530 million. Excluding this item from the first quarter of 2017, dialysis and lab services' adjusted consolidated operating income for the first quarter of 2018 increased by approximately $18 million as compared to the first quarter of 2017. This increase in adjusted operating income was principally due the administration of calcimimetics, as discussed above, as well as approximately one additional treatment day in the first quarter of 2018. Adjusted operating income also benefited from reduced pharmaceutical costs and intensity. Adjusted operating income was negatively impacted by higher labor and benefits costs, increases in asset impairments, other direct operating expenses associated with our dialysis centers, occupancy costs, and long-term incentive compensation expense.

Other—Ancillary services and strategic initiatives business

Our other operations include ancillary services and strategic initiatives, which are primarily aligned with our U.S. dialysis and related lab services business, along with our international dialysis operations. As of March 31, 2018, these consisted primarily of pharmacy services, disease management services, vascular access services, clinical research programs, physician services, direct primary care, ESRD seamless care organizations, and comprehensive care as well as our international operations. The ancillary services and strategic initiatives generated approximately $340 million in revenues for the first quarter of 2018, representing approximately 11.6% of our consolidated revenues. We expect to add additional service offerings to our business and pursue additional strategic initiatives in the future as circumstances warrant, which could include healthcare services not related to dialysis. In addition, in connection with our previously announced capital allocation strategy, in 2018 we plan to continue our evaluation of strategic alternatives for various assets in our portfolio. Any significant change in market conditions, or business performance, or in the political, legislative or regulatory environment, may impact the economic viability of any of our strategic initiatives. If any of our ancillary services or strategic initiatives, such as our pharmacy services and our international operations, are unsuccessful, it would have a negative impact on our business, results of operations and financial condition, and we may determine to exit the line of business. We could incur significant termination costs if we were to exit certain of these lines of business. In addition, we may incur a material write off or an impairment of our investment, including goodwill, in one or more of our ancillary services or strategic initiatives. In that regard, we have taken, and may in the future take, impairment charges related to our ancillary services and strategic initiatives, including in our international and pharmacy businesses.

As of March 31, 2018, we provided dialysis and administrative services to a total of 241 outpatient dialysis centers located in 10 countries outside of the United States. The total net revenues generated from our international operations are provided below.

The following table reflects the results of operations for our ancillary services and strategic initiatives:



	Three months ended
	March 31, 2018			December 31, 2017			March 31, 2017
	(dollars in millions)
U.S. revenues:⁽¹⁾
Other revenues	$	237		$	316		$	315
Total	237			316			315
International revenues:⁽¹⁾
Dialysis patient service revenues	102			94			62
Other revenues	1			1			1
Total	103			95			63
Total net revenues⁽¹⁾	$	340		$	410		$	378
Operating expenses and charges:
Operating and other general expenses	$	347		$	426		$	403
Goodwill impairment	—			2			24
Investment and other asset impairments	—			280			15
Gain from APAC JV ownership changes	—			—			(6		)
Total operating expenses and charges	347			707			436
Total ancillary services and strategic initiatives operating loss	$	(7	)	$	(296	)	$	(58	)

U.S. operating loss	$	(5	)	$	(2	)	$	(53	)
Reconciliation of non-GAAP:
Goodwill impairment charges	—			—			24
Impairment of other assets	—			—			15
Adjusted operating loss⁽²⁾	$	(5	)	$	(2	)	$	(14	)

International operating loss	$	(2	)	$	(294	)	$	(5	)
Reconciliation of non-GAAP:
Impairment of investment	—			280			—
Gain on APAC JV ownership changes	—			—			(6		)
Adjusted operating loss⁽²⁾	$	(2	)	$	(14	)	$	(11	)
Total adjusted ancillary services and strategic initiatives operating loss⁽²⁾	$	(7	)	$	(16	)	$	(25	)

Certain columns, rows or percentages may not sum or recalculate due to the use of rounded numbers.

(1)

(2)

For the periods presented in the table above, adjusted operating loss is defined as operating loss before certain items which we do not believe are indicative of ordinary results, including goodwill impairment charges, investment and other asset impairments, and gains on ownership changes. Adjusted operating loss as so defined is a non-GAAP measure and is not intended as a substitute for GAAP ~~equivalent measures.~~operating loss. We have presented these adjusted amounts because management believes that these presentations enhance a user’s understanding of our normal consolidated operating income by excluding certain items which we do not believe are indicative of our ordinary results of operations. As a result, adjusting for these amounts allows for comparison to our normal prior period results.

Revenues

~~Consolidated net revenues~~

~~Consolidated net revenues~~Revenues from our ancillary services and strategic initiatives for the first quarter of ~~2017~~2018 decreased by approximately ~~$19~~$70 million, or ~~0.5%~~17.1%, as compared to the fourth quarter of ~~2016. The~~2017. This decrease ~~in consolidated net revenues~~ was primarily due to a ~~decrease~~decline in volume in our pharmaceutical business due to a shift of ~~approximately $52 million~~calcimimetics to reimbursement for Medicare patients under Medicare Part B which is

now billed in our U.S. dialysis and related lab ~~services’ net revenues, principally due to~~services business, as discussed above, as well as a decrease in shared savings revenue recognized by our average revenue per treatment of approximately $3 and a decrease in treatments due to two less treatment days during the three months ended March 31, 2017, as discussed below. Consolidated net revenues benefited from an increase of $50 million in DMG net revenues. The increase in revenues was primarily driven by the conversion of existing contracts from shared risk to global risk, an increase in senior capitated revenues, and an increase in fee-for-service (FFS) revenues from acquisitions, as described below. In addition, consolidated net revenues were negatively impacted by a decrease of $18 million in our ancillary and strategic initiatives net revenues, primarily related to a decrease in volume related to our pharmaceutical business,ESCO joint ventures, partially offset by an increase in revenues from our international expansion due to acquired and non-acquired growth, an increase in shared savings recognized at DaVita Health Solutions and an increase in VillageHealth revenues from special needs ~~plans revenues,~~plans.

Revenues from our ancillary services and ~~growth in our international operations.~~

~~Consolidated net revenues~~strategic initiatives for the first quarter of ~~2017 increased~~2018 decreased by approximately ~~$116~~$38 million, or ~~3.2%~~10.1%, as compared to the first quarter of ~~2016. The increase in consolidated net revenues~~2017. This decrease was due to an increase of $44 million in the U.S. dialysis and related lab services’ net revenues, primarily as a result of higher volume from acquired and non-acquired treatment growth, partially offset by a decrease in our average dialysis revenue per treatment of approximately $2, as discussed below. The increase in consolidated net revenues also resulted from an increase in DMG net revenues of $98 million, primarily due to acquisition related growth, the conversion of existing contracts from shared risk to global risk, and an increase in senior capitated revenues, as described below. Consolidated net revenues was negatively impacted by a decrease of approximately $13 million in our ancillary services and strategic initiatives net revenues, primarily due to a ~~decrease~~decline in volume in our pharmaceutical business due to a shift of calcimimetics to reimbursement for Medicare patients under Medicare Part B which is now billed in our U.S. dialysis and related services lab business as well as a decrease in shared savings revenue recognized by our ESCO joint ventures, partially offset by an increase in ~~VillageHealth special needs plans~~ revenues ~~and growth in~~from our international ~~operations.~~

~~Consolidated operating income~~

Consolidated operating income for the first quarter of 2017, which includes an adjustment to the gain on the APAC JV ownership change of $6 million, a net gain on settlement of $530 million, a goodwill impairment charge of $24 million related to our vascular access reporting unit, and an asset impairment of $15 million related to the restructuring of our pharmacy business, as discussed below, increased by approximately $507 million as compared to the fourth quarter of 2016, which included goodwill and impairment charges of $28 million related to our vascular access reporting unit, an impairment of $15 million related to a minority equity investment, estimated accruals for legal matters of $16 million, and an adjustment to reduce receivables associated with the DMG acquisition escrow provision relating to an income tax item of $4 million. Excluding these items from their respective quarters, adjusted consolidated operating income for the first quarter of 2017 would have decreased by $53 million. Adjusted consolidated operating income decreasedexpansion due to ~~a decrease~~acquired and non-acquired growth, an increase in ~~adjusted operating income in U.S. dialysis and related lab services of $21 million, a decrease in operating income of $10 million related to DMG~~shared savings recognized at DaVita Health Solutions and an increase in ~~adjusted operating losses in our ancillary and strategic initiatives of $11 million, as described below.~~

Consolidated operating income for the first quarter of 2017, which includes an adjustment to the gain on the APAC JV ownership change of $6 million and a net gain on settlement of $530 million, a goodwill impairment charge of $24 million related to our vascular access reporting unit, and an asset impairment of $15 million related to the restructuring of our pharmacy business, as discussed below, increased by $523 million as compared to the first quarter in 2016, which included a goodwill impairment charge related to a DMG reporting unit of $77 million and an estimated accrual for legal matters of $16 million. Excluding these items from their respective quarters, adjusted consolidated operating income for the first quarter of 2017 would have decreased by $66 million. Adjusted consolidated operating income decreased due to a decrease in adjusted operating income in U.S. dialysis and related lab services of $25 million, a decrease in adjusted operating income of $24 million related to DMG and an increase in adjusted operating losses in our ancillary and strategic initiatives of $14 million, as described below.

~~U.S. dialysis and related lab services business~~

~~Results of operations~~

Three months ended
March 31, 2017 December 31, 2016 March 31, 2016
(dollar amounts rounded to nearest million, except per treatment data)
Net revenues:
Dialysis and related lab services patient service revenues $ 2,373
$ 2,427
$ 2,328
Less: Provision for uncollectible accounts (107 ) (109 ) (105 )
Dialysis and related lab services net patient service revenues 2,266
2,318
2,223
Other revenues 5
5
4
Total net dialysis and related lab services revenues 2,271
2,323
2,227
Operating expenses and charges:

Patient care costs 1,548
1,568
1,496
General and administrative 188
199
179
Depreciation and amortization 125
124
116
Gain on settlement, net (527 ) —
—
Equity investment income (8 ) (4 ) (4 )
Total operating expenses and charges 1,326
1,887
1,787
Operating income 945
436
440
Reconciliation of non-GAAP measures:

Gain on settlement, net (527 ) —
—
Equity investment income related to gain on settlement (3 ) —
—
Adjusted operating income⁽¹⁾
$ 415
$ 436
$ 440
Dialysis treatments 6,804,384
6,889,069
6,639,874
Average dialysis treatments per treatment day 88,369
87,203
85,236
Average dialysis and related lab services revenue per treatment $ 349
$ 352
$ 351

~~Certain columns, rows or percentages may not add or recalculate due to the use of rounded numbers.~~

~~(1)~~

For the three months ended March 31, 2017, we have excluded the net gain on the settlement with the VA of $530 million. This is a non-GAAP measure and is not intended as a substitute for the GAAP equivalent measure. We have presented this adjusted amount because management believes that this presentation enhances a user’s understanding of our normal operating income by excluding an item which we do not believe is indicative of our ordinary results of operations. As a result, adjusting for this amount allows for a more meaningful comparison to our prior period results.

~~Net revenues~~

Dialysis and related lab services’ net revenues for the first quarter of 2017 decreased by approximately $52 million, or 2.2%, as compared to the fourth quarter of 2016. The decrease in dialysis and related lab services’ net revenues was due to a decrease in the number of treatments and a decrease in our average revenue per treatment of approximately $3. The decrease in the number of treatments was primarily due to two less treatment days during the three months ended March 31, 2017, as compared to the prior quarter. The decrease in our average dialysis revenue per treatment was primarily due to a decrease in our commercial payor mix, including exchange payors.

Dialysis and related lab services’ net revenues for the first quarter of 2017 increased by approximately $44 million, or 2.0%, as compared to the first quarter of 2016. The increase in net revenues was principally due to volume growth from additional treatments, partially offset by a decrease in our average dialysis revenue per treatment of approximately $2. The increase in the number of treatments was primarily attributable to acquired and non-acquired treatment growth, partially offset by one less treatment day during the three months ended March 31, 2017, as compared to the three months ended March 31,

~~2016. The decrease in our average dialysis revenue per treatment was primarily due to a decrease in our commercial payor mix, including exchange payors.~~

~~Provision for uncollectible accounts.~~ The provision for uncollectible accounts receivable for dialysis and related lab services was 4.5% for the first quarter of 2017 and the fourth and first quarters of 2016. Based upon our historical cash collection experience and trends, we assess the provision for uncollectible accounts and adjust the provision as necessary as a result of changes in our cash collections.

~~Operating expenses and charges~~

~~Patient care costs.~~ ~~Dialysis and related lab services’ patient care costs of approximately $227~~per treatment for the first quarter of 2017 decreased by approximately $1 per treatment as compared to the fourth quarter of 2016. The decrease was primarily attributable to a decrease in pharmaceutical costs due to a reduction in price and a decrease in profit sharing expense, partially offset by an increase in pharmaceutical intensity, an increase in labor and benefits costs due to a decrease in productivity and an increase in other direct operating expenses associated with our dialysis centers.

Dialysis and related lab services’ patient care costs per treatment for the first quarter of 2017 increased by approximately $2 per treatment as compared to the first quarter of 2016. The increase was primarily attributable to an increase in other direct operating expenses associated with our dialysis centers and an increase in labor and benefits costs due to a decrease in productivity. These increases were partially offset by a decrease in pharmaceutical costs and intensity, and a decrease in profit sharing expense.

~~General and administrative expenses.~~ Dialysis and related lab services’ general and administrative expenses of approximately $188 million in the first quarter of 2017 decreased by approximately $11 million as compared to the fourth quarter of 2016. The decrease in general and administrative expenses was primarily due to a decrease in management meeting and travel expenses. In addition, long-term incentive compensation expense and profit sharing expense decreased. These decreases were partially offset by an increase in labor and benefits costs.

Dialysis and related lab services’ general and administrative expenses for the first quarter of 2017 increased by approximately $9 million as compared to the first quarter of 2016. This increase was primarily due to an increase in labor and benefits costs, occupancy and legal costs, partially offset by a decrease in long-term incentive compensation expense and profit sharing expense.

~~Depreciation and amortization.~~ Depreciation and amortization for dialysis and related lab services was approximately $125 million for the first quarter of 2017, $124 million for the fourth quarter of 2016, and $116 million for the first quarter of 2016. The increase in depreciation and amortization in the first quarter of 2017, as compared to the fourth and the first quarters of 2016, was primarily due to growth in newly developed centers and from acquired centers, as well as technology investments in our clinical network.

~~Equity investment income.~~ Equity investment income for dialysis and related lab services was approximately $8 million for the first quarter of 2017 and $4 million the first and fourth quarters of 2016, as well as the first quarter of 2016. The increase was primarily due to an increase in profitability of certain joint ventures and the equity investment income recognized related to the gain on settlement with the VA of approximately $3 million.

~~Gain on settlement, net.~~ During first quarter of 2017 we reached an agreement with the government for amounts owed to us for dialysis services provided from 2005 through 2011 to patients covered by the VA. As a result of this settlement we recognized a one time net gain of $527 million.

~~Accounts receivable~~

Our dialysis and related lab services’ accounts receivable balances, net of the provision for uncollectible accounts, were $1.335 billion and $1.358 billion at March 31, 2017 and December 31, 2016, respectively, which represented approximately 54 days and 55 days, respectively. Our day sales outstanding (DSO) decreased one day due to improvements in our cash collections, as compared to the fourth quarter of 2016. Our DSO calculation is based on the current quarter’s average revenues per day. There were no significant changes during the first quarter of 2017 from the fourth quarter of 2016 in the amount of unreserved accounts receivable over one year old or the amounts pending approval from third-party payors.

~~Segment operating income~~

Dialysis and related lab services’ operating income for the first quarter of 2017, which includes a net gain on the settlement with the VA of $530 million, increased by approximately $509 million as compared to the fourth quarter of 2016. Excluding the net gain on the settlement with the VA, operating income would have decreased by $21 million. The decrease in operating income was primarily due to a decrease in our average dialysis revenue per treatment of approximately $3 due to a decline in our commercial payor mix and a decrease in treatments due to two less treatment days in the three months ended March 31, 2017, compared to the prior quarter. Operating income was also negatively impacted by an increase in pharmaceutical intensity, labor and benefits costs and other direct operating expenses associated with our dialysis centers. Operating income benefited from a decrease in management meeting and travel expenses, a reduction in long-term incentive compensation expense, as well as, in profit sharing expense, and a decrease in pharmaceutical costs, as discussed above.

Dialysis and related lab services’ operating income for the first quarter of 2017, which includes a net gain on the settlement with the VA of $530 million, increased by approximately $505 million as compared to the first quarter of 2016. Excluding the net gain on the settlement with the VA, operating income would have decreased by $25 million. This decrease in adjusted operating income was due to a decrease in our average dialysis revenue per treatment of approximately $2 due to a decline in our commercial payor mix and one less treatment day during the three months ended March 31, 2017, as compared to the three months ended March 31, 2016. Operating income also was negatively impacted by an increase in other direct operating expenses associated with our dialysis centers, higher labor and benefits costs and increased occupancy and legal costs. Operating income benefited from an increase in volume growth from additional treatments, a decrease in pharmaceutical costs and intensity, as well as, a decrease in profit sharing expense and in long-term incentive compensation expense.

~~DMG business~~

~~Results of operations~~

Three months ended
March 31, 2017 December 31, 2016 March 31, 2016
(dollar amounts rounded to nearest millions)
Net revenues:
DMG capitated revenue $ 890
$ 845
$ 866
Patient service revenue 185
179
116
Less: Provision for uncollectible accounts (6 ) (6 ) (4 )
Net patient service revenue 179
173
112
Other revenues 18
19
11
Total net revenues 1,087
1,037
989
Operating expenses:

Patient care costs 892
834
794
General and administrative expense 129
123
127
Depreciation and amortization 57
58
46
Goodwill impairment charges —
—
77
Equity investment (income) loss (3 ) —
2
Total expenses 1,075
1,015
1,046
Operating income (loss) 12
22
(57 )
Reconciliation of non-GAAP:

Add:

Goodwill impairment charges —
—
77
Accrual for legal matters —
—
16
Adjusted operating income⁽¹⁾
$ 12
$ 22
$ 36

~~Certain columns, rows or percentages may not add or recalculate due to the use of rounded numbers.~~


~~(1)~~	For the three months ended March 31, 2016, we have excluded the goodwill impairment charges of $77 million and an estimated accrual for legal matters of $16 million. These are non-GAAP measures and are not intended as substitutes for

the GAAP equivalent measures. We have presented these adjusted amounts because management believes that these presentations enhance a user’s understanding of our normal operating income by excluding certain items which we do not believe are indicative of our ordinary results of operations. As a result, adjusting for these amounts allows for comparison to our normal prior period results.

~~Capitated membership information~~

The following table provides (i) the total number of capitated members to whom DMG provided healthcare services and (ii) the aggregate member months. Member months represent the aggregate number of months of healthcare services DMG has provided to capitated members during a period of time:

Members at Member months for
Three months ended
March 31, 2017 December 31, 2016 March 31, 2016 March 31, 2017 December 31, 2016 March 31, 2016
Payor classification:

Senior 306,600
305,200
325,800
920,200
913,300
975,300
Commercial 329,000
338,300
347,300
995,900
1,018,400
1,048,600
Medicaid 99,800
105,800
114,000
305,200
318,800
342,500
735,400
749,300
787,100
2,221,300
2,250,500
2,366,400

In addition to the members above, DMG provided healthcare services to members in two of its nonconsolidated operating joint ventures that are accounted for as equity investments. These joint ventures provided healthcare services for approximately 157,000, 148,700, and 140,900 members as of March 31, 2017, December 31, 2016 and March 31, 2016, respectively, and for approximately 465,500, 452,200, and 416,800 member months for the quarters ended March 31, 2017, December 31, 2016 and March 31, 2016, respectively. The increase in members and member months was due to an increase in enrollment of members related to Tandigm Health (Tandigm) joint venture.

Members and member months for the first quarter of 2017 decreased from the fourth quarter of 2016 primarily due to a decrease in commercial members as employers shift to less expensive options for medical services for their employees. The decline in Medicaid is due to the non-renewal of certain Medicaid contracts and a decline in Medicaid membership. In addition, senior members increased due to non-acquired growth, partially offset by a decrease in affiliate relationships.

Members and member months for the first quarter of 2017 decreased from the first quarter of 2016 primarily due to the sale of our Arizona business, which impacted senior members, as well as the decreases described above. These decreases were partially offset by increased senior members resulting from new acquisitions and non-acquired growth.

~~Revenues~~

~~The following table summarizes DMG’s revenue by source:~~

Three months ended
March 31, 2017 December 31, 2016 March 31, 2016
(dollars rounded to nearest millions)
DMG revenues:
Senior revenues $ 660
$ 617
$ 648
Commercial revenues 188
175
172
Medicaid revenues 42
53
46
Total capitated revenues 890
845
866
Patient service revenue, net of provision for
uncollectible accounts 179
173
112
Other revenues 18
19
11
Total net revenues $ 1,087
$ 1,037
$ 989

~~Certain columns, rows or percentages may not add or recalculate due to the use of rounded numbers.~~

~~Net revenues~~

DMG’s net revenue for the first quarter of 2017 increased by approximately $50 million, or 4.8%, as compared to the fourth quarter of 2016. The increase in revenues was primarily driven by the conversion of existing contracts from shared risk to global risk, which is associated with a change in presentation of both senior and commercial revenues and patient care costs from a net basis to a gross basis. In addition, senior capitated revenues increased due to an increase in the number of senior capitated members during the quarter attributable to non-acquired growth and increased per member per month (PMPM) funding due to the mix of patients, as well as an increase in FFSVillageHealth revenues from acquisitions. These increases were partially offset by decreases due to an increase in shared risk utilization throughout the first quarter, a decrease in commercial and Medicaid members to whom DMG provides health care services, and a decrease in Medicare Advantage rates, as described below.

DMG’s net revenue for the first quarter of 2017 increased by approximately $98 million, or 9.9%, as compared to the first quarter of 2016, primarily due to an increase in FFS revenues due to a full quarter of revenue from the acquisition of The Everett Clinic Medical Group (TEC) compared to only one month in the first quarter of 2016 and other acquisition related growth. The increase was also due to the conversion of existing contracts from shared risk to global risk, as described above, and an increase in senior capitated revenues, as described above. These increases were partially offset by a decrease in senior capitated revenues from the sale of our DMG Arizona business, a decrease in commercial and Medicaid members to whom DMG provides health care services, and a decrease in Medicare Advantage rates.

On April 3, 2017, CMS issued final guidance for 2018 Medicare Advantage benchmark payment rates (Rate Announcement). Based upon our preliminary analysis of the final rule, we estimate that the change in 2018 rates, including adjustments for benchmark county rates and qualifying bonuses, will result in nearly flat Medicare Advantage rates to DMG. This compares, according to CMS, to an industry average rate increase of approximately 0.45%. The difference in Medicare Advantage rates for DMG compared to the industry average are largely driven by DMG’s higher mix of Medicare Advantage patients in counties that will receive a lower-than-average benchmark rate increase. The previously mentioned numbers does not take in account for the elimination of the Health Insurer Fee.

~~Operating expenses~~

~~Patient care costs.~~ DMG’s patient care costs of approximately $892 million for the first quarter of 2017 increased by approximately $58 million as compared to the fourth quarter of 2016, primarily attributable to the conversion of existing contracts from shared risk to global risk, which is associated with a change in presentation of both revenues and expenses from a net basis to a gross basis, as described above, an increase in utilization, rate increases, an increase in senior capitated members from non-acquired growth, increased labor costs due to payroll taxes and headcount, and other acquisition related growth. The increase in costs was partially offset by the decreases due to the true-up of risk share arrangements, a decrease in commercial and Medicaid members to whom DMG provides healthcare services, and a decrease in medical malpractice expenses.

DMG’s patient care costs for the first quarter of 2017 increased by approximately $98 million as compared to the first quarter of 2016, primarily attributable to a full quarter of operations from the acquisition of TEC, the contract conversion to global risk and resulting change in presentation from a net to a gross basis, as described above, an increase in utilization, an increase in labor costs, an increase in senior capitated members from non-acquired growth, and other acquisition related growth. This increase in costs was partially offset by the true-up of risk share arrangements, a decrease due to a full quarter without our DMG Arizona business, and a decrease in commercial and Medicaid members to whom DMG provides healthcare services.

~~General and administrative expenses.~~ DMG’s general and administrative expenses of approximately $129 million for the first quarter of 2017 increased by approximately $6 million as compared to the fourth quarter of 2016. The increase was primarily attributable to increased labor costs due to payroll taxes and headcount, partially offset by a decrease in professional fees.

DMG’s general and administrative expenses for the first quarter of 2017 increased by $2 million as compared to the first quarter of 2016, which includes an estimated accrual for legal matters of $16 million in the first quarter of 2016. Excluding this item from the first quarter of 2016, adjusted general and administrative expenses would have increased by $18 million. This is primarily attributable to a full quarter of operations from the TEC acquisition and other acquisition related growth, and an increase in corporate administrative support expenses due to increased labor costs and costs associated with growth initiatives. These increases in costs were partially offset by a decrease due to the sale of our DMG Arizona business.

~~Depreciation and amortization.~~ DMG’s depreciation and amortization was approximately $57 million for the first quarter of 2017, $58 million for the fourth quarter of 2016 and $46 million for the first quarter of 2016. As of September 1, 2016, we committed to a plan to change HCP-related trade names to DMG. As a result of this decision we began to accelerate the amortization of the remaining carrying value of HCP-related trade names, which will continue through first quarter of 2019, the remaining expected life of this asset.

Depreciation and amortization decreased by approximately $1 million as compared to the fourth quarter of 2016. Depreciation and amortization increased $11 million over the three months ended March 31, 2016 due to an increase in amortization related to the acceleration of the HCP-related trade names of approximately $7 million, the acquisition of TEC, and an increase in technology and property investments as part of our growth initiatives.

~~Equity investment (income) losses.~~ DMG’s equity investment income of approximately $3 million for the first quarter of 2017 increased approximately $3 million as compared to the fourth quarter of 2016. The increase was primarily attributable to an increase in profitability of certain joint ventures, as well as the sale of our Fullwell minority ownership interest during the fourth quarter of 2016, which resulted in a reduced share of equity investment losses from this investment.

DMG’s equity investment income increased by approximately $5 million as compared to the first quarter of 2016. The increase was primarily attributable to the sale of a portion of our Tandigm ownership interest effective June 30, 2016, reducing our ownership from 50% to 19%, which resulted in a reduced share of equity investment losses during the first quarter of 2017, an increase in profitability of certain joint ventures, as well as the sale of our Fullwell ownership interest during the fourth quarter of 2016, as described above.

~~Goodwill impairment charges.~~ During the first quarter of 2016, we recognized goodwill impairment charges of $77 million at our DMG Nevada reporting unit. This charge resulted primarily from changes in expectations concerning government reimbursement and our expected ability to mitigate them, medical cost trends, and other market conditions.

While we did not recognize any goodwill impairments at our DMG reporting units during the fourth quarter of 2016 or the first quarter of 2017, various DMG reporting units remain at risk of goodwill impairment as of March 31, 2017. See further discussion under "Corporate-level charges" below.

~~Segment operating income~~

DMG’s operating income for the first quarter of 2017 decreased by approximately $10 million as compared to the fourth quarter of 2016. The decrease in DMG operating income was primarily attributable to an increase in utilization throughout the first quarter of 2017, a decrease in commercial and Medicaid members to whom DMG provides health care services, increased labor costs, and a decrease in Medicare Advantage rates. These decreases were partially offset by the true-up of risk share arrangements, an increase in senior capitated members from non-acquired growth, and an increase in equity investment income.

DMG’s operating results for the first quarter of 2017 increased by approximately $69 million as compared to the first quarter of 2016, which included a goodwill impairment charge of $77 million and an estimated accrual for legal matters of $16 million. Excluding these items from the first quarter of 2016, DMG adjusted operating income for the first quarter of 2017 would have decreased by $24 million compared to the first quarter of 2016. The decrease in adjusted operating income was primarily attributable to an increase in utilization, an increase in depreciation and amortization related to the HCP trade names acceleration, an increase related to increased labor costs and growth initiatives, a decrease in commercial and Medicaid members to whom DMG provides health care services, and a decrease in Medicare Advantage rates. These decreases were offset by the true up of risk share arrangements and an increase in senior capitated revenues from acquired and non-acquired growth.

~~Other—Ancillary services and strategic initiatives business~~

Our other operations include ancillary services and strategic initiatives which are primarily aligned with our core business of providing dialysis services to our network of patients. As of March 31, 2017, these consisted primarily of pharmacy services, disease management services, vascular access services, clinical research programs, physician services, direct primary care and our international dialysis operations. The ancillary services and strategic initiatives generated approximately $378 million of net revenues in the first quarter of 2017, representing approximately 9.8% of our consolidated net revenues. We currently expect to continue to invest in our ancillary services and strategic initiatives, including our continued expansion into certain international markets as we work to develop successful new business operations in the U.S. and internationally. However, any significant change in market conditions, business performance or the regulatory environment may impact the economic viability of any of these strategic initiatives. Any unfavorable changes in these strategic initiatives could result in a write-off or an impairment of some or all of our investments, including goodwill, and could also result in significant termination costs if we were to exit a certain line of business or one or more of our international markets.

As of March 31, 2017, we provided dialysis and administrative services to a total of 162 outpatient dialysis centers located in 11 countries outside of the U.S. The total net revenues generated from our international operations are provided below.

~~The following table reflects the results of operations for the ancillary services and strategic initiatives:~~

Three months ended
March 31, 2017 December 31, 2016 March 31, 2016
(dollar amounts rounded to nearest millions)
U.S. revenues
Net patient service revenues $ 6
$ 6
$ 7
Other revenues 281
312
317
Capitated revenues 28
20
21
Total 315
338
345
International revenues

Net patient service revenues 61
57
44
Other revenues 2
1
2
Total 63
58
46
Total net revenues 378
396
391

U.S. operating (loss) income (53 ) (59 ) (1 )
Reconciliation of non-GAAP:
Add: Goodwill impairment charges 24
28
—
         Impairment of assets 15

         Accrual for legal matters —
16
—
   Adjusted operating loss⁽¹⁾
(14 ) (15 ) (1 )

International operating (loss) income (5 ) (14 ) (10 )
Reconciliation of non-GAAP:
Add: Impairment of minority equity investment —
15
—
Less: Gain on ownership changes (6 ) —
—
   Adjusted operating (loss) income⁽¹⁾
(11 ) 1
(10 )
Total adjusted operating loss⁽¹⁾
$ (25 ) $ (14 ) $ (11 )

~~Certain columns, rows or percentages may not add or recalculate due to the use of rounded numbers.~~

~~(1)~~

For the three months ended March 31, 2017, we have excluded an adjustment to the gain on the APAC JV ownership changes of $6 million, a goodwill impairment charge of $24 million related to our vascular access reporting unit, and an asset impairment of $15 million related to the restructuring of our pharmacy business. For the three months ended December 31, 2016, we have excluded a goodwill impairment charge of $28 million related to our vascular access reporting unit, an estimated accrual for legal matters of $16 million, and an impairment on a minority equity investment of $15 million. These are non-GAAP measures and are not intended as substitutes for the GAAP equivalent measures. We have presented these adjusted amounts because management believes that these presentations enhance a user’s understanding of our normal operating income by excluding certain items which we do not believe are indicative of our ordinary results of operations. As a result, adjusting for these amounts allows comparison to our normal prior period results.

~~Net revenues~~

The ancillary services and strategic initiatives net revenues for the first quarter of 2017 decreased by approximately $18 million, or 4.5%, as compared to the fourth quarter of 2016. The decrease is primarily attributable to a decrease in our pharmacy services volume and a decrease in other pharmacy services revenue, partially offset by an increase in VillageHealth special needs ~~plans revenues, and an increase in net revenues from our international expansion.~~

The ancillary services and strategic initiatives net revenues for the first quarter of 2017 decreased by approximately $13 million, or 3.3%, as compared to the first quarter of 2016. The decrease is primarily attributable to a decrease in our pharmacy services volume and a decrease in other pharmacy services revenues. Net revenues were positively impacted by our

~~VillageHealth special needs plans revenues, an increase in pharmaceutical rates and an increase in net revenues from our international expansion.~~plans.

Operating and general expenses

Ancillary services and strategic initiatives operating expenses for the first quarter of 2017 decreased by approximately $23 million from the fourth quarter of 2016, which included an estimated accrual for legal matters of $16 million. Excluding this item from the fourth quarter of 2016, adjusted operating expenses would have decreased by approximately $7 million. The decrease in adjusted operating expenses was primarily related to a decrease in pharmaceutical costs due to decreased volume in our pharmacy business.

Ancillary services and strategic initiatives operating expenses for the first quarter of ~~2017, increased~~2018 decreased by approximately $1$79 million from the fourth quarter of 2017, primarily related to decreases in pharmaceutical costs due to decreased volume related to calcimimetics, partially offset by an increase in medical costs at VillageHealth related to the cost of calcimimetics in our special needs plans.

Ancillary services and strategic initiatives operating expenses for the first quarter of 2018 decreased by approximately $56 million, as compared to the first quarter of ~~2016,~~2017, primarily ~~due~~related to ~~higher labor costs and additional expenses associated with our international expansion, partially offset by a decrease~~decreases in pharmaceutical costs due to decreased volume related to calcimimetics, partially offset by an increase in medical costs at VillageHealth related to the cost of calcimimetics in our ~~pharmacy business.~~special needs plans and an increase in expenses associated with our international operations.

Goodwill and other asset impairment charges. During the first quarter of 2017, we recognized ~~an incremental~~ goodwill impairment ~~charge~~charges of $24 million at our vascular access reporting unit. This ~~additional~~ charge resulted primarily from changes in our outlook ~~since the fourth quarter of 2016. Our~~as our partners and operators ~~have been evaluating~~continued to evaluate potential changes in operations, including termination of their management services agreements and center closures, as a result of recent changes in Medicare reimbursement. ~~These ongoing evaluations could lead to additional~~There is no goodwill remaining at our vascular access reporting unit. During the first quarter of 2017, we also recognized other asset impairment charges ~~in future quarters.~~of $15 million related to a planned restructuring of our pharmacy business.

During the fourth quarter of ~~2016,~~2017, we determined that circumstances indicated it had become more likely than not that the goodwill of our vascular access reporting unit had become impaired. These circumstances included the changes in future governmental reimbursement announced by CMS on November 2, 2016 and our expected ability to mitigate them. Accordingly, we performed the required valuations to estimate the fair value of the net assets and implied goodwill of this reporting unit and recognized a ~~goodwill~~non-cash other-than-temporary impairment charge of ~~$28~~$280 million on our investment in the ~~fourth quarter of 2016.~~Asia Pacific joint venture (APAC JV) due to changes in our expectation for the joint venture resulting from continuing market research and assessments by both us and the APAC JV.

~~In addition, during the first quarter of 2017, we recognized an asset impairment charge of $15 million related to the restructuring of our pharmacy business.~~

~~In the fourth quarter of 2016, we also recorded an impairment of $15 million related to a minority equity investment in one of our international reporting units.~~

Gain on changes in ownership interests in Asia Pacific joint ~~venture (APAC JV)~~

venture. As a result of our agreement with Khazanah Nasional Berhad (Khazanah) and Mitsui and Co., Ltd (Mitsui), concerning the APAC JV, we recorded an additional $6 million non-cash gain during the ~~quarter~~three months ended March 31, 2017 related to a change in estimate of pending post-closing adjustments for the formation of ~~the APAC JV.~~this joint venture.

Segment operating losses

Ancillary services and strategic initiatives operating loss for the first quarter of 2018 decreased by approximately $289 million from the fourth quarter of 2017, which ~~includes~~included an impairment of $280 million on our investment in the APAC JV, as described above. Excluding this item, adjusted operating losses decreased by $9 million, primarily due to improvement in our international business and shared savings recognized at DaVita Health Solutions, partially offset by increased losses at our pharmacy business, as described above.

Ancillary services and strategic initiatives operating loss for the first quarter of 2018 decreased by approximately $51 million from the first quarter of 2017, which included an adjustment to the gain on the APAC JV ownership ~~changes~~change of $6 million, a goodwill impairment charge of $24 million related to our vascular access reporting unit, and an asset impairment of $15 million related to the restructuring of our pharmacy business, decreased by approximately $15 million from the fourth quarter of 2016, which included a goodwill impairment charge of $28 million related to our vascular access reporting unit, an estimated accrual for legal matters of $16 million, and an impairment on a minority equity investment of $15 million. Excluding these items from their respective periods, adjusted operating losses increased by $11 million compared to the fourth quarter of 2016, primarily related to a decrease in volume in our pharmacy services business and an increase in our international operating losses from foreign exchange losses, partially offset by an increase in VillageHealth special needs plans revenues.

Ancillary services and strategic initiatives operating loss for the first quarter of 2017, which includes an adjustment to the gain on the APAC JV ownership changes of $6 million, a goodwill impairment charge of $24 million related to our vascular access reporting unit, and an asset impairment of $15 million related to the restructuring of our pharmacy business, increased by approximately $47 million from the first quarter of 2016.business. Excluding these items from the first quarter of 2017, adjusted operating losses ~~increased~~decreased by ~~$14~~$18 million, primarily ~~related~~due to ~~a decrease~~shared savings recognized at DaVita Health Solutions in ~~volume~~the first quarter of 2018, improvement in our ~~pharmacy services~~international business ~~and an increase in labor costs and additional expenses associated with our international expansion, partially~~ offset by an increase in ~~VillageHealth special needs plans revenues.~~adjusted losses at our pharmacy business.

Corporate-level charges

Debt expense. Debt expense was ~~$104 million in both the first quarter of 2017 and the fourth quarter of 2016 and $103~~$114 million in the first quarter of ~~2016. Debt expense increased $1~~2018, $109 million in the fourth quarter of 2017 and $104 million in the first quarter of 2017. Debt expense increased by $5 million as compared to the fourth quarter of 2017 and by $10 million as compared to the first quarter of ~~2016~~2017, primarily due to an increase in our average interest rate ~~partially offset by a decrease~~and due to an increase in our average outstanding balance.

Corporate administrative support. Corporate administrative support consists primarily of labor, benefits and long-term incentive compensation expense, as well as professional fees for departments which provide support to all of our various operating lines of business. This is partially offset by internal management fees charged to our other lines of ~~business. These expenses are included in our consolidated general and administrative expenses.~~business for that support.

Corporate administrative support ~~was~~costs were approximately $16 million in the first quarter of 2018, $12 million in the fourth quarter of 2017 and $11 million in the first quarter of 2017, $4 million in the fourth quarter of 2016, which included the adjustment to reduce a receivable associated with the DMG acquisition escrow provision relating to an income tax item of $4 million, and $7 million in first quarter of 2016. The increase in corporate2017. Corporate administrative support costs in the first quarter of ~~2017~~2018 as compared to the fourth quarter of ~~2016 was~~2017 and the first quarter of 2017 increased primarily due to ~~an increase in long-term incentive compensation expense and~~ a ~~decrease~~reduction in internal management fees ~~paid by~~charged to our ancillary lines of business. The increase in corporate administrative support in the first quarter of 2017 as compared to the first quarter of 2016 was primarily due to a decrease in internal management fees paid by our ancillary lines of business, partially offset by a decrease in long-term incentive compensation.

In connection with the acquisition of DMG, we recorded a receivable against the acquisition escrow balance to offset specific potential tax liabilities. Certain of these potential tax liabilities expired, resulting in the reduction of this asset during the fourth quarter of 2016. This negatively impacted our corporate administrative support cost by $4 million. This cost was directly offset by a corresponding reduction in income tax expense due to the expiration of the corresponding tax liability.

Other income. Other income was $4$5 million for the first quarter of ~~2017, $1~~2018, $5 million for the fourth quarter of ~~2016,~~2017 and $3$4 million in the first quarter of ~~2016.~~2017. The slight increase in other income for the first quarter of ~~2017 as compared to the fourth quarter of 2016 was primarily related to an increase in foreign exchange rates affecting certain accounts. The increase in other income for the first quarter of 2017~~2018 as compared to the first quarter of ~~2016~~2017 was primarily ~~related~~due to ~~an increase~~foreign currency gains offset by decreases in interest and investment income.

Noncontrolling interests

Net income attributable to noncontrolling interests was $47 million for the first quarter of 2018 compared to $37 million for the fourth quarter of 2017 and $53 million for the first quarter of ~~2017 compared to $31 million for the fourth quarter of 2016 and $41 million for the first quarter of 2016.~~2017. The increase in net income attributable to noncontrolling ~~interest~~interests in the first quarter of ~~2017~~2018 compared to the fourth quarter of ~~2016~~2017 was primarily due to noncontrolling interest recognized at DMG. The decrease in net income attributable to noncontrolling interests in the first quarter of 2018 compared to the first quarter of 2017 was primarily due to additional income to noncontrolling interests ~~recognized~~ related to the net gain on the settlement with the VA of $24 million and an increase in the ~~overall number of joint ventures, offset by a decrease in~~ profitability of certain joint ventures. The increase in net income attributable to noncontrolling interest in the first quarter of 2017 compared to the first quarter of 2016 was due to the net gain on settlement with the VA and an increase in the overall number of joint ventures, partially offset by a net $7 million decrease in noncontrolling interests related to ~~noncontrolling interest from~~the goodwill impairment ~~charges related to~~at our vascular access reporting unit in the first quarter of ~~2017 and a decrease in profitability of certain joint ventures.~~2017.

Accounts receivable

Our consolidated total accounts receivable balances at March 31, ~~2017~~2018 and December 31, ~~2016~~2017 were ~~$1.901 billion~~$1,831 million and ~~$1.917 billion,~~$1,715 million, respectively, which isrepresented approximately 59 days and 57 days, respectively, net of ~~the provision~~allowance for uncollectible accounts. The increase in consolidated day sales outstanding (DSO) of two days was primarily related to our other ancillary services and strategic initiatives businesses, offset by a decrease of one day in ~~accounts receivable was due~~DSO at our U.S. dialysis and related lab services business as we continue to adjust and refine our collection operations for new protocols. Our DSO calculation is based on the ~~decrease in revenue in~~current quarter’s average revenues per day. There were no significant changes during the first quarter of ~~2017.~~

~~Outlook~~

~~These forward-looking measures and~~2018 from the underlying assumptions involve significant risks and uncertainties, including those described below, and actual results may vary significantly from these current forward-looking measures. We do not provide guidance for consolidated operating income, Kidney Care operating income or effective tax rate on a GAAP basis nor a reconciliationfourth quarter of ~~those forward-looking non-GAAP financial measures to the most directly comparable GAAP financial measures on a forward-looking basis because we are unable to predict certain items contained~~2017 in the ~~GAAP measures without unreasonable efforts. These non-GAAP financial measures do not include certain items, including~~amount of unreserved accounts receivable over one year old or the net gain related to the VA settlement, goodwill and asset impairment charges, and the gain on the APAC JV ownership change. Please read the cautionary notice regarding forward-looking statements in Item 2 of Part 1 of this report under the heading “Management’s Discussion andamounts pending approval from third-party payors.

~~Analysis of Financial Condition and Results of Operations”. See page 36 for further details regarding our forward-looking statements.~~

~~We still expect our adjusted consolidated operating income guidance for 2017 to be in the range of $1.635 billion to $1.775 billion.~~

~~We still expect our adjusted operating income guidance for Kidney Care for 2017 to be in the range of $1.525 billion to $1.625 billion.~~

~~We still expect our operating income guidance for DMG for 2017 to be in the range of $110 million to $150 million.~~

~~We still expect our consolidated operating cash flow for 2017 to be in the range of $1.750 billion to $1.950 billion, which includes the net benefit of the VA settlement.~~

Liquidity and capital resources

~~Cash~~Consolidated cash flow from operations during the first quarter of ~~2017~~2018 was ~~$865~~$363 million, of which $206 million was from continuing operations, compared ~~to $429 million~~with consolidated cash flows during the first quarter of ~~2016.~~2017 of $865 million, of which $770 million was from continuing operations. The ~~increase~~decrease in cash flow from continuing operations in the first quarter of 2017 was primarily due to the payment received in the first quarter of 2017 from the settlement with the ~~VA.~~VA as well as the timing of tax payments and other working capital items. Non-operating cash outflows for the first quarter of 2018 included capital asset expenditures of $232 million, including $114 million for new center developments and relocations and $119 million for maintenance and information technology. In addition, during the quarter ended March 31, 2018, we spent $17 million for acquisitions, paid distributions to noncontrolling interests of $45 million, and repurchased a total of 4,197,304 shares of our common stock for $298 million, of which $16 million remained unsettled at March 31, 2018. Non-operating cash outflows for the first quarter of 2017 included capital asset expenditures of $215 million, including $127 million for new center developments and relocations and $88 million for maintenance and information technology. In addition, we spent $77 million for acquisitions and ~~also~~ paid distributions to noncontrolling interests of $43 million. ~~Non-operating cash outflows for~~

During the first quarter of ~~2016 included capital asset expenditures of $173 million, including $100 million for new~~2018, our U.S. dialysis and related lab services business opened 28 dialysis centers, acquired one dialysis center, ~~developments~~closed one dialysis center and ~~relocations~~added one center which we operate under a management and ~~$73 million for maintenance and information technology.~~administrative

service agreement. In addition, ~~we spent $405 million for acquisitions, including the acquisition of TEC. We paid distributions to noncontrolling interests of $50 million~~our international dialysis operations acquired four dialysis centers and ~~we repurchased a total of 3,689,738 shares of our common stock for $249million during the first quarter of 2016. In addition, we settled $25 million related to fourth quarter 2015 repurchases.~~closed one dialysis center. Our APAC JV also acquired two dialysis centers and closed one dialysis center.

During the first quarter of 2017, our U.S. dialysis and related lab services business opened 24dialysis centers, acquired 12 dialysis centers and closed three dialysis centers. In addition, our international dialysis operations acquired three ~~dialysis centers and opened five dialysis centers. During the first quarter of 2016, our U.S. dialysis and related lab services business opened 30~~ dialysis centers and ~~closed and merged~~opened four~~centers. In addition, our international dialysis operations acquired onedialysis center and opened five~~ dialysis centers. Our APAC JV also opened one dialysis center.

During the first quarter of ~~2017,~~2018, our DMG business acquired one private medical practice. During the first quarter of 2017, DMG acquired one private medical practice and one primary care physician practice. ~~During the first quarter of 2016, DMG acquired one private medical practice and one primary care physician practice, including the purchase of TEC.~~

On May 1, 2017, we completed our acquisition of 100% of the interest in Colorado-based Renal Ventures Management, LLC (Renal Ventures) for approximately $360 million in cash, subject to certain post-closing adjustments. Renal Ventures operates 38 outpatient dialysis centers in six states. As a part of this transaction we were required to divest seven outpatient dialysis centers.

~~During~~Also during the first three months of ~~2017,~~2018, we made mandatory principal payments under our senior secured credit facilities totaling ~~$18.8~~$25.0 million on Term Loan A and $8.8 million on Term Loan B.

Cap agreements

As of March 31, ~~2017,~~2018, we maintained several currently effective interest rate cap agreements that were entered into in November 2014 with notional amounts totaling $3.5 billion. These cap agreements became effective September 30, 2016 and have the economic effect of capping the LIBOR variable component of our interest rate at a maximum of 3.50% on an equivalent amount of our debt. ~~The~~These cap agreements expire on June 30, 2018. As of March 31, ~~2017, the total fair value of~~2018, these cap agreements ~~was~~had an ~~asset of approximately $0.01 million.~~immaterial fair value. During the three months ended March 31, ~~2017,~~2018, we recognized debt expense of $2.1 million from these caps. During the three months ended March 31, ~~2017,~~2018, we recorded aan immaterial loss ~~of $0.1 million~~ in other comprehensive income due to a decrease in the unrealized fair value of these cap agreements.

As of March 31, ~~2017,~~2018, we also maintained several forward interest rate cap agreements that were entered into in October 2015 with notional amounts totaling $3.5 billion. These forward cap agreements will become effective June 29, 2018 and will have the economic effect of capping the LIBOR variable component of our interest rate at a maximum of 3.50% on an equivalent amount of our debt. These cap agreements expire on June 30, 2020. As of March 31, ~~2017,~~2018, the total fair value of

these cap agreements was an asset of approximately ~~$4.7~~$2.4 million. During the three months ended March 31, ~~2017,~~2018, we recorded a ~~loss~~gain of ~~$5.1~~$1.4 million in other comprehensive income due to ~~a decrease~~an increase in the unrealized fair value of these forward cap agreements.

Other items

On March 29, 2018, we entered into an Increase Joinder Agreement under our existing senior secured credit facilities. Pursuant to this Increase Joinder Agreement, we entered into an additional $995 million Term Loan A-2. The new Term Loan A-2 bears interest at LIBOR plus an interest rate margin of 1.00%. As of March 31, ~~2017,~~2018, we have initially drawn $452 million of the ~~interest rate~~Term Loan A-2 and we can draw up to an incremental $543 million on Term Loan A-2 through its maturity date in June 2019.

As of March 31, 2018, our Term Loan B debt bears interest at LIBOR plus an interest rate margin of 2.75%. Term Loan B is subject to interest rate caps if LIBOR should rise above 3.50%. Term Loan A bears interest at LIBOR plus an interest rate margin of 2.00%. The capped portion of Term Loan A is ~~$96.3 million.~~$131.3 million if LIBOR should rise above 3.50%. In addition, the uncapped portion of Term Loan A, which is subject to the variability of LIBOR, is ~~$747.5~~$618.8 million. Term Loan A-2 is subject to the variability of LIBOR plus an interest rate margin of 1.00%. Interest rates on our senior notes are fixed by their terms.

Our weighted average effective interest rate on the senior secured credit facilities at the end of the quarter was ~~3.95%~~4.67%, based on the current margins in effect of 2.00% for Term Loan A, 1.00% for Term Loan A-2, and 2.75% for Term Loan B, as of March 31, ~~2017.~~2018.

Our overall weighted average effective interest rate during the quarter ended March 31, ~~2017~~2018 was ~~4.55%~~4.87% and as of March 31, ~~2017~~2018 was ~~4.64%~~4.98%.

As of March 31, ~~2017,~~2018, our interest rates are fixed on approximately ~~53.1%~~51% of our total debt.

As of March 31, ~~2017,~~2018, we had ~~undrawn~~no outstanding balance on our $1.0 billion revolving line of credit under our senior secured credit facilities, ~~totaling $1.0 billion,~~ of which approximately ~~$94.6~~$14.4 million was committed for outstanding letters of credit. ~~The remaining amount is unencumbered. In addition, we~~We also have approximately ~~$1.3~~$22.4 million of additional outstanding letters of credit related to our Kidney Care business and $0.2 million of committed outstanding letters of credit ~~outstanding~~ related to our DMG business, which is backed by a certificate of deposit.

We believe that we will generate significant operating cash flows and will have sufficient liquidity to fund our scheduled debt service and other obligations for the foreseeable future, including the next 12 months, under the terms of our debt agreements. Our primary sources of liquidity are cash from operations and cash from borrowings.

Goodwill

We elected to early adopt ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ~~in the first quarter of~~, effective January 1, 2017. The amendments in this ASU simplify the test for goodwill impairment by eliminating the second step in ~~testing for goodwill impairment.~~the assessment. All goodwill impairment tests performed during ~~the quarter were~~2017 and 2018 have been performed under this new guidance.

During the ~~first quarter of~~three months ended March 31, 2018, we did not recognize any goodwill impairment charges.

During the three months ended March 31, 2017, we recognized ~~an incremental~~a goodwill impairment charge of $24 million at our vascular access reporting unit. This ~~additional~~ charge resulted primarily from changes in our outlook ~~since the fourth quarter of 2016. Our~~as our partners and operators ~~have been evaluating~~continued to evaluate potential changes in operations, including termination of their management services agreements and center closures, as a result of recent changes in Medicare reimbursement. ~~These ongoing evaluations could lead to additional impairment charges in future quarters.~~

~~During the fourth quarter of 2016, we determined that circumstances indicated it had become more likely than not that the~~There is no goodwill ofremaining at our vascular access reporting ~~unit had become impaired. These circumstances included~~unit.

For the reporting units considered at risk as of December 31, 2017 listed in the table below, there have been no major changes in the business, prospects, or expected future ~~governmental reimbursement announced by CMS~~results of these reporting units from their latest assessment date through March 31, 2018. Based on ~~November 2, 2016 and our expected ability to mitigate them. Accordingly,~~the most recent assessments, we performed the required valuations to estimate the fair value of the net assets and implied goodwill of this reporting unit and recognized a goodwill impairment charge of $28 million in the fourth quarter of 2016.

During the first quarter of 2016, we recognized goodwill impairment charges of $77 million at our DMG Nevada reporting unit. This charge resulted primarily from changes in expectations concerning government reimbursement and our expected ability to mitigate them, medical cost trends, and other market conditions.

~~As a result of the assessments described above, we have recognized the goodwill impairment charges below:~~

Three months ended
Reporting unit March 31, 2017 December 31, 2016 March 31, 2016
DMG Nevada $ —
$ —
$ 77,000
Vascular access 24,198
28,415
—
Total $ 24,198
$ 28,415
$ 77,000

~~Further~~determined that reductions in reimbursement rates, ~~increases~~changes in ~~medical cost~~actual or ~~utilization trends,~~expected growth rates, or other significant adverse changes in expected future cash flows or valuation assumptions could result in goodwill impairment charges in the future for the following reporting units, which remain at risk of goodwill impairment as of March 31, ~~2017:~~2018:

Goodwill balance
as of
March 31, 2017
Carrying
amount
coverage⁽¹⁾
Sensitivities

Operating
income⁽²⁾

Discount
rate⁽³⁾
Reporting unit
DMG Nevada $ 261,204
14.0 % (2.7 )% (3.9 )%
DMG Florida $ 447,073
10.5 % (1.6 )% (2.8 )%
DMG New Mexico $ 70,926
4.9 % (1.5 )% (2.3 )%
DMG Washington $ 245,576
2.0 % (1.7 )% (3.0 )%
Vascular Access $ 10,498
0.0 % (1.7 )% (4.9 )%



	Goodwill balance as of March 31, 2018		Carrying amount coverage⁽¹⁾	Sensitivities
Reporting unit	Goodwill balance as of March 31, 2018		Carrying amount coverage⁽¹⁾	Operating income⁽²⁾	Discount rate⁽³⁾
	(in millions)
Kidney Care Germany	$	338	13.7%	(1.6)%	(11.1)%
Kidney Care Portugal	$	48	16.9%	(1.9)%	(6.0)%
Kidney Care Poland	$	48	11.8%	(1.9)%	(6.0)%


(1)	Excess of estimated fair value of the reporting unit over its carrying amount as of the latest assessment date.


(2)	Potential impact on estimated fair value of a sustained, long-term reduction of 3% in operating income as of the latest assessment date.


(3)	Potential impact on estimated fair value of an increase in discount rates of 100 basis points as of the latest assessment ~~date.~~date.

Except as described above, none of our various other reporting units were considered at risk of significant goodwill impairment as of March 31, ~~2017.~~2018. Since the dates of our last annual goodwill impairment tests, there have been certain developments, events, changes in operating performance and other changes in key circumstances that have affected our businesses. However, ~~except as further described above,~~ these changes did not cause management to believe it is more likely than not that the fair value of any of ~~its other~~our reporting units would be less than their respective carrying ~~amount.~~amounts as of March 31, 2018.

Long-term incentive compensation

Long-term incentive program (LTIP) compensation includes both stock-based awards (principally stock-settled stock appreciation rights, restricted stock units and performance stock units) as well as long-term performance-based cash awards. Long-term incentive compensation expense, which was primarily general and administrative in nature, was attributed among our U.S. dialysis and related lab services business, ~~DMG business,~~ corporate administrative support, and ~~the other~~ ancillary services and strategic initiatives.

Our stock-based compensation awards are measured at their estimated fair values on the date of grant if settled in shares or at their estimated fair values at the end of each reporting period if settled in cash. The value of stock-based awards so measured is recognized as compensation expense on a cumulative straight-line basis over the vesting terms of the awards, adjusted for expected forfeitures.

During the three months ended March 31, ~~2017,~~2018, we granted ~~243,661~~11,490 stock-settled stock appreciation rights with an aggregate grant-date fair value of ~~$3.5~~$0.2 million and a weighted-average expected life of approximately ~~4.1~~3.7 years. We also granted ~~54,029~~60,339 stock units with an aggregate grant-date fair value of ~~$3.7~~$4 million and a weighted-average expected life of approximately ~~2.5~~1.0 years.

Long-term incentive compensation expense of ~~$17.2~~$15 million in the first quarter of ~~2017 increased by approximately $4.9 million~~2018 was flat as compared to the fourth quarter of 2016. This increase in long-term incentive compensation was primarily due to the cumulative revaluation of liability-based awards in the fourth quarter of 2016 for changes in estimated ultimate payouts that did not repeat in2017 and the first quarter of ~~2017 and expense from new awards that were granted recently.~~

Long-term incentive compensation expense decreased by approximately $7.6 million as compared to the first quarter of 2016 primarily due to the final vesting of a prior year broad grant in the first quarter of 2016 that is no longer contributing expense.2017.

As of March 31, ~~2017,~~2018, there was ~~$91.5~~$92 million in total estimated but unrecognized compensation expense for LTIP awards outstanding, including ~~$60.2~~$62 million ~~relating~~related to stock-based compensation arrangements under our equity compensation and employee stock purchase plans. We expect to recognize the performance-based cash component of these LTIP costs over a weighted average remaining period of ~~1.0 year~~1.1 years and the stock-based component of these LTIP costs over a weighted average remaining period of 1.3 years.

Stock repurchases

During the quarter ended March 31, 2018, we repurchased a total of 4,197,304 shares of our common stock for $298 million at an average price of $71.09 per share. We have also repurchased 4,350,135 shares of our common stock for $276 million at an average price of $63.44 per share, subsequent to March 31, 2018.

On October 10, 2017, our Board of Directors approved an additional share repurchase authorization in the amount of approximately $1.3 billion. This share repurchase authorization was in addition to the approximately $247 million remaining at that time under our Board of Directors' prior share repurchase authorization announced in July 2016. Accordingly, as of May 2, 2018, we have a total of approximately $545 million available under the current Board repurchase authorizations for additional share repurchases. Although these share repurchase authorizations do not have expiration dates, we remain subject to share repurchase limitations under the terms of our senior secured credit facilities and the indentures governing our senior notes.

Off-balance sheet arrangements and aggregate contractual obligations

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 nonconsolidated businesses and to dialysis centers that are wholly-owned by third parties. Substantially all of our U.S. dialysis facilities are leased. We have potential obligations to purchase the ~~noncontrolling~~equity interests held by third parties in several of our majority-owned ~~entities~~joint ventures and other nonconsolidated ~~legal~~ entities. These obligations are in the form of put provisions ~~and~~that are exercisable at the third-party owners’ discretion within specified periods as outlined in each specific put provision. If these put provisions were exercised, we would be required to purchase the third-party owners’ ~~noncontrolling~~equity interests at either the appraised fair market value or a predetermined multiple of earnings or cash ~~flow~~flows attributable to the ~~noncontrolling~~equity interests put to us, which is intended to approximate fair value. The methodology we use to estimate the fair values of noncontrolling interests subject to put provisions assumes the higher of either a liquidation value of net assets or an average multiple of earnings, based on historical earnings, patient mix and other performance indicators that can affect future results, as well as other factors. The estimated fair values of ~~the~~ noncontrolling interests subject to put provisions isare 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, which could vary significantly from our current estimates. The estimated fair values of noncontrolling interests subject to put provisions can fluctuate and the implicit multiple of earnings at which these noncontrolling ~~interest~~interests obligations may be settled ~~could~~will vary significantly depending upon market conditions including potential purchasers’ access to the 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~~equity interests. The amount of noncontrolling interests subject to put provisions that employ a contractually predetermined multiple of earnings rather than fair value are immaterial. For additional information see Note 11 to the condensed consolidated financial statements.

We also have certain other potential commitments to provide operating capital to several dialysis centers that are wholly-owned by third parties or businesses in which we maintain a noncontrolling equity interest as well as to physician-owned vascular access clinics or medical practices that we operate under management and administrative services ~~agreements of approximately $3.4 million.~~agreements.

The following is a summary of these contractual obligations and commitments as of March 31, ~~2017~~2018 (in millions):


	Remainder of 2017		1-3 years		4-5 years		After 5 years		Total		Remainder of 2018		1-3 years		4-5 years		After 5 years		Total
Scheduled payments under contractual obligations:
Long-term debt	$	115	$	918	$	4,538	$	3,297	$	8,868	$	121	$	4,520	$	1,269	$	3,312	$	9,222
Interest payments on the senior notes	156		710		473		367		1,706		156		710		401		202		1,469
Interest payments on Term Loan B⁽¹⁾	97		378		61		—		536		119		387		—		—		506
Interest payments on Term Loan A⁽²⁾	19		32		—		—		51		21		13		—		—		34
Capital lease obligations	15		65		41		176		297
Operating leases	367		1,287		636		1,156		3,446
Interest payments on Term Loan A-2⁽²⁾											10		6		—		—		16
Kidney Care capital lease obligations											16		67		46		175		304
Kidney Care operating leases											349		1,194		610		1,129		3,282
DMG capital lease obligations											36		—		—		—		36
DMG operating leases											66		215		101		248		630
	$	769	$	3,390	$	5,749	$	4,996	$	14,904	$	894	$	7,112	$	2,427	$	5,066	$	15,499
Potential cash requirements under existing commitments:
Potential cash requirements under other commitments:
Letters of credit	$	96	$	—	$	—	$	—	$	96	$	37	$	—	$	—	$	—	$	37
Noncontrolling interests subject to put provisions	564		225		84		107		980		651		202		94		88		1,035
Non-owned and minority owned put provisions	34		—		24		—		58		28		28		—		—		56
Operating capital advances	1		1		1		1		4		1		2		1		1		5
Purchase commitments											320		875		251		—		1,446
	$	695	$	226	$	109	$	108	$	1,138	$	1,037	$	1,107	$	346	$	89	$	2,579


(1)	Assuming no changes to LIBOR-based interest rates as Term Loan B currently bears interest at LIBOR plus an interest rate margin of 2.75%.


(2)	Based upon current LIBOR-based interest rates in effect at March 31, ~~2017~~2018 plus an interest rate margin of 2.00% for Term Loan A.A and plus an interest rate margin of 1.00% for Term Loan A-2.

In addition to the commitments listed above, ~~commitments,~~ we have committed to purchase a certain amount of our hemodialysis products and supplies at fixed prices through 2018 and a certain amount of our peritoneal dialysis products and supplies at fixed prices through 2022, as set forth in the contract for each year, from Baxter Healthcare Corporation (Baxter) in connection with a purchase

~~agreement.~~ agreements. We also have an agreement with Fresenius Medical Care (Fresenius), currently extended through ~~December 31, 2017,~~2020, which commits us to purchase a certain amount of dialysis equipment, parts and supplies.

Our total expenditures for the three months ended March 31, ~~2017~~2018 on such products for Fresenius was approximately 3% and for Baxter hemodialysis products and supplies was 2% of our total U.S. dialysis and related lab services operating costs. The actual amount of such purchases in future years will depend upon a number of factors, including the operating requirements of our centers, the number of centers we acquire and growth of our existing centers.

In January 2017, we entered into a six year sourcing and supply agreement with Amgen USA Inc. (Amgen) that expires on December 31, 2022. Under the terms of this agreement, we will purchase EPO in amounts necessary to meet no less than 90% of our requirements for erythropoiesis stimulating agents (ESAs). through the expiration of the contract from Amgen. The actual amount of EPO that we will purchase ~~from Amgen~~ will depend upon the amount of EPO administered during dialysis as prescribed by physicians and the overall number of patients that we serve.

Settlements of approximately ~~$31~~$34 million of existing income tax liabilities for unrecognized tax benefits, including interest, penalties and other long-term tax liabilities, are excluded from the table above ~~table~~ as reasonably reliable estimates of their timing cannot be made.

Supplemental Information Concerning Certain Physician Groups and Unrestricted Subsidiaries

The following information is presented as supplemental data as required by the indentures governing our senior notes.

We provide services to certain physician groups, ~~that,~~including those within our DMG business, which while consolidated in our financial statements for financial reporting purposes, are not subsidiaries of or owned by us, do not constitute ~~Subsidiaries~~“Subsidiaries” as defined in the indentures governing our outstanding senior notes, and ~~which~~ do not guarantee those senior notes. In addition, we have entered into management agreements with these physician groups pursuant to which we receive management fees from ~~them.~~the physician groups.

As of March 31, ~~2017,~~2018, if these physician groups were not consolidated in our financial statements, our consolidated indebtedness would have been approximately $9.165 billion excluding the debt discount associated with our Term Loan B, our consolidated other liabilities (excluding indebtedness) would have been approximately $3.653 billion, and our consolidated assets would have been approximately ~~$18.968~~$18.489 billion and our consolidated other liabilities would have been approximately $3.271 billion. IfOur consolidated indebtedness would have remained approximately $9.526 billion since almost all of these physician groups are classified as held for sale with DMG. For the quarter ended March 31, 2018, if these physician groups were not consolidated in our financial statements, ~~for the three months ended March 31, 2017,~~ our consolidated net income would have been reduced by approximately $854 thousand. Our consolidated total net revenues ~~(including approximately $186 million of management fees payable to us),~~and consolidated operating income would have remained approximately $2.849 billion and ~~consolidated net income would be reduced by approximately $338~~$410.7 million, ~~$24 million, and $4 million, respectively.~~respectively, since almost all of these physician groups are included in discontinued operations.

In addition, ~~we own~~our DMG business owns a 67% equity interest in California Medical Group Insurance (CMGI)~~. CMGI~~, which is an Unrestricted Subsidiary as defined in the indentures governing our outstanding senior notes, and does not guarantee those senior notes. ~~Our~~DMG's equity interest in CMGI is accounted for under the equity method of accounting, meaning that, although CMGI is not consolidated in our financial statements for financial reporting purposes, our consolidated income ~~statements reflect~~statement reflects our pro rata share of CMGI’s net ~~earnings as equity investment income.~~income within net loss from discontinued operations.

For the three months ended March 31, ~~2017, our equity investment income attributable to CMGI was approximately $166 thousand, and for the three months ended March 31, 2017,~~2018, excluding ~~our~~DMG's equity investment income attributable to CMGI, our consolidated ~~operating income and consolidated~~ net income would ~~decrease~~be lower by approximately ~~$166 thousand and $100 thousand, respectively.~~$490 thousand. See Note ~~21, Supplemental Data,~~23 to the ~~condensed~~ consolidated financial statements for further details.

New Accounting Standards

See discussion of new accounting standards in Note 1921 to the condensed consolidated financial statements included in Part I, Item 1 of this report.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest rate sensitivity

The tables below provide information about our financial instruments that are sensitive to changes in interest rates. The table below presents principal repayments and current weighted average interest rates on our debt obligations as of March 31, ~~2017.~~2018. The variable rates presented reflect the weighted average LIBOR rates in effect for all debt tranches plus interest rate margins in effect as of March 31, ~~2017.~~2018. Term Loan A currently bears interest at LIBOR plus an interest rate margin of 2.00%. Term Loan A and the revolving line of credit are subject to adjustment depending upon changes in certain of our financial ratios, including a leverage ratio. Term Loan A-2 currently bears interest at LIBOR plus an interest rate margin of 1.00%. Term Loan B currently bears interest at LIBOR plus an interest rate margin of 2.75%.


																	Average																				Average interest rate
	Expected maturity date																interest		Fair		Expected maturity date																		Fair Value
	2017		2018		2019		2020		2021		2022		Thereafter		Total		rate		value		2018		2019		2020		2021		2022		2023		Thereafter		Total				Fair Value
	(dollars in millions)																				(dollars in millions)
Long term debt:
Fixed rate	$	31	$	25	$	25	$	26	$	21	$	1,272	$	3,470	$	4,870	5.26	%	$	4,939	$	30	$	32	$	28	$	26	$	1,275	$	26	$	3,485	$	4,902	51.34	%		$	4,835
Variable rate	$	99	$	143	$	720	$	44	$	3,280	$	6	$	3	$	4,295	3.95	%	$	4,348	$	107	$	1,175	$	45	$	3,281	$	8	$	6	$	2	$	4,624	48.66	%		$	4,670

Notional Contract maturity date Fair
amount 2017 2018 2019 2020 2021 Pay fixed Receive variable value
(dollars in millions)
Cap agreements $ 7,000
$ —
$ 3,500
$ —
$ 3,500
$ —
LIBOR above 3.5% $ 5



	Notional Amount		Contract maturity date											Fair Value
	Notional Amount		2018		2019		2020		2021		2022		Receive variable	Fair Value
	(dollars in millions)
Cap agreements	$	7,000	$	3,500	$	—	$	3,500	$	—	$	—	LIBOR above 3.5%	$	2

On March 29, 2018, we entered into an Increase Joinder Agreement under our senior secured credit facilities. Pursuant to this Increase Joinder Agreement, we entered into an additional $995 million Term Loan A-2. The new Term Loan A-2 bears interest at LIBOR plus an interest rate margin of 1.00%. As of March 31, 2018, we have initially drawn $452 million of the Term Loan A-2, and we can draw up to an incremental $543 million on Term Loan A-2 through its maturity date in June 2019.

Our senior secured credit facilities, which include Term Loan A, Term Loan A-2, and Term Loan B, consist of various individual tranches of debt that can range in maturity from one month to twelve months (currently, all tranches are one month in duration). For Term Loan A, Term Loan A-2, and Term Loan B, each tranche bears interest at a LIBOR rate that is determined by the duration of such tranche plus an interest rate margin. The LIBOR variable component of the interest rate for each tranche is reset as such tranche matures and a new tranche is established. LIBOR can fluctuate significantly depending upon conditions in the credit and capital markets.

As of March 31, ~~2017,~~2018, our Term Loan A bears interest at LIBOR plus an interest rate margin of 2.00%, our Term Loan A-2 bears interest at LIBOR plus an interest rate margin of 1.00%, and our Term Loan B debt bears interest at LIBOR plus an interest rate margin of 2.75%. LIBOR was ~~greater~~higher than the 0.75% embedded LIBOR floor on Term Loan B, resulting in Term Loan B being subject to LIBOR-based interest rate volatility on the LIBOR variable component of our interest rate as of March 31, ~~2017.~~2018. The ~~LIBOR based~~LIBOR-based interest component is limited to a maximum LIBOR rate of 3.50% on the outstanding principal debt on Term Loan B and ~~$96.3~~$131.3 million on Term Loan A as a result of the interest rate cap agreements, as described below.

Our weighted average effective interest rate on the senior secured credit facilities at the end of the quarter was ~~3.95%~~4.67%, based on the current margins in effect of 2.00% for Term Loan A, 1.00% for Term Loan A-2 and 2.75% for Term Loan B, as of March 31, ~~2017.~~

2018.

As of March 31, ~~2017,~~2018, our Term Loan B debt bears interest at LIBOR plus an interest rate margin of 2.75%. Term Loan B is also subject to interest rate caps if LIBOR should rise above 3.50%. Term Loan A bears interest at LIBOR plus an interest rate margin of 2.00%~~. The capped portion of~~ and Term Loan ~~A is $96.3 million. In addition, the uncapped portion~~A-2 bears interest at LIBOR plus an interest rate margin of ~~Term Loan A, which is subject to the variability of LIBOR, is $747.5 million. Interest rates on our senior notes are fixed by their terms.~~1.00%.

Our overall weighted average effective interest rate during the three months ended March 31, ~~2017~~2018 was ~~4.55%~~4.87% and as of March 31, ~~2017~~2018 was ~~4.64%~~4.98%.

As of March 31, ~~2017,~~2018, we had undrawn revolving credit facilities totaling $1.0 billion, of which approximately ~~$94.6~~$14.4 million was committed for outstanding letters of credit. The remaining amount is unencumbered. ~~In addition, we~~We also have approximately ~~$1.3~~$22.4 million of additional outstanding letters of credit related to our Kidney Care business and $0.2 million of committed outstanding letters of credit ~~outstanding~~ related to our DMG business, which is backed by a certificate of deposit.

Exchange rate sensitivity

While our business is predominantly conducted in the U.S. we have developing operations in 11ten other countries as well. For consolidated financial reporting purposes, the U.S. dollar is our reporting currency. However, the functional currencies of our operating businesses in other countries are typically those of the countries in which they operate. Therefore, changes in the rate of exchange between the U.S. dollar and the local currencies in which our international operations are conducted affect our results of operations and financial position as reported in our consolidated financial statements.

We have consolidated the balance sheets of our non-U.S. dollar denominated operations into U.S. dollars at the exchange rates prevailing at the balance sheet date and have translated their revenues and expense at the average exchange rates for the period. Additionally, our individual subsidiaries are exposed to transactional risks mainly resulting from intercompany transactions between and among subsidiaries with different functional currencies. This exposes the subsidiaries to fluctuations in the rate of exchange between the invoicing or obligation currencies and the currency in which their local operations are conducted.

Item 4. Controls and Procedures

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. 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.

Beginning January 1, 2018, we adopted FASB Accounting Standards Codification Topic 606, Revenue from Contracts with Customers. Although the new standard is expected to have an immaterial impact on our ongoing net income, we did implement new business processes and related control activities in order to maintain appropriate controls over financial reporting. There ~~has not been any~~was no other change in ~~the Company’s~~our internal control over financial reporting that was identified during the evaluation that occurred during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II.

OTHER INFORMATION

Item 1. Legal Proceedings

We operate in a highly regulated industry and are a party to various lawsuits, claims, governmental investigations and audits (including investigations resulting from our obligation to self-report suspected violations of law) and other legal proceedings. We record accruals for certain legal proceedings and regulatory mattersThe information required by this Part II, Item 1 is incorporated herein by reference to the ~~extent that we determine an unfavorable outcome is probable and~~information set forth under the amount of the loss can be reasonably estimated. As of December 31, 2016 and March 31, 2017, our total recorded accruals with respect to legal proceedings and regulatory matters, net of anticipated third party recoveries, were approximately $69 million for both periods. While these accruals reflect our best estimate of the probable loss for those matters as the dates of those accruals, the recorded amounts may differ materially from the actual amount of the losses for those matters, and any anticipated third party recoveries for any such losses may not ultimately be recoverable.

~~Additionally,~~caption “Contingencies” in some cases, no estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made because of the inherently unpredictable nature of legal proceedings and regulatory matters, which may be exacerbated by various factors, including that they may involve indeterminate claims for monetary damages or may involve fines, penalties or non-monetary remedies; present novel legal theories or legal uncertainties; involve disputed facts; represent a shift in regulatory policy; are in the early stages of the proceedings; or result in a change of business practices. Further, there may be various levels of judicial review available to us in connection with any such proceeding.

~~The following is a description of certain lawsuits, claims, governmental investigations and audits and other legal proceedings to which we are subject.~~

~~Inquiries by the Federal Government and Certain Related Civil Proceedings~~

~~Swoben Private Civil Suit~~: In April 2013, HealthCare Partners (HCP), now known as our DMG subsidiary, was one of several defendants served with a civil complaint filed by a former employee of SCAN Health Plan (SCAN), an HMO. On July 13, 2009, pursuantNote 10 to the ~~qui tam~~ ~~provisions of the federal FCA and the California False Claims Act, James M. Swoben, as relator, filed his initial~~ ~~qui tam~~ action in the United States District Court for the Central District of California purportedly on behalf of the United States of America and the State of California against SCAN, and certain other defendants whose identities were under seal. The allegations in the complaint relate to alleged overpayments received from government healthcare programs. In 2009 and 2010, the relator twice amended his complaint and added additional defendants, and in November 2011, he filed his Third Amended Complaint under seal alleging violations of the federal FCA and the California False Claims Act, and added additional defendants, including HCP and certain health insurance companies (the defendant HMOs). The allegations in the complaint against HCP relate to patient diagnosis coding to determine reimbursement in the Medicare Advantage (MA) program, referred to as HCC and RAF scores. The complaint sought monetary damages and civil penalties as well as costs and expenses. The U.S. Department of Justice (DOJ) reviewed these allegations and in January 2013 declined to intervene in the case. HCP and the other defendants filed motions to dismiss the Third Amended Complaint, and the court dismissed with prejudice the claims and judgment was entered in September 2013. Upon the plaintiff’s appeal, a panel of the Ninth Circuit overturned the trial court’s ruling and vacated the dismissal of the case. Together with certain defendants, we petitioned the Ninth Circuit for a rehearing, but in December 2016, the Ninth Circuit rejected the petition and determined the relator should be given an opportunity to amend the complaint, and remanded the case back to district court. In March 2017, the relator filed his Fourth Amended Complaint alleging that HCP and certain health insurance companies employed one-way retrospective reviews that were designed only to identify additional diagnoses that would be submitted to CMS for risk adjustment purposes, and thereby drive higher risk scores that would increase the capitated payments made by the federal government under the MA program. We dispute the allegations and intend to defend accordingly.

~~2015 U.S. Attorney Transportation Investigation~~: In February 2015, we announced that we received six administrative subpoenas from the OIG for medical records from six different dialysis centers in southern California operated by us. Specifically, each subpoena sought the medical records of a single patient of each respective dialysis center. In February 2016, we received four additional subpoenas for four additional dialysis centers in southern California. The subpoenas were similarly limited in scope to the subpoenas received in 2015. On February 8, 2017, we were served with a ~~qui tam~~ complaint in the U.S. District Court for the Central District of California. We have been advised by an attorney with the United States Attorney’s Office for the Central District of California that the ~~qui tam~~ is related to the investigation concerning the medical necessity of patient transportation, which was the basis for the subpoenas. The relator alleged that an ambulance company submitted false claims for patient transportation. Although we do not provide transportation ourselves nor do we bill for the transport of our

dialysis patients, the relator alleged that two of our purported clinical staff caused the submission of a small number of those claims through improper certifications of medical necessity. The DOJ has declined to intervene. In April 2017, the court granted our motion to dismiss the complaint without prejudice for failing to state a claim upon which relief can be granted.

~~2015 U.S. Office of Inspector General (OIG) Medicare Advantage Civil Investigation~~: In March 2015, JSA HealthCare Corporation (JSA), a subsidiary of DMG, received a subpoena from the Office of Inspector General (OIG) for the U.S. Department of Health and Human Services (HHS). We have been advised by an attorney with the Civil Division of the DOJ in Washington, D.C. that the subpoena relates to an ongoing civil investigation concerning MA service providers’ risk adjustment practices and data, including identification and verification of patient diagnoses and factors used in making the diagnoses. The subpoena requests documents and information for the period from January 1, 2008 through December 31, 2013, for certain MA plans for which JSA provided services. It also requests information regarding JSA’s communications about patient diagnoses as they relate to certain MA plans generally, and more specifically as related to two Florida physicians with whom JSA previously contracted. We are producing the requested information and are cooperating with the government’s investigation.

In addition to the subpoena described above, in June 2015, we received a subpoena from the OIG. This civil subpoena covers the period from January 1, 2008 through the present and seeks production of a wide range of documents relating to our and our subsidiaries’ (including DMG’s and its subsidiary JSA’s) provision of services to MA plans and related patient diagnosis coding and risk adjustment submissions and payments. We believe that the request is part of a broader industry investigation into MA patient diagnosis coding and risk adjustment practices and potential overpayments by the government. The information requested includes information relating to patient diagnosis coding practices for a number of conditions, including potentially improper historical DMG coding for a particular condition. With respect to that condition, the guidance related to that coding issue was discontinued following our November 1, 2012 acquisition of DMG, and we notified CMS in April 2015 of the coding practice and potential overpayments. In that regard, we have identified certain additional coding practices which may have been problematic and are in discussions with the DOJ about the scope and nature of a review of claims relating to those practices. We are cooperating with the government and are producing the requested information. In addition, we are continuing to review other DMG coding practices to determine whether there were any improper coding issues. In connection with the DMG merger, we have certain indemnification rights against the sellers and an escrow was established as security for the indemnification. We have submitted an indemnification claim against the sellers secured by the escrow for any and all liabilities incurred relating to these matters and intend to pursue recovery from the escrow. However, we can make no assurances that the indemnification and escrow will cover the full amount of our potential losses related to these matters.

~~2015 U.S. Department of Justice Vascular Access Investigation and Related~~ ~~Qui Tam~~ ~~Litigation~~: In November 2015, we announced that RMS Lifeline, Inc., a wholly-owned subsidiary of ours that operates under the name Lifeline Vascular Access (Lifeline), received a Civil Investigative Demand (CID) from the DOJ. The CID relates to two vascular access centers in Florida that are part of Lifeline’s vascular access business. The CID covers the period from January 1, 2008 through the present. We acquired these two centers in December 2012. Based on the language of the CID, the DOJ appeared to be looking at whether angiograms performed at the two centers were medically unnecessary and therefore whether related claims filed with federal healthcare programs possibly violated the FCA. Lifeline does not perform dialysis services but instead provides vascular access management services for dialysis patients. We cooperated with the government and produced the requested information. The DOJ investigation was initiated pursuant to a complaint brought under the ~~qui tam~~ provisions of the FCA (the Complaint). The Complaint was originally filed under seal in August 2014 in the U.S. District Court, Middle District of Florida, United States ex. rel James Spafford v. DaVita HealthCare Partners, Inc., et al., Case Number 6:14-cv-1251-Orl-41DAB, naming several doctors with us as defendants. In December 2015, a First Amended Complaint was filed under seal. In May 2016, the First Amended Complaint was unsealed. The First Amended Complaint alleges violations of the FCA due to the submission of claims to the government for allegedly medically unnecessary angiograms and angiography procedures at the two vascular access centers as well as employment-related claims. The Complaint covers alleged conduct dating from July 2008, prior to our acquisition of the centers, to the present. The DOJ declined to intervene. In January 2017, we finalized and executed a settlement agreement with the relator and the government for an immaterial amount, and in April 2017, the court dismissed the case with prejudice.

~~2016 U.S. Attorney Prescription Drug Investigation~~: In early February 2016, we announced that our pharmacy services’ wholly-owned subsidiary, DaVita Rx, received a CID from the U.S. Attorney’s Office for the Northern District of Texas. It appears the government is conducting an FCA investigation concerning allegations that DaVita Rx presented or caused to be presented false claims for payment to the government for prescription medications, as well as into our relationship with pharmaceutical manufacturers. The CID covers the period from January 1, 2006 through the present. In the spring of 2015, we initiated an internal compliance review of DaVita Rx during which we identified potential billing and operational issues, including potential write-offs and discounts of patient co-payment obligations, and credits to payors for returns of prescription drugs related to DaVita Rx. We notified the government in September 2015 that we were conducting this review of DaVita Rx and began providing regular updates of our review. Upon completion of our review, we filed a self-disclosure with the OIG in

early February 2016 and we have been working to address and update the practices we identified in the self-disclosure, some of which overlap with information requested by the U.S. Attorney’s Office. We do not know if the U.S. Attorney’s Office, which is part of the DOJ, knew when it served the CID on us that we were already in the process of developing a self-disclosure to the OIG. The OIG informed us in February 2016 that our submission was not accepted. They indicated that the OIG is not expressing an opinion regarding the conduct disclosed or our legal positions. We are cooperating with the government and are producing the requested information.

~~2017 U.S. Attorney American Kidney Fund Investigation~~. On January 4, 2017, we were served with an administrative subpoena for records by the United States Attorney’s Office, District of Massachusetts, relating to an investigation into possible federal health care offenses. The subpoena covers the period from January 1, 2007 through the present, and seeks documents relevant to charitable patient assistance organizations, particularly the American Kidney Fund, including documents related to efforts to provide patients with information concerning the availability of charitable assistance. We are cooperating with the government and are producing the requested information.

Although we cannot predict whether or when proceedings might be initiated or when these matters may be resolved (other than as described above), it is not unusual for inquiries such as these to continue for a considerable period of time through the various phases of document and witness requests and on-going discussions with regulators. In addition to the inquiries and proceedings specifically identified above, we are frequently subject to other inquiries by state or federal government agencies and/or private civil ~~qui tam~~ complaints filed by relators. Negative findings or terms and conditions that we might agree to accept as part of a negotiated resolution of pending or future government inquiries or relator proceedings could result in, among other things, substantialcondensed consolidated financial penalties or awards against us, substantial payments made by us, harm to our reputation, required changes to our business practices, exclusion from future participation in the Medicare, Medicaid and other federal health care programs and, if criminal proceedings were initiated against us, possible criminal penalties, any of which could have a material adverse effect on us.

~~Shareholder Claims~~

~~Peace Officers’ Annuity and Benefit Fund of Georgia Securities Class Action Civil Suit~~: On February 1, 2017, the Peace Officers’ Annuity and Benefit Fund of Georgia filed a putative federal securities class action complaint in the U.S. District Court for the District of Colorado against us and certain executives. The complaint covers the time period of August 2015 to October 2016 and alleges, generally, that we and our executives violatedfederal securities laws concerning our financial results and revenue derived from patients who received charitable premium assistance from an industry-funded non-profit organization. The complaint further alleges that the process by which patients obtained commercial insurance and received charitable premium assistance was improper and “created a false impression of DaVita’s business and operational status and future growth prospects.” We dispute these allegations and intend to defend this action accordingly.

~~Blackburn Shareholder Derivative Civil Suit~~: On February 10, 2017, Charles Blackburn filed a derivative shareholder lawsuit in the U.S. District Court for the District of Delaware against us, as nominal defendant, the Board of Directors and certain executives. The complaint covers the time period from 2015 to present and alleges, generally, breach of fiduciary duty, unjust enrichment and misrepresentations and/or failures to disclose certain information in violation of the federal securities laws in our 2016 proxy statement in connection with an alleged practice to direct patients with government-subsidized health insurance into private health insurance plans to maximize our profits. We dispute these allegations and intend to defend this action accordingly. On April 4, 2017, the court stayed this proceeding until the resolution of the Peace Officers’ Annuity and Benefit Fund of Georgia Securities Class Action Civil Suit, whether by dismissal with prejudice or entry of final judgment.

~~Other Proceedings~~

In addition to the foregoing, from time to time we are subject to other lawsuits, claims, governmental investigations and audits and legal proceedings that arise due to the nature of our business, including contractual disputes, such as with payors, suppliers and others, employee-related matters and professional and general liability claims.

From time to time, we initiate litigation or other legal proceedings as a plaintiff arising out of contracts or other matters. In that regard, we had a pending lawsuit in the U.S. Court of Federal Claims against the federal government which was originally filed in May 2011. The lawsuit related to the U.S. Department of Veterans Affairs (VA) underpayment of dialysis services that we provided from 2005 through 2011 to veterans pursuant to VA regulations. In the first quarter of 2017, we received a payment of $538 million related to the settlement with the VA. Our consolidated entities recognized a net gain of $527 million on this settlement. Our nonconsolidated and managed entities recognized a gain of $9 million, of which our equity investment share was $3 million. The net effect was a net increase of $530 million to our operating income.

~~* * *~~

Other than as described above, we cannot predict the ultimate outcomes of the various legal proceedings and regulatory matters to which we are or may be subject from time to time, including those describedstatements included in this “Item 1. Legal Proceedings,” in Part II of this report or the timing of their resolution or the ultimate losses or impact of developments in those matters, which could have a material adverse effect on our revenues, earnings and cash flows. Further, any legal proceedings or regulatory matters we are involved in, whether meritorious or not, are time consuming, and often require management’s attention and result in significant legal expense, and may result in the diversion of significant operational resources, or otherwise harm our business, financial results or reputation.report.

Item 1A. Risk Factors

An updated 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 previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2017. The risks and uncertainties discussed below are not the only ones facing our business. Please read the cautionary notice regarding forward-looking statements in Item 2 of Part 1I of this Quarterly Report on Form 10-Q under the heading ~~“Management’s~~"Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations”.~~Operations."

Risk factors related to our overall business:

If we fail to adhere to all of the complex government laws and regulations that apply to our business, we could suffer severe consequences that could have a material adverse effect on our business, results of operations, financial condition and stock price.

Our operations are subject to extensive federal, state and local government laws and regulations, ~~including~~such as Medicare and Medicaid payment rules and regulations, federal and state anti-kickback laws, the Stark Law and analogous state self-referral prohibition statutes, the 21^st Century Cures Act, Federal Acquisition Regulations, the False Claims Act (FCA), the Civil Monetary Penalty statute, the Foreign Corrupt Practices Act (FCPA) and federal and state laws regarding the collection, use and disclosure of patient health information (e.g., Health Insurance Portability and Accountability Act of 1996 (HIPAA)) and the storage, handling, shipment, disposal and/or dispensing of pharmaceuticals and ~~administration of pharmaceuticals.~~blood products and other biological materials. The Medicare and Medicaid reimbursement rules impose complex and extensive requirements upon ~~dialysis~~healthcare providers as well. Moreover, the various laws and regulations that apply to our operations are often subject to varying interpretations and additional laws and regulations potentially affecting providers continue to be ~~promulgated. For example, on December 13, 2016, the 21~~^st ~~Century Cures Act was signed into law and, among other provisions, authorizes the Office of Inspector General (OIG) to impose penalties on providers~~promulgated that engage in information blocking where there is knowledge that such practice is unreasonable and likely to interfere with, prevent, or materially discourage access, exchange, or use of electronic health information.may impact us. A violation or departure from any of these legal requirements may result in government audits, lower reimbursements, significant fines and penalties, the potential loss of certification, recoupment efforts or voluntary ~~repayments.~~repayments, among other things.

We endeavor to comply with all legal requirements; however, there is no guarantee that we will be able to adhere to all of the complex government regulations that apply to our business. We further endeavor to structure all of our relationships with physicians and providers to comply with state and federal anti-kickback and physician self-referral laws. We utilize considerable resources to monitor ~~the~~ laws and regulations and implement necessary changes. However, the laws and regulations in these areas are complex, changing and often subject to varying interpretations. For example, if an enforcement agency were to challenge the level of compensation that we pay our medical directors or the number of medical directors whom we engage, we could be required to change our practices, face criminal or civil penalties, pay substantial fines or otherwise experience a material adverse effect on our business, results of operations and financial condition as a result of a challenge to these arrangements.

In addition, failure to report and return overpayments within 60 days of when the overpayment ~~was~~is identified and quantified can lead to a violation of the FCA and associated penalties, as described in further detail below, and exclusion and penalties under the federal Civil Monetary Penalty statute, including civil monetary penalties of up to ~~$10,000~~$20,000 (adjusted for inflation) for each item or service for which a person received an identified overpayment and failed to report and return such overpayment. These obligations to report and return overpayments could subject our procedures for identifying and processing overpayments to greater scrutiny. We have made ~~significant~~ investments in resources to decrease the time it takes to identify, quantify and process overpayments, and we may be required to make additional investments in the future. From time to time we may conduct internal compliance reviews, the results of which may involve the identification of overpayments or other liabilities. In that regard, in the spring of 2015, we initiated an internal compliance review of our pharmacy business during which we identified potential billing and operational issues, including potential write-offs and discounts of patient co-payment obligations, and credits to payors for returns of prescriptions drugs, related to our pharmacy business. We have disclosed the results of this ongoing review to the government. An acceleration in our ability to identify and process overpayments could result in us refunding overpayments to government and other payors more rapidly than we have in the past which could have a material adverse effect on our operating cash flows. Overpayments subject us to refunds and related damages and potential liabilities.

Additionally, the federal government has used the FCA to prosecute a wide variety of alleged false claims and fraud allegedly perpetrated against Medicare, Medicaid and ~~state~~other federally funded health care programs. Moreover, amendments to

the federal Anti-Kickback Statute in the ~~health reform law~~2010 Affordable Care Act (ACA) make claims tainted by anti-kickback violations potentially subject to liability under the FCA, including qui tam or whistleblower suits. The penalties for a violation of the FCA range from $5,500 to $11,000 (adjusted for inflation) for each false claim plus three times the amount of damages caused by each such claim which generally means the amount received directly or indirectly from the government. On ~~February 3, 2017,~~January 29, 2018, the Department of Justice (DOJ) issued a

final rule announcing adjustments to FCA penalties, under which the per claim penalty range increases to ~~$10,957~~a range from $11,181 to ~~$21,916~~$22,363 for penalties assessed after ~~February 3, 2017,~~January 29, 2018, so long as the underlying conduct occurred after November 2, 2015. Given the high volume of claims processed by our various operating units, the potential is high for substantial penalties in connection with any alleged FCA violations.

In addition to the provisions of the FCA, which provide for civil enforcement, the federal government can use several criminal statutes to prosecute persons who are alleged to have submitted false or fraudulent claims for payment to the federal government.

~~The~~Certain civil investigative ~~demand~~demands received by us or our ~~wholly-owned pharmacy services subsidiary, DaVita Rx, LLC,~~subsidiaries specifically ~~references~~reference that ~~it is~~they are in connection with an FCA ~~investigation concerning allegations~~investigations alleging, among other things, that ~~this subsidiary~~we or our subsidiaries presented or caused to be presented false claims for payment to the ~~government for prescription medications, as well as into our relationship with pharmaceutical manufacturers.~~government. See ~~“Item 1. Legal Proceedings” in Part II of this report and~~ Note 10 to the condensed consolidated financial statements included in this report for further details.

We are subject to a Corporate Integrity Agreement (CIA) which, for our domestic dialysis business, requires us to report probable violations of criminal, civil or administrative laws applicable to any federal health care program for which penalties or exclusions may be authorized under applicable healthcare laws and regulations. See ~~“If~~"If we fail to comply with our Corporate Integrity Agreement, we could be subject to substantial penalties and exclusion from participation in federal healthcare programs that could have a material adverse effect on our business, results of operations and financial condition."

If any of our operations are found to violate these or other government laws or regulations, we could suffer severe consequences that would have a material adverse effect on our business, results of operations, financial condition and stock price, including:

Suspension or termination of our participation in government payment programs;

Refunds of amounts received in violation of law or applicable payment program requirements;

Loss of required government certifications or exclusion from government payment programs;

Loss of licenses required to operate healthcare facilities or administer pharmaceuticals in some of the states in which we operate;

Reductions in payment rates or coverage for dialysis and ancillary services and related pharmaceuticals;

Criminal or civil liability, fines, damages or monetary penalties for violations of healthcare fraud and abuse laws, including the federal Anti-Kickback Statute, Stark Law violations, FCA or other failures to meet regulatory requirements;

Enforcement actions by governmental agencies and/or state claims for monetary damages by patients who believe their protected health information (PHI) has been used, disclosed or not properly safeguarded in violation of federal or state patient privacy laws, including HIPAA and the Privacy Act of 1974;

Mandated changes to our practices or procedures that significantly increase operating expenses;

Imposition of and compliance with corporate integrity agreements that could subject us to ongoing audits and reporting requirements as well as increased scrutiny of our billing and business practices which could lead to potential fines;

Termination of various relationships and/or contracts related to our business, including joint venture arrangements, medical director agreements, real estate leases and consulting agreements with ~~medical directors;~~physicians; and

Harm to our reputation which could impact our business relationships, affect our ability to obtain financing and decrease access to new business opportunities, among other things.

We are, and may in the future be, a party to various lawsuits, demands, claims,qui tam suits, governmental investigations and audits (including investigations or other actions resulting from our obligation to self-report suspected violations of law) and other legal ~~proceedings,~~matters, any of which could result in, among other things, substantial financial penalties or awards against us, substantial payments made by us, ~~harm to our reputation,~~ required changes to our business practices, exclusion from future participation in the Medicare, Medicaid and other federal healthcare programs and possible criminal penalties, any of which could have a material adverse effect on our business, results of operations and financial ~~condition.~~condition and materially harm our reputation.

We are the subject of a number of investigations and audits by the federal government. We have received subpoenas or other requests for documents from the federal government in connection with the Swoben private civil suit, the 2015 U.S. Attorney Transportation Investigation, the investigations underlying the two subpoenas regarding patient diagnosis coding

~~received by DMG and its JSA subsidiary, the 2016 U.S. Attorney Prescription Drug Investigation and the 2017 U.S. Attorney American Kidney Fund Investigation.~~governmental agencies. In addition, ~~to the foregoing inquiries and proceedings,~~ we are, ~~frequently~~and may in the future be, subject to other investigations and audits by state or federal ~~government~~governmental agencies and/or private civil qui tam complaints filed by relators and other lawsuits, demands, claims and legal ~~proceedings.~~proceedings, including investigations or other actions resulting from our obligation to self-report suspected violations of law.

Responding to subpoenas, investigations and other lawsuits, claims and legal proceedings as well as defending ourselves in such matters will continue to require management’s attention and cause us to incur significant legal expense. Negative findings or terms and conditions that we might agree to accept as part of a negotiated resolution of pending or future ~~government inquiries~~legal or ~~relator proceedings~~regulatory matters could result in, among other things, substantial financial penalties or awards against us, substantial payments made by us, harm to our reputation, required changes to our business practices, exclusion from future participation in the Medicare, Medicaid and other federal healthcare programs and, in certain cases, criminal penalties, any of which could have a material adverse effect on us. It is possible that criminal proceedings may be initiated against us and/or individuals in our business in connection with investigations by the federal government. ~~To our knowledge, no such proceedings have been initiated by the federal government against us at this time.~~ Other than as described in ~~“Item 1. Legal Proceedings” in Part II of this report and~~ Note 10 to the condensed consolidated financial statements included in this report, we cannot predict the ultimate outcomes of the various legal proceedings and regulatory matters to which we are or may be subject from time to time, including those described in the aforementioned sections of this report, or the timing of their resolution or the ultimate losses or impact of developments in those matters, which could have a material adverse effect on our business results of operations and financial condition. See ~~“Item 1. Legal Proceedings” in Part II of this report and~~ Note 10 to the condensed consolidated financial statements included in this report for further details regarding these and other matters.

Disruptions in federal government operations and funding create uncertainty in our industry and could have a material adverse effect on our business, results of operations and financial condition.

A substantial portion of our revenues is dependent on federal healthcare program reimbursement, and any disruptions in federal government operations could have a material adverse effect on our business, results of operations and financial condition. If the U.S. government defaults on its debt, there could be broad macroeconomic effects that could raise our cost of borrowing funds, and delay or prevent our future growth and expansion. Any future federal government shutdown, U.S. government default on its debt and/or failure of the U.S. government to enact annual appropriations could have a material adverse effect on our business, results of operations and financial condition. Additionally, disruptions in federal government operations may negatively impact regulatory approvals and guidance that are important to our operations, and create uncertainty about the pace of upcoming healthcare regulatory developments.

Healthcare reform could have a material adverse effect on our business, financial condition and results of operations.

We cannot predict how employers, private payors or persons buying insurance might react to the changes brought on by federal and state healthcare reform legislation, including the ACA and any subsequent legislation, or what form many of these regulations will take before implementation.

The ~~federal healthcare reform legislation, enacted in 2010,~~ACA introduced healthcare insurance exchanges, which provide a marketplace for eligible individuals and small employers to purchase healthcare insurance. The business and regulatory environment continues to evolve as the exchanges mature, and statutes and regulations are challenged, changed and enforced. If commercial payor participation in the exchanges continues to decrease, it could have a material adverse effect on our business, results of operations and financial condition. Although we cannot predict the short- or long-term effects of ~~these factors,~~legislative or regulatory changes, we believe ~~the healthcare insurance exchanges~~that future market changes could result in ~~a reduction in ESRD patients covered by traditional commercial insurance policies and an increase in the number of patients covered through the exchanges under~~ more restrictive commercial plans with lower reimbursement rates or higher deductibles and co-payments that patients may not be able to pay. To the extent that ~~the ongoing implementation~~changes in statutes or regulations, or enforcement of ~~such~~statutes or regulations regarding the exchanges, or changes in ~~regulations or enforcement of regulations regarding the exchanges results~~other market conditions result in a reduction in reimbursement rates for our services from commercial and/or government payors, it could have a material adverse effect on our business, results of operations and financial condition.

The ~~2010 healthcare reform legislation~~ACA also added several new tax provisions that, among other things, impose various fees and excise taxes, and limit compensation deductions for health insurance providers and their affiliates. These rules could negatively impact our cash flow and tax liabilities. In addition, the ~~2010 healthcare reform legislation~~ACA broadened the potential for penalties under the FCA for the knowing and improper

retention of overpayments collected from government payors and reduced the timeline to file Medicare claims. As a result, we made significant investments in new resources to accelerate the time it takes us to identify, quantify and process overpayments and we deployed significant resources to reduce our timeline and improve our claims processing methods to ensure that our Medicare claims are filed in a timely fashion. However, we may be required to make additional investments in the future. Failure to timely identify, quantify and return overpayments may result in significant penalties, which could have a material adverse effect on our business, results of operations and financial condition. Failure to file a

claim within the one year window could result in payment denials, adversely affecting our business, results of operations and financial condition.

With the ~~2010 healthcare reform legislation,~~ACA, new models of care emerge and evolve and other initiatives in the government or private sector may arise, which could adversely impact our business. For example, the ~~CMS~~Centers for Medicare and Medicaid Services (CMS) Innovation Center (Innovation Center) is currently working with various healthcare providers to develop, refine and implement Accountable Care Organizations (ACOs) and other innovative models of care for Medicare and Medicaid beneficiaries, including Bundled Payments for Care Improvement Initiative, ~~CEC~~Comprehensive ESRD Care Model (CEC Model) (which includes the development of ~~ESRD~~end stage renal disease (ESRD) Seamless Care Organizations), ~~the Comprehensive Primary Care Initiative,~~ the Duals Demonstration, and other models. We are currently participating in the CEC Model with the Innovation Center, including with organizations in Arizona, Florida, and adjacent markets in New Jersey and Pennsylvania. Our U.S. dialysis business may choose to participate in additional models either as a partner with other providers or independently. Even in areas where we are not directly participating in these or other Innovation Center models, some of our patients may be assigned to an ACO, another ESRD Care Model, or another program, in which case the quality and cost of care that we furnish will be included in an ACO’s, another ESRD Care Model’s, or other program’s calculations. Additionally, CMS instituted new screening procedures, as required by the ~~2010 federal healthcare reform legislation,~~ACA, which we expect will delay the Medicare contractor approval process, potentially causing a delay in reimbursement. We anticipate the new screening and enrollment requirements will require additional personnel and financial resources and will potentially delay the enrollment and revalidation of our centers which in turn will delay payment. These delays could adversely affect our business, results of operations and financial condition. The Bipartisan Budget Act of 2018 (BBA) revised the manner in which beneficiaries are assigned to an ACO, specifically giving ACOs the choice to have beneficiaries assigned prospectively at the beginning of a performance year and giving beneficiaries the option to voluntarily align to the ACO in which the beneficiary’s main primary care provider participates. While prospective assignment may allow ACOs to identify beneficiaries for whom they will be held accountable and proactively take steps to ensure appropriate care, the ultimate impact of such changes on our business, results of operations and financial condition is not yet known.

Other ACA reform measures allow CMS to place a moratorium on new enrollment of providers and to suspend payment to providers upon a credible allegation of fraud from any source. These types of reform measures, as well as other measures, could adversely affect our business, results of operations, and financial condition, depending ~~upon~~on the scope and breadth of the implementing regulations.

There is also a considerable amount of uncertainty as to the prospective implementation of the ~~2010 federal healthcare reform legislation~~ACA and what similar measures or other changes might be enacted at the federal and/or state level. There have been multiple attempts through legislative action and legal challenges to repeal or amend the ~~Affordable Care Act (ACA).~~ACA. In addition, the 2016 Presidential and Congressional elections and subsequent developments in 2017 and 2018 have caused the future state of the exchanges and other ACA reforms to be unclear. For example, in October 2017, the federal government announced that cost-sharing reduction payments to insurers would end, effective immediately, unless Congress appropriated the funds, and, in December 2017, Congress passed the Tax Cuts and Jobs Act, which includes a provision that eliminates the penalty under the ACA’s individual mandate effective January 1, 2019 and could impact the future state of the exchanges. Further, in February 2018, Congress passed the BBA which, among other things, repealed the Independent Payment Advisory Board that was established by the ACA and intended to reduce the rate of growth in Medicare spending. While ~~it does appear likely that~~certain provisions of the BBA may increase the scope of benefits available for certain chronically ill Federal health care program beneficiaries beginning in 2020, the ultimate impact of such changes cannot be predicted. While there ~~will~~may be significant changes to the healthcare environment in the future, the specific changes and their timing are not yet apparent. As a result, there is considerable uncertainty ~~regarding~~surrounding the ~~future with respect to~~ACA including the exchanges, and, indeed, many core aspects of the current health care marketplace. Previously enacted reforms ~~as well as~~and future ~~legislative~~ changes could have a material adverse effect on our business, financial condition and results of operations, including, for example, by limiting the scope of coverage or the number of patients who are able to obtain coverage through the exchanges and other health insurance programs, lowering or eliminating the cost-sharing reduction subsidies under the ACA, lowering our reimbursement rates, ~~and~~and/or increasing our expenses.

In addition, in December 2016, CMS published an interim final rule that ~~establishes~~questioned the use of charitable premium assistance for ESRD patients and would have established new ~~Conditions~~conditions for ~~Coverage~~coverage standards for dialysis facilities that require any facility making payments of premiums for individual market health plans to notify patients of potential coverage options and educate them about the benefits of each option. The interim final rule requires facilities to ensure that insurers are informed of and have agreed to accept the payments. Onfacilities. In January ~~25,~~ 2017, a federal district court in Texas issued a preliminary injunction on CMS’ interim final ~~rule. At this time~~rule and in June 2017, at the request of CMS, ~~has~~the court stayed the proceedings while CMS pursues new rulemaking options. In November 2017, when CMS published the 2018 final rule that updates payment policies and rates under the ESRD Prospective Payment System (PPS),

and the 2019 proposed Notice of Benefit and Payment Parameters, it did not ~~appealed~~pursue further discussion or rule making related to charitable premium assistance or propose changes to historical charitable premium assistance guidelines. This does not preclude CMS or another regulatory agency or legislative authority from issuing a new rule or guidance that challenges charitable premium assistance. In February 2018, SB 1156 was introduced in the ~~court’s ruling~~California legislature. If passed and ~~we await~~signed into law in its current form, SB 1156 would impose certain restrictions on a patient’s use of charitable premium assistance in the ~~final decision from the court. This and any other~~state of California. Any law, rule, or guidance issued by CMS ~~limiting~~or other regulatory or legislative authorities, including individual states, restricting or prohibiting ~~the use of charitable premium assistance and/or~~ the ability of patients with access to alternative coverage from selecting a marketplace plan on or off exchange, and/or otherwise restricting or prohibiting the use of charitable premium assistance, could adversely impact dialysis centers across the U.S. making certain centers economically unviable, restrict the ability of dialysis patients to obtain and maintain optimal insurance coverage, and have a material adverse effect on our business, results of operations, and financial condition.

~~Federal and state privacy~~Privacy and information security laws are complex, and if we fail to comply with applicable laws, regulations and standards, including with respect to third-party service providers that utilize sensitive personal information on our behalf, or if we fail to properly maintain the integrity of our data, protect our proprietary rights to our systems or defend against cybersecurity attacks, we may be subject to government or private actions due to privacy and security breaches, any of which could have a material adverse effect on our business, financial condition and results of operations or materially harm our reputation.

We must comply with numerous federal and state laws and regulations in both the U.S. and the foreign jurisdictions in which we operate governing the collection, dissemination, access, use, security and privacy of PHI, including HIPAA and its implementing privacy, security, and related regulations, as amended by the federal Health Information Technology for Economic and Clinical Health Act (HITECH) and collectively referred to as HIPAA. We are also required to report known breaches of PHI consistent with applicable breach reporting requirements set forth in applicable laws and regulations. From time to time, we may be subject to both federal and state inquiries or audits related to HIPAA, HITECH and related state laws associated with complaints, desk audits, and self-reported breaches. If we fail to comply with applicable privacy and security laws, regulations and standards, including with respect to third-party service providers that utilize sensitive personal information, including PHI, on our behalf, properly maintain the integrity of our data, protect our proprietary rights, ~~to our systems,~~ or defend against cybersecurity attacks, it could materially harm our reputation or have a material adverse effect on our business, results of operations and financial condition.

Data protection laws are evolving globally, and may add additional compliance costs and legal risks to our international operations. In Europe, the new General Data Protection Regulation (GDPR) becomes effective on May 25, 2018. The GDPR applies to entities that are established in the European Union (EU), as well as extends the scope of EU data protection laws to foreign companies processing data of individuals in the EU. The GDPR imposes a comprehensive data protection regime with penalties of up to the greater of 4% of worldwide turnover or €20 million. The costs of compliance with, and other burdens imposed by, the GDPR and other new laws, regulations and policies implementing the GDPR may impact our European operations and/or limit the ways in which we can provide services or use personal data collected while providing services.

Information security risks have significantly increased in recent years in part because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct our operations, and the increased sophistication and activities of organized crime, hackers, terrorists and other external parties, including foreign state agents. Our business and operations rely on the secure processing, transmission and storage of confidential, proprietary and other information in our computer systems and ~~networks.~~networks, including sensitive personal information, including PHI, social security numbers, and credit card information of our patients, teammates, physicians, business partners and others.

We are continuously implementing multiple layers of security measures through technology, processes, and our people. We utilize ~~current~~ security technologies to protect and maintain the integrity of our information systems and data and our defenses are monitored and routinely tested internally and by external parties. Despite these efforts, our facilities and systems and those of our third-party service providers may be vulnerable to privacy and security incidents; security attacks and breaches; acts of vandalism or theft; computer viruses and other malicious code; coordinated attacks by a variety of actors, including activist ~~entities;~~entities or state sponsored cyberattacks; emerging cybersecurity risks; cyber risk related to connected devices; misplaced or lost data; programming and/or human errors; or other similar events that could impact the security, reliability, and availability of our systems. Internal or external parties may attempt to circumvent our security systems, and we have in the past, and expect that we will in the future, experience external attacks on our network including reconnaissance probes, denial of service attempts, malicious software attacks including ransomware or other attacks intended to render our internal operating systems or data unavailable, and phishing attacks or business email compromise. Cybersecurity requires ongoing investment and diligence against evolving threats. Emerging and advanced security threats, including coordinated attacks, require additional layers of security which may disrupt or impact efficiency of operations. ~~Cybersecurity requires ongoing investment~~As with any security program, there always exists the risk that

employees will violate our policies despite our compliance efforts or that certain attacks may be beyond the ability of our security and other systems to detect. There can be no assurance that investments and diligence ~~against evolving threats.~~will be sufficient to prevent or timely discover an attack.

Any security breach involving the misappropriation, loss or other unauthorized disclosure or use of confidential information, including PHI, financial data, competitively sensitive information, or other proprietary data, whether by us or a third party, could have a material adverse effect on our business, financial condition, and results of operations and materially harm our reputation. We may be required to expend significant additional resources to modify our protective measures, to investigate and remediate vulnerabilities or other exposures, or to make required notifications. The occurrence of any of these events could, among other things, result in interruptions, delays, the loss or corruption of data, cessations in the availability of systems orand liability under privacy and security laws, all of which could have a material adverse effect on our business, financial condition or results of operations, materially harm our reputation and trigger regulatory actions and private party litigation. If we are unable to protect the physical and electronic security and privacy of our databases and transactions, we could be subject to potential liability and regulatory action, our reputation and relationships with our patients and vendors would be harmed, and our business, results of operations and financial condition could be materially and adversely affected. Failure to adequately protect and maintain the integrity of our information systems (including our networks) and data, or to defend against cybersecurity attacks, could subject us to monetary fines, civil suits, civil penalties or criminal sanctions and requirements to disclose the breach publicly, and could further result in a material adverse effect on our business, results of operations and financial condition or harm our reputation.As malicious cyber activity escalates, including activity that originates outside of the United States, the risks we face relating to transmission of data and our use of service providers outside of our network, as well as the storing or processing of data within our network, intensify. There have been increased international, federal and state ~~HIPAA~~ and other privacy, data protection and security enforcement efforts and we expect this trend to continue. While we maintain cyber liability insurance, this insurance may not cover us for all types of losses and may not be sufficient to protect us against the amount of all losses.

We may engage in acquisitions, mergers, joint ventures or dispositions, which may affect our results of operations, debt-to-capital ratio, capital expenditures or other aspects of our business, and if businesses we acquire have liabilities we are not aware of, we could suffer severe consequences that would have a material adverse effect on our business, results of operations and financial condition.

Our business strategy includes growth through acquisitions of dialysis centers and other businesses, as well as entry into joint ventures. We may engage in acquisitions, mergers, joint ventures or dispositions or expand into new business models, which may affect our results of operations, debt-to-capital ratio, capital expenditures or other aspects of our business. There can be no assurance that we will be able to identify suitable acquisition targets or merger partners or buyers for dispositions or that, if identified, we will be able to ~~acquire these targets on acceptable terms or~~ agree to terms with merger ~~partners.~~partners, acquire these targets or make these dispositions on acceptable terms or on the desired timetable. There can also be no assurance that we will be successful in completing any acquisitions, mergers or dispositions that we announce, executing new business models or integrating any acquired business into our overall operations. There is no guarantee that we will be able to operate acquired businesses successfully as stand-alone businesses, or that any such acquired business will operate profitably or will not otherwise have a material adverse effect on our business, results of operations and financial condition. Further, we cannot be certain that key talented individuals at the business being acquired will continue to work for us after the acquisition or that they will be able to continue to successfully manage or have adequate resources to successfully operate any acquired business. In addition, certain of our newly and previously acquired dialysis centers and facilities have been in service for many years, which may result in a higher level of maintenance costs. Further, our facilities, equipment and information technology may need to be improved or renovated to maintain or increase operational efficiency, compete for patients and medical directors, or meet changing regulatory requirements. Increases in maintenance costs and capital expenditures could have a material adverse effect on our financial condition, results of operations and cash flows.

Businesses we acquire may have unknown or contingent liabilities or liabilities that are in excess of the amounts that we originally estimated, and may have other issues, including those related to internal controls over financial reporting or issues that could affect our ability to comply with healthcare laws and regulations and other laws applicable to our expanded business. As a result, we cannot make any assurances that the acquisitions we consummate will be successful. 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, the amounts held in escrow for our benefit (if any), 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 or alternative remedies that might be available to us, or any applicable insurance, we could suffer severe consequences that could have a material adverse effect on our business, results of operations and financial condition.

Additionally, joint ventures, including our Asia Pacific Joint Venture, ~~(APAC JV),~~ and minority investments inherently involve a lesser degree of control over business operations, thereby potentially increasing the financial, legal, operational and/or compliance risks associated with the joint venture or minority investment. In addition, we may be dependent on joint venture partners, controlling shareholders or management who may have business interests, strategies or goals that are inconsistent with ours. Business decisions or other actions or omissions of the joint venture partner, controlling shareholders or management may adversely affect the value of our investment, result in litigation or regulatory action against us, result in reputational harm to us or adversely affect the value of our investment or partnership.

If we are ~~not able~~unable to ~~continue to make acquisitions,~~ compete successfully, including implementing our growth strategy and/or ~~maintain an acceptable level of non-acquired growth, or if we face significant patient attrition to~~retaining our ~~competitors or a reduction in the number of our medical directors or associated~~ physicians and patients, it could adversely affect our business, results of operations and financial condition.

Acquisitions, patient retention and medical director and physician retention are an important ~~part~~parts of our growth strategy. We face intense competition from other companies for acquisition targets. In our U.S. dialysis business, we continue to face increased competition from large and medium-sized providers, among others, which compete directly with us for the limited acquisition targets as well as for individual patients and medical directors. In addition, we compete for individual patients, physicians and medical directors based in part on the quality of our facilities. Moreover, as we continue our international ~~dialysis~~ expansion into various international markets, we will face competition from large and medium-sized providers for these acquisition targets as well. As we and our competitors continue to grow and open new dialysis centers, each center is required by applicable regulations to have a medical director, and we may not be able to retain an adequate number of nephrologists to serve as medical directors. 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~~Individual nephrologists have opened their own dialysis ~~centers.~~units or facilities. There also has been growing interest by non-traditional dialysis providers and others to enter the dialysis space and develop innovative technologies that could be disruptive to the industry. Although these potential new competitors may face operational and/or financial challenges, if their efforts to offer dialysis services or develop innovative technology are successful and we are unable to effectively compete, it could negatively impact our business. In addition, ~~FMC,~~Fresenius USA, our largest competitor, manufactures a full line of dialysis supplies and equipment in addition to owning and operating dialysis centers. This may give it cost advantages over us because of its ability to manufacture its own ~~products. If we are not able to continue to make acquisitions, continue to maintain acceptable levels of non-acquired growth,~~products or ~~if we face significant patient attrition to~~prevent us from accessing existing or new technology on a cost-effective basis, see further discussion regarding risks associated with our ~~competitors or a reduction in~~suppliers under the ~~number of our medical directors or associated physicians, it could adversely affect our business, results of operations and financial condition.~~

~~Our ability to effectively provide the services we offer could be negatively impacted if~~heading below, “If certain of our suppliers do not meet our needs, if there are material price increases, if we are not reimbursed or adequately reimbursed for drugs we purchase or if we are unable to effectively access new technology ~~which~~or superior products, it could negatively impact our ability to effectively provide the services we offer and could have a material adverse effect on our business, results of operations and financial condition.” If we are not able to effectively implement our growth strategy, including by making acquisitions at the desired pace or at all; continue to maintain the expected or desired level of non-acquired growth; if we face significant patient attrition to our competitors or as a result of new technology; or if physicians choose not to refer to our clinics, it could adversely affect our business, results of operations and financial condition.

If certain of our suppliers do not meet our needs, if there are material price increases, if we are not reimbursed or adequately reimbursed for drugs we purchase or if we are unable to effectively access new technology or superior products, it could negatively impact our ability to effectively provide the services we offer and could have a material adverse effect on our business, results of operations and financial condition.

We have significant suppliers that ~~are either~~may be the sole or primary source of products critical to the services we provide, ~~including Amgen, Baxter, FMC, NxStage Medical, Inc. and others~~ or to which we have committed obligations to make ~~purchases.~~purchases, sometimes at particular prices. If any of these suppliers do not meet our needs for the products they supply, including in the event of a product recall, shortage or dispute, and we are not able to find adequate alternative sources, if we experience material price increases from these suppliers that we are unable to mitigate, or if some of the drugs that we purchase are not reimbursed or not adequately reimbursed by commercial or government payors, ~~or through the bundled payment rate by Medicare,~~it could have a material adverse impact on our business, results of operations and financial ~~condition could be materially reduced.~~condition. In addition, the technology related to the products critical to the services we provide is subject to new developments ~~and~~which 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 have a material adverse effect on our business, results of operations and financial condition.

DMG operates in a different line of business from our historical business, and we face challenges managing DMG and may not realize anticipated benefits.

~~DMG~~DaVita Medical Group (DMG) operates in a different line of business from our historical business. We may not have the expertise, experience and resources to pursue all of our businesses at once, and we may be unable to successfully operate all businesses in the combined company. The administration of DMG requires implementation of appropriate operations,

management, forecasting, and financial reporting systems and controls. We ~~experience~~have experienced difficulties in effectively implementing these and other systems. The management of DMG requires and will continue to require the focused attention of our management team, including a significant commitment of its time and resources. The need for management to focus on these matters could have a material adverse effect on our business, results of operations and financial condition. If the DMG operations ~~are~~continue to be less profitable than we currently anticipate or we do not have the experience, the appropriate expertise or the resources to pursue all businesses in the combined company, our results of operations and financial condition may be materially and adversely ~~affected, and in~~affected. In that regard, we have taken goodwill impairment charges of ~~$442 million~~$1.093 billion in total and may continue incurring additional impairment charges.

Laws regulating the corporate practice of medicine could restrict the manner in which DMG and other subsidiaries of ours are permitted to conduct their respective business, and the failure to comply with such laws could subject these entities to penalties or require a restructuring of these businesses.

Some states have laws that prohibit business entities, such as DMG and other subsidiaries of ours, including but not limited to, Nephrology Practice Solutions, Paladina Health, DaVita Health Solutions, VillageHealth, and Lifeline, from practicing medicine, employing physicians to practice medicine, exercising control over medical decisions by physicians (also known collectively as the corporate practice of medicine) or engaging in certain arrangements, such as fee-splitting, with physicians. In some states these prohibitions are expressly stated in a statute or regulation, while in other states the prohibition is a matter of judicial or regulatory interpretation. Of the states in which DMG currently operates, California, Colorado, Nevada and Washington generally prohibit the corporate practice of medicine, and other states may as well.

DMG and other DaVita entities operate by maintaining long-term contracts with their associated physician groups which are each owned and operated by physicians and which employ or contract with additional physicians to provide physician services. Under these arrangements, DMG and such other DaVita entities provide management services and receive a management fee for providing non-medical management services; however, DMG and such other DaVita entities do not represent that they offer medical services, and do not exercise influence or control over the practice of medicine by the physicians or the associated physician groups.

In addition to the above management arrangements, DMG has certain contractual rights relating to the orderly transfer of equity interests in certain of its physician groups through succession agreements and other arrangements with their physician equity holders. However, such equity interests cannot be transferred to or held by DMG or by any non-professional organization. Accordingly, neither DMG nor DMG’s subsidiaries directly own any equity interests in any physician groups in California, Colorado, Nevada and Washington. The other DaVita entities operating in these and multiple other states have similar agreements and arrangements. In the event that any of these associated physician groups fail to comply with the management arrangement or any management arrangement is terminated and/or DMG or any of the other DaVita entities is unable to enforce its contractual rights over the orderly transfer of equity interests in its associated physician groups, such events could have a material adverse effect on the business, results of operations and financial condition of DMG and such other DaVita entities.

It is possible that a state regulatory agency or a court could determine that DMG’s agreements with physician equity holders of certain managed California, Colorado, Nevada and Washington associated physician groups and the way DMG carries out these arrangements as described above, either independently or coupled with the management services agreements with such associated physician groups, are in violation of the corporate practice of medicine doctrine. As a result, these arrangements could be deemed invalid, potentially resulting in a loss of revenues and an adverse effect on results of operations derived from such associated physician groups. Such a determination could force a restructuring of DMG’s management arrangements with associated physician groups in California, Colorado, Nevada and/or Washington, which might include revisions of the management services agreements, including a modification of the management fee and/or establishing an alternative structure that would permit DMG to contract with a physician network without violating the corporate practice of medicine prohibition. There can be no assurance that such a restructuring would be feasible, or that it could be accomplished within a reasonable time frame without a material adverse effect on DMG’s business, results of operations and financial condition. These same risks exist for the other DaVita entities utilizing similar structures.

In December 2013, DaVita Health Plan of California, Inc. (DHPC) obtained a restricted Knox-Keene license in California, which permits DHPC to contract with health plans in California to accept global risk without violating the corporate practice of medicine prohibition. However, DMG and DMG’s Colorado, Nevada and Washington associated physician groups, as well as those physician equity holders of associated physician groups who are subject to succession agreements with DMG, could be subject to criminal or civil penalties or an injunction for practicing medicine without a license or aiding and abetting the unlicensed practice of medicine.

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

We have substantial debt outstanding, we recently incurred a substantial amount of additional debt in connection with our entry into the ~~DMG transaction~~Increase Joinder Agreement, and we may continue to incur additional indebtedness in the future. For additional details regarding specific risks we face regarding the sale of DMG, see the discussion in the risk factors under the heading "Risk factors related to the sale of DMG." Our inability to generate sufficient cash to service our substantial indebtedness and for other intended purposes could have important consequences to you, for example, it could:

make it difficult for us to make payments on our debt securities;

increase our vulnerability to general adverse economic and industry conditions;

require us to dedicate a substantial portion of our cash ~~flow~~flows from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and investments, repurchases of stock at the levels intended or announced, or at all, and other general corporate purposes;

limit our flexibility in planning for, or reacting to, changes in our business and the markets in which we operate;

expose us to interest rate volatility that could adversely affect our business, results of operations and financial condition, and our ability to service our indebtedness;

place us at a competitive disadvantage compared to our competitors that have less debt; and

limit our ability to borrow additional ~~funds.~~funds, or to refinance existing debt on favorable terms when otherwise available.

In addition, we may continue to incur ~~substantial~~ additional indebtedness in the ~~future. The terms~~future, and the amount of that additional indebtedness may be substantial. Although the indentures governing our senior notes and the agreement governing our senior secured credit facilities ~~will allow us~~include covenants that could limit our indebtedness, we currently have the ability to incur substantial additional debt. IfThe related risks described above could intensify, in particular, if there is a delay in closing the sale of DMG or the sale of DMG does not close, or if new debt is added to current debt ~~levels, the related risks described above could intensify.~~levels.

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, to repurchase our stock at the levels intended or announced and to meet our other liquidity needs, 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.

After the pending sale of DMG closes, our cash flows will be reduced accordingly. We cannot provide ~~assurance~~assurances that our business will generate sufficient cash ~~flow~~flows 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 or to fund other liquidity ~~needs.~~needs, including those described above. If we are unable to generate sufficient funds to service our outstanding indebtedness or to meet our other liquidity needs, including the intended purposes described above, we may be required to refinance, restructure, or otherwise amend some or all of such obligations, sell assets, change our intended or announced uses or strategy for capital deployment, including for stock repurchases, reduce capital expenditures or planned expansions or raise additional cash through the sale of our equity. We cannot make any assurances that ~~we would be able to obtain~~any such refinancing, ~~on terms as favorable as our existing financing terms or that such restructuring activities,~~restructurings, sales of assets, or issuances of equity can be accomplished or, if accomplished, can be accomplished on favorable terms or that if accomplished that they would raise sufficient funds to meet these ~~obligations.~~obligations or our other liquidity needs.

The borrowings under our senior secured credit facilities are guaranteed by a substantial portion of our direct and indirect ~~wholly-owned~~wholly owned domestic subsidiaries, including certain of DMG’s subsidiaries, and are secured by a substantial portion of our and our subsidiaries’ ~~assets.~~assets, including those of certain of DMG’s subsidiaries. After the sale of DMG closes, we will have fewer assets with which to secure future debt or refinance or restructure existing debt. This will likely reduce the total amount of secured debt that we will be able to incur and may increase the interest rate we are required to pay on our existing secured debt and any secured debt we issue in the future. In addition, by reducing the amount of assets available to meet the claims of our secured creditors, it may also adversely affect the interest rates on our existing unsecured debt and any unsecured debt we issue in the future.

We may be subject to liability claims for damages and other expenses that are not covered by insurance or exceed our existing insurance coverage that could have a material adverse effect on our business, results of operations, financial condition and ~~financial condition.~~reputation.

Our operations and how we manage our Company may subject us, as well as our officers and directors to whom we owe certain defense and indemnity obligations, 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 or limits of coverage of any applicable insurance coverage, including claims related to adverse patient events, contractual disputes, professional and general liability and directors’ and officers’ duties. In addition, we have received ~~several~~ notices of claims from commercial payors and other third parties, as well as subpoenas and CIDs from the federal government, related to our business practices, including our historical billing practices and the historical billing practices of acquired businesses. 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 business, results of operations and financial condition. We ~~currently~~ maintain insurance coverage for those risks we deem are appropriate to insure against and make determinations about whether to self-insure as to other risks or layers of coverage. However, a successful claim, including a professional liability, malpractice or negligence claim which is in excess of any applicable insurance coverage, or that is subject to our self-insurance retentions, could have a material adverse effect on our business, results of operations, financial condition and ~~financial condition.~~reputation. Additionally, as a result of the broad scope of our DMG division’s medical practice, we are exposed to medical malpractice claims, as well as claims for damages and other expenses, that may not be covered by insurance or for which adequate limits of insurance coverage may not be available.

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 business, results of operations and financial condition could be materially and adversely affected by any of the following:

the collapse or insolvency of our insurance carriers;

further increases in premiums and deductibles;

increases in the number of liability claims against us or the cost of settling or trying cases related to those claims; or

an inability to obtain one or more types of insurance on acceptable terms, if at all.

If we fail to successfully maintain an effective internal control over financial reporting, the integrity of our financial reporting could be compromised, which could have a material adverse effect on our ability to accurately report our financial results and the market’s perception of our business and our stock price.

The integration of ~~DMG~~acquisitions and addition of new business lines into our internal control over financial reporting has required and will continue to require significant time and resources from our management and other personnel and has increased, and will continue to, increase our compliance costs. Failure to maintain an effective internal control environment could have a material adverse effect on our ability to accurately report our financial results and the market’s perception of our business and our stock price. In addition, we could be required to restate our financial results in the event of a significant failure of our internal control over financial reporting or in the event of inappropriate application of accounting principles.

Deterioration in economic conditions and further disruptions in the financial markets could have a material adverse effect on our business, results of operations and financial condition.

Deterioration in economic conditions could have a material adverse effect on our business, results of operations and financial condition. 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. Increases in job losses in the U.S. as a result of adverse economic conditions 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 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 slowdown in collections and a reduction in the amounts we expect to collect. In addition, uncertainty in the financial markets could adversely affect the variable interest rates payable under our credit facilities or could make it more difficult to obtain or renew such facilities or to obtain other forms of financing in the future, if at all. Any or all of these factors, as well as other consequences of a deterioration in economic conditions which cannot currently be anticipated, could have a material adverse effect on our business, results of operations and financial condition.

We could be subject to adverse changes in tax laws, regulations and interpretations or challenges to our tax positions.

We are subject to tax laws and regulations of the U.S. federal, state and local governments as well as various foreign jurisdictions. We compute our income tax provision based on enacted tax rates in the jurisdictions in which we operate. As the tax rates vary among jurisdictions, a change in earnings attributable to the various jurisdictions in which we operate could result in an unfavorable change in our overall tax provision.

From time to time, changes in tax laws or regulations may be proposed or enacted that could adversely affect our overall tax liability. For example, the recent U.S. tax legislation enacted on December 22, 2017 represents a significant overhaul of the U.S. federal tax code. This tax legislation significantly reduced the U.S. statutory corporate tax rate and made other changes that have and will reduce our effective U.S. federal tax rate in current and future periods. However, the tax legislation also included a number of provisions, including, but not limited to, the limitation or elimination of various deductions or credits (including for interest expense and for performance-based compensation under Section 162(m)), the imposition of taxes on certain cross-border payments or transfers, the changing of the timing of the recognition of certain income and deductions or their character, and the limitation of asset basis under certain circumstances, any of which could significantly and adversely affect our U.S. federal income tax position. The legislation also made significant changes to the tax rules applicable to insurance companies and other entities with which we do business. The estimated impact of the new law is based on management’s current knowledge and assumptions. We are continuing to evaluate the overall impact of this tax legislation on our operations and U.S. federal and state income tax position. The actual impact of the new law could be materially different from our current estimates based on our actual results, or our further analysis of the new law or any guidance and regulations that may be issued in the future. There can be no assurance that changes in tax laws or regulations, both within the U.S. and the other jurisdictions in which we operate, will not materially and adversely affect our effective tax rate, tax payments, financial condition and results of operations. Similarly, changes in tax laws and regulations that impact our patients, business partners and counterparties or the economy generally may also impact our financial condition and results of operations.

In addition, tax laws and regulations are complex and subject to varying interpretations, and any significant failure to comply with applicable tax laws and regulations in all relevant jurisdictions could give rise to substantial penalties and liabilities. We are regularly subject to audits by tax authorities and, although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. Any changes in enacted tax laws (such as the recent U.S. tax legislation), rules or regulatory or judicial interpretations; any adverse outcome in connection with tax audits in any jurisdiction; or any change in the pronouncements relating to accounting for income taxes could materially and adversely impact our effective tax rate, tax payments, financial condition and results of operations.

Expansion of our operations to and offering our services in markets outside of the U.S. subjects us to political, economic, legal, operational and other risks that could have a material adverse effect on our business, results of operations and financial condition.

We are continuing to expand our operations by offering our services and entering new lines of business in certain markets outside of the U.S., which increases our exposure to the inherent risks of doing business in international markets. Depending on the market, these risks include those relating to:

changes in the local economic environment;

political instability, armed conflicts or terrorism;

social changes;

intellectual property legal protections and remedies;

trade regulations;

procedures and actions affecting approval, production, pricing, reimbursement and marketing of products and services;

foreign currency;

repatriating or moving to other countries cash generated or held abroad, including considerations relating to tax-efficiencies and changes in tax laws;

export controls;

lack of reliable legal systems which may affect our ability to enforce contractual rights;

changes in local laws or regulations;

potentially longer ramp-up times for starting up new operations and for payment and collection cycles;

financial and operational, and information technology systems integration; ~~and~~

failure to comply with U.S. laws, such as the FCPA, or local laws that prohibit us, our partners, or our partners’ or our intermediaries from making improper payments to foreign officials for the purpose of obtaining or retaining ~~business.~~business; and

data and privacy restrictions.

Issues relating to the failure to comply with any of the above may also impact our domestic business and/or raise scrutiny on our domestic practices.

Additionally, some factors that will be critical to the success of our international business and operations will be different than those affecting our domestic business and operations. For example, conducting international operations requires us to devote significant management resources to implement our controls and systems in new markets, to comply with local laws and regulations and to overcome the numerous new challenges inherent in managing international operations, including those based on differing languages, cultures and regulatory environments, and those related to the timely hiring, integration and retention of a sufficient number of skilled personnel to carry out operations in an environment with which we are not familiar.

~~We anticipate expanding~~Any expansion of our international operations through acquisitions ~~of varying sizes~~ or through organic growth ~~which~~ could increase these risks. Additionally, ~~though~~while we ~~might~~may invest material amounts of capital and incur significant costs in connection with the growth and development of our international operations, ~~there is no assurance that~~including to start up or acquire new operations, we ~~will~~may not be able to operate them profitably ~~anytime soon, if~~on the anticipated timeline, or at all. ~~As a result, we would expect these costs to be dilutive to our earnings over the next several years as we start-up or acquire new operations.~~

These risks could have a material adverse effect on our business, results of operations and financial condition.

Risk factors related to the sale of DMG:

The announcement and pendency of the sale of DMG may adversely affect our business, results of operations and financial condition.

The announcement and pending sale of DMG may be disruptive to our business and may adversely affect our relationships with current and prospective teammates, patients, physicians, payors, suppliers and other business partners. Uncertainties related to the pending sale of DMG may impair our ability to attract, retain and motivate key personnel and could cause suppliers and other business partners to defer entering into contracts with us or seek to change existing business relationships with us. The loss or deterioration of significant business and operational relationships could have an adverse effect on our business, results of operations and financial condition. In addition, activities relating to the pending sale and related uncertainties could divert the attention of our management and other teammates from our day-to-day business or disrupt our operations in preparation for and during the post-closing separation of DMG. It is also possible that we could have stranded costs following the closing of the pending sale, which could be material. If we are unable to effectively manage these risks, our business, results of operations and financial condition may be adversely affected.

If we fail to complete the proposed sale of DMG, or if there is a significant delay in completing the sale, our business, results of operations, financial condition and stock price may be materially adversely affected.

The completion of the proposed sale of DMG is subject to customary closing conditions, including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the approval of a notice of material modification by the California Department of Managed Health Care. If any condition to the closing of the sale of DMG is neither satisfied nor, where permissible, waived, the sale of DMG will not be completed. In addition, satisfying the closing conditions to the sale of DMG may take longer than expected. Regulators may impose material conditions, terms, obligations, costs or restrictions in connection with their approval of or consent to the sale of DMG, which could delay completion of the transaction, or if such approvals or consents are not obtained, could prevent completion of the transaction. There can be no assurance that all of the closing conditions will be satisfied or waived or that other events will not

intervene to delay, or result in a failure to close, the sale of DMG. In addition, either we or Optum may terminate the equity purchase agreement if, among other things, the sale has not been consummated by June 4, 2018 (subject to two three-month extensions that can be exercised by either party unilaterally). If the equity purchase agreement is terminated and our Board of Directors seeks an alternative transaction or another acquiror for the sale of the DMG business, we may not be able to negotiate a transaction with another party on terms comparable to, or better than, the terms of the equity purchase agreement with Optum.

If the sale of DMG is not completed for any reason, investor confidence could decline. A failed transaction may result in negative publicity and may affect our relationships with teammates, patients, physicians, payors, suppliers, regulators and other business partners. In addition, in the event of a failed transaction, we will have expended significant management resources in an effort to complete the sale, we have incurred additional debt in anticipation of receiving the sale proceeds but not have received the sale proceeds to repay such debt, and we will have incurred significant transaction costs, including legal fees, financial advisor fees and other related costs, without any commensurate benefit. Accordingly, if the proposed sale of DMG is not completed, or if there is a significant delay in completing the sale, our business, results of operations, financial condition and stock price may be materially adversely affected.

Our liquidity following the close of our pending sale of DMG and our planned subsequent entry into new external financing arrangements may be less than we anticipate, and we may use the proceeds from the pending sale of DMG and other available funds, including external financing and cash flow from operations, in ways that may not improve our results of operations or enhance the value of our common stock.

The purchase price for the sale of the DMG business is subject to customary adjustments, both upward and downward,which could be significant. Following the pending DMG sale, we plan to use sale proceeds and other available funds, including from external financing and cash flow from operations, to repay debt, make significant stockrepurchases and for general corporate purposes, which may include growth investments. A number of factors may impact our ability torepurchase stock and the timing of any such stock repurchases, including market conditions, the price of our common stock, our results of operations, cash flow and financial condition, available financing, leverage ratios, and legal, regulatory and contractual requirements and restrictions. Accordingly, the actual amount of common stock we repurchase may be less, perhaps substantially, and the period of time over which we make any stock repurchases may be substantially longer, than we currently anticipate. In addition, we may identify investments or other uses for our available funds (other than the DMG sale proceeds that we plan to use to repay debt) that we believe are more attractive than our current intended uses. Further, there can be no assurance that any investment will yield a favorable return.

Under the terms of the equity purchase agreement, we are subject to certain contractual restrictions while the sale of DMG is pending, and certain post-closing contractual obligations that, in some cases, could have a material adverse effect on our business, results of operations and financial condition.

Under the terms of the equity purchase agreement, we are subject to certain restrictions on the conduct of the DMG business prior to completing the sale of DMG, which may adversely affect our ability to execute certain of our business strategies, including the ability in certain cases to enter into or amend contracts, acquire or dispose of assets, incur indebtedness or incur capital expenditures. Such limitations could negatively affect our business and operations prior to the completion of the sale of DMG. Each of these risks may be exacerbated by delays or other adverse developments with respect to the completion of the sale of DMG.

In addition, we agreed to retain certain liabilities of the DMG business for which we have certain indemnification rights against the original 2012 HealthCare Partners (HCP) sellers. An escrow was established in connection with our acquisition of the DMG business from the HCP sellers as security for these indemnification rights, including with respect to the OIG investigation into certain patient diagnosis coding practices. We have submitted an indemnification claim against the sellers secured by the escrow for any and all liabilities incurred relating to these matters and intend to pursue recovery from the escrow. However, we can make no assurances that the indemnification and escrow will cover the full amount of our potential losses related to these matters, which could have a material adverse effect on our business, results of operations and financial condition.

Risk factors related to our U.S. dialysis and related lab services, ancillary services and strategic initiatives:

If patients in commercial plans are subject to restriction in plan designs or the average rates that commercial payors pay us decline significantly, it would have a material adverse effect on our business, results of operations and financial condition.

Approximately ~~33%~~31% of our U.S. dialysis and related lab services net revenues for the three months ended March 31, ~~2017~~2018 were generated from patients who have commercial payors (including hospital dialysis services) as their 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 as a result of general conditions in the market, including as employers shift to less expensive options for medical services, recent and future consolidations among commercial payors, increased focus on dialysis services and other factors. In addition, many commercial payors that sell individual plans both on and off exchange have publicly announced losses in the marketplace. These payors may seek discounts on rates for marketplace plans on and off exchange. ~~There is no guarantee that commercial~~Commercial payment rates ~~will not~~could be materially lower in the future.

We continuously are ~~continuously~~ in the process of negotiating existing and potential new agreements with commercial payors who aggressively negotiate terms with us. Sometimes many significant agreements are being renegotiated at the same time. In the event that our continual 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 business, results of operations and financial condition. Consolidations have significantly increased the negotiating leverage of commercial payors. Our negotiations with payors are also influenced by competitive pressures, and we may experience decreased contracted rates with commercial payors or experience decreases in patient volume as our negotiations with commercial payors continue. In addition to downward pressure on contracted commercial payor rates, payors have been attempting to design and implement plans to restrict access to coverage, and the duration and/or the breadth of benefits, which may result in decreased payments. In addition, payors have been attempting to impose restrictions and limitations on patient access to commercial exchange plans and non-contracted or out-of-network providers, and in some circumstances designate our centers as out-of-network providers. Rates for commercial exchange products and out-of-network providers are on average higher than rates for government products and in-network providers, respectively. ~~In 2017, a~~

A number of commercial payors have incorporated policies into their provider manuals limiting or refusing to accept charitable premium assistance from ~~bona fide~~ non-profit organizations, such as the American Kidney Fund, which may impact the number of patients who are able to afford commercial exchange plans. Paying for coverage is a significant financial burden for many patients, and ESRD disproportionately affects the low-income population. Charitable premium assistance supports continuity of coverage and access to care for patients, many of whom are unable to continue working full-time as a result of their severe condition. A material restriction in patients' ability to access charitable premium assistance may restrict the ability of dialysis patients to obtain and maintain optimal insurance coverage, and may adversely impact a large number of dialysis centers across the U.S. by making certain centers economically unviable, and may have a material adverse effect on our business, results of operations and financial condition.

We also believe commercial payors have or will begin to restructure their benefits to create disincentives for patients to stay with commercial insurance or to select or remain with out-of-network ~~providers~~

~~and~~providers. In addition, payors may seek to decrease payment rates for out-of-network providers. Decreases in the number of patients with commercial ~~exchange~~ plans, decreases in out-of-network rates and restrictions on out-of-network access, our turning away new patients in instances where we are unable to come to agreement on rates, or decreases in contracted rates could result in a significant decrease in our overall revenues derived from commercial payors. If the average rates that commercial payors pay us decline significantly, or if we see a decline in commercial patients, it would have a material adverse effect on our business, results of operations and financial condition. For additional details regarding specific risks we face regarding regulatory changes that could result in fewer patients covered under commercial plans or an increase of patients covered under more restrictive commercial plans with lower reimbursement rates, see the discussion in the risk factor under the heading ~~“Healthcare~~"Healthcare reform could have a material adverse effect on our business, financial condition and results of operations.”"

If the number of patients with higher-paying commercial insurance declines, it could have a material adverse effect on our business, results of operations and financial condition.

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~~Any changes impacting our highest paying commercial payors will have 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. Patients~~disproportionate impact on us. In

addition, many patients with commercial and government insurance ~~frequently~~ rely on financial assistance from charitable organizations, such as the American Kidney Fund. ~~However, certain~~Certain payors ~~are challenging~~have challenged our patients’ and other providers’ patients' ability to utilize assistance from charitable organizations for the payment of premiums, including through litigation and other legal proceedings. Regulators have also questioned the use of charitable premium assistance for ESRD patients, including CMS, which had issued an interim final rule on charitable premium assistance in December 2016. Although CMS’ interim final rule is currently subject to a preliminary injunction issued by a federal court judge,patients. CMS or aanother regulatory agency or legislative authority may issue a new rule ~~to challenge~~or guidance that challenges charitable premium assistance. If any of these challenges to kidney patients’ use of premium assistance are successful or ~~regulators impose~~ restrictions are imposed on the use of financial assistance from such charitable organizations such that ~~these~~kidney patients are unable to obtain, or continue to receive or receive for a limited duration, such financial assistance, it could have a material adverse effect on our business, results of operations and financial condition. In addition, if our assumptions about how kidney patients will respond to any change in financial assistance from charitable organizations are incorrect, it could have a material adverse effect on our business, results of operations and financial condition.

When Medicare becomes the primary payor, the payment rate we receive for that patient decreases from the employer group health plan or commercial plan rate to the lower Medicare payment rate. The number of our patients who have government-based programs as their primary payors could increase and the percentage of our patients covered under commercial insurance plans could be negatively impacted as a result of improved mortality or declining macroeconomic conditions. To the extent there are sustained or increased job losses in the U.S., independent of whether general economic conditions improve, we could experience a decrease in the number of patients covered under commercial ~~plans.~~plans and/or an increase in uninsured and underinsured patients. We could also experience a further decrease in the payments we receive for services if changes to the healthcare regulatory system result in fewer patients covered under commercial plans or an increase of patients covered under more restrictive commercial plans with lower reimbursement rates. In addition, our continual negotiations with commercial payors under existing and potential new agreements could result in a decrease in the number of our patients covered by commercial plans to the extent that we cannot reach agreement with commercial payors on rates and other terms, resulting in termination or non-renewals of existing agreements and our inability to enter into new agreements. Commercial payors have taken and may continue to take steps to control the cost of and/or the eligibility for access to healthcare services, including relative to products on and off the healthcare exchanges. These efforts could impact the number of our patients who are eligible to enroll in commercial insurance plans, and remain on the plans, including plans offered through healthcare exchanges. Additionally, we continue to experience higher amounts of write-offs due to uninsured and underinsured patients, which has resulted in an increase in uncollectible accounts. Commercial payors could also cease paying in the primary position after providing 30 months of coverage resulting in a material reduction in payment as the patient moves to Medicare primary. 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 or a significant increase in the number of patients that are uninsured and underinsured, it would have a material adverse effect on our business, results of operations and financial condition.

Changes in the structure of and payment rates under the Medicare ESRD program could have a material adverse effect on our business, results of operations and financial condition.

Approximately ~~42%~~44% of our U.S. dialysis and related lab services net revenues for the three months ended March 31, ~~2017~~2018 were generated from patients who have Medicare as their primary payor. For patients with Medicare coverage, all ESRD payments for dialysis treatments are made under a single bundled payment rate which provides a fixed payment rate to encompass all goods and services provided during the dialysis treatment, including pharmaceuticals that were historically separately reimbursed to the dialysis providers, such as ~~EPO,~~erythropoietin (EPO), vitamin D analogs and iron supplements, irrespective of the level of pharmaceuticals administered or additional services ~~performed.~~performed, except in the case of calcimimetics, which are subject to a transitional drug add-on payment adjustment for the Medicare Part B ESRD payment. Most lab services are also included in the bundled payment. Under the ESRD ~~Prospective Payment System (PPS),~~PPS, the bundled payments to a dialysis facility may be reduced by as much as 2% based on the facility’s performance in specified quality measures set annually by CMS through the ESRD Quality Incentive Program, which was established by the Medicare Improvements for Patients and Providers Act of 2008. The bundled payment rate is also adjusted for certain patient characteristics, a geographic usage index and certain other factors.

In addition, the ESRD PPS is subject to rebasing, which can have a positive financial effect, or a negative one if the government fails to rebase in a manner that adequately addresses the costs borne by dialysis facilities. Similarly, as new drugs, services or labs are added to the ESRD bundle, CMS’ failure to adequately calculate the costs associated with the drugs, services or labs could have a material adverse effect on our business, results of operations and financial condition.

The current bundled payment system presents certain operating, clinical and financial risks, which include:

Risk that our rates are reduced by CMS. Uncertainty about future payment rates remains a material risk to our business. Each year, CMS publishes a final rule for the PPS, which ~~phases~~has been phasing in ~~the~~ reductions to the PPS base rate mandated by the American Taxpayer Relief Act of 2012 as modified by the Protecting Access to Medicare Act of 2014.

Risk that CMS, through its contracted Medicare Administrative Contractors (MACs) or otherwise, implements Local Coverage Determinations (LCDs) or other decisions that limit the frequency a provider can bill Medicare for home dialysis treatments or other rules that may impact reimbursement. Such coverage determinations could have an adverse impact on our revenue. There is also risk commercial insurers could incorporate the requirements or limitations associated with such LCDs into their contracted terms with dialysis providers, which could have an adverse impact on our revenue.

Risk that a MAC, or multiple MACs, change their interpretations of existing regulations, manual provisions and/or guidance; or seek to implement or enforce new interpretations that are inconsistent with how we have interpreted existing regulations, manual provisions and/or guidance.

Risk that increases in our operating costs will outpace the Medicare rate increases we receive. We expect operating costs to continue to increase due to inflationary factors, such as increases in labor and supply costs, including increases in maintenance costs and capital expenditures to improve, renovate and maintain our facilities, equipment and information technology to meet changing regulatory requirements, regardless of whether there is a compensating inflation-based increase in Medicare payment rates or in payments under the bundled payment rate system.

Risk of federal budget sequestration cuts. As a result of the Budget Control Act of 2011 and the ~~Bipartisan Budget Act of 2015,~~BBA, an annual 2% reduction to Medicare payments took effect on April 1, 2013 and has been extended through ~~2025.~~2027. These across-the-board spending cuts have affected and will continue to adversely affect our business, results of operations and financial condition.

Risk that, if our clinical systems fail to accurately capture the data we report to CMS in connection with claims for which at least part of the government’s payments to us is based on clinical performance or patient outcomes or co-morbidities, we might be over-reimbursed by the government, which could subject us to certain liability. For example, CMS published a final rule that implemented a provision of the ACA, requiring providers to report and return Medicare and Medicaid overpayments within the later of (a) 60 days after the overpayment is identified, or (b) the date any corresponding cost report is due, if applicable. An overpayment impermissibly retained under this statute could subject us to liability under the FCA, exclusion, and penalties under the federal Civil Monetary Penalty statute.

For additional details regarding the risks we face for failing to adhere to our Medicare and Medicaid regulatory compliance obligations, see the risk factor ~~below~~above under the heading ~~“If~~"If we fail to adhere to all of the complex government laws and regulations that apply to our business, we could suffer severe consequences that could have a material adverse effect on our business, results of operations, financial condition and ~~financial condition.”~~stock price."

Changes in state Medicaid or other non-Medicare government-based programs or payment rates could have a material adverse effect on our business, results of operations and financial condition.

Approximately 25% of our U.S. dialysis and related lab services net revenues for the three ~~month~~months ended March 31, ~~2017~~2018 were generated from patients who have state Medicaid or other non-Medicare government-based programs, such as coverage through the Department of Veterans Affairs (VA), as their primary coverage. As state governments and other governmental organizations face increasing budgetary pressure, we may in turn face reductions in payment rates, delays in the receipt of payments, limitations on enrollee eligibility or other changes to the applicable programs. For example, certain state Medicaid programs and the VA have recently considered, proposed or implemented payment rate reductions.

The VA adopted Medicare’s bundled PPS pricing methodology for any veterans receiving treatment from non-VA providers under a national contracting initiative. Since we are a non-VA provider, these reimbursements are tied to a percentage of Medicare reimbursement, and we have exposure to any dialysis reimbursement changes made by CMS. Approximately 3% of our dialysis services revenues for the three months ended March 31, ~~2017~~2018 were generated by the VA.

In 2013, we entered into a five-year Nationwide Dialysis Services contract with the VA which is subject to one-year renewal periods, consistent with all provider agreements with the VA under this contract. During the length of the contract, the VA has elected not to make adjustments to reimbursement percentages that are tied to a percentage of Medicare reimbursement rates. These agreements provide the VA with the right to terminate the agreements without cause on short notice. Should the VA renegotiate, or not renew or cancel these agreements for any reason, we may cease accepting patients under this program and may be forced to close centers or experience lower reimbursement rates, which could have a material adverse effect on our business, results of operations and financial condition.

State Medicaid programs are increasingly adopting Medicare-like bundled payment systems, but sometimes these payment systems are poorly defined and are implemented without any claims processing infrastructure, or patient or facility adjusters. If these payment systems are implemented without any adjusters and claims processing changes, Medicaid payments will be substantially reduced and the costs to submit such claims may increase, which will have a negative impact on our business, results of operations and financial condition. 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, resulting in decreased patient volumes and revenue. These Medicaid payment and enrollment changes, along with similar changes to other ~~non-~~

~~Medicare~~non-Medicare government programs could reduce the rates paid by these programs for dialysis and related services, delay the receipt of payment for services provided and further limit eligibility for coverage which could ~~materially adversely~~have a material adverse effect on our business, results of operations and financial condition.

Changes in clinical practices, payment rates or regulations impacting ~~EPO and other~~ pharmaceuticals could have a material adverse effect on our business, results of operations and financial condition and negatively impact our ability to care for patients.

Medicare bundles ~~EPO~~certain pharmaceuticals into the PPS ~~such that dosing variations do not change~~at industry average doses and prices. Any variation above the ~~amount paid~~industry average may be subject to a dialysis facility. Although some Medicaid programs and other payors suggest movement towards a bundled payment system inclusive of EPO, some non-Medicare payors continue to pay for EPO separately frompartial reimbursement through the ~~treatment rate.~~PPS outlier reimbursement policy.

Additionally, evaluations on the utilization and reimbursement for ESAs, which have occurred in the past and may occur in the future, and related actions by the U.S. Congress and federal agencies, could result in further restrictions on the utilization and reimbursement for ESAs. Commercial payors have increasingly examined their administration policies for ~~EPO~~pharmaceuticals and, in some cases, have modified those policies. Changes in labeling of ~~EPO and other~~ pharmaceuticals in a manner that alters physician practice patterns, including their independent determinations as to appropriate dosing, or accepted clinical practices, and/or changes in private and governmental payment criteria, including the introduction of ~~EPO~~ administration policies could have a material adverse effect on our business, results of operations and financial condition. Further increased utilization of ~~EPO~~certain pharmaceuticals for patients for whom the cost of ~~EPO~~which is included in a bundled reimbursement rate, or further decreases in reimbursement for ~~EPO and other~~ pharmaceuticals that are not included in a bundled reimbursement rate, could also have a material adverse effect on our business, results of operations and financial condition.

Additionally, as ~~a result~~of January 1, 2018, calcimimetics became part of the ~~current high level~~Medicare Part B ESRD payment, but subject to its transitional drug add-on payment adjustment. We implemented processes designed to provide the drug as required under the applicable regulations and prescribed by physicians and have entered into agreements to provide for access to and distribution of ~~scrutiny~~the drug. If Medicare Advantage plans and/or Medicaid do not pay as required or the processes we have implemented to provide the drug do not perform as anticipated, then we could be subject to both financial and ~~controversy, we~~operational risk, among other things.

We may be subject to increased inquiries or audits from a variety of governmental bodies or claims by third parties. Although we believe our anemia management practices and other pharmaceutical administration practices have been compliant with existing laws and regulations, increased inquiries or audits from governmental bodies or claims by third parties, which would require management’s attention and could result in significant legal expense. Any negative findings could result in substantial financial penalties or repayment obligations, the imposition of certain obligations on and changes to our practices and procedures as well as the attendant financial burden on us to comply with the obligations, or exclusion from future participation in the Medicare and Medicaid programs, and could have a material adverse effect on our business, results of operations and financial condition.

If we fail to comply with our Corporate Integrity Agreement, we could be subject to substantial penalties and exclusion from participation in federal healthcare programs that could have a material adverse effect on our business, results of operations and financial condition.

In October 2014, we entered into a Settlement Agreement with the United States and relator David Barbetta to resolve the then pending 2010 and 2011 U.S. Attorney physician relationship investigations and paid $406 million in settlement amounts, civil forfeiture, and interest to the United States and certain states. In connection with the resolution of these matters, and in exchange for the OIG’s agreement not to exclude us from participating in the federal healthcare programs, we have entered into a five-year CIA with the OIG. The CIA (i) requires that we maintain certain elements of our compliance programs; (ii) imposes certain expanded compliance-related requirements during the term of the CIA; (iii) requires ongoing monitoring and reporting by an independent monitor, imposes certain reporting, certification, records retention and training obligations, allocates certain oversight responsibility to the Board’s Compliance Committee, and necessitates the creation of a Management Compliance Committee and the retention of an independent compliance advisor to the Board; and (iv) contains certain business restrictions related to a subset of our joint venture arrangements, including our agreeing to (1) unwind 11 joint venture transactions that were created through partial divestitures to, or partial acquisitions from, nephrologists, and that cover 26 of our 2,119 clinics that existed at the time we entered into the Settlement Agreement, all of which have been completed, (2) not enter into certain types of partial divestiture joint venture transactions with nephrologists during the term of the CIA, (3) non-enforcement of certain patient-related non-solicitation restrictions, and (4) certain other restrictions. The costs associated with

compliance with the CIA could be substantial and may be greater than we currently anticipate. In addition, in the event of a breach of the CIA, we could become liable for payment of certain stipulated penalties, and could be excluded from participation in federal healthcare programs. The OIG has notified us in the past that it considered us to be ~~previously~~ in breach of the CIA, ~~because of three implementation deficiencies. While we have remediated the deficiencies~~ and ~~have paid certain stipulated penalties,~~ we cannot provide any assurances that we may not be found in breach of the CIA in the future. In general, the costs associated with compliance with the CIA, or any liability or consequences associated with a breach, could have a material adverse effect on our business, results of operations and financial condition. For our domestic dialysis business, we are required under the CIA to report to the OIG (i) probable violations of criminal, civil or administrative laws applicable to any federal health care program for which penalties or exclusions may be authorized under applicable laws and regulations; (ii) substantial overpayments of

amounts of money we have received in excess of the amounts due and payable under the federal healthcare program requirements; and (iii) employment of or contracting with individuals ineligible from participating in the federal healthcare programs (we refer to these collectively as Reportable Events). We have provided the OIG notice of Reportable Events, and we may identify and report additional events in the future. If any of our operations are found to violate government laws and regulations, we could suffer severe consequences that could have a material adverse effect on our business, results of operations, financial condition and stock price, including those consequences described under the risk factor ~~“If~~"If we fail to adhere to all of the complex government laws and regulations that apply to our business, we could suffer severe consequences that could have a material adverse effect on our business, results of operations, financial condition and ~~financial condition.”~~stock price."

Delays in state Medicare and Medicaid certification or other licensing and/or anything impacting the licensing of our dialysis centers could adversely affect our business, results of operations and financial condition.

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 agencies responsible for surveying dialysis centers on behalf of the state and Medicare program face increasing budgetary pressure, certain states are having difficulty keeping up with certifying dialysis centers in the normal course resulting in significant delays in certification. If state governments continue to have difficulty keeping up with 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 business, results of operations and financial condition. Although the BBA passed in February 2018 allows organizations approved by the Department of Health and Human Services (HHS) to accredit dialysis facilities and imposes certain timing requirements regarding the initiation of initial surveys to determine if certain conditions and requirements for payment have been satisfied, we cannot predict the ultimate impact of these changes. In addition to certifications for Medicare and Medicaid, some states have licensing requirements for ESRD facilities. Delays in licensure, denials of licensure, or ~~denials~~withdrawal of licensure could also adversely affect our business, results of operations and financial condition.

If our joint ventures were found to violate the law, we could suffer severe consequences that would have a material adverse effect on our business, results of operations and financial condition.

As of March 31, ~~2017,~~2018, we owned a controlling interest in numerous dialysis-related joint ventures, which represented approximately 24% of our net U.S. dialysis and related lab services net revenues for the three months ended March 31, ~~2017.~~2018. In addition, we also owned noncontrolling equity investments in several other dialysis related joint ventures. We may continue to increase the number of our joint ventures. Many of our joint ventures with physicians or physician groups also have certain physician owners providing medical director services to centers we own and operate. Because our relationships with physicians are governed by the federal and state anti-kickback statutes, we have sought to structure our joint venture arrangements to satisfy as many federal safe harbor requirements as we believe are commercially reasonable. However, although our joint venture arrangements do not satisfy all of the elements of any safe harbor under the federal Anti-Kickback Statute, they are not automatically prohibited under the federal Anti-Kickback Statute but are susceptible to government scrutiny. For example, in October 2014, we entered into a Settlement Agreement with the United States and relator David Barbetta to resolve the then pending 2010 and 2011 U.S. Attorney physician relationship investigations regarding certain of our joint ventures and paid $406 million in settlement amounts, civil forfeiture, and interest to the United States and certain states. For further details, see ~~“If~~"If we fail to comply with our Corporate Integrity Agreement, we could be subject to substantial penalties and exclusion from participation in federal healthcare programs that could have a material adverse effect on our business, results of operations and financial ~~condition”~~condition".

There are significant ~~estimating~~ risks associated with estimating the amount of dialysis revenues and related refund liabilities that we recognize, and if ~~we are unable to accurately estimate~~ our estimates of revenues and related refund liabilities are materially inaccurate, it could impact the timing and the amount of our revenues recognition or have a material adverse effect on our business, results of operations and financial condition.

There are significant ~~estimating~~ risks associated with estimating the amount of U.S. dialysis and related lab services revenues and related refund liabilities that we recognize in a reporting period. 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. Determining applicable primary and secondary coverage for approximately ~~189,400~~198,400 U.S. 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 U.S. dialysis and related lab services revenues estimating risk to be within 1% of net revenues for the segment. If our estimates of U.S. dialysis and related lab services revenues and related

refund liabilities are materially inaccurate, it could impact the timing and the amount of our revenues recognition and have a material adverse impact on our business, results of ~~operations.~~operations and financial condition.

Our ancillary services and strategic initiatives, including our pharmacy services and our international ~~dialysis~~ operations, that we invest in now or in the future may generate losses and may ultimately be unsuccessful. In the event that one or more of these activities is unsuccessful, our business, results of operations and financial condition may be negatively impacted and we may have to write off our investment and incur other exit costs.

Our ancillary services and strategic initiatives currently include pharmacy services, disease management services, vascular access services, ESRD clinical research programs, physician services, physician practice management services, direct primary careare subject to many of the same risks, regulations and laws, as described in the risk factors related to our ~~international~~ dialysis ~~operations.~~business set forth in this Part II, Item 1A, and are also subject to additional risks, regulations and laws specific to the nature of the particular strategic initiative. We expect to add additional service offerings to our business and pursue additional strategic initiatives in the future as circumstances warrant, which could include healthcare services not related to dialysis. Many of these initiatives require or would require investments of both management and financial resources and can generate significant losses for a substantial period of time and may not become ~~profitable.~~profitable in the expected timeframe or at all. There can be no assurance that any such strategic initiative will ultimately be successful. Any significant change in market conditions, or business performance, or in the political, legislative or regulatory environment, may impact the economic viability of any of these strategic initiatives.

If any of our ancillary services or strategic initiatives, including our pharmacy services and our international ~~dialysis~~ operations, ~~do not perform as planned,~~are unsuccessful, it ~~could~~would have a negative impact on our business, results of operations and financial condition, and we may determine to exit that line of business. We could incur significant termination costs if we were to exit certain of these lines of business. In addition, we may incur a material write-off or an impairment of our investment, including goodwill, in one or more of ~~these activities,~~our ancillary services or strategic initiatives. In that regard, we ~~could incur significant termination costs if we were~~have taken, and may in the future take, impairment charges related to ~~exit a certain line of business.~~our ancillary services and strategic initiatives, including in our international and pharmacy businesses.

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 business, results of operations and financial condition.

~~We believe that~~Physicians, including medical directors, choose where they refer their patients. Some 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~~sources for ~~most~~many of our centers ~~is often~~include the physician or physician group providing medical director services to the center.

Our medical director contracts are for fixed periods, generally ten years, and at any given time a large number of them could be up for renewal at the same time. Medical directors have no obligation to extend their agreements with us and if we are unable to enforce noncompetition provisions contained in terminated medical director agreements, our former medical directors may choose to provide medical director services for competing providers or establish their own dialysis centers in competition with ours. Neither our current nor former medical directors have an obligation to refer their patients to our centers.

The aging of the nephrologist population and opportunities presented by our competitors may negatively impact a medical director’s decision to enter into or extend his or her agreement with us. ~~Different~~Moreover, different affiliation models in the changing healthcare environment that limit a nephrologist’s choice in where he or she can refer patients, such as an increase in

the number of physicians becoming employed by hospitals or a perceived decrease in the quality of service levels at our centers, may limit a nephrologist’s ability or desire to refer patients to our centers or otherwise negatively impact treatment volumes.

In addition, we may take actions to restructure existing relationships or take positions in negotiating extensions of relationships to assure compliance with the federal Anti-Kickback Statute, Stark Law and other similar laws. 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.~~agreement. These actions, in an effort to comply with applicable laws and regulations, could negatively impact the decision of physicians to extend their medical director agreements with ~~us or~~us. If we are unable to obtain qualified medical directors to provide supervision of the operations and care provided at our dialysis centers, it could affect physicians’ desire to refer ~~their~~ patients to ~~us.~~our dialysis centers. If a significant number of physicians were to cease referring patients to our dialysis centers, it would have a material adverse effect on our business, results of operations and financial condition.

If there are shortages of skilled clinical personnel, or if changes to state staffing ratios are implemented with which we ~~experience a higher than normal turnover rate,~~are required to comply, we may experience disruptions in our business operations and increases in operating ~~expenses.~~expenses, among other things, which could have a material adverse effect on our business, results of operations and financial condition.

We ~~are experiencing~~face increasing labor costs generally, and in particular, face 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 healthcare providers. This nursing shortage may limit our ability to expand our operations. ~~In addition,~~Furthermore, changes in certification requirements ~~or increases in the required staffing levels for skilled clinical personnel~~ can impact our ability to maintain sufficient staff levels, including to the extent our teammates are not able to meet new requirements, ~~or we experience a higher than normal turnover rate due to increased competition for qualified clinical personnel. If we are unable to hire skilled clinical personnel when needed, or~~among other things. In addition, if we experience a higher than normal turnover rate for our

skilled clinical personnel, our operations and treatment growth ~~will~~may be negatively impacted, which ~~would~~could adversely affect our business, results of operations and financial condition.

In addition, currently pending and potential future ballot initiatives or referendums, legislation or policy changes could cause us to incur substantial costs to challenge and prepare for and, if implemented, impose additional requirements on our operations, including increases in the required staffing levels or staffing ratios for clinical personnel, minimum transition times between treatments, limits on how much patients may be charged for care, limitations as to the amount that can be spent on certain medical costs, and a ceiling on the percent of profit for such care. Changes such as these mandated by currently pending and future ballot initiatives or referendums, legislation or policy changes would likely materially reduce our revenues and increase our operating expense and impact our ability to staff our clinics to the new, elevated staffing levels, in particular given the ongoing nationwide shortage of healthcare workers, especially nurses. Any of these events or circumstances could materially reduce our revenues and increase our operating and other costs, require us to close dialysis centers, reduce shifts or negatively impact employee relations, treatment growth and productivity, and could have a material adverse effect on our business, results of operations and financial condition.

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

Our business is labor intensive, and our financial and operating results ~~are~~have been and continue to be subject to variations in labor-related costs, productivity and the number of pending or potential claims against us related to labor and employment practices. ~~If political~~Political or other efforts at the national or local level could result in actions or proposals that increase the likelihood or success of union organizing activities at our facilities ~~if union efforts impact legislation or policy issues, if~~and union organizing activities could increase for other ~~reasons, or if labor~~reasons. Labor and employment claims, including the filing of class action suits, or work stoppages, wages and benefits or adverse outcomes of these types of claims could trend ~~upwards, our operating costs~~upwards. Any of these events or circumstances could ~~increase and~~have a material adverse effect on our employee relations, treatment growth, productivity, business, results of operations and financial ~~condition could be adversely affected.~~condition.

Complications associated with our billing and collections system could materially adversely affect our business, results of operations and financial condition.

Our billing system is critical to our billing operations. If there are defects in the billing system, we may experience difficulties in our ability to successfully bill and collect for services rendered, including a delay in collections, a reduction in the amounts collected, 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, any or all of which could materially adversely affect our results of operations.

Risk factors primarily related to DMG:

DMG is subject to many of the same risks to which our dialysis business is subject.

As a participant in the healthcare industry, DMG is subject to many of the same risks as our dialysis business is, as described in the risk factors set forth above in this Part I,II, Item 1A, any of which could have a material adverse effect on DMG’s business, results of operations and financial condition.

Under most of DMG’s agreements with health plans, DMG assumes some or all of the risk that the cost of providing services will exceed its compensation.

~~Over 82%~~Approximately 83% of DMG’s revenue for the three months ended March 31, ~~2017~~2018 is derived from fixed per member per month (PMPM) fees paid by health plans under capitation agreements with DMG or its associated physician groups. While there are variations specific to each arrangement, DMG, through ~~DaVita Health Plan of California, Inc. (DHPC),~~DHPC, a subsidiary of HealthCare Partners Holdings, LLC and a restricted Knox-Keene licensed entity, and, in certain instances, DMG’s associated physician groups, generally contract with health plans to receive a PMPM fee for professional services and assume the financial responsibility for professional services only. In some cases, the health plans separately enter into capitation contracts with third parties (typically hospitals) who receive directly a PMPM fee and assume contractual financial responsibility for hospital services. In other cases, the health plan does not pay any portion of the PMPM fee to the hospital, but rather administers claims for hospital expenses itself. In both scenarios, DMG enters into managed care-related administrative services agreements or similar arrangements with those third parties (typically hospitals) under which DMG agrees to be responsible for utilization review, quality assurance, and other managed care-related administrative functions and claim payments. As compensation for such administrative services, DMG is entitled to receive a percentage of the amount by which the institutional capitation revenue received from health plans exceeds institutional expenses; any such risk-share amount to which DMG is entitled is recorded as medical revenues, and DMG is also responsible for a percentage of any short-fall in the event that institutional expenses exceed institutional revenues. To the extent that members require more care than is anticipated and/or the cost of care increases, aggregate fixed PMPM amounts, or capitation payments, may be insufficient to cover the costs associated with treatment. If medical costs and expenses exceed estimates, except in very limited circumstances, DMG will not be able to increase the PMPM fee received under these risk agreements during their then-current terms and could, directly or indirectly through its contracts with its associated physician groups, suffer losses with respect to such agreements.

Changes in DMG’s or its associated physician groups’ anticipated ratio of medical expense to revenue can significantly impact DMG’s financial results. Accordingly, the failure to adequately predict and control medical costs and expenses and to make reasonable estimates and maintain adequate accruals for incurred but not reported claims, could have a material adverse effect on DMG’s business, results of operations and financial condition.

Historically, DMG’s and its associated physician groups’ medical costs and expenses as a percentage of revenue have fluctuated. Factors that may cause medical expenses to exceed estimates include:

the health status of members;

higher than expected utilization of new or existing healthcare services or technologies;

an increase in the cost of healthcare services and supplies, including pharmaceuticals, whether as a result of inflation or otherwise;

changes to mandated benefits or other changes in healthcare laws, regulations and practices;

periodic renegotiation of provider contracts with specialist physicians, hospitals and ancillary providers;

periodic renegotiation of contracts with DMG’s affiliated primary care physicians and specialists;

changes in the demographics of the participating members and medical trends;

contractual or claims disputes with providers, hospitals or other service providers within and outside of a health plan’s network;

the occurrence of catastrophes, major epidemics or acts of terrorism; and

the reduction of health plan premiums.

Risk-sharing arrangements that DMG and its associated physician groups have with health plans and hospitals could result in their costs exceeding the corresponding revenues, which could reduce or eliminate any shared risk profitability.

Most of the agreements between health plans and DMG and its associated physician groups contain risk-sharing arrangements under which the physician groups can earn additional compensation from the health plans by coordinating the provision of quality, cost-effective healthcare to members. However, such arrangements may require the physician group to assume a portion of any loss sustained from these arrangements, thereby reducing DMG’s net income. Under these risk-sharing arrangements, DMG and its associated physician groups are responsible for a portion of the cost of hospital services or other services that are not capitated. The terms of the particular risk-sharing arrangement allocate responsibility to the respective parties when the cost of services exceeds the related revenue, which results in a deficit, or permit the parties to share in any surplus amounts when actual costs are less than the related revenue. The amount of non-capitated medical and hospital costs in any period could be affected by factors beyond the control of DMG, such as changes in treatment protocols, new technologies, longer lengths of stay by the patient and inflation. Certain of DMG’s agreements with health plans stipulate that risk-sharing pool deficit amounts are carried forward to offset any future years’ surplus amounts DMG would otherwise be entitled to receive. DMG accrues for any such risk-sharing deficits. To the extent that such non-capitated medical and hospital costs are higher than anticipated, revenue may not be sufficient to cover the risk-sharing deficits the health plans and DMG are responsible for, which could have a material adverse effect on DMG’s business, results of operations and financial condition.

Renegotiation, renewal or termination of capitation agreements with health plans could have a material adverse effect on DMG’s business, results operations and financial condition.

Under most of DMG’s and its associated physician groups’ capitation agreements with health plans, the health plan is generally permitted to modify the benefit and risk obligations and compensation rights from time to time during the terms of the agreements. If a health plan exercises its right to amend its benefit and risk obligations and compensation rights, DMG and its associated physician groups are generally allowed a period of time to object to such amendment. If DMG or its associated physician group so objects, under some of the risk agreements, the relevant health plan may terminate the applicable agreement upon 90 to 180 days written notice. If DMG or its associated physician groups enter into capitation contracts or other risk sharing arrangements with unfavorable economic terms, or a capitation contract is amended to include unfavorable terms, DMG could, directly or indirectly through its contracts with its associated physician groups, suffer losses with respect to such contract. Since DMG does not negotiate with CMS or any health plan regarding the benefits to be provided under their Medicare Advantage plans, DMG often has just a few months to familiarize itself with each new annual package of benefits it is expected to offer. Depending on the health plan at issue and the amount of revenue associated with the health plan’s risk agreement, the renegotiated terms or termination could have a material adverse effect on DMG’s business, results of operations and financial condition.

Laws regulating the corporate practice of medicine could restrict the manner in which DMG is permitted to conduct its business, and the failure to comply with such laws could subject DMG to penalties or require a restructuring of DMG.

Some states have laws that prohibit business entities, such as DMG, from practicing medicine, employing physicians to practice medicine, exercising control over medical decisions by physicians (also known collectively as the corporate practice of

medicine) or engaging in certain arrangements, such as fee-splitting, with physicians. In some states these prohibitions are expressly stated in a statute or regulation, while in other states the prohibition is a matter of judicial or regulatory interpretation. Of the states in which DMG currently operates, California, Colorado, Nevada and Washington generally prohibit the corporate practice of medicine, and other states may as well.

In California, Colorado, Nevada and Washington, DMG operates by maintaining long-term contracts with its associated physician groups which are each owned and operated by physicians and which employ or contract with additional physicians to provide physician services. Under these arrangements, DMG provides management services and, receives a management fee for providing non-medical management services; however, DMG does not represent that it offers medical services, and does not exercise influence or control over the practice of medicine by the physicians or the associated physician groups.

In addition to the above management arrangements, DMG has certain contractual rights relating to the orderly transfer of equity interests in certain of its associated California, Colorado, Nevada and Washington physician groups through succession agreements and other arrangements with their physician equity holders. However, such equity interests cannot be transferred to or held by DMG or by any non-professional organization. Accordingly, neither DMG nor DMG’s subsidiaries directly own any equity interests in any physician groups in California, Colorado, Nevada and Washington. In the event that any of these associated physician groups fail to comply with the management arrangement or any management arrangement is terminated and/or DMG is unable to enforce its contractual rights over the orderly transfer of equity interests in its associated physician groups, such events could have a material adverse effect on DMG’s business, results of operations and financial condition.

It is possible that a state regulatory agency or a court could determine that DMG’s agreements with physician equity holders of certain managed California, Colorado, Nevada and Washington associated physician groups as described above, either independently or coupled with the management services agreements with such associated physician groups, are in violation of the corporate practice of medicine doctrine. As a result, these arrangements could be deemed invalid, potentially resulting in a loss of revenues and an adverse effect on results of operations derived from such associated physician groups. Such a determination could force a restructuring of DMG’s management arrangements with associated physician groups in California, Colorado, Nevada and/or Washington, which might include revisions of the management services agreements, including a modification of the management fee and/or establishing an alternative structure that would permit DMG to contract with a physician network without violating the corporate practice of medicine prohibition. There can be no assurance that such a restructuring would be feasible, or that it could be accomplished within a reasonable time frame without a material adverse effect on DMG’s business, results of operations and financial condition. In December 2013, DHPC obtained a restricted Knox-Keene license in California, which permits DHPC to contract with health plans in California to accept global risk without violating the corporate practice of medicine prohibition. However, DMG and DMG’s Colorado, Nevada and Washington associated physician groups, as well as those physician equity holders of associated physician groups who are subject to succession agreements with DMG, could be subject to criminal or civil penalties or an injunction for practicing medicine without a license or aiding and abetting the unlicensed practice of medicine.

If DMG’s agreements or arrangements with any physician equity holder(s) of associated physicians, physician groups or ~~IPAs~~independent practice associations (IPAs) are deemed invalid under state law, including laws against the corporate practice of medicine, or federal law, or are terminated as a result of changes in state law, or if there is a change in accounting standards by the Financial Accounting Standards Board (FASB) or the interpretation thereof affecting consolidation of entities, it could have a material adverse effect on DMG’s consolidation of total revenues derived from such associated physician groups.

DMG’s financial statements are consolidated in accordance with applicable accounting standards and include the accounts of its majority-owned subsidiaries and certain non-owned DMG-associated and managed physician groups. Such consolidation for accounting and/or tax purposes does not, is not intended to, and should not be deemed to, imply or provide to DMG any control over the medical or clinical affairs of such physician groups. In the event of a change in accounting standards promulgated by FASB or in interpretation of its standards, or if there is an adverse determination by a regulatory agency or a court, or a change in state or federal law relating to the ability to maintain present agreements or arrangements with such physician groups, DMG may not be permitted to continue to consolidate the total revenues of such organizations. A change in accounting for consolidation with respect to DMG’s present agreement or arrangements would diminish DMG’s reported revenues but would not be expected to materially and adversely affect its reported results of operations, while regulatory or legal rulings or changes in law interfering with DMG’s ability to maintain its present agreements or arrangements could materially diminish both revenues and results of operations.

If DHPC is not able to satisfy financial solvency or other regulatory requirements, we could become subject to sanctions and its license to do business in California could be limited, suspended or terminated, which could have a material adverse effect on DMG’s business, results of operations and financial condition.

Knox-Keene requires healthcare service plans operating in California to comply with financial solvency and other requirements overseen by the California Department of Managed HealthCare (DMHC). Under Knox-Keene, DHPC is required to, among other things:

Maintain, at all times, a minimum tangible net equity (TNE);

Submit periodic financial solvency reports to the DMHC containing various data regarding performance and financial solvency;

Comply with extensive regulatory requirements; and

Submit to periodic regulatory audits and reviews concerning DHPC operations and compliance with Knox-Keene.

In the event that DHPC is not in compliance with the provisions of Knox-Keene, we could be subject to sanctions, or limitations on, or suspension of its license to do business in California, which could have a material adverse effect on DMG’s business, results of operations and financial condition.

If DMG’s associated physician group is not able to satisfy the California DMHC’s financial solvency requirements, DMG’s associated physician group could become subject to sanctions and DMG’s ability to do business in California could be limited or terminated, which could have a material adverse effect on DMG’s business, results of operations and financial condition.

The California DMHC has instituted financial solvency regulations to monitor the financial solvency of capitated physician groups. Under these regulations, DMG’s associated physician group is required to, among other things:

Maintain, at all times, a minimum cash-to-claims ratio (where cash-to-claims ratio means the organization’s cash, marketable securities and certain qualified receivables, divided by the organization’s total unpaid claims liability). The regulation currently requires a cash-to-claims ratio of 0.75.

Submit periodic reports to the California DMHC containing various data and attestations regarding performance and financial solvency, including incurred but not reported calculations and documentation, and attestations as to whether or not the organization was in compliance with Knox-Keene requirements related to claims payment timeliness, had maintained positive TNE (i.e., at least $1.00) and had maintained positive working capital (i.e., at least $1.00).

In the event that DMG’s associated physician group is not in compliance with any of the above criteria, DMG’s associated physician group could be subject to sanctions, or limitations on, or removal of, its ability to do business in California, which could have a material adverse effect on DMG’s business, results of operations and financial condition.

Reductions in Medicare Advantage health plan reimbursement rates stemming from ~~recent~~ healthcare reforms and any future related regulations could have a material adverse effect on DMG’s business, results of operations and financial condition.

A significant portion of DMG’s revenue is directly or indirectly derived from the monthly premium payments paid by CMS to health plans for medical services provided to Medicare Advantage enrollees. As a result, DMG’s results of operations are, in part, dependent on government funding levels for Medicare Advantage programs. Any changes that limit or reduce Medicare Advantage reimbursement levels, such as reductions in or limitations of reimbursement amounts or rates under programs, reductions in funding of programs, expansion of benefits without adequate funding, elimination of coverage for certain benefits, or elimination of coverage for certain individuals or treatments under programs, could have a material adverse effect on DMG’s business, results of operations and financial condition.

Each year, CMS issues a final rule to establish the Medicare Advantage benchmark payment rates for the following calendar year. Any reduction to Medicare Advantage rates toimpacting DMG that is greater compared to the industry average rate may have material adverse effect on DMG’s business, results of operations and financial condition. The final impact of the Medicare Advantage rates can vary from any estimate we may have and may be further impacted by the relative growth of DMG’s Medicare Advantage patient volumes across markets as well as by the benefit plan designs submitted. It is possible that

we may underestimate the impact of the Medicare Advantage rates on our business, which could have a material adverse effect on DMG’s business, results of operations and financial condition.

We ~~have taken~~took impairment charges against the goodwill of ~~three~~several of our DMG reporting units in five of the ten quarters since the fourth quarter of 2015 ~~and the first and second quarters of 2016~~ based on continuing developments atin our DMG ~~reporting units,~~business, including ~~the~~recent annual updates to Medicare Advantage ~~final~~ benchmark reimbursement rates, ~~for 2017 announced on April 4, 2016, further~~ changes in our expectations concerning future government reimbursement rates and our expected ability to mitigate them, ~~as well as~~ medical cost and utilization trends, commercial pricing pressures, commercial membership rates, underperformance of certain at-risk reporting units ~~in recent quarters~~ and other market ~~conditions.~~factors. We may also need to take additional ~~goodwill~~ impairment charges against earnings in a future period, depending on the impact of continuing ~~changes~~developments on the value of our DMG ~~reporting units. A goodwill impairment occurs when~~business. Specifically, if DMG’s fair value less the costs incurred in the sale of DMG falls below its carrying amount, ~~of a reporting unit’s goodwill is in excess of its implied fair value,~~we may need to recognize additional impairment charges on this business, and the amount of such ~~non-cash charge,~~charges, if any, could be significant. ~~In estimating~~Our estimates of the fair value of our DMG reporting units, we update our forecasts for our at-risk DMG reporting units to reflect the expected future cash flows that we believe market participants would use in determining fair values of our DMG reporting units if they were to acquire these businesses. We and our independent advisors also usethis business rely on certain estimates and ~~key~~ assumptions, ~~in determining~~including the ~~estimate~~terms and pricing agreed for the sale of ~~these fair values, including~~this business, as well as applicable market multiples, discount and long-term growth rates, market data and future reimbursement ~~rates.~~rates, as applicable. Our estimates of the fair value of ~~our~~the DMG ~~reporting units~~business could differ from the actual ~~values~~value that a market participant would pay for ~~these reporting units.~~this business.

DMG’s Medicare Advantage revenues may continue to be volatile in the future, which could have a material adverse impact on DMG’s business, results of operations and financial ~~condition~~condition.

The ~~Health Reform Acts, enacted in 2010, contain~~ACA contains a number of provisions that negatively impact Medicare Advantage plans, each of which could have a material adverse effect on DMG’s business, results of operations and financial condition. These provisions include the following:

Medicare Advantage benchmarks for 2011 were frozen at 2010 levels. From 2012 through 2016, Medicare Advantage benchmark rates were phased down from prior levels. The new benchmarks ~~will be~~were fully phased-in in 2017 and ~~will~~ range between 95% and 115% of the Medicare ~~FFS~~Fee-for-Service (Medicare FFS) costs, depending on a plan’s geographic area. If our costs escalate faster than can be absorbed by the level of revenues implied by these benchmark rates, then it could have a material adverse effect on DMG’s business and results of operations.

Rebates received by Medicare Advantage plans that were reduced, with larger reductions for plans failing to receive certain quality ratings.

The Secretary of the ~~Department of Health and Human Services (HHS)~~HHS has been granted the explicit authority to deny Medicare Advantage plan bids that propose significant increases in cost sharing or decreases in benefits. If the bids submitted by plans contracted with DMG are denied, this could have a material adverse effect on DMG’s business and results of operations.

Medicare Advantage plans with medical loss ratios below 85% are required to pay a rebate to the Secretary of HHS. The rebate amount is the total revenue under the contract year multiplied by the difference between 85% and the plan’s actual medical loss ratio. The Secretary of HHS will halt enrollment in any plan failing to meet this ratio for three consecutive years, and terminate any plan failing to meet the ratio for five consecutive years. If a DMG-contracting Medicare Advantage plan experiences a limitation on enrollment or is otherwise terminated from the Medicare Advantage program, it could have a material adverse effect on DMG’s business and results of operations.

Prescription drug plans are required to provide coverage of certain drug categories on a list developed by the Secretary of HHS, which could increase the cost of providing care to Medicare Advantage enrollees, and thereby reduce DMG’s revenues and earnings. The Medicare Part D premium amount subsidized for high-income beneficiaries has been reduced, which could lower the number of Medicare Advantage enrollees, which would have a negative impact on DMG’s business and results of operations.

CMS increased coding intensity adjustments for Medicare Advantage plans beginning in 2014 and continuing through 2018, which reduces CMS payments to Medicare Advantage plans, which in turn will likely reduce the amounts payable to DMG and its associated physicians, physician groups, and IPAs under its capitation agreements.

~~However, the 2016 Presidential~~Recent legislative and ~~Congressional elections~~executive efforts to enact further healthcare reform legislation have caused the future state of the ~~Health Reform Acts~~exchanges, other ACA reforms, and many core aspects of the current U.S. health care system to be unclear. For example, in October 2017, the federal government announced that cost-sharing reduction payments to insurers would end, effective immediately, unless Congress appropriated the funds, and, in December 2017, Congress passed the Tax Cuts and Jobs Act, which includes a provision that eliminates the penalty under the ACA’s individual mandate effective January 1, 2019 and could impact the future state of the exchanges. Further, in February 2018, Congress passed the BBA which, among other things, repealed the Independent Payment Advisory Board that was established by the ACA and intended to reduce the rate of growth

in Medicare spending. While certain provisions of the BBA may increase the scope of benefits available for certain chronically ill Federal health care program beneficiaries beginning in 2020, the ultimate impact of such changes cannot be predicted. While specific changes and their timing are not yet apparent, enacted reforms and future legislative, regulatory, or executive changes could have a material adverse effect on DMG’s business, results of operations and financial condition.

There is also uncertainty regarding both Medicare Advantage payment rates and beneficiary enrollment, which, if reduced, would reduce DMG’s overall revenues and net income. For example, although the Congressional Budget Office (CBO) predicted in 2010 that Medicare Advantage participation would drop substantially by 2020, the CBO has more recently predicted, without taking into account potential future reforms, that enrollment in Medicare Advantage (and other contracts covering Medicare Parts A and B) could reach 31 million by 2027. Although Medicare Advantage enrollment increased by approximately 5.6 million, or by 50%, between the enactment of the

ACA in 2010 and 2015, there can be no assurance that this trend will continue. Further, fluctuation in Medicare Advantage payment rates are evidenced by CMS’s annual announcement of the expected average change in revenue from the prior year: for ~~2017,~~2018, CMS announced an average increase of ~~0.85%~~0.45%; and for ~~2018, 0.45%~~2019, 1.8%. Uncertainty over Medicare Advantage enrollment and payment rates present a continuing risk to DMG’s business.

According to the Kaiser Family Foundation (KFF), Medicare Advantage enrollment continues to be highly concentrated among a few payors, both nationally and in local ~~markets.~~regions. In 2017, ~~in 439~~the KFF reported that three payors together accounted for more than half of Medicare Advantage enrollment and eight firms accounted for approximately 75% of the lives. In 441 counties in ~~26 states,~~2018, only one company will offer Medicare Advantage ~~plans- an indicator that those markets may lack competition.~~plans. Consolidation among Medicare Advantage plans in certain regions, or the Medicare program’s failure to attract additional plans to participate in the Medicare Advantage program, could have a material adverse effect on DMG’s business, results of operations and financial condition.

DMG’s operations are dependent on competing health plans and, at times, a health plan’s and DMG’s economic interests may diverge.

For the three months ended March 31, ~~2017, 67%~~2018, 71% of DMG’s consolidated capitated medical revenues were earned through contracts with three health plans.

DMG expects that, going forward, substantially all of its revenue will continue to be derived from its contracts with health plans. Each health plan may immediately terminate any of DMG’s contracts and/or any individual credentialed physician upon the occurrence of certain events. They may also amend the material terms of the contracts under certain circumstances. Failure to maintain the contracts on favorable terms, for any reason, would materially and adversely affect DMG’s results of operations and financial condition. A material decline in the number of members could also have a material adverse effect on DMG’s results of operations.

Notwithstanding each health plan’s and DMG’s current shared interest in providing service to DMG’s members who are enrolled in the subject health plans, the health plans may have different and, at times, opposing economic interests from those of DMG. The health plans provide a wide range of health insurance services across a wide range of geographic regions, utilizing a vast network of providers. As a result, they and DMG may have different views regarding the proper pricing of services and/or the proper pricing of the various service providers in their provider networks, the cost of which DMG bears to the extent that the services of such service providers are utilized. These health plans may also have different views than DMG regarding the efforts and expenditures that they, DMG, and/or other service providers should make to achieve and/or maintain various quality ratings. In addition, several health plans have acquired or announced their intent to acquire provider organizations. If health plans with which DMG contracts acquire a significant number of provider organizations, they may not continue to contract with DMG or contract on less favorable terms or seek to prevent DMG from acquiring or entering into arrangements with certain providers. Similarly, as a result of changes in laws, regulations, consumer preferences, or other factors, the health plans may find it in their best interest to provide health insurance services pursuant to another payment or reimbursement structure. In the event DMG’s interests diverge from the interests of the health plans, DMG may have limited recourse or alternative options in light of its dependence on these health plans. There can be no assurances that DMG will continue to find it mutually beneficial to work with these health plans. As a result of various restrictive provisions that appear in some of the managed care agreements with health plans, DMG may at times have limitations on its ability to cancel an agreement with a particular health plan and immediately thereafter contract with a competing health plan with respect to the same service area.

DMG and its associated physicians, physician groups and IPAs and other physicians may be required to continue providing services following termination or renegotiation of certain agreements with health plans.

There are circumstances under federal and state law pursuant to which DMG and its associated physician groups, IPAs and other physicians could be obligated to continue to provide medical services to DMG members in their care following a termination of their applicable risk agreement with health plans and termination of the receipt of payments thereunder. In certain cases, this obligation could require the physician group or IPA to provide care to such member following the bankruptcy or insolvency of a health plan. Accordingly, the obligations to provide medical services to DMG members (and the associated costs) may not terminate at the time the applicable agreement with the health plan terminates, and DMG may not be able to recover its cost of providing those services from the health plan, which could have a material adverse effect on DMG’s business, results of operations and financial condition.

DMG operates primarily in California, Florida, Nevada, New Mexico, Washington and Colorado and may not be able to successfully establish a presence in new geographic regions.

DMG derives substantially all of its revenue from operations in California, Florida, Nevada, New Mexico, Washington and Colorado (which we refer to as the Existing Geographic Regions). As a result, DMG’s exposure to many of the risks described herein is not mitigated by a greater diversification of geographic focus. Furthermore, due to the concentration of DMG’s operations in the Existing Geographic Regions, it may be adversely affected by economic conditions, natural disasters (such as earthquakes or hurricanes), or acts of war or terrorism that disproportionately affect the Existing Geographic Regions as compared to other states and geographic markets.

To expand the operations of its network outside of the Existing Geographic Regions, DMG must devote resources to identify and explore perceived opportunities. Thereafter, DMG must, among other things, recruit and retain qualified personnel, develop new offices, establish potential new relationships with one or more health plans, and establish new relationships with physicians and other healthcare providers. The ability to establish such new relationships may be significantly inhibited by competition for such relationships and personnel in the healthcare marketplace in the targeted new geographic regions. Additionally, DMG may face the risk that a substantial portion of the patients served in a new geographic area may be enrolled in a Medicare FFS program and will not desire to transition to a Medicare Advantage program, such as those offered through the health plans that DMG serves, or they may enroll with other health plans with whom DMG does not contract to receive services, which could reduce substantially DMG’s perceived opportunity in such geographic area. In addition, if DMG were to seek to expand outside of the Existing Geographic Regions, DMG would be required to comply with laws and regulations of states that may differ from the ones in which it currently operates, and could face competitors with greater knowledge of such local markets. DMG anticipates that any geographic expansion may require it to make a substantial investment of management time, capital and/or other resources. There can be no assurance that DMG will be able to establish profitable operations or relationships in any new geographic markets.

Reductions in the quality ratings of the health plans DMG serves could have a material adverse effect on its business, results of operations and financial condition.

As a result of the ~~2010 Health Reform Acts,~~ACA, the level of reimbursement each health plan receives from CMS is dependent, in part, upon the quality rating of the Medicare plan. Such ratings impact the percentage of any cost savings rebate and any bonuses earned by such health plan. Since a significant portion of DMG’s revenue is expected to be calculated as a percentage of CMS reimbursements received by these health plans with respect to DMG members, reductions in the quality ratings of a health plan that DMG serves could have a material adverse effect on its business, results of operations and financial condition.

Given each health plan’s control of its plans and the many other providers that serve such plans, DMG believes that it will have limited ability to influence the overall quality rating of any such plan. The BBA passed in February 2018 implements certain changes to prevent artificial inflation of star ratings for Medicare Advantage plans offered by the same organization. In addition, CMS has ~~begun terminating~~terminated plans that have had a rating of less than three stars for three consecutive years, whereas Medicare Advantage plans with five stars are permitted to conduct enrollment throughout almost the entire year. ~~Accordingly, since~~Although CMS’ authority to terminate plans solely for failing to achieve the minimum quality star ratings has been suspended through the end of plan year 2018, low quality ratings can still potentially lead to the termination of a plan that DMG serves, DMG may not be able to prevent the potential termination of a contracting plan or a shift of patients to other plans based upon quality issues which could, in turn, have a material adverse effect on DMG’s business, results of operations and financial condition.

DMG’s records and submissions to a health plan may contain inaccurate or unsupportable information regarding risk adjustment scores of members, which could cause DMG to overstate or understate its revenue and subject it to various penalties.

DMG, on behalf of itself and its associated physicians, physician groups and IPAs, submits to health plans claims and encounter data that support the Medicare Risk Adjustment Factor (RAF) scores attributable to members. These RAF scores determine, in part, the revenue to which the health plans and, in turn, DMG is entitled for the provision of medical care to such members. The data submitted to CMS by each health plan is based, in part, on medical charts and diagnosis codes prepared and submitted by DMG. Each health plan generally relies on DMG and its employed or affiliated physicians to appropriately document and support such RAF data in DMG’s medical records. Each health plan also relies on DMG and its employed or affiliated physicians to appropriately code claims for medical services provided to members. Erroneous claims and erroneous encounter records and submissions could result in inaccurate PMPM fee revenue and risk adjustment payments, which may be subject to correction or retroactive adjustment in later periods. This corrected or adjusted information may be reflected in financial statements for periods subsequent to the period in which the revenue was recorded. DMG might also need to refund a portion of the revenue that it received, which refund, depending on its magnitude, could damage its relationship with the

applicable health plan and could have a material adverse effect on DMG’s business, results of operations and financial condition.

In June 2015, we received a subpoena from the OIG requesting information relating to our and our ~~subsidiaries’~~subsidiaries' (including ~~DMG’s~~DMG's and its subsidiary JSA’s) provision of services to Medicare Advantage plans and related patient diagnosis coding and risk adjustment submissions and payments. See ~~“Item 1. Legal Proceedings” in Part II of this report and~~ Note 10 to the condensed consolidated financial statements included in this report for further ~~details.~~details and discussions of legal proceedings elsewhere in these Risk Factors.

Additionally, CMS audits Medicare Advantage plans for documentation to support RAF-related payments for members chosen at random. The Medicare Advantage plans ask providers to submit the underlying documentation for members that they serve. It is possible that claims associated with members with higher RAF scores could be subject to more scrutiny in a CMS or plan audit. There is a possibility that a Medicare Advantage plan may seek repayment from DMG should CMS make any payment adjustments to the Medicare Advantage plan as a result of its audits. The plans also may hold DMG liable for any penalties owed to CMS for inaccurate or unsupportable RAF scores provided by DMG. In addition, DMG could be liable for penalties to the government under the FCA that range from $5,500 to $11,000 (adjusted for inflation) for each false claim, plus up to three times the amount of damages caused by each false claim, which can be as much as the amounts received directly or indirectly from the government for each such false claim.On ~~February 3, 2017,~~January 29, 2018, the DOJ issued a final rule announcing adjustments to FCA penalties, under which the per claim penalty range increases from ~~$10,957~~$11,181 to ~~$21,916~~$22,363 for penalties assessed after ~~February 3, 2017,~~January 29, 2018, so long as the underlying conduct occurred after November 2, 2015.

CMS has indicated that payment adjustments will not be limited to RAF scores for the specific Medicare Advantage enrollees for which errors are found but may also be extrapolated to the entire Medicare Advantage plan subject to a particular CMS contract. CMS has described its audit process as plan-year specific and stated that it will not extrapolate audit results for plan years prior to 2011. Because CMS has not stated otherwise, there is a risk that payment adjustments made as a result of one plan year’s audit would be extrapolated to prior plan years after 2011.

There can be no assurance that a health plan will not be randomly selected or targeted for review by CMS or that the outcome of such a review will not result in a material adjustment in DMG’s revenue and profitability, even if the information DMG submitted to the plan is accurate and supportable.

Separately, as described in further detail in ~~“Item 1. Legal Proceedings” in Part II of this report and~~ Note 10 to the condensed consolidated financial statements included in this report, onin March ~~13,~~ 2015, JSA, a subsidiary of DMG, received a subpoena from the OIG that relates, in part, to risk adjustment practices and data. See also discussions of legal proceedings elsewhere in these Risk Factors.

A failure to accurately estimate incurred but not reported medical expense could adversely affect DMG’s results of operations.

Patient care costs include estimates of future medical claims that have been incurred by the patient but for which the provider has not yet billed DMG. These claim estimates are made utilizing actuarial methods and are continually evaluated and adjusted by management, based upon DMG’s historical claims experience and other factors, including an independent assessment by a nationally recognized actuarial firm. Adjustments, if necessary, are made to medical claims expense and capitated revenues when the assumptions used to determine DMG’s claims liability changes and when actual claim costs are ultimately determined.

Due to the inherent uncertainties associated with the factors used in these estimates and changes in the patterns and rates of medical utilization, materially different amounts could be reported in DMG’s financial statements for a particular period under different conditions or using different, but still reasonable, assumptions. It is possible that DMG’s estimates of this type of claim may be inadequate in the future. In such event, DMG’s results of operations could be adversely impacted. Further, the inability to estimate these claims accurately may also affect DMG’s ability to take timely corrective actions, further exacerbating the extent of any adverse effect on DMG’s results of operations.

DMG faces certain competitive threats which could reduce DMG’s profitability and increase competition for patients.

DMG faces certain competitive threats based on certain features of the Medicare programs, including the following:

As a result of the direct and indirect impacts of the ~~Health Reform Acts,~~ACA, many Medicare beneficiaries may decide that an original Medicare FFS program is more attractive than a Medicare Advantage plan. As a result, enrollment in the health plans DMG serves may decrease.

Managed care companies offer alternative products such as regional preferred provider organizations (PPOs) and private FFS plans. Medicare PPOs and private FFS plans allow their patients more flexibility in selecting physicians than Medicare Advantage health plans, which typically require patients to coordinate care with a primary care physician. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 has encouraged the creation of regional PPOs through various incentives, including certain risk corridors, or cost reimbursement provisions, a stabilization fund for incentive payments, and special payments to hospitals not otherwise contracted with a Medicare Advantage plan that treat regional plan enrollees. The formation of regional Medicare PPOs and private FFS plans may affect DMG’s relative attractiveness to existing and potential Medicare patients in their service areas.

The payments for the local and regional Medicare Advantage plans are based on a competitive bidding process that may indirectly cause a decrease in the amount of the PMPM fee or result in an increase in benefits offered.

The annual enrollment process and subsequent lock-in provisions of the ~~Health Reform Acts~~ACA may adversely affect DMG’s level of revenue growth as it will limit the ability of a health plan to market to and enroll new Medicare beneficiaries in its established service areas outside of the annual enrollment period.

CMS allows Medicare beneficiaries who are enrolled in a Medicare Advantage plan with a quality rating of 4.5 stars or less to enroll in a 5-star rated Medicare Advantage plan at any time during the benefit year. Therefore, DMG may face a competitive disadvantage in recruiting and retaining Medicare beneficiaries.

In addition to the competitive threats intrinsic to the Medicare programs, competition among health plans and among healthcare providers may also have a negative impact on DMG’s profitability. For example, due to the large population of Medicare beneficiaries, DMG’s Existing Geographic Regions have become increasingly attractive to health plans that may compete with DMG. DMG may not be able to continue to compete profitably in the healthcare industry if additional competitors enter the same market. If DMG cannot compete profitably, the ability of DMG to compete with other service providers that contract with competing health plans may be substantially impaired. Furthermore, if DMG is unable to obtain new members or experiences a loss of existing members to competitors during the open enrollment period for Medicare it could have a material adverse effect on DMG’s business, results of operations and financial condition.

DMG competes directly with various regional and local companies that provide similar services in DMG’s Existing Geographic Regions. DMG’s competitors vary in size and scope and in terms of products and services offered. DMG believes that some of its competitors and potential competitors may be significantly larger than DMG and have greater financial, sales, marketing and other resources. Furthermore, it is DMG’s belief that some of its competitors may make strategic acquisitions or establish cooperative relationships among themselves.

A disruption in DMG’s healthcare provider networks could have a material adverse effect on DMG’s operations and profitability.

In any particular service area, healthcare providers or provider networks could refuse to contract with DMG, demand higher payments, or take other actions that could result in higher healthcare costs, disruption of benefits to DMG’s members, or difficulty in meeting applicable regulatory or accreditation requirements. In some service areas, healthcare providers or provider networks may have significant market positions. If healthcare providers or provider networks refuse to contract with DMG, use their market position to negotiate favorable contracts, or place DMG at a competitive disadvantage, then DMG’s ability to market or to be profitable in those service areas could be adversely affected. DMG’s provider networks could also be

disrupted by the financial insolvency of a large provider group. Any disruption in DMG’s provider networks could result in a loss of members or higher healthcare costs.

DMG’s revenues and profits could be diminished if DMG fails to retain and attract the services of key primary care physicians.

Key primary care physicians with large patient enrollment could retire, become disabled, terminate their provider contracts, get lured away by a competing independent physician association or medical group, or otherwise become unable or unwilling to continue practicing medicine or contracting with DMG or its associated physicians, physician groups or IPAs. In addition, DMG’s associated physicians, physician groups and IPAs could view the business model as unfavorable or unattractive to such providers, which could cause such associated physicians, physician groups or IPAs to terminate their relationships with DMG. Moreover, given limitations relating to the enforcement of post-termination noncompetition covenants in California, it would be difficult to restrict a primary care physician from competing with DMG’s associated physicians, physician groups or IPAs. As a result, members who have been served by such physicians could choose to enroll with competitors’ physician organizations or could seek medical care elsewhere, which could reduce DMG’s revenues and profits.

Moreover, DMG may not be able to attract new physicians to replace the services of terminating physicians or to service its growing membership.

Participation in ACO programs is subject to federal regulation, supervision, and evolving regulatory developments that may result in financial liability.

The ~~Health Reform Acts~~ACA established the Medicare Shared Savings Program (MSSP) for ACOs, which took effect in January 2012. Under the MSSP, eligible organizations are accountable for the quality, cost and overall care of Medicare beneficiaries assigned to an ACO and may be eligible to share in any savings below a specified benchmark amount. The Secretary of HHS is also authorized, but not required, to use capitation payment models with ACOs. DMG has formed an MSSP ACO through a subsidiary, which operates in California, Florida, and Nevada and is evaluating whether to participate in more ACOs in the future. The continued development and expansion of ACOs will have an uncertain impact on DMG’s revenue and profitability. WeDaVita Kidney Care is also ~~are~~ participating as a dialysis provider in Arizona, Florida, New Jersey, and Pennsylvania for the Innovation Center’s CEC Model.

The ACO programs are relatively new and therefore operational and regulatory guidance is limited. It is possible that the operations of DMG’s subsidiary ACO may not fully comply with current or future regulations and guidelines applicable to ACOs, may not achieve quality targets or cost savings, or may not attract or retain sufficient physicians or patients to allow DMG to meet its objectives. Additionally, poor performance could put the DMG ACO at financial risk with a potential obligation to CMS. Traditionally, other than ~~FFS~~fee-for-service billing by the medical clinics and healthcare facilities operated by DMG, DMG has not directly contracted with CMS and has not operated any health plans or provider sponsored networks. Therefore, DMG may not have the necessary experience, systems or compliance to successfully achieve a positive return on its investment in the ACO or to avoid financial or regulatory liability. DMG believes that its historical experience with fully delegated managed care will be applicable to operation of its subsidiary ACO, but there can be no such assurance.

California hospitals may terminate their agreements with HealthCare Partners Affiliates Medical Group and DaVita Health Plan of California, Inc. (formerly HealthCare Partners Plan, Inc., and, together with HealthCare Partners Affiliates Medical Group ~~AMG)~~(AMG)) or reduce the fees they pay to DMG.

In California, AMG maintains significant hospital arrangements designed to facilitate the provision of coordinated hospital care with those services provided to members by AMG and its associated physicians, physician groups and IPAs. Through contractual arrangements with certain key hospitals, AMG provides utilization review, quality assurance and other management services related to the provision of patient care services to members by the contracted hospitals and downstream hospital contractors. In the event that any one of these key hospital agreements is amended in a financially unfavorable manner or is otherwise terminated, such events could have a material adverse effect on DMG’s business, results of operations and financial condition.

DMG’s professional liability and other insurance coverage may not be adequate to cover DMG’s potential liabilities.

DMG maintains primary professional liability insurance and other insurance coverage through California Medical Group Insurance Company, Risk Retention Group, an Arizona corporation in which DMG is the majority owner, and through excess coverage contracted through third-party insurers. DMG believes such insurance is adequate based on its review of what it believes to be all applicable factors, including industry standards. Nonetheless, potential liabilities may not be covered by insurance, insurers may dispute coverage or may be unable to meet their obligations, the amount of insurance coverage and/or

related reserves may be inadequate, or the amount of any DMG self-insured retention may be substantial. There can be no assurances that DMG will be able to obtain insurance coverage in the future, or that insurance will continue to be available on a cost-effective basis, if at all. Moreover, even if claims brought against DMG are unsuccessful or without merit, DMG would have to defend itself against such claims. The defense of any such actions may be time-consuming and costly and may distract DMG management’s attention. As a result, DMG may incur significant expenses and may be unable to effectively operate its business.

Changes in the rates or methods of third-party reimbursements may materially adversely affect DMG business, results of operations and financial condition.

Any negative changes in governmental capitation or FFS rates or methods of reimbursement for the services DMG provides could have a material adverse effect on DMG’s business, results of operations and financial condition. Since governmental healthcare programs generally reimburse on a fee schedule basis rather than on a charge-related basis, DMG generally cannot increase its revenues from these programs by increasing the amount it charges for its services. Moreover, if DMG’s costs increase, DMG may not be able to recover its increased costs from these programs. Government and private

payors have taken and may continue to take steps to control the cost, eligibility for, use, and delivery of healthcare services due to budgetary constraints, and cost containment pressures as well as other financial issues. DMG believes that these trends in cost containment will continue. These cost containment measures, and other market changes in non-governmental insurance plans have generally restricted DMG’s ability to recover, or shift to non-governmental payors, any increased costs that DMG experiences. DMG’s business, results of operations and financial condition may be materially adversely affected by these cost containment measures, and other market changes.

DMG’s business model depends on numerous complex management information systems and any failure to successfully maintain these systems or implement new systems could materially harm DMG’s operations and result in potential violations of healthcare laws and regulations.

DMG depends on a complex, specialized, and integrated management information system and standardized procedures for operational and financial information, as well as for DMG’s billing operations. DMG may experience unanticipated delays, complications or expenses in implementing, integrating, and operating these integrated systems. Moreover, DMG may be unable to enhance its existing management information system or implement new management information systems where necessary. DMG’s management information system may require modifications, improvements or replacements that may require both substantial expenditures as well as interruptions in operations. DMG’s ability to implement and operate its integrated systems is subject to the availability of information technology and skilled personnel to assist DMG in creating and maintaining these systems.

DMG’s failure to successfully implement and maintain all of its systems could have a material adverse effect on its business, financial condition and results of operations. For example, DMG’s failure to successfully operate its billing systems could lead to potential violations of healthcare laws and regulations. If DMG is unable to handle its claims volume, or if DMG is unable to pay claims timely, DMG may become subject to a health plan’s corrective action plan or de-delegation until the problem is corrected, and/or termination of the health plan’s agreement with DMG. This could have a material adverse effect on DMG’s operations and profitability. In addition, if DMG’s claims processing system is unable to process claims accurately, the data DMG uses for its incurred but not reported ~~(IBNR)~~ estimates could be incomplete and DMG’s ability to accurately estimate claims liabilities and establish adequate reserves could be adversely affected. Finally, if DMG’s management information systems are unable to function in compliance with applicable state or federal rules and regulations, including medical information confidentiality laws such as HIPAA, possible penalties and fines due to this lack of compliance could have a material adverse effect on DMG’s financial condition, and results of operations.

DMG may be impacted by eligibility changes to government and private insurance programs.

Due to potential decreased availability of healthcare through private employers, the number of patients who are uninsured or participate in governmental programs may increase. The ~~Health Reform Acts have~~ACA has increased the participation of individuals in the Medicaid program in states that elected to participate in the expanded Medicaid coverage. A shift in payor mix from managed care and other private payors to government payors as well as an increase in the number of uninsured patients may result in a reduction in the rates of reimbursement to DMG or an increase in uncollectible receivables or uncompensated care, with a corresponding decrease in net revenue. Changes in the eligibility requirements for governmental programs such as the Medicaid program under the ~~Health Reform Acts~~ACA and state decisions on whether to participate in the expansion of such programs also could increase the number of patients who participate in such programs and the number of uninsured patients. Even for those patients who remain in private insurance plans, changes to those plans could increase patient financial responsibility, resulting in a greater risk of

uncollectible receivables. These factors and events could have a material adverse effect on DMG’s business, results of operations and financial condition.

Negative publicity regarding the managed healthcare industry generally or DMG in particular could adversely affect DMG’s results of operations or business.

Negative publicity regarding the managed healthcare industry generally, the Medicare Advantage program or DMG in particular, may result in increased regulation and legislative review of industry practices that further increase DMG’s costs of doing business and adversely affect DMG’s results of operations or business by:

requiring DMG to change its products and services;

increasing the regulatory, including compliance, burdens under which DMG operates, which, in turn, may negatively impact the manner in which DMG provides services and increase DMG’s costs of providing services;

adversely affecting DMG’s ability to market its products or services through the imposition of further regulatory restrictions regarding the manner in which plans and providers market to Medicare Advantage enrollees; or

adversely affecting DMG’s ability to attract and retain members.

Risk factors related to ownership of our common stock:

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 (or 120 days for nominations made using proxy access); 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.

Most of our outstanding employee stock-based compensation awards include a provision accelerating the vesting of the awards 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 March 31, ~~2017,~~2018, these cash bonuses would total approximately ~~$522~~$464 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.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table summarizes the Company’s repurchases of its common stock during the first quarter of ~~2017:~~2018:



	~~Total number~~ ~~of shares~~	~~Average~~ ~~price paid~~	~~Total number~~ ~~of shares~~ ~~purchased as~~ ~~part of publicly~~ ~~announced plans~~	~~Approximate~~ ~~dollar value~~ ~~of shares that~~ ~~may yet be~~ ~~purchased under~~ ~~the plans~~ ~~or programs~~
~~Period~~	~~purchased~~	~~per share~~	~~or programs~~	~~(in millions)~~
~~January 1-31, 2017~~	—	—	—	~~677.1~~
~~February 1-28, 2017~~	—	—	—	~~677.1~~
~~March 1-31, 2017~~	—	—	—	~~677.1~~
~~Total~~	—	—	—



	Total number of shares purchased	Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs	Approximate dollar value of shares that may yet be purchased under the plans or programs (in millions)
Period	Total number of shares purchased	Average price paid per share
January 1-31, 2018	519,227	$	76.63	519,227	$	1,079.3
February 1-28, 2018	937,180	73.63		937,180	1,010.3
March 1-31, 2018	2,740,897	69.17		2,740,897	820.7
Total	4,197,304	$	71.09	4,197,304

On ~~July 13, 2016,~~October 10, 2017, our Board of Directors approved an additional share ~~repurchases~~repurchase authorization in the amount of approximately ~~$1.2~~$1.253 billion. ~~These~~This share ~~repurchases were~~repurchase authorization was in addition to the approximately ~~$259~~$247 million remaining at that time under our Board of Directors’ prior share repurchase authorization announced in ~~April 2015.~~July 2016. We are authorized to make purchases from time to time in the open market or in privately negotiated transactions, including without limitation, through accelerated share repurchase transactions, derivative transactions, tender offers, Rule 10b5-1 plans or any combination of the foregoing, depending upon market conditions and other considerations. During the quarter ended March 31, 2018, we repurchased a total of 4,197,304 shares of our common stock for approximately $298 million at an average price of $71.09 per share. As of ~~March 31, 2017, there was~~May 2, 2018, we had approximately ~~$677~~$545 million remaining in Board authorizations available for share repurchases under our ~~current Board authorizations for additional share repurchases. We have not repurchased any shares from April 1, 2017 through May 2, 2017.~~stock repurchase program. Although these share repurchase authorizations have no expiration dates, we are subject to share repurchase limitations under the terms of the senior secured credit facilities and the indentures governing our senior notes.

Items 3, 4 and 5 are not applicable

Item 6. Exhibits

(a) Exhibits

The information required by this Item is set forth in the Index to Exhibits that precedes the signature page of this Quarterly Report on Form 10-Q.

INDEX TO EXHIBITS



Exhibit
Number

10.1		~~Sourcing~~Amendment to Stock Appreciation Rights Agreements, entered into effective as of March 1, 2018, by and ~~Supply Agreement~~ between DaVita Inc. and ~~Amgen USA Inc. effective as of January 6, 2017.~~Carol Anthony Davidson. ü*

10.2		~~Employment Agreement, effective April 27, 2016, by and between~~ DaVita ~~HealthCare Partners~~ Inc. ~~and Kathleen A. Waters.~~Non-Employee Director Compensation Policy, adopted on March 29, 2018. ü*

10.3		Consulting Agreement, made and entered into as of April 9, 2018, by and between DaVita Inc. and Jeanine Jiganti. ü*

12.1		Ratio of earnings to fixed charges. ü

31.1		Certification of the Chief Executive Officer, dated May ~~2, 2017,~~3, 2018, 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 May ~~2, 2017,~~3, 2018, 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 May ~~2, 2017,~~3, 2018, 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 May ~~2, 2017,~~3, 2018, 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. ü

101.SCH		XBRL Taxonomy Extension Schema Document. ü

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document. ü

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document. ü

101.LAB		XBRL Taxonomy Extension Label Linkbase Document. ü

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



ü	Filed herewith.
*	~~Portions of this exhibit are subject to a request for confidential treatment and have been redacted and filed separately with the SEC.~~Management contract or executive compensation plan or arrangement.

SIGNATURE

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.



	DAVITA INC.

	BY:		/s/ JAMES K. HILGER
			James K. Hilger
			Chief Accounting Officer*

Date: May ~~2, 2017~~3, 2018



*	Mr. Hilger has signed both on behalf of the Registrant as a duly authorized officer and as the Registrant’s principal accounting officer.

~~INDEX TO EXHIBITS~~



~~Exhibit~~
~~Number~~

~~10.1~~		~~Sourcing and Supply Agreement between DaVita Inc. and Amgen USA Inc. effective as of January 6, 2017.~~ ü*

~~10.2~~		~~Employment Agreement, effective April 27, 2016, by and between DaVita HealthCare Partners Inc. and Kathleen A. Waters.~~ ü

~~12.1~~		~~Ratio of earnings to fixed charges.~~ ü

~~31.1~~		~~Certification of the Chief Executive Officer, dated November 2, 2016, 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 2, 2016, 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 2, 2016, 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 2, 2016, 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.~~ ü

~~101.SCH~~		~~XBRL Taxonomy Extension Schema Document.~~ ü

~~101.CAL~~		~~XBRL Taxonomy Extension Calculation Linkbase Document.~~ ü

~~101.DEF~~		~~XBRL Taxonomy Extension Definition Linkbase Document.~~ ü

~~101.LAB~~		~~XBRL Taxonomy Extension Label Linkbase Document.~~ ü

~~101.PRE~~		~~XBRL Taxonomy Extension Presentation, Linkbase Document.~~ ü



ü	~~Filed herewith.~~
*	~~Portions of this exhibit are subject to a request for confidential treatment and have been redacted and filed separately with the SEC.~~



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



Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company	☐

Emerging growth company	☐



	Three months ended March 31,
	2018			2017
Dialysis and related lab patient service revenues	$	2,591,074		$	2,422,786
Provision for uncollectible accounts	25,545			(107,058		)
Net dialysis and related lab patient service revenues	2,616,619			2,315,728
Other revenues	232,825			315,523
Total revenues	2,849,444			2,631,251
Operating expenses and charges:
Patient care costs and other costs	2,035,585			1,852,045
General and administrative	266,529			262,895
Depreciation and amortization	142,799			132,884
Equity investment income	(155		)	(677		)
Provision for uncollectible accounts	(6,000		)	1,910
Investment and other asset impairments	—			15,168
Goodwill impairment charges	—			24,198
Gain on changes in ownership interests	—			(6,273		)
Gain on settlement, net	—			(526,827		)
Total operating expenses and charges	2,438,758			1,755,323
Operating income	410,686			875,928
Debt expense	(113,516		)	(104,397		)
Other income, net	4,582			3,986
Income from continuing operations before income taxes	301,752			775,517
Income tax expense	70,737			281,665
Net income from continuing operations	231,015			493,852
Net (loss) income from discontinued operations, net of tax	(5,786		)	6,433
Net income	225,229			500,285
Less: Net income attributable to noncontrolling interests	(46,543		)	(52,588		)
Net income attributable to DaVita Inc.	$	178,686		$	447,697
Earnings per share:
Basic net income from continuing operations per share attributable to DaVita Inc.	$	1.07		$	2.29
Basic net income per share attributable to DaVita Inc.	$	1.00		$	2.33
Diluted net income from continuing operations per share attributable to DaVita Inc.	$	1.05		$	2.26
Diluted net income per share attributable to DaVita Inc.	$	0.98		$	2.29
Weighted average shares for earnings per share:
Basic	178,957,865			192,376,735
Diluted	181,834,547			195,281,014
Amounts attributable to DaVita Inc.:
Net income from continuing operations	$	191,015		$	440,905
Net (loss) income from discontinued operations	(12,329		)	6,792
Net income attributable to DaVita Inc.	$	178,686		$	447,697



	Three months ended March 31,
	2017			2016
Patient service revenues	$	2,601,378		$	2,481,933
Less: Provision for uncollectible accounts	(112,983		)	(109,205		)
Net patient service revenues	2,488,395			2,372,728
Capitated revenues	918,036			887,047
Other revenues	290,852			321,361
Total net revenues	3,697,283			3,581,136
Operating expenses and charges:
Patient care costs and other costs	2,722,820			2,582,333
General and administrative	391,780			386,429
Depreciation and amortization	190,206			169,355
Provision for uncollectible accounts	1,910			2,517
Equity investment income	(3,935		)	(1,387		)
Goodwill and asset impairment charges	39,366			77,000
Gain on changes in ownership interests	(6,273		)	—
Gain on settlement, net	(526,827		)	—
Total operating expenses and charges	2,809,047			3,216,247
Operating income	888,236			364,889
Debt expense	(104,429		)	(102,884		)
Other income, net	4,243			2,976
Income before income taxes	788,050			264,981
Income tax expense	287,765			126,822
Net income	500,285			138,159
Less: Net income attributable to noncontrolling interests	(52,588		)	(40,725		)
Net income attributable to DaVita Inc.	$	447,697		$	97,434
Earnings per share:
Basic net income per share attributable to DaVita Inc.	$	2.33		$	0.48
Diluted net income per share attributable to DaVita Inc.	$	2.29		$	0.47
Weighted average shares for earnings per share:
Basic	192,376,735			204,366,869
Diluted	195,281,014			207,928,096


	Three months ended March 31,						Three months ended March 31,
	2017			2016			2018			2017
Net income	$	500,285		$	138,159		$	225,229		$	500,285
Other comprehensive income (loss), net of tax:
Unrealized losses on interest rate cap and swap agreements:
Unrealized losses on interest rate cap and swap agreements	(3,188		)	(5,469		)
Reclassifications of net rate cap and swap agreements realized losses into net income	1,265			465
Other comprehensive income, net of tax:
Unrealized gains (losses) on interest rate cap agreements:
Unrealized gains (losses) on interest rate cap agreements							1,050			(3,188		)
Reclassifications of net realized losses on interest rate cap agreements into net income							1,537			1,265
Unrealized gains on investments:
Unrealized gains on investments	1,557			229			—			1,557
Reclassification of net investment realized gains into net income	(140		)	(93		)	—			(140		)
Unrealized gains on foreign currency translation:
Foreign currency translation adjustments	13,261			11,181			19,881			13,261
Other comprehensive income	12,755			6,313			22,468			12,755
Total comprehensive income	513,040			144,472			247,697			513,040
Less: Comprehensive income attributable to noncontrolling interests	(52,586		)	(40,725		)	(46,543		)	(52,586		)
Comprehensive income attributable to DaVita Inc.	$	460,454		$	103,747		$	201,154		$	460,454



		Page No.
	PART I. FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements:
	Consolidated Statements of Income for the three months ended March 31, ~~2017~~2018 and March 31, ~~2016~~2017	1
	Consolidated Statements of Comprehensive Income for the three months ended March 31, ~~2017~~2018 and March 31, ~~2016~~2017	2
	Consolidated Balance Sheets as of March 31, ~~2017~~2018 and December 31, ~~2016~~2017	3
	Consolidated Statements of Cash Flows for the three months ended March 31, ~~2017~~2018 and March 31, ~~2016~~2017	4
	Consolidated Statements of Equity for the three months ended March 31, ~~2017~~2018 and for the year ended December 31, ~~2016~~2017	56
	Notes to Condensed Consolidated Financial Statements	67
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3638
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	56	54
Item 4.	Controls and Procedures	57	55

	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	5856
Item 1A.	Risk Factors	6256
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	87
Item 6.	Exhibits	8887
	Signature	89


	March 31, 2017			December 31, 2016			March 31, 2018			December 31, 2017
ASSETS
Cash and cash equivalents	$	1,472,232		$	913,187		$	358,874		$	508,234
Restricted cash and equivalents							88,744			10,686
Short-term investments	313,265			310,198			4,602			32,830
Accounts receivable, less allowance of $242,462 and $252,056	1,900,561			1,917,302
Accounts receivable, net							1,830,590			1,714,750
Inventories	174,159			164,858			125,555			181,799
Other receivables	539,656			453,483			415,914			372,919
Income tax receivable							18,660			49,440
Prepaid and other current assets	204,027			210,604			106,351			112,058
Income taxes receivable	—			10,596
Current assets held for sale							5,724,265			5,761,642
Total current assets	4,603,900			3,980,228			8,673,555			8,744,358
Property and equipment, net of accumulated depreciation of $2,954,237 and $2,832,160	3,171,199			3,175,367
Intangible assets, net of accumulated amortization of $987,468 and $940,731	1,487,029			1,527,767
Equity investments	521,848			502,389
Property and equipment, net of accumulated depreciation of $3,230,717 and $3,103,662							3,185,223			3,149,213
Intangible assets, net of accumulated amortization of $360,828 and $356,774							113,366			113,827
Equity method and other investments							245,564			245,534
Long-term investments	108,368			103,679			34,344			37,695
Other long-term assets	43,450			44,510			51,728			47,287
Goodwill	9,452,470			9,407,317			6,638,592			6,610,279
	$	19,388,264		$	18,741,257		$	18,942,372		$	18,948,193
LIABILITIES AND EQUITY
Accounts payable	$	464,790		$	522,415		$	437,733		$	509,116
Other liabilities	783,806			856,847			544,846			552,662
Accrued compensation and benefits	756,002			815,761			526,183			616,116
Medical payables	389,681			336,381
Current portion of long-term debt	170,217			165,041			184,136			178,213
Income tax payable	249,081			—
Current liabilities held for sale							1,254,625			1,185,070
Total current liabilities	2,813,577			2,696,445			2,947,523			3,041,177
Long-term debt	8,918,878			8,947,327			9,279,885			9,158,018
Other long-term liabilities	504,380			465,358			391,156			365,325
Deferred income taxes	830,990			809,128			507,226			486,247
Total liabilities	13,067,825			12,918,258			13,125,790			13,050,767
Commitments and contingencies:
Noncontrolling interests subject to put provisions	979,848			973,258			1,034,501			1,011,360
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; 194,596,120 and 194,554,491 shares issued and outstanding, respectively)	195			195
Common stock ($0.001 par value, 450,000,000 shares authorized; 182,660,712 and 182,462,278 shares issued and 178,463,408 and 182,462,278 shares outstanding, respectively)							183			182
Additional paid-in capital	1,058,610			1,027,182			1,030,772			1,042,899
Retained earnings	4,158,010			3,710,313			3,820,767			3,633,713
Accumulated other comprehensive loss	(76,886		)	(89,643		)
Total DaVita Inc. shareholders’ equity	5,139,929			4,648,047
Treasury stock (4,197,304 and zero shares, respectively)							(298,377		)	—
Accumulated other comprehensive income							27,335			13,235
Total DaVita Inc. shareholders' equity							4,580,680			4,690,029
Noncontrolling interests not subject to put provisions	200,662			201,694			201,401			196,037
Total equity	5,340,591			4,849,741			4,782,081			4,886,066
	$	19,388,264		$	18,741,257		$	18,942,372		$	18,948,193


	Three months ended March 31,						Three months ended March 31,
	2017			2016			2018			2017
Cash flows from operating activities:
Net income	$	500,285		$	138,159		$	225,229		$	500,285
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	190,206			169,355			142,799			190,206
Goodwill and asset impairment charges	39,366			77,000
Impairment charges							—			39,366
Stock-based compensation expense	9,601			13,097			9,685			9,601
Deferred income taxes	20,091			47,519			43,617			20,091
Equity investment income, net	1,423			5,238			3,564			1,423
Other non-cash charges	9,467			11,507
Changes in operating assets and liabilities, other than from acquisitions and divestitures:
Other non-cash charges, net							9,959			9,464
Changes in operating assets and liabilities, net of effect of acquisitions and divestitures:
Accounts receivable	16,168			(78,097		)	(63,701		)	16,168
Inventories	(8,909		)	(4,924		)	57,621			(8,909		)
Other receivables and other current assets	(84,511		)	(75,326		)	(34,120		)	(84,511		)
Other long-term assets	(2,310		)	(965		)	2,054			(2,310		)
Accounts payable	(26,214		)	7,782			(62,830		)	(26,214		)
Accrued compensation and benefits	(62,825		)	(32,909		)	(62,550		)	(62,825		)
Other current liabilities	(9,633		)	55,673			49,379			(9,633		)
Income taxes	258,490			76,685			30,772			258,490
Other long-term liabilities	14,479			19,208			11,061			14,479
Net cash provided by operating activities	865,174			429,002			362,539			865,171
Cash flows from investing activities:
Additions of property and equipment	(214,535		)	(173,187		)	(232,443		)	(214,535		)
Acquisitions	(77,236		)	(405,154		)	(16,582		)	(77,236		)
Proceeds from asset and business sales	46,612			4,657			18,535			46,612
Purchase of investments available for sale	(2,358		)	(4,435		)	(2,646		)	(2,358		)
Purchase of investments held-to-maturity	(121,670		)	(228,198		)	(3,586		)	(121,645		)
Proceeds from sale of investments available for sale	4,025			5,155			5,151			4,025
Proceeds from investments held-to-maturity	116,285			252,701			31,454			116,285
Purchase of equity investments	(1,135		)	(5,850		)	(2,476		)	(1,135		)
Distributions received on equity investments							2,465			—
Net cash used in investing activities	(250,012		)	(554,311		)	(200,128		)	(249,987		)
Cash flows from financing activities:
Borrowings	12,803,015			13,098,553
Payments on long-term debt and other financing costs	(12,839,156		)	(13,118,741		)
Purchase of treasury stock	—			(274,926		)
Distributions to noncontrolling interests	(43,316		)	(50,409		)
Stock award exercises and other share issuances, net	3,330			3,167
Contributions from noncontrolling interests	17,989			10,190
Proceeds from sales of additional noncontrolling interests	—			3,557
Purchase of noncontrolling interests	(799		)	(4,300		)
Deferred financing costs	—			(188		)
Net cash used in financing activities	(58,937		)	(333,097		)
Effect of exchange rate changes on cash and cash equivalents	2,820			717
Net increase (decrease) in cash and cash equivalents	559,045			(457,689		)
Cash and cash equivalents at beginning of the year	913,187			1,499,116
Cash and cash equivalents at end of the period	$	1,472,232		$	1,041,427



	Non- controlling interests subject to put provisions			DaVita Inc. Shareholders’ Equity																						Non- controlling interests not subject to put provisions
									Additional paid-in capital											Accumulated other comprehensive loss
				Common stock								Retained earnings			Treasury stock
				Shares		Amount						Retained earnings			Shares		Amount						Total
Balance at December 31, 2015	$	864,066		217,120		$	217		$	1,118,326		$	4,356,835		(7,366	)	$	(544,772	)	$	(59,826	)	$	4,870,780		$	213,392
Comprehensive income:
Net income	99,834											879,874											879,874			53,374
Other comprehensive loss																				(29,817		)	(29,817		)	190
Stock purchase shares issued				438		1			23,902						—								23,903
Stock unit shares issued				4		—			(19,815		)				276		19,815						—
Stock-settled SAR shares issued				218		—			(36,685		)				513		36,685						—
Stock-settled stock-based compensation expense									37,970														37,970
Excess tax benefits from stock awards exercised									13,251														13,251
Distributions to noncontrolling interests	(111,092		)																							(81,309		)
Contributions from noncontrolling interests	33,517																									14,073
Sales and assumptions of noncontrolling interests	28,874								3,423														3,423			2,585
Purchase of noncontrolling interests	(6,660		)						(13,105		)												(13,105		)	(1,747		)
Changes in fair value of noncontrolling interests	65,855								(65,855		)												(65,855		)
Reclassifications and expirations of noncontrolling interests subject to puts	(1,136		)																							1,136
Purchase of treasury stock															(16,649	)	(1,072,377		)				(1,072,377		)
Retirement of treasury stock				(23,226	)	(23		)	(34,230		)	(1,526,396		)	23,226		1,560,649						—
Balance at December 31, 2016	$	973,258		194,554		$	195		$	1,027,182		$	3,710,313		—		$	—		$	(89,643	)	$	4,648,047		$	201,694
Comprehensive income:
Net income	34,585											447,697											447,697			18,003
Other comprehensive income																				12,757			12,757			(2		)
Stock unit shares issued				4		—			—						—		—						—
Stock-settled SAR shares issued				38		—			—						—		—						—
Stock-settled stock-based compensation expense									9,567														9,567
Distributions to noncontrolling interests	(25,957		)						—														—			(17,359		)
Contributions from noncontrolling interests	13,193								—														—			4,796
Sales and assumptions of noncontrolling interests	7,347								—														—			(6,388		)
Purchase of noncontrolling interests	(294		)						(423		)												(423		)	(82		)
Changes in fair value of noncontrolling interests	(22,284		)						22,284														22,284
Balance at March 31, 2017	$	979,848		194,596		$	195		$	1,058,610		$	4,158,010		—		$	—		$	(76,886	)	$	5,139,929		$	200,662



	For the three months ended
	March 31, 2018									March 31, 2017⁽¹⁾
	U.S. dialysis and related lab services			Other - Ancillary services and strategic initiatives			Consolidated			U.S. dialysis and related lab services			Other - Ancillary services and strategic initiatives			Consolidated
Patient service revenues:
Medicare and Medicare Advantage	$	1,485,192		$	—		$	1,485,192		$	1,272,595		$	—		$	1,272,595
Medicaid and Managed Medicaid	157,496			—			157,496			144,585			—			144,585
Other government	107,119			82,537			189,656			91,993			47,761			139,754
Commercial	782,979			19,718			802,697			756,710			13,883			770,593
Other revenues:
Medicare and Medicare Advantage	—			142,758			142,758			—			225,203			225,203
Medicaid and Managed Medicaid	—			15,791			15,791			—			18,595			18,595
Commercial	—			40,420			40,420			—			25,207			25,207
Other⁽²⁾	5,114			38,941			44,055			5,311			47,576			52,887
Eliminations of intersegment revenues	(18,422		)	(10,199		)	(28,621		)	(11,799		)	(6,369		)	(18,168		)
Total	$	2,519,478		$	329,966		$	2,849,444		$	2,259,395		$	371,856		$	2,631,251


(1)	As noted above, prior period amounts have not been adjusted under the cumulative effect method. The Company's dialysis and related lab services revenues for the three months ended March 31, 2017 has been presented net of the provision for uncollectible accounts of $107,058 in this table to conform to the current period presentation.


(2)	Other consists of management fees and revenue from the Company's ancillary services and strategic initiatives.


~~(1)~~	~~Shares associated with stock-settled stock appreciation rights~~escrow that ~~are excluded from the diluted denominator calculation because they are anti-dilutive under the treasury stock method.~~



	March 31, 2017						December 31, 2016
	Held to maturity		Available for sale		Total		Held to maturity		Available for sale		Total
Certificates of deposit, commercial paper and money market funds due within one year	$	312,065	$	—	$	312,065	$	256,827	$	—	$	256,827
Investments in mutual funds and common stock	—		48,124		48,124		50,000		47,404		97,404
Cash surrender value of life insurance policies	—		61,444		61,444		—		59,646		59,646
	$	312,065	$	109,568	$	421,633	$	306,827	$	107,050	$	413,877
Short-term investments	$	312,065	$	1,200	$	313,265	$	306,827	$	3,371	$	310,198
Long-term investments	—		108,368		108,368		—		103,679		103,679
	$	312,065	$	109,568	$	421,633	$	306,827	$	107,050	$	413,877


(1)	Shares associated with stock-settled stock appreciation rights excluded from the diluted denominator calculation because they are antidilutive under the treasury stock method.



	March 31, 2018						December 31, 2017
	Debt securities		Equity securities		Total		Debt securities		Equity securities		Total
Certificates of deposit and other time deposits	$	3,402	$	—	$	3,402	$	31,630	$	—	$	31,630
Investments in mutual funds and common stock	—		35,544		35,544		—		38,895		38,895
	$	3,402	$	35,544	$	38,946	$	31,630	$	38,895	$	70,525
Short-term investments	$	3,402	$	1,200	$	4,602	$	31,630	$	1,200	$	32,830
Long-term investments	—		34,344		34,344		—		37,695		37,695
	$	3,402	$	35,544	$	38,946	$	31,630	$	38,895	$	70,525


	U.S. dialysis and related lab services			DMG			Other-ancillary services and strategic initiatives			Consolidated total			U.S. dialysis and related lab services			Other-ancillary services and strategic initiatives			Consolidated total
Balance at January 1, 2016	$	5,629,183		$	3,398,264		$	267,032		$	9,294,479
Balance at January 1, 2017													$	5,691,587		$	323,788		$	6,015,375
Acquisitions	75,295			248,901			123,632			447,828			485,434			131,598			617,032
Divestitures	(12,891		)	(2,223		)	(29,645		)	(44,759		)	(32,260		)	(126		)	(32,386		)
Goodwill impairment charges	—			(253,000		)	(28,415		)	(281,415		)	—			(36,196		)	(36,196		)
Foreign currency and other adjustments	—			—			(8,816		)	(8,816		)	—			46,454			46,454
Balance at December 31, 2016	$	5,691,587		$	3,391,942		$	323,788		$	9,407,317
Balance at December 31, 2017													$	6,144,761		$	465,518		$	6,610,279
Acquisitions	46,569			14,989			17,171			78,729			2,137			13,905			16,042
Divestitures	(14,110		)	(29		)	—			(14,139		)
Goodwill impairment charges	—			—			(24,198		)	(24,198		)
Foreign currency and other adjustments	—			—			4,761			4,761			—			12,271			12,271
Balance at March 31, 2017	$	5,724,046		$	3,406,902		$	321,522		$	9,452,470
Balance at March 31, 2018													$	6,146,898		$	491,694		$	6,638,592

Balance at March 31, 2017:
Balance at March 31, 2018:
Goodwill	5,724,046			3,848,671			380,044			9,952,761			$	6,146,898		$	562,214		$	6,709,112
Accumulated impairment charges	—			(441,769		)	(58,522		)	(500,291		)	—			(70,520		)	(70,520		)
	$	5,724,046		3,406,902			321,522			9,452,470			$	6,146,898		$	491,694		$	6,638,592



	Goodwill balance as of March 31, 2017		Carrying amount coverage⁽¹⁾		Sensitivities
					Operating income⁽²⁾		Discount rate⁽³⁾
Reporting unit					Operating income⁽²⁾		Discount rate⁽³⁾
DMG Nevada	$	261,204	14.0	%	(2.7	)%	(3.9	)%
DMG Florida	$	447,073	10.5	%	(1.6	)%	(2.8	)%
DMG New Mexico	$	70,926	4.9	%	(1.5	)%	(2.3	)%
DMG Washington	$	245,576	2.0	%	(1.7	)%	(3.0	)%
Vascular Access	$	10,498	0.0	%	(1.7	)%	(4.9	)%



	Three months ended
	March 31, 2017
Healthcare costs payable, beginning of the period	$	214,275
Add: Components of incurred health care costs
Current year	467,683
Prior years	421
Total incurred health care costs	468,104
Less: Claims paid
Current year	247,723
Prior years	172,693
Total claims paid	420,416
Healthcare costs payable, end of the period	$	261,963


2017 (remainder of the year)	129,532
2018	167,855
2018 (remainder of the year)		136,885
2019	745,584	1,206,668
2020	70,157	72,608
2021	3,301,236	3,307,539
2022	1,277,759	1,283,255
2023		32,340
Thereafter	3,472,834	3,486,684


	Amount of losses recognized in OCI on interest rate cap and swap agreements						Location of losses reclassified from accumulated OCI into income		Amount of losses reclassified from accumulated OCI into income							Amount of unrecognized gains (losses) in OCI on interest rate cap agreements								Location of losses reclassified from accumulated OCI into income		Amount of losses reclassified from accumulated OCI into income
	Three months ended March 31,							Three months ended March 31,							Three months ended March 31,										Three months ended March 31,
Derivatives designated as cash flow hedges	2017			2016				2017				2016			2018				2017						2018				2017
Interest rate swap agreements	$	—		$	(692	)		Debt expense		$	—			$	151
Interest rate cap agreements	(5,217		)	(8,259		)		Debt expense		2,070				610			$	1,414			$	(5,217	)		Debt expense		$	2,070			$	2,070
Tax benefit (expense)	2,029			3,482					(805		)		(296		)
Tax (benefit) expense																(364		)		2,029				Tax expense		(533		)		(805		)
Total	$	(3,188	)	$	(5,469	)			$	1,265			$	465		$	1,050			$	(3,188	)				$	1,537			$	1,265


(1)	Reflects the cumulative effect of a change in accounting principle for ASUs 2016-01 and 2018-03 on classification and measurement of financial instruments and ASU 2018-02 on remeasurement and reclassification of deferred tax effects in accumulated other comprehensive income associated with the 2017 Tax Act.


Current assets	$	1,123		$	1,572
Property and equipment	5,604			1,643
Amortizable intangible and other long-term assets	6,173			2,563
Goodwill	78,729			16,042
Noncontrolling interests assumed	(8,052		)
Deferred income taxes	(2,194		)
Liabilities assumed	(447		)
Aggregate purchase price	$	80,936
Current liabilities				(2,392		)
Noncontrolling interests				(688		)
				$	18,740



Beginning balance, January 1, 2017	$	9,977
Contingent earn-out obligations associated with acquisitions	1,053
Remeasurement of fair value for contingent earn-out obligations	102
Payments on contingent earn-out obligations	(2,567		)
	$	8,565



	For the three months ended March 31, 2018
Beginning balance	$	6,388
Remeasurement of fair value for contingent earn-out obligations	174
Ending balance	$	6,562


	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	$	48,124	$	48,124	$	—	$	—
Cash surrender value of life insurance policies	$	61,444	$	—	$	61,444	$	—
Investments in mutual funds and common stock									$	35,544	$	35,544	$	—	$	—
Interest rate cap agreements	$	4,712	$	—	$	4,712	$	—	$	2,446	$	—	$	2,446	$	—
Funds on deposit with third parties	$	79,459	$	79,459	$	—	$	—
Liabilities
Contingent earn-out obligations	$	8,565	$	—	$	—	$	8,565	$	6,562	$	—	$	—	$	6,562
Temporary equity
Noncontrolling interests subject to put provisions	$	979,848	$	—	$	—	$	979,848	$	1,034,501	$	—	$	—	$	1,034,501


(1)	Includes management fees for providing management and administrative services to dialysis centers that are wholly-owned by third parties and legal entities in which the Company owns a noncontrolling equity investment.


~~(2)~~	Includes medical consulting service fees and management fees for providing management and administrative services to unconsolidated joint ventures, as well as revenue related to the maintenance of existing physician


~~(3)~~	~~U.S. dialysis and related lab services operating income includes the net gain on the settlement with the VA.~~



	March 31, 2017		December 31, 2016
Segment assets
U.S. dialysis and related lab services (including equity investments of $85,769 and $66,924, respectively)	$	11,744,695	$	11,099,137
DMG (including equity investments of $12,579 and $10,350, respectively)	6,209,369		6,213,091
Other—Ancillary services and strategic initiatives (including equity investments of $423,500 and $425,115, respectively)	1,434,200		1,429,029
Consolidated assets	$	19,388,264	$	18,741,257


~~18.~~20.	Changes in DaVita Inc.’s ownership interest in consolidated subsidiaries


				Guarantor subsidiaries				Non- Guarantor subsidiaries				Consolidating adjustments				Consolidated total				DaVita Inc.				Guarantor subsidiaries			Non- Guarantor subsidiaries				Consolidating adjustments				Consolidated total
For The Three Months Ended March 31, 2017	DaVita Inc.
For The Three Months Ended March 31, 2018																				DaVita Inc.				Guarantor subsidiaries			Non- Guarantor subsidiaries				Consolidating adjustments				Consolidated total
Patient services revenues	$	—					$				1,553,356			$	1,098,752			$	(50,730				)							$				2,601,378
Less: Provision for uncollectible accounts	—			(62,281		)		(50,702		)		—				(112,983		)
Provision for uncollectible accounts																				—				9,628			15,917				—				25,545
Net patient service revenues	—			1,491,075				1,048,050				(50,730		)		2,488,395				—				1,799,816			864,318				(47,515		)		2,616,619
Capitated revenues	—			463,627				454,954				(545		)		918,036
Other revenues	221,386			477,675				35,637				(443,846		)		290,852				195,565				204,960			70,933				(238,633		)		232,825
Total net revenues	221,386			2,432,377				1,538,641				(495,121		)		3,697,283				195,565				2,004,776			935,251				(286,148		)		2,849,444
Operating expenses and charges	131,910			1,880,155				1,292,103				(495,121		)		2,809,047				133,356				1,791,094			800,456				(286,148		)		2,438,758
Operating income	89,476			552,222				246,538				—				888,236				62,209				213,682			134,795				—				410,686
Debt expense	(102,664		)	(91,401		)		(13,716		)		103,352				(104,429		)		(114,334		)		(52,197		)	(7,375		)		60,390				(113,516		)
Other income, net	100,337			3,537				3,721				(103,352		)		4,243				104,081				2,523			5,704				(107,726		)		4,582
Income tax expense	34,093			221,421				32,251				—				287,765				14,387				48,944			7,406				—				70,737
Equity earnings in subsidiaries	394,641			151,704				—				(546,345		)		—				141,117				66,496			—				(207,613		)		—
Net income from continuing operations																				178,686				181,560			125,718				(254,949		)		231,015
Net (loss) income from discontinued operations, net of tax																				—				(40,443		)	(12,679		)		47,336				(5,786		)
Net income	447,697			394,641				204,292				(546,345		)		500,285				178,686				141,117			113,039				(207,613		)		225,229
Less: Net income attributable to noncontrolling interests	—			—				—				(52,588		)		(52,588		)		—				—			—				(46,543		)		(46,543		)
Net income attributable to DaVita Inc.	$	447,697		$	394,641			$	204,292			$	(598,933	)		$	447,697			$	178,686			$	141,117		$	113,039			$	(254,156	)		$	178,686


	Consolidated Total			Physician Groups				Unrestricted Subsidiaries			Company and Restricted Subsidiaries⁽¹⁾			Consolidated Total			Physician Groups				Unrestricted Subsidiaries			Company and Restricted Subsidiaries⁽¹⁾
For The Three Months Ended March 31, 2017
For The Three Months Ended March 31, 2018														Consolidated Total			Physician Groups				Unrestricted Subsidiaries			Company and Restricted Subsidiaries⁽¹⁾
Patient service operating revenues	$	2,601,378				$	133,537					$	—							$			2,467,841
Less: Provision for uncollectible accounts	(112,983		)	(3,725		)		—			(109,258		)
Provision for uncollectible accounts														25,545			—				—			25,545
Net patient service operating revenues	2,488,395			129,812				—			2,358,583			2,616,619			—				—			2,616,619
Capitated revenues	918,036			384,262				—			533,774
Other revenues	290,852			9,851				—			281,001			232,825			—				—			232,825
Total net operating revenues	3,697,283			523,925				—			3,173,358			2,849,444			—				—			2,849,444
Operating expenses	2,809,047			500,390				(166		)	2,308,823			2,438,758			—				—			2,438,758
Operating income	888,236			23,535				166			864,535			410,686			—				—			410,686
Debt expense, including refinancing charges	(104,429		)	(1,450		)		—			(102,979		)	(113,516		)	—				—			(113,516		)
Other income	4,243			35				—			4,208			4,582			—				—			4,582
Income tax expense	287,765			18,594				66			269,105			70,737			—				—			70,737
Net income (loss)	500,285			3,526				100			496,659
Net income from continuing operations														231,015			—				—			231,015
Net (loss) income from discontinued operations, net of tax														(5,786		)	7,397				490			(13,673		)
Net income														225,229			7,397				490			217,342
Less: Net income attributable to noncontrolling interests	(52,588		)	—				—			(52,588		)	(46,543		)	(6,543		)		—			(40,000		)
Net income (loss) attributable to DaVita Inc.	$	447,697		$	3,526			$	100		$	444,071
Net income attributable to DaVita Inc.														$	178,686		$	854			$	490		$	177,342


(1)	After elimination of the unrestricted subsidiaries and the physician groups.



	Members at			Member months for
				Three months ended
	March 31, 2017	December 31, 2016	March 31, 2016	March 31, 2017	December 31, 2016	March 31, 2016
Payor classification:
Senior	306,600	305,200	325,800	920,200	913,300	975,300
Commercial	329,000	338,300	347,300	995,900	1,018,400	1,048,600
Medicaid	99,800	105,800	114,000	305,200	318,800	342,500
	735,400	749,300	787,100	2,221,300	2,250,500	2,366,400